Q3 2020 Gentherm Inc Earnings Call
As well as climate and comfort solutions for second and third gross.
Addition to us to continue to outperform light vehicle production.
Medical we again delivered double digit revenue growth.
The momentum on the top line along with our relentless focus on productivity enabled us to achieve the highest quarterly gross margin and gross margin rate in three years as well as record quarterly operating income and adjusted EBITDA in the company's history.
On the award front, we secured approximately $80 million in automotive New business awards in the third quarter.
This award level is lower than we anticipated and it reflects the limited opportunities in the quarter as Oems continue to conservatively manage sourcing decisions and thus pushed out the timing of several awards.
That said, our RFP pipeline remained strong into the upcoming quarters.
On the operations front, our global manufacturing and supply chain teams performed exceptionally I quickly pivoting to meet the increased demand from our customers, while still assuring safety of all of our employees.
Even with the increased working capital needs in the quarter, we were able to generate $23 million in cash flow from operations.
Importantly, our balance sheet remains strong with total liquidity of nearly $450 million at quarter end.
The tail will provide more details on our financial results in just a few moments.
Now turning to automotive highlights on slide five.
In the third quarter, we launched our automotive solutions on 29 different vehicles across 14, Oems, including Daimler FCTA, great wall, Hyundai Kia and Volkswagen.
We continue to see momentum for our Ccs product.
And launched on the Buick envision Jeep Compass, Kia Sorento, and the Mercedes S class, our first Ccs launch with Mercedes.
In addition, our innovative combined steering wheel heat and hands on detection sensor solution.
Launched for Volkswagen, It's now available on an increasing number of nameplates, including the Gulf eight days.
Okay Blonde L. Coupe Skoda Octavia Carl.
Our OIC and Kodiak as well as multiple vehicles manufactured by say out.
The ramp up of this solution has exceeded our expectations.
On the technology front, our strong progress on climate since development projects continues Rick.
Recall that in 2019 General Motors engine Therm jointly presented our development project results at the Society of automotive Engineers thermal management systems Symposium.
And these results were subsequently highlighted in a number of industry publication.
I'm very pleased to announce that general Motors has decided to extend our partnership and we kicked off a third phase of the advanced development project.
Our growing portfolio of development projects with Oems in North America, Europe, and Asia demonstrates that our climb ascents offering is a compelling solution for passenger comfort and energy efficiency in future vehicles.
Lastly, I'm pleased to announce the geothermal was named a top north American supplier by Honda.
One of only 41 suppliers out of a total of 735.
Im proud of our team for winning the top North American supplier for our excellence and value.
This recognition reflects our commitment to developing innovative solutions and our team's dedication and commitment to quality innovation and operational excellence.
Now on to slide six where you can see that in the third quarter, we secured approximately $80 million in new program awards across six different customers.
Even though automotive production rebounded in the third quarter Oems remained cautious and have shifted out the timing for awarding a number of projects.
Nonetheless, we're in the middle of several RF queues that we expect will lead to significant awards the upcoming quarters.
The third quarter, we won multiple Ccs awards, including platform wins with BMW Xfive in China and PPSA.
Of note. This is our first Ccs award with the Fridge OEM DSA in China.
In addition.
We received multiple steering wheel heater awards from FDA as well as an additional award from one of the largest electric vehicle manufacturers.
On the battery thermal management front, we continue to make progress in expanding our business.
Winning air cooling awards with both Hyundai and Kia.
Moreover, we partner with Oems, such as General Motors, Great Wall, Hyundai and Kia to drive significant take rate increases and products like Ccs seat heaters and steering wheel heaters.
For example, our revenue from great wall doubled in the third quarter as compared to the prior year period the.
The majority of the growth resulted from our China team's efforts to drive incremental Ccs grade.
Great on the popular of all hover age six and eight seven SCS.
New and follow on climate and comfort awards, new technology launches.
Increased content per vehicle as well as strong take rate increases demonstrate the continued momentum we have in automotive.
Now, let's turn to slide seven for a discussion of our medical business.
In the third quarter, we continued to see double digit revenue growth growing 17% year over year.
Im pleased to share that approximately one third of this growth is driven by incremental sales of steeler blood warming products.
Proving the growth synergy we expected from this acquisition.
In addition, we think.
Roll and Hema therm equipment demand continued to grow in international markets, including Spain, Brazil, and Hong Kong.
Although we saw some recovery in electric elective procedures, we believe it could be some time to return to normalized levels.
Finally, I'm excited to report that we achieved an important milestone in our medical business recently.
