Gentherm Incorporated (NASDAQ:THRM) Q1 2024 Earnings Call Transcript April 30, 2024
Gentherm Incorporated beats earnings expectations. Reported EPS is $0.62, expectations were $0.43. THRM isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the Gentherm First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Yijing Brentano, SVP, Investor Relations. Thank you. You may begin.
Yijing Brentano: 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 will make forward-looking statements within the meaning of federal securities laws. These 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 this call, we will also 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 and 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.
Phil Eyler: Thank you, Yijing. Good morning everyone and thank you for joining us today. I am proud of Gentherm’s strong execution to start the year. While the global automotive environment remained volatile in the first quarter and near term light vehicle production volumes softened compared to what was forecasted by S&P Global just two months ago, we continue to see strong demand from our customers for our thermal comfort, massage and lumbar solutions, winning 80% of our quoted pursuits for thermal and pneumatic solutions during the quarter. We secured nearly $530 million of automotive new business awards, a record for the first quarter. Adjusting for the impact from foreign currency exchange and one-time recoveries, our automotive climate and comfort solutions revenues, which include primarily CCS, seat heaters, steering wheel heaters and lumbar and massage comfort solutions outperformed the light vehicle production in our relevant markets by approximately 300 basis points in the first quarter with many new launches and ramp ups still to come throughout 2024.
On the profitability front, our Fit-for-Growth 2.0 initiatives drove over 200 basis points year-over-year improvement in gross margin rate through supplier cost reductions, value engineering and increased productivity at the factories. Before I cover the details of the quarter, I’d like to share some exciting news fresh from the Automotive News awards ceremony held last night on Slide 4. At Gentherm, we pride ourselves on our industry leading innovative product portfolio and I am extremely pleased to share that we won the Automotive News PACE Innovation Partnership Award for our partnership with General Motors for launching ClimateSense, the industry’s first scalable, software driven automotive microclimate solution. If you recall, we are launching two ClimateSense production programs with General Motors this year.
In addition, we previously announced a breakthrough scalable ClimateSense software award for nearly all future architecture General Motors ICE and electric vehicles. ClimateSense was recognized as one of the 33 finalists globally for the overall Automotive News PACE Award. Automotive News PACE Awards identify and recognize automotive suppliers for their technological innovation in product and process that has reached the commercial market. I would like to congratulate the global Gentherm team for winning such prestigious awards for bringing to market game changing innovations. Now, turning to our Q1 automotive highlights on Slide 5. In the first quarter, we launched our automotive solutions on 27 different vehicles across 13 OEMs including BMW, General Motors, Great Wall, Honda, Li Auto, Stellantis, Subaru and Volkswagen.
We continue to see expanded application of our CCS solutions. In the first quarter, our CCS solutions were launched on the BMW V series, Chevrolet Traverse, GMC Acadia, Honda Prologue, Subaru Forester, Volkswagen Magotan and a popular BEV with one of the largest global EV manufacturers. In addition, we launched our first CCS solution on Li Auto’s L9 and L8 flagship SUVs as well as our hands on detection enabled steering wheel heat solutions on multiple vehicle platforms for Li Auto. As I mentioned on previous calls, software and electronics are fundamental to our strategy. As the automotive industry prepares for the proliferation of software defined vehicles, we expect to add incremental electronics and software features through our ClimateSense and wealth sense platforms that will enable greater energy efficiency, more personalization, and novel comfort and wellness experiences.
To prepare for the increased demand for resources and competencies, I’m very excited to share that we have established an extended advanced engineering lab and team in Hyderabad, India with the support of an established partner. The India location will focus on the development of software and technologies that aim to improve agility, scalability and efficiency in product development. Now on to Slide 6 where, as I mentioned, we secured a first quarter record of $530 million of automotive new business awards, winning 80% of our quoted pursuits in the quarter. And I am pleased to announce that we continue to grow our business with our largest customer, General Motors. And we recently won a conquest high-end lumbar and massage award for their next generation truck platform, including the Chevrolet Silverado and GMC Sierra.
With this win, we will supply our entire suite of climate and comfort seating solutions including seat heat, CCS, lumbar and massage as well as multifunction electronic control units and ClimateSense software for our largest customer on their largest platform. I would like to recognize our global team for winning against significant competition. We won several CCS awards in the quarter, of note, we won the new Ford Bronco, several Great Wall models in China, Hyundai Genesis G80, a Hyundai fuel cell EV and Volkswagen Tehran. In addition, we won a CCS award for a midsize crossover for one of the largest global EV manufacturers for the North America market. This is on the heels of winning the CCS awards for Europe and China for this EV manufacturer in the fourth quarter of 2023.
