Gentherm Inc (THRM) 2025 Q3 法說會逐字稿

Greetings and welcome to the Gentherm third-quarter 2025 earnings conference call.

(Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gregory Blanchette, Senior Director, Investor Relations. Thank you, sir. You may begin.

Thank you and good morning, everyone. Thanks for joining us today. Gentherm's earnings results were released earlier this morning, and a copy of the release is available at gentherm.com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Gentherm's website.

During this call, we will make forward-looking statements within the meaning of federal securities laws. These statements reflect our current views with respect to future events and financial performance. And actual results may differ materially. We undertake no obligation to update them except as required by law.

Please see Gentherm's earnings release and its SEC filings, including the latest 10-K and subsequent reports for discussions of our risk factors and other significant assumptions, risks, and uncertainties underlying such forward-looking statements.

During the call, we will also 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 our earnings release and investor presentation.

On the call with me today are Bill Presley, President and Chief Executive Officer; and Jon Douyard, Chief Financial Officer. During their comments, they will be referring to a presentation deck that we've made available on the Investors section of Gentherm's website. After the prepared remarks, we'd be pleased to take your questions. Now I'd like to turn the call over to Bill.

Thank you, Greg, and good morning, everyone. Our third-quarter results showcase improved execution across Gentherm, allowing us to deliver record quarterly revenue and strong operating cash flow. We are committed to the execution of our strategic priorities while focusing on the day-to-day actions required to drive financial results. Now, let's turn to slide 3 to discuss highlights.

Third quarter automotive new business awards of $745 million puts us at $1.8 billion year-to-date and on track to deliver a full year above $2 billion. Momentum for lumbar and massage comfort solutions continued as we secured another important strategic conquest win with Mercedes-Benz on one of their highest volume platforms, which includes the S-Class, GLS, GLE, and CLS vehicles. It is important to note that this is 100% incremental revenue for us, as we were able to displace a competitor for this award.

The platform will include our proprietary pulsating massage system, Puls.A, marking the fourth global OEM to adopt our innovative technology since we introduced it to the market last year. Securing this award demonstrates we have innovative, highly desirable, and value-added solutions that customers demand from the OEMs, driving continued market adoption, increasing take rates, and revenue growth for our automotive business.

Additionally, we achieved record quarterly revenue of $387 million, driven by high demand for our products and improved third quarter light vehicle industry production versus our prior expectations. Automotive Climate and Comfort Solutions outperformed actual light vehicle production in our key markets by 160 basis points, excluding FX, and we were pleased to see improved performance in China during the quarter. In addition, our operational excellence initiatives are gaining traction, which contributed to operating cash generation of $88 million year-to-date.

Before I finish this slide, I want to share my perspective on recent supply chain news. We are keeping a very close eye on the supply chain and the potential impacts across the industry. There will likely be an impact on OEM production, though it is too early to call at this time. Our teams are working with customers and suppliers to mitigate potential exposure and maintain visibility. The situation continues to evolve and we’ll keep you updated as necessary.

Now, turning to slide 4. We continue our relentless focus on our strategic priorities to drive long-term shareholder value. We spoke earlier this year about our strategy of scaling our core technologies across multiple end markets to drive profitable growth. We saw success in the second quarter with wins in power sports and commercial vehicles, and we made further progress on this initiative during the third quarter.

Our efforts in the past 90 days have generated a commercial funnel of over $300 million of lifetime revenue, and we're still early in our efforts. I'm excited to say that we were selected by a large global furniture brand to supply our comfort solutions and are preparing for production to start in Q1 of 2026. The product we will be supplying utilizes existing plant, property, equipment, and installed capacity.

We are in discussions with several other furniture brands for our thermal and pneumatic solutions and see this as an attractive adjacent market given the annual volumes, margin profile, and limited incremental investment. As mentioned, we are preparing to deliver components in Q1 of 2026, demonstrating that the development cycles and time to revenue in these markets is much faster than our traditional automotive business.

Moving to medical, our new product development is progressing, and we are on track for a significant product announcement near year end. The refresh of the product line in medical is a priority, and we are accelerating plans by leveraging existing automotive intellectual property.

Operationally, we continue the rollout of our standardized company operating system across the globe, and we are starting to see early signs of traction. This is the type of foundational work that will maximize utilization of our existing assets, deliver expanded margins, lower CapEx requirements, and generate increased cash flows.

In September, we brought Gentherm’s top leadership together for an in-person summit. We used this time to align on strategic initiatives and key priorities, including the standardization of global business processes. We understand that people are Gentherm’s most valuable asset and ultimately drive performance of our business. The leaders left with a clear vision of how we will drive value creation and the sense of urgency at which we must move to deliver the required results.

