Gentherm Inc (THRM) 2015 Q3 法說會逐字稿

Greetings, and welcome to the Gentherm third-quarter and nine-month earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Mason. Thank you. You may begin.

Thanks, Matt. Good evening, and thank you for joining us for the Gentherm Incorporated 2015 third-quarter results conference call. Before we start the call, there are a few items that I'd like to cover.

In addition to disseminating through PRNewswire, 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 release, you may download a copy from the Gentherm website at www.Gentherm.com. Additionally, a replay of the conference call will be available via a link provided on the events page of the investor section of Gentherm's website.

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 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 the 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 Mr. Bud Marx, Chairman of the Board; Mr. Dan Coker, President and Chief Executive Officer; and Mr. Barry Steele, Chief Financial Officer. 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 good evening, everyone. Thank you for joining us this evening at this late hour. We would like to review what we think was a very respectable quarter. We had record revenues despite some serious headwinds from the dollar strength in the marketplace.

Revenues were around $223 million with a significant headwind, as I mentioned, somewhere around $13 million worth of currency exchange loss. But we were very pleased with the overall results of the Company and especially on the operating line and the net profits of the business.

We had a very strong quarter by our Global Power Technologies group, as you'll hear us refer to it as GPT. They had an extraordinary quarter and contributed very well to our top line and to our bottom line.

Barry is going to get into a little bit more of the details, and then we will open the floor for comments and questions from the audience. Barry?

Thank you, Dan. As Dan mentioned, our earnings for the 2015 third quarter were $0.76 a share on a fully diluted basis. This represents an increase of $0.28, or 58%, over the third quarter of 2014. This is also a 43% increase sequentially from that of the second quarter of this year. It further comes from our continued product revenue growth and favorable margin performance and in spite of currency translation headwind, as Dan mentioned, putting pressure on our revenue growth.

As in the recent quarterly periods, the strong dollar reduced our revenue performance this time by over $13 million, or 6%. Fortunately, that same effect helped reduce expenses in foreign currencies so that the impact on our earnings is actually favorable.

Our product revenues for the second quarter -- excuse me, third quarter were $224 million roughly and represented an increase of more than $17.8 million, or just over 8% -- 8.5%. Again, if currency exchange rates were the same as 2014, we would have showed revenue growth of nearly 15%. This increase is attributable to the continued growth of our automotive products, but also included an almost -- or over $12 million increase from Global Power Technologies, or GPT as we call it, which represented a 59% increase when compared with the third quarter of 2014 revenue for GPT.

The GPT revenues partly are due to favorable shipment timing of large programs.

This quarter, our gross margin was 33.5%. This compares to the gross margin percent of 29.9% for the prior-year period, which has a 3.6% increase and also a 2.7% increase from just this last quarter, the second quarter of this year. A number of favorable factors contributed to this increase including a favorable impact coming from the strong dollar, as I mentioned. Other benefits, including better coverage of fixed costs and a higher product revenue -- fixed cost on higher product revenue and the shifting mix and products based in climate control seat and GPT revenue.

Our operating expenses were $37.4 million during the third quarter, which was about the same as the prior-year period and represented a decrease of $1.6 million from this year's second quarter. This decrease was due to our equity incentive plan, a part of which is accounted for on a mark-to-market basis of Gentherm common stock, which decreased during the quarter.

Our fourth-quarter adjusted EBITDA was $43.8 million, which was $12.8 million, or 41% higher than that of the prior-year period. So it was very strong.

Just a couple of comments on the balance sheet. Our cash is now totaling $129.2 million, at least at the end of the quarter. This increased by $43.5 million since the beginning of the year. And our debt, which is now $99.3 million, also increased by $8.5 million. The decrease in our debt is partly due to the fact that we closed on a new loan in Vietnam which has helped to provide local financing for this new production location. The borrowing of that loan was about $15 million.

We continue to have over $85 million in available borrowing capacity on our revolving line of credit. So we have got plenty of liquidity, Dan.

