Gentherm Inc (THRM) Q4 2020 Earnings Call Transcript

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Gentherm Inc (THRM 1.14%)
Q4 2020 Earnings Call
Mar 1, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Gentherm Inc. Fourth Quarter and Full Year 2020 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Yijing Brentano. You may begin.

Yijing Brentano -- Senior Vice President, Investor Relations and Global Financial Planning and Analysis

Thank you and good morning, everyone. Thanks 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 securities 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 earnings release and its SEC filings, including the latest 10-K and subsequent reports for discussions of our risk factors and other risks and uncertainties underlying such forward-looking statements.

During the call, we may discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release or investor presentation.

On the call with me today are Phil Eyler, President and Chief Executive Officer; and Matteo Anversa, Chief Financial Officer. During their comments, Phil and Matteo will be referring to a presentation deck that we have made available on our website at 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. 2020 was a year like no other, one that saw two polar opposite operating extremes for the company.

In the first half of 2020, the global pandemic created significant hardship and challenges worldwide, which was then followed by a strong recovery of automotive demand in the second half. I'm proud of the global Gentherm team for their flexibility, dedication and agility to swiftly pivot from preserving liquidity in the first half to delivering record results in the second half, all while maintaining the health and safety of our global team members.

Our performance in the second half of the year confirms that our strategic plan to focus growth, realign our cost structure and bring innovative solutions to market continues to deliver long-term shareholder returns.

Now let's look at 2020 in a little more detail. Please turn to Slide 4. We finished 2020 with a record-breaking fourth quarter, generating the highest quarterly revenue and profitability in the history of the company. In automotive, we outperformed light vehicle production in our key markets by over 20 percentage points. Accomplishing these achievements in such a challenging environment clearly demonstrates strong operational execution across our enterprise.

Looking back at the full year of 2020, light vehicle production declined 14% in North America, Europe, China, Japan and Korea as a result of the pandemic. Gentherm's new launches in battery thermal management, hands-on detection-enabled steering wheel heaters and other electronics, along with increasing take rates of climate and comfort solutions, enabled us to consistently outperform in automotive versus the key markets that we serve.

Excluding the impact of foreign currency translation, our 6% decrease in full-year organic automotive revenue outperformed light vehicle production in our key markets by approximately 800 basis points. With a strong finish of $440 million in awards during the fourth quarter, we secured a total of $940 million in automotive awards in 2020. While the annual award level is lower than prior years and reflects limited opportunities as OEMs conservatively manage sourcing decisions, our strong win rate of over 90% positions us well for long-term growth.

In medical, we achieved record annual revenue with double-digit year-over-year growth in 2020, driven by demand for our flagship products such as Blanketrol and Hemotherm and the addition of Stihler blood warming products to our portfolio.

On the operations front, our global manufacturing and supply chain teams performed exceptionally well in 2020; first by swiftly responding to the negative effects of the pandemic in the first half of the year; and then shifting to meet the rebound in demand, increasing take rate and our new launches in the second half, while ensuring the safety of our employees at all times.

On a cost front, we continued our disciplined approach to managing operating expenses. After adjusting for restructuring, acquisition and divestiture expenses, we reduced operating expenses by 10% in 2020. Adjusted operating expense as a percentage of revenue improved 80 basis points from 2019 and 190 basis points from 2018. Despite the unprecedented challenges in 2020, we delivered a $140 million in adjusted EBITDA, in line with the 2019 level. More importantly, we improved our total company adjusted EBITDA margin rate to 15.3% for the year, up over 60 basis points from 2019 and 190 basis points from 2018.

Matteo will provide more details about our fourth quarter financial results as well as some information on the tax asset valuation review that delayed our earnings announcement in a few minutes.

Now turning to the automotive highlights on Slide 5. In the fourth quarter, we launched our automotive solutions on 19 different vehicles across the 11 OEMs, including Audi, BMW, Ford, General Motors, Hyundai and Volkswagen. We continue to see momentum for our CCS product and launched on the Acura MDX, Ford F-150, Hyundai Tucson and Hyundai Sonata.