It’s worth noting that this EV manufacturer has some combination of our climate and comfort products across all their vehicle platforms and regions. In addition, we received 17 Steering Wheel Heater awards across nine OEMs. Importantly, we won hands-on detection-enabled steering wheel heater awards with Geely, General Motors, Li Auto, Mercedes-Benz and Volkswagen. On the pneumatic comfort front we won lumbar awards for the Audi Q5 and Volkswagen ID.4, both in China. In addition, we continue to strengthen our relationship with Li Auto, winning a high-end massage award for their all-electric SUV Li M6. With this award, we will supply the combined seat heat, CCS and pneumatic solutions for the Li M6. These wins confirm our strong market leading position in thermal and pneumatic comfort.
We’re seeing strong interest from a growing number of OEM customers for ComfortScale. Our combined thermal and pneumatic lumbar and massage product ComfortScale can be integrated with any foam and with any seat. It’s adaptable for all OEMs and all Tier 1s. This is one of the unique value propositions that Gentherm offers. In addition, our innovative, differentiated, proprietary solutions such as ClimateSense, WellSense and ComfortScale position us to be a significant contributor to software defined vehicles of the future and continue to increase Gentherm’s content per vehicle. Now let’s turn to slide seven for a discussion of our Medical business. I am pleased to share that we have entered into a new partnership agreement with US Med-Equip for both Blanketrol equipment and Maxi-Therm Lite consumables, as well as field services.
This is our second key partnership agreement to provide world class patient temperature management solutions to the U.S. healthcare market and after our successful first partnership with SourceMark Medical, a certified minority supplier. In addition, we added 21 new hospital customers in China in the first quarter, including Sanxia Hospital at the Chongqing Medical University. We continue to gain momentum with Astopad resistive patient warming technology, as a result of increased demand for more sustainable solutions. In the first quarter, revenues from Astopad grew 36% year-over-year. We remain laser-focused on growing both the top and bottom line in medical, leveraging large partnerships, distribution channels and white label opportunities.
Before I turn the call over to Matteo, I would like to close with a couple of key highlights. Gentherm is an independent partner that can cooperate with any combination of the 50-plus vehicle OEMs and the 30-plus seat manufacturers globally, including those that are vertically integrated, to create truly differentiated solutions. Our award momentum over the last couple of years is a true testament of this key differentiator. Let me give you two examples on Slide 8. First, for the BMW flagship, next-generation electric and ICE X Series SUVs, including the X5, X6 and X7 and the iX5, iX6, iX7, we have won climate and comfort awards that include CCS, seat heat, interior surface heat and pneumatic lumbar and massage. Second, as I mentioned earlier, we will supply our entire suite of climate and comfort seating solutions, including seat heat, CCS, lumbar and massage, as well as the multifunction electronic control unit and ClimateSense software for the General Motors for their next generation truck platform, including Chevrolet Silverado and GMC Sierra.
Expansive climate and comfort conquest wins on large vehicle platforms like these demonstrate that our unique value proposition resonates with customers. Turning to Slide 9, you will see that Gentherm’s anticipated compound annual revenue growth rate to be above 14% between 2020 and 2024, compared to the corresponding growth in light vehicle production of under 4% in our relevant markets for the same period. This is a strong testament that our focused growth strategy is translating into above market revenue growth. Now, let me summarize. Our first quarter results continue to validate the effectiveness of our strategy and demonstrate our unique positioning to deliver profitable growth. The industry environment remains volatile and dynamic.
Nonetheless, our relentless focus on strong operational execution, innovation and cash flow generation, along with our record performance on new business awards, positions us well to continue to drive shareholder value over the long-term. With that, I will turn the call over to Matteo for a little more color on the financial results.
Matteo Anversa: Thank you, Phil. Let me turn to Slide 10 and focus on the most significant items in our first quarter results. For the quarter, product revenues decreased by 2% compared to the same period of last year consistent with our expectations. If we adjust for the impact of foreign exchange, our overall product revenue decreased by 1%. Starting with the Automotive segment, automotive revenues were $345 million, reflecting a 2% decrease compared to the prior year period. Adjusting for negative foreign currency translation, phasing out of the non-automotive electronics business as well as one-time benefits from recoveries in both periods, automotive revenue remained relatively flat. Actual light vehicle production in our key markets of North America, Europe, China, Japan and Korea decreased by 1% year-over-year.
