Earnings Call Transcript - THRM Q4 2021

Operator, Operator

Greetings. Welcome to the Gentherm Inc. Fourth Quarter and Year-End 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Yijing Brentano, Corporate Development and Investor Relations.

Yijing Brentano, 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 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. 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.

Phil Eyler, President and CEO

Thank you, Yijing. Good morning, everyone, and thank you for joining us today. I'm extremely proud of what the Gentherm team accomplished in 2021 despite a challenging operating environment. As shown on slide four, our full-year automotive revenue surpassed light vehicle production in our key markets by about 13 percentage points, achieving the highest annual automotive revenue in the company's history, along with near-record automotive awards of $1.6 billion. We also achieved record adjusted EBITDA, record cash flow from operations, and record free cash flow in 2021. We have solidified our position as a leading supplier in the growing electric vehicle market, which I will discuss further shortly. On the operations side, I want to acknowledge our manufacturing and supply chain teams for their relentless efforts to mitigate the effects of fluctuating customer demand, rising freight costs, material cost inflation, and global semiconductor shortages, including the anticipated supply gap with one of our suppliers in the fourth quarter that we discussed in our last earnings call. Matteo will elaborate on our fourth quarter and full-year financial results shortly. Now, let’s look at the automotive highlights on slide 5. In the fourth quarter, we launched our automotive solutions on 15 different vehicles across 11 OEMs, including BMW, Ford, Geely, General Motors, Hyundai, and Toyota. We continue to see strong momentum for our CCS product, launching it on the Lincoln Zephyr, Nissan Ariya EV, Nissan Pathfinder, and Infiniti QX60. Our CCS solution has now been launched on Range Rovers MLA platform, including plug-in hybrid and mild hybrid vehicles. Initially aimed at internal combustion vehicles, our cable business has expanded with the launch of our high-voltage cable solution on the Rivian R1P and R1S, in addition to the recently launched high-voltage cables across Jaguar and Land Rover plug-in hybrid platforms. I'm proud of our teams for adapting our product lines to create value for electric vehicle applications. Furthermore, we are making significant strides with ClimateSense, our software-driven microclimate platform guided by a thermal physiology-based algorithm. Winning our first ClimateSense production award in 2021 was a pivotal achievement for us, and our top priority is to ensure a smooth launch on this model year 2024 platform. ClimateSense plays a vital role in our long-term strategy and is receiving increasing interest from global OEMs. I’m also pleased to announce that we have initiated a new development project with a third OEM in Europe. We are focused on enhancing the value proposition for electric vehicles by dramatically reducing power consumption and boosting range under extreme temperature conditions, all while ensuring optimal passenger comfort. Now on to Slide 6, where you can see that we continue to secure new business at a pace that establishes a strong foundation for future growth. In the fourth quarter, we won $540 million in new program awards across 20 different customers. This brings our total year wins to over $1.6 billion, marking a robust finish to a challenging year. We received multiple CCS awards, including platform wins with Cadillac XT3, Hongqi HS5, Great Wall WEY sedans, Honda Vessel and XRV, KIA Sportage, and a number of EV SUVs. Gentherm continues to build our strong position with one of the largest electric vehicle manufacturers. Additionally, we secured several program awards for our climate-controlled seats and seat heaters in the fourth quarter, representing the largest win we have achieved on EV platforms. This win adds to the steering wheel and seat heater programs that we've launched with this OEM since 2014. I’d like to extend my gratitude to our global teams for this groundbreaking award as we work to enhance the adoption of Gentherm technologies in the EV sector. We received 23 steering wheel heater awards