Gentherm Inc
NASDAQ:THRM
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
40.3
59.18
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Gentherm Inc
You don't have any saved screeners yet
Greetings and welcome to the Gentherm Incorporated Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Yijing Brentano.
Thank you, Yijing. You may begin.
Thank you Lexi, and good morning everyone. Thank you for joining us today. Gentherm's earnings results were released earlier this morning and a copy of the release is available at Gentherm.com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Gentherm's website.
During this call we may make forward-looking statements within the meaning of Federal Securities 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 discussions of various risk factors 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 financials measures to the comparable GAAP financial measures are included in our earnings release.
On the call with me today are Phil Eyler, President and Chief Executive Officer and Matteo Anversa, Chief Financial Officer.
Please note that during their comments, Phil and Matteo will be referring to a presentation deck that we have made available on our website at gentherm.com/events. In addition, they will refer to performance excluding divested assets and assets held for sale as our Core Business, which include Automotive and Gentherm Medical. After their prepared remarks, we will be pleased to take your questions.
Before, I turn the call to Phil, I would like to remind you about certain adjustments related to a reclassification of amortization of customer relationships last year, which Matteo discussed on our 1Q earnings call. These adjustments continued to impact some of our previously reported second quarter 2018 financial items. This resulted in $2.6 million being reclassified from a contra-revenue item into SG&A for the second quarter of 2018, which impacted revenue for Other Automotive as well as revenue for each of our Industrial businesses. As Matteo pointed out last quarter, the annual impact for 2018 was $10.2 million increase in both product revenue and SG&A. As a result, the gross margin rate was also impacted by 70 basis points for full year 2018.
Now I'd like to turn the call over to Phil.
Thank you, Yijing. Good morning everyone and thank you for joining us today. In the second quarter, the challenging macroeconomic and automotive industry conditions continued. Nonetheless, we were still able to deliver strong operating performance in the quarter, despite revenues being below our expectations. First, we were able to significantly outperform in Automotive versus the key markets that we serve. Excluding the impact of foreign currency translation, our 3% decline in organic automotive revenue compares to a decline of 8% in global vehicle production, outpacing the market by 500 basis points.
Year-to-date we secured $660 million in Automotive awards. In addition, our pipeline of potential awards for the balance of 2019 gives us confidence in our continued ability to significantly outperform the automotive market. Also, we saw strong double-digit growth in Medical as a result of growth from many of our existing products such as Blanketrol, as well as the addition of Stihler products to our portfolio.
Next, we continue to make significant progress on our focused growth and margin expansion activities and are seeing positive results in both our gross margin and operating expenses. As I shared with you on last quarter's call, we've turned our Fit-for-Growth cost reduction efforts towards gross margin expansion. On top of this, our teams took rapid operating actions to adjust our cost structure to the declining market. These actions allowed us to achieve a 100-basis point improvement year-over-year in gross margin in the second quarter. There are still significant opportunities ahead as we finalize our plan to improve our manufacturing productivity and rationalize our global footprint.
Additionally, operating expenses declined 14% year-over-year in the quarter. This improvement was achieved even as we increased our R&D investment in future product technologies such as ClimateSense, BTM and Medical. While we work through the current external challenges, we're focused on those factors that we can control to help mitigate the impact of those we can't. We achieved adjusted EBITDA margin rate of over 14% year-to-date in our Core Business. Matteo will provide more details about our financial results in a few minutes.
Finally, we repurchased approximately $25 million of our shares during the second quarter and continued to repurchase more in July pursuant to a 10b5-1 plan. As of this week, we've repurchased a total of $190 million in shares since launching our share repurchase program and we have $110 million left in our authorization. We recognize the value of our shares and we'll continue to evaluate and opportunistically deploy capital towards share repurchases depending on market conditions.
Now let's turn to slide 5. The strong execution by our automotive team continued in the second quarter with launches of systems on 20 different vehicles across 11 OEMs. This included the Kia K3; Land Rover Defender; Subaru Legacy; Ford Ranger; VW Touareg, Golf and Tiguan and FAW Hongqi. We're seeing continued momentum for our CCS product and launched with OEMs such as SAIC, FAW in China and on Kia. During the quarter, we launched our proprietary multi-function intelligent positioning system memory seat module on the Ford Explorer and Lincoln Aviator. This technology uses sophisticated algorithms to control both seat movement and memory position functions as well as the climate features in the seat. In addition, we continue to make progress on ClimateSense, with a new development project with a luxury German automaker and 2 follow-on development projects with a U.S. Automaker.
