Q2 2020 Gentherm Inc Earnings Call
Welcome to the Gen third second quarter 2020 earnings conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation there'll be an opportunity to ask questions to join the question Q You May Press Star then one on your telephone keypad.
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I would now like turn the conference over teaching Brentano Investor Relations. Please go ahead.
Thank you and good morning, everyone and thank you for joining us today.
John Times earnings results were released earlier this morning, and a copy of the release is available at Genon thumb Dot com.
Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Gendarmes website.
This call we may make forward looking statements within the meaning of federal security laws.
Pigments 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 jumped comes as easy filings, including the latest 10-K and subsequent reports for discussions about risk factors and other risks and uncertainties underlining such forward looking statements.
During the call we may discuss non-GAAP financial measures as defined by S. E C regulation G.
Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release or Investor presentation.
Oh the call with me today are still eiler, President and Chief Executive Officer, and Mattel inverse that Chief Financial Officer.
During their comments so one would tell we'll be referring to a presentation deck that we have made available our website, a gem stones dot com slash events.
After their prepared remarks, we won't be pleased to take your questions.
Now I'd like to turn call over to Phil.
Thank you Jamie good morning, everyone and thank you for joining us today.
The second quarter, the global pandemic continue to create significant hardship and challenges worldwide.
Top priority has continued to be the health safety and support our global team members and the communities we serve.
I'm proud of the team for their strong execution and the second quarter. Despite the unprecedented conditions created by the worldwide Cobot 19 pandemic.
Let me start by sharing some of the key highlights of the quarter on slide four.
While our 44% decline in total product revenue reflects the challenges in the underlying markets, we were able to outperform in automotive and each of the key markets that we serve based on <unk> July data.
Adjusting for higher revenue exposure in North America in Europe, we outperformed actual light vehicle production by approximately 700 basis points.
In medical we delivered double digit revenue growth both year over year and sequentially.
On the awards brought our customer business units secured approximately 300 million Dollarss and automotive New business awards in the second quarter.
More importantly, we had the highest win rate in company history in the second quarter, securing over 90% of our opportunities.
Moving to the cost side, our ongoing disciplined approach to managing expenses allowed us to reduce operating expense like 30% from a year ago.
Importantly, we generated a 24% increasing cash flow from operations in the first half of 2020 versus the prior year period.
Despite the challenging environment, our balance sheet remains strong.
Total liquidity of nearly $370 million at quarter end.
Well tail will provide more details on our financial results in a few minutes.
Now turning to the automotive highlights on slide five.
I'm very proud to share that Jeff thermals named a 2019 general motors supplier of the year.
This prestigious GM supplier of the your work is presented to the top 1% of GM supply base.
It's even more rare for a tier two supplier to win this recognition.
The first time that just arm has been recognized by GE I'm for our work to deliver exceptional solutions and customer service globally.
Do you have is one of our longest standing customers and continues to be an exceptional partner in developing and adopting new technologies.
When he was supplier of the year award with our largest customer is a testament to our commitment to deliver the highest level of quality and service.
I want to thank the entire Jim Thorpe team for their dedication and commitment to quality innovation safety and operational excellence.
Also in the second quarter, we launched our automotive solutions on 30 different vehicles across 29, Oems, including F.C.G. and how that Keith.
We continue to see momentum for our Ccs product.
And we launched on the accurate Mdx Chevy Blazer and Chevy bolt.
The G.M.C.C. era and Chevy Silverado.
The Hong she H S seven in China, as well as the key K five and key optima.
On the technology front, we continue to make great progress on climate sense development projects.
As I've discussed in the past Genstar has been in development with a major European OEM.
Now I'm pleased to announce that this OEM BMW has decided to extend our partnership and we kicked off a second phase of the advanced development project.
Lastly, I'm excited to share that Lear has introduced its newest solution and intelligent seeding the into thermal comfort with Gendarmes climate sense technology.
Our collaboration with we are addresses consumer preferences of today and tomorrow by combining gen therms expertise in humans thermal physiology, with where strength as a leader of automotive seeding and electronic systems.
The partnership has resulted in an intuitive solution that delivers faster passenger comfort and automatically adjust based on occupant temperature preferences and profiles.
The into thermal comfort with climate since technology is the first market ready solution developed from this collaboration.
Now onto slide six where you can see that in the second quarter, we secured approximately $300 million in new program awards across 11 different customers.
Well the pandemic significantly impacted our revenue performance in the second quarter, Our award momentum was for all.
