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Gentherm Inc  (NASDAQ:THRM)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 8:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Greetings and welcome to Gentherm Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Yijing Brentano, Investor Relations Corporate Communications. Thank you. You may begin.

Yijing Brentano -- Senior Vice President, Investor Relations and Corporate Communications

Thank you, Sherrie and good morning everyone. 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.

During this call, we may make forward-looking statements within the meaning of federal security laws. Statements reflect our current views with respect to future events and financial performance. We undertake no obligation to update them and actual results may differ materially. Please see Gentherm's SEC filings including the latest 10-K and subsequent reports for discussions of various risk factors 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.

On the call with me today are Phil Eyler, President and Chief Executive Officer and Matteo Anversa, Chief Financial Officer. Please note that during their comments, Phil and Matteo will be referring to a presentation deck that we have made available on our website at gentherm.com/events. After their prepared remarks, we will be pleased to take your questions.

Now I'd like to turn the call over to Phil.

Phil Eyler -- President and Chief Executive Officer

Thank you, Yijing. Good morning everyone and thank you for joining us today. 2018 was a transformative year for Gentherm. While headwinds across the automotive industry presented some challenges, I'm pleased that we were able to deliver record revenue and automotive award levels for full year 2018. In addition, our Fit-for-Growth cost reduction initiatives began to generate positive impact. While we've demonstrated initial progress in 2018, there are certainly opportunities for further improvement in 2019. Before Matteo gets into the details of our financial results, let me step back and look at all that we've accomplished in 2018 as shown on slide four.

It's been just over a year since I joined Gentherm and we have driven significant change over that time. Let me spend a few minutes talking about how we've repositioned the company and some of our achievements over the past year. We've restructured the organization around the One Gentherm concept of a global business. To leave the organization going forward, we're leveraging the strong internal executives with the years of successful experience at Gentherm and we've augmented the team with a proven external talent from industry leading companies such as GE, Sprint, Pepsi, BD Medical, Fiat Chrysler and Panasonic and functions such as finance, medical, battery thermal management, technology and human resources.

This has resulted in what I believe to be a truly world-class team and I think it speaks to the optimism about our company going forward. We completed a strategic assessments in just under six months, which resulted in a breakthrough transformation strategy that we shared with you back in June. That assessment has resulted in several things. We clarified the company's mission. We identified a plan to divest and minimize non-core businesses. We created a focused growth strategy around automotive and medical verticals, which involves four key pillars; one, accelerating our climate and comfort business; two, developing an innovative microclimate system, which we call ClimateSense; three, creating unique battery thermal management solutions; and four, expanding our patient thermal solutions in Medical, all of which are enabled by electronics and software expertise.

We've seen good early progress as evidenced by record automotive awards of $1.6 billion in 2018 and the recent divestiture of the CSZ Industrial Chambers business. We developed our Fit-for-Growth program to expand margins with an initial focus on operating expenses. We've identified $65 million of annualized cost savings with $37 million of that already implemented. We're now turning our attention to gross margin where 70% of our cost structure lies. Driving cultural change has been a key factor in our early success. We've created an environment centered on customer focus, a global mindset, employee engagement as well as performance and accountability. We've also realigned compensation to be consistent with driving our focused growth strategy. As I mentioned earlier, we are turning our focus to gross margin expansion, and that will come from improved manufacturing efficiencies, footprint rationalization, expanded purchasing excellence and value engineering. Our journey truly has just begun. Gentherm is perfectly positioned to capitalize on the future trends of automotive electrification, connected autonomous vehicles and the increasing demand for consumer comfort and wellness. We're creating an engine that will drive growth and we're poised to deliver on our 2021 objectives and beyond.

Now let's review some recent business highlights, beginning with slide six (ph) in our presentation deck. We're pleased that we were able to deliver 7.6% revenue growth in our core businesses, excluding assets held for sale. For full year 2018, which was 60 basis points better than our plan. In addition, we delivered 1% organic growth in automotive, despite the challenging automotive production environment. We also continued to see momentum in market launches and 2018 marked a record number of automotive awards for Gentherm.

When looking specifically at the fourth quarter, we also delivered 1% organic growth in automotive, significantly outperforming our key automotive markets. We saw continued revenue growth for our Climate Control Seat or CCS business, both sequentially and year-over-year. We also continued to make significant progress on our focused growth and margin expansion activities and we're seeing positive results in our financials, particularly in our operating expense line items.

In 2018, we achieved an EBITDA margin rate of 14.1% in our core business, excluding assets held for sale. Finally, we repurchased approximately $84 million of our shares during the fourth quarter and we continued to repurchase more in early 2019 pursuant to a 10b5-1 plan. As of yesterday, we've repurchased a total of over $160 million in shares, since launching our share repurchase program and we have almost $140 million remaining in our current authorization. We recognize the value of our shares and will continue to evaluate and opportunistically deploy capital toward share repurchases depending on market conditions.

