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Gentherm Inc (NASDAQ:THRM)
Q1 2021 Earnings Call
Apr 29, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Gentherm Inc. First Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over that Yijing Brentano, Investor Relations. Please go ahead.

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

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

During this call, we may make forward-looking statements within the meaning of Federal Securities Law s. 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 & Chief Executive Officer

Thank you, Yijing. Good morning, everyone, and thank you for joining us today. I'm pleased with the strong execution of the Gentherm team as we continued our momentum on the topline and delivered solid financial results in the first quarter. This despite significant supply disruption, including semiconductor shortages, port congestions and other inflationary factors.

Excluding the impact of foreign currency translation, we delivered 24% organic revenue growth in automotive year-over-year in the first quarter, outperforming light vehicle production in our key markets by 850 basis points. While light vehicle production declined 15% sequentially from the fourth quarter of 2020 to the first quarter of 2021, reflecting the challenges in the global supply chain. Our automotive revenues remained flat to the fourth quarter, still at company record levels.

In addition, we continued our momentum on automotive awards from the fourth quarter, securing $400 million awards from global OEMs with a strong 90% win rate in the first quarter. On the cost front, our disciplined approach to managing expenses allowed us to further reduce operating expenses from the fourth quarter of 2020. In addition, when compared to where we were two years ago, operating expenses in the first quarter of 2021 were 12% lower than the same period in 2019.

We continue to deliver adjusted EBITDA margin rate in the high teens and generated strong free cash flow, even considering increased capital expenses as we prepare for new launches and invest in new technologies. Matteo will provide more details about our first quarter financial results in a few minutes.

Now turning to the automotive highlights on Slide 4. In the first quarter, we launched our automotive solutions on 10 different vehicles across eight OEMs, including Great Wall, Honda, Hyundai, Nissan, Seltos [Phonetic] and Volkswagen. We continue to see momentum for our CCS product and launched on the Acura MDX, Jeep Grand Cherokee, Kia's Sportage, Seltos, DS9 in China, and the VW CrossBlue and Tiguan.

We continue to make great progress on our ClimateSense. Our software-driven microclimate platform using an algorithm based on thermal physiology. Our development projects are advancing well in Phase 3 with both General Motors and BMW, as well as Phase II with Honda. If you recall, ClimateSense delivered between 50% to 69% energy savings in cold weather testing based on our development project with GM. I am pleased to share that we have seen even greater energy savings in cold weather testing with another OEM.

In addition, we continue to work with our strategic partner [Indecipherable] to enhance our human-based thermal comfort measurement model, which measures the performance of localized heating and cooling solutions. We're in discussions with multiple OEMs to transition to this innovative thermal measurement methodology. 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. This, all while providing best-in-class passenger comfort.

Now on to Slide 5, where you can see that we continued our business and growth momentum from the fourth quarter. In the first quarter, we secured $400 billion in new program awards across 10 different customers. I'm proud of our global team for continuing to win 90% of the opportunities available to us. We won multiple CCS awards, including platform wins with the Hyundai Genesis EQ900, Kia Ka4, Toyota Tacoma, and Volkswagen T-Roc.

We received 10 steering wheel heater awards across eight OEMs, including the Audi A1, Transit City van, Honda CRD, Jeep Grand Wagoneer, Jeep Grand wagon, Rivian R1T and R1S, and Volkswagen Polo, Passat and Tiguan. I'm also very excited to share that we have won significant business award with Volkswagen Group in the quarter. In addition to the CCS and steering wheel heater awards that I already mentioned, we also won seat heater awards for Volkswagen Tiguan and Passat, Skoda Superb, Audi A4, A5, A6, and A7. I'd like to congratulate our global team for growing our business with the Volkswagen Group.

On the battery performance solutions, we continue to make progress in expanding our business, winning multiple air cooling, battery thermal management awards with both Hyundai and Kia. In electronics, we continue to expand our stand-alone electronic control unit business by winning a power seat for electronics award with Shanghai General Motors. As we've discussed previously, Gentherm is very well positioned to capitalize on the tailwinds of EV adoption. During 2020, we won 32 program awards on different EV platforms, which accounted for over 40% of our whole 2020 award dollars.

