Q3 2023 Gentherm Inc Earnings Call
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Ladies and gentlemen, good morning, and welcome to the Genco third quarter 'twenty to 'twenty three earnings conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It does now my pleasure to introduce your host <unk> Brentano Senior Vice President of strategy corporate development and IR. Please go ahead.
Thank you and good morning, everyone and thanks for joining US today Jan terms earnings results were released earlier this morning, and a copy of the release is available at <unk> Dot Com. Additionally, a webcast replay of today's call will be available later today on the investor.
<unk> section of <unk> website.
During this call we may make forward looking statements within the meaning of federal Securities law.
Statements reflect our current views with respect to future events and financial performance.
Actual results may differ materially.
We undertake no obligation to update them, except as required by law.
Please see <unk> earnings release, and its S easy filings, including the latest 10-K and subsequent reports for a discussion of our risk factors and other risks and uncertainties underlying such forward looking statements.
During our call we may discuss non-GAAP financial measures as defined by S. E C regulation G, including certain pro forma measures related to the Albemarle acquisition.
Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and Investor presentation.
On the call with me today are Phil I alert, president and CEO, and Mattel and versa CFO 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 flash events.
Operator: And I'll be right back, I'll be right back, I'll be right back, I'll be right back[inaudible] After their prepared remarks, we will be pleased to take your question.
After their prepared remarks, we will be pleased to take your question.
Now I'd like to turn the call over to Phil.
Thank you eating good morning, everyone and thank you for joining us today.
I'm pleased with the continued strong momentum in the third quarter and year to date.
Demand for our thermal comfort massage and lumbar solutions continues to accelerate.
The $520 million in New business Awards achieved in Q3 set a third quarter record.
Bringing us to $1 $7 billion in new business awards year to date.
I am thrilled to announce that as of today, we have now exceeded all prior year records for new business wins, which now stands at $2 billion with more than two months left in the fiscal year.
Also during the third quarter, we achieved record revenue in the key product lines of climate control seats, and steering wheel heaters as well as improved profitability.
During the quarter, we continued to strengthen our operational execution and further improve productivity we.
We delivered the highest quarterly adjusted EBITDA in the past 10 quarters up 15% compared to the third quarter of 2022, and an increase of 12, 5% from the second quarter of 2023.
We also continue to make progress on our fit for growth 2.0 initiatives and on the preparations for our footprint expansion in Morocco, and Monterrey, Mexico.
These actions will help us to continue to expand margin and return a high teens adjusted EBITDA margin rate in the midterm.
Now turning to the automotive highlights on slide four.
The third quarter, we launched our automotive solutions on 16 different vehicles across eight Oems, including BMW BYD for General Motors, Great wall and Volkswagen.
We continue to see expanded application of our Ccs solutions.
In the third quarter, our CCF solutions were launched on the BMW five series Chevrolet Equinox, EV, Great Wall, Mecca Dragon, Hong Chi E H, five N X paying jeannine.
Now let me give you a quick update on climate sense.
First of all I am pleased to announce that Gen. <unk> climate since won the 2023 automotive drive honors for reducing emissions.
Thrive is Reuters events annual recognition for automotive excellence.
Climate sense is the industry's first scalable intelligent automotive micro climate comfort solution that offers an interior cabin experience that uniquely delivers energy efficient personalized comfort for each occupant that extends electric vehicle range.
Our proprietary climate sense, Leverages thermal physiology principles to determine which areas of the body to target at specific intensity and duration to provide optimal comfort with minimized energy consumption.
I would like to congratulate the gentler team for winning the coveted recognition.
Phillip Eyler: Now, I'd like to turn the call over to Phil. Thank you, Yijing. Good morning, everyone, and thank you for joining us today. I'm pleased with the continued strong momentum in the third quarter and year to date. Demand for our thermal comfort, massage, and lumbar solutions continue to accelerate. The $520 million in new business awards achieved in Q3 set a third quarter record, bringing us to $1.7 billion in new business awards year to date.
In addition to climate since our advanced engineering team continues to integrate our thermal products with lumbar and massage products to create innovative full system solutions.
The combination of heating and cooling the body with massage, including our industry's first proprietary pulsating massage Jose is opening vast opportunities for solutions that promote health and wellness experiences alertness enhancements and physical recovery in the car.
Phillip Eyler: I am thrilled to announce that as of today, we have now exceeded all prior year records for new business wins, which announced fans at $2 billion with more than two months left in the fiscal year. Also, during the third quarter, we achieved record revenue in the key product lines of climate controlled seats and steering wheel heaters, as well as improved profitability. During the quarter, we continued to strengthen our operational execution and further improved productivity.
Now onto slide five where as I mentioned, we secured $520 million of awards in automotive in the third quarter.
We won several Ccs awards in the quarter.
Of note we wanted a Dodge Ram 20, 530, 500, Mazda CX five and Volkswagen Tyron.
And in China, we want Audi a for a future electric Buick SUV.
Phillip Eyler: We delivered the highest quarterly adjusted EBITDA in the past 10 quarters, up 15% compared to the third quarter of 2022, and an increase of 12.5% from the second quarter of 2023. We also continue to make progress on our fit for growth 2.0 initiatives, and on the preparations for our footprint expansion in Morocco and Monterey, Mexico. These actions will help us to continue to expand margin and return to a high teens adjusted EBITDA margin rate in the midterm.
Ford Explorer and Hyundai Tucson fuel cell E D.
We continue to gain momentum with some of the fastest growing Chinese EV makers.