Turning to slide six, the strong execution by our automotive team continued in the fourth quarter, with launches of systems on 17 different nameplate models across 13 OEM. These figures incorporate the continued momentum we're seeing with our CCS product, with nine launches that included the Chevrolet Blazer, Geely NL-5, Hyundai Santa Fe and Kia Telluride. Our systems were very well represented through vehicles that were highlighted at the Detroit Auto Show. In January, we announced the strategic development partnership with Lear, the collaboration is for the advanced development of a highly integrated modular heat and cool solution for Lear's (inaudible) system that will provide world-class passenger comfort. I am excited that our teams will join forces to drive innovation and vehicle interior comfort solutions. This partnership is a great example of how our customers view us as the global leader in thermal comfort solutions. Also through our partnership with Rinspeed we were able to proudly display our passenger thermal comfort expertise on the global stage of both CES and the Detroit Auto Show. Working with the Swiss-based think tank and Mobility Lab, we developed a personalized passenger thermal solutions for Rinspeed's latest autonomous concept vehicle, the microSNAP. This concept vehicle is perfectly tailored to the autonomous electrified and ride sharing ecosystem of the future. Customer feedback has been resoundingly positive. I know that many of you who attended either of these events got to experience those capabilities first hand. I'm proud of our global team that worked hard to bring the Rinspeed project to life in a very short period of time, the true testament of the tremendous talent we have at Gentherm. And finally, just last week we announced the partnership with ThermoAnalytics, the leading thermal modeling software development firm. This partnership will enable Gentherm to improve the personalized thermal comfort experience provided through both our current CCS and our future ClimateSense solutions.

Now on to slide seven, where you can see that we're continuing to win new business at a record pace. In the fourth quarter, we secured approximately $350 million in new program awards across 25 different customers. As I already mentioned, we secured $1.6 billion in new awards from OEMs for full year 2018, surpassing our record of $1.2 billion in awards for full year 2017 by 33%. We won multiple CCS awards including platform wins with Geely FS-11, Kia K5 and Kia Sorento, Land Rover Range Rover and Evoque, Nissan C-CUV and the Volkswagen Golf. We received a follow on award from Geely for our Air Cooling Battery Thermal Management System beyond the two vehicles we were awarded in the second quarter of 2018. We continue to make progress in expanding our business with luxury German automakers. We won Seat Heating awards on the Mercedes EQS, a new electric vehicle based on the S-class platform and on the BMW small car platform, including the X1 , X2 and 2 series tour. Finally, we were awarded the follow on thermoelectric BTM business for Mercedes, which will extend this program through 2025. We're proud that our solution has proven to be such an integral part of their EQ-Boost 48-volt mild hybrid system.

Now let's turn to slide eight for a discussion on our industrial segment. In CSZ Medical, we saw continued growth in Blanketrol, our liquid-based patient thermal management solution with several large orders from top US Integrated Delivery Networks or IDN. Blanketrol consistently ranked as top three brands in patient temperature management globally with the number of two rating in the US and the number one rating in the UK. We're proud of this signature product. We're seeing strong momentum in our international markets with 20% growth in Europe and 47% growth in Middle East and Africa. We also saw substantial orders from China and Japan in the quarter. On the R&D front, we continue to invest in next generation products and upgrade our existing portfolio with additional launches this year. One example; we're launching a digital upgrade kit to our Blanketrol product that will seamlessly connect to hospitals electronic medical record system. Our medical team continues to leverage the scale of our automotive engineering and sourcing to optimize design and secure lower component costs for our core medical products.

Let me summarize. While the challenges presented by the global auto industry persist, I'm pleased with the progress we continue to make. The momentum we're seeing in new automotive awards and our increased focus on margin position us well to achieve both our 2019 guidance and 2021 outlook. I remain proud of the hard work and commitment of the talented global Gentherm team.

With that I'd like to formally introduce you to Matteo Anversa, our new CFO and welcome him to the Gentherm team. Matteo joins us from Myers industries where he was CFO. He brings tremendous experience in the capital markets including preparing Ferrari first IPO and financial discipline through detailed planning and analysis with his GE and Fiat Chrysler route. Matteo, welcome aboard. I'll turn the call over to you for a little more color on the financial results.

Matteo Anversa -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Phil. And thank you to everyone joining the call today. I am excited to be here and I look forward to speaking and meeting many of you in the forthcoming future.

So if we start from slide nine, I will focus my prepared remarks on the items that impacted our fourth quarter results. For the fourth quarter. Our product revenues declined year-over-year by $3.5 million or 1.4%. 2% increase in the automotive revenues was more than offset by a 26% decline in industrial. If we adjust for the impact of FX in the Etratech acquisition, our overall organic revenue declined by 2% with automotive growing 1% and industrial declining 26%. The 1% organic growth in the automotive segment was achieved despite the headwinds in global vehicle production. According to IHS latest data for our key markets of North America, Europe, China, Japan and Korea, light vehicle production in the fourth quarter declined almost 6% year-over-year. More significantly, this compares with the forecast back in mid-October of a relatively flat fourth quarter, which was a negative swing of approximately 600 basis points.

