Gentherm Inc
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Gentherm Inc
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Greetings, and welcome to the Gentherm Inc. First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Yijing Brentano with Investor Relations and Corporate Communications. Please go ahead.
Thank you, operator, 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 security laws. Statements reflect our current views with respect to future events and financial performance. We undertake no obligation to update them, and actual results may differ materially. Please see Gentherm's SEC filings, including the latest 10-K and subsequent reports, for disclosures 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 remarks, 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.
Thank you, Yijing. Good morning, everyone, and thank you for joining us today. As we're all well aware, the outbreak of the global pandemic has created a significant hardship and challenge worldwide. Our hearts go out to the communities and individuals deeply affected by the COVID-19 pandemic. We would like to express our gratitude for all of those on the front line, including healthcare workers, first responders, and other essential service providers. On the outset of the pandemic, our top priority has remained clear, the health, safety, and support of our global team members and the communities we serve.
Now, let me move to Slide 4. COVID-19 will have severe economic ramifications, the full extent of which are still to be determined. Since launching our focused growth strategy two years ago, we've built a strong foundation from a capital, liquidity, and balance sheet perspective. As no one can perfectly predict the severity or longevity of the virus's has impact on the global economy, we've moved quickly to take additional actions to further improve our financial flexibility and conserve cash. Shown on Slide 4, these include, we drew down an additional $169 million under our revolving credit facility in March. We have re-prioritized capital expenditures and are reducing our planned capital spending, we're actively reducing operating expenses. We're deferring a portion of employee compensation beginning May 1, including a 30% to 40% deferral at the executive level and a 20% deferral for all other salaried employees. We are managing working capital with strong discipline to improve cash flow.
Turning to Slide 5. Let me give you a quick update on the current status of our operations. As of this morning, the majority of our offices and manufacturing facilities outside of North America are open. In North America, we're still waiting for many OEM customers to resume operations, and for government approval to reopen our plants in Mexico. However, our medical operation in Cincinnati is considered essential, and is operating at full capacity. In addition, our facility in Burlington, Canada is primarily supporting the medical business at partial capacity. In Europe, our manufacturing facilities in North Macedonia and Ukraine, as well as our warehouse in Hungary, are partially open to support limited customer orders. In Asia, our plants in China and Vietnam are fully operational, but we are adjusting our capacity based on reduced customer demands. As you can see our Asia based operations were the first to come back online and we have leveraged our learnings from those facilities to identify and implement the appropriate COVID-19 safe work practices and protocols in our other manufacturing facilities around the world. We're actively managing our response to the situation in each of the regions, taking into consideration, government mandates and health and safety guidelines.
As our customers are coming back online, we are ramping up our production where possible in line with demand, always taking into account the health and safety of our team members. We have implemented a global task force to manage our supply chain and to ensure a proper flow of components from our key partners. So far, we are meeting all customer requirements and we're managing this dynamic situation on a real-time basis.
Now on to the first quarter highlights on Slide 6. Despite the challenging environment, we delivered solid financial results for the quarter. First, we were able to continue to outperform in automotive versus the key markets that we serve. Excluding the impact of foreign currency translation, our 9.4% decrease in first quarter organic automotive revenue compares to a decline of 24% in vehicle production for our key markets of North America, Europe, China, Japan and Korea. Adjusting for our lower revenue exposure in China, which represented only 6% of revenue in the quarter, we outperformed actual light vehicle production by approximately 560 basis points. Second, we achieved record quarterly revenue in Medical growing nearly 50% year-over-year or 27% excluding the impact from the acquisition of Stihler. Hospitals across the U.S. and Europe are using our Blanketrol solutions to support temperature management of COVID-19 patients to improve outcomes. Third, we managed our expenses with discipline reducing SG&A expenses by 20% year-over-year, a portion of which was attributable to the divestitures of CSZ industrial chambers and GPT.
Finally, we significantly improved cash flow from operations compared to the first quarter of 2019. We generated nearly $30 million of cash flow from operations in the first quarter of 2020 and over $140 million in the last 12 months. Our business model, which generates substantial cash flow, along with our strong balance sheet with total liquidity at $450 million at quarter end will provide the financial flexibility to help safeguard against the current uncertainties in the marketplace.