We received five 10-K clearance from the FDA and have added the Astro pad patient warming system.
Product portfolio in the United States. This.
This system can be utilized in all surgical procedures.
And helps prevent and treat hypothermia in patients throughout the Perry operative journey.
The introduction of the Fastow pad patient warming system demonstrates our deep understanding of human thermal physiology.
And how we're able to leverage technology from our automotive business to provide advancements and patient temperature management and our medical business.
Our unique carbon fiber resistive heating technology was originally designed for comfort more reliability and safety and automotive passenger thermal management.
This technology is ideal for the operating room.
And anywhere in a hospital when medical professionals need quiet comfortable and reliable warming to help prevent and treat hypothermia in a surgical patient.
Now before I close let.
Let me remind you of our four pillars of the focused growth strategy on slide eight.
One accelerate core automotive climate income for growth.
To introduce our innovative microclimates solution climate sense.
Three dry battery thermal management.
And for expands patient thermal solutions.
All of this is enabled by our electronics and software systems.
We're very pleased to see significant progress on each of these pillars and more importantly, the growth generated by our focused growth strategy.
Now, let me summarize on slide nine.
Our results in the third quarter demonstrate the continued successful execution of our strategic strategic plan to focus growth.
Realign our cost structure and bring innovative solutions to market.
This record performance is attributable to our global team and their dedication and agility to successfully deliver on our commitments to our customers. During these unprecedented times.
Well, there's still certainly near term uncertainty in the macroeconomic environment.
Our improving operating performance expanding technology leadership and strong balance sheet gives us confidence in delivering long term shareholder returns.
With that I'll turn the call over to retail for a little more color on the financial results.
Okay. Thank you Phil and thank you to everyone joining the call today.
So let me start on slide 10, and focus on the items that most significantly in profit I will for quarter results.
For the quarter product revenues increased by 8% compared to compared with the same period of last year.
If we adjust for the impact of FX and divested assets. Our overall product revenue also increased by approximately 8%.
Starting with automotive automotive segment revenue was a quarterly record of almost $250 million.
9.4% increase compared to the prior year period.
Adjusting for foreign currency translation automotive revenue increased by approximately 8%.
In comparison, according to IMS chest latest data light vehicle production for our key markets of North America, Europe, China, Japan, and Korea was essentially flat compared to the prior year quarter.
As a result, we outperformed light vehicle production by approximately 800 basis points.
We saw strength in between all of the automotive product lines and more specifically Stephen will heaters revenue increased by 35% compared to the third quarter of last year as a result of the newly launched hands on detection enable heaters with Volkswagen that.
The field just mentioned.
BTM revenues increased 34% is the result of the New center connecting books solution that we launched in the new you mean.
As witnessed trend of our BTM products with CA, primarily the battery heating solution for engineering.
Electronics revenue increased 22% due to the memory module program with Ford and the recovery of the market.
As revenues increased 10%, primarily due to higher volumes with young Brachia General motors and diameter.
These increases were partially offset by decreases in automotive cables and other automotive.
If we move to the industrial segment revenue decreased 17% due to the disposition of the GPP business, which occurred in October Onest 2019.
Conversely, we saw continued strength in our.
Our medical business, where revenues increased more than 17% year over year, primarily due to the higher demand on the Steelers visisted blood warming products as well as growth in month term and blankets wholesales.
If we move to gross margin gross margin rate for the third quarter was 31.8% a highest rate in the past three years.
This compares to 31.1% in the year ago period.
The 70 basis point increase was driven by labor per inch.
Including the fixed cost leverage due to the volume increase as.
As well as supplier cost reductions and positive mix.
And these were partially offset by annual customer price reductions and wage inflation.
Moving to operating expenses, which were $44.1 million in the quarter compared to 54.4 million in the prior year period.
The current year amount included zero point $3 million restructuring charges.
And this compares to last year's third quarter, when we incurred approximately $8.7 million restructuring charges, primarily related to our footprint realignment project that we announced in September 2019.
If we adjust for the restructuring charges in both periods operating expenses were $43.8 million down from $45.7 million in the third quarter of cleaning.
The year over year improvement of 4%.
Was primarily driven by the impact of the divestiture of GPC.
No one is genie due to decreased headcount we.
Reduced travel costs, as well as lower consolidating and R&D costs.
These positive effects were potentially offset by incentive compensation adjustment.
Now please keep in mind that the reduced operating expenses are also a result of a boost travel trade shows and other activities, which will digital wants to cover the restrictions on leasing.
Adjusted EBITDA of 50.1 million the highest in the company's history.