In order to best represent the breadth of all of our current and future product offerings, we recently renamed battery thermal management, or BTM, product portfolio as battery performance solutions, or BPS. One of the fastest-growing segments of our battery performance solutions portfolio is our cell connecting technologies. We have both a wire-based cell connecting technology and our proprietary thin foil technology.

In the third quarter of 2019, we launched our wire-based solution on the BMW MINI Electric and that demand continues to exceed our original expectations. As discussed previously, we won our first cell connecting award based on our proprietary thin foil technology with the premium German OEM in the fourth quarter of 2019. I'm pleased now to share that this premium OEM is also BMW, which demonstrates the confidence in Gentherm by one of the technology leaders in automotive.

Our R&D team developed this innovative mechanical structuring technology that offer significant design flexibility and some exciting opportunities for new applications. We will soon be offering some of these new applications to OEM customers.

We continue to make great progress on ClimateSense, which, as you recall, is our software-driven microclimate platform using an algorithm based on thermophysiology. ClimateSense is a critical part of our long-term strategy. We are disrupting the current thermal solutions in vehicles by significantly reducing power consumption and increasing range in extreme temperatures, all while providing best-in-class passenger comfort.

I'm pleased to announce that we have launched the third phase of the development project with BMW. In addition, Gentherm and Audi have completed Phase 1 of an advanced ClimateSense development project for an electric vehicle. We've been working with an Asian OEM on a ClimateSense project since 2019 and I'm happy to share that this OEM is Honda. And we've just kicked off the second phase of our development project with them. Our Phase 3 development project with General Motors continues to progress well. As we previously shared, ClimateSense delivered between 50% to 69% energy savings in cold weather testing and 34% energy savings in hot weather testing. Translating these savings to range extension, in the cold weather cycle, ClimateSense increased its range by 33% or approximately 50 miles. These results demonstrate that our ClimateSense offering is an unique solution for energy efficiency as well as passenger comfort and it represents a significant content increase opportunity for Gentherm in EVs in the coming years.

Now on to Slide 6. Where you can see that we continue to win new business at a pace that sets a solid foundation for future growth, in the fourth quarter, we secured $440 million in new program awards across 12 different customers. This is a strong finish to a challenging year. I'm especially proud of our global team for winning over 90% of the opportunities available to us in 2020. We won multiple CCS awards, including platform wins with the Chevy SUV, Ford F-250/350, GM Hummer EV, Range Rover, Mazda CX-5 and the Volkswagen CrossBlue plug-in hybrid.

We also received eight steering wheel awards across six OEMs, including the Chevrolet Colorado, GMC Acadia, Terrain & Canyon and the Maserati Grecale. Gentherm continues to expand our strong position with General Motors. In the fourth quarter, we were able to secure an additional nine new program awards for our Climate Control Seats, seat heaters and steering wheel heaters for both North America and China. GM is one of our long-standing customers and continues to be an exceptional partner not only in growing the business together but also in developing and adopting our new technologies. In addition to growing our business with long-standing customers, we've also secured additional steering wheel and seat heat awards with one of the largest global EV manufacturers.

Moving to electronics. We achieved another milestone in the fourth quarter by winning an innovative steering wheel adjustment electronic control unit award with Audi. This is a further example of where we have established credibility with the technology-leading OEM. In addition, I'm pleased to share that we just won a next-generation multi-function electronic controller award with Ford. If you recall, our initial win with Ford combined Gentherm's climate control solution with memory seat functionality, which utilizes our proprietary Intelligent Positioning System technology.

We now have added other functionalities, for example, to control the power running boards, helping forward to further increase system efficiency and reduce costs. This module will be used in Ford and Lincoln vehicles produced in North America and China for both internal combustion and battery electric vehicles. More importantly, it's compatible with Ford's next-generation advanced electrical architecture, which allows for more feature flexibility, connectivity and personalization. This module which -- also will have cyber-security and over-the-air update features.

I would like to congratulate our electronics team for continued innovation and expansion of our business with global OEMs. Our track record for strong win rates, coupled with a healthy pipeline of RFQs, position us well for continued growth in automotive.