Matteo will provide more details on our financial results in a few minutes. Before I get into the details of the quarter, I would like to share that Ford Motor Company announced that they would manufacturer powered air purifying respirators, as part of their response to the COVID-19 pandemic. The core of the respirator design is the electronic controller, which adjusts the power level of an air blower. I'm very proud that Ford has selected Gentherm to be their partner to design and supply the electronic controller in this vital equipment used to protect healthcare workers in the fight against COVID-19.
Now turning to automotive highlights on Slide 7. In the first quarter, we launched our automotive solutions on 39 different vehicles across 19 OEMs, including Ford, Geely, General Motors, Great Wall, Honda, Hyundai, and Kia and Volkswagen.
We continue to see momentum for our CCS product and we launched on the Buick Enclave, Changan, PSA, DS9 Sedan, Hyundai Kona, Hyundai Mighty, Kia Sorento and [indiscernible]. In battery thermal management, we started production of our proprietary battery heating solution for the plug-in hybrid Jeep Renegade through our customer LG Chem in the fourth quarter and we've now launched on the second vehicle, The Jeep Compass.
I'm pleased to share that our manufacturing facilities in Acuna and Celaya, Mexico, and Langfang and Shenzhen, China have each earned the coveted 2019 Supplier Quality Excellence Award from General Motors. This award acknowledges top-performing suppliers that meet a very stringent set of quality performance criteria. I would like to congratulate our global operations team for their hard work and commitment to deliver the highest level of quality and service for our key customer.
On the technology front, we continue to make great progress on ClimateSense development projects with luxury German, Asian and US automakers. In 2019, General Motors and Gentherm jointly presented our development project results at the Society of Automotive Engineers Thermal Management Systems Symposium. The results were subsequently highlighted in a number of industrial publications, including the Green Car Congress, Charged Electric Vehicle Magazine and most recently, in the March edition of Automotive Engineering that highlighted new approaches in thermal management.
Lastly, I'm excited to share that we made a strategic acquisition of Promethean's portfolio of innovative thermal management technologies in the first quarter. Through a combination of in-house innovation and strategic investments like this, we're developing innovative next-generation products engineered to deliver industry-leading comfort with more energy efficiency.
I'd like to thank our global R&D team for their continued efforts and expanding our technology leadership even in this challenging time.
Now on to Slide 8, where you can see that in the first quarter, we secured $120 million in new program awards across five different customers. While the award level is lower than prior quarters given the current environment, we continue to win over 80% of our opportunities. While there are many delayed awards in the first quarter, we are seeing increased activity and more wins in the second quarter.
In the first quarter, we won multiple CCS awards including platform wins with the Ford, Everest, Hyundai Creta, Kia Sportage, as well as the Rivian R1S SUV and R1T truck. Rivian is one of our newest customer. Electric vehicle manufacturers are now leveraging our solutions to enhance comfort while significantly improving energy efficiency and range.
As a further example, I'd like to share that we have just won a strategic CCS award for the Hyundai Genesis EV platform. With the addition of this award Gentherm is now the exclusive provider of all CCS solutions for the genesis brand. I'm also very excited to share that we won our first electronic air cooling award for infotainment and head-up displays with Mercedes for their entire future lineup of battery electric vehicles. This is an important milestone for Gentherm as we continue to expand value propositions to our customers and add [content] to vehicles.
Now let's turn to Slide 9, for a discussion of our medical business. Many of our medical products play a critical role in helping to fight COVID-19. The Medical team is doing an exceptional job in meeting increased customer demand, while keeping our team members safe.
In the first quarter, we delivered record quarterly revenue growing nearly 50% year-over-year or 27% excluding the benefit of the acquisition of Stihler. During the quarter, we recorded a substantial increase in Blanketrol equipment and consumable shipments across the US and Europe to support temperature management of COVID-19 patients, which helps to improve outcomes.
