Gentherm Incorporated
Q2 2020 Earnings Call Transcript

Published: 4 Aug 2020

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Gentherm Second Quarter 2020 Earnings Conference Call. As a remainder, all participants are in a listen-only mode and the conference is being recorded. I would now like to turn the conference over to Yijing Brentano, Investor Relations. Please go ahead.

[Yijing Brentano:]

Thank you, and good morning, everyone, and thank you for joining us today. Gentherm’s earnings results were released earlier this morning and a copy of the release is available at gentherm.com. Additionally, a webcast replay of today’s call will be available later today on the Investor Relations section of Gentherm’s website.

[Phil Eyler:]

Thank you, Yijing. Good morning, everyone, and thank you for joining us today. In the second quarter, the global pandemic continued to create significant hardship and challenges worldwide. Our top priority has continued to be the health, safety and support of our global team members and the communities we serve. I’m proud of the team for their strong execution in the second quarter despite the unprecedented conditions created by the worldwide COVID-19 pandemic. Let me start by sharing some of the key highlights of the quarter on Slide 4. While our 44% decline in total product revenue reflects the challenges in the underlying markets, we were able to outperform in Automotive in each of the key markets that we serve based on IHS’s July data. Adjusting for our higher revenue exposure in North America and Europe, we outperformed the actual light vehicle production by approximately 700 basis points. In medical, we delivered double-digit revenue growth, both year-over-year and sequentially. On the award front, our customer business units secured approximately $300 million in automotive new business awards in the second quarter. More importantly, we had the highest win rate in company history in the second quarter, securing over 90% of our opportunities. Moving to the cost side. Our ongoing disciplined approach to managing expenses allowed us to reduce operating expense by 30% from a year ago. Importantly, we generated a 24% increase in cash flow from operations in the first half of 2020 versus the prior year period. Despite the challenging environment, our balance sheet remains strong with total liquidity of nearly $370 million at quarter end. Matteo will provide more details on our financial results in a few minutes.

[Matteo Anversa:]

Thank you, Phil, and thank you to everyone joining the call today. So let me start on Slide 9 and focus on the items that most significantly impacted our second quarter results. For the quarter, product revenues declined by 44% compared to the same period of last year. And if we adjust for the impact of FX, our overall product revenue decreased by approximately 43%. The primary driver of the year-over-year decline was the impact of the COVID-19 outbreak. Before I jump into the gross margin, let me give you a little more color on the revenue by segment. Our automotive segment was significantly impacted by COVID-19, and revenue declined 46% year-over-year or 45% if we exclude FX. In comparison, according to IHS latest data, light vehicle production declined 39% for our key markets of North America, Europe, China, Japan and Korea. Please keep in mind that our regional revenue mix differs from the light vehicle production mix. And as we projected on our last earnings call, in the second quarter, we declined at a faster pace than IHS due to Gentherm’s higher exposure to the North American and European markets. As Phil mentioned, if we adjust for this, we outperformed actual light vehicle production by approximately 700 basis points. As a result of COVID-19, we experienced significant revenue shortfall in all of our automotive product lines, except electronics, where revenue was up almost 18% year-over-year, primarily due to the electronic control units that we sold to Ford to support their production of respirators as well as revenues coming from the recently launched memory seat module program also with Ford. If we move to the industrial segment, revenue declined 14% compared to the second quarter of last year due to the disposition of the GPT business, which occurred in October of 2019. Conversely, we saw continued strength in our medical business, where revenues increased more than 18% year-over-year, and this increase was primarily due to the high demand of Blanketrol as a result of the COVID-19 pandemic. If we move to gross margin. Gross margin for the second quarter was 19.6% compared to 29.9% in the year ago period. This decrease was due to the lower automotive volume as well as annual price reductions partially offset by lower manufacturing fixed cost, positive sales mix as a result of the strength in our medical business and supplier cost reductions. Moving to operating expenses, which were $36.6 million in the quarter. This amount included a $600,000 net reduction in the restructuring charges related to revisions to our footprint realignment initiative that we announced last September in a proactive effort to preserve cash.

[Operator:]

Thank you. Our first question comes from Gary Prestopino of Barrington Research. Please go ahead.

[Gary Prestopino:]

Good morning, everyone. A couple of questions here. First of all, Matteo, I didn’t quite catch this, but was – you said about 60% to 70% of the expense reductions are sustainable going forward. Now is that on a total operating expense basis or just SG&A expenses?

[Matteo Anversa:]

Gary, that’s total operating expenses. So it includes both SG&A and R&D. The majority of the I would expect to be in SG&A.

[Gary Prestopino:]

Okay. So 60% to 70% of that is sustainable, good. Okay. And then, Phil, could you maybe – a little bit confused here, not really confused, but just maybe drill down a little bit. You talked about outperformance in the quarter. And I thought – I think you said you were over-indexed to North America, but yet your revenues – product – your automotive revenues were down versus light vehicle production. So could you maybe explain a little bit better about where that and how you determine that outperformance?