Now on to slide 6 where you can see that we're continuing to win new business at a pace that bodes well for our promising future. In the second quarter, we secured $260 million in new program awards across 23 different customers, bringing us to $2.2 billion in cumulative new program awards over the past 6 quarters. We won multiple CCS awards including platform wins with the Jeep Compass, BMW 7 Series, Buick Enclave and Chevrolet Traverse.
Let me talk about specifically the BMW 7 series. This award is the company's first-ever CCS Active win with a German luxury OEM. We believe this win supports our view that CCS Active provides truly differentiated occupant comfort and system performance. We also received steering wheel heater awards across 15 OEMs, including the GMC Sierra, Chevy Silverado, Volkswagen ID Lounge, Jeep Grand Cherokee and Grand Wagoneer, the Opel Adam X and a leading North American electric vehicle company.
On the Battery Thermal Management front, we continue to make progress in expanding our business, winning an air cooling award with a plug-in hybrid SGM Buick GL8 in China. As we announced on our last earnings call, the addition of battery heating to our portfolio of thermoelectric and air cooling BTM technologies positions us well to achieve our growth aspirations for this product portfolio.
I'm also very excited to share that we recently added a new customer to our portfolio. We won an award with Renault, for seat heaters and electronic control units on multiple vehicles. These programs will start shipping in 2021. Our customer business unit leaders are making significant contributions to existing customers and landing new important OEMs.
Now let's turn to slide 7 for a discussion on our Industrial segment. In Gentherm Medical, revenue in the second quarter grew almost 31% over the second quarter of 2018 and more than 20% over the first quarter of 2019. A significant portion of this growth was a result of our Stihler acquisition which delivered ahead of our expectations. Stihler's resistive warming products are further strengthening our operating room patient normothermia portfolio. Additionally, we saw continued strong growth in Blanketrol, our liquid-based patient thermal management solution, particularly in Asia.
We received initial orders for the UV TREO, our new cardiovascular heat/cool system with integrated disinfection technology. This innovative device has allowed us to tap into new segments in Europe and other international markets.
To summarize, the global automotive industry and the macroeconomic environment continues to present challenges. However, I'm very pleased with the team's ability to deliver improved gross margin rate and reduced operating expenses. We continue to take proactive steps to help mitigate the challenges we currently face as we work towards our longer-term objectives of focused growth. I remain proud of the hard work and commitment of the talented global Gentherm team to deliver on our plans.
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 I will start now on slide 8 and focus on the items that most significantly impacted our second-quarter results. So while not shown on slide 8, there is a table in the earnings release which shows the breakdown of segment revenues for your reference. So now for the quarter. Product revenues declined by 8.7% compared to the same period of last year. While we outpaced the market in the Automotive segment, where our revenues declined 5.5%, actually 3% if we exclude the impact of foreign exchange, the Industrial segment declined by more than 40%, primarily due to the disposition of the CSZ Industrial Chambers business.
If we exclude the assets held for sale and the impact of FX, our overall revenue declined by 1.9%. The 3% year-over-year decline in automotive was a result of a significant headwind in the global vehicle production. However, we outperformed our key markets again in the second quarter. According to IHS' latest data, global light vehicle production in the second quarter declined 8% year-over-year and approximately 400 basis points below their mid-April forecast.
Our Automotive business outpaced the market as a result of the continued strength in the CCS product line where revenue was nearly flat year-over-year, excluding the impact of FX, despite the market headwinds. Additionally, our revenue in BTM increased almost 23% compared to the same period of last year, primarily due to the PACE award-winning BTM solution that we discussed during the last quarter.
This revenue increase was offset by a decline in Seat Heaters and Steering Wheel Heaters. Seat Heaters revenue declined by 8%, primarily due to the continued decline in Volkswagen sales in China, as well as our conscious decision to walk away from lower margin business. Steering Wheel Heater sales declined almost 9% due to the lower vehicle production at FCA. Additionally, Automotive Cables declined 13% due to the continued decrease in orders from a large Tier 1 customer in Germany. And finally, Electronics revenue was down 28%, primarily due to the continued slowdown in the RV industry.