In the first quarter of 2021, we continue to secure additional award with leading EV manufacturers across North America, Europe and Asia. Consistent with 2020 results, 40% of our first quarter awards were on EV platforms. Gentherm's current and future technologies will play an important role in extending the range of EVs and delighting passengers with thermal comfort.

Now let's turn to Slide 6 for a discussion on our Medical business. The pandemic continued to create challenges for our Medical business with COVID-19 restrictions and cancelled elective procedures. That said, we saw some late quarter recovery in Blanketrol equipment demand in the U.S. and Asia.

If you recall, we received 510(K) clearance from the FDA and added the ASTOPAD patient warming system to our product portfolio in the United States in 2020. We're starting to see strong interest from ambulatory surgery centers for ASTOPAD. We expect to convert to sales in the upcoming quarters. Introduction of ASTOPAD patient warming system is a strong proof point how we're able to leverage technology from our Automotive business to provide advancements in patient temperature management in our Medical business.

To summarize, I'm pleased with the continued strong execution by the Gentherm team despite the headwinds in the global supply chain. We continue to outperform in automotive versus the key markets we serve and achieve record first quarter revenue and adjusted EBITDA. In addition, we secured $400 million of new awards from automakers around the world and we continue to make progress on ClimateSense. While there is still uncertainty in the supply chain, I'm proud of our global team for maintaining the momentum on the topline and delivering strong operating performance, while continuing to expand technology leadership.

With that, I'll turn the call over to Matteo for a little more color on the financial results.

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

Thank you, Phil. And thank you to everyone joining the call today. So let me turn to Slide 7 to focus on the items that most significantly impacted our first quarter result.

The fourth quarter product revenues increased by 26% compared to the same period of last year. And if we adjust for the impact of FX, our overall product revenue increased by 21%. Starting with the Automotive segment, revenue was $279 million, corresponding to a 29% increase compared to the prior year period. Adjusting for foreign currency translation, automotive revenue increased by 24%, driven by higher volumes as a result of new launches and higher take rate as well as the negative impact of COVID-19 in the prior year.

In comparison, according to IHS latest data, light vehicle production for our key markets, North America, Europe, China, Japan and Korea increased by approximately 16% over the prior year quarter. And, as Phil mentioned earlier, we outperformed light vehicle production by 150 basis points.

We saw strength in all the automotive product lines, and more specifically, EPS revenues increased 58% as a result of new launches with Mercedes, the strength of the cell connecting board solution launched on the BMW E, and the terminal electric battery thermal management product with [Indecipherable] on the Jeep Renegade.

Steering wheel heaters revenue increased by 50% compared to the first quarter of last year. As a result of the hands-on detection enabled here in VW, the ramp up of the Audi Q5 and Tesla Model Y. Electronics revenue increased almost 46% due to higher revenue from automotive, including the Memory Seat Module program with Ford as well as RV car. CCS revenues increased 32% to $109 million, the second highest quarter in the company's history. Due to higher volumes and take rate here with Hyundai, Kia, General Motors trucks and SUVs, Mercedes S-Class and several Stellantis models.

Seat heater revenues increased by 19%, primarily due to higher volumes with Mercedes and BMW, and finally Cable revenue increased almost 10% due to higher volumes with Bosch in under two months.

If we move to the Medical segment, let me remind you that last year's first quarter benefited from the extremely strong Blanketrol sales to help in temperature management of COVID-19 patients. And as a result, revenue in the first quarter decreased 25% yearly. In addition, demand from Blanketrol equipment, Hemotherm products and UV Cardio was down this year due to the protracted negative impact of the COVID-19 pandemic on elective surgeries. And we expect both of these trends to continue at least for one more quarter.

If we move to the gross margin, gross margin rate for the first quarter was 30.4%. This compares to 28.9% in the year ago period. The 150 basis point increase was driven by positive effects, primarily due to the appreciation of the Euro compared to the U.S. dollar. Labor productivity at factories and fixed cost leverage due to the higher volume. These were partially offset by the annual customer price reductions, wage inflation and the negative impact from the industrywide supply chain disruptions. These disruptions included semiconductor shortages, value shortages for, poor concessions as well as customer plant shutdowns. We estimate this resulted in approximately $5 million in gross revenue for Gentherm and approximately $3 million and higher cost of goods sold due to higher material costs, increased premium freight and overtime.