Increased to more than 9 million or 23% from the prior year period.
In addition, adjusted EBITDA rate of 19.3% improved 230 basis points.
Finally, adjusted EPS in the quarter was 91 cents per share compared to 68 cents per share in the third quarter of last year.
And our tax rate in the quarter was approximately 28.5% in line with our expected range of 27% to 29%.
Now moving to the balance sheet on slide 11, our cash position at the end of the quarter was approximately $230 million, including two and a half million over to complete the cash coming from the disposition of the CZ industrial chambers business.
Our cash position in the quarter increased by 70 million from Dan on the second quarter price.
Primarily as a result of the 23 million of cash generated from operating activities.
Net debt decreased by $22 million from negative 9 million last quarter to negative $31 million I'd entered a third quarter.
Total debt Stuart.
Ultimately 195 million.
Similar to last quarter as of September Thirtyth, we wedding, the net cash position as cash on hand exceeded the gross debt.
And is that has helped our net leverage ratio was negative zero point 24.
Based on the trailing 12 month consolidated adjusted EBITDA and the September Thirtyth we.
We had approximately $221 million of remaining availability on our line of credit up from 159 million as we entered the second quarter.
And total available liquidity at the end of the third quarter was $448 million up from $369 million at the end of last quarter.
As you are aware, we withdrew our guidance for 2020 in late March due to the uncertainty of the macro economic environment.
However.
While we have not providing specific guidance.
Based on current customer demand and assuming no significant market changes due to the resurgence of coal that.
We're expecting fourth quarter product revenues to be in the range of 240 to 260 million.
Reflecting our typical fourth quarter seasonality and launch timing.
As a result, we expect gross margin rate decrease in the fourth quarter as compared to the third.
And in addition, we expect higher operating expenses in the fourth quarter, primarily due to the timing effects of R&D project spend.
In conclusion.
Our global team delivered strong financial results in the third quarter, including a number of company records all on that unprecedented and extremely difficult circumstances.
While the macro economic environment remains uncertain.
The results that we achieved in the third quarter, our strong proof points of the positive impact of focused growth strategy on our financial results.
And with that I'll turn the call back to the operator to begin the Q and a session.
Thank you Sir we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad.
You will hear a tone acknowledging your request.
If you're using a peak of phone please pick up your handset before pressing any key too.
To withdraw your question. Please press Star then too.
We will pause for a moment as callers join the queue.
Our first question is from Gary Prestopino with Barrington Research. Please go ahead.
Good morning, everyone.
Eric again.
Hi, Phil.
Phil.
You often have said in prior calls or what percentage of I guess these RF queues that you're winning.
Are you still winning things in the high 80, 90% range that you're trying to.
Again on the phone.
Yes, Gary I was a good quarter, we were above 80% in the quarter, okay above 80%. Okay. Good and then in terms of of some of this a pushback on on.
See the model Rollouts of New awards.
Do you feel that in Q4 you.
We will go to see uplift ROE decisions made on things that were pushed out in Q3, what could this even dribble into 2021.
Well, yes, I think we're feeling pretty good about Q4 again, it's there's there's still some uncertainty there but.
Based on what we see right now, we see a pretty good path to likely achieving a little bit higher in Q or in the second half than in the first half.
That should give you a little bit of a feeling for what we expect in Q4, but I will say this the the pipeline going forward is still really strong.
So the pipeline's pretty appealing.
Yes, Okay. That's good to hear and then enter.
In terms of.
What's going on with the battery thermal management products.
Could you give us some idea of.
How many actual models at least on the TV side that you you guys participate in.
As for this what are these battery thermal management products.
I don't have a number of specific models, but just to give you a sense certainly if you look at our thermal electric BTM, we're on all of diverse.
48 volt mild hybrid systems and then.
And also out of.
Good platforms with with Jeep on that program and then in terms of the.
The.
Resistive.
Using our innovative tin foil technology that just launched on the Jeep renegade encompass.
And we've got some upcoming programs using that similar technology for cell connecting unfortunately haven't been able to announce.
Those platforms and then if you look at air cooling.
There are.
I would say over a dozen programs just to estimate.
[music].
But but that one is rolling out pretty prevalently in terms of air cooling.
So.
Good momentum there than thinking about east just to expand on that beyond.
Just the BTM of course, our climate comfort products, where the Ccs seek heat or steering wheel.
Our really rolling out significantly on EPS.
Okay, and then just lastly, and I'll I'll, let somebody else get in.
On the Opex side.
In a normalized environment for retail where you're doing traveling in trade shows would that.
