Gentherm Inc Q1 FY2020 Earnings Call

Greetings, and welcome to the Gentherm Inc. First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Yijing Brentano with Investor Relations and Corporate Communications. Please go ahead.

Thank you, Operator, and good morning, everyone, and thank you 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 may make forward-looking statements within the meaning of federal security laws. Statements reflect our current views with respect to future events and financial performance. We undertake no obligation to update them, and actual results may differ materially. Please see Gentherm's SEC filings, including the latest 10-K and subsequent reports, for disclosures of our risk factors and other risks and uncertainties underlying such forward-looking statements. During the call, we 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 our earnings release or investor presentation. On the call with me today are Phil Eyler, President and Chief Executive Officer; and Matteo Anversa, Chief Financial Officer. During their remarks, Phil and Matteo will be referring to a presentation deck that we have made available on our website at gentherm.com/events. After their prepared remarks, we will be pleased to take your questions. Now, I'd like to turn the call over to Phil.

Thank you, Yijing. Good morning, everyone, and thank you for joining us today. As we're all well aware, the outbreak of the global pandemic has created a significant hardship and challenge worldwide. Our hearts go out to the communities and individuals deeply affected by the COVID-19 pandemic. We would like to express our gratitude for all of those on the front line, including healthcare workers, first responders, and other essential service providers. From the outset of the pandemic, our top priority has remained clear: the health, safety, and support of our global team members and the communities we serve. Now, let me move to Slide 4. COVID-19 will have severe economic ramifications, the full extent of which are still to be determined. Since launching our focused growth strategy two years ago, we've built a strong foundation from a capital, liquidity, and balance sheet perspective. As no one can perfectly predict the severity or longevity of the virus's impact on the global economy, we've moved quickly to take additional actions to further improve our financial flexibility and conserve cash. Shown on Slide 4, these include: we drew down an additional $169 million under our revolving credit facility in March. We have re-prioritized capital expenditures and are reducing our planned capital spending. We're actively reducing operating expenses. We're deferring a portion of employee compensation beginning May 1, including a 30% to 40% deferral at the executive level and a 20% deferral for all other salaried employees. We are managing working capital with strong discipline to improve cash flow. Turning to Slide 5, let me give you a quick update on the current status of our operations. As of this morning, the majority of our offices and manufacturing facilities outside of North America are open. In North America, we're still waiting for many OEM customers to resume operations and for government approval to reopen our plants in Mexico. However, our medical operation in Cincinnati is considered essential and is operating at full capacity. In addition, our facility in Burlington, Canada is primarily supporting the medical business at partial capacity. In Europe, our manufacturing facilities in North Macedonia and Ukraine, as well as our warehouse in Hungary, are partially open to support limited customer orders. In Asia, our plants in China and Vietnam are fully operational, but we are adjusting our capacity based on reduced customer demands. As you can see, our Asia-based operations were the first to come back online, and we have leveraged our learnings from those facilities to identify and implement the appropriate COVID-19 safe work practices and protocols in our other manufacturing facilities around the world. We're actively managing our response to the situation in each of the regions, taking into consideration government mandates and health and safety guidelines. As our customers are coming back online, we are ramping up our production where possible in line with demand, always taking into account the health and safety of our team members. We have implemented a global task force to manage our supply chain and to ensure a proper flow of components from our key partners. So far, we are meeting all customer requirements, and we're managing this dynamic situation on a real-time basis. Now on to the first quarter highlights on Slide 6. Despite the challenging environment, we delivered solid financial results for the quarter. First, we were able to continue to outperform in Automotive versus the key markets that we serve. Excluding the impact of foreign currency translation, our 9.4% decrease in first quarter organic Automotive revenue compares to a decline of 24% in vehicle production for our key markets of North America, Europe, China, Japan, and Korea. Adjusting for our lower revenue exposure in China, which represented only 6% of revenue in the quarter, we outperformed actual light vehicle production by approximately 560 basis points. Second, we achieved record quarterly revenue in Medical, growing nearly 50% year-over-year, or 27% excluding the impact from the acquisition of Stihler. Hospitals across the U.S. and Europe are using our Blanketrol solutions to support temperature management of COVID-19 patients to improve outcomes. Third, we managed our expenses with discipline, reducing SG&A expenses by 20% year-over-year, a portion of which was attributable to the divestitures of CSZ Industrial Chambers and GPT. Finally, we significantly improved cash flow from operations compared to the first quarter of 2019. We generated nearly $30 million of cash flow from operations in the first quarter of 2020 and over $140 million in the last 12 months. Our business model, which generates substantial cash flow, along with our strong balance sheet with total liquidity at $450 million at quarter end, will provide the financial flexibility to help safeguard against the current uncertainties in the marketplace. Matteo will provide more details on our financial results in a few minutes. Before I get into the details of the quarter, I would like to share that Ford Motor Company announced that they would manufacture powered air-purifying respirators as part of