Moving to operating expenses, which were $46.9 million in the quarter compared to $47.4 million in the prior year period. The current year first quarter amount included $0.8 million of restructuring charges, and this compares to last year's first quarter when we incurred $3.8 million of restructuring charges. If we adjust for restructuring expenses in both periods, operating expenses were $46.1 million, up from $43.6% in the first quarter of 2020.

The year-over-year increase of approximately 6% was primarily driven by increased stock-based compensation expenses as a result of mark-to-market adjustment and cash-settled stock appreciation rights, as well as higher R&D expenses, partially offset by higher R&D income and reduced travel cost. Adjusted EBITDA of $52 million increased by $19 million or 15% for the prior year period. Additionally, adjusted EBITDA rate of 18% improved 370 basis. Finally, adjusted diluted earnings per share in the quarter was $1.04 per share compared to $0.51 per share in the first quarter of last year. And our effective tax rate in the quarter was 18.7%.

Now moving to the balance sheet on Slide 8. Our cash position at the end of the quarter was $171 million, down from $268 million as of December 31, 2020. A decrease of $97 million in our cash position was the result of $130 million repayment o the quarter, partially offset by free cash flow generation in the first quarter. We generated $30 million in free cash flow in the first quarter of 2021, up from $26 million in the prior year period. The increase was due to higher cash flow from operations issues, partially offset by higher capital expenditures associated with the investment that Phil just discussed.

Net debt decreased sequentially by $33 million and total debt stood at $62 million. So we closed the first quarter in a net cash position as cash on hand exceeded the gross debt. Based on the trailing 12-month consolidated adjusted EBITDA ended March 31st, we had $419 million of remaining availability on our line of credit, up from $289 million at the end of 2020.

Total available liquidity as of March 31st was $590 million, up from of $557 million, again in the quarter ending. I am also pleased to share that given our strong cash flow generation in the last 12 months, we have now repaid all of the $169 million drawdown on the revolving credit facility that occurred in the first quarter of last year as as result of the COVID pandemic.

Now let me turn to Slide 9 for 2021 guidance. So let me start by saying that we continue to see significant uncertainties due to the global supply chain challenges that I just discussed. As mentioned earlier, we believe this negatively impacted our revenues in the first quarter by approximately $5 million as well as our cost of goods sold by approximately $10 million. in spite of the lingering impact of the supply chain disruption that I just mentioned, we are reiterating the guidance we provided on our last earnings call based on the performance the team delivered in the first quarter. We're still expecting product revenues to be in the range of $1.05 million to $1.13 million, assuming FX remains at the current level in light vehicle production and our relevant market grows at low teens rate in 2021 versus '21.

As we mentioned previously, the midpoint of our guidance implies an organic growth rate of 17%. Additionally, we still expect adjusted EBITDA margin rate will be in the range of 17% to 19%. And capital expenditures to be in the range of $50 million to $60 million.

With that, I'm going to turn the call back to the operator to begin the Q&A session.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question today is coming from Matt Koranda from ROTH Capital Partners. Your line is now live.

Matt Koranda -- ROTH Capital Partners -- Analyst

Hey guys, thanks for taking my questions. Just curious if you can provide a little bit more color on the cadence of revenue growth expectations for the rest of the year here, especially 2Q? I know that some of your customers of sort of talked about losing quite a bit of production given the semiconductor shortage, just wanted to get your take on sort of how we should be thinking about the progression of revenue and margin for the rest of the year? Obviously, we can kind of infer that you're still guiding to some outperformance relative to light vehicle production for the rest of the year here, but would like a little bit more color on that?

Phil Eyler -- President & Chief Executive Officer

Good morning, Matt. I'm going to take this one. So, yeah, as I mentioned, the overall supply chain disruptions that we faced in the first quarter impacted us in gross revenue for the first quarter and when you look at the gross margin rate, about under 120 bps here in the first quarter. So currently, we are seeing a slightly bigger impact in the second quarter, I would say, as we continue to see OEMs, particularly in North America, both all -- FCA, Ford, GM announced plant shutdowns due to the semiconductor shortage. So we've seen a little bit of impact in the second quarter.