All right, Barry. Thank you very much for that comprehensive and detailed report as usual. We would like to open the questioning from the floor. Operator, we are ready if you are.

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

Obviously, gross margin is extremely strong. And I was just wondering, Barry, if you could quantify how much of a benefit the strong dollar was to those against the [grevnon] and peso?

About the same as in prior quarters. We've given some statistics on that in the past. There are impacts some that are both favorable and negative from various currencies. We prefer not to give you a very detailed specifics, but you can generally say it's about 1% or something like that.

But consistent with (multiple speakers) year?

Yes, consistent. It's very sustained, as we've been seeing for almost a year.

Yes, okay. And GPT, it sounded like a good quarter, maybe a pull-forward of some revenue or something like that. How should we think about that revenue next year? It's obviously a question on everybody's mind given the oil and gas prices, et cetera.

Yes. There is a lot of pressure in the oil and gas industry. We've been fairly lucky so far this year. We are currently looking out and seeing no real change in the oil and gas market. Of course, we are heavily dependent on the gas business, which is -- has remained fairly stable. Although new pipelines, new exploration are definitely being impacted. So we're going to be conservative in what we see in terms of growth for next year for our GPT division.

Okay. And then also for next year, I think your first battery thermal management award kicks in probably somewhere in the second half. Is that the only one that you think you'll derive revenue from next year or is there still opportunity for more?

The revenue we're going to see in 2016 from that program will be very, very small. It will be very early shipments. The real impact from that comes in in 2017, 2018, 2019 and forward. And any additional programs we get in that area and the BTM, the battery thermal management area, will not likely impact our 2016 revenues at all but would kick in in 2017, 2018 and 2019.

Okay, got it. And then last one for me and I'll hop back in the queue. Your 10% revenue growth guidance for next year, what does that assume for a euro rate? What are you thinking there in putting that guidance together?

The euro has been fairly -- it's going down a little bit recently, so we're using the latest knowledge on that. But about $1.10.

So $1.10 is kind of the base line of your thinking for 10% revenue growth next year. Obviously if it weakens further, you'll have more headwind and vice versa if it strengthens?

Absolutely.

All right. Thank you. Bye.

Okay, Matt.

Matt Koranda, ROTH Capital Partners.

I just wanted to start in on gross margins. Really strong gross margin this quarter. With maybe a more normalized mix of products, say, maybe a little bit less GPT next year, where should gross margins shakeout? I mean, are we North of 30% next year? What is a reasonable assumption?

I think it would be fairly safe to say that we're targeting a 30% gross margin across the line. And you'll see some swings up and down. And when we get good solid quarters like we did out of GPT division, we see a little bit better mix of margin out of that group. Plus, our bids should be coming in a little bit stronger next year, too. So we're pretty confident that the margin should be about the 30% range for the full year.

Okay, got it. On the battery thermal management opportunity, could you just help us size the opportunity for you guys? I mean, how many other OEM customers are you speaking to? Is it possible to quantify that or give us maybe the nature of the discussions around that? Are there other channels for you guys as well? Are the battery manufacturers potential customers for this or integrators -- maybe you could just talk about the environment right now and the discussions you are having around it.

Sure. Well, currently, these things are particularly intriguing to folks who have start-stop technology, either hybrid or mild hybrid vehicles. The packaging of the battery packs that go in these types of vehicles are extremely difficult, and it's very hard to get thermal energy management systems where they need to be.

The beauty of a thermal electric-driven system is that it can be very nicely packaged and can deliver a pretty good punch of cool power. And that is very helpful in maintaining the service life of the battery. So we have currently announced one very significant customer that we think could generate $25 million per year on an annual basis, and we are in talks with several other people. There are different ways that we can get to this market including industrial applications. But in the automotive world, we have relationships directly with OEMs, which is what our first contract announcement was. But there's also the battery manufacturers themselves, the people who supply the cells themselves, are very interested in making sure that their products are properly managed from a thermal basis.