across eight OEMs in the quarter, including Cadillac CT6, Chevrolet CUV, Great Wall FlashCat, Lincoln Nautilus, Volkswagen Tiguan, and Volvo XC90. Notably, seven of these programs included hands-on detection capabilities. In terms of electronics, I'm happy to announce that we have received a follow-on award for our next-generation multifunction electronic controller with Ford. Our initial win with Ford incorporated Gentherm's climate control solution with memory seat functionality utilizing our proprietary intelligent positioning system technology. This follow-on award enhances the system with additional functionalities, such as controlling the power running boards, ultimately improving system efficiency and lowering costs. This module will be featured in the Lincoln Navigator and Ford Expedition models produced in North America. Lastly, we secured a strategically significant award in our Battery Performance Group by winning a battery heating award for a new Renault plug-in hybrid vehicle using our proprietary thin foil technology, further validating the potential of our unique technology against the current benchmarks. Moving to Slide 7, I’d like to highlight how our innovative solutions can significantly increase Gentherm's content per vehicle as electric vehicles gain traction in the market. IHS estimates that electrified vehicle production—spanning mild hybrid, full hybrid, and battery electric—is expected to rise from 20% of global production in 2021 to 70% by 2030. We believe Gentherm's existing and future technologies will be crucial in extending electric vehicles' range and enhancing passenger thermal comfort. Over the past few years, we have expanded our core climate and comfort solutions, which now include seat heating, surface heating, radiant heating for floors and ceilings, neck and shoulder conditioning, advanced climate-controlled seats, and our proprietary hands-on detection-enabled steering wheel heaters. Individually or in combination, these technologies reduce reliance on HVAC systems by focusing on the thermal management of occupants, thus lowering power consumption and increasing range. In our Battery Performance Solutions segment, we’ve moved beyond air cooling and our award-winning thermal electric battery thermal management products for mild hybrid 48-volt lithium-ion batteries by launching high-voltage cables, our proprietary thin foil battery heater, and wire-based and thin foil Cell Connecting Systems. Our expanding portfolio of Battery Performance Solutions aids OEMs in improving battery performance and extending longevity. On the digital intelligence front, we’re developing and manufacturing innovative thermal and multifunction electronic control units, or ECUs, including the one for the recent Ford award I mentioned. By combining functionalities in ECUs, we reduce the number of units in the vehicle, leading to lower costs and reduced weight, which are especially beneficial for electric vehicles. Additionally, we have significantly enhanced our software capabilities. As we prepare for the launch of our first ClimateSense production award, we are making advancements to our microclimate platform using our proprietary thermal physiology algorithm. To summarize, our customers are turning to Gentherm for interior climate comfort solutions, which are proving essential for energy conservation in EVs, as well as for battery performance and digital intelligence solutions. We are well-positioned to take advantage of the accelerated growth of electric vehicles. Moving to Slide 8, I want to emphasize the innovative work our team is doing to bring unique and proprietary solutions to market. In 2021, we introduced several new technologies. First, as previously mentioned, our ClimateSense software solution is now ready for production. We also unveiled a user experience platform and application designed to inspire OEMs to enhance consumer experiences. Next, our proprietary Fiber-Therm, a next-generation carbon fiber CP technology, integrates seat heaters closer to the seat surface to deliver faster comfort and energy savings compared to traditional wire heater technologies. Third, Pilot Sense represents Gentherm's next-generation hands-on detection technology, which merges heating and capacitive sensing in a single-layer solution with one ECU managing both functions. HOD is essential for