Gentherm's (THRM) CEO Daniel Coker on Q4 2015 Results - Earnings Call Transcript

| About: Gentherm Incorporated (THRM)

Gentherm Incorporated (NASDAQ:THRM)

Q4 2015 Results Earnings Conference Call

February 19, 2016, 08:30 AM ET

Executives

Michael Mason - Investor Relations

Oscar Marx - Chairman of the Board

Daniel Coker - President and Chief Executive Officer

Barry Steele - Vice President, Treasurer and Chief Financial Officer

Analysts

Steven L. Dyer - Craig-Hallum

Matt Koranda - Roth Capital Partners

Samik Chatterjee - J.P. Morgan

Christopher Van Horn - FBR & Company

Operator

Greetings, and welcome to the Gentherm Inc. 2015 Fourth Quarter and Year-End results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Michael Mason. Thank you. Mr. Mason, you may begin.

Michael Mason

Thanks, Michele. Good morning and thank you for joining us for the Gentherm Incorporated 2015 fourth quarter and year end results conference call. Before we start the call, there are a couple of items I'd like to cover.

In addition to disseminating through PR Newswire this morning's news release announcing Gentherm's results, an e-mail copy of the release was also sent to a number of conference call participants. If you need a copy of the release, you may download a copy from the Gentherm website at gentherm.com. Additionally, a replay of the conference call will be available via a link provided on the Events page of the Investors Relations section of Gentherm's website.

During this call, representatives of the company may make forward-looking statements within the meaning of Federal Securities Laws. These statements reflect current views with respect to future events and financial performance and actual results may materially differ. Please see the company's SEC filings, including the latest 10-K and subsequent reports for discussions of various risks and uncertainties underlying such forward-looking statements.

During the call, the company 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 the company's earnings release.

On the call, we have Mr., Oscar Marx, Chairman of the Board, Mr. Dan Coker, President and Chief Executive Officer; and Mr. Barry Steele, Chief Financial Officer. Management will provide a review of the results, after which there'll be a question-and-answer period.

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

Daniel Coker

Good morning Mike, and good evening everyone for joining us on our fourth quarter and year end 2015 results earnings call. 2015 for us was a very strong year. All of our businesses were operating at very solid performance levels and we're quite pleased with the results and we hope that we'll be able to provide some insight on how we see the years in.

It turned out to be a very good year for us operationally worldwide. We had some very good things happen. We saw continued strength in growth in all of our core businesses, plus the addition of our very new and exciting area for us, battery thermal management and we think that the year turned out to be a very, very solid positive year.

We did have a little bit of a headwind on the revenue line with the strength of the U.S. dollar many of our results when converted back to U.S. dollars have a muted impact. Barry will give you some significant detail on that, but with no financial impact from the FX measures our business grew by about 12% last year in all local currencies. So that achieved many of our basic goals and our results. The bottom line turned out to be a very solid year, making about $95 million at net after tax profit, so that's a very strong result and we're very pleased with how things have turned.

Today, we will continue our normal pattern and we will have Barry provide some significant details about the operations and then we will open the floor for questions.

Mr. Steele, good morning.

Barry Steele

Good morning, Dan. Thank you very much. Thanks everybody for joining us today. Our earnings for the 2015 fourth quarter were $0.78 a share on a fully diluted basis. This represents an increase of $0.23 or 42% over the fourth quarter of 2014. This includes a benefit of $0.20 associated with our previously announced legal settlement benefit relating to our cash related swap instrument. Without this benefit our earnings would have been $0.58 per share. The increase was partly offset by a higher tax rate during the fourth quarter as compared with the prior year I'll talk about in a couple of moments.

The improvements come from our continued product revenue growth and favorable margin performance and in spite of currency translation pressures reducing our revenue growth. As in the recent quarterly periods the strong dollar reduced our revenue performance this time by over $9 million in the fourth quarter or about 5%. Fortunately that same effect helped reduce expenses in foreign currencies so that the impact to our earnings is actually favorable.

Our product revenues for the fourth quarter were $212 million and represented an increase of more than $7 million or just about 3.5%. Again if currency exchange rates were the same as 2014, we would have shown revenue growth of over 8%. This increase is attributable to the continued growth of our automotive products. This quarter our gross margin was 32.6%. This compares to a gross margin percent of 30.4% for the prior year period representing an increase of 2.2% over the prior year.

