Earnings Call Transcript - THRM Q1 2021

Operator, Operator

Hello and welcome to Gentherm Inc's First Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Yijing Brentano from Investor Relations. Please proceed.

Yijing Brentano, Investor Relations

Thank you, and good morning, everyone, and thank you for joining us today. Gentherm's earnings results were released earlier this morning, and a copy of the release is available at gentherm.com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Gentherm's website. During this call, we may make forward-looking statements within the meaning of federal securities laws. Statements reflect our current views with respect to future events and financial performance. We undertake no obligation to update them, and actual results may differ materially. Please see Gentherm's 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.

Phillip Eyler, CEO

Thank you, Yijing. Good morning, everyone, and thank you for joining us today. I'm pleased with the strong execution of the Gentherm team as we continued our momentum on the top line and delivered solid financial results in the first quarter. This is despite significant supply disruption, including semiconductor shortages, port congestions, and other inflationary factors. Excluding the impact of foreign currency translation, we delivered 24% organic revenue growth in Automotive year-over-year in the first quarter, outperforming light vehicle production in our key markets by 850 basis points. While light vehicle production declined 15% sequentially from the fourth quarter of 2020 to the first quarter of 2021, reflecting the challenges in the global supply chain, our Automotive revenues remained flat to the fourth quarter, still at company record levels. In addition, we continued our momentum on automotive awards from the fourth quarter, securing $400 million in awards from global OEMs with a strong 90% win rate in the first quarter. On the cost front, our disciplined approach to managing expenses allowed us to further reduce operating expenses from the fourth quarter of 2020. In addition, when comparing to where we were 2 years ago, operating expenses in the first quarter of 2021 were 12% lower than the same period in 2019. We continued to deliver adjusted EBITDA margin rate in the high teens and generated strong free cash flow, even considering increased capital expenses as we prepare for new launches and invest in new technologies. Matteo will provide more details about our first quarter financial results in a few minutes. Now turning to the Automotive highlights on Slide 4. In the first quarter, we launched our automotive solutions on 10 different vehicles across 8 OEMs, including Great Wall, Honda, Hyundai, Nissan, Stellantis, and Volkswagen. We continue to see momentum for our CCS product launched on the Acura MDX, Jeep Grand Cherokee, Kia Sportage, Stellantis DS9 in China, and the VW CrossBlue and Tiguan. We continue to make great progress on our ClimateSense, our software-driven microclimate platform using an algorithm based on thermophysiology. Our development projects are advancing well in Phase 3 with both General Motors and BMW as well as Phase 2 with Honda. If you recall, ClimateSense delivered between 50% to 69% energy savings in cold weather testing based on our development project with GM. I'm pleased to share that we have seen even greater energy savings in cold weather testing with another OEM. In addition, we continue to work with our strategic partner Freunhofer to enhance our human-based Thermal Comfort Measurement Model, which measures the performance of localized heat and cooling solutions. We're in discussions with multiple OEMs to transition into this innovative thermal measurement methodology. ClimateSense is a critical part of our long-term strategy. We are disrupting the current thermal solutions in vehicles by significantly reducing power consumption and increasing range. This, all while providing best-in-class passenger comfort. Now on to Slide 5, where you can see that we continued our business award momentum from the fourth quarter. In the first quarter, we secured $400 million in new program awards across 10 different customers. I'm proud of our global team for continuing to win 90% of the opportunities available to us. We won multiple CCS awards, including platform wins with the Hyundai Genesis EQ900, Kia KA4, Toyota Tacoma, and Volkswagen Passat. We received 10 steering wheel heater awards across 8 OEMs, including the Audi A1 and Q3, Ford Transit City Van, Honda CR-V, Jeep Grand Wagoneer, Rivian R1T and R1S, and Volkswagen Polo, Passat, and Tiguan. I'm also very excited to share that we have won significant business awards with Volkswagen Group in the quarter. In addition to the CCS and steering wheel heater awards that I already mentioned, we also won seat heater awards for Volkswagen Tiguan and Passat, Skoda Superb, Audi A4, A5, A6, and A7. I'd like to congratulate our global team for growing our business with the Volkswagen Group. On the Battery Performance Solutions front, we continue to make progress in expanding our business, winning multiple air-cooling Battery Thermal Management awards with both Hyundai and Kia. In Electronics, we continued to expand our stand-alone electronic control unit business by winning a Power Seat Electronics award with Shanghai General Motors. As we've discussed previously, Gentherm is very well positioned to capitalize on the tailwinds of EV adoption. During 2020, we won 32 program awards on different EV platforms, which accounted for over 40% of our total 2020 award dollars. In the first quarter of 2021, we continued to secure additional awards with leading EV manufacturers across North America, Europe, and Asia. Consistent with 2020 results, 40% of our first quarter awards were on EV platforms. Gentherm's current and future technologies will play an important role in extending the range of EVs and delighting passengers with thermal comfort. Now let's turn to Slide 6 for a discussion on our Medical business. The pandemic continued to create challenges for our Medical business with COVID-19 restrictions and canceled elective procedures. That said, we saw some late-quarter recovery in Blanketrol equipment demand in the U.S. and Asia. If you recall, we received 510(k) clearance from the FDA and added the ASTOPAD Patient Warming System to our product portfolio in the United States in 2020. We're starting to see strong interest from ambulatory surgery centers for ASTOPAD, which we expect to convert to sales in the upcoming quarters. The introduction of the ASTOPAD Patient Warming System is a strong proof point of how we're able to leverage technology from our automotive business to provide advancements in patient temperature management in our Medical business. To summarize, I'm pleased with the continued strong execution by the Gentherm team despite the headwinds in the global supply chain. We continue to outperform in Automotive versus the key markets we serve and achieved record first quarter revenue and adjusted EBITDA. In addition, we secured $400 million of new awards from automakers around the world, and we continued to make progress on ClimateSense. While there is still uncertainty in the supply chain, I'm proud of our global team for maintaining the momentum on the top line and delivering strong operating performance while continuing to expand technology leadership. With that, I'll turn the call over to Matteo for a little more color on the financial results.