supporting higher levels of autonomous vehicle operations. Our proprietary solution removes the need for a second ECU and wire harness, reducing system costs while maintaining full sensing resolution during heating mode. Pilot Sense enhances steering wheel surface heating and allows for lighter designs by removing the second layer found in traditional multi-layer HOD solutions. Fourth, our intelligent neck conditioning solution features a neck warmer integrated into the seat headrest, offering immediate warmth to the occupant. Our thermal physiology research indicates that this close proximity leads to instant and personalized comfort. Equipped with integrated sensors and smart algorithms, this localized microclimate device delivers optimal individual thermal comfort and energy savings. Fifth, our Next Generation CCS active solution entails the development of an intelligent microthermal module that combines features of our active and ventilated Climate Controlled Seat systems. With its smart airflow control valve and thermal electric element, it ensures quick comfort and cooling at the start of a drive on hot days before transitioning to ventilation mode for lasting comfort. This can function as a standalone offering or in conjunction with other smart microclimate technologies as part of ClimateSense. IMTM employs our thermal physiology-based algorithm for an optimized thermal comfort experience, conserving power and enhancing range for electric vehicles. Lastly, we have introduced our market-ready thin foil Cell Connecting Systems featuring embedded cell sensing, elevating the intelligence of battery management systems. As we continue to innovate, more electric vehicle manufacturers are leveraging our solutions to improve comfort while significantly enhancing energy efficiency and range. Now let’s review Slide 9 for an update on our medical business. We achieved double-digit revenue growth in the medical sector in the fourth quarter, reaching a 17% increase year-over-year. There remains strong demand for our flagship product, Blanketrol, in both domestic and international markets like Mexico and Argentina. Blanketrol is a reliable brand for fever management, and we secured upgrade orders to replace end-of-life competitor devices during the quarter. We also entered the equipment rental market through an exclusive partnership with US Med-Equip, which offers rental solutions for hospitals needing capital equipment. They are part of many group purchasing organization contracts and provide a valuable option for hospitals lacking budget for purchases. We are witnessing strong progression with ASTOPAD, with trials conducted in large health systems and independent hospitals. The ASTOPAD patient warming system effectively showcases our ability to apply technology from our automotive sector for patient temperature management advancements in our medical business. Spectrum Health in Michigan has approved ASTOPAD for use by all their members, and West Virginia University Hospital plans to adopt it for cardiac procedures, extending its use into Orthopedics. Mountain View Regional Medical Center in New Mexico is employing ASTOPAD for various surgeries. As hospitals seek non-air options for warming patients, Gentherm stands out from competitors by providing both convective and conductive solutions. In conclusion, our financial results for 2021 reflect the successful execution of our strategic plan to drive growth, aggressively manage our cost structure, and introduce innovative solutions to the market. I'd like to recognize our global team for achieving near-record automotive awards, as well as delivering record automotive revenue, adjusted EBITDA, and free cash flow in 2021. I'm immensely proud of the hard work and dedication of the talented Gentherm team in navigating challenges and achieving our strategic goals in yet another unprecedented year. While uncertainty persists around production rates in the upcoming months, we anticipate significant pent-up demand to be addressed once extraordinary supply chain constraints are resolved. This, paired with our unwavering focus on operational excellence, technological leadership, and robust cash flow generation, positions us well for profitable long-term growth. Now, I will hand the call over to Matteo for deeper insights into our financial results and 2022 guidance.