Moving to Slide 7. I'd like to share some of the growth momentum we have in the EV space. Electrified vehicle production, including mild hybrid, full hybrid and battery electric is expected to grow from 13% of global production in 2020 to 60% in 2030, almost a five-fold increase. Gentherm's current and future technologies will play an important role in extending the range of electric vehicles and of course delighting passengers with thermal comfort.

Currently, we're working on 106 programs with 30 OEMs. Customers are looking to Gentherm not only for thermal comfort solutions like seat heaters, climate-controlled seats and steering wheel heaters but also for battery performance solutions such as our PACE Award-winning battery thermal management solution and proprietary thin foil cell connecting and heating solutions. In addition, we are providing customers with innovative thermal ECUs and multi-function ECUs. In total, for 2020, we won 32 program awards on different EV platforms. And this accounted for over 40% of our total award dollar value for the year.

Looking ahead, our ClimateSense solution provide significant opportunities for future growth through the addition of our proprietary software, increased thermal content and significant range extension. To-date, we've completed seven development projects and we're working on four more with OEMs in North America, Europe and Asia. More electric vehicle manufacturers are now leveraging our solutions to enhance comfort, while significantly improving energy efficiency and range.

Now let's turn to Slide 8 for a discussion of our medical business. As I mentioned a few moments ago, we delivered record annual revenue in medical in 2020 with 17% year-over-year growth. The pandemic created heightened demand, especially in the first half of the year, for some of our products that play a critical role in helping to fight COVID-19. On the other hand, hospitals are delaying capital purchases due to the financial hardships created by halted or reduced elective procedures. This headwind caused a short-term impact in the fourth quarter. Nonetheless, we expanded our WarmAir and FilteredFlo patient warming systems across multiple large hospital networks, including Einstein Health in Philadelphia and Pinnacle Health in Harrisburg, Pennsylvania.

Despite delays in elective surgeries, we saw a tailwind in consumables that are used with Blanketrol. In addition, we continue to make progress on innovation programs leveraging thermophysiology synergies between our medical and automotive businesses.

Now let's turn to Slide 9 and look back at the year we just completed. I'd like to highlight a few of our accomplishments in 2020. On the customer front, we continue to exceed customer expectations. We earned the coveted Supplier Quality Excellence Award from General Motors for several of our manufacturing facilities and for the first time in Gentherm history we were named a General Motors Supplier of the Year, representing the top 1% of GM supply base. In addition, Gentherm was named a top North American supplier by Honda one of only 41 suppliers out of a total 735.

Despite the slowdown in OEM sourcing activities in 2020, we secured several strategic awards in the year. We won our largest single vehicle production Climate Control Seat award in the company's history for the global BMW 5 Series. We won a strategic CCS Award for Hyundai Genesis EV platforms and we became the exclusive provider of all CCS solutions for the Genesis brand. We also won 23 program awards from our largest customer, General Motors.

With below freezing temperatures affecting hundreds of millions of people in the lower 48 states over the last few weeks, drivers and passengers are increasingly relying on our solutions for comfort while on the road. We've seen significant increase in the adoption and take rate of our products across multiple customers. We continue to add content to both ICE and electric vehicles. We successfully ramped our innovative combined steering wheel heat and hands-on detection sensor solution for Volkswagen.

We won our first electronic air cooling award for infotainment and head-up displays with Mercedes for their entire future lineup of BEVs and battery performance solutions. We won our first thin foil cell connecting award with BMW and increased production of the battery heating solution for the Jeep Renegade and Jeep Compass. On the innovation front, our global R&D team continued to expand our technology leadership even in these challenging times.

Now let me summarize. Our financial results in 2020 demonstrate the continued successful execution of our strategic plan to focus growth, realign our cost structure and bring innovative solutions to market. I'd like to thank our global team for delivering another record-setting quarter in revenue and adjusted EBITDA. I'm very proud of the agility, hard work and commitment of the talented global Gentherm team to overcome challenges in the market, deliver on our strategy and improved profitability in an unprecedented year.

While there is still near-term uncertainty in the macroeconomic environment, we're entering 2021 with strong momentum. This, combined with our relentless focus on operational excellence, technology leadership and strong cash flow generation, positions the company well for profitable long-term growth.