Our liquid-based patient thermal management solution was selected by several large US hospital systems to treat high fevers of COVID-19 patients. These include Northwell Health, New York state's largest healthcare provider; Stony Brook University Hospital, the largest academic medical center on Long Island, University of Rochester Medical Center in New York and Northwestern Memorial Hospital in Chicago, just to name a few.
In addition, we achieved strong growth in our new UV Treo cardiovascular surgical advanced temperature management system. We continue to leverage our expertise in thermal technology and medical device design and production to further develop our product port -- pipeline for continued revenue growth.
To summarize, on Slide 10. Over the past few years, we have steadfastly executed against our strategic plan to focus our growth, divest non-core businesses, realign our cost structure and bring innovative solutions to the market to drive long-term growth. As we are faced with a worldwide pandemic that has significant implications for our customers and our company, I'm extremely proud of the agility, flexibility and dedication that I've witnessed from our more than 11,000 employees globally as we continue to successfully deliver on our commitments to our customers, shareholders and other stakeholders.
We will remain highly focused on strong execution, delivering critical medical equipment to enable hospitals to manage patient temperature needs, empowering Ford Motor to build Air-power -- powered air-purifying respirators and as production lines ramp up again, deliver our unique thermal solutions to OEMs and Tier 1 suppliers worldwide.
With our capability to pivot our resources to meet immediate customer needs, coupled with our strong balance sheet and financial resources, I'm confident in our ability to weather this storm and emerge as an even stronger company in the future.
With that, I'll turn the call over to Matteo for a little more color on the financial results.
Thank you, Phil. And thank you to everyone joining the call today. So let me start on Slide 11 and focus on the items that most significantly impacted our first quarter results. So for the quarter, product revenues declined by 11% compared to the same period of last year. And if we adjust for the impact of FX, our overall product revenue decreased by approximately 10%. Primary driver of the year-over-year decline was the impact of the COVID-19 outbreak, which accounted for approximately $27 million in revenue shortfall in the quarter. If we exclude the impact of COVID-19. Our revenues in the quarter would have been pretty much flat year-over-year.
Our automotive segment was significantly impacted by the COVID-19 outbreak, and revenue declined 11% year over year or down 9%, if we exclude FX. In comparison, according to IHS latest data, light vehicle production declined 24% for our key markets of North America, Europe, China, Japan and Korea. While our automotive business was impacted by COVID-19 in all the product lines, we saw strength in steering wheel heaters where revenue was up 13% year-over-year, due to higher volume at FCA, Ford and VW.
In additionally, revenue in BTM was also up 4% primarily due to the newly launched [M&A] program. These revenue increases were offset by a decline in all the other product lines and specifically CCS revenues decreased by 13%. However, excluding the impact of COVID-19 and FX, CCS revenues would have grown 4%. Seat Heater revenues decreased 13%, but similar to CCS, would have grown 1% excluding the impact of COVID-19 and FX. Automotive cables revenue decreased 7% due to lower orders from Bosch and electronics revenue was down 19% primarily due to the continued decline in volume related to RV and platform cancellations that occurred later in 2019.
If we move to the industrial segment, revenue declined 22% compared to the first quarter of last year and this decline was entirely due to the dispositions of GPT and the CSZ industrial chamber businesses in 2019. Conversely, we saw continuous strength in our medical business where revenues increased more than 48% year-over-year or 27% if we exclude the benefit from the acquisition of Stihler. This increase was primarily due to the high demand of blanketrol as a result of the COVID-19 pandemic.
If we move to gross margin, gross margin for the quarter was 28.9% compared to 29.2% in the year-ago period. 30 basis point decrease was due to the annual customer price reductions and the lower automotive volume due to COVID-19, partially offset by labor productivity at the factories, supplier cost reductions and the positive sales mix as a result of the strength in our medical business.
Gross margin also improved 40 basis points sequentially compared to the fourth quarter of 2019. And this was primarily driven by the positive sales mix and lower manufacturing fixed cost.
If we move to operating expenses, operating expenses were $47.4 million in the quarter and this amount included $3.8 million of restructuring charges related to our footprint realignment initiative that we announced last September as well as other discrete restructuring actions.