Our global strategic manufacturing footprint realignment plans remain on track to be substantially complete by the end of next year. We have made significant progress relocating and launching manufacturing processes in Tianjin, China; and Tangier, Morocco. Customers have been supportive and we are actively shipping production components from both facilities.

As we think about deploying capital to achieve superior financial performance, we believe that M&A will serve an important role for the company in achieving our strategic priorities. We are cultivating a wide range of opportunities that are aligned with our core technology platforms and provide access to new markets and expand our product portfolio. We will evaluate these opportunities as a lever to accelerate our strategy. And with that, I will turn the call over to Jon to review third quarter highlights and results. Jon?

Thanks, Bill. Now turning to slide 5. In the third quarter, we secured $745 million of automotive new business awards, one of the highest quarters on record for the company. As Bill discussed earlier, awards were highlighted by a significant win with Mercedes-Benz.

Our team did a fantastic job securing this conquest business, which will more than double the annual lumbar and massage revenue with this customer after it goes into production in 2028, and it will also support lumbar and massage growth into the future. Additionally, we had another strategic win with GM for a ComfortScale solution, which is our patented next-generation integrated thermal and pneumatic hardware system.

Last year, we secured our first ComfortScale Award on the full-size GM truck platform, including the Chevrolet Silverado and GMC Sierra, and in the third quarter, GM expanded the solution to its mid-size truck platform, including the Chevy Colorado and GMC Canyon, through a mid-cycle change in 2026.

ComfortScale is a win-win for all involved. As we receive more content and value add, OEMs reduce their labor costs, and any consumer get an improved in-vehicle experience. This award highlights our close partnership with General Motors and our ability to provide value-added, innovative solutions to our customers.

Next, I want to highlight our success in partnering with Japanese OEMs as we look to drive growth and customer diversification across Asia. We secured multiple awards in the quarter, including one for climate-controlled seats on a Honda platform for the Indian market.

Although Gentherm has not historically prioritized this market, on our hunt for strategic, profitable growth, we are evaluating the broader opportunity India may present for our products and will provide updates as we progress.

Moving on to the third quarter launch activity, we again made progress in China as our solutions were included on several new programs with Chinese domestic OEMs, including our thermal solutions with Xpeng and our full suite of thermal and pneumatic solutions with Li Auto on the i6, both of which contributed to improved growth over market performance in China.

Coupled with the focus on winning new business with domestic OEMs, these launches will shift their customer mix and result in our business being more closely aligned to the overall Chinese market over time.

In Europe, we launched thermal and pneumatic solutions on the all-new Jeep Compass. Stellantis first introduced this vehicle to the European market in September and will soon launch it with our content in other regions. This vehicle will be offered in a variety of powertrain options, highlighting the powertrain-agnostic nature of our solutions.

Finally, our climate-controlled seat solution is included on Subaru's high-volume Forester. This is another great example of the success we have had in expanding our business with Japanese OEMs.

Please turn to slide 6 for a more detailed review of the financial results. Overall, third quarter results were above expectations as revenue came in higher, driven by increased industry volumes. We also delivered sequential adjusted EBITDA improvement in the quarter.

Overall, revenue of $387 million was up 4.1% compared to the same period last year. Revenues excluding foreign currency translation increased 2.4%. Automotive Climate and Comfort Solutions revenue increased 8.6% year over year, or 7% ex-FX, which more than offset planned revenue decreases from previously discussed strategic exits. Medical revenue decreased 0.4% year over year, or 1.6% ex-FX.

Turning to profitability, we delivered $49 million of adjusted EBITDA, or 12.7% of sales compared to 12.9% in the third quarter of last year. The 20 basis point decline was primarily driven by higher material costs, including a minor impact from tariffs, expenses related to our footprint realignment, and higher operating expenses, partially offset by operating leverage and favorable foreign exchange.

Consistent with our prior communication, the impact from tariffs has been minimal, and our team has done a nice job of working with customers to mitigate our exposure. Adjusted diluted earnings per share was $0.73 per share compared to $0.75 per share in the third quarter of last year.

On cash, we have generated $88 million of operating cash flow year-to-date, further strengthening our balance sheet. Net leverage stands at 0.2 times at the end of the quarter, providing us with ample access to capital to deliver on our strategic priorities.

Please turn to slide 7 for a discussion on our guidance for the remainder of the year. Based on our year-to-date performance and current visibility into OEM production schedules, we are increasing the midpoint of our revenue guidance while narrowing our EBITDA range.

For the full year, we now expect revenue to be in the range of $1.47 billion to $1.49 billion, with the increase driven by improved second-half light vehicle industry production versus our prior expectations.