Now with that, I'll turn the call over to Matteo for a little more color on the financial results and our 2021 guidance.

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

Thank you, Phil. And thank you to everyone joining the call today.

Before I discuss the details of our fourth quarter financial results, I would like to provide a little bit more information about our review of the valuation of certain tax assets. During the 2020 year-end close process, we determined that certain deferred tax assets were not properly evaluated for realizability in 2019. After a thorough investigation and review of historical company records, we identified that in the fourth quarter of 2019 we overstated income tax expenses and understated net income by approximately $11.4 million due to an understatement of deferred tax assets. We have now revised the fourth quarter and full year 2019 financials and that is reflected in the tables contained in the earnings release that we issued this morning. The revision had no cash impact and did not change our reported adjusted EBITDA figures.

Now let me move to Slide 10 and focus on the items that most significantly impacted our fourth quarter results. For the quarter, product revenues increased by 25% compared to the same period of last year. If we adjust for the impact of FX, our overall product revenue increased by approximately 22%.

Starting with the automotive segment, revenue was a quarterly record of approximately $280 million, corresponding to a 27% increase compared to the prior year period. Adjusting for foreign currency translation, automotive revenue increased by approximately 23%. In comparison, according to IHS latest data, light vehicle production for our key markets of North America, Europe, China, Japan and Korea increased by approximately 3% over the prior year quarter. And as Phil mentioned earlier, we outperformed light vehicle production by over 20 percentage points.

We saw strength in virtually all of the product lines in automotive. And more specifically, our BPS revenues increased 71% as a result of the launch of the new Mercedes S-Class, strength of our electric battery thermal management products with FCA and the new cell connecting board solution launched on the new e-MINI.

Steering wheel heaters revenue increased by 68% compared to the fourth quarter of last year as a result of the newly launched hands-on detection-enabled heaters with VW. Electronics revenue increased almost 30% due to the Memory Seat Module program with Ford and higher revenue from other automotive products as well as the recovery of the RV market.

CCS revenues increased 28% to a company record of $113 million due to higher volumes with Hyundai Kia, General Motors and Daimler as well as new launches in higher take rates. Seat heaters revenue increased by 19%, primarily due to higher volumes with GM trucks and SUVs as well as new launches with the VW Group. Cable revenues increased 6% due to higher volume with Samsung, Bosch and other tier-ones. And these increases were partially offset by decreases in other automotive.

If we move to the medical segment, revenue decreased 9% due to the reduction in demand, primarily of Blanketrol equipment and Hemotherm products as a result of the negative impact of the COVID-19 pandemic on elective surgeries. Despite a negative impact of COVID in the fourth quarter, medical revenues increased by approximately 17% in 2020 compared to 2019.

Now if we move to gross margin, gross margin rate for the quarter was 32.1% and this compares to 28.5% in the year ago period. The 360-basis-point increase was driven by labor productivity and other cost reductions at the factories, positive effects primarily due to the appreciation of the euro compared to the US dollar, fixed cost leverage due to the higher volume and supplier cost reductions. These were partially offset by annual customer price reductions, wage inflation and higher freight costs.

Moving to operating expenses, which were $50.8 million in the quarter compared to $43.6 million in the prior year period. Current year fourth quarter amount included $2.4 million of restructuring charges and approximately $1.2 million of acquisition and divestiture expenses. This compares to last year's fourth quarter when we incurred approximately $1.1 million of restructuring charges. If we adjust for restructuring, acquisition and divestiture expenses in both periods, operating expenses were $47.2 million, up from $42.6 million in the fourth quarter of 2019.

The year-over-year increase of approximately 11% was primarily driven by the impact of mark-to-market adjustments in cash settled stock appreciation rights as a result of the appreciation of Gentherm stock price as well as lower R&D income due to project timing. These were partially offset by lower incentive compensation as well as reduced travel, trade shows and other costs due to the pandemic.

Sequentially, adjusted operating expenses increased by approximately $3.4 million compared to the third quarter of 2020. Primary driver of this increase was the impact of the mark-to-market adjustments that I mentioned earlier, partially offset by higher R&D income and lower incentive compensation.

