Gentherm Inc (THRM) 2014 Q3 法說會逐字稿

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

I would now like to turn the conference over to your host, Michael Mason. Thank you. Mr. Mason, you may begin.

Thank you very much. Good morning and thank you for joining us for the Gentherm Incorporated 2014 third-quarter and nine-month results conference call.

Before we start today's call, there are a few items I'd like to cover. 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 Gentherm.com or the Allen & Caron website at AllenCaron.com.

Additionally, a replay of the conference call will be available via a link provided on the events page of the investor relations section of Gentherm's website.

Finally, I've been asked to make the following statement. During today's conference call, representatives of the Company may make forward-looking statements within the meaning of federal securities laws. These statements reflect current interviews with respect to future events and financial performance and actual results may materially differ. Please see the Gentherm Incorporated filings with the Securities and Exchange Commission, including the Company's latest annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K 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 Budd 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, Michael, and thank you very much for that kind introduction and good morning to everyone out on the line. We very much appreciate you taking the time to join us today.

We were quite pleased with the results of the third quarter for 2014. We are continuing to achieve all of our strategic goals, both by market opportunity and by product strategy segment. So we see the third quarter as having been very positive. We may be in the minority, but we see good news coming and we continue to see good news for the fourth quarter and for 2015 as well.

We are going to follow our normal format. Our revenues were up substantially over the same period in 2013 and the results are expected to continue through the fourth quarter of 2014, and Barry is going to give you some details about all of the financial facts. But we'll talk about those in just a second. Mr. Steele, I'd like for you to review the details, please.

Thanks a lot, Dan. Welcome, everybody. Good to hear you on the line.

Our earnings for the 2014 third quarter were $0.48 a share on a fully diluted basis. This represents an increase of $0.24 or double the amount from the third quarter of 2013. This improvement is the result of a favorable conversion of significantly higher revenue to net profits.

Our product revenues for the third quarter were $206 million, which represented an increase of $34.8 million or 20% over the third-quarter 2013 product revenue. This increase was due to strong performance in all of our product lines and in all regions, led by the Climate Control Seat product, which increased by 28% during the third quarter over the prior year.

Additionally, we acquired Global Thermoelectric, Inc., now called Gentherm Global Power Technologies, on April 1, 2014. The product revenues of this new company during the quarter were $8.5 million. All early indications point to an equally strong amount of product revenue during our 2014 fourth quarter.

Our gross margin for the third quarter was again higher on a year-over-year basis and as compared to the second quarter of this year, at 29.9%. A number of favorable factors contributed to this increase, including improved coverage of fixed costs, significantly higher product revenue, the shifting mix in products favoring Climate Controlled Seats, a favorable exchange rate on production costs that we incur in foreign currencies, and a continually improving contribution coming from our electronics manufacturing capabilities, which continue to increase production volumes.

Our operating expenses were $37.5 million during the third quarter, representing an increase of $6.2 million. Over one-third of this increase represents the regular operating expenses of Gentherm Global Power Technologies, the new company acquired this year, fully $2.4 million. Not including Gentherm Global Power Technologies, the increase in operating expenses would've been $3.8 million, or 12%.

Much of this 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 targets.

Our fourth-quarter adjusted EBITDA was -- EBITDA was $30.9 million, which was $9.7 million or 46% 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 now to the balance sheet for a moment, our cash, now totaling $65.2 million at the end of the quarter, increased by $10.3 million from the beginning of the year. During the quarter, we refinanced our senior bank credit facilities. The benefits of this refinancing have been to double our revolving line of credit borrowing capacity to $100 million, extend the terms so that we now have five years to our maturity date, slightly lower our borrowing costs, and reduce -- and a reduced term note amortization, among a number of other benefits.

Our total outstanding debt at September 30, 2014, was $94.7 million, representing an increase of $12.5 million during the year-to-date period.

That's what I have for the moment and we'll look forward to questions. Mr. Coker?

Thank you very much, Mr. Steele. Operator, we'd be delighted to open the floor for questions from the callers.