their response to the COVID-19 pandemic. The core of the respirator design is the electronic controller, which adjusts the power level of an air blower. I'm very proud that Ford has selected Gentherm to be their partner to design and supply the electronic controller in this vital equipment used to protect healthcare workers in the fight against COVID-19. Now turning to Automotive highlights on Slide 7. In the first quarter, we launched our automotive solutions on 39 different vehicles across 19 OEMs, including Ford, Geely, General Motors, Great Wall, Honda, Hyundai, Kia, and Volkswagen. We continue to see momentum for our CCS product, and we launched on the Buick Enclave, Changan PSA DS9 Sedan, Hyundai Kona, Hyundai Mighty, Kia Sorento, and SAIC RX7 Roewe. In Battery Thermal Management, we started production of our proprietary battery heating solution for the plug-in hybrid Jeep Renegade through our customer LG Chem in the fourth quarter, and we've now launched on a second vehicle, the Jeep Compass. I'm pleased to share that our manufacturing facilities in Acuna and Celaya, Mexico, and Langfang and Shenzhen, China have each earned the coveted 2019 Supplier Quality Excellence Award from General Motors. This award acknowledges top-performing suppliers that meet a very stringent set of quality performance criteria. I would like to congratulate our global operations team for their hard work and commitment to deliver the highest level of quality and service for our key customer. On the technology front, we continue to make great progress on ClimateSense development projects with luxury German, Asian, and US automakers. In 2019, General Motors and Gentherm jointly presented our development project results at the Society of Automotive Engineers Thermal Management Systems Symposium. The results were subsequently highlighted in a number of industrial publications, including the Green Car Congress, Charged Electric Vehicle magazine, and most recently, in the March edition of Automotive Engineering that highlighted new approaches in thermal management. Lastly, I'm excited to share that we made a strategic acquisition of Promethient's portfolio of innovative thermal management technologies in the first quarter. Through a combination of in-house innovation and strategic investments like this, we're developing innovative next-generation products engineered to deliver industry-leading comfort with more energy efficiency. I'd like to thank our global R&D team for their continued efforts and expanding our technology leadership even in this challenging time. Now on to Slide 8, where you can see that in the first quarter, we secured $120 million in new program awards across five different customers. While the award level is lower than prior quarters given the current environment, we continue to win over 80% of our opportunities. While there are many delayed awards in the first quarter, we are seeing increased activity and more wins in the second quarter. In the first quarter, we won multiple CCS awards, including platform wins with the Ford, Everest, Hyundai Creta, Kia Sportage, as well as the Rivian R1S SUV and R1T truck. Rivian is one of our newest customers. Electric vehicle manufacturers are now leveraging our solutions to enhance comfort while significantly improving energy efficiency and range. As a further example, I'd like to share that we have just won a strategic CCS award for the Hyundai Genesis EV platform. With the addition of this award, Gentherm is now the exclusive provider of all CCS solutions for the Genesis brand. I'm also very excited to share that we won our first electronic air cooling award for Infotainment and Head-Up displays with Mercedes for their entire future lineup of battery electric vehicles. This is an important milestone for Gentherm as we continue to expand value propositions to our customers and add content to vehicles. Now let's turn to Slide 9, for a discussion of our Medical business. Many of our medical products play a critical role in helping to fight COVID-19. The Medical team is doing an exceptional job in meeting increased customer demand while keeping our team members safe. In the first quarter, we delivered record quarterly revenue, growing nearly 50% year-over-year, or 27% excluding the benefit of the acquisition of Stihler. During the quarter, we recorded a substantial increase in Blanketrol equipment and consumable shipments across the U.S. and Europe to support temperature management of COVID-19 patients, which helps to improve outcomes. Our liquid-based patient thermal management solution was selected by several large US hospital systems to treat high fevers of COVID-19 patients. These include Northwell Health, New York State's largest healthcare provider; Stony Brook University Hospital, the largest academic medical center on Long Island; University of Rochester Medical Center in New York; and Northwestern Memorial Hospital in Chicago, just to name a few. In addition, we achieved strong growth in our new UV Treo cardiovascular surgical advanced temperature management system. We continue to leverage our expertise in thermal technology and medical device design and production to further develop our product pipeline for continued revenue growth. To summarize, on Slide 10, over the past few years, we have steadfastly executed against our strategic plan to focus our growth, divest non-core businesses, realign our cost structure, and bring innovative solutions to the market to drive long-term growth. As we are faced with a worldwide pandemic that has significant implications for our customers and our company, I'm extremely proud of the agility, flexibility, and dedication that I've witnessed from our more than 11,000 employees globally as we continue to successfully deliver on our commitments to our customers, shareholders, and other stakeholders. We will remain highly focused on strong execution, delivering critical medical equipment to enable hospitals to manage patient temperature needs, empowering Ford Motor to build powered air-purifying respirators, and, as production lines ramp up again, deliver our unique thermal solutions to OEMs and Tier 1 suppliers worldwide. With our capability to pivot our resources to meet immediate customer needs, coupled with our strong balance sheet and financial resources, I'm confident in our ability to weather this storm and emerge as an even stronger company in the future. With that, I'll turn the call over to Matteo for a little more color on the financial results.