I would say, we don't give quarterly guidance. So I think the way I would provided is as you see, we are confirming the guidance that we gave for the year. So I think in our thinking, the guidance that we have today, both on the revenue side and on the profitability reflects the best knowledge that we have around the supply chain. These are options that the industry is facing. I would say there's still a lot of uncertainties. And we are thinking that things will somehow, somewhat get a little better toward the second half, but that's kind of the best of our knowledge, I know.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay, that's fair. And then just any concern that you guys are pulling forward, any revenue in this environment, obviously, with OEMs prioritizing sort of the higher profitability vehicles, higher trim level vehicles that probably improves your take rates quite a bit, I would assume. And so any concern as we sort of normalize as the shortages abates whenever that may pay, that the mix shift back to sort of a more base level vehicle may impact you and then outsize way? [Phonetic]

Phil Eyler -- President & Chief Executive Officer

Yeah, I would say not a huge amount. We are watching a couple of customers where the take rate seem a little bit high. But we are fortunate that the vehicles where we have the highest penetration has been the vehicles that have been the focus on maintaining production. Many of those are running as expected take rates. So we don't expect to see a change there. But built into our guidance is a little bit of softness on a few customers that we think are running a little bit higher.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay, great. And then maybe just wondered if you could talk a little bit Phil about the current bookings environment. It looks like we're back to a pretty solid level with the $400 million, and just -- and you highlighted some nice wins on some pretty high volume platforms. And so just curious if you could talk a little bit about what you're seeing in sort of the bookings environment? Has that changed at all just given, I would assume OEMs are somewhat all hands on some of the production issues. It doesn't seem like it's the case, but I just wanted to see if you could kind of provide a little bit more color on the current bookings environment that you're seeing?

Phil Eyler -- President & Chief Executive Officer

Obviously, we're pleased with the quarter, hope on the overall awards and win rates and the profile we see over the course of the year so far looks strong. So we're pretty excited about the year where we're expecting to get back up to close to the run rate we had in '19, '18 and kind of well '17. So in that ballpark could be higher, could be lower, depends on timing, but it's pretty busy out there right now.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay. And then last one, just on the inventory and gross margin front. Looks like you guys have managed through that really well. Obviously, there's going to be an impact no matter what that you're just in the environment that we're in. But could you just call out just any particular raw materials or any sort of components that you purchase that are in short supply or that are seeing outsized inflationary pressure? I'm just curious how you're managing through that? It looks like higher level, you're managing very well. But anything to call out that we should be sort of noting as we think about gross margins for the remainder of the year?

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

Sure. So let me address the inventory question first and then we'll talk about inflation. So as you look at our balance sheet actually, we increased our inventory by about almost $10 million dollar since the end of the year. And the -- if you also see, for us as being, we have a very strong cash generating company, the balance sheet is extremely strong. Therefore, we are using that to our advantage and also to make sure that we have enough inventory to fulfill customer demand. So if you break down this increase in inventory, really half is driven by the -- to make sure that we can mitigate some of the pressures due to the port congestions [Indecipherable] on the West Coast in another half is to make sure that we have enough, and it's all mix in semiconductors and we can fulfill the customer demand, so that the passion along the inventory and the strategy that we have been using. So really leveraging this time for the balance sheet to our advantage and the customer's advantage.

On the inflationary side, the basic raw material that we consume Matt is copper. We don't buy copper per se, but we buy semi-finished product like harness wire, heating wire, magnet wire is all that's copper. So we are, obviously, facing the inflationary pressure that copper has. About 40% is the pass-through and then the rest is -- we are working selectively with some customers on on price increases to try to mitigate this pressure. But to your point, I think the team has done a fabulous job in continuing to deliver a strong gross margin rate performance despite the supply chain disruptions that you talked about.

Matt Koranda -- ROTH Capital Partners -- Analyst

Okay, very helpful. Thank you, Matteo. And thanks, Phil. And I'll jump back in queue here.