Adjusted EBITDA of $57 million was the highest in the company's history and increased by approximately $23 million or 66% from the prior year period. Additionally, the adjusted EBITDA rate of 19.7% improved 480 basis points. Finally, adjusted diluted EPS in the quarter was $1.16 a share compared to $0.99 per share in the fourth quarter of last year.

Our tax rate in the quarter was approximately 16% and 27% for the full year 2020. However, after adjusting for the effect of the settlement and closure of multi-year international tax audits that occurred in the second quarter, our tax rate for 2020 was approximately 23%. Our tax rate was lower than our expected range of 27% to 29% due to the cumulative impact in 2020 from the conclusion of the review of the deferred tax assets that I mentioned earlier.

Now moving to the balance sheet on Slide 11. Our cash position at the end of the quarter was approximately $268 million. Our cash position in the quarter increased by $39 million from the end of the third quarter, primarily as a result of the cash generated from operating activities. Additionally, we generated $93 million in free cash flow in 2020, on par with the company record in 2019. Net debt decreased sequentially by $45 million and total debt stood at approximately $192 million.

We closed 2020 in a net cash position as cash on hand exceeded the gross debt. And as a result, our net leverage ratio was negative 0.50. Based on the trailing 12-month consolidated adjusted EBITDA ended December 31st, we had approximately $289 million of remaining availability on our line of credit, up from $221 million at the end of the third quarter. The total available liquidity as of December 31st was $557 million, up from $448 million at the end of the third quarter.

As the macroeconomic environment improved over the last few months, we repaid approximately $80 million of the $186 million outstanding balance on our revolving credit facility in January. This allows us to reduce interest costs, while maintaining ample cash on hand in case of worsening economic conditions due to the COVID resurgence. As of the end of January, cash on hand was approximately $190 million.

Now let's turn to Slide 12 for the 2021 guidance. We are expecting product revenues to be in the range of $1.05 billion to $1.13 billion, assuming FX remains at a current level and light vehicle production in our relevant market grows at low-teens rate in 2021 versus 2020, which is in line with the latest IHS forecast. We expect to have an FX benefit of approximately 200 basis points in 2021 versus 2020 at the current exchange rates. Therefore, the midpoint of our guidance implies an organic growth rate of 17%.

Additionally, we expect our medical business to grow at a slower pace than Automotive as a result of the continued negative impact of COVID on elective surgeries. Our guidance also factors in the impact to Gentherm based on our current understanding of anticipated reduced OEM production due to the semiconductor shortage in the first half of 2021.

In terms of profitability, we expect adjusted EBITDA rate to be in the range of 17% to 19% and we do expect to invest more in R&D to support our new technology launches and reverse some of the austerity measures that we implemented in 2020. Capital expenditures are expected to increase compared to 2020 and to be in the range of $50 million to $60 million. We estimate our tax rate to be in the range of 22% to 24%, assuming no significant changes to current tax regulations.

Now before I turn the call back to the operator, I wanted to echo Phil's comment about the Gentherm team. I am very proud of our team's ability to execute and deliver record performance in such a turbulent year. When we launched our focused growth strategy in June of 2018, we set our goal to achieve high-teens EBITDA margin in 2021. The automotive production outlook has deteriorated significantly since then. However, we believe that our focus on operational execution and cost improvement will enable us to meet our profitability goal established in 2018 in spite of the lower revenues.

And with that, let's turn the call back to the operator to begin the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] And our first question is from Matt Koranda with ROTH Capital Partners. Please proceed with your question.

Matt Koranda -- ROTH Capital Partners -- Analyst

Hey, guys. Good morning and thanks. The 90% win rate is encouraging. What does the funnel of new opportunities look like in 2021, given we're back to sort of a more normal-ish level of operating scenarios for most OEMs, any way to quantify that? And then, also just wonder some of these ClimateSense Phase 3 development projects drop in the commercial bookings, it sounds like you guys gave some good color on completing a number of that working on like four more, how long after completion do you get a commercial booking on an OEM program for ClimateSense?

