Gentherm Inc (THRM) 2015 Q2 法說會逐字稿

Greetings and welcome to the Gentherm 2015 second-quarter and six-month results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host: Mr. Mike Mason, Vice President of Investor Relations. Please go ahead, Mr. Mason.

Good evening and thank you for joining us for the Gentherm Incorporated 2015 second-quarter conference call. Before we start the call, there are a few items I would like to cover.

In addition to disseminating through PR Newswire this afternoon's news release announcing Gentherm's results, an email copy of the release was also sent to a number of conference call participants. If 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 the call will be available via a link provided on the events page of the investors section of Gentherm's website.

During this conference call, representatives of the Company may make forward-looking statements within the meaning of federal securities law. These statements reflect current views with respect to future events and financial performance, and actual results may materially differ. Please see the Company's SEC filings, including the latest 10-K and subsequent reports, for a discussion of various risks and uncertainties underlying such forward-looking statements.

During this call, the Company may discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in the Company's earnings release.

On the call, we have from Gentherm, President and Chief Operating Officer Mr. Dan Coker, and Chief Financial Officer Mr. Barry Steele. 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 evening, Dan.

Good evening, Mike. And thanks very much for hosting and letting us in on the call. We would like to say that we appreciate everyone joining us at this new hour. And to show you there's no hard feelings, we are coming to you live from Munich, Germany, where it's a little bit after 11 PM today on our initial call here at our new hour.

We would also like to point out that we think that the Company had a very good second quarter. We were quite pleased with the results. All of our operations are doing very well and hitting our internal targets, particularly in local currency.

As we go through the numbers, you are going to see that we have had another record revenue quarter followed by another record bottom line. So we are quite pleased with how things have been going. And we also are very excited about some news that we received just this week about being named as the Supplier of Choice for serial production for a new product category: battery thermal management systems.

This is a very exciting thing for our Company. It's something that stresses our strengths in technology, manufacturing, and our global presence in the auto industry. This will lead to some fairly significant new business for us. It's the first step, hopefully among many, that will allow us to establish our strength and presence in thermoelectric technology, heating, and cooling for automotive applications.

Today, we are going to go through our normal procedure, even though the hour is a bit later. We are going to allow -- Barry is going to give us the financial details and then we are going to open the floor for questions.

Please stand by for Mr. Barry Steele, CFO. Barry?

Thanks, Dan. Good evening, everyone. Once again, an important driver of this year's second-quarter result is the impact of a significantly stronger US dollar. We are a global company with operations in North America, Europe, and Asia and are exposed to currency translation in a number of ways, like many other global company. In general, the stronger US dollar has reduced our reported product revenue, but has resulted in lower production and operating costs that have more than offset the unfavorable impact to revenue.

Our earnings for the 2015 second quarter were $0.53 a share on a fully diluted basis. This represents an increase of $0.07 or 15% over the second quarter 2014. This improvement comes from our continued product revenue growth, but also enhanced by the strong US dollar impact that I just mentioned.

Our product revenues for the second quarter were $213 million, which represented an increase of more than $7 million or just under 4% over the second-quarter 2014 product revenue. We achieved this despite the significant foreign currency translation headwind coming from our euro-denominated sales in Europe and from some other currencies in which we sell our products.

Had the second-quarter currency exchange rate been the same as the prior-year second quarter, our revenue for the current quarter would have been nearly $14 million higher and represented an increase of more than 10% over the prior-year period. This increase is attributable to continued growth of our automotive products, but also included $4 million increase for Global Power Technologies, which represented a 54% increase when compared with the second quarter of 2014 for that Company.

By the way, we have now owned Global Power Technologies for five quarters, so this is our first period where we have been able to show the growth in that business on a post-acquisition basis.

This quarter, our gross margin was 30.7%. This compares to a gross margin percent of 29.5% for the prior-year period, representing an increase of 1.2%. A number of favorable factors contributed to this increase, including a favorable impact coming from the strong dollar, most notably against the Ukraine hryvnia and Mexican peso. Our assets include better coverage of fixed costs by the higher product revenue and shifting mix in costs favoring our Climate Control Seat.

Our operating expenses were $39 million during the second quarter, representing an increase of $2.8 million or 8% over the prior-year period. About $600,000 of this increase was from our equity incentive plan, a part of which is accounted for on a mark-to-market basis of Gentherm common stock, which increased significantly during the quarter.

The remaining increase reflects increased resources that are being directed to development of existing and new products and the rate of marketing activities of those new product, which we expect will continue to support our product revenue growth target. One example of these new products is the battery thermal management system that reached an important milestone, as Dan mentioned, this past week, when we were awarded our first serial production contract with a global automotive manufacturer.