Phil Eyler -- President & Chief Executive Officer

Thank you, Matt.

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

Thanks, Matt.

Operator

Thank you. Our next question today is coming from Ryan Sigdahl from Craig-Hallum Capital Group. Your line is now live.

Ryan Sigdahl -- Craig-Hallum -- Analyst

Great. Good morning, guys, and thanks for taking my question. Curious on, as you're 10 nameplate launches in Q1 was quite a bit lower than the 20 to 40-ish per quarter cadence looking back over the last couple of years. Just curious why the deceleration there?

Phil Eyler -- President & Chief Executive Officer

[Technical Issues] vehicle launches.

Ryan Sigdahl -- Craig-Hallum -- Analyst

Good. Then when do you think as we talk about the chip supply, supply chains, etc. There are fairly wide expectations out there from companies. So I guess curious what are you guys thinking, and do you expect those challenges to persist into 2022?

Phil Eyler -- President & Chief Executive Officer

Yeah, and we've taken from Brazil. We have two data point. One is, of course, our semiconductors that we purchased from select suppliers, so we certainly are in the deep as we can get with those suppliers and using that intelligence to forecast as best we can, but probably even bigger will be the impact to our customers and looking at the releases that we're getting from customers and the feedback we're getting from customers on top of that the public information that they're sharing with everyone, we look at all those elements and calculate our best estimates out there. So we feel like we've done the best we can with the information at hand to see the change relatively quickly. But if you listen to all of those data points, that those points are some kind of relief coming in sometime in the second half of the year. But we also believe that in general the problem will persist at some level, probably into next year. So it's going to be a challenge as Matteo pointed -- there is continued uncertainty. We'll have to watch it real closely. We built into the best knowledge we have into our forecast.

Ryan Sigdahl -- Craig-Hallum -- Analyst

And then two on EVs. I guess I don't know if you've ever quantified it or if you can, but any idea what type of market share you have on EVs from your cell connecting battery performance solutions? And then secondly on ClimateSense, any update here on the third development project with GM and BMW? It's the same update I believe you had last quarter. So I guess curious if there is a timeline for that phase of development? And then any update specifically on those two OEMs kind over the last few months within that development program?

Phil Eyler -- President & Chief Executive Officer

Sure. Our CCB is the cell connecting board, pretty low market share right now and that's because most CCBs have already been launched before we developed our -- what we consider very innovative competitive products. So that will have to make up with new awards going forward. Feedback is great. We have a ton of activity on that, and we think we'll gradually start replacing. What's right now is in the market is primarily buyer base and some this foil chemical etched product, but we believe we have a nice advantage there and we continue to advance that. So pretty excited about the potential growth of cell connecting. That's a big growth engine for us in the future we think.

On ClimateSense side, I would say those -- some of those phases that we announced in the last quarter were relatively early. And so we're just kind of in the middle of those and continue to make good progress. The one data point that I shared is that with one of the old OEMs, they did cold weather testing and it actually showed power consumption performance that will be better than we had seen in other testing.

So lot of good validation of at least the power consumption side of the product and everything continues to move forward. So, we're working hard on it. We've got a ton of resources added. And we know that we initially have to get to a point of an award. And we expect that's in the not too distant future.

Ryan Sigdahl -- Craig-Hallum -- Analyst

Great. Thanks, Phil. Good luck, guys. That's it from me.

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

Thank you, Ryan.

Phil Eyler -- President & Chief Executive Officer

Pleasure, thank you.

Operator

Thank you. We reached end of our question-and-answer session. I'd like to turn the floor back over to Phil for any further or closing comments.

Phil Eyler -- President & Chief Executive Officer

Sure. Thanks everyone for joining the call today. As we 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 agility, flexibility and dedication to deliver on all of our commitments to all of our stakeholders. While we certainly expect continued industry headwinds in the remainder of 2021, our momentum in new awards along with demand for our new technologies, our continued focus on productivity, position us well to deliver significant long-term shareholder value. We appreciate your interest and support and look forward to keeping you apprised of our progress going forward.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

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

Phil Eyler -- President & 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 -- Analyst

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