Phil Eyler -- President and Chief Executive Officer

Hi, good morning, Matt. So I'll start with your question on the awards. Certainly 2021 is looking to be healthy amount better than 2020 in terms of the pipeline for sure. And we're pretty excited about our progress already in Q1 and expect to see a better year. So, it' a little hard to say exactly how much but we're pretty optimistic. Definitely OEMs are getting much more aggressive in terms of awarding suppliers for the new launches coming.

On the ClimateSense side, yeah, we're really excited about the progress. As you know, we have -- as we announced, we have two projects that are in Phase 3 now. And clearly that's a pretty big commitment by those OEMs. And we're pretty optimistic that we're getting closer to the potential for our production award. So we'll definitely be keeping you posted as that progresses. But these -- as these move to Phase 3, they continue to get much more focused on potential vehicles that could go into production in the not-so-distant future.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay, got it. And then, just on the outlook, maybe a little bit of help just on the cadence of revenue growth during the year. I mean, it sounds like, just given the semi shortage, if you guys have baked that into the guidance. And so maybe we should expect a little bit of a lower growth rate early in the year, but then obviously we have easy comps from last year. So just a little bit of help on how you guys expect the year to progress from a revenue standpoint that's -- what's embedded within that midpoint of the outlook maybe.

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

Hi, Matt. Good morning. It's Matteo. So, yes, I think, overall I would expect the first half revenue to be slightly lower than what we're going to experience in the second half. And this is primarily due to the semiconductor shortage that you just referred. So that's how I would refine it.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay. And then, just last one from me and I'll jump back in queue. But any callouts on specific projects or plan expansion activity that's embedded in capex I noticed, it stepped up quite a bit from the last couple of years. Is there just some catch-up embedded in there or are there any specific things you can call out within that capex budget for the year?

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

Sure. So, yeah, right, we had only about $70 million of capex in 2020. And the number was particularly lower due to the fact that we implemented some austerity measures depending of COVID. So, the $50 million to $60 million guidance for 2021 assumes a pickup in terms of capex due to some of the delayed projects that we had out of 2020.

Overall, I would say, if you look at the total $50 million to $60 million, about 60% of that amount is growth and 40% is maintenance. And the growth is going to really be around fulfilling some of the capital expenditures required in the project that we won in the last 18 to 24 months. That's the way we'll provide it [Phonetic].

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay, great. Thanks. I'll jump in queue, guys. Thank you.

Phil Eyler -- President and Chief Executive Officer

Thank you, Matt.

Operator

And our next question is from Ryan Sigdahl with Craig-Hallum Capital Group. Please proceed with your question.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Good morning, guys. Thanks for taking my questions.

Phil Eyler -- President and Chief Executive Officer

Hey, Ryan.

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

Good morning, Ryan.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Just want to dive, I know you said second half was stronger -- a little stronger than first half, but is it fair to assume kind of sequential growth throughout the year, given the shortage probably stronger here in Q1 -- Q2 is bigger than Q1, etc?

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

Yes, that's what I would expect.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Good. And then, just a follow-up on ClimateSense seems to be continuing to make good traction there. And I know, just going to ask kind of first commercial award, when we can expect that? But how many development projects, any indication from especially thinking BMW and GM, you are on the third development projects with them, are we getting close or do you think this could go fourth, fifth, who knows how long after that?

Phil Eyler -- President and Chief Executive Officer

It's a little hard to tell because, I mean, one of the challenges, the OEMs are a big challenge, but one of the parts of the project is that there is a pretty significant architectural change in the vehicles, clearly implementing our system, which has a lot of different elements and components, and a new controller and software go into that, but that's also an adjustment of the APAC architecture. So, I mean, that's it. We've been working on for quite a while. So, I think we'll continue to get closer.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Good. And just on the balance sheet, continuing to generate nice free cash flow, keeps getting better now in a nice net cash position. What are the allocation priorities comfortable with the debt, to plan to pay some of that down? But how do you think about the growing cash on the balance sheet?