Additionally, in last year's first quarter, we incurred approximately $1.1 million of CFO transition cost that did not repeat this quarter. So if we adjust for the restructuring charges in both periods, and for the CFO transition costs, operating expenses were $43.6 million, down from $50.5 million in the first quarter of 2019. The year-over-year decline of more than 13% was primarily driven by the impact of the divestiture of the CSZ industrial chambers and GPT businesses, lower SG&A due to lower headcount, reduced travel costs and lower R&D costs.
Also in the quarter, we incurred in the lower stock compensation cost of approximately $2 million as a result of the mark-to-market revaluation of Stock Appreciation Rights at the end of March. We expect that this one-time benefit will normalize in the upcoming quarters when the equity market stabilizes.
Adjusted EBITDA of $32.7 million decreased $2.5 million or 7% from the prior period. However, adjusted EBITDA rate of 15.3% improved 70 basis points in spite of the lower volume as a result of our continued focus on cost reduction initiatives.
And finally, adjusted EPS in the quarter was $0.51 a share, compared to $0.55 a share in the first quarter of last year. Our tax rate in the quarter was approximately 31%, slightly higher than our expected range of 27% to 29% And the higher tax rate in the quarter was driven by lower-income, low tax jurisdictions due to the impact of COVID-19.
If we move to Slide 12, to the balance sheet, our cash position at the end of the quarter was $225 million including $2.5 million of restricted cash coming from the disposition of the CSZ Industrial chamber business. Our cash position in the quarter increased by 172 million primarily as a result of the $169 million drawdown from the revolver that we executed in the middle of March as a precautionary measure.
As of April 30, we had approximately $230 million in cash, cash equivalents and restricted cash. In the first quarter, we generated $29.5 million in cash from operating activities compared to approximately $7 million in the prior-year quarter. Additionally, we had approximately $9 million of cash outlay for our share repurchase program and $3 million of cash expenditure for the strategic investment in Promethean technology portfolio.
Our net debt decreased by $19 million during the quarter from $30 million at the end of 2019, to $11 million at the end of the first quarter of 2020. And as a result, our net leverage ratio, as of March 31 was 0.08. As of the end of the first quarter, the total debt stood at approximately $234 million, including the cash received from the revolver drawdown. Based on the trailing 12 months consolidated adjusted EBITDA ended on March 31, we had approximately $227 million of remaining availability on our credit line, which we expect will be lower at the end of the second quarter.
Now as you are aware, we withdrew our guidance for 2020 in late March due to the uncertainty of the macroeconomic environment. However, I would like to provide a little bit more detail to what Phil mentioned at the beginning of the call regarding the actions that we have been taking since the COVID-19 outbreak.
So first of all, as soon as the dramatic impact of the outbreak became clear in early March, we suspended our share repurchase program in order to preserve liquidity. We also completed a full review of our operations and decided to re-prioritize and reduce our capital expenditures by 20% to 40% from our original plan of $40 million to $50 million. Moreover, we are reducing our operating expenses by eliminating non-critical discretionary cost, in addition to what we had already accomplished through the first quarter of 2020.
And finally, we are negotiating extended payment terms with our sourcing partners where possible.
So now let me talk about what we're seeing in the second quarter. So based on the latest forecast, IHS is estimating a decline of 44% in vehicle production for our key markets of North America, Europe, China, Japan and Korea.
Our expectation is that OEMs will ramp up production slowly, they will likely use up inventory accumulated prior to the shutdown before resuming significant orders from suppliers. Please also keep in mind that the majority of our product revenues is in North America and in Europe. Therefore, we expect our second quarter automotive revenue to decrease year-over-year, slightly more than the IHS forecast. Given the uncertainty that still exists, we will not provide a full-year 2020 guidance until we can gain more clarity around the future industry production levels and the ramp-up of customer operations. And as a result, we are also postponing to a later date our strategic update meeting for investors, which was originally scheduled on June 9.