Thank you, Phil. And thank you to everyone joining the call today. So let me start on Slide 11 and focus on the items that most significantly impacted our first quarter results. So for the quarter, product revenues declined by 11% compared to the same period of last year. And if we adjust for the impact of FX, our overall product revenue decreased by approximately 10%. The primary driver of the year-over-year decline was the impact of the COVID-19 outbreak, which accounted for approximately $27 million in revenue shortfall in the quarter. If we exclude the impact of COVID-19, our revenues in the quarter would have been pretty much flat year-over-year. Our Automotive segment was significantly impacted by the COVID-19 outbreak, and revenue declined 11% year over year, or down 9% if we exclude FX. In comparison, according to IHS latest data, light vehicle production declined 24% for our key markets of North America, Europe, China, Japan, and Korea. While our automotive business was impacted by COVID-19 in all the product lines, we saw strength in Steering Wheel Heaters where revenue was up 13% year-over-year, due to higher volume at FCA, Ford, and VW. Additionally, revenue in BTM was also up 4%, primarily due to the newly launched e-Mini program. These revenue increases were offset by a decline in all the other product lines. Specifically, CCS revenues decreased by 13%. However, excluding the impact of COVID-19 and FX, CCS revenues would have grown 4%. Seat Heater revenues decreased 13%, but similar to CCS, would have grown 1% excluding the impact of COVID-19 and FX. Automotive Cables revenue decreased 7% due to lower orders from Bosch, and Electronics revenue was down 19% primarily due to the continued decline in volume related to RV and platform cancellations that occurred later in 2019. If we move to the industrial segment, revenue declined 22% compared to the first quarter of last year; this decline was entirely due to the dispositions of GPT and the CSZ Industrial Chambers businesses in 2019. Conversely, we saw continued strength in our Medical business where revenues increased more than 48% year-over-year, or 27% if we exclude the benefit from the acquisition of Stihler. This increase was primarily due to the high demand for Blanketrol as a result of the COVID-19 pandemic. If we move to gross margin, gross margin for the quarter was 28.9% compared to 29.2% in the year-ago period. The 30 basis point decrease was due to the annual customer price reductions and the lower automotive volume due to COVID-19, partially offset by labor productivity at the factories, supplier cost reductions, and the positive sales mix as a result of the strength in our Medical business. Gross margin also improved 40 basis points sequentially compared to the fourth quarter of 2019. This was primarily driven by the positive sales mix and lower manufacturing fixed costs. If we move to operating expenses, operating expenses were $47.4 million in the quarter, and this amount included $3.8 million of restructuring charges related to our footprint realignment initiative that we announced last September, as well as other discrete restructuring actions. Additionally, in last year's first quarter, we incurred approximately $1.1 million of CFO transition cost that did not repeat this quarter. If we adjust for the restructuring charges in both periods, and for the CFO transition costs, operating expenses were $43.6 million, down from $50.5 million in the first quarter of 2019. The year-over-year decline of more than 13% was primarily driven by the impact of the divestiture of the CSZ Industrial Chambers and GPT businesses, lower SG&A due to lower headcount, reduced travel costs, and lower R&D costs. Also in the quarter, we incurred lower stock compensation costs of approximately $2 million as a result of the mark-to-market revaluation of stock appreciation rights at the end of March. We expect that this one-time benefit will normalize in the upcoming quarters when the equity market stabilizes. Adjusted EBITDA of $32.7 million decreased $2.5 million, or 7% from the prior period. However, adjusted EBITDA rate of 15.3% improved 70 basis points in spite of the lower volume, as a result of our continued focus on cost reduction initiatives. Finally, adjusted EPS in the quarter was $0.51 a share, compared to $0.55 a share in the first quarter