Our automotive business outpaced the market as a result of new program launches and take rate improvement. Revenue increase in automotive was driven by strength in our Climate Control Seat product line, which was up 5% as well as battery thermal management, which was up more than 3 times year-over-year due to the new product launches that occurred throughout 2018. Steering wheel heaters were also contributor with revenues up 3%. This revenue increase was partially offset by a 10% decline in seat heaters primarily due to lower volume with European OEMs. And product volumes were down 13% on a pro forma basis due to sedan platform cancellations with certain automotive OEMs as well as a slowdown in the ERV industry. Automotive Cable revenues were down 13% due to decline in orders from one of our large Tier 1 cable customers in Germany.

Moving to industrial. In the industrial segment, revenues declined by 26.4%. Via CSZ, industrial chamber business and GPT declined 3% and 58% respectively. Throughout 2018, we experienced declines in shipments of our custom projects in GPT and custom climate testing chambers in CSZ Industrial. Additionally, GPT experienced unusually high shipment volume in the fourth quarter of 2017, which makes it a difficult comparison. As you may recall, we indicated in the past our intention to divest both of these businesses and on February 1st, we announced the successful disposition of the CSZ Industrial test chambers business. Industrial segment revenues were also impacted by an approximately 5% decline in medical revenues, most of which was due to the timing of shipments, which shifted from December to January. For the full year 2018, medical revenues were essentially flat. However, excluding the one-time benefit in 2017 related to our competitors issue, medical revenues would have grown 11%.

If we move to gross margin, gross margin for the quarter was 27%, a decrease of 300 basis points compared to the year ago quarter, which was 30%. The decline in gross margin was primarily due to lower than expected sales volume, late quarter Tier 1 customer order adjustment, higher labor costs and launch costs for the battery thermal management unit. In addition, we incurred higher freight costs and we also had a negative impact coming from the tariffs. These were partially offset by cost reductions, driven by our Fit-for-Growth initiatives. The labor cost increases were mostly incurred at our production facilities in Mexico and Macedonia where we increased our headcount due to higher expected production volume. However, the sudden decline in customer production volumes did not allow us to adjust headcount and other variable cost fast enough in a couple of that decline during the quarter. Additionally, in Mexico, we adjusted our wage rates to align with competitive labor market conditions ahead of a new minimum wage requirement that is currently being implemented. In BTM, we are still in the ramp-up phase of our production, therefore we incurred high fixed cost and production expenses, which negatively impacted our gross margin. On tariffs, while we were able to mitigate some of the impact as a result of the efforts of our sourcing team, the net negative impact in the quarter was approximately $800,000 and at this point, we still expect the annual impact of tariffs to be approximately $3 million to $5 million as we previously indicated. In addition, we incurred premium freight due to some inefficiencies in Mexico as we ramped up our plant in (inaudible) and these inefficiencies that impacted our fourth quarter results are currently being resolved.

If move to operating expenses, operating expenses in the quarter were $47.6 million. This amount included approximately $1.9 million of restructuring charges related to the Fit-for-Growth initiatives. If we adjust for these restructuring charges, operating expenses were $45.8 million, down from $56.2 million in the fourth quarter of 2017 and $51.6 million in the third quarter of 2018. This year-over-year decline of nearly 19% was primarily driven by the impact of the Fit-for-Growth cost reduction initiatives and the non-recurrence of $3.8 million in CEO transition expenses that occurred in the fourth quarter of last year. It is also important to note that the fourth quarter of both 2017 and 2018 benefited from market-to-market amount in cash settled stock options of approximately $2 million. In addition, the fourth quarter of 2018 also benefited from higher than normal R&D customer reimbursements of approximately $2 million. So if we take into account all these items that I just mentioned, the year-over-year decrease in operating expenses in the quarter was approximately 9%.

Our tax rate was 33.7% in the quarter, which was higher than our forecasted 25% due to lower income in jurisdictions with favorable tax rates. And as a result, our tax rate for the full year 2018 was 27.9%. Finally, our adjusted EPS in the quarter was $0.50 per share compared to $0.61 per share in the fourth quarter of last year.

If we move to slide 10, I will review the balance sheet. So our cash position decreased during the year by $64 million. We actually generated $118 million in cash from operating activities, which helped us to partially offset the $148 million cash outlay for our share repurchase program. As a result, our net debt increased by $59 million from $38 million at the end of 2017 to $97 million at the end of 2018. As of year-end 2018, the total debt stands at $139.9 million and our revolving line of credit availability stands at $222 million, which is pretty much flat year-over-year.

If we turn to slide 11, I will provide you with an update on our guidance for '19 and the 2021 outlook. So if we start with 2018, we are projecting organic revenue growth to be in the range of 4% to 6% excluding assets held for sale. We expect year-over-year revenue growth to gradually increase as the year progresses and as we enter into the next phase of our Fit-for-Growth initiatives with more focus on the variable cost reduction, we expect our gross margin rate to gradually improve in '19 and to be in the range of 28% to 30% for the full year. Operating expenses will be decreasing to 19% to 20% of revenue, mainly due to the impact of the Fit-for-Growth actions and as a result, adjusted EBITDA margin will be in the range of 14% to 15%. We are also affirming our outlook for 2021 as shown on slide 11.

With that, I'll turn the call back to Sherin to begin the Q&A session. Sherin?