A number of favorable factors contributed to this increase including a favorable impact coming from the strong dollar. Other benefits included better coverage of fixed costs, but higher product revenue and the shifting mix in products favoring climate control season in particular.

Our operating expenses were $39.1 million during the fourth quarter, which was $1.5 million higher than the prior year period. This increase was mainly due to our equity incentive plan a part of which is accounted for on a mark-to-market basis of Gentherm common stock. That accounted for about $1 million of the $1.5 million the majority of them.

Our fourth quarter adjusted EBITDA was $36.3 million, which was $656,000 higher than that of the prior year period. One item I'd mention is we include realized foreign currency losses and gains in our adjusted EBITDA although we had back unrealized effects of foreign currency. These total a loss of $1 million during 2015 whereas we had a slight gain of $200,000 in the prior year. Without this impact our EBITDA would have actually increased by $1.9 million more or about 5%.

Our fourth quarter effective tax rate was 27%. This compares to a tax rate of 18% for the prior year fourth quarter. This difference is primarily due to unusual benefits reported during the prior year, but it is also due to some changes to our accruals that increased the rate during the current year, including accruals associated with the potential repatriation of our foreign earnings.

We estimate that our normalized tax rate will be 25% to 26% in the coming quarters except for the first quarter which will be affected by the previously announced North American reorganization which will increase our tax expense by about $5 million due to a one time withholding tax payment.

Now turning to the balance sheet, our cash is now totaling $144.5 million, so we're building up our liquidity reserves quite nicely. This increased by %58.8 million from the beginning of the year. Our total debt is $97.7 million now which also increased by $7 million. The increase in our debt is probably due to a new loan in Vietnam which has helped to provide local financing for this new production location. We continue to have over $85 million in available borrowing capacity on our revolving credit line.

That's all I have. Dan?

Daniel Coker

All right, well thank you, Barry. As you have already detailed in comprehensive review of the results, operator we'd like to turn the phones open for questions from our friends in the audience.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your questions.

Steven L. Dyer

Hey good morning Dan, good morning Barry.

Daniel Coker

Good morning, sir.

Steven L. Dyer

10% revenue growth guidance for this year seems appropriately conservative I guess given everything that is going on, obviously you're getting a lot better, North America is still at a very strong level. Can you go kind of below the 10% and bucket a little bit where you think that comes from? In other words is GTE sort of up, down or flat this year, battery thermal management I think that maybe a small contribution at the end of the year, anything from that? May be any color you can kind of give us as to how you get there?

Daniel Coker

Sure, we see continued strength in our core products, the heated, cool, heated ventilated seats are going to continue to do well. We do see continued strength in the basic heated elements as well, although those are converting at a very nice pace to our heat vent business which gets reported as heat vent, but it also includes a heater along with our distribution products.

And you are correct, we don’t see a lot of impact in 2016 for the very new and exciting battery thermal management product category, a new segment for us that really starts to pick up in 2017 and gets rolling in 2018 with several customers already lined up and placing orders. And you also mentioned the bids, we do expect to see some good performance from the bids in 2016 and that will of course most of that will occur in the second half of the year.

But in general, is this going to be a good solid year for us? We see pretty good results. I would disagree with your assessment that Europe is rolly and rosy. It is still a very volatile market. There is a lot of uncertainty there. It is certainly improving over last year. The U.S. market has continued its very strong recovery, but the growth rates here are a little bit softer than they have been as a percentage, but the units are still very strong and that's what we like to watch.

Asia, we expect another good year out of Korea and Japan and China is still in a little bit of flux. So we see a good overall performance for the business in all categories with a couple of new things kicking in providing very good strength for our business. And we of course are preparing for additional future growth by the opening of a new facility in Vietnam and of course our new facility in Macedonia, both should be on line in production. Vietnam is in production now. Macedonia is shipping a very narrow product line and will be at total capacity sometime at mid-year.

We are also taking activities to support North American market with an additional plant in central Mexico. So in general, we think 10% is pretty darn good.

Steven L. Dyer

Yes, okay that's very helpful. You mentioned a lot of those investments this last year obviously with a pretty heavy CapEx year what are you sort of expecting this year on that front?