Of note in the third quarter, we won three full Ccs awards with Lee auto on their L. Eight L nine and a future electric SUV.
Additionally, I am pleased to share that we just won our first combined Ccs and pneumatic massage award from the auto and October I'd.
I'd like to congratulate our global team for this breakthrough win our first high end massage system with a domestic Chinese OEM.
Phillip Eyler: Now, turning to the automotive highlights on slide 4. In the third quarter, we launched our automotive solutions on 16 different vehicles across eight OEMs, including BMW, BYD, Ford, General Motors, Great Wall, and Volkswagen. We continue to see expanded application of our CCS solutions. In the third quarter, our CCS solutions were launched on the BMW 5 Series, Chevrolet Equinox EV, Great Wall, Mecha Dragon, Hong Chi, EH5, and X-Pain G9.
And in addition, we received pneumatic lumbar massage awards with Atlantis and Mercedes in the third quarter.
We continue to win nomadic lumbar and massage awards at a much faster pace than expected.
Allow me to remind you that in just 14 months since the Altmeyer acquisition. We have won conquest pneumatic lumbar and massage awards with BMW General Motors Jaguar land Rover still Lantus, Volkswagen and one of the largest global EV manufacturers.
These wins confirm our altmeyer acquisition thesis of leveraging <unk> strong customer relationships to introduce Alf Myers industry, leading technologies.
Phillip Eyler: Now, let me give you a quick update on climate sense. First of all, I'm pleased to announce that GenTherm's climate sense won the 2023 automotive drive honors for reducing emissions. Drive is Reuters' event's annual recognition for automotive excellence. Climate sense is the industry's first scalable, intelligent, automotive microclimate comfort solution that offers an interior cabinet experience that uniquely delivers energy efficient, personalized comfort for each occupant that extends electric vehicle range. Our proprietary climate sense leverages thermal physiology principles to determine which areas of the body to target at specific intensity and duration to provide optimal comfort with minimized energy consumption.
Okay.
Also of note in the third quarter, we received 10 steering wheel heater awards across eight Oems.
These included Audi V a IC BMW.
Many Fiat GNC Honda Hong sheet, and Volvo and importantly, six of these awards are hands on detection enabled.
Turning to climate sense, our demonstrations of range extension and superior thermal comfort enabled by climate sense have driven higher thermal content higher take rates and adoption of our solutions on electric vehicles, which contributed to our record awards in 2023.
Phillip Eyler: I would like to congratulate the GenTherm team for winning this coveted recognition. In addition to climate sense, our advanced engineering team continues to integrate our thermal products with lumbar and massage products to create innovative full system solutions. The combination of heating and cooling the body with massage, including our industries first for proprietary pulsating massage, Pulse A, is opening vast opportunities for solutions that promote health and wellness experiences, alertness enhancements, and physical recovery in the car.
Of special note, we have want to follow on heated interior solutions award, including our electronic control units from Honda for additional EV platforms.
Our ongoing climate since development project with Honda has demonstrated significant savings and HVAC energy consumption by combining seat heating steering wheel heat and interior heat. We are excited about our ongoing partnership with Honda in Japan.
Moving onto electronics and software.
Pleased to share that we want our first Multifunction electronic control unit award from General Motors as part of their software defined vehicle platform.
Phillip Eyler: Now, on to slide five, where, as I mentioned, we secured $520 million of awards in automotive in the third quarter. We won several CCS awards in the quarter. Of note, we won the Dodge Ram 2500 and 3500, Mazda CX-5, and Volkswagen Tyron. And in China, we won Audi A4, a future electric Buick SUV, Ford Explorer, and Hyundai Tucson fuel cell EV. We continue to gain momentum with some of the fastest growing Chinese EV makers.
This is truly a breakthrough win for agenda.
Our electronics hardware will be on every general motors software defined vehicle requiring control of thermal devices along with other features.
Resulting in a higher take rate of electronics and higher content per vehicle for agenda.
This award opens the door for us to be a major player in the software defined vehicles of the future.
Our multifunction electronic control units, which operate the thermal functions as well as control motors and other actuators are increasingly in demand as Oems look to combine ease of use and remove sensors to decrease weight and complexity.
Phillip Eyler: Of note, in the third quarter, we won three full CCS awards with Leonardo on their L8, L9, and a future electric SUV. Additionally, I am pleased to share that we just won our first combined CCS and pneumatic massage award from Leonardo in October. I'd like to congratulate our global team for this breakthrough win. Our first high-end massage system with a domestic Chinese OEM. In addition, we received pneumatic lumbar massage awards with Stellantis and Mercedes in the third quarter.
And this is just the beginning as the industry's STV ecosystem continues to grow we expect to add incremental electronics and software features that will enable greater energy efficiency more personalization and novel comfort and wellness experiences.
Software and electronics are fundamental to our strategy, we have significantly increased our resources and competency from embedded devices to algorithm driven connected solutions.
Phillip Eyler: We continue to win pneumatic lumbar massage awards at a much faster pace than expected. Allow me to remind you that in just 14 months since the outmire acquisition, we have won Conquest pneumatic lumbar massage awards with BMW, General Motors, Jaguar Land Rover, Stellantis, Volkswagen, and one of the largest global EV manufacturers. These wins confirm our out-mire acquisition thesis of leveraging Jim Thurham's strong customer relationships to introduce out-mires industry leading technologies. Also, of note, in the third quarter, we received 10 steering wheel-hear awards across eight OEMs.
Now, let's turn to slide six for a discussion of our medical business.
Medical revenue in the third quarter increased 10% year over year, primarily driven by revenue growth of our adoption are warming blankets.