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question is from Chris Van Horn with B. Riley FBR. Please proceed with your questions.

Christopher Van Horn -- B. Riley FBR, Inc. -- Analyst

Hi, good morning. Thanks for taking my call.

Phil Eyler -- President and Chief Executive Officer

Hi, Chris.

Christopher Van Horn -- B. Riley FBR, Inc. -- Analyst

Looking at the 2019 guidance, could you give us some of your assumptions for underlying industry production and then kind of the puts and takes of that 4% to 6%, how we think about that as timing of launches or new business rolling on and then on the same lines on the margin side, how much are you kind of -- you've identified $37 million and you identified $65 million, you've had $37 million, what are you kind of thinking about for the Fit-for-Growth contribution in terms of the margin range?

Phil Eyler -- President and Chief Executive Officer

Sure Chris. We'll start with the growth side. We're basically taking the best estimates we have through the February release of IHS data, which basically says flat year-over-year. And if you look at the trends throughout the year, the first couple of quarters show a little bit more movement in the down direction and the last half comes back a little bit. So that's basically what we've got in the model and we're comfortable that we can achieve our results given those latest forecast.

In terms of our 4% to 6% growth, the lion's share is new launches, new vehicles and it will continue to grow with new technologies, certainly our climate and comfort business continues to grow with share and take rate and new launches in that period. So we're pretty excited about that momentum heading into 2019.

On the Fit-for-Growth side, clearly we're moving pretty fast on the operating expense side of the equation and we'll continue to see some momentum on that in 2019. We're shifting our focus now to the opportunities we've identified on the gross margin side, which as you know, a significant part of our cost structure is in cost of goods sold. So we'll be looking at efficiencies. We'll look at our global footprint for manufacturing and several other realignments there that we think will help us achieve those gross margin targets that we laid out going forward. So I think we're pretty comfortable on those and obviously we're going to be really aggressive as we move forward.

Christopher Van Horn -- B. Riley FBR, Inc. -- Analyst

Okay, got it. Thank you for the detail. And then just for a follow-on, a lot of new business seems like it's coming from CCS and you saw some good topline growth in the quarter from that business that in the past that kind of seen some challenges as people switch from various technologies. I'm just wondering if you could offer some commentary on how you see that business going forward. It seems like customers are shifting back maybe into more active core and just what you're seeing in the marketplace on the CCS side?

Phil Eyler -- President and Chief Executive Officer

Sure. We're really proud of the growth we continue to see even in this tough market on the CCS side, certainly speaks to the momentum we have. When you look at this,at the technology movement, it's still definitely trending on the CCS vent side with wins and launches, but given the movement toward electrification and the focus on fuel efficiency, we're seeing lots of interest in active and that's from customers in all regions. So we'll continue to announce wins on the active side and we're excited about continuing to inform you of those wins that will be coming, but that shift really toward active is going to be beyond the 2021 period as we start winning those awards.

Christopher Van Horn -- B. Riley FBR, Inc. -- Analyst

Okay, great. Thanks again for the time.

Phil Eyler -- President and Chief Executive Officer

Sure. Thank you, Chris.

Operator

Our next question is from Steve Dwyer with Craig-Hallum Capital. Please proceed with your question.

Steve Dwyer -- Craig-Hallum Capital -- Analyst

Thanks. Good morning everybody.

Phil Eyler -- President and Chief Executive Officer

Good morning Steve.

Steve Dwyer -- Craig-Hallum Capital -- Analyst

On the 4% to 6% product growth that you had outlined for 2019, are you able to or willing to breakout sort of how it splits between the medical business and the auto business?

Phil Eyler -- President and Chief Executive Officer

Well, we've not given a kind of detail on that, but I would say that the medical business is growing a little faster rate relatively, but as you know, it's a very small business compared to the overall company.

Steve Dwyer -- Craig-Hallum Capital -- Analyst

Got it. And then looking forward to the 2021 and the reiterated guidance there, revenue growth of high single-digits organically would imply a pretty significant reacceleration in 2020-2021, given sort of what we've seen from IHS ratcheting down their production estimates and so forth, what sort of gives you the confidence that you'll get that -- if you're talking about sort of mid-single digits this year would imply double-digit organic growth in 2020 and 2021 to kind of get to those numbers. So is that, sort of based on the design wins that you're seeing or new wins something like that. Maybe a little more color there would be great.

Phil Eyler -- President and Chief Executive Officer

Sure. Well, clearly it's, the win rate, as we start layering in all these wins that we've been amassing over the last two years plays a big part of that and that's across multiple technologies, CCS, of course is a big part of that. We also continue to see growth in the battery thermal management business. It's going to reach its higher run rate toward the end of 2019, so that'll play a big part of it. We also see pretty strong growth coming in the medical business, both combination of those three elements.

Steve Dwyer -- Craig-Hallum Capital -- Analyst

Okay. And then lastly for me along those lines you just referred to battery thermal management sort of reaching a run rate. I assume that's sort of based on those initial couple of design wins. Are you seeing sort of additional interest there, would you expect to add more nameplates going forward?

