Gentherm Inc Q1 FY2023 Earnings Call

Greetings, and welcome to the Gentherm First Quarter 2023 Earnings 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, Senior Vice President of Strategy, Corporate Development and Investor Relations for Gentherm. Thank you. You may begin.

Thank you and good morning everyone, and 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 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, including certain pro forma measures related to the Alfmeier acquisition. 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. I'm quite proud of the Gentherm team for coming together, executing with focus and delivering strong results in the first quarter. We delivered the highest quarterly revenue in company history, growing 36% year-over-year or 39%, excluding the impact of foreign currency translation. Adjusting for FX and the Alfmeier acquisition, automotive revenues increased 14% year-over-year in the first quarter, outperforming actual light vehicle production in our key markets by over 800 basis points. It was just a year ago that we announced our acquisition of Alfmeier, which expanded Gentherm's value proposition beyond thermal within comfort, health, and wellness. Demand for our thermal comfort, massage, and lumbar solutions is accelerating, evidenced by our $480 million of new automotive business awards, a record for our first quarter. We won a breakthrough integrated thermal comfort, lumbar, and massage system for Jaguar Land Rover EVs. We also won our first lumbar and massage award with General Motors on a future electric vehicle. The pace of these conquest awards is well ahead of our expectations following the Alfmeier acquisition. On the profitability side, our margin performance improved year-over-year as a result of our cost improvement initiatives and our negotiation of appropriate cost recoveries from customers. On a pro forma basis, our adjusted EBITDA margin rate improved 230 basis points year-over-year. We generated $25 million of cash flow from operations and repurchased $10 million of shares in the quarter. Matteo will provide more details on our financial results in a few minutes. Now, turning to automotive highlights on Slide 4. In the first quarter, we launched our automotive solutions on 17 different vehicles across 9 OEMs, including BMW, Ford, General Motors, Great Wall, Hyundai, and Mercedes-Benz. We continue to see momentum for our CCS solutions on both ICE and electric vehicles. In the first quarter, our CCS solutions were launched on the Cadillac XT 3, Chevrolet Colorado, Chevrolet Silverado EV, Hyundai Genesis G80, Lincoln Nautilus as well as several EV models of Great Wall vehicles in China. Now, let me give you a quick update on ClimateSense. In addition to preparing for the flawless launch of the production programs with General Motors, we continue to work with other OEMs across multiple regions to highlight the critical design concept that we've implemented with ClimateSense. We've developed our solution as a scalable platform that can be incrementally integrated into today's EV architecture or it could be unleashed for the next generation of heating and cooling visions for our OEM customers who are ready to more completely update the heating and cooling architecture. Our proprietary smart effectors, which can be installed on a modular building block platform will allow customers to take advantage of a continuum of implementation based on their current EV migration and their product strategy. And this allows us to scale our content to support steady increases in energy efficiency and thermal performance. Let me give you a couple of examples of how some of our customers are taking advantage of our modular approach and have awarded us additional thermal effectors in the last few quarters. As a result of ongoing development projects, Honda will add our heated interior solutions, including our electronic control units to a number of their upcoming EV platforms. In addition, Stellantis is adding our intelligent neck conditioner to some of their PSA DS model vehicle lines. Awards like these are proof points that our scalable modular approach is gaining momentum, and it is one of many important stepping stones toward our future ClimateSense growth. In addition to ClimateSense, our advanced engineering team is making great strides in creating full system solutions that integrate thermal with lumbar and massage. The combination of heating and cooling the body with pulsating massage is opening vast opportunities