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Executives

Dan Coker - President & CEO

Bud Marx - Chairman

Barry Steele - CFO

Analysts

Rich Hoss - Roth Capital Partners

Steve Dyer - Craig-Hallum

Tyson Bauer - Wealth Monitors Incorporated

Matthew Mishan - KeyBanc

Amerigon Inc. (ARGN) Q1 2010 Earnings Call April 27, 2010 11:30 AM ET

Operator

Welcome to the Amerigon Inc. 2010 First Quarter Results Conference Call on the 27 of April 2010. Throughout today’s recorded presentation all participant will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator Instructions) I would now hand the conference over to Jill Bertotti. Please go ahead.

Jill Bertotti

Good morning and thank you everyone for joining us today for the Amerigon first quarter results conference call. Before we start today’s call there are a few items I would like to cover with you. First, in addition to you disseminating through peer newswire this morning’s news release announcing Amerigon’s results, an email copy of the release was also sent to a number of conference call participants. If any of you need a copy of the news release, you may download a copy from either the Amerigon website, at www.amerigon.com, or the Allen & Caron website, at www.allencaron.com. Additionally, a replay of this conference call will be available via a link provided on the events page of the Investors section of Amerigon’s website.

Finally, I have been asked to make the following statement. Certain matters discussed on this conference call are forward-looking statements that involves risks and uncertainties and actual results may be different. Important factors that could cause the Company’s actual results to differ materially from its expectations on this call are risks that sales may not significantly increase; additional financing, if necessary that may not be available; new competitors may arise; and adverse conditions in the automotive industry may negatively affect its results. The liquidity and trading price of its common stock may be negatively affected by these and other factors. Please also refer to Amerigon’s Securities and Exchange Commission filings and reports, including but not limited to its Form 10-Q for the period ending March 31, 2010 and its Form 10-K for the year ended December 31, 2009.

On the call today from Amerigon we have Dan Coker, President and CEO; Bud Marx, Chairman; and Barry Steele, Chief Financial Officer. Management will provide a review of the results, after which there will be a question-and-answer period.

I would now like to turn the call over to Dan. Good morning, Dan.

Dan Coker

Good morning Jill and thank you very much and thank you to everyone for spending time in your busy day today to hear our little story. We are going to try to stick with the same format we’ve used with moderate success from the past about a brief overview from us and then open it up for questions and answers.

From our view as management we felt like we had a successful quarter. We had record revenues and very good earnings on the bottom line. We had a couple of what I call operational highlights that we would like to mention. We announced during the quarter that we were beginning shipments of CCS systems to our new platform the Ford F-250 heavy duty or super duty pick up truck that new platform began taking deliveries in the first quarter and we are very excited about the future and opportunity of that. And other new platform that will be announced during the year which will give us a foothold for growth in the future. We also secured and closed a deal to purchase the assets of our partners in our ZT Plus venture. This allows us to move forward with confidence that we can make success of our new material venture and that allows us to look into our operational future with a steady hand. We will continue to press forward into the market with new vehicle products. We’ve got a couple of new key products that are coming out in our Asian businesses and that continues to be successful as well as our other operations are now I think back in tune.

The automotive market globally is in the process of recovery. We have seen a good third quarter in 2009, a very good fourth quarter in 2009 and our first quarter of 2010 has run up a pretty good quarter and it looks to us right now like the second quarter is going to be just slightly better than the first. So with those I would say generally positive comments I would like to turn the conversation over to Barry who will give you a little bit more detail on the quarter’s results. Barry.

Barry Steele

Thank you Dan. The first quarter 2010, we had revenue of $24.2 million that was a significant increase over the first quarter of last year about 38%. Last year’s first quarter had revenues of $10.2 million. There also was an increase of about 12% over our fourth quarter revenue which was $21.6 million. The significant increase was primarily related to improving the automotive industry generally, production levels have returned back to may be not normal levels but much, much better levels compared to the first quarter last year.