In the third quarter, we added 20, new hospital customers in China.
In the U S. We were awarded contract extensions with two of the largest group purchasing organizations premier and busy it for our flagship blankets roll product.
These contract extensions will give us continued access to more than 70% of the domestic acute care hospitals associated with the <unk>.
Phillip Eyler: These included Audi, VAIC, BMW, Mini, Fiat, GMC, Honda, Hongxi, and Volvo. And importantly, six of these awards are hands-on detection enabled. Turning the climate sense, our demonstrations of range extension and superior thermal comfort enabled by climate sense have driven higher thermal content, higher take rates, and adoption of our solutions on electric vehicles, which contributed to our record awards in 2023. Of special note, we have won a follow-on heated interior solutions award, including our electronic control units from Honda for additional EV platforms. Our ongoing climate sense development project with Honda has demonstrated significant savings in HVAC energy consumption by combining seat heat, steering wheel heat, and interior heat. We are excited about our ongoing partnership with Honda in Japan.
Given the change in purchasing behaviors in the medical device market post Covid, we haven't adapted our go to market model in the medical business to leverage large partnerships distribution channels and white label opportunities.
As we announced on the last earnings call, we're partnering with source Mark Medical a certified minority supplier to provide world class patient warming solutions to the U S health care market.
Consequently, we have reduced the size of our in house sales team to improve our cost structure and medical.
We remain cautiously optimistic about the opportunity in medical and a laser focus on improving returns in this business in the near term.
And with that I'll turn the call over to Matteo for a little more color on our financial results.
Thank you Phil let me turn to slide seven and focus on the most significant items in our third quarter results.
For the quarter total revenues increased by 10% compared to the same period of last year.
<unk> the contribution from the acquisitions.
Phillip Eyler: Moving on to electronics and software, I'm pleased to share that we won our first multi-function electronic control unit award from General Motors as part of their software-defined vehicle platform. This is truly a breakthrough win for Jim Thurham. Our electronics hardware will be on every General Motors software-defined vehicle requiring control of thermal devices along with other features. Resulting in a higher take rate of electronics and higher content per vehicle for gender This award opens the door for us to be a major player in the software defined vehicles of the future Our multi-function electronic control units, which operates the thermal functions as well as control motors and other actuators are increasingly in demand as OEMs look to combine ECUs and remove sensors to decrease weight and complexity And this is just the beginning.
If we adjust for the impact of acquisitions and FX.
Our overall total revenue increased by 3%.
Starting with the automotive segment automotive revenues were 355 million, reflecting a 10% increase compared to the prior year period.
Adjusting for the contribution from Us Meyer in both periods and Florida and currency translation.
Automotive revenue increased by three 1%, which is 150 basis points lower than the four 6% increase in the actual light vehicle production in our key markets of North America, Europe, China, Japan, Okay.
Excluding the non automotive electronics business, which we are in the process of phasing out.
And last year's onetime benefit from spot buy recoveries, we were in line with the production volume for the third quarter and year to date, we outperformed the market by 370 basis points.
Phillip Eyler: As the industry's SDV ecosystem continues to grow, we expect to add incremental electronics and software features that will enable greater energy efficiency, more personalization, and novel comfort and wellness experiences. Software and electronics are fundamental to our strategy. We have significantly increased our resources and competency from embedded devices to algorithm driven connected solutions.
It is worth noting that our core thermal product lines, which include Tcs seat heaters and steering wheel heaters outperformed the production and our relevant market by over 500 basis points in the third quarter.
And 650 basis points year to date.
We saw growth in the majority of our product lines.
Phillip Eyler: Now let's turn to slide six for a discussion of our medical business. Medical revenue in the third quarter increased 10% year over year, primarily driven by revenue growth of our dot-gen air warming blankets. In the third quarter, we added 20 new hospital customers in China. In the U.S., we were awarded contract extensions with two of the largest group purchasing organizations premiere and busy for our flagship like control product. These contract extensions will give us continued access to more than 70% of the domestic acute care hospitals associated with the ATPOs.
Quarterly records in bold steering wheel heaters and Ccs.
More specifically, given where heater revenue increased by 27% compared to the prior year period.
Due to higher demand of our hands on detection enabled steering wheel heaters on multiple VW model.
Ccs revenues increased by 12% due to higher production volume of GM trucks, and Suvs as well as higher take rate with Hyundai Kia and the start of production. It's one of our largest global EV manufacturers.
Phillip Eyler: Given the change in purchasing behaviors in the medical device market post-COVID, we have adapted our go-to-market model in the medical business to leverage large partnerships, distribution channels and white label opportunities. As we announced on the last earnings call, we're partnering with source mark medical, a certified minority supplier to provide world-class patient warming solutions to the U.S, healthcare market. Consequently, we have reduced the size of our in-house sales team to improve our cost structure in medical. We remain cautiously optimistic about the opportunity in medical and are laser focused on improving returns in this business in the near term.
This was partially offset by reduced volume of several model year, changeovers and slower ramp up than expected of some customer electric vehicles.
Cable revenues increased 7% due to higher sales with Bosch.
<unk> revenues increased by 2% due to higher production volume at Ford Honda as well as ramp up one on electric vehicle for our global EV manufacturer.
Lumber and massaging advanced systems revenue was relatively flat year over year on a pro forma basis due.
Due to lower production volume of certain vehicle models, it's one of the largest global electric vehicle manufacturer.