Matteo Anversa, CFO

Thank you, Phil, and thank you to everyone joining the call today. So let me turn to Slide 7 to focus on the items that most significantly impacted our first quarter results. For the quarter, product revenues increased by 26% compared to the same period of last year. If we adjust for the impact of FX, our overall Product Revenues increased by 21%. Starting with the Automotive segment, revenue was $279 million, corresponding to a 29% increase compared to the prior-year period. Adjusting for foreign currency translation, Automotive revenue increased by 24%, driven by higher volume as a result of new launches and higher take rates, as well as the negative impact of COVID-19 in the prior-year period. In comparison, according to IHS' latest data, light vehicle production for our key markets of North America, Europe, China, Japan, and Korea increased by approximately 16% over the prior-year quarter. And as Phil mentioned earlier, we outperformed light vehicle production by 850 basis points. We saw strength in all of the Automotive product lines and more specifically, our BPS revenues increased 58% as a result of new launches with Mercedes, the strength of the cell connecting boards solution launched on the BMW e-Mini, and the thermoelectric battery thermal management product with Stellantis on the Jeep Renegade. Steering wheel heaters revenue increased by 50% compared to the first quarter of last year as a result of the hands-on detection-enabled heaters with VW, the ramp-up of the Audi Q5 and Tesla Model Y. Electronics revenue increased almost 46% due to higher revenue from automotive, including the memory seat module program with Ford as well as RV products. CCS revenues increased 32% to $109 million, the second-highest quarter in the company's history due to higher volumes and take rate in Hyundai Kia, General Motors trucks and SUVs, Mercedes S-Class, and several Stellantis models. Seat heater revenue increased by 19%, primarily due to higher volumes with Mercedes and BMW. And finally, Cable revenue increased almost 10% due to higher volumes with Porsche and other Tier 1s. If we move to the Medical segment, let me remind you that last year's first quarter benefited from the extremely strong Blanketrol sales to help the temperature management of COVID-19 patients. And as a result, revenue in the first quarter decreased 25% year-over-year. In addition, demand from Blanketrol equipment, Hemotherm products, and UV TREO was down this year due to the protracted negative impact of the COVID-19 pandemic on elective surgeries. And we expect both of these trends to continue at least for one more quarter. If we move to the gross margin... gross margin rate for the first quarter was 30.4%. This compares to 28.9% in the year-ago period. The 150-basis point increase was driven by positive FX, primarily due to the appreciation of the Euro compared to the U.S. dollar, labor productivity at the factories, and fixed cost leverage due to the higher volume. These were partially offset by the annual customer price reductions, wage inflation, and the negative impact from industry-wide supply chain disruptions. These disruptions included semiconductor shortages, resin shortages, port congestions, as well as customer plant shutdowns. We estimate that this resulted in approximately $5 million in lost revenue for Gentherm and approximately $3 million in higher cost of goods sold due to higher material costs, increased premium freight, and overtime. Moving to operating expenses, which were $46.9 million in the quarter compared to $47.4 million in the prior-year period. The current year first quarter amount included $0.8 million of restructuring charges. And this compares to last year's first quarter, when we incurred $3.8 million of restructuring charges. If we adjust for restructuring expenses in both periods, operating expenses were $46.1 million, up from $43.6 million in the first quarter of 2020. A year-over-year increase of approximately 6% was primarily driven by increased stock-based compensation expenses as a result of mark-to-market adjustment in cash-settled stock appreciation rights as well as higher R&D expenses, partially offset by higher R&D income and reduced travel costs. Adjusted EBITDA of $52 million increased by $19 million or 58% from the prior-year period. Additionally, adjusted EBITDA rate of 18% improved 370 basis points. Finally, adjusted diluted earnings per share in the quarter was $1.04 per share compared to $0.51 per share in the first quarter of last year. And our effective tax rate in the quarter was 18.7%. Now moving to the balance sheet on Slide 8. Our cash position at the end of the quarter was $171 million, down from $268 million as of December 31, 2020. The decrease of $97 million in our cash position was the result of $130 million repayment of the revolver, partially offset by free cash flow generation in the first quarter. We generated $30 million in free cash flow in the first quarter of 2021, up from $26 million in the prior-year period. The increase was due to higher cash flow from operating activities, partially offset by higher capital expenditures associated with the investments that Phil just discussed. Net debt decreased sequentially by $33 million, and total debt stood at $62 million. So, we closed the first quarter in a net cash position, as cash on hand exceeded the gross debt. Based on the trailing 12-month consolidated adjusted EBITDA ended March 31, we had $419 million of remaining availability on our line of credit, up from $289 million at the end of 2020. Total available liquidity as of March 31 was $590 million, up from $557 million at the end of 2020. I am also pleased to share that given our strong cash flow generation in the last 12 months, we have now repaid all of the $169 million drawdown of the revolving credit facility that occurred in the first quarter of last year as a result of the COVID pandemic. Now let me turn to Slide 9 for the 2021 guidance. So let me start by saying that we continue to see significant uncertainty in the industry due to the global supply chain challenges that I just discussed. As mentioned earlier, we believe this negatively impacted our revenues in the first quarter by approximately $5 million as well as our cost of goods sold by approximately $3 million. In spite of the lingering impact of the supply chain disruptions that I just mentioned, we are reiterating the guidance we provided on our last earnings call based on the performance that we delivered in the first quarter. We're still expecting Product Revenues to be in the range of $1.05 billion to $1.13 billion, assuming FX remains at the current levels and light vehicle production in our relevant market grows at a low-teens rate in 2021 versus 2020. As we mentioned previously, the midpoint of our guidance implies an organic growth rate of 17%. Additionally, we still expect adjusted EBITDA margin rate to be in the range of 17% to 19% and capital expenditures to be in the range of $50 million to $60 million. With that, I'm going to turn the call back to the operator to begin the Q&A session.