In the meantime, we’ve also added an number of new programs such as F-250, Dan mentioned as well as several others that were launched in the latter part of 2009. Revenues were significantly up. Our gross margin improved as well over the first quarter of last year but slightly down from our fourth quarter. The reason for the increases are primarily due to lower costs of some of the raw material components, tellurium in particular. We also had an improved mix of products with higher margin programs and we were able to cover our fixed cost better.

The slight decrease from the fourth quarter is primarily related to our mix, which decreased slightly. Research and development activities cost us a net basis of $1.8 million that’s slightly up from the prior year of $1.7 million up $58,000 and up really significantly from the fourth quarter, up $0.5 million, that increase is primarily related to the ZT Plus venture which is now beginning of the month of March, the last month of the quarter is being funded by Amerigon and also due to increased activities surrounding some of the new products that are coming out including the bed and the cup holder.

Our selling, general, administrative expenses were about $2.5 million that increased over the prior year by $311,000, a decrease slightly from the rate that we had in the fourth quarter. The increases from the prior year first quarter are related to some stock options that were issued in the latter part of the first quarter, last year as well as some additional resources being devoted to our marketing activities primarily in South Korea, and some in Europe.

Our earnings per share for the quarter were $0.07 that compares to a loss of $0.40 for the prior year and slightly better than the fourth quarter’s $0.06 per share. I would also like to mention that our cash reserves did increase during the quarter in spite of the approximately $1.5 million we spent to purchase back the deposit shares, that now is a matter of cash. Our cash increased about $728,000.

Now I will turn it back to Dan.

Dan Coker

Okay Gary thank you very much for that report and following our usual tradition we would like to see if we can get Bud Marx on our West Coast office to give us an update on how things are going against technology group. Bud.

Bud Marx

Thank you Dan. Good morning everyone. Well obviously the thing we are focused on right now is the reintegration of ZT Plus into our operations as a fully owned entity. We believe that this is a key strategic asset for us. We believe that we have the world’s best performing power generation material in terms of its efficiency and we expect to be providing usable samples to customers of this material in the second half of this year and then we intend to turn our attention towards the development of high performance eating and cooling material which would be the next step by redirecting our university partners, now that we think we’ve attained the objectives we had in line for power generation material.

There is work to be done still to metalize this material and put it in condition for customers to sample it and agree to its performance and that’s one of the main tasks for us in the next four five months. So I think that’s really the big news we continue to press forward on both automotive and non-automotive applications for our technology. I think we’ve talked about progress. There’s not a lot new to report in that arena this quarter.

Dan Coker

Alright thank you very much Bud for your concise report. Operator, if you would mind we would be delighted to open the phones for any questions we may have from the participants.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question comes from Rich Hoss from Roth Capital Partners. Please go ahead.

Rich Hoss - Roth Capital Partners

First, Barry, BSST spend on a net basis event?

Barry Steele

BSST was about $946,000 for the quarter.

Rich Hoss - Roth Capital Partners

Okay. The payment for ZT, was that fully reflected in the first quarter? I see you have a $1.5 million cash flow associated with that. Is that price, or is there still going to be some costs that are going to float in the second quarter?

Barry Steele

That’s the full end of the transaction. There will be no further requirements for that.

Rick Hoss - Roth Capital Partners

Okay. The marketing initiatives that you just talked about, increasing in the EU, is this related to the seats, or is this related to the waste heat product or both?

Dan Coker

It’s actually related to both in the long run. We are actually kind of organizing ourselves in Europe. A good portion of the increased expense from the first quarter of this year to the first quarter of last year actually occurred in Korea where we’ve added a couple of resources in the Korean market to help us satisfy a very busy couple of customers over there in the Korean market.

Rick Hoss - Roth Capital Partners

Okay. But the near-term, the marketing near-term is more the waste heat versus seats?