Barry Steele

It will taper down a bit. We still have continued production going, building going on in Macedonia and some other equipments and things that will come into the Vietnam plant. So we will still have a pretty healthy year for CapEx even not quite what we see this much.

Steven L. Dyer

Okay. And then gross margins continue to be really, really impressive and I know you'll probably talk me down and say not sustainable, but what do you kind of think that the range is, the reasonable range and it seems like the drivers to that primarily being mixed, both in CCS as well as where all the CCS is going, trucks, SUVs, et cetera. I mean is there kind of a new step function up there that you are comfortable with being at sustainable level?

Daniel Coker

Well, we ended last year at, sorry and we were talking about 2015 here, in 2014 we ended the year right at 30% and we had given a target of 30% and we felt like we were achieving those goals. When we achieved the 30% we said our new target was something in the low 30s and I think that the results for 2015 represent that continued long path to achieve our model target gross margins which would be right now in the low 30s.

So I see us being able to achieve and maintain this low 30% range and we're continuing to drive forward. A big push of this has been mix, but cost reductions and cost opportunities have been a big contributor as well. So we believe we have a good plan. We're on that plan, it has been a multiyear plan and we are achieving our goals and we're very happy with telling everyone we're looking forward to hitting something in the low 30% gross profits each of the quarters for 2016.

Steven L. Dyer

Okay, great, thanks. I'll hop back in queue.

Daniel Coker

Okay, thanks Steve.

Operator

Our next question comes from the line of Matt Koranda with Roth Capital Partners. Please proceed with your questions.

Matt Koranda

Good morning guys, thanks for taking the questions.

Daniel Coker

Good morning, thanks for getting up early.

Matt Koranda

I kind of just wanted to continue a further line of questioning that Steve was on there and it seems like one theme that we've seen this earning season in the automotive space has been that maybe there have been some concerns regarding where we are in the automotive cycle in terms of North America there has been a debate over the peak versus plateau, just wondering if then if Dan you could weigh in with your opinion, just given that you interface with a number of majorly OEMs and Tier 1s in the market.

What are you seeing in terms of production schedules and platform launches and does any of that data suggest that there is any sort of peak that we're hitting or are we more at a plateau or just kind of a steady growth rate here?

Daniel Coker

Our opinion in the North American marketplace is kind of based upon as you said conversations and actually looking at what we see the demand curve is looking like. We see the North American market as still being a very, very, strong recovery. I'm not sure if you want to call it a plateau, but we are currently pushing towards 18 million units for the North American marketplace and there are some projects that indicate that it is very possible we'll be getting close to 20 million units.

A big part of that is the hole that the market created for itself in 2008, 2009 and 2010 when the unit volumes shriveled and the age of the fleet in the U.S. went to fairly extraordinary levels. The common age of the U.S. fleet is still an all time record highs. That means that these vehicles are going to need to be replaced over the next three to five years and that shows a good solid steady demand in excess of 17 million and some have said approaching 20 million.

So we're not at all concerned about the North American market having peaked, even if it has reach a plateau, this plateau is going to last for another three or four years. So we're very comfortable with the North American numbers.

Matt Koranda

Got it, that's very helpful. Secondly, I'd just like to cover the batter thermal management opportunity here. I know you guys announced your second contract win several weeks back and it looks like just given the wording in the press release that it may not have been within the OEM, it may have been with the Tier 1 or battery customer. I just wanted to if you could kind of discuss that a little bit more in detail for us and how that new win compares to your first one and sort of how that ramps up relative to the first one as well?

Daniel Coker

Well, all of these relationships with the battery thermal management technology are a collaborative effort between us, sometimes the battery manufacturer, sometimes the electronic subsystems architecture guy and the OEM as well, all are required to be involved in this type of decision. These problems are unique to certain types of packaging that’s required for particularly start-stop and mild hybrid vehicles and we have a very unique solution that put us in a position to be able to address this problem in a very creative way.

So, the wording was slightly different because the relationship was slightly different, not significant, but slightly different. All three or four of the major participants are involved in the earlier projection the OEM took the lead, in the second projection we worked more as a collaborative effort between us, the battery supplier and the systems integrator.

So don’t read too much into our carefully crafted legal language, but the relationships are still based in the OEM and they are part of a collaborative effort between ourselves and the rest of the Tier 1 and Tier 2 partners that satisfy this need.

