Q1 2022 Gentherm Inc Earnings & Alfmeier’s Automotive Business Acquisition Call
[music].
Greetings and welcome to the Jones, our 2022 first quarter results conference call. At this time, all participants are in a listen only mode.
And answer session will follow the formal presentation.
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I would now like to turn the call over to Adi's Shang Brentano Senior Vice President of strategy corporate development and Investor Relations. Thank you you may begin.
Thank you and good morning, everyone and thanks for joining us today.
<unk> earnings results and the announcement of the agreement to acquire Altmeyer automotive business were released earlier this morning and copies of the releases are available at <unk> Dot com.
Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of <unk> website.
During this call we may make forward looking statements within the meaning of federal Securities laws.
Statements reflect our current views with respect to future events and financial performance.
And actual results may differ materially.
We undertake no obligation to update them, except as required by law.
Please see Johnson's earnings release, and its S easy filings, including the latest 10-K and subsequent reports for discussions of 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 I alert, President and Chief Executive Officer, and Matteo and versa, 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 <unk> dot com slash of bats.
After their prepared remarks, we will be pleased to take your questions now.
Now I'd like to turn the call over to Phil.
Thank you Eugene and good morning, everyone and thank you for joining us today.
This morning, we announced that we have entered into a definitive agreement to acquire Alpha Myers automotive business. We're very excited about this transaction as it will create the largest global supplier of thermal and pneumatic seating comfort for the automotive industry.
This transaction will expand gen firms value proposition beyond thermal and comfort health wellness and energy efficiency.
Before getting into the details of what this acquisition means for <unk>.
First provide a little background on the business that we're acquiring on slide four.
Altmeyer, our private company headquartered in Portland in Germany is an innovative market leader of automotive lumbar and massage comfort solutions.
There are also a leading provider of advanced valve systems technology integrated electronics and software.
Accordingly, they are a leader in seat comfort and wellness innovation with a 50 year old culture of innovation that often puts them. One generation ahead of the competition with respect to technology.
This has resulted in a strong IP leadership position with more than 200 patents, including significant coverage for advanced shape memory alloy technology or SMA.
Altmeyer pioneered the use of SMA valve and pump actuator technology for automotive seat comfort solutions, which delivers quiet high speed pneumatic lumbar and massage performance.
In addition to their leadership position in seat comfort solutions Altmeyer as a global leader in high complexity high rely reliability valves for automotive fluid systems.
Our industry, leading capabilities in valve technology has led to the development of the next generation and intelligent pneumatic seat copper called pulse a.
The proprietary pulse a pneumatic system combines massage with high frequency pulsation, which can stimulate muscles and alleviate paying attention.
With approximately 2200 employees and operations in five countries Altmeyer as automotive business that we are acquiring generated 232 million euros in revenue last year.
Moving on to slide five let me talk briefly about the transaction itself and then discuss in more detail what it means for <unk>.
We will be acquiring the seat comfort solutions and fluid valve systems business of Altmeyer for 177.5 million euros subject to adjustments as set forth in the purchase agreement.
We plan to fund this acquisition using a combination of current cash balances and our revolving credit facility.
The transaction is expected to close in the third quarter of 2022 subject to regulatory approvals and other closing conditions.
We're excited to offer more compelling and high value solutions across complementary customer relationships.
Leveraging the combined technologies teams and capabilities.
Get them sees an opportunity to integrate the highest performing comfort and wellness solutions and the most space efficient manner, which is especially important for electric vehicles that demand compact integrated designs.
In addition to electric vehicles. The addition of the massage and lumbar business will further expand our value proposition from thermal to overall comfort and wellness for both the luxury and high volume vehicles.
Altmeyer, who has built a strong customer portfolio, especially with European Oems.
Some of the customers that we both serve our BMW.
XY again, Mercedes Benz Ford and large electric vehicle manufacturer.
Similar to <unk>, but the majority of altmeyer as business is directly sourced by Oems.
With this transaction, we expect to be able to expand Alf Myers market share by capitalizing on <unk> market, leading customer base, especially in North America and Asia.
In addition to revenue synergies, we've identified significant cost savings opportunities through integration into our disciplined management system.
One that has been proven over the past few years.
We expect to achieve approximately $10 million in annual run rate savings.
Altmeyer has industry, leading expertise in air and liquid flow valve systems should also open additional growth opportunities for Gen <unk> climate sense and battery performance solutions.
The fluid power business has a leading market position attractive margins and generate strong cash flow.
Requiring minimal capital investment the cash it generates can be used to invest in other growing opportunities for gender.
Okay.