Matteo Anversa: But with that, I'll turn the call over to Mateo for a little more color on the financial results. Thank you, Phil. Let me turn to slide seven and focus on the most significant items in our third quarter result. For the quarter, product revenues increased by 10% compared to the same period of last year, including the contribution from the acquisitions. If we adjust for the impact of acquisitions and effects, our overall product revenue increased by 3%.
EPS revenue declined 15% due to lower volumes with Jeep and Mercedes driven.
Driven by earlier than expected decrease of the mild hybrid vehicle products.
This was the primary driver of our at market. This is above market performance during the quarter.
Electronics revenue decreased 16% due to lower production volume with Ford and the phase out of non automotive electronics.
Matteo Anversa: Starting with your automotive segment, what are the revenues where 355 million, reflecting a 10% increase compared to the trailer period? Adjusting for the contribution from alpha-mire in both periods and foreign currency translation. For the automotive revenue increased by 3.1%, which is 150 basis points lower than the 4.6% increase in the actual life-field production in our key markets of North America. Europe, China, Japan. Excluding the non-automotive electronics business, which we are in the process of phasing out, and last year's one-time benefit from spot-buy recoveries, we were in line with the production volume for the third quarter, and here today we help perform the market by 370 basis points.
Other automotive revenue decreased 60%, primarily due to last year's onetime benefit and support by recoveries.
Turning to medical.
Medical revenues increased 10%, primarily as a result of growth of our doctrine are warming blankets.
As well as strong sales of our liquid cooling disposable blankets in the United States.
Moving to adjusted EBITDA.
Adjusted EBITDA rate in adjusted EBITDA in the quarter was $47 7 million up from $41 6 million in the prior year period, and $42 2 million in the prior year pro forma.
The adjusted EBITDA rate for the third quarter was 13%.
Highest profitability rate in seven quarters.
Matteo Anversa: It is worth noting that our core thermal product lines, which include CCS, three theaters, and Steering Wheel Hears, outperform the production in our relevant market by over 500 basis points in the third quarter, and 650 basis points here today. We saw growth in the majority of our product lines with quarterly records involved Steering Wheel Hears and CCS. More specifically, Steering Wheel Hears revenue increased by 27% compared to the prior year period, due to higher demand of our hands-on detection enabled Steering Wheel Hears on multiple VW models.
This compares to 12% in the year ago period on a comparable pro forma basis.
We had 100 basis points year over year improvement.
Driven by lower freight cost productivity in the factories and fixed cost leverage on higher sales volume.
These were partially offset by material and wage inflation and lower price recoveries relative to the prior year period, which had included catch up recoveries of previous quarter.
It is worth noting that sequentially adjusted EBITDA margin rate rose 160 basis points. Despite.
Despite lower sales volume.
And by an improved profitability from Us Meyer.
Factory productivity and supplier cost reduction.
Matteo Anversa: CCS revenues increased by 12%, due to higher production volume of GM trucks and SUVs, as well as higher tape rate with hand-by-team, and the start-up production at one of our largest global EV manufacturers. This was partially offset by reduced volume of several model-year changeovers, and slower ramp up than expected of some customer electric vehicle. Table revenues increased 7%, due to higher sales with Bosch, TTT revenues increased by 2%, due to higher production volume at Ford, Honda, as well as ramp up on an electric vehicle for a global EV manufacturer.
Operating expenses were $62 5 million during the quarter compared to $57 5 million in the prior year period.
If we adjust for acquisition integration and restructuring costs.
As well as noncash stock compensation expenses in both periods.
Operating expenses were $56 4 million up from $51 6 million in the third quarter of last year.
The year over year increase of approximately $5 million.
It was primarily driven by additional expansion fastest from the acquired businesses as.
There's been a higher compensation and R&D expenses.
Really offset by higher reimbursement of R&D costs.
Matteo Anversa: Lumber and massage involved systems revenue was relatively flat year-over-year on a performance basis, due to lower production volume of certain vehicle models at one of the largest global electric vehicle manufacturers. VPS revenue declined 15%, due to lower volumes with Jeep and Mercedes, driven by earlier than expected decrease of the mild hybrid vehicle products. This was the primary driver of our app market versus above market performance during the war. Electronics revenue decreased 16%, due to lower production volume with Ford, and the phase-out of non-automotive electronics.
Our effective tax rate in the quarter was approximately 30%.
And finally adjusted diluted earnings per share in the quarter were 64 cents per share compared to 70 cents per share in the third quarter of last.
If we move to the balance sheet on slide eight.
Our cash position at the end of the quarter was approximately 154 million and our net debt stood at $54 million.
Net debt increased by 5 million in the quarter due to capital expenditures and share repurchases, partially offset by $21 million of cash generated from operating activities.
Our net leverage ratio was 0.3 generally third quarter in line with the prior quarter and well below our target of one five times.
Matteo Anversa: Other automotive revenue decreased 60%, primarily due to last year's one-time benefit from spot-buy recoveries. Turning to medical revenues increased 10%, primarily as a result of growth of our darkened air-warming blankets, as well as strong sales of our liquid cooling disposable blankets in the United States. Moving to adjusted EBDA, adjusted EBDA rate in adjusted EBDA in the quarter was 47.7 million, up from 41.6 million in the prior year period and 42.2 million in the prior year performance.
Based on the trailing 12 month consolidated adjusted EBITDA in the September 30th.
We had approximately 293 million of remaining availability on our line of credit.
And the total available liquidity as of September 30 was $447 million.
Now, let me turn to slide nine.
Our 2023 guidance.
For comparison purposes, we included the actual results as.
As we reported for 2022 as well as the pro forma 2022 values. If we have incorporated the results of asthma.