Opex as a percentage of sales maybe tick up one to 200 basis points Bruce.
Versus where it was this quarter I mean, it was about 17% of sales now.
Do those some of these categories that Europe expenses, how much would they raise that number I'm just trying to get an idea. We've all that you've done what would be a good run rate as a percentage of sales for opex.
Yeah, So I think.
Gary the way I would look at it.
A couple of things I would say more let me step through a number of 10 first and then I maybe have been you back a little bit on the fourth quarter on what you are seeing more short time, so longer term our target remains to have and opex as a percent of sales between 15 and 17% as we outlined back in.
Indeed indeed.
In the Investor day back in June 18, so thats the number that we're shooting for.
Right more short term comments regarding the fourth quarter. So we are Rob.
I would expect the opex in the fourth quarter to increase sequentially compared to the third by say a capital million and this is really primarily driven by timing of R&D expenses.
As a result of the or the fact that we have we have resumed some of the.
Suspended opex.
Primarily on the R&D side.
As a result of the improved market condition.
That's what I would expect for the fourth quarter.
And then one last comment I would make I think cap.
Well that all down to the profitability the team was able to deliver.
In the quarter I would say that I.
I think what we achieved the 31.8% gross margin Debbie.
Maybe debate about above 19% is really a proof point of the double the profitability that we can accomplish as a company.
As we see it started to seeing improved revenue and we continue to focus on sourcing excellence driving productivity at the factories and obviously tight expense management.
Okay. Thank you appearances.
Good.
Our next question is from Matt Koranda with Roth Capital. Please go ahead.
Hey, guys good morning.
Just wanted to clarify a one to one of those.
Answers to Kerrys question.
It sounded like you said second half bookings could be higher than the first half.
And I guess that would suggest that you'd be well north of 300 million and bookings potentially in the fourth quarter. So just wanted to get some color on that and whether there are I guess to some large programs that are out there for bid at the moment and why the confidence that we get those books.
Yes, we have a pretty significant pipeline as I mentioned, our fuse that are in motion and it's really about how the site. This decision timing pans out so.
Yes. The number you just said is right. If obviously if you do the math and put it north of the first half that that would make sense.
Still some uncertainty in the decision, making timing, but but we think there is a path to to get that done.
And certainly I would think about a broader as the next couple of quarters to three quarters look really strong.
Great and the mix of items kind of in the near term pipeline is that more weighted toward ccs fill or is that sort of battery thermal management.
And steering wheel heaters look what's the sort of the mix composition of whats out for bid versus maybe compare and contrast versus what we're where we're at in terms of current revenue run rate mix.
It's a good mix and we typically don't break out the specific mix, but definitely.
Lots of Ccs activity, good electronics activity actually have some some decent opportunities there.
It's certainly BTM.
There as well so it really covers just about everything we're doing.
Great. Okay, and then a question on the guidance and for Q, I think well understood that we see the typical sequential decrease.
Just given holiday shutdown schedules and whatnot.
So it makes sense do you see a sequential decrease in gross margins, but maybe could we talk a little bit about incremental margin gross margin year over year any reason that we can achieve sort of the solid 40% increase.
Incremental margins that you did in Threeq you.
Maybe talk a little bit about the mix. That's that's coming in Fourq, you and help us kind of triangulate around that you get to the right level of gross margin for Q.
Sure Matt so.
I would say that I think at the end what we have seen even if you look at what we experienced between the second and third quarter.
In general our.
Incremental gross margin over the incremental revenue. Thanks.
Thanks to be between 40, and 45% was a little higher than me. When you guys had a range into the quarter. So I think that that's a good number to use and obviously as we indicated in the revenue projection that we gave in the prepared remarks, this implies that into fourth quarter.
It is going to be a slightly below what we experienced in the third.
I would expect.
As a result of that to have some decremental margin on the decremental revenue around 40%. So thats. One one thing that we are seeing in the fourth quarter I would also add another item that we are forecasting that expecting to have a little.
Hi, your price reductions.
To selected customers in the fourth quarter compared to the third eco.
Let me finish with some Big awards that were working through it feel just alluded to so thats also an impact there we are seeing the fourth quarter compared to the David.
Great very helpful on that front and then just one more from me.
Balance sheet, obviously in great shape here, and just wondering preliminary thoughts and sort of reinstating the buyback and how we're thinking about deploying capital on a go forward basis, just given the health of the balance sheet.
Sure. So I think one thing that we continue to monitor it extremely carefully use how wrong there.
Macroeconomic environment reacts to the.