(Operator Instructions). Steve Dyer, Craig-Hallum.

Gross margin was very, very good again in the quarter and I'm guessing you are still pretty comfortable with the 20% to 30% band that you've been saying, but as you look at the factors that impact that, whether that's the internal manufacturing, the Ukraine exchange rate, the mix, etc., is there a certain -- do you feel one way or another in that band kind of in Q4, knowing what you know so far?

I think you're going to see consistent performance in Q4. I don't think you're going to see any major shift one way or the other.

There are some positive indications that are helping us a bit. You mentioned the Ukrainian currency that has impacted us for the past three quarters. It will actually continue into the fourth quarter. So we don't see any shifts in the gross margin percentage in the fourth quarter.

Okay, and then as it relates to the -- I'm wondering with respect to the electronics manufacturing. That's been all internal, as I understand it, so far. Are you willing to give us an idea of when you might start generating some external revenue from that facility?

It has been our plan to satisfy our own internal needs first as a top priority, and that is what the team has been challenged to do.

At the same time, we are beginning to integrate ourselves into the market. We for -- as an example, last week we participated in the SAE Convergence show here in the Detroit, Michigan, area where we had a booth and introduced our expanded capabilities to design, develop, and produce ECU modules in any types of electronics required by our common customers here.

Our long-term goal is to engage customers in development discussions now and to begin generating revenue as quickly as we can, given that our top priority is to establish ourselves as our primary customers, we build up that competence and capability in both our North American and Asian facilities today, and in a year or so we'll be building a facility -- expanded facility in the European market.

Okay, great. And then, as you look forward into next year, I know you haven't said anything specific about guidance, but is there any reason kind of seeing what you see with new program wins, etc., that you wouldn't be able to continue to outgrow global production by 10 to 15 points, call it, as you have been?

We look at next year and we see a landscape that will allow us to continue hitting our corporate goal, which is 10% to 15% growth. And we, right now, at this time -- there's a lot of things that change in the world as you go through a year, but right now we feel confident that those numbers are still quite achievable.

Okay. I will hop back in the queue. Thank you.

Matt Koranda, ROTH Capital.

I just wanted to touch on guidance for 2014 for a moment. It looks just like the semantics changed a bit in the release. So you guys said greater than 20% year-over-year revenue growth in this release versus at least 20% in the last release. First of all, is there any difference between those two items, the two pieces of commentary there?

And then, second, what are some of the factors that would cause 2014 revenue growth to come in around 20%? And then, what are some of the factors that could swing it closer to maybe the 22%, 23%, 24% growth area?

There was a very slight modification in the language. It seemed disingenuous for us to say that it was going to be 20% or so, and we wanted to make sure that we were not forecasting an off fourth quarter, which we are not.

The language was changed to indicate greater than 20% and with the indications that we would continue the type of path that we've seen in the last three quarters of 2014. There was no intention, there was no strategy to try to shift the language. It was a minor modification. It apparently spooked some people, but there is no intent. We still see a good, solid fourth quarter.

The variations there that we've seen in the past, to the second part of your question, are really customer driven and it really has to do with cutoff periods for holidays and whether people make commitments to hold inventory over the holidays for us or not. Those are typically a couple of Asian customers that have in the past shown a little bit of an erratic purchasing pattern, but even if both of those customers went wild, it wouldn't have enough to swing us off of our current forecasts for the fourth quarter.

Okay, that's very helpful. And then, just touching on the F150 transition at Ford. Can you provide an update on how sales trended with Ford during Q3? I believe they said production was down about 9% during the quarter. And then, also, how is it tracking today? What are you seeing? Just an update there would be helpful.

I think that Ford is achieving their plans for the changeover and I think they are going well.

For us, whatever hiccup we may have seen in the F150 line has been more than offset by the K2XX programs outperforming. So for us, we really didn't see any significant impact at all, nor do we anticipate any in the fourth quarter.