Dan Coker

No the marketing efforts near term are working to identify seek potential customers and at the same time we are clarifying and beginning to introduce the concepts of the power generation and other advanced products in all markets actually but we are trying to get ourselves established in Europe as a platform first to deliver seats and then to deliver the advanced technologies.

Rick Hoss - Roth Capital Partners

And then, Dan, how long do you think you can continue to add five to seven platforms a year?

Dan Coker

Well we are scratching the surface of the overall market. We have made I would say reasonable penetration in the up end market of the heating cool, heat product lines. For the near term it looks like we are going to be capable of doing that continuously for the next probably three years I would put in at least a cautious bet on that.

There continues to be a strong appetite for our product and variations of our product in the upper middle and now we are beginning to see some actual mid market customers come in and show interest the heated and cool seats. But I would say that we have at least several years ahead of us where this type of growth is sustainable.

Rick Hoss - Roth Capital Partners

Okay. So we’re talking about maybe 75 platforms, and then you start to see it tail-off a little bit. But you may see the same sort of trend that we are seeing with the higher tier where you have the migration of front seat only to front seat and back seat?

Dan Coker

Yes and there is another factor that we are kind of pleasantly surprised with that more people are recognizing that being able to deliver thermal energy to the seat services business, changes the way people thought about how you heat and cool the cap. So the HVAC strategy is now beginning to incorporate having independent heating and cooling elements built into seat services to deliver early comfort in early parts of (inaudible).

Rick Hoss - Roth Capital Partners

Okay Dan, last question, what is your outlook for SAR if you have one?

Dan Coker

My outlook for SAR is we are going to be in the ranges that everybody has been talking about. We still see somewhere between 12.5 and 13 million as being our high side. Although Ford did announce this morning with their spectacular first quarter that their adding even more vehicles to the second quarter. So we are encouraged by not just in the US but also by the global trend that the market is beginning to recover as Barry said, it’s not actually back up to its normalized ways in any way. But there will be a steady recovery I think over the next three years, where we will work our way back up to full utilization and full service to the market.

Operator

Thank you. The next question comes from Steve Dyer from Craig Hallum. Please go ahead.

Steve Dyer - Craig-Hallum

Just a question on the R&D line. Obviously that jumped up with ZT Plus. Is that a good number to use, or does it need to go a little bit higher even just given that it was only one month?

Dan Coker

It was only one month. We were the month of March showed the full cost for us to carry the ZT Plus operating expense. Rolling forward in the near term we would obviously be responsible for the full operating expenses during the future quarters. A couple of things we are trying to focus ourselves as much as possible and keep our cost in line as much as possible while achieving our technical goals. And we are also looking for additional funding and partners to help us support the rather significant material efforts that we feel is critical to our long-term success both in power generation and in the low temp applications for heating and cooling applications.

Steve Dyer - Craig-Hallum

Okay. So it kind of sounds like in the near-term it might be a little higher?

Dan Coker

It will be higher in the short-term, yes.

Steve Dyer - Craig-Hallum

Okay. SG&A was a little bit elevated to the relative to sort of the historical $2.1 million run-rate. Was there any one-time sort of issue there or is that kind of the new run-rate as well?

Dan Coker

There are no specific one-time events that I can recall. Barry if you have something you would like to tell us now.

Barry Steele

Yeah I don’t think so. I think about 2.5 may be a little less is probably the correct way.

Steve Dyer - Craig-Hallum

Okay. With respect to the bed, anything more on when that is expected to launch?

Dan Coker

Nothing has been announced.

Steve Dyer - Craig-Hallum

Okay. And then finally, Ford this morning as you alluded to raised their North American production for Q2. Is that sort of already accounted for and embedded in your guidance, or is that additive to you?

Dan Coker

We actually had a little bit of a head notice so heads up on that notice that they gave to the market today but yeah its going to be a good quarter for us. The second quarter is going to be another good quarter.

Operator

Thank you. The next question comes from Jeff (Inaudible) Capital. Please go ahead.