of last year. Our tax rate in the quarter was approximately 31%, slightly higher than our expected range of 27% to 29%. The higher tax rate in the quarter was driven by lower income in low tax jurisdictions due to the impact of COVID-19. If we move to Slide 12, to the balance sheet, our cash position at the end of the quarter was $225 million, including $2.5 million of restricted cash coming from the disposition of the CSZ Industrial Chambers business. Our cash position in the quarter increased by $172 million, primarily as a result of the $169 million drawdown from the revolver that we executed in the middle of March as a precautionary measure. As of April 30, we had approximately $230 million in cash, cash equivalents, and restricted cash. In the first quarter, we generated $29.5 million in cash from operating activities compared to approximately $7 million in the prior-year quarter. Additionally, we had approximately $9 million of cash outlay for our share repurchase program and $3 million of cash expenditure for the strategic investment in Promethient's technology portfolio. Our net debt decreased by $19 million during the quarter from $30 million at the end of 2019 to $11 million at the end of the first quarter of 2020. As a result, our net leverage ratio, as of March 31, was 0.08. As of the end of the first quarter, the total debt stood at approximately $234 million, including the cash received from the revolver drawdown. Based on the trailing 12-month consolidated adjusted EBITDA ended on March 31, we had approximately $227 million of remaining availability on our credit line, which we expect will be lower at the end of the second quarter. Now as you are aware, we withdrew our guidance for 2020 in late March due to the uncertainty of the macroeconomic environment. However, I would like to provide a little bit more detail to what Phil mentioned at the beginning of the call regarding the actions that we have been taking since the COVID-19 outbreak. First of all, as soon as the dramatic impact of the outbreak became clear in early March, we suspended our share repurchase program in order to preserve liquidity. We also completed a full review of our operations and decided to re-prioritize and reduce our capital expenditures by 20% to 40% from our original plan of $40 million to $50 million. Moreover, we are reducing our operating expenses by eliminating non-critical discretionary costs, in addition to what we had already accomplished through the first quarter of 2020. And finally, we are negotiating extended payment terms with our sourcing partners where possible. So now let me talk about what we're seeing in the second quarter. Based on the latest forecast, IHS is estimating a decline of 44% in vehicle production for our key markets of North America, Europe, China, Japan, and Korea. Our expectation is that OEMs will ramp up production slowly; they will likely use up inventory accumulated prior to the shutdown before resuming significant orders from suppliers. Please also keep in mind that the majority of our product revenues are in North America and in Europe. Therefore, we expect our second quarter Automotive revenue to decrease year-over-year, slightly more than the IHS forecast. Given the uncertainty that still exists, we will not provide a full-year 2020 guidance until we can gain more clarity around the future industry production levels and the ramp-up of customer operations. As a result, we are also postponing our strategic update meeting for investors, which was originally scheduled for June 9. So let me summarize. We believe that our improved financial discipline implemented in 2019 around free cash flow generation, our prudent approach to share buybacks, the ample liquidity currently available, combined with the steps that I just mentioned, will allow us to weather the storm. Our current liquidity position should allow us to sustain a protracted market downturn in line with the April 27 IHS forecast of over a 21% decline in light vehicle production in our key markets in 2020. So in conclusion, the pandemic has created a very dynamic situation for all of us. We will continue to monitor the market and make further adjustments as appropriate to maintain our financial health and continue to pursue growth opportunities. With that, I will turn the call back to the operator for the Q&A session.