Matteo Anversa: The adjusted EBDA rate for the third quarter was 13%, the highest profitability rate in seven quarters. This compares to 12% in the year ago period on a comparable performance basis. The 100 basis point European improvement was driven by a lower freight cost for activity at the factories and fixed cost leverage on higher sales bond. We were partially offset by material and wage inflation and lower price recoveries relative to the prior period which had included hedge up recoveries of previous quarter.
The beginning of the year.
Based on our performance year to date and the best information that we currently have from our customers and suppliers.
We are updating the full year 2023 guidance that was provided at the beginning of the year.
The UAW situation remains volatile however for the purpose of the guidance, we assume that the OEM plans impacted by the UAW strike as of October 25th will.
Pain idled through the end of November.
Matteo Anversa: It is worth noting that sequentially adjusted a bidam margin rate rose 160 basis points despite lower sales volume driven by improved profitability from off-mire, higher factory productivity and supplier cost reduction. Operating expenses were 62.5 million in the quarter compared to 57.5 million in the prior period. If we adjust for acquisition, integration and restructuring costs as well as non-cash stop compensation expenses in both periods. Operating expenses were 56.4 million up from 51.6 million in the quarter of last year.
For 2023, we now expect revenue to be in the range of $1 45 to 147 billion, assuming FX remains at current levels.
The midpoint of our guidance implies a growth rate of 9% on a pro forma basis, excluding the impact of foreign exchange.
We now expect adjusted EBITDA margin rate to be in the range of 11, five to 12, 5% for 2023.
We still expect our adjusted full year effective tax rate, excluding the impact of the previously recorded goodwill impairment.
It will be in the range of 28% to 32%.
And we now expect capital expenditures to decrease to the range of $40 million to $50 million.
Matteo Anversa: The year over year increase of approximately 5 million was primarily driven by additional expenses from the acquired businesses as well as higher compensation and LND expenses partially offset by higher reimbursement of LND. Our effective tax rate in the quarter was approximately 30%. And finally adjusted deluded earnings per share in the quarter were 64 cents per share compared to 70 cents per share in the third quarter of last year.
With that I will turn the call back to Phil.
Thanks, Matteo now, let me summarize as the new business wins record revenues in key product lines and improved profitability in Q3 demonstrate the <unk> team is executing strongly.
As we've discussed we're driving content per vehicle and simultaneously, increasing our penetration into key EV product lines and into Oems globally. We are effectively leveraging the altmeyer acquisition, winning global conquest nomadic lumbar and massage awards with a growing number of Oems globally.
Matteo Anversa: If we move to the balance sheet on slide 8, our cash position at the end of the quarter was approximately 154 million and our net debt stood at 54 million. Net debt increased by 5 million in the quarter due to capital expenditures and share repurchases partially offset by 21 million off-cash generated from operating activity.
And we are laser focused on building, an even stronger foundation for the future as we expand our global manufacturing capabilities with investments in Morocco in Mexico.
While the automotive production environment environment remains challenging and including the UAW strike a relentless focus on strong operational execution innovation and cash flow generation, along with our record performance on new business awards positions us well to continue to drive shareholder value over the long term.
Matteo Anversa: Our net leverage ratio was 0.3 million at the end of the quarter in line with the prior quarter and went below our target of 1.5 times based on the trading 12 months consolidated adjusted EBDA and the September 30th. We had approximately 293 million of remaining availability on our line of credit and the total available liquidity as a September 30th was 447 million.
With that I'll turn the call back to the operator to begin the Q&A session.
Okay.
Thank you.
Ladies and gentlemen, we will now be conducting a question and answer session.
If you'd like to ask a question. Please press star and one on your telephone keypad.
Matteo Anversa: Now let me turn to slide 9 for our 2023 guidance. For comparison purposes we included the actual results as reported for 2022 as well as the performance 2022 values if we had incorporated the results of us Meyer since the beginning of the year. Based on our performance year to date and the best information that we currently have from our customers and suppliers, we are updating the two-year 2023 guidance that was provided at the beginning of the year.
Confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Ladies and gentlemen, one moment, please while we poll for questions.
Our first question comes from the line of Matt Koranda with Roth Capital Partners. Please go ahead.
Matteo Anversa: The UAW situation remains volatile. However for the purpose of the guidance we assume that the OEM plans impacted by the UAW strike as of October 25th will remain For 2023, we now expect revenue to be in the range of 1.45 to 1.47 billion, assuming effects remains at a current level. The midpoint of our guidance implies a growth rate of 9% on a performer basis, excluding the impact of foreign exchange. We now expect a justly bidum margin rate to be in the range of 11.5 to 12.5% for 2023.
Hey, guys, it's Mike Zebra non for Matt.
I guess good morning, Bernard on the top.
Good morning.
Just starting on the top line.
Maybe just speak to why organic and ex FX automotive revenue growth locked industry production in the third quarter I know you called out some spot by recoveries in the prior year period, but are we also seeing lack of launch activity our take rates like I guess, just some more color on <unk> would be helpful.
Then how do we expect revenue to trend relative to industry production and <unk>.
Sure thing I'll I'll take that.
Matt.
First of all you're right, we were basically flat to market, excluding the spot buys and the phase out revenue from our non automotive electronics business.
Matteo Anversa: We still expect our adjusted full year effective tax rate, excluding the impact of the previously recorded good will impairment to be in the range of 28 to 32%. And we now expect capital expenditures to decrease to the range of 40 to 50 million.
Outside of that I'll, just kind of break it down by product category.
To explain.
How we performed first off.