Our fourth-quarter adjusted EBITDA was $33.8 million, which was $1.6 million or 5% higher than that of the prior-year period.

Turning now to the balance sheet. Our cash, now totaling $101.6 million at the end of the quarter, increased by $16 million from the beginning of the year. And our total debt is now $85.6 million, which decreased by $5.2 million. These amounts both decreased partially from the decline in the euro exchange rate, since we have some of our cash and some of our debt in the euro.

This decrease of our cash balance, along with cash used for capital expenditures totaling $23 million for the 6 months, was more than offset by $39.8 million in positive operating cash flow. We continue to have significant liquidity, with approximately $85 million in available borrowing capacity in our revolving line of credit.

That's what I have, Dan.

All right. Thank you very much, Barry. And I think that summarizes a business that is achieving all of its goals and objectives. And we are continuing to see strength in all of our major markets and all of our segments.

So with that, operator, we would like to go ahead and open the floor for questions. Gary?

(Operator Instructions) Steve Dyer, Craig-Hallum.

Couple quick questions, first on the battery thermal management product. Congratulations on the win; very promising. I noticed model year 2017, but those tend to launch not necessarily in the third quarter as they always used to. How should we think about revenue contribution from that, both in timing and maybe magnitude?

Well, this is a product that is being designed into a category of vehicle. So it will be launching -- as you say, it won't be launching on a exact calendar segment; it will be launching as these vehicles come into the stream of this manufacturer.

So it's a very critical part of this new vehicle. Each one of these vehicles with this equipment option will be equipped with one of our heating and cooling technological devices. So you can look at this as when you say model year 2017, it will start slow and it will build as each of these vehicle lines come on board. And it will probably take us a good six months to get the full production activity at full output.

And is this multiple models or just one?

It's multiple models. It actually goes with a series of engine packages, each of which has a unique battery kit.

Okay. And just in terms of margins directionally, is this in line with corporate average or better? Or any color there would be great.

It's in line with our corporate objectives.

Okay. And then just digging into the currency piece, I noticed in the release you talked about a $4.3 million benefit from the stronger dollar. Is that just, Barry, in cost of goods sold? Or is that contemplating across OpEx and different expenses as well that you have there from an operating perspective?

That number relates to those two specific currencies, which are really affecting cost of sales. The increase is in other parts of the P&L as well, from other currencies. That said, there's also negative impacts from just the declining euro as it affects the denominator and the numerator of some of the margins. So there is -- it's just one piece.

Okay.

Those are how the currency helped the profitability, though.

The currency did help, right. Okay. Just hopping over to the bed, it's been a while since there has been any real momentum there. It seems like it's starting to pick up. How should we think about revenue contribution in the second half of the year? You talked about significant growth, although it's coming off of a very low base. What do you have in there, just maybe in terms of your expectations for the next six months?

Well, what we've got with the bed program is a bit of a reenergized project. What we had in -- what the very limited activity that you saw in the first half was the final stages of what we call a slow introduction and a couple of -- actually, only in one test market.

The test market came out very, very well. And you are going to see a steady escalation of the number of stores that Mattress Firm offers this new Atmos brand bed. We are very excited about it.

And you are correct; there's a very fairly small base to deal with. But I think you're going to be able to see a couple million dollars of revenue in the second half from this new bed program and I think that's going to carry over into 2016. So I think we're going to see some pretty good response. The market indications from the test market are very positive.

Okay. Best-selling product in the market is what we've heard. So that's great.

Best-selling product, yes, sir.

And then just last question and I'll cede the floor. This is the first time you guys have been in a net cash positive position since before W.E.T. Does that change your philosophy on whether it be a dividend or buybacks? Or is there any difference to your approach with a balance sheet that is really, really very strong right now?

It doesn't change our philosophy at all. We still believe very strongly in what I would call a conservative balance sheet. We do not mind having cash on hand. That allows us to take any particular strategic move we want to make.

We have never really been big fans of dividends. And we have occasionally flexed buyback programs when we saw the opportunity. For us right now, the market is an extremely appealing place. We are constantly looking for opportunities to expand our business capabilities, and having $100 million in cash or so is very helpful when you start thinking about acquisitions or new entrances into new segments and new products.

As you know, we also have been growing our business quite steadily. And we have been able to expand our manufacturing base worldwide, including two new facilities that are coming online: our Vietnam factory to help our Asian business and our new Macedonian plant will come online early next year to help offset some of the load we have on our European business.