Operator, Operator

Our first question today is from Matt Koranda from ROTH Capital Partners.

Matthew Koranda, Analyst

Just curious if you can provide a little bit more color on the cadence of revenue growth expectations for the rest of the year here, especially Q2. I know that some of your customers have sort of talked about losing quite a bit of production given the semiconductor shortage. And just wanted to get your take on sort of how we should be thinking about the progression of revenue and margin for the rest of the year? Obviously, we can kind of infer that you're still guiding to some outperformance relative to light vehicle production for the rest of the year here but would just like a little bit more color on that.

Matteo Anversa, CFO

As I mentioned earlier, the supply chain disruptions we encountered in the first quarter resulted in approximately $5 million in lost revenue and a 120 basis points decrease in the gross margin rate. We are currently experiencing an even greater impact in the second quarter, especially with OEMs like FCA, Ford, and GM announcing plant shutdowns due to the semiconductor shortage. We do not provide quarterly guidance, but we are maintaining our annual guidance. We believe that our current revenue and profitability forecasts account for the ongoing supply chain issues in the industry. There is still considerable uncertainty, and we anticipate a potential improvement in the second half of the year, but that represents our best understanding at this point.

Matthew Koranda, Analyst

Okay. That's fair. And then just any concern that you guys are pulling forward any revenue in this environment, obviously, with OEMs prioritizing sort of the higher-profitability vehicles, higher trim-level vehicles that probably improves your take rates quite a bit I would assume. And so any concern as we sort of normalize as the shortages abate, whenever that may be, that the mix shift back to sort of a more base level vehicle may impact you in an outsized way?

Phillip Eyler, CEO

Yes. I would say, not a huge amount. We are watching a couple of customers where the take rates seem a little bit high, but we are fortunate that the vehicles where we have the highest penetration have been the vehicles that have been the focus of maintaining production. Many of those are running at expected take rates. So we don't expect to see a change there. But built into our guidance is a little bit of softness on a few customers that we think are running a little bit high.

Matthew Koranda, Analyst

Sure. I wanted to ask you, Phil, about the current bookings environment. It appears we are back to a strong level with the $400 million, and you mentioned some impressive wins on high-volume platforms. Can you share more about what you’re observing in the bookings environment? Has there been any change, considering that OEMs seem to be focusing on production issues? I would like to hear more about the current situation regarding bookings.