We grew basically in line with expectations that we had previously on our climate.
Phillip Eyler: With that, I would turn the call back to fill. Thanks, Matteo.
Core climate business, so ccs seat heat steering wheel heat.
Phillip Eyler: Now let me summarize. As the new business wins, record revenues in key product lines and improve profitability in Q3 demonstrate, the Gentherm team is executing strongly. As we discussed, we're driving content for vehicle and simultaneously increasing our penetration into key eb product lines and into OEMs globally. We are effectively leveraging the outmeyer acquisition, winning global conquest, pneumatic lumbar and massage awards with a growing number of OEMs globally. And we are laser focused on building an even stronger foundation for the future, as we expand our global manufacturing capabilities with investments in Morocco and Mexico.
There are some puts and takes in there, though I mean, we had some higher take rates and <unk>.
Vehicle launches than we expected, but those were somewhat offset by.
Lower volume on some vehicle changeovers, and some delayed EV ramp ups, which I think has been well publicized with.
With some Oems.
So all in all right kind of right on track with the climate business, where we saw the most significant impact.
Below our expectations was with our battery performance solutions.
So we've talked about in the past the majority of our revenue.
Currently in that category is with 48 volt mild hybrid vehicles, and that's where we have our thermal electric based battery thermal management product.
Phillip Eyler: While the automotive production environment remains challenging, including the UAW strike, our relentless focus on strong operational execution, innovation and cashflow generation, along with our record performance on new business awards, positions us well to continue to drive shareholder value over the long term.
We've known over time that that's going to gradually phased down. Unfortunately, it was a little faster or a phase down or ramp down in the in the quarter than we expected.
Operator: With that, I'll turn the call back to the operator to begin the Q&A session. Thank you.
Now those customers are Jeep Mercedes so.
Revenue revenue will still be there on those products is just gradually phasing down.
Over the longer period for bps I think if you look at the next several quarters, probably going to be relatively flat on our bps business.
Operator: Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Due to that ramped down.
The good side, where we're launching some new product.
Mostly through our MSP based flex circuits.
So the BMW cell connecting board the Renault battery heater, Mercedes battery heater products like that we're also ramping up our growing air cooled.
Operator: Ladies and gentlemen, one moment, please, while we poll for questions.
Our battery products.
So some good guys that are coming but that'll.
Matthew Koranda: Our first question comes from the line of Matt Coranda with Roth Capital Partners. Please start on the top. Maybe just speak to why organic and XFX automotive revenue growth, lack industry production in the third quarter. I know we called out some spot buy recoveries in the prior year period, but are we also seeing lack of launch activity or pay grades light? I guess just some more color on 3Q would be helpful, and then how do we expect the revenue to trend relative to industry production and for it? Thank you. Everything.
That will be basically offset by the declining.
Declining 48 volt mild hybrid business.
So thats bps.
On the <unk> on the other.
Alex as you look into the full year as you know, we kind of softened the topline a little bit the bps plays a significant impact there.
Of the year, we still see the climate product.
About online with our expectations.
If you look at the pneumatic products.
See a little bit of a delay in the in the outperformance on our pneumatic lumbar massage.
We expected quite a ramp up of evs in the back half of the year.
And some of those customer ramp ups are happening a little slower or delayed than expected.
Phillip Eyler: I'll take that first of all, you're right. We were basically flat to market, excluding the spot buys and the phase out revenue from our non-automotive electronics business. Outside of that, I'll just kind of break it down by product category to explain how we performed first off. We grew basically in line with expectations that we had previously on our core climate business, so CCS, seat heat, steering wheel heat. There are some puts and takes in there though.
That's kind of the high level assessment of.
Of the revenue.
Got it.
Moving down to gross margins.
It sounds like we're not totally getting the margin pull through maybe that we were expecting could you help bridge. The 60 bps of year over year decline in a little bit more detail.
Yes sure so.
I think the gross margin.
We India in the quarter, we recorded about.
Phillip Eyler: I mean, we had some higher take rates and vehicle launches than we expected, but those were somewhat offset by lower volume on some vehicle changeovers and some delayed EV ramp-ups, which I think has been well-publicized with some OEMs. So all in all, kind of right on track with the climate business, where we saw the most significant impact below our expectations was with our battery performance solutions. We talked about in the past, the majority of our revenue currently in that category is with 48-volt mild hybrid vehicles, and that's where we have our thermal electric-based battery thermal management product.
Three three and a half million of charge on inventory related to the <unk>.
Not automotive electronics that we are phasing out as we announced last year. So that's what is impacting the gross margin in the quarter I think if you if we want to look at the profitability of of the quarter, probably the better metric is EBITDA and that's where we see on a pro forma basis the 100.
<unk> points year over year improvement and 160 basis points sequential improvement on the year over year side on the positive we continue to see a normalization of the environment.
Particularly around freight so the biggest.
Expansion in margin was the.
The reduction of expedited and.
Phillip Eyler: We've known over time that that's going to gradually phase down. Unfortunately, it was a little faster of a phase down or ramp down in the quarter than we expected. Now, those customers are Jeep and Mercedes, so revenue will still be there on those products. It's just gradually phasing down. Over the longer period for BPS, I think we look at the next several quarters, probably going to be relatively flat on our BPS business due to that ramp down.
Freight in the quarter.
Productivity of the factory also was a nice lift.
We did we achieved better productivity in the factory in this quarter compared to the last several ones and then on the negative side we.
We've seen.
Negative price, primarily due to the fact that we had a tough comp when you compare the third quarter of 23 versus last year. Since the we had a high elevated number of pleasure to cover it as in the third quarter of last year, just due to timing.