Matteo Anversa, CFO

Thank you, Phil. Let me focus on the key items that significantly influenced our fourth-quarter results presented on Slide 10. For the quarter, revenues decreased by 14% compared to the same period last year. When adjusting for foreign exchange impact, our overall product revenue declined by 13%. In the Automotive segment, revenues were $237 million, reflecting a 15% decrease from the previous period. After adjusting for foreign currency translation, automotive revenue decreased by 14%, which is about 200 basis points lower than the decline in light vehicle production in our key markets of North America, Europe, China, Japan, and Korea. It's important to note that in Q4 2020, we experienced a considerable number of new launches with extremely high take rates, resulting in a record quarter for automotive revenues that outperformed light vehicle production by 20 percentage points in the prior year, making comparisons quite challenging for this current quarter. When looking at product line results for Q4 compared to last year’s record results, most lines saw a decrease except for BPS and other automotive products. Specifically, BPS revenues increased by 1% due to higher sales from the self-connecting board solution on the BMW E MINI, increased take rates for the 48-volt Mercedes C class, and greater sales of air-cooling BTM to General Motors. Revenues from other automotive products rose by 79% due to increased sales of neck conditioners and heated interior products. However, most other automotive product lines experienced declines primarily because of reduced production volume and challenging year-over-year comparisons. Additionally, there were a couple of unique factors that negatively affected our fourth quarter. First, as Phil mentioned, there was a semiconductor supply gap from one of our suppliers. The Ford F150 launched in Q4 2020 with high take rates, which have now normalized. Ford also reduced the take rates of our memory seat module due to an electronics shortage from other suppliers. Hyundai similarly reduced take rates because of semiconductor shortages, leading them to prioritize lower-tier vehicles. In contrast, medical revenue grew by 17% from the previous year, driven by continued success of our Blanketrol and Hemotherm products. Moving on to gross margin, the rate for the fourth quarter was 27.1%, down from 32.1% last year. The decline of 500 basis points was primarily due to higher costs incurred from supply chain disruptions, including spot buys and premium freight, annual customer price reductions, negative volume leverage because of sales decline, and foreign exchange impacts. These were partially offset by cost recoveries from customers. Regarding operating expenses, they decreased to $45.5 million for the quarter from $50.8 million in the previous period. This year's fourth quarter included $0.4 million in restructuring, acquisition, and divestiture expenses, compared to around $2.4 million in restructuring charges and $1.2 million of acquisition and divestiture expenses from last year's fourth quarter. Adjusting for these expenses in both periods, operating expenses were $45.1 million, down from $47.2 million in the fourth quarter of 2020. The year-over-year decrease of about 4% was mainly driven by mark-to-market adjustments in cash-settled stock appreciation rights from the fourth quarter of last year and strict expense control, especially in SG&A, though this was partially offset by reduced R&D income. Sequentially, adjusted operating expenses fell by about $2.8 million compared to Q3 2021, largely due to cost-saving measures we implemented to address supply chain disruptions. Adjusted EBITDA was $30.9 million, a decline of approximately $26 million from the prior year. Adjusted diluted earnings per share for the quarter were $0.61, down from $1.16 in the fourth quarter of last year. Our effective tax rate for Q4 was around 11%, while it was 18% for the full year 2021. This rate was lower than anticipated due to cumulative tax credits and deductions related to R&D and favorable tax impacts from stock compensation. Before discussing the balance sheet, I want to highlight a few key successes in 2021. We achieved the highest automotive revenue in the company's history and are particularly proud of our team in China, which saw a 53% growth in our debt market over the past three years. In 2018, China accounted for about 9% of our revenues, and it has now increased to 14%. On the cost side, we maintained a disciplined approach to managing operating expenses. After adjusting for restructuring, acquisition, and divestiture expenses, operating expenses as a percentage of revenue were 17.5%, the lowest since 2014, which is a 120 basis points improvement from 2020 and 210 basis points lower than in 2019. We delivered a record $157 million of adjusted EBITDA and generated $105 million of free cash flow in 2021, also a company record. Moving on to the balance sheet, our cash position at the end of the quarter was approximately $191 million, slightly lower than in Q3. The $4 million decrease was due to a $20 million stock repurchase, partially offset by free cash flow generation. We ended 2021 with a net cash position of $152 million, as cash on hand exceeded gross debt, resulting in a negative net leverage ratio of 0.9. Based on trailing 12-month consolidated adjusted EBITDA as of December 31, we had about $440 million of remaining availability on our line of credit, with total liquidity at $631 million by the end of 2021. Now, regarding our 2022 guidance presented on Slide 12, the semiconductor shortage situation remains highly variable. Based on the latest information from our customers and semiconductor suppliers, we are more cautious about light vehicle production in the first half of 2022 than the latest IHS forecast. We do expect gradual improvements in the second half of the year, which is reflected in our guidance. We're projecting product revenues to be in the range of $1.12 billion to $1.22 billion, assuming foreign exchange rates remain stable and light vehicle production grows at a high single-digit rate in our relevant markets compared to 2021. Adjusting for around 200 basis points of foreign exchange pressure year over year, the midpoint of our guidance indicates an organic growth rate of 14%. Our guidance also indicates higher revenues in the latter half of the year compared to the first half. In terms of profitability, we continue facing supply chain disruptions resulting in additional costs. In Q4 and into the first quarter, we are encountering unprecedented challenges in maintaining our semiconductor supply. Consequently, we expect the adjusted EBITDA rate for 2022 to be between 14% and 16%. Due to the necessity of managing supply gaps with several suppliers, we anticipate profitability in the first half of 2022 to be lower than the 12.5% rate reported in Q4 2021. In the second half of 2022, we expect to return to a high teens adjusted EBITDA rate, assuming supply chain pressures ease. However, we expect inflationary pressures to persist for a considerable time. We will remain proactive in managing costs and strategically allocating resources throughout the year to focus on lowering product costs. As for capital expenditures, we expect them to be between $50 million and $60 million and estimate our tax rate will range from 26% to 28%. The expected increase in the tax rate from 2021 is mainly due to the new German trade tax law effective January 1, 2022. I'll now turn the call back over to the Operator to start the Q&A session.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Matt Koranda with ROTH Capital. Please go ahead with your question.