Bottom line. This transaction is well aligned with our mission to develop and deliver solutions that improve lives through comfort health wellness and energy efficiency by creating the largest global supplier of thermal and pneumatic comfort for the automotive market.
Before I discuss the first quarter results I'd like to give you a brief update on the situation in Ukraine.
Our primary concern remains the safety and welfare of our colleagues and their families.
Although we've been working with our customers to transfer production of select products to other gen third facilities and to build redundant manufacturing and tooling capacity, we're doing all possible to maintain employment status for our colleagues.
In addition, we paid a special bonus to all Ukrainian employees of our manufacturing facility in recognition of their current challenges.
As part of our humanitarian efforts. We also launched an employee donation program for the world Central kitchen, and made matching company donations to provide meals to the local community and truckloads of a central supplies, including water food blankets and other general supplies to those in need.
At this time, we have not experienced any material impact to our production capacity revenue or costs.
The situation in Ukraine continues to be fluid and we're monitoring the situation closely.
Now onto the quarter.
In Q1, we faced the most significant challenges to maintain our supply of semiconductors that we have experienced to date.
Our manufacturing and supply chain teams worked around the clock to minimize the impact of global semiconductor shortages, along with the many other challenges resulting from volatile customer demand.
Scalade and freight costs and material cost inflation.
I'm proud of the team for remaining focused on execution and continuing to deliver for our customers and stakeholders.
In fact in February we were recognized by Forbes magazine as one of America's Best Midsize companies.
But teo will provide more detail about our first quarter financial results in a few minutes.
Now turning to automotive highlights on slide six in the first quarter, we launched our automotive solutions on 12 different vehicles across nine Oems, including Ford General Motors, Mazda Mercedes Benz and Renault.
We continue to see momentum for our Ccs product on both IC E and electric vehicles.
In the first quarter, our Ccs solutions were launched on the Cadillac lyric EV Honda N P. One and N S. One electric Suvs.
Zoradi Love on Tino, Mazda CX 50, as well as the Mercedes Benz S. L class.
In addition, we continue to make great progress on our proprietary climate sense, our software driven microclimate platform using an algorithm based on thermal physiology.
Climate sense is a critical part of our long term strategy and continues to gain interest from global Oems.
I'm pleased to announce that we have launched a new development project with a fourth OEM in Europe .
In cold weather testing, we've achieved energy savings results in line with other development projects exceeding customer expectations.
We continue to optimize the value proposition for electric vehicles by significantly reducing power consumption and increasing range and extreme temperatures all while providing best in class passenger comfort.
Now on to slide seven where you can see that in the first quarter, we secured over $170 million and New program awards across 10 different customers.
The award level is lower than prior quarters, mainly as a result of lower quoting activity and delayed awards.
The pipeline of opportunities remains strong for the remainder of the year.
We won multiple Ccs awards, including platform wins with the Acura, a dx and Honda prologue through the Honda General Motors EV partnership.
In addition, the Audi Q five Cadillac Optique EV, Hyundai Genesis, <unk> 70, Hyundai Kona, Volkswagen Cross Blue as well as several Volkswagen vehicle platforms in China, including Magneton Prasad <unk> Zeta and Tiguan.
Of important note, we want our Ccs award for the Chevrolet Silverado EV in the first quarter.
This was on the heels of winning the Hummer EV pickup Ford F 150, Lightning EV and revealed our <unk> awards were capturing significant share in the all electric truck market with our CCF solution.
In the first quarter. We also received five steering wheel heater awards across four Oems, including the Mercedes MSL platform vehicles, Nissan Juke toy.
Toyota C H R and free us.
In addition, we want our hands our detection enabled steering keep steering heater award for ROE V. R X nine saic's new flagship SUV.
Our teams continue to transform our product lines to create value for the electric vehicle applications.
I am pleased to share that we want a high voltage cable award for hydrogen fuel cell electric semi trucks in the first quarter.
While our cable business has been traditionally concentrated on internal combustion vehicles, we've introduced high voltage cable solutions for plug and hybrid platforms across Jaguar and land Rover on the full electric revealing our one T and our one S trucks and now for the hydrogen fuel cell heavy duty trucks.
<unk>.
As we continue to bring innovative solutions to our customers <unk> is well positioned to significantly increase content per vehicle as electric vehicles expand in the market.
Yeah.
Now, let's turn to slide eight for a discussion of our medical business.
Medical's revenue grew 9% ex FX in the quarter year over year.
While elective surgeries are coming back with the ease of COVID-19 restrictions hospitals are navigating supply chain issues as many medical supplies are on back order in.