Phil Eyler -- President and Chief Executive Officer

Yeah. I think, we're clearly number one focused on security and liquidity. And what we still think is a very dynamic economic bond. So that's our first priority. But outside of that, we're definitely in a good position to keep our eyes out for both organic and inorganic investment opportunities to grow the business. So that's a key area. And of course, as you know, we got approval for the potential of more share buybacks, should the opportunity arise, if it makes sense. And we'll keep our eyes on that. So those are our top three areas of focus.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Great. Thanks, guys. I'll hop back in queue. Good luck.

Phil Eyler -- President and Chief Executive Officer

Thank you.

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

Thanks.

Operator

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

Ryan Brinkman -- JPMorgan -- Analyst

Hi. Thank you. I thought it was interesting you mentioned your strong relationship with General Motors, including the multiple CCS and CT awards in 4Q and how they've been sort of quick to embrace your new technologies. I remember the work you did with them regarding -- you remember the greenhouse gas credit stemming from the CCS use. And I was just wondering if you think that this might be General Motors a natural customer for your future ClimateSense product, just given the relationship there, but also because of their recent announcements, they intend to be 100% battery electric by 2035.

Are there any trends you can call out with regard -- I know you're limited in what you can say, but are there any trends you can call out with regard to your discussions or your development phase projects in terms of which geographies or maybe which vehicle segments and I'm maybe most interested in which propulsion types that automakers are considering for using ClimateSense?

Phil Eyler -- President and Chief Executive Officer

Good question. Thanks, Ryan. No, I think, the EV space, just to answer your last question first, we're getting a lot of interest on the EV side with ClimateSense. That's the most interest thing. I mean, the value proposition of range extension and extreme temperatures is really compelling. So that's the number one driver. Certainly our system has an increase in thermal comfort. So, passenger satisfaction and driver satisfaction is better with this than even with our traditional CCS products. So that's kind of in a two-for-one benefit there.

On talking about GM, it's a great relationship we have. We're very focused on delivering value proposition for them. And we're in all of their EVs going forward with our -- that are coming to launch with our CCS products and other steering wheel and heat products. And as we talked about, we're -- the work with GM on the ClimateSense project is pretty advanced. We've been doing this for a couple of years now and we're on Phase 3. And obviously it's something that they're taking very seriously to be that far along. So, we continue to put a lot of resources into GM, pretty excited.

Ryan Brinkman -- JPMorgan -- Analyst

Okay. That's helpful. Thanks. I'm sort of hearing that maybe luxury battery electric vehicles could be a good first place to start with ClimateSense. I wanted to check in also on the 2021 outlook just in the context of the semiconductor shortage issue, which, the guidance looks unchanged versus the preannouncement on February 18 versus other suppliers have kind of been coming in a little bit softer maybe. So you were looking for growth in your markets in the low-teens versus IHS, which is I think looking for plus 13.4%. Just curious if you see your assumption for low-teens, if that's driven by any different view versus IHS? If you're using the IHS numbers? If you see the customers you serve in the regions in which you operate being maybe more or less impacted than the global total?

And then, just given that you do have your own in-house electronics business, which also serves external customers, I don't know to what extent you're purchasing semiconductors in advance, what's scarce or if there's other electrical components maybe that are being impacted also? Just if you have any direct exposure there to difficulty sourcing components or if it's more just the indirect impact of lower customer production? And if you do have any kind of direct exposure, what you're doing to kind of limit that or what risk you might see there?

Phil Eyler -- President and Chief Executive Officer

Yeah. I'll answer your last question first. On the direct side, definitely it's an impact to us. We do source semiconductors for several of our products. That's ICs, microcontrollers and motor drivers are the three most predominant one that we are struggling with. So far, we've been able to get through it with some expedites and a lot of freight. And we seem to be in pretty good shape at the moment, that could change at any time. Just as an example, we're expecting, I think, $3 million in expedited freights in Q1 around that. So, I think that's definitely not been easy. Our team has done a great job. And I give some of our suppliers a lot of credit for helping us to get through it successfully so far.

And then, of course, on the customer end, yeah, I mean, our guidance is based on what we see from customers. The IHS numbers are built in as one factor, but the driver of it is the specific information we get from our customers. And in the releases, obviously with the semiconductor situation, the releases in the next couple of months, certainly through the first half of the year, is what we're watching most closely. And that's where we're kind of deducting a little bit of revenue based on what we see. But I think, from our situation, we're maybe a little bit better than some because the OEMs are really focusing on their higher margin vehicles, their vehicles where they have a higher mix of content -- feature content, which keeps us a little bit more stable on those. Not that we're not seeing impact, but I think that's what's helping us stay just maybe a little bit higher.