Matt Koranda, Analyst

Hey, guys. Good morning. Thanks for taking the question.

Phil Eyler, President and CEO

Hey, Matt.

Matteo Anversa, CFO

Good morning, Matt.

Matt Koranda, Analyst

Morning, guys. Just wanted to start off on the cadence of revenue in 2022, especially in light of your comments about IHS, and your view relative to the industry. Any help on that front, in terms of how we should think about relative growth that you're expecting for the industry versus digest this forecast, and then how you guys assume take rate trend in the first half to help us out with revenue expectations?

Phil Eyler, President and CEO

Sure, Matt. We are considering a few factors. First and foremost, demand for our product is still very high. There are strong indications from the market that consumers and dealers really want our product. However, we are currently experiencing some volatility. Customer order cancellations remain at elevated levels, which we need to take into account. We are also navigating a challenging period with chip supplier volatility, as Matteo mentioned. In some instances, we've had to ask customers to reduce their orders to align with our chip supply. We're closely monitoring all orders and forecasts from our customers. Particularly in the US, Europe, and Korea during the first half, we believe the IHS estimates might be somewhat optimistic, which could be contributing to lower expectations for Q1 and Q2. On a positive note, we are receiving encouraging feedback from customers and semiconductor suppliers that suggest a recovery in the second half. If everything goes according to plan, we anticipate the second half will be a significantly stronger period. Therefore, we have slightly moderated our expectations for the first half but expect a solid ramp-up in the second half. Got it, that's helpful, Phil, thanks.

Matt Koranda, Analyst

A good way to understand the supply chain challenges factored into the guidance is to look at the difference in EBITDA margins between the first and second halves, which is about 600 to 700 basis points of margin pressure in the second half. This serves as a way to consider supply chain issues. If possible, could you provide insights on where you're experiencing the most strain, given that you're currently navigating a difficult environment? It would help us understand where we are feeling and seeing these constraints.

Matteo Anversa, CFO

Matt, let me provide some insights on the margins we've observed in the first half and the challenges we're facing. I'll start from where Phil left off. The supply gaps we're encountering now are quite different from what we experienced for most of 2021. Managing these supply gaps incurs significant costs, primarily due to premium freight and spot buys, which will affect our profitability in the first half of the year. We're actively working with customers to recover costs, and we've had some success in this area. For instance, in the fourth quarter, we managed to recover nearly 60% of the non-inflationary costs. However, the timing of these recoveries can be inconsistent, as the amounts recovered in the fourth quarter reflect negotiations that began much earlier in the year. Considering all these factors, I anticipate that the first half will have higher costs net of recoveries compared to the fourth quarter. Additionally, we're expecting inflation in both labor and, more importantly, supplier costs. In the second half of 2021, we were able to offset some of this through volume rebates from suppliers, which will also be available in 2022 but tend to be received later in the year. Consequently, we won't benefit from those in the first half. Another factor to consider is the annual customer price reductions that typically take effect in the first half of each year. We aim to offset some of these reductions through negotiations with customers, but the positive impact will materialize later in the year, not in the first half. This context should help you understand our expectations for the first half compared to the second half. Finally, it's worth noting that despite all the challenges in 2021, we faced nearly $70 million in lost revenue due to supply gaps, incurred $25 million in additional costs from premium freight and spot buys, while recovering about $10 million. If we adjust for these impacts, we would have achieved nearly an 18% EBITDA rate for the year. Overall, despite the challenges, our team did an excellent job of mitigating the impacts.

Matt Koranda, Analyst

Very detailed and helpful, Matteo, thank you. And then just lastly, I'm going to bring you up in this one. But on the bookings front, $540 million, a very nice step up sequentially and year-over-year. You guys called out several programs, but just curious if you can put it one on just mix of bookings and what you're seeing on that front in terms of shaping expectations around CCS versus Battery Performance Solutions side of things, and steering wheel heaters, which sounded you may have been heavy in the quarter on those. But just any color you can provide around the mix of bookings or quantify it, that'd be very helpful.