for health and wellness treatments, also alertness enhancements, and physical recovery in the car. We are perfectly positioned to be a major player in the software-defined vehicle of the future by integrating our proprietary software and algorithms. Now on to Slide 5, where you can see that in the first quarter, we secured $480 million of awards in automotive. Since the announcement of the Alfmeier acquisition, our customers have resoundingly expressed support and excitement to see Gentherm further expand its value proposition beyond thermal to include pneumatic lumbar and massage solutions, and the pipeline of opportunities for the combined company remains very strong. As I mentioned earlier, we won several awards for pneumatic comfort leveraging Gentherm's strong customer relationships. Specifically, I'd like to share two breakthrough conquest wins in the first quarter. First, I'm pleased to share that we won a combined thermal comfort, lumbar, and massage full system award with Jaguar Land Rover for their new Jaguar BEVs. This is also our first-ever pneumatic comfort award with JLR as a result of the combined company. Second, we won our first lumbar and massage award with General Motors for one of their upcoming electric vehicles. This win is a testament to the synergies of the Alfmeier acquisition, highlighting the strong partnership and trust by our largest customer. With agility, speed, and creativity, we developed a solution for every challenge and broke in with General Motors through extremely formidable competition. I'm also pleased to note that we won multiple CCS awards in the quarter. In addition to the Jaguar Land Rover EV platform that I mentioned earlier, we won CCS awards for the Great Wall Ora, Honda CRV, Subaru Legacy and Outback, and an extension of General Motors multi-vehicle full-size trucks and large SUV platforms. Of special note, we won a conquest climate control seat award for BYD, the world's largest EV manufacturer by volume. This is our first award with BYD, and it's a proof point that our track record of innovation, quality, and execution is a key competitive advantage. In the first quarter, we also received 16 steering wheel heater awards across 10 OEMs. These included the Audi Q6 e-tron, Lincoln MKZ as well as multiple models from Honda, Nissan, and Volkswagen. In addition, we won a hands-on detection-enabled steering wheel heater award for Geely. Our teams continue to transform our product lines to create value for electric vehicle applications. I am pleased to share that we won a follow-on high-voltage cable award for hydrogen fuel cell electric semi-trucks in the first quarter. In addition, we won a battery sensor harness award for the start-stop system for future hybrid models of Audi. Finally, I'd like to share a couple of recent wins in battery performance solutions. Mercedes-Benz awarded us a new 48-volt battery heating business based on our proprietary thin foil mechanical structuring process. We were also awarded a significant extension of our 48-volt thermal electric-based battery thermal management solution for Mercedes-Benz. As we continue to bring innovative solutions to our customers, Gentherm is well positioned to significantly increase content per vehicle as electric vehicles expand in the market. Now let's turn to Slide 6 for a discussion of our medical business. Medical revenue in the first quarter grew 13%, ex FX, year-over-year, primarily driven by our acquisition of Dacheng Medical. While hospitals in the U.S. continue to face financial pressures and are carefully managing their capital spending, we saw a rebound in elective surgeries with the China reopening. In the first quarter, we gained 35 new major hospital accounts in China. I'm also pleased to share that we won a key Blanketrol award at Select Medical in Mechanicsburg, Pennsylvania. Select Medical is a group of post-acute hospitals that partner with medical centers across the United States. They are adding new locations and have selected Blanketrol as their hypo-hyperthermia device of choice. In addition, we were awarded patient warming business with warm air and filter flow systems at the University of Cincinnati Medical Center, replacing competitor products. Our win was not only driven by our clinically preferred solutions, but also our ability to consistently supply consumable blankets to our customers, while the competition had supply chain issues. Now with that, I'll turn the call over to Matteo for a little more color on the financial results.