So let me summarize. We believe that our improved financial discipline implemented in 2019 around free cash flow generation, our prudent approach to share buybacks, the ample liquidity currently available, combined with the steps that I just mentioned, will allow us to weather the storm.
Our current liquidity position should allow us to sustain a protracted market downturn in line with the April 27 IHS forecast over 21% decline in light vehicle production in our key markets in 2020. So in conclusion, the pandemic has created a very dynamic situation for all of us. We will continue to monitor the market and make further adjustments as appropriate to maintain our financial health and continue to pursue growth opportunities.
With that I will turn the call back to the operator for the Q&A session.
Thank you. At this time, we'll be conducting a Question-and-Answer Session. [Operator Instructions] Your first question comes from the line of Chris Van Horn with B. Riley FBR.
So I guess in your conversations as we're progressing here in April go on, have you got -- we're hearing some product launches slated for 2020 or proceeding as planned or is best to their knowledge and some are being deferred. Have you looked at kind of your product launch schedule and talk to the OEMs and maybe give us an update around that?
Yes, sure, Chris. We're -- obviously we're very closely watching how that plays out. Based on, what we've seen, we're kind of watching the 2020 and 2021 launches extremely closely. Those are the ones that have the most meaningful impact, we've seen 14 vehicle delays over those the course of those couple of year so far.
And that's on a base -- at least the projects we have right now about 150 vehicles, so that kind of puts it in perspective, wouldn't be surprised to see some more flow in, but that's where we're at right now.
Got it, okay. And you've been really, really good at executing despite the challenges here, I'm just curious on the cost side of what you've been able to kind of extract from there? What's permanent versus more temporary? Have you broken that out or could you break that out.
Yes, Matteo will tell you.
So I think, Chris, if you're referring to the actions that we have been taking since the pandemic -- the impact of the pandemic became clear, I would say a couple of things. Fore and foremost, our first priority was to make sure that we had -- we protected the liquidity of the company.
So mid of March, we concurrently drove down 50% of the revolver roughly and then halted the share buybacks. And then, we looked at all our operations starting with CapEx, which is a little bit the easier one, and we identified opportunities to reduce CapEx, as I said in my prepared remarks, by about 20% to 30% compared to the original guidance that we gave in February, and I give you a couple of examples of what we will be doing.
So first of all, we delayed any CapEx expenditure related to capacity expansion until the volume picture becomes clearer. We also delayed all kind of non-critical programs, such as for example building improvements that we have planned throughout the year and some of the non-essential IT programs that will be planned in the year.
So I would expect these delays to be effective in 2020, and then we will reassess if we will postpone this and expenditure will come through in 2021 at a later date, once we have a better clear view of the older volume.
On the operational -- on the OpEx side, similar approach. So we did a bottoms-up, we kind of reduced all the discretionary operating expenses obviously travel, but this includes also training cost, outside services cost. We put very strict controls on hirings. So all these cost, the reduction that I would expect would yield approximately about $10 million of annualized benefits starting from the run rate that we had in the second quarter -- in the first quarter.
I think these cost will -- you will see they will hit in the next 8 to 12 months, mostly back end loaded towards the end of the year. And I would assume this cost to be -- cost reduction to be there to stay, at least until we get a clearer picture on the volume.
Okay, great.
Just on top of that obviously will -- we'll be looking at really closely where production volumes and orders from our customers kind of level out, and obviously we'll be preparing and are preparing adjustments to our overall cost structure to meet that both on the cost of sales side and OpEx side.
Okay, great, thanks for all that color. Maybe on the award side, a positive here, -- The air cooling award with Mercedes, it seems like a new application or a potentially new application. Can you maybe describe a little more detail what that is and what you were able to -- how you able to kind of win that?
Yeah. We have a great relationship as you know with Mercedes and they were having some overheating issues on their design and came to us and asked for some help analyzing thermally the situation, and then that kind of one thing led to another and our product became an obvious choice for them. So it was kind of the engineering help, an assessment along with a really good product that we could that we could craft for them. So, as I pointed out many times our number one goal is to consistently be sitting across the table from advanced engineering at our customers, and I think in this case, it proved to be pretty valuable.
