Greetings and welcome to the Gentherm 2022 First Quarter Results 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 will now turn the call over to Yijing Brentano, Senior Vice President of Strategic Corporate Development and Investor Relations. Thank you. You may begin.

Thank you, and good morning, everyone. And thanks for joining us today. Gentherm's earnings and the announcement of an agreement to acquire Alfmeier’s Automotive Business were released earlier this morning and copies of the releases are 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 Securities laws. 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 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 comments, 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. This morning we announced that we have entered into a definitive agreement to acquire Alfmeier’s Automotive Business. We're very excited about this transaction as it will create the largest global supplier of thermal and pneumatic seating comfort for the automotive industry. This transaction will expand Gentherm’s value proposition beyond thermal and comfort, health, wellness, and energy efficiency. Before getting into the details of what this acquisition means for Gentherm, let me first provide a little background on the business that we're acquiring on slide 4. Alfmeier, a private company headquartered in Treuchtlingen, Germany, is an innovative market leader of automotive lumbar and massage comfort solutions. They're also a leading provider of advanced valve systems technology, integrated electronics, and software. Importantly, they are a leader in seat comfort and wellness innovation, with a 50-year culture of innovation that often puts them one generation ahead of the competition with respect to technology. This has resulted in a strong leadership position with more than 200 patents, including significant coverage for advanced Shape Memory Alloy technology or SMA. Alfmeier pioneered the use of SMA valve and pump actuator technology for all automotive seat comfort solutions, which delivers quiet, high-speed pneumatic lumbar and massage performance. In addition to their leadership position in seat comfort solutions, Alfmeier is a global leader in high complexity, high reliability valves for automotive fluid systems. Alfmeier’s industry-leading capabilities in valve technology has led to the development of the next generation in intelligent pneumatic seat comfort, called Pulse A. The proprietary Pulse A pneumatic system combines massage with high-frequency pulsation, which can stimulate muscles and alleviate pain and tension. With approximately 2,200 employees and operations in five countries, Alfmeier’s automotive business that we are acquiring generated EUR 232 million in revenue last year. Moving on to slide 5, let me talk briefly about the transaction itself, and then discuss in more detail what it means for Gentherm. We will be acquiring the seat comfort solutions and fluid valve systems business of Alfmeier for EUR 177.5 million subjected to adjustments as set forth in the purchase agreement. We plan to fund this acquisition using a combination of current cash balances and our revolving credit facility. The transaction is expected to close in the third quarter of 2022, subject to regulatory approvals and other closing conditions. We're excited to offer more compelling and high-value solutions across complementary customer relationships, leveraging the combined technologies, teams, and capabilities. Gentherm sees an opportunity to integrate the highest performing comfort and wellness solutions in the most space-efficient manner, which is especially important for electric vehicles that demand compact integrated designs. In addition to electric vehicles, the addition of the massage and lumbar business will further expand our value proposition from thermal to overall comfort and wellness for both luxury and high volume vehicles. Alfmeier has built a strong customer portfolio, especially with European OEMs. Some of the customers that we both serve are BMW, Volkswagen, Mercedes Benz, Ford, and a large electric vehicle manufacturer. Similar to Gentherm, the majority of Alfmeier’s business is directly sourced by OEMs. With this transaction, we expect to be