The second quarter, we won multiple Ccs awards, including platform wins with Cadillac Xtfive.
Ford Mustang and Hyundai Genesis.
Also I'm very pleased to announce that recently secure our largest single vehicle production climate control seat award in the company's history.
Genstar will be the exclusive climate control seat technology supplier for the global BMW five series, which has produced boasted both in Europe and China.
Also just there continues to grow our business with our largest customer general motors.
And the second quarter, we were able to further secure 10, New program awards for our climate control seat business for both North America and China.
This was a significant achievement to expand our strong position with general Motors.
In addition, we receive steering wheel heater awards across five Oems, including the C.L.A. our platform on all BMW X series vehicles.
Bronco on the pilot and Porsche kayak.
I also very excited to share that we're growing our business with Toyota winning seat heater awards for the Lexus Rx and Lexus index as well as the Toyota Sequoia.
Our extremely strong win rate in the quarter, coupled with increased activities with many of the OEM customers demonstrates the continued momentum we have in automotive.
Now, let's turn to slide seven for a discussion of our medical business.
In the second quarter, we delivered record quarterly revenue growing over 18% year over year.
The majority of the growth resulted from the increase in blankets for all equipment and consumables shipments across the U.S. in Europe.
To support temperature management of Cobot 19 patients to help improve outcomes.
In addition through the U.S. food and drug administration emergency use authorization, our Hema Therm model 400, CE dual reservoir blood cooler heater can be used to treat patients with cobot 19.
This authorization from the FDA opens the way for Genthree to provide support to health care professionals and treating patients with severe symptoms of coping 19.
Thanks to the enormous effort of our team, we're able to have a positive impact for patients and healthcare workers. During this pandemic.
Summarized on slide eight.
Our steadfast execution against our strategic plan to focus our growth divesting noncore businesses realign our cost structure and bring innovative solutions to the market has helped to create a stronger business foundation from which we can address the challenges we're facing today.
And it's the agility flexibility and dedication of our entire global workforce, that's enabling us to successfully deliver on our commitments to our customers. During these unprecedented times.
Well the coven 19 pandemic will continue to create challenges and uncertainties in the near term.
The momentum, we're seeing and new awards.
Winning the Covenant General Motors supplier of the year Award.
Coupled with aggressive cost management, and our strong balance sheet, all position us well to continue to deliver over the long term.
With that I'll turn the call over time, a tail for a little more color on the financial results.
Thank you, Phil and thanks to everyone joining the call today.
So let me start sounds like nine and focus on the items that most significantly impacted our second quarter results.
For the quarter part of revenues declined by 44% compared with the same period of last year.
And if we adjust for the impact of effects. Our overall total revenue decreased by approximately 43%.
The primary driver over the year over year decline was the impact on the coping 19 outbreak.
Before I jump into the gross margin, let me give you a little more color on the revenue by segment.
Our automotive segment was significantly impacted by Coven 19.
Revenue declined 46% year over year or 45%, if we exclude bags.
In comparison, according to your chest latest data.
<unk> vehicle production declined 39% for our key markets of North America, Europe, China, Japan and Korea.
Please keep in mind that our seasonal revenue mix differs from the light vehicle production mix and as we projected on our last earnings call in the second quarter, we declined at a faster pace deny Hs you to Gen terms, how your exposure to the North American and European markets.
As Phil mentioned, if we adjust for this we outperform actual light vehicle production by approximately 700 basis points.
Is that has helped of course in 19, we experienced significant revenue shortfall in all of our automotive Proto lines, except electronics, where revenue was up almost 18% year over year, primarily due to be electronic control units that we sold to afford to support their production that's Peter theaters.
As well as revenues coming from there recently launched memories seats module program also with Ford.
If we moved to the industrial segment revenue declined 14% compared to the second quarter of last year, you get a disposition or did you PT business, which occurred in October of 2019.
Conversely, we still continue to strengthen our medical business, where revenues increased more than 18% year over year.
And this increase was primarily due to the high demand a blanket tool is the result of the cold in 19 pandemic.
If we moved to gross margin.
Gross margin for the second quarter was 19.6%.
Passed with 29.9% in the year ago period.
This decrease was due to the lower automotive volume as well as annual price reductions, partially offset by lower manufacturing fixed cost.
Positive sales mix is that he's also to strengthen our medical business and supplier cost reductions.
Moving to operating expenses, which were 36.6 million into quarter.
This amount included a 600000 office net reduction and restructuring charges related to revisions to our footprint realignment initiative that we announced last September in that proactive effort to preserve cash.