Okay, great. And then, just one more from me here, on gross margins. I think it was asked a little bit earlier. You guys are running closer to 30% now, but could you quantify the margin lift from each of the items that Barry mentioned in the prepared remarks? So I believe he broke it out into improved coverage of fixed costs, better CCS mix, favorable exchange rate, and I think there was one other item, but is there a way to kind of break it into those buckets and just quantify some of the lift you guys have gotten?

We wouldn't necessarily want to quantify each. I could prioritize things, though.

We would say that mix is probably the most important factor, maybe representing one-half, if you would, of the benefit we are seeing. The currency is probably here to stay for a while, we would think, although it might cause a little bit of inflation in certain markets that will affect us at some point.

And the rest are kind of insignificant. But really, Matt, if you think of it this way, if you think of one of our key strategies that we've been trying to unfold in 2013 and 2014, we've been trying to concentrate our efforts on increasing as dramatically as we can our sale of heated and cooled and heated and ventilated seat products.

We've been lucky. That's been very well accepted in the marketplace, and so now you see in our current run rates a very high and a significant portion of heat cooled and heat vent product has basically overwhelmed the old lower margin, more commodity-type heater business only. So that has really been the driving factor behind why we show good, solid, steady increased gross margins.

Plus, coupled with our very strong efforts by all of our manufacturing facilities to stay within and below their operating budgets while exceeding the manufacturing targets for them. So it's a very -- I think a respectable performance level. We did target 28% as a key milestone early on in the relationship between the new company, and today, as you all have noted, we are targeting 28% to 30%, and we believe we are getting close to a good steady run rate at that level, but it has a lot to do with the product mix.

Okay, that's helpful. And one more here, if I may. Is there any reason to believe that revenues in Q4 would be down sequentially from Q3? Maybe if you could just address that directly, that would be helpful. And then, I'll jump back in queue.

Well, there's a possibility that it could go down, but it's not probable. We see the fourth quarter as being another good, solid quarter for us and we are not anticipating any significant change, and based on what we see today, we don't anticipate one.

Okay, great. That's it for me. Thanks, guys.

Samik Chatterjee, JPMorgan.

I was just curious. In the back half of 2014, you're comping on your very strong growth in the back half of 2013. But can you give us some color on the pace of sort of upcoming launches and which quarters might be sort of more lumpy around that, and what are you seeing with visibility around these launches, what we should be keeping in mind as we go ahead in terms of looking at your revenues?

Sure. Good morning, sir. What we've been able to achieve in 2014 is a very good, solid, steady run rate, in excess of $200 million per quarter.

When we look forward to 2015, we see a little bit more backended -- backend-loaded year where -- with the new programs we'll be launching at midyear and beyond.

So, we've been very pleased with how 2014 has performed. We were able to kind of jumpstart and get ahead of the year a little bit at the end of 2013 and we've been able to maintain and manage that growth through all of 2014. When we get to 2015, you'll see a little bit more, as you said, lumpiness in the second half, as we have some new platforms and new programs loading in in the second half.

Great. And just -- sorry to go back to the revenue guidance question here for the full year now. Based on the last comment that you made, that it's very improbable that sequentially you see a decline in the revenue from the 3Q level, is it fair to say that right now, if we are thinking about your full-year revenue guidance and probably in the fourth quarter you're doing another sort of $206 million, at least, you're sort of looking at that greater than 20% guidance as more like 23% year-on-year growth at least for 2014 or would that be a fair way of putting it?

Well, you guys had been putting it in many different fair way and we've been trying to respond as consistently as we can.

We see no major shift in fourth-quarter revenues, either up or down. We think it's going to be very steady and very comparable to the second and third quarter. And those numbers, if you are very good at math, as Barry is, would indicate to you that it will be over 20% and could run as high as that 22% to 23% number you referenced.

Great. Thanks for taking my questions. Thank you.

Gary Prestopino, Barrington Research.

I was going to ask you a question on Q4 sales, but I think that's been beat up pretty well here. Just in terms of Europe, really, could you -- you mentioned that European-based sales were higher, but could you give us a percentage of how high they were and what you're seeing or thinking for Q4 and into next year as well?