able to expand Alfmeier’s market share by capitalizing on Gentherm's terms market-leading customer base, especially in North America and Asia. In addition to revenue synergies, we've identified significant cost savings opportunities through integration into our discipline management system, one that has been proven over the past few years. We expect to achieve approximately $10 million in annual run rate savings. Alfmeier’s industry-leading expertise in air and liquid flow valve systems should also open additional growth opportunities for Gentherm’s climate sense and battery performance solutions. The fluid valve business has a leading market position, attractive margins, and generates strong cash flow. Requiring minimal capital investment, the cash it generates can be used to invest in other growing opportunities for Gentherm. Bottom line, this transaction is well aligned with our mission to develop and deliver solutions that improve lives through comfort, health, wellness, and energy efficiency by creating the largest global supplier of thermal and pneumatic comfort for the automotive market. Before I discuss the first quarter results, I'd like to give you a brief update on the situation in Ukraine. Our primary concern remains the safety and welfare of our colleagues and their families. Although we've been working with our customers to transfer production of select products to other Gentherm facilities and to build redundant manufacturing and tooling capacity, we're doing all possible to maintain employment status for our colleagues. In addition, we paid a special bonus to all Ukrainian employees of our manufacturing facility in recognition of their current challenges. As part of our humanitarian efforts, we also launched an employee donation program for the World Central Kitchen, and made matching company donations to provide meals to the local community and truckloads of essential supplies including water, food, blankets, and other general supplies to those in need. At this time, we have not experienced any material impact to our production capacity, revenue, or costs. The situation in Ukraine continues to be fluid and we're monitoring the situation closely. Now on to the quarter. In Q1, we faced the most significant challenge in maintaining our supply of semiconductors that we have experienced to date. Our manufacturing and supply chain teams worked around the clock to minimize the impact of global semiconductor shortages, along with the many other challenges resulting from volatile customer demand, escalating freight costs, and material cost inflation. I'm proud of the team for remaining focused on execution and continuing to deliver for our customers and stakeholders. In fact, in February, we were recognized by Forbes Magazine as one of America's best midsize companies. Matteo will provide more detail about our first quarter financial results in a few minutes. Now, turning to automotive highlights on slide 6, in the first quarter, we launched our automotive solutions on 12 different vehicles across nine OEMs including Ford, General Motors, Mazda, Mercedes Benz, and Renault. We continue to see momentum for our CCS product on both ICE and electric vehicles. In the first quarter, our CCS solutions were launched on the Cadillac Lyriq, EV, Honda NP1, and NS1 electric SUVs, Maserati Levantino, Mazda CX 50, as well as the Mercedes-Benz SL-Class. In addition, we continue to make great progress on our proprietary climate sense, our software-driven microclimate platform, using an algorithm based on thermophysiology. Climate sensor is a critical part of our long-term strategy and continues to gain interest from global OEMs. I'm pleased to announce that we have launched a new development project with a fourth OEM in Europe. In cold weather testing, we have achieved energy savings results in line with other development projects exceeding customer expectations. We continue to optimize the value proposition for electric vehicles by significantly reducing power consumption and increasing range in extreme temperatures, all while providing best-in-class passenger comfort. Now on to slide 7, where you can see that in the first quarter, we secured over $170 million in new program awards across 10 different