Okay. Thank you, Phil. Let me turn to Slide 7 and focus on the items that most significantly impacted our first quarter results. For the quarter, our product revenues increased by 36% compared to the same period of last year, including the contribution from the acquisitions. If we adjust for the impact of acquisitions and FX, our overall product revenue increased by 14%. Starting with the Automotive segment. Automotive revenues were $353 million, reflecting a 37% increase compared to the prior year period. Adjusting for the $66 million contribution from Alfmeier and foreign currency translation, automotive revenue increased by 14%. And this compares to a 6% increase in the actual light vehicle production in our key markets of North America, Europe, China, Japan, and Korea. And as Phil just mentioned, we outperformed the light vehicle production volume by over 800 basis points. We have provided the detail on revenue growth by product category in our earnings press release and associated materials that are available on our Investor Relations website. We saw significant growth on the majority of our product lines. And more specifically, steering wheel heaters revenue increased by 27% compared to the prior year period due to higher demand and production volume on multiple GM platforms as well as higher production volume with a major global EV OEM. BPS revenue increased 15% due to higher volume with Mercedes, Jeep, and the start of production of our proprietary thin foil self-connecting board on the BMW 7 Series plug-in hybrid. CCS revenue increased by 12% due to higher production volume of GM trucks and SUVs as well as take rate increases on Mercedes, Stellantis, and Hyundai Kia. Seat heater revenue increased by 10% due to higher production volume of trucks and SUVs at GM, Ford, and Stellantis. Lumbar and massage solutions revenue increased 7% on a pro forma basis due to the ramp-up of several platforms on BMW, Mercedes, and VW, including the BMWs EQS EVs, as well as higher production volume with a major global EV OEM. Electronics revenue increased 1% due to higher sales of our multifunction electronic control units to Ford. Cable revenues decreased 8% due to temporary labor availability issues in one of our plants in Europe. And Valve systems revenue decreased 9% on a pro forma basis due to lower production volume in China for VW, SGM, and SAIC. Turning to Medical. Medical revenues increased approximately 13%, ex-FX, compared to the prior year period, primarily as a result of the Dacheng acquisition. Moving to adjusted EBITDA. Adjusted EBITDA in the quarter was $41.5 million, up from $29.8 million in the prior year period and $30.4 million in the prior year pro forma. The adjusted EBITDA rate for the first quarter was 11.4%, and this compares to 9.1% in the year-ago period on a comparable pro forma basis. The 230 basis points year-over-year increase was driven by fixed cost leverage on higher sales volume, lower freight costs, and positive price. These were partially offset by material and wage inflation and the negative impact of foreign exchange, primarily due to the appreciation of the U.S. dollar compared to the euro and the Korean won. It is worth noting that excluding the impact of the Alfmeier acquisition, legacy Gentherm adjusted EBITDA margin rate rose to 14% compared to 11% in the prior year quarter. Operating expenses were $63.5 million in the quarter compared to $49.9 million in the prior year period. If we adjust for acquisition, integration and restructuring costs as well as the non-cash stock compensation expenses in both periods, operating expenses were $58.8 million, up from $43.9 million in the first quarter of last year. The year-over-year increase of approximately $15 million was primarily driven by additional expenses from the acquired businesses as well as higher compensation expenses and increased R&D cost to support new programs wins. Finally, adjusted diluted earnings per share in the quarter was $0.49 a share compared to $0.41 per share in the first quarter of last year. Our adjusted EPS calculation includes the impact of non-cash stock compensation expenses, consistent with the prior year calculation. Our effective tax rate in the quarter was approximately 32%, on the high end of our guidance range due to the impact of a state tax audit settlement. Moving to the balance sheet on Slide 8. Our cash position at the end of the quarter was approximately $167 million, up from $154 million at the end of December 2022. We closed the quarter in a net debt position of $68 million compared to net debt of $81 million at the end of December. The reduction in net debt was primarily driven by approximately $25 million of cash generated from operating activities, partially offset by $6 million of capital expenditures and $10 million of share repurchases. As a result, our net leverage ratio was 0.47 at the end of the first quarter, well below our target of 1.5x. Based on the trailing 12-month consolidated adjusted EBITDA ended March 31, we had approximately $266 million of availability in our line of credit and the total available liquidity as of March 31 was $433 million, up from $419 million at the end of December. Now let me turn to Slide 9 for our 2023 guidance. As we did in the last earnings call, for comparison purposes, we included the actual results as reported for 2022 as well as the pro forma 2022 values if we had incorporated the results for the Alfmeier since the beginning of the year. Based on our performance in the first quarter, we are reaffirming our 2023 guidance as discussed in the prior earnings call. For 2023, we are expecting revenue to be in the range of $1.45 billion to $1.55 billion, assuming a euro to USD exchange rate of 1.05 and light vehicle production in our relevant market grows at a low single-digit rate in 2023 versus 2022. Adjusting for approximately 150 basis points of FX pressure year-over-year, the midpoint of our guidance implies an organic growth rate of 13%. Our guidance also assumes higher revenue in the second half compared to the first half as a result of new program launches. We continue to expect adjusted EBITDA margin rate to be in the range of 11.5% to 13.5% for 2023. And as we indicated in the last earnings call, due to the revenue cadence and the impact of contractual price-downs, which we expect to offset in the second half of the year through incremental price recoveries, supplier cost improvements, and productivity actions, we expect the adjusted EBITDA margin rate to steadily improve throughout the year. We still expect our full-year effective tax rate to be in the range of 28% to 32% and the capital expenditures to be in the range of $60 million to $70 million. So with that, I'll turn the call back to Phil.