Phil Eyler, President and CEO

I think there's a typical mix with a strong focus on CCS and steering wheels, along with several significant heat programs. There was a lot of electric vehicle activity during the quarter, which is really exciting for those products. We also received a major award from Renault for our battery heater using our new proprietary thin foil product. Additionally, we secured some valuable ECU awards. Overall, it’s a balanced mix across our portfolio, and this aligns well with what we see in our pipeline. One quick thing to add is that we are launching a new emerging product in high-voltage cables, which has garnered a lot of interest across a few platforms. Cables account for about 8% of our company's revenue. While this may be a lesser-known aspect of our business, our expertise in cables has created numerous opportunities in the electric vehicle space, primarily in Cell Connecting. Most of the business is coming to us from proactive customers, rather than us actively pursuing these products. We are excited about the growing traction in this area.

Operator, Operator

Our next question comes from Luke Junk with Baird. Please go ahead with your question.

Luke Junk, Analyst

Good morning. Thank you for taking the questions, Phil.

Phil Eyler, President and CEO

Morning, Luke.

Luke Junk, Analyst

Could you provide an update on your ClimateSense development contracts and your internal capacity to support this work? Also, considering the ongoing projects with your first customer, how do you assess your ability to handle additional ClimateSense-related development activities in 2022 compared to fiscal year 2021?

Phil Eyler, President and CEO

Yes. That's a big challenge for us. We, obviously, all hands on deck with the production contract that we're finalizing development that launches for model year 24, and that's going quite well. But taken a lot of resources, especially on the software side, we're very selective on development contracts and we're really excited about the new one with this European OEM that's a serious one and we're definitely chasing after it. We were fortunate to have a little bit of a gap. A slowdown in work on one contract that we completed that led us to be able to shift resources to that one. But absolutely we're, as I point out many times, we got to be really careful to not overcommit on that, to make sure we produce the best results. What adds challenges to that is our electronics team seems to be the team that is the most burdened by ClimateSense projects. And we're also using that team pretty heavily to work on redesigns of semiconductors, finding new suppliers to offset the challenges we have. So it's certainly, and I think this is the same for all electronics suppliers in the market, is it's our biggest challenge is managing those resources. But we've done well so far. We're really excited about bringing our first ClimateSense project to market. And we continue to present the case for ClimateSense to our key customers and continue to get a lot of very positive feedback.

Luke Junk, Analyst

Thank you for that. For the second question, I am curious if you could help us better understand the significance of the CCS and Seat Heater award with the large EV OEM that you mentioned.

Phil Eyler, President and CEO

I think I have to stick pretty much with what we put in writing at this point. Some of our customers require certain levels of confidentiality in our communication. So we have had some product with a customer, not huge volumes, involving the steering wheel and some seat heat. Now that's expanded into multiple platforms of CCS, combined with new awards on heat. We're really excited about that, and it also applies importantly to multiple regions with this customer. I think it's really securing our relationship with them, and we're really excited about it.

Luke Junk, Analyst

I appreciate the information you shared. I have a more tactical question regarding the current dynamics around chips, particularly in the fourth quarter and as we move into the new year. Is this affecting your guidance for outgrowth? If I compare the midpoint of organic growth to your production assumptions, it suggests a full-year outgrowth in the mid-single digits. Should we anticipate that outgrowth may be more heavily concentrated in the second half of the year rather than the first half? Any insights on this would be appreciated. Thank you.

Phil Eyler, President and CEO

I agree with your point. As I mentioned, we are currently facing significant challenges due to semiconductor shortages. Specifically, some customers require us to limit their orders while we coordinate with their teams to align with our chip supply. This is definitely impacting our performance in the first half. We're hopeful that we will see improvement in semiconductor supply starting in the second half, as indicated by our suppliers’ recovery plans. That's encouraging. Additionally, I want to emphasize that the fourth quarter was a tough comparison for us. If you consider the first quarter of 2021 as a comparison, that was also a peak launch period for us with our steering wheel and HOD programs, which had high take rates. This also presents a bit of a challenge as we move into the first quarter of this year.