customers. The award level is lower than prior quarters mainly as a result of lower quoting activity and delayed awards. The pipeline of opportunities remains strong for the remainder of the year. We won multiple CCS awards, including platform wins with the Acura ADX and Honda Prologue through the Honda General Motors EV partnership. In addition, the Audi Q5, Cadillac Optiq EV, Hyundai Genesis GV70, Hyundai Kona, Volkswagen Cross Blue, as well as several Volkswagen vehicle platforms in China including Magathone, Fasat, Sajita, and TIGUAN. Of important note, we won a CCS award for the Chevrolet Silverado EV in the first quarter. This is on the heels of winning the Hummer EV Pickup, Ford F-150 Lightning EV, and Rivian R1T awards. We are capturing significant share in the all-electric truck market with our CCS solution. In the first quarter, we also received five Steering Wheel Heater awards across four OEMs including the Mercedes MSL platform vehicles, Nissan Juke, Toyota C-HR, and Prius. In addition, we won a hands-on detection-enabled steering key award for Roewe RX9, SAIC's new flagship SUV. Our teams continue to transform our product lines to create value for the electric vehicle applications. I'm pleased to share that we won a High Voltage Cable award for hydrogen fuel cell electric semi-trucks in the first quarter. While our cable business has been traditionally concentrated on internal combustion vehicles, we've introduced high voltage cable solutions for plug-in hybrid platforms across Jaguar and Land Rover on the full electric Rivian R1T and R1S trucks, and now for the hydrogen fuel cell heavy-duty trucks. As we continue to bring innovative solutions to our customers, Gentherm is well positioned to significantly increase content for vehicles as electric vehicles expand in the market. Now let's turn to slide 8 for a discussion of our medical business. Medical’s revenue grew 9% x FX in the quarter year-over-year, while elective surgeries are coming back with the ease of COVID-19 restrictions. Hospitals are navigating supply chain issues as many medical supplies are on backorder. In addition, hospitals are managing higher costs as a result of higher wages for travel nurses due to the nursing shortage as well as increased prices for many suppliers. Higher operating costs for hospitals have also put a strain on new capital spending. During the quarter, one of the market leaders for fluid warming was not able to supply to their customers. Gentherm was able to step in and provide ASTOTHERM and ASTOFLO, our fluid warming solutions to the University of California, San Diego and Scripps Health also in San Diego. We continue to see solid demand for our flagship product Blanketrol in the US. Our liquid-based patient thermal management solution was selected by several large US hospital systems, including the Cleveland Clinic, Seattle's Children's Hospital, and Norton Healthcare in Louisville, Kentucky. Now, let me summarize, our financial results in the first quarter reflect the significant headwinds created by the supply chain disruptions, both in terms of lost revenue and higher cost of goods sold. That said, we still believe there is significant pent-up demand that will need to be met once the extraordinary supply chain constraints are resolved. I'd like to thank our global team for working tirelessly to overcome challenges in the market and deliver to our customers. While uncertainty remains about where production rates will be for the next few quarters, we remain focused on bringing differentiated thermal management solutions across both the automotive and medical markets. Our portfolio of innovative solutions along with the addition of pneumatic comfort solutions, following the completion of the acquisition of Alfmeier, are expected to significantly increase Gentherm’s content for vehicles over time. In the near term, we believe that inflationary pressures will remain for some time, and we will continue to focus on execution and remain aggressive on cost management, while continuing to collaborate with our customers for reasonable inflationary cost recovery in order to deliver profitable long-term growth. With that I’ll turn the call over to Matteo for a little more color on the financial results.