Phil Eyler -- President and Chief Executive Officer

Yeah, definitely on, I mean we have a host of technologies there the thermo-electric BTM, that we couldn't be more excited about our extension with Mercedes. I think that speaks to the value proposition of the product. So we certainly expect more from that product going forward. As I mentioned a couple of quarters ago, we've got some development contracts that are under way, but on top of that, we've got some very interesting technologies around air cooling. We've got heating and we've got some cell connecting product in that mix. So I think there's going to be a nice runway of growth in that whole business area.

Steve Dwyer -- Craig-Hallum Capital -- Analyst

Got it. All right. Thanks very much.

Phil Eyler -- President and Chief Executive Officer

Thank you.

Operator

Our next question is from Gary Prestopino with Barrington Research. Please proceed with your question.

Gary Prestopino -- Barrington Research -- Analyst

Good morning, everyone.

Phil Eyler -- President and Chief Executive Officer

Hi, Gary.

Gary Prestopino -- Barrington Research -- Analyst

Phil, you mentioned some factors and looking at your gross margin going forward, could we just revisit them and maybe you could kind of rank order them in terms of where you see the biggest impact to gross margin determent (ph)?

Phil Eyler -- President and Chief Executive Officer

Yeah. I will let Matteo take that question.

Matteo Anversa -- Executive Vice President, Chief Financial Officer and Treasurer

So I would say in order of importance back to Phil's comment, I think as we are shifting more attention of the Fit-for-Growth initiatives on the variable cost side, I think all the actions around improving our manufacturing footprint and efficiencies of the plants, the value engineering, reducing waste, the plants, that I think is going to be the bulk of you will see the gross margin improvements. In addition to this, I would say the continue to work on the purchasing savings by achieving lower cost either through piece price reduction or rebates from our supplier that we definitely rank the second, then the rest.

Phil Eyler -- President and Chief Executive Officer

Those are the actions Gary, but if you look at the quarter and the 27% versus kind of the normalized 30% from last year, it's really I would categorize it one-third, two-thirds, about a third of the gap was related to our own operational issues. So some of the efficiency issues one-time effects of expedited freight, and the ramp of our Mexico plant, two-thirds was related to market factors such as obviously in the fourth quarter, overall volume came in lower and that affected everybody in our space. We also had a one-off effect of a steep decline in orders or order cancellations from a couple of European customers. One of them was this cable customer that dramatically cut our orders and left us really -- we had no time to really respond to that at the end of the quarter. Same thing on CCS business toward the end of the quarter with European customers. So that combination was about two-thirds of the problem we had in fourth quarter.

Gary Prestopino -- Barrington Research -- Analyst

I guess what I'm getting at. Obviously, proving the footprint would be one thing, but in terms of some of these things like efficiencies, waste, have you been like applying six sigma principles at the plant or is this something that you are really going to go full bore, because you can continually improve your gross margin if you get continually better at running your plants?

Phil Eyler -- President and Chief Executive Officer

Yeah, I think that's exactly right. As I mentioned, we focused most of the year one Fit-for-Growth activities on operating expenses, kind of getting those back on track. I think we're showing good progress there and through the year we've identified opportunities with the gross margin, but now we're in a stage to really start the solid execution of those and those fall into two buckets. The bigger bucket is more of structural changes where most of the cost savings would would come, whether that's footprint rationalization, how we manage the network, make versus buy that kind of thing. Those may be smaller bucket would be the in-plants efficiencies. We're really proud of our plants. I think it's a proven competitive advantage for us as a company in terms of our quality and the talent we have in the plants. So I think there's a really good culture of execution in the plants and we'll just continue to go after that.

Gary Prestopino -- Barrington Research -- Analyst

Okay. And then just a couple of more here. In terms of Cincinnati Sub-Zero, I went through the press release. I didn't see it here, what is the annualized revenue of the medical business at this point. Can you make that public?

Phil Eyler -- President and Chief Executive Officer

It's in the neighborhood of $30 million.

Gary Prestopino -- Barrington Research -- Analyst

Okay. So medical is $30 million. Okay. And your guidance is really pegged-off of the auto business, the medical, but there's nothing in there. We should not consider anything for more power generation just kind of treat that as a discontinued up as we got our numbers together?

Phil Eyler -- President and Chief Executive Officer

Yeah. GPT and CSZ industrial chambers have all taken out of that altogether.

Gary Prestopino -- Barrington Research -- Analyst

Okay, that's fine. And then lastly, I mean, is at the auto show plenty of SUVs, crossovers and all of that, I mean, are you still seeing that as we transition away from sedans into these light trucks and all that there is more of an appetite for your CCS products in steering wheel heaters things like that?

Phil Eyler -- President and Chief Executive Officer

Yeah I think so, I think that's true. We're generally on the trucks and SUV's, we have a little bit higher take rates. It seems like the OEMs are competing more and more on these comfort convenience features in the vehicle, so we definitely see that trend. We are facing the challenge of roll off of sedan though, I mean those -- that certainly is those announcements by some of the big players has a negative effect in the short run. We're hopeful that SUV and truck market continue to overcome that, but certainly that's been a factor and it will continue to be a factor in the next year as end of production comes on some of these vehicle.