Our outlook for the fourth quarter includes the assumption of seasonally lower revenue versus Q3. This revision does not include the potential impact of supply chain disruption that Bill discussed earlier. Year-to-date, we have delivered 12% adjusted EBITDA margin and are narrowing our adjusted EBITDA margin range to 11.9% to 12.3% for the full year.

The EBITDA range primarily accounts for the impact of volume, as well as the potential timing of year-end initiative spending, including expenses related to footprint transitions and new product introductions. On CapEx, we are again reducing our expected range of spend from $45 million to $55 million, which reflects an ongoing focus on optimizing current plant equipment while also scrutinizing new projects.

In closing, we are pleased with the results year-to-date, and our team is focused on finishing the year strong. With that, I will hand it back to Bill for closing remarks.

Thanks, Jon. Our third-quarter results demonstrate improved execution and progress toward our long-term strategic initiatives. We delivered record revenue with strong cash flow and have made notable progress entering into adjacent markets. With innovative solutions and a strong balance sheet, we are well positioned to deliver profitable growth, margin expansion, and increased levels of cash flow.

We remain focused on these strategic imperatives that will result in long-term value creation for our shareholders. With that, I will turn the call back to the operator to begin the Q&A session.

(Operator Instructions) Matt Koranda, Roth Capital.

Hey, good morning. Good to see the further conquest award with Mercedes. I'm curious if maybe you can just point to a few of the factors that are giving you momentum in winning that conquest business. Is it technology superiority? Is it sort of having the full suite of comfort and thermal? Maybe just touch base on sort of some of the factors that are at play there.

Yeah, Matt. Good morning, it's Bill Presley. I would start with -- it's certainly an innovative edge. Our solutions provide the OEMs with the experience that they can pass on to their customer and price for. So there's a true value-added proposition there, and we have an innovative lead there.

Our commercial relationships with our customers are very strong, so I would say our commercial model of interacting directly with the OEMs to impact their product plan versus attempting to sell through a Tier 1 gives us a position with the OEMs I think that maybe not a lot of our competitors share.

And I think a really interesting one here is, it included Puls.A. So this is the fourth OEM to adopt our Puls.A technology globally since we introduced it to the market last year. So, in order, I would say it's the innovative edge, the value proposition it provides to their end users, and our customer relationships.

Okay, I appreciate the clarity there. And then just on the adjacent market opportunity, good to see the $300 million funnel that you guys highlighted. Maybe curious how that breaks out between some of the opportunities that you have mentioned in prior calls, power sports, commercial vehicles, furniture, I believe.

And then how do we think about that converting to commercial wins that could impact 2026 or 2027? I know you mentioned there's some shipments on furniture in the first quarter of '26, but I would imagine that it builds into the '27, so maybe just level set us on sort of how to think about that.

Yeah, so that $300 million pipeline, as you mentioned, I mean, that was with just six months' worth of work, right? So, things move very fast there, which is very encouraging. I would say in rough numbers, it would be roughly one-third what I would call the furniture, one-third what I would call specifically commercial vehicle, and one-third what I would call other mobility. In order of excitement in that space, the furniture industry seems to be actually pulling rapidly.

So they're talking exciting adoption rates. The speed to market is quite impressive. I anticipate further awards in that space that we'll be able to announce, but that revenue will start flowing in 2026. On the commercial vehicle side, they're very interested in our fluid systems, so that's a new market that we're quoting with the valve business that came with Alfmeier. So fluid systems is gaining traction there.

And steering wheel technology, specifically like heaters, hands-on detection, which we supply in the light vehicle market. And then other mobility things that we've talked about like two-wheelers, construction vehicles, that's the other one-third. That one, we'll have to see how it develops. But I would say motion furniture --furniture and commercial vehicle are really gaining traction.

Yeah, Matt, I would just add in terms of time to revenue, I think you know we did talk about Q1 production on the furniture award. We think that's a $3 million to $5 million opportunity, just that one award as we look at 2026. And so to the extent that the team can continue to stack these up, we think it could be a meaningful growth driver, certainly a couple points here as we get maybe later in the '26 and the '27.

And just piling on to that and make sure it wasn't lost in the script. That's capacity that we already have installed, equipment we already have installed, so it's incremental dollars on existing net assets.

Great. Makes total sense. I'll turn it over, guys. Thank you.

Ryan Sigdahl, Craig-Hallum Capital Group.

Hey, good morning, Bill, Jon. I want to start on kind of the near-term production environment. I know there's some noise out there, you called it out in your prepared remarks, but Jaguar Land Rover, you have an aluminum supplier. I don't know if there are others, but curious if there are others beyond those two.