Matt Koranda

Got it and then maybe you could just cover what else is in the pipeline in terms of that battery thermal management solution and how soon we could see some of that potentially convert into new wins over the coming year?

Daniel Coker

Well, obviously I'm not going to tell you the details about what we're working on, but we do a very strong team. We’re building new capabilities to able to satisfy demand and we are investing in that business segment's future. We see this is as a very exciting opportunity. It’s a very interesting application for thermal electrics and other cooling and heating technologies that we are hoping to introduce. It is a very good business opportunity for us, so we are pursuing that as a big business opportunity.

Matt Koranda

Great. I'll just sneak one more in here in Dan, acquisitions maybe you could just touch on kind of where we are with the appetite for acquisitions? I know you mentioned it was relatively high in the last call and may be you could just touch on what’s in the funnel currently or just opportunities that you may see kind of coming in the first of 2016?

Daniel Coker

Yes, the appetite and the interest in acquiring new technologies and new market segments is very high for us. It is something we've not been coy about. We see our ability to push thermal technologies into new segments as being very, very high and we think a very good opportunity for us. We are constantly searching and reviewing potential targets and candidates and we certainly expect 2016 we’ll see some activity there.

Matt Koranda

Got it. I'll jump back in the queue. Thanks guys.

Operator

Our next question comes from the line of Samik Chatterjee with J.P. Morgan. Please proceed with your question.

Samik Chatterjee

Hi Dan, hi Barry. So I wanted to go back to the discussion about the North American market first and looking at how the consumers are moving into trucks and SUVs just wanted to ask you about what your view is in terms how you are best positioned for that, like what are your take rates on the trucks and the SUVs versus the passenger cars, and how do you sort of, how are you positioned relative to that trend?

Daniel Coker

Oh certainly. Well, obviously with the low gas prices despite the Fed's concern and the rest of the world's concern that low gas prices, low petroleum prices are bad for the global economy, we see the opposite, we see more money in people pockets and we see people being able to afford a different class of car and a lot of Americans are buying large cars, large SUVs and minivans. Those are the types of cars they like, they meet their demands for transportation and with low gas prices people are buying pickups and SUVs.

That means that we have an opportunity in a very strong segment. Many of these pickup trucks and SUVs come with these luxury features like heat and cool seats, heated steering wheels and maybe even heated cool storage boxes in the feature. There are all sorts of luxury features that these people target when they look for a vehicle.

So for us the trends in the U.S. market are actually very positive. The segments we perform well in are really driven by the consumer that is looking for a certain set of the features or kits in his car. So that is where we think we see a better stream. These segments will continue to be strong. Even if petroleum prices turn around a bit, you’re still going to see strong demand for pickups and SUVs and we are going to continue to satisfy those demands.

Samik Chatterjee

Got it, got it and secondly I just wanted to move over to China and I know you came in really on the revenue front where you guided at the end of 3Q, but some of these other suppliers that see some upside from the rebound in the industry in China in 4Q, so maybe just talk about what your customers did relative to the industry in 4Q and are you seeing that same strength flow through into 2016 as well?

Daniel Coker

Well yes, we are very excited about the Chinese market in general, but there is a lot of volatility in the local Chinese business. The people who satisfy the general market in China are the people who are making standard vehicle parts are still seeing a good steady growth. The business itself is growing 8% to 10%.

We tend to focus more on the high-end luxury market and we have been very strong in the German, Japanese, Korean and U.S. transplants [ph] who operate their businesses in China. The vehicles that most of those people supply are the high-end luxury market. So it’s a bit of a mixed bag for us, but we continue to see China as a very strong market opportunity for us and we’re continuing to push our presence there.

Samik Chatterjee

Okay, great. Last one from me just on the operating expenses, I know you guide to it, but directionally how should we think about 2016 relative to 2015, maybe relative to your 10% growth in revenues is that you are guiding for?

Barry Steele

This is Barry. We always are trying to keep our operating expenses under control. At the same time we have new businesses that are basically launching from scratch, such as the battery thermal management. So you will see incremental increases as we continue to develop our capability and round out the team that needs to be in place to be successful in these launches.

Samik Chatterjee

Okay. Good, thanks for taking my question. Thank you.