Thank you, Phil. Let's focus on the key factors that significantly influenced our first quarter results. Overall, total revenues fell by 7% compared to the same period last year. When we adjust for foreign exchange impacts, our product revenue decreased by 5%. In the automotive segment, revenues were $258 million, reflecting an 8% decline from the previous year. Adjusted for foreign currency, automotive revenues dropped by 5%, consistent with light vehicle production in our main markets: North America, Europe, China, Japan, and Korea. In comparison to the prior year, all product lines were negatively affected by supply chain shortages and adverse foreign exchange translations. Specifically, BPS revenues rose by 5% when excluding foreign exchange impacts due to increased sales of air cooling BTM to General Motors and a rise in sales of cell connecting board solutions related to the BMW-EMD peak rate of the 48V Mercedes S and C class. Steering Wheel Heaters revenue was up 2% year-over-year without foreign exchange effects, attributed to growth with a significant electric vehicle manufacturer. CCS revenues fell by 4% when adjusted for foreign exchange due to the semiconductor shortage affecting truck and SUV production at Ford and GM, as well as several models at Hyundai, IKEA, and Mazda. Cables revenue decreased by 5% when excluding foreign exchange effects due to lower volume at a specific location. Seat heater revenues dropped by 8% without foreign exchange effects mainly because of semiconductor shortages impacting GM and Lexus production, somewhat offset by growth with a notable electric vehicle manufacturer. Electronics revenues saw a steep decline of 28% from the previous period due to decreased production volume at Ford, which affected the deliveries of our membership module, in addition to falls in non-automotive electronics. On the medical segment, revenue grew by 9% when excluding foreign exchange impacts compared to last year, fueled by the consistent demand for our Blanketrol products. Now, regarding the gross margin, it was 24% for the first quarter, down from 30.4% from the year-ago period. This 600 basis point decline was mainly due to increased costs to address supply chain disruptions, primarily from higher freight and spot buying, annual customer price reductions, material and wage inflation, and adverse foreign exchange impacts. Additionally, gross margin was affected by an isolated issue during the ramp-up of our new electronic plant in Mexico, which has since been resolved. However, this was partially balanced out by cost recoveries from customers. For operating expenses, they totaled $49.9 million this quarter, compared to $46.9 million last year. This year's amount included $3.4 million in restructuring and acquisition costs, while last year’s first quarter reflected about $0.9 million in such expenses. Therefore, when we adjust for these costs in both periods, operating expenses rose to $46.5 million from $46 million in the first quarter of last year. The slight year-over-year increase of around 1% was mainly due to higher R&D expenses, mitigated by reduced SG&A costs from favorable mark-to-market adjustments in cash-settled stock appreciation rights and stringent expense management. Adjusted EBITDA was $27 million, down approximately $25 million compared to the previous period. Finally, adjusted diluted earnings per share for the quarter was $0.41, down from $1.04 per share in the first quarter last year. Our effective tax rate for this period was about 26.8%, aligning with our full-year guidance of 26% to 28%. Looking at the balance sheet, our cash position at the end of the quarter stood at roughly $178 million, a decrease from $191 million at the end of December. The $13 million sequential decline was mainly due to $6 million in negative free cash flow, largely resulting from temporarily elevated working capital needs. We concluded the quarter with a net cash position of $139 million, with available cash surpassing our gross debt, resulting in a negative net leverage ratio of 0.98. As of March 31, we had about $424 million remaining on our credit line, bringing total available liquidity to $602 million. Regarding our 2022 guidance, which does not account for the Alfmeier acquisition announced today, it's important to note that the semiconductor shortage remains very dynamic. Additionally, we are navigating the consequences of the military conflict between Russia and Ukraine and the COVID lockdowns in China. With the latest updates from our customers and semiconductor suppliers, we expect improvements in the second half of the year, which we have incorporated into our guidance. We anticipate product revenues to range from $1.12 billion to $1.22 billion, assuming foreign exchange rates remain steady and light vehicle production in our relevant markets grows at a low single-digit rate in 2022 versus 2021. Adjusting for about 200 basis points of foreign exchange pressure year-over-year, the midpoint of our guidance suggests an organic growth rate of 14%. We expect revenue to be higher in the second half compared to the first half. As for profitability, we are still facing supply chain disruptions leading to additional expenses. We are in discussions with our customers about price increases and cost recoveries to address current cost inflation. Although we continue to predict an adjusted EBITDA rate between 14% and 16% for 2022, we expect profitability in the second quarter to fall below this range as we manage ongoing supply gaps with some suppliers. In maintaining our revenue and adjusted EBITDA guidance, we assume semiconductor supply chain pressures begin to ease in the second half, leading to some recovery of additional costs from customers associated with semiconductor shortages and inflation. While our guidance for 2022 remains intact, our forecasts currently lean toward the lower end of the revenue and adjusted EBITDA guidance spectrum. We expect capital expenditures will be between $50 million and $60 million and the tax rate to fall within the 26% to 28% range. With that, I’ll hand the call back to the operator to initiate the Q&A session.