In addition hospitals are managing higher costs as a result of higher wages for travel nurses due to the nerdy nursing shortage as well as increased prices for many suppliers.
Higher operating cost for hospitals have also put a strain on new capital spending.
During the quarter one of the market leaders for fluids warming was not able to supply to their customers.
<unk> was able to step in and provide Astro therm and Astro flow are fluid warming solutions to the University of California, San Diego and Scripps Health also in San Diego.
We continue to see solid demand for our flagship product blankets role in the U S.
Our liquid based patient thermal management solution was selected by several large U S hospital systems, including the Cleveland Clinic.
<unk> children's hospital, and Norton healthcare in Louisville, Kentucky.
Now let me summarize.
Our financial results in the first quarter reflect the significant headwinds created by the supply chain disruptions. Both in terms of lost revenue and higher cost of goods sold.
That said, we still believe there is significant pent up demand that will need to be met once the extraordinary supply chain constraints are resolved.
I'd like to thank our global team for working tirelessly to overcome challenges in the market and deliver to our customers.
While uncertainty remains about where production rates will be for the next few quarters, we remain focused on bringing differentiated thermal management solutions across both the automotive and medical markets.
Our portfolio of innovative solutions, along with the addition of pneumatic copper solutions. Following the completion of the acquisition of Altmeyer are expected to significantly increase <unk> concept per vehicle over time.
In the near term, we believe that inflationary pressures will remain for some time.
We will continue to focus on execution and remain aggressive on cost management, while continuing to collaborate with our customers for reasonable inflationary cost recovery in order to deliver profitable long term growth.
With that I'll turn the call over to Matteo for a little more color on the financial results.
Thank you Phil let me turn to slide nine and focus on the items that most significantly impacted our first quarter results.
For the quarter total revenues decreased by 7% compared to the same period of last year.
And if we adjust for the impact of FX, our overall product revenue decreased by 5%.
Starting with your automotive segment automotive revenues were 258 million corresponding to an 8% decrease compared to the prior year period.
Adjusting for foreign currency translation automotive revenue decreased by 5% in line with the actual light vehicle production in our key markets of North America, Europe , China, Japan and Korea.
When comparing Q1 revenue by product line with the results that we achieved the previous year.
All product lines were negatively impacted by the supply chain shortages as well as unfavorable foreign exchange translation.
Most specifically vps revenues grew 5% ex FX as a result of higher sales of air cooling btn to general Motors.
Higher sales of the cell connecting both solutions on the BMW <unk>.
An increase take rate over the 48 volt, a Mercedes S N C class.
Steering wheel heaters revenue increased 2% year over year ex FX due to growth with a large electric vehicle manufacturer.
Ccs revenues declined 4% ex effects due to the negative impact of the semi conductor shortage on production of trucks and Suvs at Ford and GM and.
And several other models and used Ikea and Mazda.
Cables revenue decreased 5% ex effects due to lower volume at boss.
Seat heater revenues decreased by 8% ex effects due to the semi conductor shortage impacting G M and Lexus production.
Partially offset by growth with a large electric vehicle manufacturer.
Electronics revenues decreased 28% compared to the prior year period.
Due to lower production volume export impacting the deliveries of our memory seat module.
As well as declines in non automotive electronics.
Moving to the medical segment.
Revenue increased by 9% ex FX compared to the prior year period, driven by the continued strength of our blankets all products.
Turning next to gross margin.
Gross margin rate for the first quarter was 24%.
This compares to 34% in the year ago period.
The 600 basis point decrease was primarily driven by higher cost incurred to mitigate the impact of the supply chain disruptions.
Primarily in the form of higher freight and spot buys.
Annual customer price reductions higher wage and material inflation and the negative impact of foreign exchange and lower volume.
In addition, gross margin was impacted by a discrete issue related to the ramp up of our new electronic plant in Celaya Mexico.
This issue has now been resolved.
These were partially offset by cost recoveries from customers.
Moving to operating expenses, which were $49 9 million in the quarter.
Compared to $46 9 million in the prior year period.
The current year first quarter amount included $3 4 million of restructuring and acquisition expenses.
And this compares to last year's first quarter, when we incurred approximately 0.9 million over restructuring and acquisition expenses.
So if we adjust for restructuring and acquisition expenses in both periods.
Operating expenses were $46 5 million up from $46 million in the first quarter of last year.
The year over year increase of approximately 1%.
It was primarily driven by higher R&D expenses.
Huh.
Offset by lower SG&A due to the favorable impact of mark to market adjustments and cash settled stock appreciation rights and tight expense control.
Okay.
Adjusted EBITDA of $27 million declined by approximately $25 million from the prior year period.
