Gentherm Inc (THRM) 2014 Q1 法說會逐字稿

Greetings, and welcome to the Gentherm first-quarter 2014 results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jill Bertotti. Thank you. You may begin.

Good morning, and thank you for joining us today for the Gentherm Incorporated 2014 first-quarter 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 a link provided on the Events page of the Investor section at Gentherm's website.

Finally, I've been asked to make the following statements. 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, Daniel 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.

Yes, Good morning, Jill, Thank you and thank you to everyone for dialing into our first-quarter earnings call. As I think most of you probably saw from our press release at 6 a.m. this morning this morning, the first quarter of 2014 was an extraordinary result and we are very, very pleased.

I'd like to start off my comments by thanking all of our associates, all of our vendor partners, and all of our folks around the world who worked very hard to get these results in place. And it's not just a quarter that they've been working. We've been working together with our partners at W.E.T. for the past three years to develop this good result. And we'd also like to welcome our new associates at Global Thermoelectric, Inc. in Calgary, Canada, which we just acquired effective on April the 1st.

The results were quite extraordinary. We're very pleased with the top-line performance, the middle of the P&L, and the bottom line. Everything fell into perfect order for the quarter and we're very, very pleased.

Barry is going to give you a brief overview of the details of the P&L and the balance sheet, and a little bit on the cash, and then we'll open the floor for questions. So, Barry, if you would help us walk through this extraordinary quarter we'd appreciate it.

Thank you, Dan. Hello, everyone.

Our earnings for the 2014 first quarter were $0.47 a share on a fully diluted basis. This represents an increase of $0.23, or 96%, from the first quarter of 2013 and an increase of $0.16, or 52%, from the fourth quarter of 2013. These improvements are the result of a favorable conversion of significantly higher revenue to net profits.

Our product revenues for the first quarter were $193.9 million, which represented an increase of $45.8 million, or 31%, over the first-quarter 2013 product revenue. This also represented a sequential increase of $11.6 million, or 6.4%, over the product revenue of the 2013 fourth quarter. The increase is due to strong performance in all of our product lines and regions, the strongest of which being the climate control seat, which for the first time exceeded our heated seat product revenues. Climate control seats revenues grew by 46% over the prior year.

On April 1 we acquired Global Thermoelectric, Incorporated. The product revenues of this new company will be included in our results during the second quarter and beyond. This should increase our product revenues between $20 million to $25 million during the balance of 2014 in the second, third, and fourth quarters.

Our gross margin for the first quarter was 29.4%, which was 3% higher than the prior year and 2.2% higher than the 2013 fourth quarter. A number of favorable factors contributed to this increase, including improved coverage of fixed costs by the significantly higher product revenues, the shifting mix of products favoring climate control seats, a favorable exchange rate on production costs that we incurred in foreign currencies, and, for the first time, a contribution coming from our electronics manufacturing facility, which continues to increase production volumes.

As we've mentioned in the past, our target for gross margin percentage is currently 28%. The performance this quarter exceeded that goal. However, we expect that this represents the higher end of our potential gross margin range.

Our operating expenses were $32.2 million during the first quarter, representing an increase of $2.9 million, or 10%. This included approximately $1 million 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, which we expect will continue to support our product revenue growth target. We expect that additional investments in our development of new products, including in the area of electronic components, will increase our spending rates in future quarters.

Our fourth-quarter adjusted EBITDA was $32.4 million which was $14.3 million, or 79%, higher than that of the prior-year period. Again, this significant increase resulted from a very favorable conversion of the much higher product revenues.

Turning to the balance sheet just for a moment, our cash increased by $2.8 million from the end of the fourth quarter and was $57.5 million at March 31.

As we had indicated during our last quarterly earnings call, we invested approximately $23 million in working capital as a result of the higher product revenue during the first quarter. This was offset by a borrowing of $13 million on our revolving line of credit and our operating cash flows before working capital increases.

Our total outstanding debt was $90.3 million at the end of the quarter, representing an increase of $8 million, which included the revolver borrowing I just mentioned. This was offset by normal term payments. Our revolver capacity was approximately $43 million at the end of the quarter.

That's what I have, Dan. And I turn it back to you.

Thanks a lot, Barry. It's always good to give good numbers.

We will at this point turn the call over to the Operator for questions from the audience. Operator?

Thank you. (Operator Instructions) Philip Shen; ROTH Capital.

It's Matt Riley on for Phil. So I wanted to start off with your China facility. Could you comment on what percentage of your internal electronics demand was generated from this facility in Q1?