Gary Prestopino -- Barrington Research -- Analyst

Okay, thank you so much.

Phil Eyler -- President and Chief Executive Officer

Thank you, Gary.

Operator

Our next question is from Ryan Brinkman with JPMorgan. Please proceed with your question.

Ryan Brinkman -- JPMorgan & Co. -- Analyst

Great. Thanks for taking my questions.

Phil Eyler -- President and Chief Executive Officer

Hi Ryan.

Ryan Brinkman -- JPMorgan & Co. -- Analyst

Hi, what is your expectation for the China market this year. What's the latest you're seeing on the ground there in terms of demand for the vehicles new supply, and then anything that might be happening with your take rates there and also if you could just remind us of your revenue exposure and who your biggest customers are?

Phil Eyler -- President and Chief Executive Officer

Just of our -- yeah, we definitely got growth in China in 2019 and a lot of that is coming from -- it's come from two places. We still have growth in penetration rates with our international OEMs that are operating in JVs in China and then we're going to be launching several programs with domestic OEM, such as Geely, and Great Wall and GIC as we roll into the new year. The China market is now about $100 million-ish in revenue, but we see that as significant upside in the years ahead, but certainly the bulk of the growth is going to come more in the out years as we win more vehicles and the take rates pickup.

Ryan Brinkman -- JPMorgan & Co. -- Analyst

Understood (ph). That's helpful, thank you. And then how should we regard the lower R&D in 4Q. How much of this was due to the higher than normal level of customer reimbursements, which I would think is probably more of of a timing-related issue versus how much is coming from maybe your efforts to better focus the business and entire R&D to revenue-generating activities the benefit for which I imagine would carry forward better and do you have an outlook for R&D that you can share?

Phil Eyler -- President and Chief Executive Officer

Yeah, it's definitely coming down, net-net coming down. We did see a little more decline in the quarter given the higher reimbursement, but we will definitely see it on a normalized basis coming down from 19% to 18% and that's built into our OpEx target that we put out there, I think 19% to 20%. That said, we are in the four key areas of growth, we are adding resources and we're funneling more into those areas that will offset some of the savings. So for example, the battery thermal management business, our new ClimateSense solution, certainly on the medical side, those areas are getting some reinforcements in terms of R&D expertise.

Ryan Brinkman -- JPMorgan & Co. -- Analyst

Okay, thanks. And then last question. Have you done any work to try to understand the potential impact of Section 232 to your business, those cash that was extended from steel and aluminum to also include autos and auto parts and perhaps while answering that you could give us an update on the section 301, your efforts there to try to mitigate some of the impact of those tariffs to your margin.

Phil Eyler -- President and Chief Executive Officer

Well, I think if you look at our estimate of $3 million to $5 million, it captures everything we see right now that we know about and we're still working to offset those. I think the team has done a good job. If you look at our previous estimate, we originally expected to have double that impact in 2019. So we're really happy with what we've already mitigated through their supplier changes, supplier location changes and even some of our own internal manufacturing locations. We will continue to work on that. We've got some other ideas in the hopper, but as you know, in automotive, making design changes and supplier changes takes time. We have to go through qualifications. We have to get approvals from customers and alike. So I think we feel comfortable with the $3 million to $5 million at this point.

Ryan Brinkman -- JPMorgan & Co. -- Analyst

Great, thank you.

Phil Eyler -- President and Chief Executive Officer

Thank you.

Operator

Our next question is from Matt Koranda with ROTH Capital. Please proceed with your question.

Matt Koranda -- ROTH Capital Partners -- Analyst

Hey guys, good morning. Thanks.

Phil Eyler -- President and Chief Executive Officer

Hey Matt.

Matt Koranda -- ROTH Capital Partners -- Analyst

Just in terms of a question in regards to one you answered earlier Phil. I think you mentioned that the take rate is growing this year for you guys. I just wanted to clarify. Do you mean you're seeing a mixed tailwind in 2019 as OEMs produce more hybrid (ph) vehicles with your content or is CCS just being put down into kind of the mid-term level vehicle?

Phil Eyler -- President and Chief Executive Officer

This combination, we're seeing current vehicles that were on apply the technology at a higher take rate. So just market take rate going up. We're also seeing adoption rate, so vehicles that in the past haven't had the technology are now launching with it. And by the way the supplies to CCS, heat steering wheel, that kind of lump all that together, but certainly and then on top of that, you add increased content in the specific vehicle, so rear seat as we're seeing rear seats with heat, we're seeing rear seats with full CCS both passive or both vent and active and all those things kind of coming together to drive our take rate.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay, great.

Phil Eyler -- President and Chief Executive Officer

We haven't seen it. Surprisingly, in the large SUVs, we are seeing it in the third row.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay, interesting. And then just in terms of gross margins that you mentioned, I think that two-thirds of the issue with gross margins was essentially sort of the end of quarter adjustments that you saw from some customers. Was that better thermal management launch sort of the balance of that headwind or whether there is additional headwinds in the quarter there?