Unidentified Analyst

Just a quick question on gross margin as we think about Q2 and beyond. So the contribution margin sequentially was about 11.5% to gross profit on the incremental sales from Q4 to Q1. Obviously, I assume we should expect a much higher contribution margin going forward. Could you guys just talk about, I know, Dan, you mentioned there was a mix shift that sequentially affected gross margins. Can you maybe just help us think about that as we look into Q2 and maybe also talk about input costs with regard to your personnel?

Dan Coker

Yeah actually as we mentioned in the well actually during all of 2009 during the calamity that was the total financial collapse of the world. We got knocked down on our margins and we turned around and we started working our way back up and as we mentioned in the fourth quarter we had achieved about 29% gross number which we were pleased with but we also warned that we didn’t feel like that was going to be sustainable quarter-over-quarter, the type of improvement that we obtained. And we predicted actually that the first quarter would be slightly less than the 29% number we saw in the fourth quarter and that actually came out a little bit more true than we thought but within a reasonable range. The improvement of our margins are a long hard draw and we have to work very diligently to keep our cost down and find ways to find better efficiencies overtime.

So I think we are very much on track to returning to the 30% gross margin target that we like to maintain in order to make the business highly or efficiently profitable. But in the short-term, there are hiccups that occur. You mentioned raw materials, particularly for us the key raw material is a material called tellurium. It has been bouncing around for the last couple of years, peak to something in the 380 per kilo range, reasonably those ranges have been anywhere from 175 to 200 per kilo and that’s pretty much what we saw again in the first quarter. So with regard to that I think that there seems to be some stabilization of those input costs from us from the outside world.

Unidentified Analyst

So the decline was just mainly mix related? It wasn’t tellurium?

Barry Steele

So to say that the fourth quarter was a little heavy on rich mix in this quarter and that’s what I want to say about our customers about that was a little lean.

Unidentified Analyst

And just looking out maybe throughout the remainder of the year, should we extrapolate this quarter’s ASP or Q4’s ASP?

Barry Steele

Well, the average selling prices driven a lot by content from program to program. So we really predict whether it is going to go up or down, we look after just the overall volume. So, probably this quarter is pretty representative, where we are going for the rest of the year.

Operator

Our next question comes from Tyson Bauer from Wealth Monitors Incorporated.

Tyson Bauer - Wealth Monitors Incorporated

A quick question, in regards to the heated and ventilated seats relative to your heated and cooled seats, are you seeing any short-term impacts or any acceleration of growth in one segment versus the other?

Dan Coker

Well as we’ve just recently introduced this heated and ventilated seats receiving the dramatic expansion in the number of platforms proportionately that are offering that, and again they are mostly focused for us where we thought they would be during the mid-market and entry level vehicles primarily from our Asian customers. So I say that, we are going to see more and more of those types of vehicles coming on board is particularly in that mid-market. This is a new product for us and I believe this is going to grow but we are seeing very good response and still pretty positive for results out of our heated and cooled seats, for the upper middle and upper end markets.

Tyson Bauer - Wealth Monitors Incorporated

Is that part of a mixed situation that we will see in the quarters upcoming, and what impact does that have as that segment continues to grow?

Dan Coker

The impact to us obviously is positive on the revenue line which we are adding new sources of revenue for us in areas where we would not be able to get high powered expensive heating and cool devices installed in moderately priced vehicles. The margin target filled for the heating-cooled and heating-ventilated features virtually the chance you will see better revenue and you will see margins contribute.

Tyson Bauer - Wealth Monitors Incorporated

Is it important to get a significant foothold in that heated-ventilated side because of the ease to switch that over because of the systems to eventually heated and cooled, or do you think the heated and ventilation market pretty much stands alone, and we don’t have an upgrade option in the out years?

Dan Coker

That’s actually a very good point. Most of the current heated and cooled business is new landscape for us where there is either a power availability problem on a very small engine or there is a cost problem on a moderately priced vehicle. We have had our successes though right here describing the Nissan Teana, which is sold in certain market is a upper mid-market car where it has heated and cooled seats and then is sold in some of the developing markets as a mid-priced entry level vehicle, full sized vehicle but still mid-priced. And it offers heated and ventilated seats with a smaller engine.