So we have a couple of different paths to get into the automotive market dealing directly with the battery cell manufacturers and also dealing directly with the OEMs themselves.

In an industrial application, a similar type of problem exists in various different battery backup systems that are used around the world. So we have a similar advantage there in the packaging ability of the pump electric systems, and we are continuing to look at those.

Right now, we are focusing a lot of our attention on dealing with the automotive application as start-stop and hybrid systems proliferate throughout the industry. And virtually every manufacturer in the world is one of our targets for OEM.

So that's kind of -- it's a big scale, but it's a very big opportunity. We have a lot of hard-working engineering and technical skills in thermal electric, and we know how to package them effectively and efficiently. And we have a very good service and technical support system. So we think we are very uniquely positioned to be able to take advantage of this kind of new and expanding market opportunity for us.

Got it, very helpful. Thanks, Dan. One more for me here. On the 2015 outlook, maybe you could just talk about some of the assumptions that are driving the lowered outlook for 2015 on the top line at least. US to euro hasn't seemed to really depreciate much since you guys gave your last outlook, but maybe you could give us the puts and takes there on the 6% growth.

Well, the 6% growth for this year is based upon what we basically are facing today. The third quarter came in a little bit lighter than we thought it would. And the euro-dollar exchange rate have continued to remain. In fact, they've gotten little bit worse.

So for us, the world has changed. We see that there is a softness in the Asian markets, particularly in China. And the European market is beginning to come back, but it is still a little bit softer than we had hoped at this time. When we look forward into 2016, we see new programs and commitments that will help us support a 10% revenue growth over and above where we close out 2015.

So while we are confident of this, we want to make sure that this very dangerous and shifting world we live in comes true. So we are giving ourselves a target of about a 10% growth over this year.

Got it. All right. I will jump back in queue, guys. Thanks, Dan.

Samik Chatterjee, JPMorgan.

Just looking -- going back and looking again at your 2016 guidance, just curious to know what do you mean for global light vehicle production next year? We see Asia's numbers, and I think they have gone up 3% right now for 2016. But in your view, is that too optimistic? And are you assuming -- what are you assuming for next year?

We do actually read the IHS numbers, which are fairly good. We think they might be a hair optimistic, but we don't use the IHS numbers for China in particular. They don't seem to have as good a hold as the Chinese marketplace. So we get data from the Chinese market from another group. But in general, I think you would say that our base numbers are just below that 3% target number that you mentioned.

Okay, got it. And in terms of China, what are you seeing there? Are you seeing just lower volumes coming through? Are you seeing any push-out of the launches, et cetera, through the year as well?

What we're seeing is a couple of things. There are definite volume changes, but we are also seeing a significant shift in mix in the product suite that is being sold in China. In the past, there's been a very strong and robust demand for high-end cars, particularly high-end German luxury cars. That is changing, and there is a definite softening in demand for those products and an increase in demand in the very, let's say, entry model -- entry-level models that are primarily sold by the domestic Chinese business.

So when we look at China, we see definitely a swing and a shift. Our products typically are very attractive to the upper mid-market and luxury market vehicle. So those businesses are being affected a little bit more than the general market, and the general market is definitely being impacted by a slowdown in the growth rate of the Chinese economy. We do not see the Chinese economy going into a depression or into a recession, but their growth rates have definitely slowed, and that is impacting the auto build and purchase.

Got it, and just last question. The PCS revenues were up 6% in the quarter. Just look touch softer than we would expect, especially when the total firm revenues were up 9%. So just is that more about timing of launches and -- or is that more sort of representative of what you are looking at in going into 2016?

It is more of a timing-of-launches impact. You may see some changes as we go into the fourth quarter offset a bit by -- to some slowness we've seen in December. But clearly the improvement in the GPT revenues helps depress that a little bit as well in terms of the overall mix.

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

(Operator Instructions) Gary Prestopino, Barrington Research.

With this GPT having the strong revenue growth in this quarter -- and it's a question of timing of the sales -- was there some taking from what should have been in the fourth quarter that was pushed into the third quarter in terms of the sales?