And if we move to our Industrial ... Industrial revenue declined 41% compared to the second quarter of last year. The decline in revenue was primarily due to the absence of revenue from the CSZ Industrial Chambers business, which as you know was sold in February, as well as the lower sales coming from GPT which has been classified as held for sale. Conversely, we saw continued strength in Medical, where revenues increased almost 31% year-over-year due to the Stihler acquisition that we closed in the first quarter, as well as the higher Blanketrol sales. If we exclude the Stihler products acquisition, Medical revenues increased almost 9% compared to the second quarter of last year.
If we move to the gross margin ... gross margin for the second quarter was 29.9% which is a increase of a 100 basis points compared to the year- ago quarter. And our gross margin also improved sequentially by 70 basis points compared to the first quarter of 2019. The year-over-year increase in the gross margin was primarily driven by supplier cost reductions, which more than offset the annual customer price decreases in the quarter, as well as higher labor productivity at our factories, lower premium freight and savings coming from our Fit-for-Growth initiatives.
These improvements were partially offset by the negative impact of tariffs, lower margin in BTM associated with the launch phase of our new actively cooled technology program, as well as the negative fixed cost leverage from the lower unit volume and higher wages. Just to add a little more color, the labor productivity in the quarter was achieved by right-sizing our factories to the lower volume. As a reference, manufacturing head count decreased by approximately 12% since the beginning of the year. Additionally, better efficiencies allowed us to minimize premium freight compared to last year, particularly out of our factories in Mexico.
On tariffs, while we were able to mitigate some of the impact as a result of the efforts from our sourcing team, the net negative impact in the quarter was approximately $800,000, which is pretty much in line with what we experienced in the prior quarters. The 70-basis point sequential improvement in gross margin was primarily driven by improved labor efficiencies in our plants, as well as the rapid cost adjustments in response to the lower customer demand.
If we move to operating expenses, operating expenses in the quarter were $52.7 million. Now this amount included $1.2 million of restructuring charges, mostly related to the factory rightsizing that I mentioned earlier. If we adjust for the restructuring charges in both periods and this quarter's acquisition expense, operating expenses were $51.1 million, down from $55.3 million in the second quarter of last year. This year-over-year decline of 8% was primarily driven by the impact of the Fit-for-Growth cost reduction initiatives, as well as the sales of the CSZ Industrial Chambers business, partially offset by higher SG&A in Medical.
Also in the quarter, as we continuously evaluate the fair value of our assets held for sale, we recorded a $9.9 million impairment charge related to GPT. Adjusting for the non-deductible impact of this impairment charge, the effective tax rate in the quarter was 30.5%. For the first 6 months of 2019, adjusting for the $20 million impairment charges related to the GPT business, which we have recorded in the first and the second quarters, the effective tax rate was 28.3%. Finally, our adjusted EPS in the quarter was $0.47 per share compared to $0.58 a share in the second quarter of last year.
Now if we move to slide 9 on the balance sheet, our cash position in the quarter was $36.2 million, including $2.5 million of restricted cash coming from the disposition of CSZ Industrial Chambers. Our cash position decreased sequentially by $5.1 million in the quarter. We generated $33.5 million in cash from operating activities compared to $27 million in the year-ago quarter. And also year-to-date, we generated $40.4 million in cash from operating activities compared to $32.5 million last year. In the quarter, we had approximately $25 million of cash outlay for our share repurchase program and a $15 million cash outlay related to the acquisition of the Stihler business. As a result, our net debt increased by $12 million from $59 million at the end of the first quarter 2019 to $71 million at the end of the second quarter. As of June 30, the total debt stands at approximately $107 million.
Additionally, during the quarter, we also announced that we amended our credit agreement. This amended agreement provides Gentherm with a new $475 million secured revolving credit facility which will provide the Company with ample liquidity in an uncertain macroeconomic environment, as well as lower interest rates. As a result of the new credit facility, our revolving line of credit availability at the end of June stands at approximately $380 million.