Can't give you a direct number. It's an increasing number as we tend to pull in volumes that we used to purchase from the outside. But I wouldn't tie it down to a specific number of what our total purchases are. I would guess, just in rough estimates, that we probably buy somewhere between $75 million and $100 million worth of electronic components from the outside world. And we're nowhere near making a dent in that. Our ultimate goal is to be able to be self-sufficient by the end of next year with our two existing facilities. So it's going to grow and build.

Barry mentioned earlier that we had finally kind of gotten over that hump of where the facility is now contributing. And of course it's helping contribute to our gross margin line in that we are not buying from the outside more expensive electronic components.

Okay. Thanks, Dan. That's helpful. Just touching on that self-sufficiency by the end of 2015, could you comment on external business, when you might start seeing that come on line, what the revenue levels might be, and if you secured any new wins during the first quarter for that?

During the first quarter we have not secured any new additional wins outside of our own -- on our self-sufficiency programs. We are very heavily engaged with several very good programs. And I think it's fairly safe to say that we've secured a couple of programs that indicate to us that our decision to go after this electronics business is very valid.

In terms of the upside potential for this, it's literally hundreds of millions of dollars of potential business for us in the long run. So we're very excited. We think we've made a good decision. We've made a good investment with our facilities and with our team. And we're continuing to try to build the internal resources and team necessary to support that external business.

Got it. Turning over to the GTE acquisition, obviously it helps you guys get closer to commercialization of your own internal technology. What might be the initial end markets for that technology? Would it be on the smelting side? Could it perhaps be truck or bus? Could you just give us a little color around that?

Well, obviously initially their business that's existing in the gas and oil pipeline business is their main focus and we're going to obviously concentrate on that. We're going to try to expand that business and provide whatever resources and support necessary for them to build on their own existing business longer term -- or mid term, actually. I would say that we have targeted some industrial applications that we think that an asset like Global Thermoelectric will be very helpful for us to go after. And that's outside of the normal oil and gas work.

And then ultimately we see mobile power generation systems as being a key target for this type of team. So initially we'll go after the existing markets and try to expand there. Internationally there's lots of room to grow in that marketplace. And then there are additional industrial applications that we want to target. And then with a lot of work together and working with our potential partners in the truck and bus business, we see this as being a very good opportunity for the Company.

Okay, great. Just to expand a bit on that mobile segment, Dan, what might the award cycle and the sales cycle look like for that segment?

They're similar to the automotive market, but particularly the volumes are a lot smaller in the trucking industry. So it's a little bit easier to get field tests set up and get some kind of immediate data. But the cycle is not too far off from the normal auto industry or transportation industry. It takes a couple or three years to get something designed and tested, evaluated and put on the street.

Okay, great. And just one more if I may here.

You're using up your whole quarter, Matt.

You broke out the three segments, CCS, heated seats, heated steering wheel. Could you give us any kind of sense of how these segments might trend going into the remainder of 2014 on perhaps a year-over-year basis?

I think you're going to see a continued transition from just the heated seats over to heated and vent, heated and cooled seats. We've seen that. Barry mentioned, quite astutely, that this is the first quarter where we've actually had -- we generated more revenue out of the climate control seat group than we did from the traditional seat heater business. And we predicted that that trend was likely to occur. It's occurred in the past in a month or two, but never in a solid steady state for a full quarter.

So we expect to see climate control seats, heated and vent, heated and cooled seats, continue to increase. And we still believe there's growth in the heated seats, but I think it will be outpaced by growth in the climate control seat factors.

Okay, terrific. I'll jump back in queue. Thanks, guys.

Steve Dyer; Craig-Hallum.

Dan, Barry, congratulations. Great results.

Thanks a lot. A lot of people worked very hard for these results.

Understood. So, a couple of different things. As you look at the gross margin sort of upside to your target this quarter, is there any way to sort of spitball kind of how much of that was driven by mix versus just kind of overhead absorption? I guess I'm trying to figure out is 28% kind of the midpoint of what we should think about? Or is that sort of the level that we can kind of build on as we get Shenzhen contributing more to the cost of goods?

I think you're going to see the continued improvement. I do think that this quarter might have been a spike, because of a couple of things that happened. But we are making progress toward our target of 28% on a regular, consistent, steady basis. We've been working up to that level. In the second quarter of last year we were beaten in the Street because we slipped a little bit below 26% for a random series of events that occurred. And I think you're going to see that we're going to continue to make progress. Again, we're focusing on a good, solid, steady, consistent reporting of margins in that 28% range.