Barry Steele

Thank you, Samik.

Operator

[Operator Instructions] Our next question comes from the line of Christopher Van Horn with FBR & Company. Please proceed with your question.

Christopher Van Horn

Thanks, good morning. Thanks for taking the call.

Daniel Coker

Good morning.

Barry Steele

Hey.

Christopher Van Horn

Could you give us a sense of and if it’s applicable whether or not the margins benefited from FX at all and what the calculation was?

Barry Steele

They did, they have for quite some time for a few different reasons. We have Mexican Peso for the cost structure, we have Ukraine Hryvnia as per the cost structure, so those currencies weakness has been a benefit for us as we don’t have revenues in those currencies. All-in-all it is probably around 1% benefit to our gross margin.

Christopher Van Horn

Okay, great. And would you be able to split out kind of your exposure to passenger car versus truck versus luxury brands, is that something you guys disclose?

Barry Steele

We don’t actually compute that. Our product is good for each – any of these types of vehicles, so we don’t actually track that ourselves to kind of share with you.

Christopher Van Horn

Okay, okay. Can you give me a sense of the mix of the heated cold or I’m sorry excuse me, heated vent versus active cold for the quarter and I guess along with that how does the pipeline look for those two product categories, is it weighed towards one versus the other?

Daniel Coker

Well right now about half of our business comes in the traditional resistance heated mats. The other half of our business comes in heated cool heat vent and the heat cool heat vents are roughly the same size, they are about 50:50, so about 25%, 25%. The segment we see a lot, well both have been growing very nicely and we expect the heat vent business to continue to grow and maybe even accelerated growth where heat cool is beginning to achieve a very good business position proposition in the higher luxury end markets, but the mid-range vehicles are going to continue to press heat vent and that is going to grow at a faster clip than heat cool will over time.

Christopher Van Horn

Got it, got it. Okay and one more if you don’t mind, where do you think we stand on the penetration of kind of rear climate, rear seating climate controlled products, do you think we’re still in the early innings here or have you seen customers increase their interest or do you think it is abating or plateauing, just any commentary around the penetration there?

Daniel Coker

Sure, well the key customers who are adapting the technology for the rear seats or the mid row seats in SUVs are pretty much the high end luxury market and that is pretty much where that is limited, we are not seeing that trend follow down into the mid-range of entry level vehicles at all. And I would say the penetration is certainly well below 1% of the marketplace and I don’t see a lot of these vehicles adapting the heat cool or heat vent business in a large scale in the rear passenger vehicles. And North America is an example, well over 80% of the drives are single passenger vehicles. So a lot of people don’t want to spend that kind of money for the rear seats and they don’t. So I don’t see that being a big trend and a huge market opportunity for us, although we do see continued interest in activity in the luxury segment.

Christopher Van Horn

Okay. Great, thanks again for taking the call.

Daniel Coker

Thank you sir. Operator?

Operator

[Operator Instructions]

Daniel Coker

Operator, we are also approaching the end of our appointed time. So if we see no further questions let’s go ahead and wind up.

Operator

Okay, great. There are no further questions at this time. I would like to turn the floor back over to Mr. Dan Coker for closing comments.

Daniel Coker

All right, thank you operator and thank you for all your questions. 2015 as I said at the beginning was very good year for Gentherm. We continued to expand our business. We continued to expand our capabilities of being to address our business. We’ve got new facilities going up in all three of our major markets and we believe we are well positioned to take advantage of this good strong market for us in the next three to five years.

We also were seeing extremely good response on some of our technologies including the battery thermal management systems, which did not play very strong in terms of the revenue generation for 2015 and 2016, but are going to be a very big player for us in growth in 2017 and 2018 as Barry has mentioned. We will be investing in those business structures as we ramp up for full production beginning in 2018.

So we’ve got a strong team. We’ve got a strong product. We’ve got strong technologies and we see the future for our business as being very good and well within the models that we have set for ourselves in terms of revenue growth, earnings and the technologies that we see.

So we would like to thank everyone who contributed our success in 2015, all of our associates around the world and all of our vendor partners and even our customers have all contributed to make Gentherm a successful company in 2015 and we thank you all. We’ll see you here in about 90 days to be able to talk about our first quarter results 2016. Thank you all for dialing in.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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