Our first questions come from the line of Luke Junk with Baird.

Good morning. And thank you for taking the questions today. I wanted to start with the acquisition this morning of Alfmeier, specifically, I'm wondering if there's anything you can share and take rates relative to both seat massage and lumbar support as compared to the company's position? And if it didn't include seats, is it right to assume that there's a similar take rate story for Alfmeier there if or Gentherm overall?

Well, that's definitely what we see. We see the demand continues to grow, just as we've talked very clearly that consumer demand is growing for comfort features, wellness features in the vehicle. This fits perfectly with that trend. And obviously, we're very much a mission-driven company around our desire to improve the consumer experience in the vehicle through health, wellness, comfort, and energy efficiency. So we're really excited about how that fits into our direction. In terms of market share, Alfmeier has a very strong position. They're number one in massage systems and number two in overall lumbar, and keep in mind that includes all forms of lumbar systems, including the mechanical systems, and Alfmeier is 100% focused on the pneumatic side.

Okay, thank you for that, Phil. And then my follow-up question with respect to updated guidance. And your indication today that the lowering of the range is still achievable. Just wondering where you stand on things that are within your control, specifically, the cost recovery front. Where do those conversations stand as of early May and in here today, in terms of how much work is still left to do on that front? Thank you.

Yes, we are actively engaged in those discussions. It's a multi-faceted approach where we consider various aspects of recovery, including reimbursement related to spot buys, expedited freight, and similar areas, and we have seen some success in that regard. However, this quarter presented significant one-time costs, and reimbursements generally do not occur immediately, so those will be forthcoming. Additionally, we are focused on long-term strategies such as price increases, surcharges, and reducing annual price cuts, which we are integrating into new business negotiations. We feel confident in our ability to achieve meaningful recoveries throughout the year, and Matteo can provide more insight into the potential value of those recoveries.

Yes, look, so we are back to the prepared remarks. We are working with our customers to recover some of the more stable inflationary costs. And we are right now projecting that the impact on the gross margin to be between 100 and 150 basis points, and that will all come in the back end of the year because as you can imagine it takes some time to complete the negotiations, but this is kind of where we are.

Our next question comes from the line of Glenn Chin with Seaport Research Partners.

Great, thank you. Good morning, folks. Just sticking with the Alfmeier transactions and congratulations. I don't know if you can share with us the genesis of the transaction? I don't know. Did you have a history of working with them?

Yes, I've, we've actually been very close to this company for four years now, doing development projects together. And to be honest with you, this has been a discussion that's been ongoing for that entire time and finally culminated in the right opportunity for the two companies to come together. So it's been a long-standing process.

Okay, yes. And I'm not as familiar with the space as I am with sort of the market for your products. So who are some of the competitors there, Phil?

Leggett & Platt, we believe is one of the players, Kongsberg is, of course, a large player. There are some other smaller companies out there around the world and Asia especially that compete in this space.

Okay. And I think you mentioned that the margins are healthier or appealing, I don't know if you can talk about whether or not it'll be more, the business will be margin accretive. And perhaps, Matteo, you can talk about the multiple that you paid.

Yes. So, Glenn, let me address that. To start with your question about margins, both the seating comfort and fluid systems have margins that are slightly lower than Gentherm's margin. However, with the integration of Alfmeier's automotive into Gentherm, we believe that profitability will benefit from increased scale and purchasing power, along with the synergies mentioned in the press release. I expect that when we publish the results of the combined company after the transaction closes, there may be some modest dilution in EBITDA margin percentages. However, we also anticipate that margins will improve relatively quickly over time due to the design, operational, and purchasing synergies we expect to realize from the transaction. Regarding your second question about the multiple, based on Alfmeier's last published financials from 2020, they reported an EBITDA of a little over EUR 20 million. Considering the synergies, that would suggest a multiple of about six times.

Okay, great. Thanks very much for all the detail. And just lastly, and then I'll get back in line just on the white space that you highlighted in a slide on the deck. Is that to say that the OEMs that Alfmeier does not do business with so JR, GM, et cetera? Is that to say they don't expect those types of features historically or its own, of Alfmeier.

So there's a mix, and Alfmeier has been heavily focused in Europe. As we pointed out, some of their customers include BMW, Daimler, Volkswagen Group is a fast-growing customer for them. Ford is their primary customer in North America, a large EV manufacturer also. What we're really excited about is two things. Number one, that our product and their product will come together to increase content in those care customers. Gentherm has a far larger global portfolio of customers. And we're excited about the opportunity to take that solution through our channels and relationships, especially in North America and Asia. And significantly take big growth opportunities there. Every customer is different. They're using different technologies and they're in different phases of implementation of lumbar and massage. But fundamentally we really believe in this combination of thermophysiology-based application with physiotherapy, which is what we call this pneumatic solution. And these solutions, we think could be game-changers for passenger comfort. You think about heated massage, hot and cold pulsation. And Alfmeier is based on all that we know the industry leader in innovation, and vertically integrated core competencies around this space that fits perfectly with Gentherm. That's exactly the way Gentherm is positioned in the thermal side. And we both companies attempt to stay one generation ahead when it comes to new technologies. And that's certainly the case with Alfmeier, we pointed out in the prepared remarks, their latest offering that is, those being developed called Pulse A technology, which is a high-frequency pulsating massage that can really create a wellness effect. So we really see this opportunity to combine thermal and pneumatic as a real game changer.