Thanks, Matteo. Now let me summarize. The results of the first quarter clearly demonstrate the significant and continued progress we're making against our long-term strategic initiatives. We delivered the highest quarterly revenue in company history and improved profitability year-over-year. We secured $480 million in new automotive business awards, the highest that we've ever secured in the first quarter. Our results also highlight how the Alfmeier acquisition has accelerated our market penetration. And finally, our momentum in the first quarter demonstrates our unique positioning to capitalize on industry megatrends to create a flywheel of profitable growth. With that, I'll turn the call back to the operator to begin the Q&A session.

Thank you. Our first question comes from the line of Matt Koranda with ROTH MKM.

Hey guys, good morning.

Good morning, Matt.

On the bookings, good morning guys. On the bookings front, the $480 million, it sounded like a good amount of Alfmeier content may be in there. Just any breakdown on the balance between thermal comfort versus lumbar and massage?

Yes. I think both were stronger than normal, so very good performance. We're especially excited about the combined award with JLR, which was very sizable in total and was an exciting conquest win for us.

And it sounds like there is additional potential in the pipeline for the additional combined content. Just curious if maybe, Phil, if you could just give a little bit of color on sort of what's in the pipeline on a go-forward basis on that front?

Sure. Well, I would say we have quite a bit more interest than we had anticipated, especially from the more traditional Gentherm customer base that Alfmeier did not do business with prior to the acquisition. That's keeping us very busy, as you can see with the big wins with JLR and with General Motors. But on top of that, the potential for new platforms with traditional Alfmeier customers like BMW, Mercedes, Volkswagen, Audi, some really significant opportunities are rolling in there too. So we're very busy with all of the opportunities rolling in. But at the same time, our win rate was very high on thermal business and activity is starting to pick up. So we're excited about the pipeline leading into the rest of 2023.

That's great to hear. Matteo, could you provide a more detailed gross margin analysis for the first quarter? Revenue has increased significantly, and it seems Alfmeier might impact the gross margin, so I would appreciate a detailed breakdown of the gross margin comparison year-over-year.

Yes, good morning. I’d like to discuss the legacy Gentherm business. I'm pleased with the profitability figures from the first quarter. When comparing our gross margin of 24% from the first quarter of last year to the legacy business, which adjusted for the exit from non-automotive electronics, we achieved a gross margin rate of 26.5%. This reflects a nice year-over-year improvement. Several key factors contributed to this. Volume leverage contributed to an expansion of about 250 basis points. As anticipated, freight costs decreased significantly, primarily due to improved conditions compared to last year and our team's successful negotiations for better freight rates. Freight accounted for around 180 basis points of margin expansion. Additionally, prices were a positive factor in the first quarter, which is atypical for our business since we usually experience a negative impact from annual price reductions at this time. The team excelled in maintaining positive momentum on cost recoveries with customers, resulting in about 80 basis points of margin expansion. On the downside, labor and material inflation negatively impacted margins by approximately 140 basis points, and foreign exchange affected them by around 120 basis points. Overall, the team performed exceptionally well, and we are seeing a significant pickup in profitability within the legacy business, leaving us confident about the rest of the year.

Okay, excellent. And then just last one from me. I noticed, you reiterated the guide for the full year, makes sense. Just any additional commentary on sort of the seasonality or cadence for the rest of the year here, is it's still expected to be sort of build into the back half of the year on both revenue and EBITDA margin? I mean, you outperformed the EBITDA margin a little bit, I think, in the first quarter, but just any more commentary on sort of the shape of the year here?

Sure. Yes, you're right, Matt. I think the first quarter came in slightly better than what we were expecting at the beginning of the year, which is good. If I look at where we need to be in terms of the EBITDA rate, for the next three quarters, on average, the EBITDA rate needs to be about 12.9% to hit the midpoint. To bridge from the 11.5% of today to 12.9% for the remainder of the year, there are a couple of factors we are expecting. First is volume, which you mentioned. As for revenue cadence, we are confirming what we said a couple of months ago; we expect the second half to be higher than the first half, thanks to new product launches. That accounts for about 80 basis points of margin expansion. Alfmeier is projected to be in the mid-single-digit range for the EBITDA rate for the rest of the year, contributing about 100 basis points of margin expansion. Additionally, we anticipate the usual timing for incremental price recoveries that the team will negotiate, as well as sourcing savings expected in the latter part of the year, which will also drive another 70 basis points of margin expansion. There will be some investment in operating expenses primarily driven by merit increases that take effect on April 1. This is how we bridge from the EBITDA reported today towards the midpoint of our guidance for the rest of the year. Overall, our rationale for reaffirming the guidance is twofold: we are very excited about the quarter's performance and the momentum we have, particularly with price recoveries. On the other hand, the environment remains volatile, and we need to continue our efforts to enhance the company's profitability. That is why we maintain the guidance we provided a couple of months ago. We are pleased with the team's performance in the first quarter.

Okay. Super detailed and helpful. I'll leave it there guys, thank you.

Thank you, Matt.

Thank you. Thank you, ladies and gentlemen. This concludes our Q&A session, and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.