And finally adjusted diluted earnings per share in the quarter was <unk> 41 per share compared to a $1.04 per share in the first quarter of last year.
Yeah.
Our effective tax rate in the first quarter was approximately 26, 8% in.
In line with our guidance of 26% to 28% for the full year 2022.
Now moving to the balance sheet on slide 10.
Our cash position at the end of the quarter was approximately $117 million down from $191 million at the animal December 2021.
The 30 million sequential decrease was the result of 6 million negative free cash flow generation, primarily due to a temporary higher working capital.
We closed the quarter in a net cash position of 139 million as cash on hand exceeded our gross debt.
And as a result, our net leverage ratio was negative <unk> 98.
Based on the trailing 12 month consolidated adjusted EBITDA ended March 31, we.
We had approximately 424 million of remaining availability on our line of credit.
And the total available liquidity as of March 31 was $602 million.
Yes.
Now, let me turn to slide 11 for our 2022 guidance, which does not include any impact or the altmeyer acquisition that we announced earlier today.
Let me start by saying that the semi conductor shortage situation remains extremely fluid.
In addition, we are managing through the impact of the military conflict between Russia and Ukraine.
As well as the Covid Lockdowns in China.
Based on the latest information that we have from our customers and semiconductor suppliers.
We continue to expect an improvement in the second half of the year, which we have factored into our guidance.
We continue to expect product revenues to be in the range of $1 12 to $1 22 billion.
Assuming effects remains at current levels.
In light vehicle production in our relevant market grows at a low single digit rate in 2022 versus 2021.
Adjusting for approximately 200 basis points of FX pressure year over year.
The midpoint of our guidance implies an organic growth rate of 14%.
Our guidance continues to assume higher revenue in the second half compared to the first half.
In terms of profitability, we continue to see disruptions in our supply chain that have resulted in additional costs.
We are negotiating price increases and cost recoveries with our customers to compensate for current cost inflation.
While we continue to expect adjusted EBITDA 18, 2022 to be in the range of 14% to 16% we.
We expect profitability in the second quarter to be below this range due to the need to continue to manage supply gaps we had a couple of our suppliers.
In maintaining our revenue and adjusted EBITDA guidance.
We have assumed semiconductor supply chain pressures start to ease in the second half and do we recover a portion of the additional costs related to the semiconductor shortages and inflation from customers.
While we are maintaining our 2022 guidance. Our current forecast is at a lower end of the revenue and adjusted EBITDA guidance range.
We continue to expect capital expenditures to be in the range of $50 million to $60 million.
And the tax rate to be in the range of 26% to 28%.
With that I'll turn the call back to the operator to begin the Q&A session.
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Our first questions come from the lineup Luke junk with Baird. Please proceed with your questions.
Good morning, and thank you for taking the questions today.
Good morning, Good morning, Luke I'm wanted to start with the acquisition. This morning of Myers, specifically I am wondering if theres anything you can share in take rates relative to both seat massage and lumbar support as compared to the company's position and he did and he didn't include seats is it right to assume that there is a similar take rate story for <unk>.
Meyer as there is for Gen <unk> overall.
Well that's definitely.
What we see we see the demand continuing to grow just as we've talked very clearly.
That consumer demand is growing for comfort features wellness features in the vehicle.
Fits perfectly with that trend.
And obviously, we're very much a mission driven company around our desire to improve consumer experience in the vehicle through health wellness.
Comfort and energy efficiency. So we're really excited about how that fits into our.
Our direction.
In terms of market share you know Alpha Myers is.
Very strong position there number one and massage systems and number two in overall lumbar keep in mind that includes all forms of lumbar systems, including the mechanical systems.
Altmeyer is 100% focused on the pneumatic side.
Okay. Thank you for that film and then my follow up question with respect to updated guidance and your indication today that the loan to the range is still achievable just wondering where you stand on things that are within your control specifically the cost recovery front, where do those conversations stand as of early may.
Sitting here today in terms of how much work is still left to do on that front. Thank you.
Yeah, we're very active in those discussions obviously it's.
Our multi pronged approach, we look at different elements of recovery, including.
Of course reimbursement, which as you know.
Kind of around spot buys expedited freight and the like and we've been pretty successful on that but.
If you just look at the quarter the quarter was we got really slammed with onetime costs in the quarter and reimbursements typically don't happen immediately so those will be coming.
And then there are things that are more longer term like price increases surcharges.
Lowering annual price reductions and then of course.
Flowing this into new business negotiations and terms in all of those are active.
We do feel pretty strong about the ability to get some some healthy recoveries throughout the year and Matteo can talk about maybe the value of those recoveries yes.