If we adjust for the restructuring charges and acquisition related expenses in both periods operating expenses were 27.2 million down from 51.1 million in the second quarter 29 team.
But you don't give you a decline of more than 27%.
Was primarily driven by a 21% reduction and Ms., Jenny and 20% reduction in net R&D expenses.
The key drivers are these cost reductions include the impact of the adjustment in projected incentive compensation payouts and they did it would accompany performance in 2020.
The divestiture of did you put the business.
No what headcount reduced travel costs and lower outside service fees.
We expect that of the 14 million you it'll be your reduction in adjusted operating expenses, approximately 60% to 70% would be sustainable.
He is the result of the cost reduction initiatives across the manufacturing area are indeed and as Ginny.
Adjusted EBITDA for the quarter was a breakeven compared to 32.2 million of the year ago quarter.
And finally, adjusted the P.S. into quarter was a loss of 30 cents a share compared to earnings of 47 cents a share in the second quarter of last year.
After adjusting for the effect of the settlement and closure of multiyear international tax audits, primarily in Korea.
Our tax rate in the quarter was approximately 31% in line with first quarter.
Moving to the balance sheets on slide 10.
Our cash position do you entered the quarter was 212 million, including two and a half million or restricted cash coming from the disposition of the she is industrial chamber business.
Our cash position in the quarter decreased by 14 million, primarily as result of 33 million net repayment of the revolver.
The second quarter, we generated 21 million in cash from operating activities compared to approximately 34 million in the prior year quarter.
And in the first half was 2020, our cash flow for operating activities was 50 million compared to 40 million in the same prior year period.
Our net debt decreased by approximately 20 million during the quarter from 11 million at the end of first quarter of 2022 negative 9 million I'd ended the second quarter.
Our net leverage ratio there. So June 30 was negative 0.08 is there any south of the fact that cash on hand exceeded the gross debt by approximately 9 million.
And so if the entered the second quarter. The total debt stood at approximately 200 million, including the cash receipts from they've all that throw down that we executed in March.
Based on the trailing 12 month consolidated adjusted EBITDA ended June 30.
We had approximately 159 million of remaining availability on our line of credit it down from 227 million I'd be entered a for score.
Now as you're aware, we do our guidance for 2020 in late March due to the uncertainty Oh, the macro economic environment.
Given the uncertainty the still exists we would not provide full year guidance until we can gain more clarity around future industry production levels.
However.
Let me give you a little color on the third quarter.
While we're not providing specific guidance based upon current customer demand and assuming no significant market changes due to the resurgent coal it.
Wed expect Inc. third quarter production revenues to improve sequentially into being the range of 210 to 240 million.
What were stealing the process of closing them onto July.
We expect our cash balance to decreased by approximately 10 million in Vermont.
In addition, with <unk>.
Our revolver availability to be lower I'd, you don't know third quarter.
In summary.
We're pleased with it teams continued ability to execute in this difficult environment, allowing us to preserve cash and protect the liquidity of the company.
Our correctly the credit position is expected to enable us to navigate through a protracted market downturn in line with the latest are your chest forecast over 20% decline in light vehicle production in our key markets for 2020.
With that I'll turn to called back to do you operator to begin the Kuni session.
Thank you.
We will now begin the question and answer session.
To join the question Q you May Press Star then one on your telephone keypad.
You'll hear a tone acknowledging your request if you are using the speakerphone. Please pick up your handset before pressing any Keith to withdraw. Your question. Please press Star then too to join the question Q. Please press Star then one now.
Our first question comes from Gary Prestopino of Barrington Research. Please go ahead.
Hey, good morning, everyone.
Morning, guys and good morning.
Couple of questions here.
First of all the tail.
I didn't quite catch this but was was you said about 60% to 70% of the expense reductions are sustainable.
Going forward now was that on a total operating expense basis or just SGN a expenses.
Hi, getting that's total operating expenses includes both as DNA in R&D.
The majority of well I would expect to be as Janet.
Okay, so 60% to 70% of that is a sustainable good okay, and then bill could you maybe.
Little bit confused you're not really confused but just maybe drill down a little bit you talk about outperformance in the quarter and I thought you I think you said youre over index to North America, but yet you're revenues product revenue automotive revenues were down versus light vehicle production. So could you maybe you know it.
Playing a little bit better about where that how you determine that outperformance.
Sure, Yes, basically what it's a weighted number based on our volumes in the different regions. So.
That kind of re run the number based on that waiting.