While the numbers may not look like it in US dollars, our European business is actually doing quite well and we are achieving all of our operating goals in the local currency. If you took the currency impact out, our European business has grown quite nicely quarter over quarter and year over year. So we are funding all of that growth activity internally without having to take on any additional heavy debt.

You mentioned acquisitions. How would you gauge your appetite for acquisitions? Would you expect to do something in the next year, or is it hit and miss?

I would describe our appetite for acquisitions of the proper type of companies and product technologies as high. We are looking and we are reviewing a number of companies each quarter, and we have not found the perfect mix of things that we like to bring into our Company.

Barry just mentioned the satisfaction that we have by seeing our Global Power Technologies group perform very well for the quarter. This strong quarter now brings them up to par and up to where they wanted to be in the first half of the year and we think we're going to finish the year strong with them. And we think that's the type of company we like to invest in.

Got it. Okay, thanks, guys.

Samik Chatterjee, JPMorgan.

So the first thing I want to hit upon was obviously the good news that you had on the battery thermal management contract. And maybe to the extent that you can, if you can share some more details on the contract. You mentioned it's on a couple of models.

Is it like a hybrid model that you're looking at, or is it electric vehicle? Is the product that you developed, can it be used on board like hybrids and electric vehicles? And I remember from our previous discussions you were in discussions with a couple of automakers about this product. So maybe how close you are to getting a contract from other automakers as well on this product?

The concept of the product is that the chemistry in batteries is very sensitive to heat exposure. Extreme heat will actually shorten the service life of the battery. The auto manufacturers and the battery manufacturers recognize this in a fairly painful way, and some of the packaging that is required to be able to put these additional power sources into the vehicles are inconvenient. So they have to put an AC/DC converter, which generates a lot of heat and can sustain a lot of heat, very close to basically a box of chemistry that cannot sustain heat.

So the devices that we are designing and have designed and worked with a couple of customers with are thermoelectric-driven and they allow us to take away the heat from the battery and protect the battery's service life. So it doesn't really matter whether it's a standard battery, a hybrid, a mild hybrid or what. It is a more electrified vehicle that has a need to have a battery pack protected from thermal exposure.

And we are working with several other customers worldwide and we do anticipate that we will be receiving additional orders. And we have no particular time schedule that we can announce as to when we feel we will be receiving these future orders.

But we have been talking about the fact that this area, this new product category, is a very significant piece of our future business. And it's something that we are uniquely positioned because of our strengths in thermoelectrics, because of our understanding of the automotive application and the environment that we have to operate in, to be able to take advantage of this growing new exciting opportunity for us to be able to come in and help our customers manage their vehicle requirements and extend the service life of these very expensive battery packs.

Great. Thanks for the details, Dan. Maybe if I can follow up on that. I'm just curious to know like were you competing with other technologies for this award win or where you competing with other suppliers who were doing something similar? Or maybe, again, like your climate control piece here, you were the only supplier that was going out with this technology to the automaker?

Well, the auto companies are very open-minded in terms of problem resolution. So we were competing with lots of different technological approaches.

When we presented our concept, it was based upon thermal electrics. Other people presented programs based upon conventional compressed gas systems. There were also a few other people who were presenting either straight thermoelectric or modified hybrid thermoelectric systems as well.

Our knowledge of thermoelectrics and how to package them, manage them, and manufacture devices with them was our strength. And that allowed us to win a very sophisticated customer's concept competition and then we were able to beat out all comers. Once the concept had been determined to be a thermoelectric device, we were the guy who won the contract based upon our strengths.

Got it, got it. And finally, just my last question here, just wanted to understand the moving pieces of your basic guidance. Relative to the end of 1Q, I believe the euro sort of stabilized. So maybe just walk me through what really changed relative to your expectations in April and early May. And is it in some way related to what you are seeing out of China in terms of low production?

Okay. That's a whole lot of questions as your final question. Let's take the China piece first. The Chinese market is in a bit of a doldrum. It is not growing the way it has been in the past few years.

For us, the market is being depressed because the government is putting pressure on some areas and some segments of the business, plus I believe that the local Chinese market is beginning to understand that the overheated housing market and the overheated stock market in China is something that can't be depended on in the long term. So I believe that the appetite for new vehicles in China, in particular, is going to be well under control for a period of time as the economy adjusts to these new factors. I don't know how long that is going to be. But for us, we see a definite indication that the Chinese market is softening.

Asia, however, consists of several big pieces for us. Our Korean business is still doing very strong and happy business. Our Japanese business is still doing very well. So overall, the Asian market is a little softer than we thought at the beginning of the year, and we don't see anything changing in that area during this year.