Yes look so we are.
Back to the prepared remarks.
We are working with our customers to recover.
Some of the.
More stable inflationary cost.
And we are now projecting that the impact on the gross margin to be between 100, and 150 bps and that will all come in the backend of the year because you can imagine it takes some time to complete the negotiations, but this is kind of where we are.
Yeah.
Okay, great. Thank you for both for that color I will go ahead and leave it there for now.
Thank you. Thank you.
Thank you our next question from <unk>.
Line of Glenn Chin with Seaport Research partners. Please proceed with your questions.
Great. Thank you and good morning folks.
I'll go ahead, and just sticking with.
Hi.
Just sticking with the outlier.
Transactions and congratulations.
I don't know if you can share with us the genesis of the transaction.
Did you have a history of working with them.
Yeah.
Actually been very close to this company for four years now.
Doing development projects together.
To be honest with you. This has been a discussion that's been ongoing for that entire time and finally culminated in the right opportunity.
For the two companies to come together, so it's been a long standing process.
Okay, and I'm not as familiar with the space as I am with.
Sure the market for your products or who are some of the competitors there Phil.
<unk> and plat, we believe is one of the one of the large players kongsberg.
Of course, a large a large player there are some other smaller companies out there around the world in Asia, especially that compete in this space.
Okay and.
I think you mentioned.
That's good the margins are high.
Healthier appealing I don't know if you can talk about.
Whether or not it'll be more divisions.
The business will be margin accretive and perhaps.
If you can talk about the multiple that you paid.
Yeah. So let me let me take that one so.
Let me start first.
The first portion of your question on the margin so.
Both businesses.
<unk> confirmed a fluid system have margins that are slightly lower.
<unk> margin.
However.
The integration of <unk>.
For Myers automotive into journalism.
We strongly believe that the profitability will benefit from the scale.
The purchasing power in addition to the synergy that.
We outlined in the press release, so what I would expect.
Is that the ones, we will publish the results of the combined company. After we close the transaction I would expect some modest EBITDA margin percentage dilution.
However, we would expect also the margins to improve.
Quickly overtime as a result of the design synergies operational synergies in purchasing synergies.
We are expecting to achieve with <unk>.
Action.
Florida is the.
Your second part of the question on the under multiple them. So.
If you go to the last published.
Financials of semi here in 2020 they had.
And they'd be down of about a little bit north of 20 million euros. So when you combine that with synergies that would imply a multiple of about.
Six times.
Okay, great. Thank you very much for all the detail.
Okay and then.
Just lastly, and then I'll get back in line just on the white space.
You highlighted in the slide in the deck.
Is that to say that.
The OEM that altmeyer does not do business with so J R and GM et cetera is that to say that you don't expect those types of features.
Historically, you know not necessarily.
Al.
There is a mix at Albemarle has been heavily focused in Europe .
As we pointed out some of their customers include BMW.
Daimler Volkswagen group is a fast growing customer for them for.
Ford as their primary customer in North America, a large EV manufacturer also.
<unk>.
What we're really excited about is two things number one that our product and their product will come together to increase content in those share customers.
<unk> has a far larger global portfolio of customers and we're excited about the opportunity to take that solution through our channels and relationships, especially in North America and Asia.
And significantly take.
Take growth opportunities there.
Every customer's different they're using different technologies and they're in different phases of implementation of lumbar and massage.
But fundamentally we really believe in this combination of.
Thermal physiology based.
Application with <unk>.
Physiotherapy, which is what we call this pneumatic solution.
These these solutions, we think can be game changers to passenger comfort.
You think about heated massage hot and cold pulsation.
Altmeyer is based on on all that we know the industry leader in innovation.
And vertically integrated or core competencies around this space that fits perfectly with <unk>, that's exactly the way Gen thermos positions in the thermal side.
And we both companies.
Uh huh.
Attempt to stay one generation ahead when it comes to.
New technologies, and that's certainly the case with Alf Meyer.
We pointed out in the prepared remarks.
Their latest offering that is being developed called pulse, a technology, which is a high frequency pulsating massage.
That can really create a wellness effects so.
We really see this opportunity to combine thermal and pneumatic as a real game changer.
Maybe Glenn if I may add.
The $10 million annual run rate synergies that we outlined of just the cost synergies.
But we also believe that the back to Phil's point earlier that we also have significant cross selling opportunities, particularly with seating conflict side of Australia.
With our North American and Asian customers and this is not factored in.
The synergies that we outlined in the press release.
Yeah understood. Okay, Yeah, I think that all makes sense got it thanks for all the detail and.
You have plenty more questions, but I'll get back into queue. Thank you.