Maybe Glenn, if I may add, the $10 million annual run rate synergies that we outlined are just the cost synergies. But we also believe that back to Phil's point earlier, that we also have significant cross-selling opportunities, particularly with the seating comfort side of Alfmeier with our North American Asian customers, and this is not factored in the synergies that we outlined in the press release.

Our next question is from the line of Matt Koranda with Roth Capital.

Hey, good morning, guys. So maybe just sticking along the lines of the Alfmeier questions and congrats on the acquisition, by the way. Phil, you said you've been speaking with these folks for the better part of the last four years, I'm just wondering, what was the catalyst to finally get something done there? And then you guys did reference sort of cross-sell opportunities. So I'm just curious to kind of think about how quickly you guys could generate some bookings for them through this cross-selling opportunity? Because that'd be relatively near term, maybe just level set expectations on that front?

I'll start with the second question. Yes, we have a clear list of potential opportunities in front of us to capitalize on the cross-selling and while the pneumatic massage and comfort market on its own is going to outpace the automotive space, we see an opportunity to really step beyond that with our synergies. So there's no doubt that we have a clear path to those revenue synergies. But as Matteo said, we didn't build that into the $10 million, that's going to be all upside on top of that. So obviously, until the deal closes, we can't get to work on those, but we're certainly evaluating those and feel good about them. On your first point, it’s, the company is a really outstanding company, privately owned, and I've been close to their owners for that period of time. And just seeing the migration of the industry, and the opportunities and the situation in the market, all those kind of came together at the right point for us. And we put it together and made it happen. So as I said, this has been a bit of a long dialogue back and forth and working together. And we really know that company very, very well. And we're already getting notes from customers that they're excited about this combination.

Excellent. And then just curious if you could maybe touch on the historical growth rates of the category that they plan. And maybe if you could also touch on specifically the company's historical growth rate over the last couple of years. I know that's probably a little bit distorted just given COVID and some of the production issues in the industry, but maybe looking back a little bit further. And I guess the general rule of thumb I have on Gentherm is you guys typically outgrow sort of automotive production by 10, 15 points plus, in any given year in your core categories. Is there a way to think about the growth rate for Alfmeier and that sort of category growth versus OEM production?

So I would look more forward-looking. I mean, obviously, they've been part of the dynamics of the automotive industry, just like we have since the onset of COVID, and also shortages and so forth. But if you look at the next five years, we really believe that our growth rate once we are combined will be well above IHS growth rate. So I won't get into too much more of the specifics on that, hopefully will in the coming months be able to present a more detailed plan around it. But I would say without a doubt, significantly higher than IHS growth rates.

Okay, great. That's fair. And then just one more on Alfmeier. And I have one other question. And I won't talk all the space here. But Matteo, you mentioned the $10 million in run rate savings. But maybe could you just put a maybe bucket out sort of where you see the bulk of the savings coming from? You referenced purchasing synergies, but is there some footprint consolidation? Like what's the timing of the $10 million? And what are the major buckets there?

Sure. So really, the synergies are around, I will say, three main buckets. On the manufacturing side, so footprint rationalization of the company will be one. Materials and sourcing synergies around consolidating the supply base, where applicable, and the third one is on the OpEx side, which is really around removing the overhead of the company. So that's really the three key buckets. I would expect that we should be able to achieve the full run rate in the synergies in about roughly three years. That's how the time will play out. But that's kind of what we are looking at.

Okay, great. And then just last one, if I can sneak one on margins in the core business, so if you could maybe just provide a bit more of a bridge on the gross margin theory or decline in the first quarter? How big was the Mexico ramp-up issue? And then as we think about EBITDA margin in the second quarter, I know you guys said, still below the full year target range. But maybe just should we expect a sequential improvement there relative to Q1, just any help on sort of directionality?