And in general, the currency situation, which we would describe as a very strong and powerful US dollar, is something that came on in the fourth quarter of 2014 and has consistently gotten actually stronger during the year. There are several social and economic issues that are driving that strength, not limited to the Greek economic crisis and the political and economic instability of some of the adventures of our friends in Russia.

There's also pressure around the world. Oil prices are at pretty much all-time lows and a lot of the economy is still adjusting to this factor. So we believe that the currency exchange rates are going to continue to be dominated by the dollar.

And when we lay that forward, looking at where we think this might impact our year, we see a consistent, steady, strong dollar. And that's going to negatively impact our revenue at the top line. But as Barry has so eloquently explained, it also has a positive impact for us on some of our operating expense currencies, such as Ukrainian hryvnia and the Mexican peso.

So it's good news/bad news. And we are uniquely positioned. We are not dominated by either currency, but we do have impact, and the strength of the dollar makes some of our operating cost positive. So it impacts our bottom line in a positive and favorable sense.

So we see a very strong operating business that has a headwind on a conversion loss of the results of our international businesses back into the US dollar. We are a US dollar-based company. And when these currency conversion losses come in, they are significant on our business.

Got it. Thanks for taking my questions, Dan. Thank you.

Gary Prestopino, Barrington Research.

What was the constant-currency revenue growth in the seat heater business? Do you have that handy?

It was up by 7%.

Okay.

Seat heater? No, that's not true.

I don't have that handy. We did indeed grow in seat heaters despite two things. One is the euro currency impact of that particular product line more than any other. Plus we have (inaudible) the heated ventilated seat programs, which have been growing very nicely, absorbed some seat heaters. So there's a classification difference when we look at year-over-year comparison.

And if you look at the numbers, the units of seat heaters did go up. But the revenue for seat heaters was one of the more impacted pieces of our business due to the strong dollar.

Okay. And then getting back to this new piece of business, which sounds very exciting, that you won, is this a option that is going to be offered by the manufacturer at the choice of the consumer? Or is this something that is going to be part of the actual car in terms of the manufacturers want to put it in there to increase the battery life?

It's actually -- if you think about it in a very broad sense, it's tied with a drive train package. So it's not necessarily an option. When this drive train is called for, it requires a battery that will have our cooling device built into the package. So it's not really an option.

Okay. Do you have any idea how much it increases the cost of the car to the consumer, Dan?

I do not know how much it increases the cost of the car to the consumer. I know how much it costs the manufacturer to be able to offset the potential very large warranty cost if these batteries don't fulfill their full service life. So that's really what the car company is trying to do. They are trying to make sure that their vehicles, which are famous for reliability, remain reliable once they are in the field.

Okay. Thank you.

Matt Koranda, ROTH Capital.

Thanks for taking my questions. Just wanted to get this completely clear. The outlook here, the entire thrust of the lower 2015 outlook, is driven by currency only. Is that correct?

It's not driven by currency only, but the impact is very much very heavily dominated by the currency. The strong dollar is definitely the number one, two, and three impact on our revision of the guidance.

Okay, got it. So maybe it's some residual impact from maybe just the lower production rates in China as well as a small piece of impact in there?

There are things like that, and some I would describe more as mixed issues that come and go.

Okay. Okay, got it. That's helpful. Just looking in the second half here, I would assume potentially -- and correct me if I'm wrong here, but I would assume we are going to see some smaller headwinds to revenue in the base seat heater business. What steps in to fill that void? Are we thinking it's some combination of GPT and CCS? If you could just walk us through your assumptions there for the second half.

Well, we are not going to walk you through all of our assumptions. We will tell you that we've looked at our business and we see a very good third quarter. And like many years, we look down and we see the fourth quarter, and there are some areas in the fourth quarter that may or may not turn around and give us an indication of how strong the business is going to be for the full complete year.

We do believe we are going to see continued strength. We have product launches that are going very well, particularly in the heat/cool and heat vent business. As Barry has alluded to, success in the heat vent business is basically a cannibalistic approach because every new seat, heat, and dent system that we sell, we now lose a standard seat heater unit in the future.

So we expect to see the seat heater business change over time as the heat/cool and heat vent business expands and continues to grow. We expect to see that activity continue in the second half of this year. And you will see seat heater business being replaced forever by the heat/cool and heat/vent business as that transition occurs.

Okay, great. That makes a lot of sense. One more on the second half here. In terms of the visibility you guys have in the platform launches, I know you guys don't want to get into individual platform launches. But could you give us a sense for maybe regions and geographies in which you guys are going to see some launches in the second half here? Is most of that going to be dominated by North America in the CCS category? Just a little color there would be great.