Yeah.
Thank you Glenn.
Thank you. Our next question comes from the line of Matt Koranda with Roth Capital. Please proceed with your questions.
Hey, good morning, guys.
Hey, Matt.
So.
Maybe just sticking along the lines of my questions and congrats on the acquisition by the way.
Phil you said you'd been speaking with these.
Folks for the better part of the last four years, just wondering what was the catalyst to finally get something done there.
And then you guys did reference sort of cross sell opportunities. So I'm just curious to kind of think about how quickly you guys could could generate some bookings for them through this cross selling opportunity could that'd be relatively near term, maybe just level set expectations on that front.
I'll start with the second question, Yes, we have a clear a clear list of potential opportunities in front of us.
To capitalize on the cross selling and.
While the pneumatic massage and comfort market.
On its own is going to outpace the automotive space, we see an opportunity to really.
Really step beyond that with our synergies.
So there is no doubt.
We have a clear path to those revenue synergies, but as Matteo said, we didn't build that into the $10 million.
Is going to be all upside on top of that so.
Obviously, we until the deal closes we can't get to get to work on those but we're certainly evaluating those and feel good about them.
On the on your first point.
You know.
The company is.
Really outstanding company privately owned.
I've been close to their owners for that period of time in.
Just seeing the migration of the industry and the opportunities.
And the situation in the market.
All of those kind of came together at the right point for us and.
And we put it together and made it happen. So as I said this has been it's been a long dialogue back and forth and.
And working together and we really know that company very very well and Oh.
We're already getting notes from customers that they are excited about this combination.
Excellent.
And then just curious if you could maybe touch on the historical growth rates of the category that they plan.
And maybe if you could also touch on specifically the company's historical growth rate over the last couple of years I know, it's probably a little bit distorted just given COVID-19 and some of the production issues in the industry, but maybe looking back a little bit further.
And I guess, the general rule of thumb I have on Jen <unk>, you guys typically outgrow sort of automotive production by 10 to 15 points plus in any given year and your core categories is there a way to think about.
The growth rate for all Meyer and that sort of category growth versus OEM production.
Well I would look more forward looking I mean, obviously they've been part of the the dynamics of the automotive industry just like we have.
Since the onset of Covid and also shortages and so forth, but if you look at the next five years.
We really believe that.
Our growth rate once were combined we'll be well above IHS growth rate.
I won't get into too much more of the specifics on that.
Hopefully we will in the coming months be able to present, a more detailed plan around it but.
I would say without a doubt.
Significantly higher than IHS growth rates.
Okay, that's fair.
And then just one more on off hire and I have one other question I won't go golf space here, but.
You mentioned the $10 million in run rate savings, but maybe could you just put a maybe bucket out sort of where you see the bulk of the savings coming from.
You referenced purchasing synergies, but is there some footprint consolidation like what's the timing of the 10 million.
What are the major buckets there.
Sure so really the synergies aren't around I'll say three.
Main buckets.
On the manufacturing sites so footprint.
Utilization of the company will be one.
Materials and sourcing synergies around consolidating the supply base, where where applicable and the third one is on the opex side.
Which is really around.
The overhead on the.
So thats really are the three key buckets I would expect that we should be able to achieve the full run rate.
Oh Geez, you know about roughly three years, that's how the time would play out but.
But that's kind of what we are looking at.
Okay, Great and then just last one if I can sneak one in on margins in the core business. So.
If you could maybe just.
Provide a bit more of a bridge on the gross margin year over year decline.
In the first quarter, how big was the Mexico ramp up issue and then as we think about.
EBITDA margin in the second quarter I know you guys.
Ed.
Below the full year.
Target.
Range.
Maybe just should we expect a sequential improvement there relative to Q1, just any help on sort of directionality.
Sure Matt So let me take this one let me start maybe before I think getting to the details of the year over year walk just as a reminder of the dynamics that are happening in them I'm going to maybe touch upon some of the points that we.
We also made in the last earnings call.
So I think if you take a step back there are a couple of factors that are impacting the industry and us in particular right now is the number one is.
The supply situation with the semiconductors.
<unk> as you may recall is extremely different today compared to what it was for the majority of 2021 2021 for most of the year we were.
Negatively impacted by the shortages of the Oems that they would shut US down then in starting with the end of the fourth quarter and then the.
Things exacerbated in the first we also started to incur in our own supply gaps with a couple of our suppliers.
That forced us to cap the deliveries to our customers and in this micro managing all the supply comes obviously with significant cost in there.
Indeed in premium freight and spot buy so that's the first dynamic that I think it's important to remember.
Related to this one.