Your first question comes from the line of Chris Van Horn with B. Riley FBR. Please proceed with your question.

Good morning everyone. Thanks for taking my call and hope everyone is doing well.

Hi, Chris.

Hi, Chris. Good morning.

In your discussions this April, have you found that some product launches planned for 2020 are still on track while others are being postponed? Have you reviewed your product launch schedule and consulted with the OEMs to provide us with an update on that?

Yes, we're closely monitoring how things develop. We are particularly focused on the launches from 2020 and 2021, as those have the most significant impact. We've encountered 14 vehicle delays during those years. Currently, we have about 150 vehicles in our projects, which provides some context. We might see additional flow in, but that's our current situation.

Got it, okay. And you've been really, really good at executing despite the challenges here. I'm just curious on the cost side of what you've been able to kind of extract from there. What's permanent versus more temporary? Have you broken that out or could you break that out?

Yeah, Matteo will tell you.

So I think, Chris, if you're talking about the steps we've been taking since the pandemic became evident, I would say a few things. First and foremost, our top priority was to ensure the company's liquidity. So in mid-March, we drew down about 50% of our credit line and halted share buybacks. Then we evaluated all our operations, starting with capital expenditures, which was the easier area to address. We found opportunities to cut CapEx by about 20% to 30% compared to our original guidance from February. For example, we postponed any CapEx related to capacity expansion until we have a clearer view of volume trends. We also delayed non-essential programs, such as planned building improvements and certain IT initiatives. These delays are expected to take effect in 2020, and we will reassess whether to postpone expenditures into 2021 once we have a clearer understanding of overall volume. On the operational side, we took a similar approach by reducing discretionary operating expenses, which includes travel, training, and outside services. We implemented strict hiring controls. I anticipate these reductions will generate approximately $10 million in annualized benefits based on the run rate from the first quarter. You should see the effects of these cost reductions in the next 8 to 12 months, primarily towards the end of the year. I believe this cost reduction will be sustained until we have a clearer picture of the volume.

Okay, great.

We will closely monitor where production volumes and customer orders stabilize. We are also preparing to adjust our overall cost structure to align with that, including both sales costs and operating expenses.