So there are factors, I think, that were a little bit extraordinary. I think it's higher than we would expect to see in a regular run rate. But it shows progress toward our long-term goal. And that's what we're excited about.

Sure. So, is it just safe to kind of think 28% is a good kind of baseline-averaged level going forward? Or is that still something that you think it's going to kind of reset down into the 27s and work back up to the 28%?

I think we're getting close to 28%. But you're going to see some 27s. You may even see a 26% once in a while. But I think we're getting closer to that 28% target. But it wouldn't surprise me at all if one of the quarters during this year has a 27% or a 26% on it. And it wouldn't surprise me if we saw some 28s.

Perfect. As it relates to operating expenses, really good kind of discipline there. And I'm trying to think about how that number should look going forward. You had $1 million or so in acquisition-related costs this quarter. So, absent that, it's kind of $31 million. I'm assuming some will get layered in from the acquisition. But is $31 million kind of a number to grow off this year? Or is there a significant amount from the acquisition that we should be thinking about adding? Or how should we think about that number?

There's going to be some spending on the Global Thermoelectric team and I would remind the group that we're continuing to spend and invest in, particularly in our electronics business. We're also investing in some of our convenience products businesses. So in the second half in particular, I think you'll see some increased spending. But, again, it's not going to be what I would call a wholesale assault on spending. We're going to try to keep a very monitored, measured, approach to it. You'll see steady, predictable results on the operating expense increases.

Great. And then, the bed business, which I think we talk about every quarter, are we turning the corner there? Or, any update there would be great.

I think we're continuing to make good progress. I think the designs of the bed are really nice. We've introduced some new partners to the bed business. They're showing some extraordinary designs. I'm very excited about them. I haven't actually gotten one of the brand new beds yet to sleep on myself. But we've seen some very good designs and I think we're going to see some exciting stuff happening in the second half of this year.

Great. One last question and I'll hop back in the queue. You pointed out that the new K2 lineup from GM is a real area of strength for this quarter. Is your -- and I know you're on the GM Ts as well. Is it just that kind of initial volumes there are so much better? Or do you have significantly more content on the K2s?

It's actually turned out to be a wonderful program for us. There's been a lot of acceptance of the feature. And it's been pretty broad. So we're pretty excited about K2XX.

Do you have additional content on it, vis a vis the GM Ts?

We have additional content compared to the GM T 900 line, yes.

Okay. Thank you, guys.

Bill Selesky; Argus Research.

Hi, guys, and congratulations on a great operational quarter. I just had two questions. Basically, with GTE, the acquisition April 1, Dan, you mentioned gas and oil will be the main focus going forward and you'll try to expand that. Is oil and gas the primary product area that GTE kind of functions in right now? I know they also do telecommunications and some security and I think military. But is it oil and gas by far and away the biggest part of their business?

Yes, Bill. I would say it's very safe to say that their primary function in life is to provide remote power for oil and gas field operations, including offshore rigs and field power wherever it's necessary. They do a lot of other work in a lot of other areas and they've done a lot of excellent design work in some new applications.

What we're hoping to bring is some additional experience and understanding and knowledge of working with thermoelectrics and with materials. We also have a very broad scope globally around the world. We can provide now perhaps some additional base for them to work on to try to expand the business a little bit more outside of the North American marketplace, which is where they are very, very strong.

So I think the general answer is, yes, they are very, very familiar with and expert in the oil and gas field power [range.]

Now, are they primarily North American as far as the oil and gas exposure goes, or do they also have some international --

They have a substantial international business. But I think the bulk of their business is North American based.

Okay, great. And just one last question. CCS had a great quarter. Can you tell me, your internal studies and numbers, what percentage of the luxury market you possibly have right now and what it could go to in the future?

Well, I think we've stated publicly that we believe we have less than 10% market share -- I'm sorry, not market share -- market penetration of the luxury high-end market. And I believe that number can go up -- I think it can go above 50% over time. But that's going to take us a lot of work and we're going to have to show a lot of better performance, particularly in the European market where we've kind of lagged behind getting the word out to some of the bigger luxury car makers in Europe.

Okay, great. And one last thing. On the German OEM market, can you bring us up to date there and talk about potential penetration? Anything going on within that space for you?

Well, we're working very hard. We're very pleased to say we have a very strong position in the German market in the seat heater business. And we're working very diligently now to parlay that relationship we have from the seat heater business to get into their currently more comfortable area, which is the heat vent systems that they seem to like a little bit better. And we're trying to get them to focus on heat cooled in some of the -- particularly in the export markets for them, here to North America and to China, which are two very large markets for them and perhaps might be a little bit warmer environmental markets than they might see in the beautiful, lovely Swabian and Bavarian Woods in Southern Germany.