Ryan Brinkman -- JPMorgan -- Analyst

Okay. Very helpful. Thank you.

Phil Eyler -- President and Chief Executive Officer

Thank you, Ryan

Operator

[Operator Instructions] Our next question is from Scott Stember with CL King. Please proceed with your question.

Scott Stember -- CL King -- Analyst

Good morning, guys.

Phil Eyler -- President and Chief Executive Officer

Good morning, Scott.

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

Good morning, Scott.

Scott Stember -- CL King -- Analyst

Can you maybe talk about the steering wheel heaters? Obviously this is something in the past that was more of a -- or considered more of a, I don't know, commoditized item, but this seems like this is really starting to really take on some advanced technology. Maybe talk about that and some of the opportunities for additional growth.

Phil Eyler -- President and Chief Executive Officer

Sure. Well, I wouldn't call it a commoditized item at all, I think it's still a luxury feature. In fact, if you look at it from a take rate perspective, it's significantly lower than our CCS and heat take rates, just in general. So we still think there's pretty good opportunities for growth, just in the steering wheel heat side of things.

Now, obviously the movement in the industry toward more ADAS content in vehicles has kind of picked up the need for hands-on detection integration in the steering wheel. So you're going to see that, I think, grow steadily, which is why we focused on integrating a sensor capability into our Stihler heat product. And we're continuing to work on innovations around that. We're really focused on that so that we can provide an efficient solution for our OEMs. Certainly we're very pleased with the growth and we expect that growth to continue going forward. And we're going to continue to invest in making sure that we can add electronics and sensoring and other technologies so our product can stand out of most of competition.

Scott Stember -- CL King -- Analyst

Got it. And just last question on medical. It sounds like you expect growth in 2021, but how should we look at that from first half versus second half of the year, given some of the deferral trends that you guys are seeing?

Phil Eyler -- President and Chief Executive Officer

Yeah. It's a tough space right now, to be honest with you, because of a couple of reasons. One is, of course, the electric procedure reduction overall has a direct effect on our product utilization. And hospitals are struggling a little bit more financially, so capital expenditures are down at hospitals. And then, the third factor is salespeople aren't allowed to go visit hospitals and sell products. So, when we're out there trying to sell our new product like ASTOPAD, which was just approved this year, it is pretty difficult to do that virtually. So, I think those headwinds definitely are going to be steady in the first half. That's my expectation. We hope it picks up a little bit in the second half and we are expecting some growth on the year in medical, assuming that happens in the second half. But I do expect medical won't grow at the same rate as the overall Company. So it's going to lag a little bit this year.

Scott Stember -- CL King -- Analyst

Got it. Thank you.

Phil Eyler -- President and Chief Executive Officer

Thank you, Scott.

Operator

And we have reached the end of the question-and-answer session. And I'll now turn the call over to President and CEO, Phil Eyler, for closing remarks.

Phil Eyler -- President and Chief Executive Officer

All right. Great. Thanks everyone for joining our call today. As I've consistently shared in the past, we remain very focused on operational execution, innovation and cash flow generation. I'm really proud of our team's ability to take swift operating action in light of the pandemic and the fluctuating global automotive production levels. And I'm very proud that we delivered record performance in the second half of 2020. Of course, we expect continued industry headwinds in 2021. That said, the momentum in new awards, along with expanding demand for our new technologies and continued focus on productivity, I believe, position us very well to deliver significant long-term shareholder value.

We appreciate your interest and support and look forward to, as always, keeping you apprised of our progress.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Yijing Brentano -- Senior Vice President, Investor Relations and Global Financial Planning and Analysis

Phil Eyler -- President and Chief Executive Officer

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

Matt Koranda -- ROTH Capital Partners -- Analyst

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Ryan Brinkman -- JPMorgan -- Analyst

Scott Stember -- CL King -- Analyst

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