And as Phil mentioned earlier, revenues from our automotive climate and comfort solutions outperformed light vehicle production in our key markets by approximately 300 basis points. We saw growth in several of our product lines, excluding the impact of foreign exchange and more specifically Steering Wheel Heaters revenue increased by 10% compared to the prior year period due to the start of production of Li Auto L6 in a battery electric vehicle in Asia with one of the largest global EV manufacturers as well as several Mercedes and Stellantis programs. Automotive cables revenue increased by 6% due to higher volume with Bosch and Samsung. Seat Heater revenues increased by 3% due to growth with several GM models in Asia. TCS revenue increased by 2% due to the start of production of Li Auto SUV’s as well as a battery electric vehicle in Asia with one of the largest global EV manufacturers.
Revenues from lumbar and massage and valve systems remained relatively flat ex-FX [ph]. Revenues from a few of our product lines decreased year-over-year ex-FX [ph] and specifically BPS revenue decreased 33% due to the end of production for the Jeep Wrangler 48 volts BTM and the BMW e-MINI cell contacting board as well as the volume ramp down for the Mercedes 48 volts BTM. And as a reminder, we announced on the last earnings call that we are phasing out certain battery performance solution products. Electronics revenue decreased 25%, primarily due to the phase out of non-automotive electronics. Other automotive revenue decreased by 55% or $5 million primarily due to one-time material inflation recoveries received in the prior year period. Turning to Medical.
Medical revenues increased by percent ex-FX [ph], primarily as a result of higher FilterFlo and Astopad sales. Moving to adjusted EBITDA. Adjusted EBITDA in the quarter was $44 million, up from $42 million in the prior year period. The adjusted EBITDA rate for the first quarter was 12.2% and this compares to 11.4% in the first quarter of last year. The 80 basis point year-over-year improvement was driven by fit for growth initiatives including supplier cost reductions, value engineering activities and net productivity at the factories as well as lower freight cost. And these were partially offset by annual price reduction and negative impact from foreign exchange. Operating expenses were $71 million in the quarter compared to $63 million in the prior year period, and if we adjust for acquisition, integration and restructuring costs as well as non-cash stock compensation expenses in both periods operating expenses were $60 million relatively in-line with a prior year.
Finally, adjusted diluted earnings per share in the quarter were $0.62 per share compared to $0.49 per share in the first quarter of last year. Our effective tax rate for the quarter was approximately 19% lower than the guided range of 26% to 29% due to a one-time benefit related to the Alfmeier acquisition. Now moving to the balance sheet on Slide 11, our cash position at the end of the quarter was approximately $125 million and our net debt stood at $97 million. Net debt increased sequentially by $24 million as a result of increased working capital and higher capital expenditures. Our net leverage ratio was 0.5 at the end of the first quarter, well below our target of 1.5 times. Based on the trailing 12-month consolidated adjusted EBITDA ended March 31st, we had approximately $278 million of remaining availability on our line of credit and the total available liquidity as of March 31st was $403 million.
Now let me turn to Slide 12 for our 2024 guidance. We are reaffirming our 2024 guidance as discussed in the prior earnings call. We’re expecting revenue to be in the range of $1.5 billion to $1.6 billion, assuming a euro to U.S. dollar exchange rate of 1.1 and light vehicle production in our relevant markets decreasing at a low-single-digit rate in 2024 versus 2023. Adjusting for approximately 30 basis points of FX benefit year-over-year, the midpoint of our guidance implies an organic revenue growth rate of approximately 5%. We continue to assume higher revenue in the second half compared to the first half as a result of the timing of new program launches. Adjusted EBITDA margin rate is expected to be between 12.5% and 13.5% and as a reminder our guidance assume a 50 basis points headwind associated with the start up cost of our new plants in Morocco and Mexico and product engineering and launch costs associated with our record new awards.
Due to the revenue cadence that I just mentioned and a one-time cost associated with our new plans, we expect the adjusted EBITDA margin rate in the second quarter to be in line with the first quarter and for the rate to improve in the second half. Our full year effective tax rate is expected to be in the range of 26% to 29% and capital expenditures to be in the range of $65 million to $75 million. I would like to thank the global Gentherm team for continued progress on our fit for growth initiatives, which allowed us to deliver an 80 basis point improvement in adjusted EBITDA margin rate in spite of market volatility. And with that, I will turn the call back to the operator to begin the Q&A session.
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