Yes, Gary, in the press release, we actually give you our European based -- our euro-denominated revenues. They were $38 million this quarter versus $35.7 million in the prior-year quarter. I think that answered your question, but you know the other question -- what was the other question you had? You had two questions.

You guys, I mean, are you seeing a precipitous slowing in Europe? I know I've heard the car sales are starting to be impacted by economic issues there, and what are you thinking in 2015 in that for Europe as well?

Gary, this is Dan Coker. We are seeing an interesting kind of, let's say, shift in demand in Europe right now. The majority of our customers are located in Germany. And the German market, even though some of the other countries are reporting some slightly bumpy revenues, the German market has been pretty solid.

So we are not seeing any major shift in demand. In fact, I'd say that our demand in Europe has been -- based upon the German market conditions, has been very strong. As we look forward into the 2015 period, we believe that that same trend will continue. We believe you will see a strong, solid Germany, which depends very heavily on its export market, and you'll see some of the weaker countries will continue to have some difficulties on and off.

But overall, we see that the European market has kind of hit bottom and is beginning to show some strength in places, particularly in places where we happen to luckily be concentrated, which is the German market.

Okay, thank you.

Steve Dyer, Craig-Hallum.

Thanks. GPT, as I guess it's now called, how do you think about the revenue growth rate for that next year? I know you're throwing a lot of resources at it and you're not going to want to break it out forever, but just anecdotally, how are you feeling on that?

We feel pretty good about it, actually. We think that there is a good strong opportunity, as we've indicated in the past, that the $30 million some odd worth of revenue that we acquired, we'll be able to grow to the -- in excess of our corporate goals of 10% to 15%.

So I think you're going to see some pretty good response as that team is able to get out and use more resources to be able to expand the existing product into broader markets and new products coming on in the future. So I think you're going to see quite a happy time with our new Global Power Technologies group.

Great. And then, as it relates to operating expenses going forward, I mean, is it pretty safe to say that you'd continue to tick higher sequentially at $37.5 million between the two this quarter? Is that number going to kind of keep bumping up or was there anything one time or costs that should come out there?

Well, our business has been growing at about 20% on the topline and we do have to increase our operating expenses to be able to service and handle that growth. And so, it is reasonable to assume that we are going to continue to see operating expenses tick up as the business grows and expands.

Plus I think we've also indicated that we have strategically made the decision that we are going to invest in various segments that we see particular good long-term strength in. The best example of that is our electronics business. We are currently investing heavily in developing the capabilities and capacities necessary to have a strong electronics team, and that cost is upon us now and continues to grow, and the majority of the revenue or the benefit from that will be evident in the next two to three years as you see other new business outside of our own internal consumption expand.

Okay, thank you, and then one last question, Barry, a housekeeping question. Can you give us a stock comp expense for the quarter? I noticed you didn't include a cash flow statement in the release.

I don't have it right at this moment but I will follow up with you.

Okay, thank you.

Josh Goldberg, G2 Investment Partners.

Hi, guys. Happily, a great quarter. I had a couple quick questions. First on the mix from the seat heater to the Climate Control Seat, I noticed that the seat heater business was actually down roughly around $3 million in the September quarter. How much of that was a mix shift to the higher-priced CCS offerings and how much of that was just sort of global production being a little bit softer? And I have a follow-up.

We are continuing to see a very pleasant change or a migration, I should say, rather than a change, from a simple heated product up to the heat vent and then perhaps to the heat cool product line as well.

I didn't see a big or any falloff, I guess, is a question I would have in the seat heater business by itself. It actually went up by about 10% as compared to the heat cool/heat vent business going up by 28%. But we do see that trend as the customers around the world are accepting heat vent and heat cool at a faster pace than we've been able to expand the heated business. (multiple speakers) follow-up?

And then, on the heated steering wheel, I certainly feel like there's some pretty good opportunity there. That growth decelerated down to only 14% in the September quarter. Do you expect a stronger fourth quarter in the heated steering wheel area and how do you see that playing out next year?