Phil Eyler -- President and Chief Executive Officer

That was in the on-third.

Matteo Anversa -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah.

Phil Eyler -- President and Chief Executive Officer

Sorry. Go ahead Matteo.

Matteo Anversa -- Executive Vice President, Chief Financial Officer and Treasurer

So depending on the impact of the battery thermal launch was about 60 basis points.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay, got it.

Matteo Anversa -- Executive Vice President, Chief Financial Officer and Treasurer

And the freight makes the rest. Sorry.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay, that's helpful. Assuming that, that launch essentially goes to plan toward the back half of the year that then becomes a tailwind. Is that embedded in the gross margin outlook sort of at the midpoint or is that sort of what gets you to maybe the higher end of the range that you highlighted?

Matteo Anversa -- Executive Vice President, Chief Financial Officer and Treasurer

I think we are expecting that the margin on the BTM to improve, but I would still say that the gross margin of BTM in '19 will still be dilutive compared to the total company. That's the way we portray it.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay. And then in the Fit-for-Growth actions and sort of a longer-term gross margin, improvement actions, you guys did highlight footprint actions a fair bit in your commentary today. Just wondering, I mean timing-wise, when do we sort of have to see those additional announcements around footprint action for some of the footprints have to take hold by 2021, I mean I would assume we're going to need to see it by middle point of this year at the very least to start to see that kind of flow through to the gross margin improvement. Is that fair?

Phil Eyler -- President and Chief Executive Officer

Yeah, definitely. We'll be announcing this year and start working on those adjustments this year.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay, got it. And I hate OpEx questions, but I have to ask one more. So the 18% to 20% that you guys highlighted implies about $200 million of annualized OpEx, but I guess even if I annualize sort of what you did in Q4 and I ex-out sort of the one-time R&D reimbursement that you got, it still sort of puts me in the 190 range. So any help there in terms of the gap?

Phil Eyler -- President and Chief Executive Officer

Yeah. I think we're going to keep prudently investing in R&D. That'll be your delta. As I mentioned, we're working. Our strategy is focused growth and we got it. We have to invest in those technologies or the core of our company is competing on technology and innovation. That's what we're all about and we're really going to prudently portion resources into those growth areas.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay. Fair enough guys. Thank you.

Phil Eyler -- President and Chief Executive Officer

Thank you.

Operator

(Operator Instructions) Our next question is from Anthony Deem with Longbow Research. Please proceed with your question.

Anthony Deem -- Longbow Research -- Analyst

Hi, good morning. Thanks for taking the question.

Phil Eyler -- President and Chief Executive Officer

Hi Anthony.

Anthony Deem -- Longbow Research -- Analyst

So a few for me. It sounds like all the Fit-for-Growth operating cost benefits also included in the 2019 guidance. If that's the case, we're looking at a 300, 400 basis point improvement expected for (inaudible) operating expenses as a percentage of revenue, right. So I'm just wondering if this is simply accomplished by excluding GPT. Is that a restructuring payback timing issue or was this guidance for the 300, 400 basis point improvement. Is that based primarily on leverage on higher revenues? I think that was about 100, 150 basis points before and the upgrades to the lower operating expenses. So, yeah, just kind of wondering if you can dimension those issues if that is the case what's driving that?

Phil Eyler -- President and Chief Executive Officer

Yes, sure. So I think I would say it's a -- the major one it's definitely the work on the continued actions on Fit-for-Growth. I would also say that we are assuming at least 1 point and 1.5 points of fixed cost leverage, thanks to the revenue increase. So that's how I would portray it.

Anthony Deem -- Longbow Research -- Analyst

Okay. Got you. So Fit-for-Growth benefits coming past 2019 and in addition to the operating leverage. Okay. So with said, the leverage 2018-'21 guidance, can you just be more specific around the high-single digit product growth? Does this high single-digit mean 7% or does it mean 9%, because we can make some very different assumptions there? And also I'm also wondering on top of that, for that high signature product growth guidance, does that include the upside with Etratech (inaudible) or does it use your adjusted decline of 1% in 2018?

Phil Eyler -- President and Chief Executive Officer

Okay, So the growth is high single digit. I think that's what we're willing to share at this point in time and it's a combination of the limits and earlier, we see higher growth in the climate comfort business for sure in that period of time through take rates and starting to roll the new awards with our record backlog, that's going to start having an effect in those years. And clearly the BTM business is going to pick up pace and we are expecting a fair amount of growth as compared to 2018 in that, regards and then medical. Medical is -- we're expecting to double the business basically in medical between '18 and '21. All those things are net of the businesses we're exiting, of course, so the starting point is kind of what we're laying out as the net result of 2018 after assets that are either divested or held for sale.

Anthony Deem -- Longbow Research -- Analyst

Got you. Are you able to sort of break out contribution between those three in terms of the win rate, higher BTM run rate, the medical. I think we can back into the medical. Interested in contribution or if it's pretty clarification.

Phil Eyler -- President and Chief Executive Officer

On the dollar value, it's going to be higher in the climate and comfort business, so the core business on a percentage growth basis certainly higher in BTM and medical.