So I think you are going to see most of the heated and ventilated business will be new space for us in the mid-market and entry level market business. But I think you will also see a few opportunities where some one may step up and our heating and ventilation system with the options upgrade if the vehicle sees an opportunity go for an upscale market.

Tyson Bauer - Wealth Monitors Incorporated

And in regards to your targeted 30% margin, what’s going to play the critical role in getting there? Is it going to be that reduction in raw materials costs, or is it going to be more associated with growing those volumes?

Dan Coker

Obviously volume contribution is significant for us as we kind of claw our way back up to fully operating industries and we’ve got pretty good initiatives ongoing now and we had started really in the second-half of last year and they are continuing throughout 2010. So those are going to be contributing, returning to target of 30%.

Tyson Bauer - Wealth Monitors Incorporated

The only reason I ask is you’ve been able to perform at 30% plus margin at lower unit volumes than previous years. So that’s why I was wondering how important is the volume to actually achieving that as opposed to just maintaining pricing and getting better efficiencies with the raw materials you have?

Dan Coker

When we were much smaller volume business, we did have a smaller basement and now we’ve expanded to kind of targeted sales little bit smaller size company and we do have higher inflection points for our margin. We would like to see the volume come back that’s a big contributor for us.

Tyson Bauer - Wealth Monitors Incorporated

And the last question for me, the second half of the year, any indications at this point, or is it a wait and see game?

Dan Coker

All the indications right now are that there are steady solid gains to recovery in the automotive marketplaces. The general market I think is still cautiously optimistic. There are some big things that have to be swallowed yet by the world’s financial markets, there’s not been a lot done about the housing crisis worldwide. But I think that generally speaking it looks like we are kind of at a steady slow pace of expansion and for the auto industry in particular I think there is going to be a good steady return to normal volume period to gain over a couple of your period but I think you will see good strong rebound for the next couple of years.

Tyson Bauer - Wealth Monitors Incorporated

But Q1 was the base for this year?

Dan Coker

Sorry I didn’t hear.

Tyson Bauer - Wealth Monitors Incorporated

Q1 is the base level of units we should expect this year and continued growth of that?

Dan Coker

We do have, it’s really the economy that continue to do that, kind of filter along as they are. We have good confidence that the future looks pretty good for us. We have new programs coming in this year as well as carry over some last year’s second half.

Operator

The next question comes from Matthew Mishan from KeyBanc.

Matthew Mishan - KeyBanc

As I look through some of your results from years prior, there seems to be a little bit of seasonality with the gross margins, especially from the fourth quarter to the first quarter on a sequential basis. Is there a seasonality there, or is it mix?

Dan Coker

A lot of that I think is mix, there could be some random opportunity there but we don’t really see a seasonality on that, not a predictable one in there.

Matthew Mishan - KeyBanc

Because as I looked, it seems as if there was 100 to 300 basis point move down from the fourth quarter into the first quarter and then a continuous ramp-up throughout the year. Is that not something we can expect in 2010 as well?

Dan Coker

Well certainly our expectation that margins will continue to firm up as we go through the year.

Matthew Mishan - KeyBanc

I think you mentioned over the short-term we are going to see some higher R&D costs. I’m just trying to get a grasp for the amount. If they went up by about $0.5 million or so from $400,000 from the fourth quarter and only maybe about a month or so of that was factored into ZT Plus, is it looking like it’s an extra $0.5 million or $1 million there? Should we be able to do the run rate there for one month to three?

Dan Coker

I think that if you look at it and just kind of guess that the normal operating cost they would be somewhere between $250,000 and $300,000 a month for that operation. We saw somewhere between $750,000 and maybe $800,000 or $900,000 a quarter if we were fully supporting this program with no additional outside sources of support, that would be a good run rate.