And then I guess the, the second question would be, why you're not including it in guidance is one, are you not expecting it in Q4, or is there just not visibility on kind of the magnitude to put it in numbers, but curious about that decision.

Yeah, I would say, so you touched on the JLR cyber issue that seems to be behind us now. They're ramping back up. That was more heavy for us in Q3. You touched on the Novelis fire which impacts aluminum. I can tell you that, that's heavy Ford, maybe Stellantis based on what they've said publicly.

We talk to them on a daily basis, right now. They're working to mitigate the issue, so it's difficult for us to see or say what the impact will be. Certainly we haven't seen any meaningful impact in the schedules yet with regard to that.

And then the third one, which is widely known that we're watching very closely, is just the Nexperia issue going on between the Dutch government, the Chinese government, and that company, and the US trade barriers.

Nexperia for us right now, our supply chain team has done a phenomenal job of mitigating any direct Gentherm impacts. So we don't see any near-term Gentherm impacts. We've done a good job of finding alternative sources for what we need.

The bigger question there will be who does it impact in the industry because they're widely used components. It's likely that somebody will be impacted. Not sure who. You want to talk about the guidance piece?

Yeah, I mean, I think, to Bill's point, the Jaguar piece certainly impacted us. There was a headwind for us in September. There'd be a little bit of hangover from that in fourth quarter. We've contemplated that in the guidance.

I think if you look at, at the fire as well as the Nexperia piece, we're really looking to our customer ADI schedules to adjust our forecast. So there's been a little bit of movement here, I would say in the last, week or two, that has been contemplated, but we don't want to speculate more broadly than whatcommunication we have from our customers. And so, it's really, the latter of what you said in terms of just visibility and -- that we have today and the impact on the business.

So we're, we're trying to be transparent as to what we see, but we haven't seen any significant schedule shifts to this point.

Helpful. Then India, I don't know that I've heard that before, I guess as you think about adjacencies, I always thought of adjacent sectors, adjacent market opportunities, can you maybe provide a little more? I know you said you'll give more color there in the future? But are there other markets around the world, whether you want to be specific or not, but that could be potential pockets of opportunity as you hunt for profitable adjacent opportunities?

Yeah, I mean, the Indian market, as you heard Jon say, talk about the conquest when it was with the Japanese OEM in the Indian market, but that's our first entry into the Indian market. And although we haven't historically looked at the Indian market, we're actively evaluating that look.

It's an attractive market to us for a couple of reasons. One is scale, and we have no presence there. Number two is if you look at some of the proof of concepts we're developing on what we call alternative markets, two-wheelers is a huge market in India. And there's a desire there for full seats. So that's a market that we're evaluating, and it looks like a very good market for us with regard to our valve technology.

So it's something that we're exploring and considering, but it could certainly open up alternative streams of revenue for us. Jon, I don't know what else you want to add.

Nothing.

Thanks guys. Good luck.

(Operator Instructions) Ryan Brinkman, JP Morgan.

Hi, thanks for taking my questions. I'd like to ask first on the strategic footprint alignment plan, now that you are growing near its completion by the end of 2026, what is the latest in terms of how you anticipate the layering on of the incremental savings with the phase-out of the associated spending to drive those savings? How should we expect the cadence of margin to progress throughout and beyond 2026 on account of both of those factors?

Yeah, I think, a couple points there. I mean, we talked about the impact in the year being about 50 basis points. I think it'll come in a little bit higher than that just based on the timing of where we are. And the fact, frankly, that we've seen higher volumes in the year, that's impacted some of the ability to build inventory.

I think if you look at 2026, we will start to see some of the legacy costs fall off, but we'll also see the impact of sort of the inventory build that we've had this year. And so the real, savings from that is probably late 2026, but really more like 2027 in terms of when we see the benefit of the footprint transitions.

That's helpful. Thank you. And then with regard to the M&A pipeline, given all the traction that you're seeing expanding into non-automotive end markets in a really capital-light way, should we think about M&A being aimed more at product expansion rather than channel diversification, or what are the strategic priorities that you're most looking to accelerate through M&A?

Yeah, I mean, when we think about M&A, we look at it, I would say through a three-fold lens, right? I mean, ultimately, we're trying to build a more resilient company, right? So we're looking for two things. We're looking for something that provides access to markets that we're interested in. And we've been very vocal about becoming more than a light vehicle producer alone, so markets are important.

Number two is it has to fit our core strategy, which means they are products that align with our current mission. So, you know, you won't see us take any wild left turns. So product expansion is important as well, right? So, more resilient company, so it has to fit the right margin profiles, it has to create value. Number two is access to other markets; and number three is, broadening the product portfolio.

Great, thank you.

We have reached the end of our question-and-answer session as there are no further questions, which now concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.