One factor is absolutely certain, and that is that they do have the systems business that has very large multimillion-dollar programs that can affect the quarter dramatically. And in reality, we've had strong quarters for a couple of quarters in a row. Whether we do see a decrease in the fourth quarter, that isn't necessarily (inaudible) in the fourth quarter, just appeared where we had less of these shipments. You could probably interpret it either way.

So it will continue to be sort of a lumpy business as we go through it, but we have seen consistent growth there for the latest three quarters.

Yes. It's just been -- pardon the urgent note -- that this is not our typical business where there is a normal predictable regular demand on a monthly basis. These projects are soft and one -- one at a time. And as Barry says, these things are multiple million-dollar programs. They are basically built and scheduled to the customer's requirements. We don't necessarily have the capability to pull forward or to push these things out. It's all customer driven, and we are responsive to the customers in this marketplace. And as Barry has pointed out, we've had three very good quarters in a row. The fourth quarter is typically a little bit softer, and we see that coming up in the fourth quarter this year as well.

Okay. Well, what -- in terms of what is driving the growth right now -- and I know it's a lot of retrofit, but the industry is obviously having problems. Is it all just that there has been such a lack of retrofit or capital investments?

What's really happening is that we are kind of spreading out a little bit further around the world, and we are getting a little bit broader acceptance into the marketplace for our technical skills and products.

So it's really not -- we're not tied directly to the number of feet of new pipeline that's put out. It's really us coming in and getting business in different markets around the world. We've gotten a lot of very good exposure and experience in the Asian markets as an example. And even though Canada has slowed down a bit, the market here in North America has been stable for us. So it's not necessarily something that we can say is a general predictable pattern. We are working to get programs around the world now and we have won a few, and so it's good.

Okay, that's good. And then with the battery thermal management contract that you signed, that's just with one OEM. Correct?

That's correct, sir.

All right. So is it your sense that as you are talking to other OEMs that they are waiting on the sidelines here to see how this rolls out and whether the functionality is there before you would sign other OEMs?

No, not at all. I think what really -- people are trying to find solutions to a rather vexing problem. The company that we signed with is kind of well ahead of the world in this area, and they are doing a very good job of aggressively pursuing solutions. The other OEMs are all examining various different options, and we are working with several people that have come to us and said we've got this problem. And we look at the problem, and we think we can put together a package that will satisfy their needs. We are engaged with several people, both OEMs and battery suppliers. So we suspect that this new opportunity will result in additional volumes and programs for us.

Okay. And, lastly, two other questions. In terms of thermal management solutions on the peak side and interior side, is it safe to say that for the 2016 model year, models coming out now, that you are seeing an increased appetite on the behalf of OEMs to put these products into their vehicles even at the mid-range level now?

Yes, I think it's safe to say that the consumers are actually keenly interested in these types of features, and the OEMs are definitely looking for things even in today's marketplace. They are looking for things to satisfy consumer demand and uniquely differentiate their vehicles.

We will continue to see a dramatic increase in the heat vent solutions that we have very much enjoyed a market leadership role in. And heat/cool will continue to be dominant in the high-end market. But, as you point out, the mid-range market will begin to naturally adopt the more moderately priced heat vent solutions.

What about things like the cool bin unit and the armrest heating, steering wheel heating, cup holders, things like that? Is that moving more into the midrange? Are the automakers wanting to put these in the mid-range vehicles as creature comforts?

Most of those products you're seeing primarily in the high-end vehicles. I would say maybe the one that's probably got the most reach would be the heated steering wheel, and that's a product that the consumers indicate testing off the charts. When someone gets a heated steering wheel, they demand it in their next vehicle. So we're seeing very good response there, and that will probably lead the charge down into the midrange. Heat and cool cup holders, heat and cool storage boxes, heated interior panels are more likely to stay on the higher end and the upper entry or mid-range level.

Thank you.

Thank you, sir.