And if you do that actually in every region we outperformed.
Okay.
Okay.
And then just lastly.
Is it.
Is it safe to say that the bulk of the revenues you generated really came in the month of June.
For this year was most manufacturing production shut down in April.
Okay and then kick started in late May early June is that kind of a away we should look at it.
Yes, Gary so and just to give you an idea.
Our revenues in June will 65 million 66 million and up and it probably may we're pretty much half of that amount.
Okay. Thank you.
You bet figure.
Once again if your other question. Please press Star then one.
Our next question comes from Ryan signal of Craig Hallum Capital Group. Please go ahead.
Great. Thanks, guys predicting that her questions.
Hi, Good morning, right. So you guys talk.
You guys talk about kind of this mix adjusted regional breakout in the quarter curious what when you do that for Q3, using I'd just or whoever you walk from a forecast perspective, but what expectations are for your mix adjusted regional break out relative to your guidance.
Well, we're not really given that specifically in the guidance, but certainly you know all indications are North America will be probably the strongest region.
Obviously that 50% of our revenue. So you can imagine that we do have a situation, though where ford.
Is planning to do.
To a model changeover.
Actually if you look at their expectations in the fourth quarter for the F 150.
They're pretty low based on the model changeover that of course generally has a lead time effect for supplier. So we do expect a negative impact in in Q3 on the other 150, which is pretty high revenue product for us but outside of that you know certainly we expect north America to be strongest.
And then the Lear partnership you announced yesterday.
The more details you can provide on that are there any exclusivities on either side et cetera.
Now we're really excited about this is though for the last year. We work together on this product it's a modular sea based.
Third solution.
So it's something that.
Can be applied to you know many many different vehicle types through the modular seat application and it is complete its market ready so were both companies together in a position to our office that product.
Super excited obviously, you can see from the announcement that this this would be kind of a breakthrough in the industry. It's.
It's a platform that through our combined algorithm it can be personalized based on the climate sense technology, which has embedded into the the controls of this this product and of course using.
Any of the Gent, there our thermal effectors, so that's kind of the essence of it.
You know when it comes to the proprietary nature, you know there's kind of a mix. There are some of the application of this at the level of the modular system is proprietary and but much of it can be used in the biogen term.
Across all our customers and different applications.
And just as a follow up so you said it's market ready you've also talked about a number of different climate since development projects with Oems directly I guess, when you say commercial or market ready are you going after commercial awards here in the near term or is it to go after more of these develop.
<unk> projects with the Oems in joint fashion with Lear.
Well, so hard to say, how that's going to be any work. We're just now starting to customer marketing side of it it is up but I would call it a market ready product.
Which could.
You know based on the status of the development could be awarded to a vehicle should the right customer come around to force for prioritizing those customers together with a clear.
That to differentiate that with climate sense.
Hi, My sense is more of a.
Integrated vehicle approach, which is not just the macular scheme, but also.
Multi surfaces integrates with age HVAC system et cetera. So.
Imports and differentiate the the products a little bit, but but this one is really ready if we if we were to receiving a work together we could we could get this and development a pretty quickly.
Yeah.
[noise] a then one last one for me then I'll hop back into queue on Ccs you noted gems.
About platform Leftfield warded across all current and future models for any additional detail there. Thanks.
Well there specific models that we won that on so future models, we have to continue to perform and ER and when those oh on phone right as they come come around so.
That said, we're we're winning and out all of the programs that we're going after with GM at the moment then.
Well, we know the position is this fantastic, but we also know the we have to continue to execute on quality innovation and cost to maintain that business and and all the upcoming platforms in the future.
And just quick right you're are you on all of their.
Battery electric vehicle platforms today are models or is it just specific ones even at the current ones.
All of the ones that have been released and bid for climate seating wave one.
Great. Thanks, guys. Good luck.
Thank you.
Once again, if you have a question. Please press Star then one.
This concludes the question and answer session I would like to turn the conference back over to fill either for any closing remarks.
Okay. Thank you thanks, everyone for joining our call today.
As I've consistently shared in the past, we remain very focused on operational execution innovation and cost improvement.
Which has become even more important in today's coven 19 environment.
I'm extremely proud of our teams agility flexibility and dedication to deliver on our commitments.
Stakeholders.
Despite the current uncertainties around an economic recovery and what that means for both genders arm and our customers.
Our strong liquidity and our continued focus on productivity enable us to continue to deliver significant long term shareholder value.
We appreciate your interest and support and look forward to keeping you apprised of our progress. Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
HM.
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