We see the heated steering wheel as being an excellent opportunity for us. We spent a little bit of time getting involved in that and it's been one of our best performing segments in the last two years, since we first introduced the product into the marketplace. And we do see a -- not unlimited, but we do see a very good window of opportunity over the next few years for a heated steering wheel product line.

But the growth down in September, was that just sort of an anomaly that there was only 14%? Or was there something happening?

Josh, you could probably attribute that to tougher comps as you move through the year.

We are kind of catching up with the success we had last year, Josh, is that we had a very strong third and fourth quarter last year in this product line, and so on top of that growth, we are also seeing an additional 14% or 15% growth there. So, it's still performing quite well.

Okay. Last one from me, if that's okay. When I look at your business in 2015, I know people are trying to triangulate 10% to 15%, and obviously the global economy and other issues have to play into a role. But to me, it would seem like whether you grow 10% or 15%, your expenses, which include your cost of revenue because your gross margin should continue to improve, as well as your expenses, should not grow as fast as your revenue. So you will continue to see margin expansion in 2015 as more of your new acquisition, which has a higher margin, and your Climate Control Seat business takes a bigger part of your revenue, has a higher margin. Is there any reason to believe that that will not be the case, that you shouldn't see margin expansion in 2015?

That's actually one of our key corporate strategies is to try to grow our revenues at a significantly higher rate than we grow our operating expenses and to keep focus on the operating costs to make sure that our margins stay within our target. So you are exactly right. That's our strategy and that's exactly what we are pushing.

Okay. And would anything about the tax rate affect that at all in 2015? Do you think your tax rate should go up in any way, Barry, or do you feel this is the right number going forward?

It's probably pretty good. I would say there's more factors that might show a slight decrease in the tax rate than increase it. But I would -- our own projections, we're using the same rate as you see here in the third quarter.

Okay. Any update on the mattress side or some of the other opportunities that you have in terms of new products?

I'd say we are positioning ourselves very nicely with our key strategic partner, the Mattress Firm team. We are very happy with the development of the next generation of product that should be coming out in early spring of next year and we're pretty excited about where that's going.

The Global Thermoelectric product, which is a oil and gas field product line, we are looking at expanding our capacities and capabilities to be able to service more customers in that market. Our team is very excited about the opportunity to get out into broader markets and I think that is going to develop very, very nicely, and I think you'll see some new and interesting products over the next three to five years.

Got you. Okay, congratulations again. Thanks so much.

Jeff Bernstein, AH Lisanti.

So we've talked about the importance of getting the first German luxury customer in heat cool. Do you want to speculate at all on the odds of doing that next year and how you're positioned there?

No, I don't speculate ever. I'm a very conservative guy.

I would tell you, though, that we've already made some good head road with our German partners and we have -- some of the German companies are currently offering a product of ours that, just as an example, the Porsche Panamera has our heat vent system in it today. So we're making headway and we're making progress with all of the German companies, as well as a couple of the other European companies, and we've been working at it for a while and we've been working hard to develop another set of generations of the existing technologies as well. So, I think that's where our best opportunities occur is coming out with something new and more innovative for that very important market.

And any reading on when that kind of product would be available?

In my lifetime.

Thanks.

There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

All right. Thank you very much, Operator, and thank you very much for all of those insightful questions. I think the callers on our line kind of drilled down to the real core results in the third quarter have been very positive.

There has been some -- quite a bit of discussion about the change in language on our guidance statement and how that might impact the fourth quarter. I hope we've been able to address that satisfactorily for everyone. To reiterate, we don't see any major shifts in the fourth-quarter revenues compared to the other quarters of this year and we do see the opportunity before us to be able to maintain our 10% to 15% corporate goal growth for 2015.

All in all, I think it's been a good quarter. I think we're going to finish up with a good year for this 2014 and we ask you to join us again in about 90 days to review the final results of 2014. Thank you very much for your time and attention.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.