Phillip Eyler: On the good side, we're launching some new products, mostly through our MSP-based flex circuits. So the BMW self-connecting board, the Renault battery heater, Mercedes battery heater products like that. We're also ramping up our growing air cooled battery products. So some good guys are coming, but that'll be basically offset by the declining 48-volt mild hybrid business. So that's BPS. On the other products, as you look into the full year, as you know, we kind of soften the top line a little bit.
So that's the walk year over year sequentially really the improvement came from US Meyer as we said throughout the year as <unk> started the year in the single digit EBITDA eight cents in the third quarter, we were in the a.
A high single digit so really a good improvement thanks to productivity price recoveries lower scrap.
And then we started to see also benefits coming from supplier on a sequential basis.
So that's up at a high level the walk both sequentially and year over year.
Phillip Eyler: The BPS plays a significant impact there. The rest of the year, we still see the climate product about online with our expectations. If you look at the pneumatics products, we're going to see a little bit of a delay in the outperformance on our pneumatic lumbar massage. We expected quite a ramp up of EVs in the back half of the year, and some of those customer ramp-ups are happening a little slower or delayed than expected. So that's kind of a high-level assessment of the revenue.
Got it Super helpful last one for me good to hear Altmeyer, our margins improving that was kind of my next question.
I guess, just what needs to happen to get the segment to maybe low double digit margins in 2024, if we still think this is a reasonable assumption for next year.
Yeah.
I would say a little early to talk about 2024, but but overall I think the.
Then the the real lift on the on the gross margin on the IB.
EBITDA margin of US Meyer will come from a couple of things.
Matteo Anversa: That's so powerful. Moving down to the gross margins, those like we're not totally getting the margin pull through, maybe that we were expecting. Could you help bridge the 60 bibs of the earlier decline in a little bit more detail? Yes, sure. So, I think for the gross margin, we in the quarter, we recorded about 3.5 million charge on a inventory related to the, not on more electronics that we are facing out as we announced last year.
If you go back to what we said back in February.
Print optimization is a there's one other project that we kicked off actually with the announcement that we.
We had the earlier in September.
And then obviously incremental volume thanks to D. A.
Today huge them a number of awards that we have been winning since we owned the company.
<unk>.
And then continuing to work on productivity and scrap reduction across the factories. I think these are the three catalysts that will take the.
Matteo Anversa: So, that's what is impacting the gross margin in the quarter. I think if we want to look at the profitability of the quarter, probably the better metric is the EBITDA. And that's where we see on a performer basis, the 100 basis points year-over-year improvement and 160 basis points sequential improvement. On the year-over-year side, on the positive, we continue to see an organization of the environment, particularly on freight. So, the biggest expansion in margin was the reduction of expedited and very afraid in the quarter.
EBITDA margin of lost my job.
It's important to add first of all that as Matteo said, we're winning at a much faster rate than we expected on our pneumatic lumbar lumbar and massage products and.
Besides the growth that product is going to be coming in over time at company margins, So that'll help to replace business and backfill.
Your margin business over time.
Very clear that's all for me guys. Thank you.
Thank you.
Thank you.
Matteo Anversa: Productivity at the factory also was a nice lift. We achieved better productivity in the factory in this quarter compared to the last several ones. And then on the negative side, we've seen negative price, primarily due to the fact that we had the tough comp when you compared the quarter of 23 versus last year. Since we had a high, elevated number of price recoveries in the third quarter last year, just due to timing.
Ladies and gentlemen, a reminder.
If you wish to ask questions. Please press star and one.
Our next question comes from the line of Ryan <unk> with Craig Hallum Capital Group. Please go ahead.
Good morning Bill.
Good morning, Ryan.
I'm curious so within the guidance Youre, assuming the UAW strike goes through the end of November and as its last night forward and UAW came to a tentative agreement.
Matteo Anversa: So, that's the walk year-over-year. Sequentially, really the improvement came from Asmaier. As we said throughout the year, Asmaier started the year in the single-digit EBITDA rates. And in the third quarter, we were in the high single-digit. So, really a good improvement thanks to productivity, price recoveries, lower scrap. And then we started to see also benefits coming from supplier on a sequential basis. That's at a high level. I did walk both sequentially in the year-to-year.
Any comments I guess, how that was factored if at all into the guidance for Q4 and the rest of the year.
So <unk> and <unk>.
Obviously right now we are monitoring.
Situational between the UAW and the OEM very closely there was no impact in the third quarter, but the impact will be in the fourth.
<unk>.
As I said in my remarks, we are assuming that the plans that were impacted up to yesterday.
Continue to be idled towards the end of November.
So in terms of numbers this equates to about $15 million to $20 million revenue impact in Florida for the fourth quarter.
Matteo Anversa: Got a super helpful last one from me. Good to hear, Asmaier, margins improving, that was kind of my next question. I guess just what needs to happen to get the segment to maybe low double-digit margins in 2024, if we still think this is a reasonable assumption for next year. I would say a little early to talk about 2024, but overall, I think the real lift on the growth margin of Asmaier will come from a couple of things.
Ford is about 25% 30% of it so that gives you kind of a gauge in case things change in the in the upcoming weeks.
Maybe last comment I would make the decremental margin on this 50% to 20% means that our revenue is about 40%, which is a little higher than that.
What we normally have just because there are embedded in the estimate additional inefficiencies that we.
We are expecting to incur due to be up due to the strike.