Okay. That's great. Thanks very much.

Gerry Farber; Gerry Farber, LLC.

Congratulations. And is there much in the way of seasonality in the March quarter you reported? Or is that a typical quarter in terms of activity? And could we think about the run rate applied to the quarter in terms of how the business should play out for the rest of the year?

The seasonality in our business is typically -- we're kind of a model year launch season. So the new models pretty much around the world all launch in the beginning of the third quarter. So I guess you could say our fiscal year might start in July and then run through June the following year.

So the strength you saw in the existing March quarter that we're just reporting right now, that trend was started in the third quarter of 2013, carried on in fourth. And so, this is really the third quarter of that expansion that we saw during the 2014 model launch, which was July of 2013. So the next opportunity for us to show some improvement over these numbers will be in the second half of this year as the 2015 models start launching.

Okay. So seasonally the June quarter should just seasonally moderate from the March quarter levels. Correct?

It should be pretty consistent, although there is an occasional softening in the second quarter. But we really expect to see the third and fourth quarter be the result of any new programs we introduce during any given year.

So, could we say that the March quarter seasonally, if you look at a four-quarter average or an annual average, represents less than 25%, generally, of your full-year results?

Slightly. Yes, sir.

Slightly less than 25% of your full-year results. That's [what the thinking] --

Yes.

Sort of seasonal adjustment, if you will?

Yes, sir.

So that one might take the [quarter-year] report and apply a greater-than- four-times factor to just establish a run rate on a seasonally adjusted basis.

One might.

Okay. Thank you.

Josh Goldberg; G2 Investment Partners.

Nice results. Just a couple quick questions. First, on the acquisition, it sounds like you paid roughly around $35 million and they're contributing about $20 million to $25 million of revenue for the balance of the year. So roughly about a $30 million, $35 million sales -- is that a fair assumption?

Well, a little bit. The $34 million or $35 million you referred to are Canadian dollars. So roughly it's somewhere between $30 million and $32 million US dollars that we acquired the assets for.

Okay.

And on a run rate, yes, you're right. We're predicting that in three quarters of this year we'll see somewhere between $20 million and $25 million worth of revenue for us, as we acquired them effectively April 1st.

And what's roughly their gross margin and EBITDA profile for that business?

They're actually -- they do pretty good in terms of gross margin. The business they have has high value-added and they get some pretty good solid results, much better than the traditional automotive businesses and much more like custom work industrial markets.

But we're pretty -- we haven't released anything yet about those operations and we prefer not to talk about them until we fully understand the numbers.

Okay. But fair to say it's additive to your gross margins as it starts going into the second quarter?

It will definitely be accretive to our business. Yes.

Okay. And then, just added on here to the previous caller's question, the $193 million that you did in the first quarter did not include any of this acquisition. So if you have a roughly similar or even slightly down Q2, that does not include this, call it -- and you said $8 million or $9 million a quarter, $20 million to $25 million for the rest of the year. Is that fair to say?

That is absolutely fair to say. There was nothing in the $193 million included for the results for the GTE acquisition. And we will be booking those results in the remaining three quarters of the year. And that will be additive to the numbers you see.

Okay. Last two questions for me. One is on the balance sheet. So, did you use your long-term debt to pay for this acquisition?

The revolver borrowing we referred to was used for the acquisition. But we paid all cash, really, for it.

Okay. But you're hoping that the cash that you'll generate for the back half of the year will kind of bring your -- get it back to a normal level?

Much more than that, yes. We have much -- very good cash generation.

Okay. And then, just on your taxes, I mean, 27 -- your tax rate for the rest of the year?

The rate you see in the first quarter is our estimate for the full year.

Great. Thank you very, very much and congratulations.

Steve Dyer; Craig-Hallum.

One last one. F-Series, which I think is still your biggest program, or at least it was recently, is going to undergo a changeover in the second half of the year. Two kind of offshoots of that. One, how should we think of the impact from that? I don't know that that truck in and of itself is super material anymore. But then, secondly, when the new models start shipping would we expect to see additional content on there, whether it's new trim levels or steering wheels or anything now like that?

Well, yes. Ford has announced themselves that as they go into the model year launch that there will be some downtime, as they have to make a major shift in the manufacturing operation from steel panels to aluminum panels. And there's a big shift in process required in order to do that. So Ford themselves have announced that there will be some downtime in the second half as they convert over to the new 2015 all-aluminum model truck. We have that in our projections and in our plans. And we also see from the pre-orders that Ford's announced that that's going to be a very popular item.