Sure, Matt. Let me address this. Before I dive into the specifics of the year-over-year changes, I want to remind you of the current dynamics affecting the industry and our situation in particular. First, the semiconductor supply situation is drastically different today than it was for most of 2021. Last year, we faced significant challenges due to OEM shortages, which led to shutdowns starting at the end of the fourth quarter, and this was further exacerbated in the first quarter as we began to experience our own supply gaps with certain suppliers. This situation forced us to limit deliveries to our customers, which, unfortunately, came with substantial costs related to premium freight and spot purchases. Next, we have customer recoveries, where we have managed to recover somewhat. Recovery rates tend to vary; in the fourth quarter, we achieved about 60% of our targeted recoveries, and we anticipated a decrease in the first half, which indeed occurred, as we realized about 50% of the non-inflationary cost recoveries in the first quarter. The third dynamic is the ongoing inflation related to labor and materials, which we typically manage to offset in the latter part of the year when we benefit from volume rebates with our suppliers. We expect this pattern to repeat in 2022, but the effects will be felt more significantly at the end of the third quarter and, primarily, in the fourth quarter, so the first half lacks those benefits. Additionally, annual customer price reductions take effect at the start of each year. As mentioned earlier, we anticipate being able to negotiate some inflation recoveries, but the impacts I previously noted, which total around 100 to 150 basis points, will manifest later in the year. This context helps explain what transpired in the first quarter and what you will observe in the second quarter. Now, looking more closely at the year-over-year changes, the total impact is roughly 600 basis points, with about 400 basis points coming from the supply chain disruptions I mentioned. The annual customer price reduction amounted to about 180 basis points, while material and wage inflation contributed 150 basis points. The Mexico impact, which has since been resolved at our new electronics plant, was around 110 basis points. These were partially countered by customer recoveries, which positively contributed approximately 130 basis points during the quarter, along with some productivity improvements in our factories. If we normalize these figures, about 300 basis points of these impacts are considered transitory costs related to spot purchases, premium freight, and the Mexico situation. Adding roughly $30 million of lost revenue due to supply shortages reveals a quarter that could have achieved a gross margin rate of around 28.5% at $300 million in revenue. This forms our normalized view, which we also factor into our guidance range and the lower end of that range for the year. Regarding the second quarter, there are a few points to note. First, according to IHS, the production levels in our relevant market are expected to remain flat year-over-year, but sequentially, IHS projects a slight decline in the second quarter compared to the first due to ongoing lockdowns in China, and we are experiencing similar trends. We expect our second-quarter revenue to fall slightly below that of the first quarter. However, we will continue to focus on aggressive cost management, and we anticipate a slight improvement in profitability compared to the first quarter, though I still expect our gross margin and EBITDA rates in the second quarter to be below the annual guidance range we provided.

Our next question comes from the line of Ryan Sigdahl with Craig-Hallum.

Good morning, guys. Curious, so you mentioned growth with a large EV manufacturer in the quarter. What product was that related to? And then is that also in relation to the breakthrough EV award you announced last quarter? Are those two different things?

Yes, and we were talking about steering wheel and seat heat.

This quarter, right. So it'd be different than the award you announced last quarter. Can you remind me when that one ramps?

The new award. It'll start in ‘23.

Got you. Then just switching over to climate sense. Good to see another development project. The ones you've announced the last several years. Have you continue to work with those OEMs or have any of those I guess tested and then went dormant so to speak?

None have gone dormant, but they are at varying stages of implementation potential. Some are very active, with the recent announcement in Europe having specific opportunities, and we are optimistic about advancing that one. We have another project that is somewhat similar. There are some initiatives where the evaluation has shown that, while we believe in their potential benefits, they are currently focused on getting their list of electric vehicles out the door. They need to figure out how to adjust their solutions to integrate these projects into their pipeline. However, I am hopeful as we are seeing the development phase for the next generation of electric vehicles begin, which is encouraging more discussions. Our primary focus is on the launch of our first production win scheduled for 2024. We are fully dedicated to ensuring this first go-to-market is successful, and we are actively discussing additional applications of our technology with that customer.