[Thad Habeep], DA Capital

I wanted to understand a couple questions. One is your guidance for the full year 2015. What would that imply for Q4 on a constant currency basis?

On a constant currency basis.

(multiple speakers) revenue is your question?

Yes, yes.

It's roughly $217 million in revenue.

Yes. It's just about 5.5% growth, but I wonder what is it in terms of local currency growth ex FX?

You know, it would be a little bit different than what we are seeing in these previous quarters because the euro did start to begin to decline in the fourth quarter. I don't have that information right at hand before me, but it's still going to be at least 3% or 4% that has been hurt by the currency impact.

Okay. So instead of 5.5%, maybe 8.5% or 9.5%, something around there?

That's correct.

Yes.

And then for 2016, you are guiding to 10% revenue growth. Your long-term target is obviously 10% to 15%. You're at the lower end of that. I assume that the 2016 numbers don't have any currency impact. Is that fair to say?

It's pretty -- our assumptions are pretty consistent with (multiple speakers). The currencies have degraded a bit during the year. The Canadian dollar, for example, is a good example -- it is one that has degraded during the year. But the euro has been a little bit more consistent. So our assumptions are basically where we have been on these currencies in the last three to four months as opposed to where they were at the beginning of the year. So, maybe a little bit further degradation, but not a lot.

Right. Is it -- is most of the reason for being at the lower end of the 10% to 15% range, is it attributable to China, or is it more broad than that?

It's actually the general conditions around the world. The US market has begun to slow its growth and recovery from the 2009 market crash. The European businesses are beginning to very slowly come out of that same, slightly later recession. The Asian markets, Korea is doing very well, Japan is doing well, but China is in a bit of disarray. So when we look at the market, we see where we are. We have pretty good indications of what our awarded programs are, and we see that being on that 10% range. So that's -- our corporate targets are 10% to 15%. We are on the low side of that target, and we're going to try everything we can do to try to meet that if not beat that for 2016.

Sounds good. And then just a couple of quick things. One is your cash balance has obviously grown a lot. Are you seeing any interesting technologies that you could use the cash balance for to purchase?

Yes, we do. We are definitely in an acquisitive state, and that's exactly why we like cash. We are trying to make sure that we are ready to go when we see opportunities that are irresistible and fit with our strategic goal.

And then previously, you mentioned that healthcare is one of the areas that you've looked at. Is that your focus for you guys, or not specific to any particular sector?

It is one of our key interest areas that we are looking. I will say, though, that the medical market has been shopped over pretty heavy, and there are not as many great opportunities as we had hoped to see. But it is definitely an area of interest for us. There's clearly a strong opportunity for the delivery of heating and cooling systems for patient recovery and patient health care and patient comfort. We have not been able to find the ideal starting candidate in that group, but we continue to look.

And I guess last question, could you update us on the heating cooling mattress, how that's playing out?

As you know and you probably heard the last few quarters, we're in a rollout of a market testing approaches and technologies and product platforms. We have been learning a lot as we have gone through these last two quarters. The learning we had during the third quarter was interesting. We found out some things that we needed to adjust in the -- actually, the construction of the bed. That learning has now been applied, and we are expecting to see some better results in the fourth quarter as we continue to roll out these test markets and continue to get ready to go into a full push in 2016.

Okay. Management, it appears there's no further questions in the queue. Would you like to make any closing remarks?

Certainly. Thank you very much, Matt, and we appreciate all of the questions that we've gotten. Again, management thinks we had a pretty darn good quarter. Adjusting for our currency headwinds, it was definitely, clearly, a record quarter on revenues. The bottom-line results were quite satisfying, and the results of a lot of people's hard work keeping our business focused on profit and a bottom-line return.

We believe that the fourth quarter is going to continue to be much like the third quarter. And as we roll into 2016, we're fairly confident at the moment that the 10% revenue growth rate will help us improve our bottom line as well.

So we would like to thank everyone for joining us, and we ask you to join us again in about 90 days when we wrap up the year. Thank you, operator.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time.