[Phil Eyler:]

Sure. Yes, basically, what – it’s a weighted number based on our volumes in the different regions. So we kind of rerun the number based on that weighting. And if you do that, actually, in every region, we outperformed.

[Gary Prestopino:]

Okay. Okay. And then just lastly, is it safe to say that the bulk of the revenues you generated really came in the month of June for this year? Was most manufacturing production shut down in April and May? And then it kick-started in late May, early June. Is that kind of a way we should look at it?

[Matteo Anversa:]

Yes, Gary. So just to give you an idea, our revenues in June were about $65 million, $66 million. And April and May were pretty much half of that amount.

[Gary Prestopino:]

Okay, thank you.

[Operator:]

Our next question Ryan Sigdahl of Craig-Hallum Capital Group. Please go ahead.

[Ryan Sigdahl:]

Great. Thanks guys for taking our questions. You guys talked about kind of this mix-adjusted regional breakout in the quarter. Curious what – when you do that for Q3 using IHS or whoever you want from a forecast perspective, but what expectations are for your mix-adjusted regional breakout relative to your guidance?

[Phil Eyler:]

Well, we’re not really giving that specifically in the guidance. But certainly, all the indications for North America will be probably the strongest region. Obviously, that’s 50% of our revenue. So you can imagine that. We do have a situation, though, where Ford is planning to do a model changeover there. Actually, if you look at their expectations in the fourth quarter for the F-150, they’re pretty low based on the model changeover. That, of course, generally has a lead time effect for suppliers. So we do expect a negative impact in Q3 on the F-150, which is pretty high revenue product for us. But outside of that, certainly, we expect North America to be strongest.

[Ryan Sigdahl:]

And then the Lear partnership you announced yesterday, any more details you can provide on that? Are there any exclusivities on either side, et cetera?

[Phil Eyler:]

Yes, we’re really excited about this. This is a – for the last year, we worked together on this product. It’s a modular seat-based thermal solution. So it’s something that can be applied to many, many different vehicle types through the modular seat application, and it is complete. It’s market ready. So we’re – both companies together in a position to market that product. Super excited. And obviously, you can see from the announcement that this would be kind of a breakthrough in the industry. It’s the platform that through our combined algorithm can be personalized based on the ClimateSense technology, which is embedded into the controls of this product. And of course, using many of the Gentherm thermal effectors. So that’s kind of the essence of it. When it comes to the proprietary nature, there’s kind of a mix there. Some of the application at this – at the level of the modular system is proprietary, and much of it can be used in – by Gentherm across all of our customers in different applications.

[Ryan Sigdahl:]

And just as a follow up, so you said it’s market ready. You’ve also talked about a number of different ClimateSense development projects with OEMs directly. I guess when you say commercial or market ready, are you going after commercial awards here in the near term? Or is it to go after more of these development projects with the OEMs in joint fashion with Lear?

[Phil Eyler:]

Well, it’s a little hard to say how that’s going to be. I mean, we’re just now starting the customer marketing side of it. It is, I would call it, a market-ready product, which could – based on the status of the development, could be awarded to a vehicle, should the right customer come around. Of course, we’re prioritizing those customers together with Lear. That – to differentiate that with ClimateSense, ClimateSense is more of an integrated vehicle approach, which is not just the modular seat but also multi surfaces, integrates with the HVAC system, et cetera. So it’s important to differentiate the products a little bit. But this one is really ready. If we were to receive an award together, we could get this in development pretty quickly.

[Ryan Sigdahl:]

Then one last one for me and then I’ll hop back in the queue. On CCS, the GM’s BEV platform, will that be awarded across all current and future models or any additional detail there? Thanks.

[Phil Eyler:]

Well, they are specific models that we won that on. So future models, we have to continue to perform and win those on their own right as they come around. So that said, we’re winning in all of the programs that we’re going after with GM at the moment. And we know the position is fantastic, but we also know that we have to continue to execute on quality, innovation and cost to maintain that business in all the upcoming platforms in the future.

[Ryan Sigdahl:]

And just to clarify, are you on all of their battery electric vehicle platforms today or models? Or is it just specific ones even on the current ones?

[Phil Eyler:]

All of the ones that have been released and bid for climate seating, we’ve won.

[Ryan Sigdahl:]

Great. Thanks, guys good luck.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Phil Eyler for any closing remarks.

[Phil Eyler:]

Okay. Thank you. Thanks, everyone, for joining our call today. As I’ve consistently shared in the past, we remain very focused on operational execution, innovation and cost improvement, which has become even more important in today’s COVID-19 environment. I’m extremely proud of our team’s agility, flexibility and dedication to deliver on our commitments to all of our stakeholders. Despite the current uncertainties around an economic recovery and what that means for both Gentherm and our customers, our strong liquidity and our continued focus on productivity enable us to continue to deliver significant long-term shareholder value. We appreciate your interest and support and look forward to keeping you apprised of our progress. Thank you.

[Operator:]

This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.