[Operator Instructions] Your next question comes from the line of Ryan Brinkman with JPMorgan.
Just had a follow-up on the previous response, I mean clearly pretty good execution here in the first quarter on decremental margins. Based on the OpEx cost that you talked about in other cost reduction, what kind of decremental margin should we be expecting here like in the second quarter? And then also, how would that progress again in the third and fourth quarter, you know, when the rate of decline starts to improve?
And as a follow-up on the cash flow side, like how should we think about the working capital? You're in the second quarter-- like what the cash burn rate might be through -- through April and through mid-May? And then how do you -- how should we expect that to rewind or unwind later in the quarter and in the second half? Thanks.
So let me start with the first one and talk about the margin. So let me start first with the -- the first quarter impact. So we had as I mentioned in my prepared remarks, about $27 million of net impact in terms in revenue due to the COVID-19, obviously the majority was in automotive, and then we have a little bump to the positive side on the medical side.
And that the decremental margin on this $27 million was about 35% to 40%, roughly in terms of rate. As far as the second quarter is concerned, let me give you -- maybe a little bit of color. I would say, so first of all, the visibility that we have right now on the second quarter is still very, very limited in terms of releases.
But what I can say is starting from where we are seeing that happening on the topline, as we are in the process of closing the month of April, we are seeing the revenue in the month of April to be down year-over- year between 50% and 60%, which not surprisingly, the majority of the decline comes obviously in Europe and in North America, which is a little bit of a different regional mix of the decline compared to what we experienced in the first quarter.
So, back to your question on the margin, I think, what I would expect, the decremental margin to be in the second quarter is to be obviously higher than what we experienced in the first quarter, just for a couple of reasons. First, the magnitude of the revenue decline is significantly higher, we are talking about a quarter with revenue, almost half of what we had over the last year. But also the regional mix, as I mentioned, is different, because it will be more weighted towards North America and Europe.
So that impacts on a negative way, the decremental margin. I would add also a couple of other points, I think, we need to consider as we look at the second quarter. First, we will have to maintain some of our labor force in preparation for the ramp up post COVID-19, which is still pretty unclear as we speak. In some of the locations where we work, we are required by the local government to continue to pay a certain percentage of the salary of the people regardless of the volume.
And then depending on how the ramp-up will play out and how steep the ramp-up will be, I would expect that we will incur some additional cost on premium freight, expediting fees in order to serve our customers. That's also some of the items that we experienced as we ramped up back up Asia, India in the first quarter.
So that's to give you a little bit of color on how we are thinking about the decremental margins in the second quarter.
As far as your second question on cash. So I think we're pretty pleased on where we started the year. I think the -- if you look at the year-over-year CFOA improvement that we experienced in the second quarter, $29 million versus $7 million last year. That really came from working capital improvement. So it's a good start to the year.
In terms of what -- how the working capital will play out in the remaining three quarters. It's all a function honestly on how steep the ramp-up will be, but the way in the amount of that -- in different scenarios multiple scenarios that we have been running in the past few weeks, I would say that -- I would expect working capital in the next three quarters to be a drain to the cash flow for the company, but this all depends on how the ramp-up will be. And the drain will come, most likely between the second and third quarter, depending on the timing of the ramp up.
Got it, that's a super helpful color. Just to sum it up on the decremental margin. So you said that the detrimental margin on the COVID-related impact was 35% to 40%. So the second quarter could be a little bit on the higher end of that, of the 35% to 40% or was that comment more in relation to the overall 1Q decremental margin?
No, no. So I would expect the -- so you've got it correctly. The decremental margin in the first quarter was between 35% and 40%, and I would expect the second quarter decremental margin to be a little higher than that due to the reasons that I outlined.
Your next question comes from the line of Scott Stember with C.L. King.
Could you remind us that before COVID and all the maneuvers that you're taking place right now, the variability of your cost structure and your ability to flex up and down with the end markets?
Yeah, I think that's an area we've taken pretty great pride. If you can follow over the last several quarters, our gross margin performance. It's been consistently improving and even in Q1 under a lot of pressure, we held it really close to kind of the going rate at almost 29%.