Thank you for that information. Regarding the award side, there's a positive development with the air cooling award from Mercedes. This seems to be a new or potentially new application. Could you provide more details about what this entails and how you managed to secure that award?

Yeah. We have a great relationship, as you know, with Mercedes, and they were having some overheating issues on their design and came to us and asked for some help analyzing thermally the situation. And that kind of one thing led to another, and our product became an obvious choice for them. So it was kind of the engineering help, an assessment along with a really good product that we could craft for them. So, as I pointed out many times, our number one goal is to consistently be sitting across the table from advanced engineering at our customers. And I think in this case, it proved to be pretty valuable.

Okay, great. Thank you so much for the time this morning, and stay safe and healthy.

Thanks.

Thank you, Chris. You too.

Your next question comes from the line of Ryan Brinkman with JPMorgan. Please proceed with your question.

All right, thanks for taking my question. This is Rajat Gupta for Ryan.

Good morning, Rajat.

Hey, how are you? I wanted to follow up on the earlier response. Clearly, there's been good execution in the first quarter regarding decremental margins. Based on the operating expenses and other cost reductions you mentioned, what decremental margin should we expect in the second quarter? Also, how will that progress in the third and fourth quarters as the rate of decline begins to improve? On the cash flow side, how should we consider working capital in the second quarter, specifically what the cash burn rate might look like through April and mid-May? Finally, how can we expect that to change later in the quarter and into the second half? Thanks.

Let me begin by discussing the margin. First, I'll address the impact from the first quarter. As mentioned earlier, we experienced approximately $27 million in revenue impact due to COVID-19, primarily affecting the Automotive sector, with a slight positive uptick in the Medical sector. The decremental margin on this $27 million was around 35% to 40%. Moving to the second quarter, our visibility remains quite limited regarding revenue projections. As we approach the end of April, our revenue for this month is down year over year by 50% to 60%, primarily driven by declines in Europe and North America, which shows a different regional mix compared to the first quarter. Regarding the margin in the second quarter, I anticipate that the decremental margin will be higher than in the first quarter for a couple of reasons. First, the revenue decline is much more significant, with revenue at about half of what we had last year. Additionally, the regional mix has changed, with a heavier weighting towards North America and Europe, negatively impacting the decremental margin. We also need to keep in mind a few other considerations as we look at the second quarter. We will need to retain some of our workforce in preparation for the post-COVID-19 ramp-up, which remains uncertain at this time. In some locations, local governments require us to continue paying a certain percentage of employees' salaries regardless of the volume. Depending on how quickly we ramp up and the pace of that increase, I expect we may incur additional costs related to premium freight and expediting fees to meet customer needs. We faced similar costs when ramping back up in Asia during the first quarter. This provides some context for our expectations regarding decremental margins in the second quarter. Now addressing your second question about cash flow, we are pleased with how we started the year. Looking at our year-over-year CFOA improvement in the second quarter, we moved from $7 million last year to $29 million this year, largely due to working capital improvements. This sets a good foundation for the year ahead. As for how working capital will develop in the next three quarters, it will largely depend on the pace of the ramp-up. Based on various scenarios we've run recently, I anticipate that working capital will likely pose a cash flow drain in the next three quarters, particularly between the second and third quarters, depending on the timing of the ramp-up.

Got it, that's a super helpful color. Just to sum it up on the decremental margin. So you said that the detrimental margin on the COVID-related impact was 35% to 40%. So the second quarter could be a little bit on the higher end of that, of the 35% to 40% or was that comment more in relation to the overall 1Q decremental margin?

I would expect the decremental margin in the first quarter to be between 35% and 40%, and I anticipate that the decremental margin for the second quarter will be slightly higher than that based on the reasons I mentioned.

Great, thanks so much and good luck.

Thank you very much. Stay safe.

Your next question comes from the line of Scott Stember with C.L. King. Please proceed with your question.