Luke Junk, Analyst

Great, I appreciate the color I will leave it there, thank you.

Phil Eyler, President and CEO

Thank you, Luke.

Matteo Anversa, CFO

Thanks, Luke.

Operator, Operator

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

Ryan Sigdahl, Analyst

Right. Good morning, guys.

Matteo Anversa, CFO

Hey, Ryan.

Phil Eyler, President and CEO

Hey, Ryan.

Ryan Sigdahl, Analyst

I just want to follow-up on that breakthrough CCS sort of a newbie. Is this typical timeline of two to three years until it hits production or is there an accelerated interest to that? And then secondly, I can't connect the dots to basically, one EV of note. Are we missing something there?

Phil Eyler, President and CEO

The timeline is a little bit faster than the typical two-year period. I won't be addressing your second question.

Ryan Sigdahl, Analyst

Fair enough. As you think about medical growth rates directionally relative to your guidance, you think faster forward there?

Phil Eyler, President and CEO

I'd say roughly in line. Potential to be faster, but roughly in line with our guidance for next year.

Ryan Sigdahl, Analyst

Great. It's encouraging to see a third European OEM and development projects. You had two OEMs involved in third development projects. Can you provide an update on the status of the third, if they've made any further progress? Also, an update on the two key ones that have been in development the longest would be appreciated.

Phil Eyler, President and CEO

They're continuing very well, a lot of testing that's happening on those. In fact, some of them have gone into exclusive testing, so it allowed us to free up some of the resources to work on this third one, as I mentioned earlier. So all positive, but as I pointed out many times in the past, it's a long process. These OEMs are to really get the most of ClimateSense, it's a significant transformation of their HVAC strategy, and that's coming in the middle of a huge effort just to launch EVs. It's obviously taking a little longer than we had hoped with some of these folks. Now, here's the positive side, as we're doing these development projects, we're able to demonstrate the added content step-wise that we have. We talked about the enhanced CCS active product, we call IMTM. We think that's an integral part of ClimateSense and that's getting a lot of interest. The net conditioning, a lot of interest. All the surface level heating and radiant heating, so all these things are getting a lot more attention independently as a result of these development contracts. So obviously, it may take some time to get to full-blown ClimateSense, but we see more and more spin-off projects and potential interest in these added content plays as well.

Ryan Sigdahl, Analyst

Great. One more for me, just on the cadence throughout the year. Is Q4 decent run rate as you look at production, what your supply chain is to start the year for Q1 and then presumably gradual improvements throughout the year on revenue?

Phil Eyler, President and CEO

Sorry, Ryan, I didn't quite catch that. Is, you said a Q4, a decent run rate?

Ryan Sigdahl, Analyst

So you did $237 million of revenue in Q4. Is that a decent run rate to start the year for Q1, assuming the similar supply chain production challenges?

Matteo Anversa, CFO

We do not provide quarterly guidance. However, I want to emphasize what I mentioned earlier in the call regarding our expectations. Looking at the IHS production volume for our market, IHS anticipates that the second half will be about five percentage points higher than the first half, and we believe it may be even a bit higher than that. This is the trend we are forecasting.

Ryan Sigdahl, Analyst

Great. Good luck, guys. Thanks.

Phil Eyler, President and CEO

Thanks, Ryan.

Matteo Anversa, CFO

Thank you.

Operator, Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Phil Eyler for closing remarks.

Phil Eyler, President and CEO

Great. Thank you. And thanks, everyone, for joining our call today. As I've consistently shared in the past, we remain very focused on operational execution, innovation, and cash flow generation. I am extremely proud of our team's ability to take swift operating action in light of the significant supply chain challenges and fluctuating global automotive production levels to deliver record adjusted EBITDA and free cash flow in 2021. While we expect continued industry headwinds in 2022, the momentum on awards along with expanding demand for our new technologies and our continued focus on productivity 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.

Operator, Operator

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.