Anthony Deem -- Longbow Research -- Analyst

Yeah, that make sense. And then just last question from me. The Lear entity, congrats on this collaboration. So is this one area Lear looks to accelerate their growth certainly, the highlight how it can help instead, I think high medium, low temperatures like (inaudible). I'm just wondering, do you see this the option as a luxury product with a few customers or in your opinion, does it really have mass market potential? And thanks for taking my questions.

Phil Eyler -- President and Chief Executive Officer

Yeah, I mean that's probably a detail I can't give, because that's not the Lear project but I think certainly the idea behind it is that it is modular and something that can be efficiently integrated into the C design, so certainly not meant to be something that only would be used on the highest of the high-end.

Operator

Our next question is from Richard Carlson with BMO Capital Markets. Please proceed with your question.

Richard Carlson -- BMO Capital Markets -- Analyst

Hey, good morning guys.

Phil Eyler -- President and Chief Executive Officer

Good morning.

Richard Carlson -- BMO Capital Markets -- Analyst

So, Phil, you talked a little bit about BTM, I hope you maybe dig in a little bit more -- it sounds like you've been very successful as when that's going to be probably a pretty big part of your growth in the next couple of years? So with the add-on for Mercedes, I think in the past you've shared kind of what you expect just from the current wins with the revenue would be once you fully ramp, are you willing to give us some numbers on that and then talk about the number of maybe how big the pipeline is for that currently?

Phil Eyler -- President and Chief Executive Officer

Yeah. I think in general, if you look between 2018 and 2021, our expectation is on a dollar basis to grow somewhere between $80 million and $100 million, and that's a combination of all the different product lines.

Richard Carlson -- BMO Capital Markets -- Analyst

Got it. Sorry. So that's certainly pretty substantial growth and so are you hearing anything different from your customers because certainly, the expectation is that especially with the 48-volt, that's going to go from a pretty low penetration, currently to a pretty substantial size, are you hearing anything different with that?

Phil Eyler -- President and Chief Executive Officer

No, I think the estimates are still pretty solid based on where we built our plans and if you look at our solution set right now, that's the lion's share of the BTM business we have, whether it's the thermoelectric based or if our air cooling is really growing fast in that 48-volt miles hybrid space. So that's certainly what we expect to be the largest market through 2025.

Richard Carlson -- BMO Capital Markets -- Analyst

Great. Then what's your regional concentration for that business, I assume it is mostly Europe and China?

Phil Eyler -- President and Chief Executive Officer

Yeah, right now it is mostly Europe and China. Of course, we have the one program in the US with FDA but, and we are seeing some other opportunity start to come in, but right now, most of the shipments are Europe and China.

Richard Carlson -- BMO Capital Markets -- Analyst

Thank you for that. And just one last modeling question. So your tax rate of 28% to 30% of course is much higher than what you've shown over the past couple of years. Is that just a GAAP number and they're being lower on an adjusted basis?

Matteo Anversa -- Executive Vice President, Chief Financial Officer and Treasurer

We are till 2019, that's a question, we are expecting 28% to 30% is going to be couple of points higher than what we experienced in '18 because in '18 we enjoyed some favorable tax rates on inter-company transactions that we are not expecting to occur again in '19 and that's the reason for the increase.

Richard Carlson -- BMO Capital Markets -- Analyst

Got it. And then, so that should be what we should think about going forward as well for the out years?

Phil Eyler -- President and Chief Executive Officer

For now, that's what I would use.

Richard Carlson -- BMO Capital Markets -- Analyst

Okay, great. Thank you very much guys.

Phil Eyler -- President and Chief Executive Officer

Thanks, Richard.

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Eyler for closing remarks.

Phil Eyler -- President and Chief Executive Officer

Great. Well, thanks everyone for joining our call today. As I said in my opening comments, we remain focused on execution, innovation, and cost improvement. Just to briefly recap what you've heard today, 2018 was really a transformative year for Gentherm. We clarified our mission and strengthened our leadership team, we design, develop and continued to implement a strong strategic plan to drive focused growth and it's already achieving early returns. Today, Gentherm really is perfectly positioned to capitalize on the emerging trends in the automotive industry. Electrification, connected and autonomous vehicles and consumer demand for comfort and convenience. I'm confident that we'll continue to deliver significant shareholder value in the quarters and years ahead. I appreciate your interest and support and we look forward to keeping you appraised of our progress. Thank you.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.

Duration: 54 minutes

Call participants:

Yijing Brentano -- Senior Vice President, Investor Relations and Corporate Communications

Phil Eyler -- President and Chief Executive Officer

Matteo Anversa -- Executive Vice President, Chief Financial Officer and Treasurer

Christopher Van Horn -- B. Riley FBR, Inc. -- Analyst

Steve Dwyer -- Craig-Hallum Capital -- Analyst

Gary Prestopino -- Barrington Research -- Analyst

Ryan Brinkman -- JPMorgan & Co. -- Analyst

Matt Koranda -- ROTH Capital Partners -- Analyst

Anthony Deem -- Longbow Research -- Analyst

Richard Carlson -- BMO Capital Markets -- Analyst

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