Matthew Mishan - KeyBanc

And I guess the first priority is to get up to form a new partnership. But is there also some thought to maybe rationalizing a little bit R&D? Because you said over the short-term, I’m assuming that you mean you are looking for a partnership there. But if a partnership doesn’t develop, is there some rationalization that may occur?

Dan Coker

Yeah, you might imagine that there assuming that we have just now stepped up to take over the full operating cost ourselves. There are some rationalization efforts to be made.

Bud Marx

Just to amplify that a little bit, I think you’ve correctly heard the run rate if you were only s stand-alone run rate. As Dan says we are looking to rationalize our cost in the R&D area. Secondly, we are looking to get additional support particularly from very strong support in the government arena who would like to see thermo electrics and power generation for its benefit to the country sustained. And then thirdly we are presently looking for partners to help us carry this forward.

Matthew Mishan - KeyBanc

Just moving on, the F-250 congratulations, that’s a really nice program. Are we still thinking six to eight relatively new programs or new vehicle launches in the 2010-2011 area?

Dan Coker

Yes, we are.

Matthew Mishan - KeyBanc

Just the last question I had was on tellurium, and I know it’s not the easiest to track. But given that you’ve seen other commodity costs start to move, is your expectation that tellurium moves in is correlated with other commodities and then move in conjunction with them, or is it possible that other commodities, steel, iron and copper all move in tellurium can just stick around with where that is?

Dan Coker

I don’t believe that the tellurium market; it’s a very small niche material. I don’t believe it’s directly connected to all of our materials, or raw materials. But obviously it is effective with general economic activity. We are kind of back strong everybody else know what was coming back strong. There is obvious economic uplift in the pricing get demand curves for this material. But some of the, let’s say pricing movement that we’ve seen in the past two years and particular has been a little bit irrational exuberance to call the famous economist in the US. Some people thought that this thing was going to take out bigger than it is in the solar industry and I think that was a little bit over played because I think generally we have no idea which way the market is going to go, but I would say that generally speaking I would say its going to be, we are hoping for a relative stability as opposed to the better erratic swings we saw in the past 18 months.

Operator

(Operator Instructions)

Dan Coker

Okay operator seeing no great commerce or questions. We will hold for one second maybe take one more question. And then we’ll move on.

I think it appears that we’ve answered all the questions. So operator I think with your permission we’ll go ahead and sum up and close out the call. The first quarter for us was a continuation of something it started basically in the third quarter of ‘09. Sure it’s a pretty good follow-up in the fourth quarter. The first quarter was continuing to support the economic activity that we are seeing. Really now for the last nine months in the automotive industry as we struggle back up from oblivion where the production numbers worldwide completely collapsed.

The numbers that we are talking about now the reference to the SAR I think you heard couple of analyst mention, the 12.5 million is and those numbers are reflected worldwide in each of the major markets proportionately. These are catastrophic numbers in normal times worldwide for the auto industry.

So we believe pretty firmly that over the next three years you will see a return to the normal global production output for vehicles that we serve and that’s going to be somewhat back up $60 million plus range worldwide. So the market that we are associated with today is in a slow or steady recovery mode globally and we have new products coming that will enter in to this and other markets outside of the automotive industry Barry mentioned earlier, the debt program that we have been talking about for a while including very positive and the early indications are that we will have some announcements coming during 2010 on that program as well as our cup holder.

We continue to work and push for the advanced development teams to help us step in to the next major market arenas which are power generation and more advanced solid state heating and cooling systems. So again we think we had a pretty good quarter but we also believe our better days are ahead of us. So we would like to thank all of our suppliers and our partners and our associates worldwide for delivering an excellent quarter for Amerigon and we ask you to all please drop by here in about 90 days and hear our second quarter [turned out]. Thank you very much for calling in and operator I think that will well do it.

Operator

Thank you. This concludes the conference call. Thank you for participating and you may now disconnect.

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