Helpful, one more for me, just on the high voltage cable product mentioned a new award and some opportunities there. Do you think Gentherm can grow its cable business over the coming years as new business offsets the legacy ICE business that has some headwinds and challenges against it?

Yes, I do. We're not super aggressive. As I've said before on this, we're very selective about the applications. But we've kind of built a reputation for ourselves in this combined table and cell connecting arena. And they're very complementary. In fact, as I point out before, the fact that we had this cable expertise is really what helped us to gain credibility to be awarded cell connecting? And on the cell connecting side within our BPS product line, there is a lot of activity right now in terms of testing with our thin foil solution, and we're really excited about that opportunity. So I guess the net of that is even on the high voltage, especially with high voltage cables, we definitely see some opportunities to grow.

Our next question comes from the line of Glenn Chin with Seaport Research Partners.

Great, thanks again. If you can just focus on some of the factors underlying your guidance, so first time IHS. Do you guys feel as if IHS is in the right place or you still feel like you need to haircut them?

I think, Glenn, I think if you go back to that last earnings call, we said we didn't believe really what IHS was projecting. They came down since then. So I think maybe slightly lower than them, but not major. So I think we're fine.

Okay, great. Thanks. And then secondly is still on factors underlying your guidance. So it's predicated upon improving semiconductor supply in the back half. Phil, you and I discussed this last quarter, I think I asked you about your level of confidence that semiconductor supply will actually improve and you distinguish that from whether or not you would actually get as much as you wanted. How has that channeling effect that it would improve, would you mind delineating those two again this quarter for us?

Sure. In general, the situation is developing as we discussed last quarter. We anticipated Q1 to be our semiconductor quarter, and it turned out that way. The positive news is we are noticing signs of recovery as we approach the second quarter. It remains challenging, but so far the commitments made by some of the difficult semiconductor suppliers are still being met, and they are affirming the increase in supply. Currently, as Matteo mentioned, it is a dynamic environment, but the indicators are still optimistic that we will see recovery in the second half. Our largest customers are also reporting that they are witnessing recovery from other suppliers which is beginning to take shape for the second half. Therefore, we feel reasonably positive about both of these areas.

Okay, would you care to put a number on it, Phil, from say, 1 to 10, 10 being the most confident?

No, not really.

Okay. I just keep in mind what you told me last quarter then. Okay, last question just on Alfmeier, I think you mentioned that their business is directly sourced by OEMs. Is that different? I know some of yours is right perfectly sourced by, well, sourcing decision is by your tier ones. Is that not the case with them? Is the dynamic different there?

No, it's very similar to our business. And we've been pretty consistent in our comments there that at least in today's market, the majority of awards and sourcing comes from the OEMs. And that applies to Gentherm. And it also applies to Alfmeier’s business. Of course, there's plenty of sourcing from the tier ones as well. And we're just 100% focused on developing the best-in-class solution, both individually with the two technologies and now going forward, hopefully, with some exciting breakthrough combination products and systems. And we're here to make sure that in the end, the end consumer experiences the most amazing solution. Okay, thank you. And thanks everyone for joining our call. Today marks the beginning of a new chapter for Gentherm. The acquisition of Alfmeier’s lumbar and massage business will further expand Gentherm’s value proposition beyond thermal in comfort, health, wellness, and energy efficiency, making Gentherm the largest supplier of combined thermal and pneumatic seat comfort solutions in the industry. Combining Alfmeier’s technological advancements in physiotherapy with Gentherm’s expertise in thermo physiology maximizes our capabilities of providing world-class comfort and wellness solutions. I'm extremely excited about uniting the innovative expertise, the talent, and the complementary global customer base of our two companies. I have no doubt that this transaction will further improve Gentherm's competitive advantages and position us well to deliver significant long-term shareholder value. We appreciate your interest and support and look forward to keeping you apprised of our progress.

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