So, I think we've got a lot of flexibility to maneuver our factories to adjusted demand. We've got a good model there that helps us do that. Obviously with the trough that we're facing in Q2, as Matteo just pointed out, it's - that's a little bit more difficult to adjust to, but I feel like once we get clarity -- what's going to transpire later in this year, we should be able to adjust pretty quickly to get back to that that run rate.
Got it. And as far as I guess where your facilities are operating at right now, the ones that are open. Is it fair to assume that at least in May that obviously it will improve somewhat as year-end markets start to pick production back up, but is it fair to assume that there is a direct correlation between that and from the comments that you made about, where you expect sales to be particularly the automotive segment for the quarter?
Yes, I mean, obviously we are going by the information that everyone else has which is, Europe is gradually ramping up right now, still very low volume. North America is projected, not confirmed yet 100% but projected to start production May 18. And we're looking at that in May to be a very slow ramp-up. In fact -- keeping in mind too -- we're a Tier 2 supplier. So a lot of our product is in inventory at the Tier 1 supplier's location.
So we expect -- there is going to be a little bit of delay in the ramp-ups. That's our expectation on our side, so which is why we project out a little less and a little more drop in the quarter than maybe IHS, which show. But that said, we're -- all of our plants are ready. We've restructured each of the plants around the COVID or COVID-19 playbook, including safety measures, social distancing within the plant. We've actually had to go through and reconfigure many of our workstations and assembly lines to allow further distancing, which was no easy task, but I'm very proud of the team for preparing it. So as soon as that switch gets turned on, we'll be able to keep up with demand really well, albeit at a maybe slightly less productive manner.
So all that said, I think it's kind of a wait and see. Let's see how the demand plays out.
Got it. And just last question, obviously appreciate the situation you guys are in and obviously it's pretty tough right now particularly with production being down, but can you talk about your ability for the year, do you think to remain free cash positive just given your crystal ball and some of the maneuvers that you can do on the working capital side?
Sure. I think, look -- I think I would say, the work that we have done in the last -- since we launched the focused growth strategy a couple of years ago, around building a strong foundation, strong processes around generating free cash flow and managing working capital are really paying off. I think we entered the year in a much better financial condition than where we were just on year-on-year and a half ago and this is really a credit to all the work that the team has done.
I think today if I look at our days to pay to days to collect, they're in sync, so around mid-60s and I think, we still have some opportunities to work on that and make sure that we collect some of the longstanding [pass queues] that we have, but again as I said before, it's all going to be I think a function on how steep the ramp-up will be. And that will -- how much drain that we'll put into the working capital.
I would also say, I think in terms of inventory right now, we are sitting in a relatively good position. So that also should help. But we are obviously striving to maintain strong momentum in our free cash flow for 2020, but for sure, it will be obviously lower than what we delivered in 2019.
Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Mr. Phil Eyler for closing remarks.
All right, thank you very much. Well, thank you all for joining our call today. I did want to highlight one area where, maybe a question wasn't asked. And that's on the advanced development and innovation front, one of the positive signs I see is that we consistently see our customers maintain focus on advanced technology that we are working on, so ClimateSense as an example, our key partners have continued that effort and prioritize that. As everyone knows OEMs and suppliers are looking at ways to cut costs.
We're encouraged that even in the midst of heavy shutdowns and resource reviews that we're seeing our project still boil up to the critical level. So that's pretty exciting for us and very proud of our team's being flexible and creative to keep those projects moving forward on all of our different businesses.
So with that said, as I've consistently shared in the past, we remain very focused on operational execution, innovation and cost improvement, which has become even more important in today's COVID-19 environment.
I'm extremely proud of our team's agility, flexibility and dedication to deliver on our commitments to all of our stakeholders. Despite these current uncertainties around an economic recovery and what that means for both Gentherm and our customers, our strong liquidity and our continued focus on productivity, position us well to emerge in the current crisis with the ability to deliver significant long-term shareholder value.
We appreciate your interest and your support and look forward to keeping you apprised of our progress. Thank you.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.