I would say that it's not going to be dominated by one particular region. We have some very good activity going in the North American business. I think you're going to see some renewed activity in the European marketplace, which we believe is coming back. And we have some pretty good schedules going in Asia. So it's not particularly dominated by any regional aspect of the business.

Okay, great. Last one here for me. Does a recovery in Europe and an uptick in production there have any implications for gross margins in the second half here? Are we talking a different mix that could weigh on gross margins a bit, or will that be offset by some other factors? Just some commentary there would be great.

I'd say that we have given our guidance on the gross margins. And we do see some increased activity in Europe. And I don't think that that would negatively impact our gross margin projections at all.

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

(Operator Instructions) Anthony Deem, KeyBanc.

So just looking at the revenue and the outlook, so it looks like revenue up 5% year to date, 6% FX headwind. So maybe excluding some M&A and currency, 9% growth in the first half. So a few hundred basis points of market growth there, so maybe new business growth above market more in the mid to high single-digits year to date.

So I'm just wondering, as we look into the back half and over the next few years, based on the visibility you have today, should we think about new business growth for Gentherm above underlying production in the mid to high single-digits or more so in the double-digit range?

Well, we are not going to quibble math with you. But when we did a quick analysis of it, we see the impacted version of our growth at around 10% for the first half. When we look at it in units instead of it being impacted or shattered by the strength of the dollar, we still see very strong activity worldwide.

So when we look at it in the long-term sense, we are going to obviously have to adjust our thinking in terms of what the currency realities are on a worldwide basis. But we still are going to be driving our business to a 10% to 15% year-over-year growth rate.

These current short-term headwinds that we are seeing in the currency are going to force us to have to really redouble our efforts in some areas to be able to get this growth. We are not able to offset this type of very rapid swings in the currency exchanges. It takes a bit of time in our core businesses to be able to realign our position ourselves. So we believe that you're going to see double-digit growth out of the Company over and above the normal 2% to 3% or 4% growth that we have been seeing in the auto industry worldwide.

Okay, I appreciate that. And then just lastly for me. On the new battery thermo management system, does that business come online at similar corporate average margins or maybe above? And also what are your longer-term expectations for that business? What do you see the market opportunity as for that battery business? Is there strong interest from your customers?

Yes. There's definitely a strong need for this type of technology in the marketplace. It's something that we see as a very dramatic growth area in the auto business worldwide. As more and more vehicles on a global basis are becoming electrified, companies are having to pay more and more attention to the types of technologies they deploy to be able to maintain their vehicles' reliability.

The reason that these technologies are coming on board is to extend the service life of batteries in a very, very difficult environment. That's why we are in this segment, this business. So we believe that this segment is going to be growing very rapidly. We also see ourselves as being very uniquely qualified to attack a very large portion of this marketplace because of our skills in thermoelectric devices and in packaging and understanding the auto environment.

We have electronics skills; we have manufacturing skills. And we're positioned globally to be able to take care of very large chunks of new business in this very important new product set. And the gross margins that we anticipate for this product line are very much in line with our corporate goals and averages. We are not going to particularly announce what the gross margin is on any particular individual product or program.

Thank you very much.

This concludes the question-and-answer session. I will turn the conference back over to Mr. Mason. Please go ahead, sir.

Well, actually, you are not turning it over to Mr. Mason. You are turning it over to Mr. Coker. But that will be just fine. We wanted to summarize today's call and the operations that we've seen for the quarter and for the half as being a very strong success for our business. We are quite pleased with the results that we are [being getting] into the marketplace.

The operations for us in almost every segment across the board are performing at or above expectations. We were very delighted to be able to be named as the Supplier of Choice for the new battery thermal management project that we've mentioned. This one program alone is a significant piece of business and will be the opening for us to be able to step in and deal with other opportunities such as this in this new, very important, fast-growing segment.

This has been a tough year on one aspect, in terms of the impact of the strong dollar. But we think our teams are responding well to this challenge. Our businesses are being run very effectively, very efficiently. And you will see us continuing to be strong on the bottom line. And bottom-line profit return is what we're trying to achieve.

So I would like to thank everybody for joining us in this rather unusual hour for us. This is going to be our regular pattern as we go forward, trying to announce our release earnings after the close of business and then offering the conference call to review the release itself. So we thank everybody and we ask you to join us again in 90 days as we review what we hope to be a very good third quarter. Thank you, operator.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time and thank you for your participation.