We have the customer recoveries in the customary recoveries, we have been successful relatively successful in obtaining the recoveries at <unk>.
These tend to be lumpy.
If you recall in the fourth quarter, we were able to achieve about 60% of the recoveries.
And and we said that we would expect this to be lower in the first half and this actually materialized, we recovered about 50% of the non inflationary cost in the first quarter.
So thats the second dynamic that is impacting not only the first quarter, but the first half of the year.
The third one is the inflation, which is labor and.
No.
And generally we are able to mitigate the impact of this inflation in.
In the backend of the year when we enjoy the volume rebates with our suppliers same thing will happen in 2022, but you will see the impact of this coming in at the end of the third quarter and primarily in the fourth quarter. So you don't have the benefits of that in the first half.
Then lastly, the annual customer price reduction, which always kicking in at the beginning of the year.
And as I mentioned earlier.
Two the prior question, we are expecting to be able to negotiate.
Some of the recoveries of the inflation.
But.
These impacts this 100 150 bps impact that I mentioned earlier will come later in the year. So that's I think is the context of what is happening and what happened in the first quarter and what also you will see in the second quarter. Okay.
So now let me go more into the details of the year over year.
So the 600 basis points, usually has about 400 bps was the supply chain disruptions that I just mentioned earlier.
The annual customer price reduction was about 180 bps.
Material and wage inflation was 150 and the Mexico impact of this onetime impact that it seems is being resolved on our new electronics brand was about 110 bps. Okay.
And these were partially offset by the customary Colorado's which accounted for about 130 bps positive in the quarter and then a little bit of priority to the factories. So that's the overall year over year walk now if you take a step back about I would say 300 basis point of this cost of this impact.
Is transitory right.
This bulk buys the premium freight net of recoveries plus the Mexico impact.
So really when you normalize that and you add to that about $30 million of lost revenue due to the <unk>.
Supply shortages.
You really see.
<unk> quarter.
Would have delivered about 28, 5% gross margin rate at a $300 million.
Revenue, so that's kind of what we're looking at a normalized base.
And then on top of it you have to add the impact of the <unk>.
Thanks negotiations that I mentioned earlier, so that's how we get to our <unk>.
<unk> range in the lower end of the guidance that we mentioned we mentioned earlier for the year.
As far as the second quarter is concerned I think that on a couple of things to consider so first of all on the.
Maybe start with the top line. If you look at IHS IHS it'll be here is estimating pretty much what our relevant market.
Year over year flattish on a on the production, but sequentially when you compare the second quarter to the first.
<unk> is forecasting a slight decline primarily this is due to China and the lockdowns that are happening over there and we are seeing the same. So also for US we are expecting the second quarter revenue to be slightly below what we had in the first quarter.
We will continue obviously to remain aggressive on the cost management as we always do.
And so.
So we would expect the profitability in the second quarter to improve slightly compared to the first but I would still expect.
Margin rate EBITDA rate in the second quarter to be below the annual guidance range.
We gave.
Okay Super detailed and helpful. I appreciate all the answers guys.
I'll leave it there.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next questions come from the line of Ryan <unk> with Craig Hallum. Please proceed with your questions.
Okay.
Good morning, guys.
Hi, Ryan.
Curious you mentioned growth with the large EV manufacturer in the quarter.
Alex was that related to and then is that also in relation to the breakthrough Edie Award you announced last quarter or are those two different things.
Yeah, and we were talking about steering wheel and Cte.
This quarter right. So it would be different than the award you announced last quarter.
Can you remind me when that one ramps.
The New award it'll start in 'twenty three.
Got you.
Then just switching over to climate sense, alright, good to see another development project.
The ones you've announced the last several years have you continue to work with those Oems.
Or have any of those I guess tested and then went dormant so to speak.
None have gone dormant, but theyre all in different levels of you know I would say.
Implementation potential.
Some are very active the one that we just announced in Europe is has some very specific opportunities and we're pretty optimistic about moving that one forward.
We've got another one that's you know that's I would say somewhat similar to that there are some where they've evaluated and said you know.
This is pretty common right now we've just got to get this list of Evs out the door.
We love. This we think it could be very beneficial, but we don't have time to implement it we got to figure out how to re architect.
Our solution to to make this part of our pipeline.
<unk>.
We do see what I'm kind of optimistic about as there is beginning to crop up this development phase of the next generation of Evs.
And that's leading to more of these discussions so.
I am optimistic that we will start to get more momentum there.
Our top focus though as we've as we've said is the launch of our first win.
Production win that's slated for 24.
We're we're all hands on deck on that to make sure that our.