Phillip Eyler, CEO

Obviously, we're pleased with the quarter, both on the overall awards and the win rate. And the profile we see over the course of the year so far looks strong. So we're pretty excited about the year. We're expecting to get back up to close to the run rate we had in '19, '18, at kind of level '17. So in that ballpark. It could be higher, it could be lower. It depends on timing, but it's pretty busy out there right now.

Matthew Koranda, Analyst

Okay. On the topic of inventory and gross margin, it appears you have navigated this effectively. There's certainly going to be an impact due to the current environment. Could you highlight any specific raw materials or components you are finding to be in short supply or experiencing significant inflation? I'm interested in how you are managing these challenges. Overall, it seems you are doing well, but is there anything specific we should keep in mind regarding gross margins for the rest of the year?

Matteo Anversa, CFO

Sure. Let me first address the inventory question and then discuss inflation. Looking at our balance sheet, we increased our inventory by nearly $10 million since the end of last year. Our philosophy is that, as a strong cash-generating company with a robust balance sheet, we can leverage that strength to ensure we have sufficient inventory to meet customer demand. This inventory increase is partly due to mitigating pressures from port congestion, especially on the West Coast, and partly to ensure we have enough electronics and semiconductors to satisfy customer needs. On the inflation side, copper is our largest raw material. While we do not buy copper directly, we purchase semi-finished products that contain copper, such as harness wire, heating wire, and magnet wire, which are experiencing inflationary pressures. We have passed about 40% of these costs through to customers and are working with some customers on price increases to help alleviate the impact. Despite the supply chain disruptions we have faced, our team has done an excellent job maintaining a strong gross margin rate.

Operator, Operator

Our next question today is coming from Ryan Sigdahl from Craig-Hallum Capital Group.

Ryan Sigdahl, Analyst

Great. Curious on so you had 10 nameplate launches in Q1. It was quite a bit lower than the 20 to 40-ish per quarter cadence looking back over the last couple of years. Just curious why the deceleration there?

Phillip Eyler, CEO

Just launch time. That's it. It's the timing of the vehicle launches.

Ryan Sigdahl, Analyst

Good. When do you think about the chip supply and supply chains, there are quite varied expectations from different companies. I'm interested to know your perspective on this. Do you anticipate these challenges will continue into 2022?

Phillip Eyler, CEO

Yes. We have two data points. One is the semiconductors we purchase from select suppliers, and we are doing our best to use that information to forecast. However, an even larger consideration is the impact on our customers. We are reviewing the releases and feedback from customers, along with the public information they are sharing. We are taking all these elements into account to provide our best estimates. We feel confident in the information available to us, even though it changes quickly. Listening to these data points suggests that some relief may come in the second half of the year, but we also believe that the problem will continue at some level into next year. This presents a challenge, and as Matteo mentioned, there is ongoing uncertainty that we need to monitor closely. We have incorporated our best insights into our forecast.

Ryan Sigdahl, Analyst

And then two on EVs. I guess I don't know if you've ever quantified it or if you can, but any idea what type of market share you have on EVs from your cell connecting Battery Performance Solutions? And then secondly, on ClimateSense, any update on the third development project with GM and BMW? That's the same update, I believe you had last quarter. So I guess curious if there is a time line for that phase of development. And then any update specifically on those 2 OEMs kind of over the last few months within that development program?

Phillip Eyler, CEO

Sure. I'll start with CCBs, the cell connecting boards. Pretty low market share right now, and that's because most EVs had already been launched before we developed our what we consider a very innovative, competitive product. So that's ground we'll have to make up with new awards going forward. Feedback is great. We have a ton of activity on that. And we think we'll gradually start replacing what right now is in the market, which is primarily wire-based and some thin foil chemical-etched product. But we believe we have a nice advantage there, and we continue to advance that. So pretty excited about the potential growth of cell connecting. That's a big growth engine for us in the future, we think. On the ClimateSense side, I would say some of those phases that we announced in the last quarter were relatively early. And so we're just kind of in the middle of those and continue to make good progress. But one data point that I shared is that with one of the OEMs, they did cold weather testing, and they actually showed power consumption performance that was even better than we had seen in other testing. So a lot of good validation of at least the power consumption side of the product, and everything continues to move forward. So we're working hard on it. We've got a ton of resources at it. And we know that we eventually have to get to a point of an award, and we expect that's in the not-too-distant future.

Operator, Operator

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Phil for any further or closing comments.

Phillip Eyler, CEO

Sure. Thanks, everyone, for joining the call today. As we've consistently shared in the past, we remain very focused on operational execution, innovation, and cash flow generation. I'm really proud of our team's agility, flexibility, and dedication to deliver on all of our commitments to all of our stakeholders. While we certainly expect continued industry headwinds in the remainder of 2021, our momentum in new awards along with 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 going forward.

Operator, Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.