Matteo Anversa: If you go back to what we said back in February, footprint optimization is one of the projects that we kicked off actually with the announcement that we had earlier in September. And then obviously incremental volume, thanks to the huge number of awards that we have been winning since we owned the company. And then continue to work on reliability and scrap reduction across the factories. I think these are the three catalysts that will take the maybe the margin of Asmaier.
Then obviously, Ryan if things were to continue.
Obviously, if the strike gets prolonged then we have a contingency plan in place, which we will enact.
Includes obviously cost control the opex side.
Controlling capital expenditures, but for sure we.
We're planning to fore and foremost to protect.
Our people and our customers we have.
We delivered good strong free cash flow in the year. So we can afford to build a little bit of inventory to make sure that we are ready for the ramp up once this issue is resolved.
Matteo Anversa: I think it's important to add, first of all, that as Matteo said, we're winning at a much faster rate than we expected on our pneumatic lumbar and massage products and besides the growth, that product is going to be coming in over time at company margins. So that will help to replace business and backfill lower margin business over time.
And then just my second question. It seems like you guys have had an accelerated traction with local Chinese Oems.
This primarily customers demanding more thermal comfort solutions and more of your products or is this primarily you guys winning conquest business away from our competitors.
Operator: Very clear. That's all from me guys, thank you. Thank you. Ladies and gentlemen, a reminder, if you wish to ask questions, please press star and one.
So it's both the <unk>.
First one for sure we're seeing a rising demand for thermal and pneumatic features and China period.
So the consumer is.
As more and more accustomed to those solutions and expecting it from the OEM. So that's great great tailwind just on the features in general.
Ryan Sigdahl: The next question comes from the line of Ryan Sigdahl with Craig Hallem, Capital Group. Please go ahead. Morning, Bill. Morning, Ryan. I'm curious.
On the other side, we have very tactically focused on specific Oems.
You know in the past we've most of our business. We will still is and certainly traditionally has been with global Oems who have.
Phillip Eyler: So within the guidance you're assuming the UAW strike goes through the end of November and it as is last night forward and UAW came to a tentative agreement. Any comments I guess how that was factored, if at all, into the guidance for Q4 and the rest of the year? So the obviously Ryan, we are monitoring the situation between the UAW and the OEM very closely. There was no impact in the third quarter, but the impact will be in the fourth.
Joint ventures in China, and we've kind of a transition of our business with them into the market in the last couple of years, we've prioritized.
Several domestic Chinese Oems and are starting to make very good progress there.
Have a.
Full support team in China, very large with three manufacturing plants.
Ready enable to.
To aggressively go after those customers and we're excited to announce that especially with rising EV players companies like Lee Auto BYD.
Phillip Eyler: And as I said in my remarks, we are assuming that the plans that were impacted up to yesterday will continue to be idle through the end of November. So in terms of numbers, this equates to about 15 to $20 million revenue impact for the fourth quarter. And Ford is about 25 to 30% of it. So that gives you kind of a gauge in case things change in the upcoming weeks. Maybe last comment I would make, the decremental margin on this 50 to 20% million dollar revenue is about 40%, which is a little higher than what we normally have. Just because there are embedded in the estimate additional inefficiencies that we are expecting to incur due to the up, due to the strike.
Ex paying and certainly great wall that we picked up a lot of business of late so it's a priority for us and we're excited about what the team is doing there.
Great. Thanks, guys. Good luck.
Thanks Ryan.
Yes.
Thank you.
Ladies and gentlemen, if you wish to ask a question Please press star and one.
As there are no further questions.
The conference of Gen. Crim has now concluded. Thank you for your participation you may now disconnect your lines.
Okay.
[noise].
Phillip Eyler: Then obviously, you know, Ryan, if things were to continue, obviously in the strike gets prolonged, then we have a contingency plan in place, which we will enact, which includes obviously cost control. The op excite, you know, tighter control on capital expenditures. But for sure, we are planning to foreign for most to protect, you know, our people and our customers. We have a, you know, we deliver good, strong free cash flow in the year. So we can afford to build a little bit of inventory to make sure that we are ready for the ramp up once this issue is resolved.
Ryan Sigdahl: And then that's just my second question.
Sure.
Yes.
Yeah.
Okay.
Yes.
Okay.
[music].
Okay.
Phillip Eyler: It seems like you guys have had an accelerated traction with local Chinese Williams. Is this primarily customers demanding more thermal comfort solutions to more your products or is this primarily you guys winning conquest business away from competitors? It's both the first one for sure we're seeing a rising demand for thermal and pneumatic features in China, period. So the consumer is going more accustomed to those solutions and expecting it from the OEM.
[music].
Phillip Eyler: So that's great, great tailwinds just on the features in general. On the other side we have very tactically focused on specific OEMs. In the past we've, most of our business will still is and certainly traditionally has been with global OEMs who have formed joint ventures in China and we've kind of transitioned our business with them into the market. In the last couple of years we've prioritized several domestic Chinese OEMs and are starting to make very good progress there.
Phillip Eyler: We have a full support team in China very large with three manufacturing plants ready and able to aggressively go after those customers. And we're excited to announce that especially with rising e-players, companies like Leado, BYD, X-Pang and certainly Great Wall, that we've picked up a lot of business of late. So it's a priority for us and we're excited about what the team is doing there.
Ryan Sigdahl: Great, thanks guys, good luck. Thanks for having me. Thank you.
Operator: Ladies and gentlemen, if you wish to ask a question, please press star and one.
Operator: As there are no further questions, the conference of Gen Krim has now concluded. Thank you for your participation.
Operator: You may now disconnect your lines.