We don't expect a whole lot of additional business. We didn't win the heated steering wheel business on that model. There's nothing else other than our normal solid take rates on the heated and cooled seats that are featured on the F-150 today.

Very good. Thank you.

Mike Schneider; Artisan.

Can you just comment on the sequential increase in revenue? If the model launch is, again, in the middle of last year, what would explain the sequential increase in CCS? Is it higher take rates? Is it just higher production levels at your customer? I'm trying to figure out if the launches really occurred nine months ago why you saw the increase this quarter.

Well, it's a global thing. It's a combination of all of those things, but it's really a global thing, Mike. And what we're seeing is a lot of good, solid strength in a couple of key markets for us, particularly in our Asian business. Our Japanese and our Korean businesses are extremely strong. And they're dominated more by the climate control seat business than the heated business.

The North American business has been very strong in the climate control seat business.

So it is a combination of things. And we do see shifts around the world as different markets pick up strength. So I think that explains a little bit of the sequential increase that you see.

Okay. And then, as it relates to the revenue guidance of now greater than 15%, it basically assumes that revenue is flat sequentially, or even slightly down. That would imply you're not expecting any new model wins in the second half. Can you just comment on -- presumably you know your front log of platform wins and launches in the second half. Why would the guidance imply none?

I think we said at least 15%. And we didn't include the additional revenue volumes from our GTE partners. But we think we have a few new wins coming in the second half. Some of that will be slightly offset by losses of volume from the F-150 as Ford goes through their conversion. And the Chinese market is not as exciting as we had hoped it would be during this year. So there's some negative headwinds. But mostly for us we see positive results.

And I know that you are quite familiar with our story, but we are relatively conservative people by nature.

And can you quantify either number of platform wins or just in any way frame what you see coming in the second half in terms of new business?

No. We don't release any information about new models or new wins. We simply provide as best we can the broad guidance for the year. And right now we see that being better than 15% for the full year.

Okay. And then, the GTE acquisition, you said it's additive to the numbers. I presume the stated margins are higher, but with purchase price accounting and any inventory adjustments or up front expenses other than what you've already booked, will there actually be any unusual items or, again, purchase price accounting hits in the second quarter or third quarter?

Bob, this is Barry. Yes, there definitely will be. They should be fairly modest, because it is not a huge balance sheet, quite frankly. But we're still analyzing the actual amounts and when we do have them and publish them in the second quarter, we'll be adding those new amortizations and intangible assets to our disclosures that we put in the earnings release so you can see what those purchase accounting effects are.

Okay. And then, if we normalize the gross margin this quarter back to the 28% kind of target number, it implies there was about $2.7 million or $3 million in round numbers of excess earnings. And you said there were some unusual items or events that drove those. What would explain, in rough numbers, that $3 million of excess earnings?

It was a number of things. The most important, probably about half of that, is coming from the currency benefits we're seeing in the Mexican peso and the Ukrainian currency. But there are a number of other things as well.

Okay. And those other things other than currency will not recur from here on, or --

(Multiple speakers) -- will not. We won't go through a laundry list and predict every one. But I think it's somewhat safe to say that some of the currency benefits are going to stick with us. We've hedged some of it. But that's also to say that we haven't seen any real unusual negative things in this quarter as we did, as Dan pointed out, in the second quarter last year. And things crop up from time to time. So we'll always be cautious about our gross margin comments when we think about the things we don't know about that could be bad.

Right. So if we scrub that $3 million in excess earnings, or exceptional items, including the currency you did about $0.48, not $0.56. Is there anything about that earnings run rate that is otherwise unsustainable?

Well, we mentioned that we'll probably make some investments in our operating expenses. So that may be something you'll see as a creeping factor. But we should be able to grow over that. So I don't think there's anything else that's unusual.

I don't think so either. Yes.

Okay. Thank you so much.

Thank you. We have reached the end of the question-and-answer session. I would now like to turn the floor back over to Mr. Coker for closing comments.

Well, thank you very much, everyone, for joining us. It's always a pleasure to hear all of your questions. And for us, when the results look like they have for us in the first quarter, we're always pleased to talk about how well things have worked out. But, again, I remind everybody that this is the result of three years of hard work by nearly 8,000 people internally that are members of the Gentherm family and countless thousands of others who are partners with us, either in the customer base or in the supply base.

So we felt like we had a really good quarter. We are trying our best, right now as we speak, to have a really good second quarter. And we invite everybody back here in about 90 days and we'll sit and talk about how the second quarter turns out.

Thank you very much, and we'll talk to you later.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.