Good morning and thanks for taking my questions.

Good morning.

Could you remind us that before COVID and all the maneuvers that you're taking place right now, the variability of your cost structure and your ability to flex up and down with the end markets?

We take great pride in our gross margin performance, which has been steadily improving over the past several quarters. Even in Q1, under significant pressure, we maintained it close to nearly 29%. This gives us a lot of flexibility to adjust our factories according to demand. We have an effective model that facilitates this. While facing some challenges in Q2, as Matteo mentioned, we believe that once we gain clarity on what will happen later this year, we can adapt quickly to return to our previous performance level.

Got it. And as far as I guess where your facilities are operating at right now, the ones that are open. Is it fair to assume that at least in May that obviously it will improve somewhat as year-end markets start to pick production back up, but is it fair to assume that there is a direct correlation between that and from the comments that you made about, where you expect sales to be, particularly the Automotive segment for the quarter?

We are currently relying on the available information, which indicates that Europe is slowly increasing production, though volumes remain low. North America is expected, although not yet fully confirmed, to begin production on May 18, and we anticipate a very gradual ramp-up in May. As a Tier 2 supplier, most of our products are in inventory at Tier 1 suppliers' locations, which leads us to expect some delays in ramping up. Therefore, we are projecting slightly lower and larger declines for the quarter compared to IHS estimates. That said, all our plants are prepared, having been modified according to COVID-19 safety protocols including social distancing. We've made significant adjustments to our workstations and assembly lines to facilitate this, which was quite challenging, but I am proud of our team's efforts. Once production resumes, we'll be ready to meet demand effectively, even if it means operating at a slightly lower productivity level. Ultimately, we will have to wait and see how demand develops.

Got it. And just last question, obviously appreciate the situation you guys are in, and obviously it's pretty tough right now particularly with production being down, but can you talk about your ability for the year, do you think to remain free cash positive just given your crystal ball and some of the maneuvers that you can do on the working capital side?

Sure. I believe the efforts we've made since launching our focused growth strategy a couple of years ago to build a strong foundation and improve processes related to generating free cash flow and managing working capital are really starting to show results. We entered this year in a significantly better financial position compared to a year and a half ago, and this is largely thanks to the team's hard work. Currently, our days to pay and days to collect are aligned, both around the mid-60s. We still have opportunities to work on this, especially in collecting some longstanding past dues. However, it will depend on how steep the ramp-up is and how much pressure that will place on working capital. I also want to emphasize that we are in a relatively good position regarding inventory, which should be beneficial. We are certainly focused on maintaining strong momentum in our free cash flow for 2020, though it will be lower than what we achieved in 2019.

Got it. All right, thank you so much.

Thank you.

Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Mr. Phil Eyler for closing remarks.

All right, thank you very much. Well, thank you all for joining our call today. I did want to highlight one area where maybe a question wasn't asked, and that's on the advanced development and innovation front. One of the positive signs I see is that we consistently see our customers maintain focus on advanced technology that we are working on. So ClimateSense, as an example, our key partners have continued that effort and prioritize that. As everyone knows, OEMs and suppliers are looking at ways to cut costs. We're encouraged that even in the midst of heavy shutdowns and resource reviews that we're seeing our project still boil up to the critical level. So that's pretty exciting for us and very proud of our teams being flexible and creative to keep those projects moving forward on all of our different businesses. So with that said, as I've consistently shared in the past, we remain very focused on operational execution, innovation, and cost improvement, which has become even more important in today's COVID-19 environment. I'm extremely proud of our team's agility, flexibility, and dedication to deliver on our commitments to all of our stakeholders. Despite these current uncertainties around an economic recovery and what that means for both Gentherm and our customers, our strong liquidity and our continued focus on productivity position us well to emerge from the current crisis with the ability to deliver significant long-term shareholder value. We appreciate your interest and your support and look forward to keeping you apprised of our progress. Thank you.

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