Lead us.
Sharp increase in coal the cases, both in Europe, and the United States.
First thing.
First thing we are looking at but overall I think.
I would say on that in terms of our capital allocation strategy. I think these are the top priorities that we have first and foremost we want to maintain the companys safe and secure so liquidity comes first set.
Second we want to continue to allocate profit amounts of capital to continue to grow the company both organically and also inorganically so towards M&A and then third.
The share buybacks, so thats the way I would think about that please follow how we're thinking about it and I know.
Great.
And as a follow up maybe bill could you talk a little bit about the M&A pipeline and how we're thinking about.
That may be shaping up.
As we go forward here.
Are we in sort of a charter its environment.
Or our multiple sort of relatively.
Relatively stretched supplemental or just kind of given where the the overall capital markets are.
Target rich might be a little strong, but theres definitely activity and it's an area as I as I pointed out in the last quarter.
We really focus the first the first section of our focused growth strategy was getting our house in order and then getting the discipline in place when it comes to productivity and cost management.
Divestitures et cetera, and I think we've we've passed that hurdle, it's a never ending.
Journey, but I think we made good progress there so definitely our eyes are out for.
Potential acquisitions that fit our focused growth strategy and I think thats, an important point that we'll be looking for technologies.
Expanding content in a vehicle that that ties to our strategy.
Potential regional plays.
Course medical and those those are I would say the four areas that that were.
Looking into and.
Certainly if we got more resources pursuing that at the moment.
Great very helpful guys and thank you.
Thanks, Matt.
Once again, if you have a question. Please press Star then one on your telephone.
Our next question is from Ryan Todd with Craig Hallum Capital Group. Please go ahead.
Good morning.
Two questions for me.
So auto production forecasts are expected to be flattish to up sequentially Q4 versus Q3.
Our revenue guidance implies a sequential decline any color there I guess on the puts and takes.
Sure sure, Yes, I think a couple key areas one is.
That I.
We've got some launch changes that occur in the fourth quarter, especially in one example is the Ford F 150.
That's going through a changeover.
Fairly big revenue product for us personally a little decline there.
We also saw a little bit upside and in the Q3 period related to launches watching a lot of new programs both on core business SPT.
Steering wheel heater.
Product.
That is by the way, we're really excited about that product I havent had a chance to highlight that but.
With Volkswagen, we've launched a platform that not only.
Heats the steering wheel, but has also used as a key sensor for hands on detection and Volkswagen is rolling this out across their lineup so really excited to it.
Expand our technology offering and I think that positions us well long term for per growth.
What's your annual business.
Then on top of that you've got shutdowns in a typical factory shutdowns that would occur.
In the December a timeline and as a tier two supplier you typically see that a little bit earlier.
So those are the.
Say the three big effects.
Good.
Second one from me you mentioned kind of climate sense third phase of the development project with GM good to see also.
Also working on or BMW. So curious how that one is going and then if you're any closer to any other development projects and then secondly.
Any thoughts on timing of when these development projects, how many of those phases you need before you could potentially see a commercial or.
Sure, Yes, I think well first of all we have several development contracts underway right now really in all regions. So obviously the GM BMW. We have we have another OEM in Europe that we're working with and then also in Asia. So we got our handful holes to fill that contract.
And in terms of the process too.
Award obviously this is a pretty significant architectural change in the car. So it's always a little bit.
Longer process.
We think this GM extension or next phase is a great indicator of.
How this thing is going to progress.
Essentially.
As as the development contracts roll forward, you get into deeper and deeper levels of validating.
That the solution as viable in the vehicle so really that we've been able to continue to show the kind of results that that lead to ongoing development now timeline wise, we're definitely looking at.
Yes, I would say 2023 and beyond with the earliest SLP.
And clearly we're hoping you know in the in the not too distant future to ask some opportunities to announce awards.
Great. Thanks, guys the pretty.
Thank you Keith.
This concludes the question and answer session I would like to turn the conference back over to feel Pilar for closing remarks.
Great. Thanks, everyone for joining our call today.
I really want to again express my gratitude to the global jet 13, who have so impressively manage through the challenges of this pandemic, especially want to highlight our manufacturing team they truly performed incredibly.
I'm extremely proud of our teams that will focus on operational execution innovation and cost improvement in order to deliver on the commitments all of our stakeholders.
Despite the uncertainties in the macroeconomic environment, our strong liquidity, our relentless focus on productivity enable us to continue to deliver significant long term shareholder value.
We certainly appreciate your interest and your 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.
Mm Hmm.
[music].
Okay.