Our first go to market is a big success.
And then of course with that customer inactive.
In active discussions about.
Other applications of the technology in there.
And their lineup.
Okay.
Helpful. One more for me just on the high voltage cable product you mentioned, the New award and some opportunities. There do you think <unk> can grow its cable business over the coming years as new business offsets the legacy ice business that.
Some of the headwinds and challenges against it.
Yes, I do.
I do.
We're we're not super aggressive as I've said before on this we're very selective about the applications.
But we've kind of built a reputation for ourselves and.
In this combined.
Cable and cell connecting.
Arena, and they're very complementary and in fact as I pointed out before the the.
The fact that we had this cable expertise is really what helped us to gain credibility too to be awarded cell connecting.
And on the cell connecting side within our bps product line. There is a lot of activity right now in terms of.
Testing.
With our.
Our thin foil solution and we're really excited about that opportunity. So I guess the net the net of that is even on the high volt, especially with high voltage cables.
We definitely see some opportunities to grow.
Great. Thanks, guys. Good luck.
Thank you Ryan.
Thank you. Our next question is coming from the line of Glenn Chin with Seaport Research Partners. Please proceed with your questions.
Great. Thanks, Thanks again.
If he can just focus on.
Some of the factors underlying your guidance so first time IHS.
Do you guys feel as this.
IHS is.
In the right place or you still feel like you need to haircut them.
No I think Brian I think.
And if you go back to.
But in the last earnings call, we said, we Didnt believe.
With IHS was projecting they came down since then.
I think.
Maybe it does.
We are slightly lower than them, but not not major so I think.
I think we're fine.
Okay, great. Thanks, and then secondly, still on factors underlying.
Your guidance so it's <unk>.
Predicated upon improving semiconductor curious supply in the back half so.
You and I discussed this last quarter I think I asked you about your level of confidence that.
Semiconductor supply will actually improve in <unk>.
Distinguish that from.
Whether or not you actually get as much as you wanted notwithstanding the fact that it would improve would you mind delineating that was true again this quarter for us.
Sure.
I would say in general the situation is playing out kind of like we talked about in the last quarter, we certainly expected Q1 to be.
Kind of semi conductor torture for us which was.
But the good news is we are seeing.
Signs of recovery as we head into.
The second quarter, it's still tough.
And so far all of the promises that we were originally given by some of these challenging semiconductor.
Suppliers are still coming.
Still coming through in and Theyre reaffirming the increase in supply so at.
At least at the moment and again.
<unk> pointed out this is a fluid space.
The indicators are still good that we'll see that recovery in the second half.
And we're hearing similar similar comments from our largest customers that they are seeing the recovery.
On their side across other suppliers start to shape up for second half so.
I'd say both of those both of those areas were still feeling.
Fairly good.
Okay would you care to put a number on itself from say one to 10 10 being the most confident.
Okay.
Yes.
No not really.
Okay.
Okay.
Just keep in mind with just only last quarter then.
Okay.
Last question just on <unk> I think you mentioned that their business is directly sourced.
By Oems is that different I know some of yours is great correctly.
Directly sourced by.
Sourcing decision.
By your tier ones.
Is that not the case with him is the dynamic different there.
No, it's very similar to our business and we've been pretty consistent in our comments there.
At least in today's market the majority of.
Awards and sourcing comes from the Oems and that applies to <unk> and it also applies to <unk> business.
Of course, there is there are plenty of sourcing from the tier ones as well.
And we're just 100% focused on developing.
Best in class solution, both individually with the two technologies and now going forward hopefully with some exciting breakthrough combination.
Products and systems, and where we are.
We're here to make sure that in the end the end consumer.
Experiences the most amazing solution.
Okay very good thanks very much.
Thank you.
Thank you there are no further questions at this time I would now like to turn the call back over to Phil Island for any closing comments.
Okay. Thank you and thanks, everyone for joining our call today marks the beginning of a new chapter for Jennifer <unk>.
The acquisition of Alpha Myers, lumbar and massage business will further expand gen <unk> value proposition beyond thermal and comfort health wellness and energy efficiency.
<unk> the largest supplier of combined thermal and pneumatic seat comfort solutions in the industry.
Combining off Myers technological advancements and physio therapy with <unk> expertise in thermal physiology, Max's maximizes our capabilities of providing world class comfort and wellness solutions.
I am extremely excited about uniting the innovative expertise the talent and the complimentary global customer base of our two companies I have no doubt that this transaction will further improve <unk> competitive advantages and position us well to deliver significant long term shareholder value.
Yes.
Yes.
We appreciate your interest and support and look forward to keeping you apprised of our progress.
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