If we turn to slide 10, I will walk you through guidance. So based on our second quarter results and the challenging macroeconomic environment, we are reducing our 2019 guidance for revenue. We now expect revenue growth to be flat to up 2% year-over-year for our Core Business, excluding the impact of foreign exchange, compared to our prior guidance of 4% to 6% growth. As a result of our continued progress on cost reduction activities, we are tightening the gross margin range to be between 29% and 30% and maintaining the adjusted EBITDA rate of 14% to 15% in spite of the revenue decline.
With respect to our long-term outlook, as you have seen in recent quarters, there have been significant adverse changes in the automotive industry outlook for future years. Due to this challenging and volatile order environment, as well as the continued macroeconomic uncertainty, we believe it is appropriate to cease providing quarterly updates to our 2021 outlook. We will be completing our annual planning cycle in the upcoming months and we will be prepared to provide an updated longer-term outlook in early 2020. With that said, I will also note that, based on our recent financial performance and the volatile market conditions, we believe that our cumulative free cash flow from 2018 through 2021 will be reduced from our aspirational goal of $550 million which we shared back in June of 2018.
So in summary, while we still have work to do to further improve our margins, we are pleased with the progress that we have made year-to-date. I would say that most importantly, our ability to proactively improve our cost structure has proven beneficial, especially in light of the rapidly changing market conditions.
And with that, I will turn the call back to Lexi to begin the Q&A session.
[Operator Instructions]. Your first question comes from Chris Van Horn with FBR. Please go ahead.
I guess, could we just get into the guidance, maybe some of the puts and takes that you're seeing in terms of reducing the revenue guide and how you get from -- what causes 0% versus 2%? Is that just the cadence of your launches? And then a similar kind of question on the gross margin because obviously that's coming up a little bit on the bottom end. Are you just seeing something from a mix perspective or is Fit-for-Growth just progressing quicker and better than you thought? Thanks.
Good questions, Chris. I'll start with revenue side. Looking back at when we put the guidance together, we originally assumed flat IHS growth for the year and now it's based on the latest IHS market estimates -- it's down 4% compared to last year. So that's obviously an indicator of what's happening in the space. And if you just compare that number versus what we expected at the beginning of the quarter back in mid-April, it's a full 300-basis point degradation for full-year 2019. So, obviously the market is driving the bulk of our downward trend there.
And there are a couple of unique issues that we're dealing within the business. I think you've heard over the last couple of quarters that we continue to struggle in our non-automotive electronics business, especially related to RV and consumer and industrial products. That's something that's been moving kind of in the wrong direction, and certainly our cable business as well. We're heavy weighted on one customer there and that outlook continues to look pretty difficult in the remaining part of the year.
And then finally, a couple of our high-volume cars are experiencing some mix challenges and we referred to this in the last quarter as some roll-off issues, but these are new vehicle transitions that are happening, where -- just to give you an example, the old vehicle that is phasing out, this customer has decided to kind of strip down the options, so it's running at very, very low take rate on CCS. And the new car launching is running as expected, very nice take rates, but when you blend the 2 volumes, our CCS take rate overall on that vehicle is less than we expected. So we've got 2 or 3 of those examples that kind of provide other unique challenges for us, certainly happened in Q2 and we expect that also in Q3 with that.
Getting to your gross margin question, the bulk of our confidence in achieving gross margin is related to our own cost improvements. The mix is a part of that. As we've mentioned, we've rolled off a couple of vehicles that we chose not to go after with some customers due to low pricing, low margin, but most of it is accelerated cost management.
On that note, let me talk quickly about 2021. As you noted, we found it appropriate to delay our update until early 2020, and I think this is prudent given the volatility and uncertainty in the market. Just to give you an indication on the 2021 numbers, compared to the overall vehicle production we were expecting when we put out the 2021 outlook in June of 2018, we've seen a 10% reduction in overall vehicle production in 2021. And that compares to mid-April, the difference was only 5%. So just in one quarter, we've seen a 5-point drop in that situation. So that gives you a little bit of a reason why we found it made a lot of sense to complete our detailed annual planning and then kind of give an update in early 2020. So that said, we're very pleased with our execution in the business. We're steadily outperforming to market and we expect to continue that significant outperformance and we're ahead of plan on gross margin and cost management. So we have good line of sight to achieve our cost, profit and return outlook for 2021.
That makes a lot of sense. I was going to ask you about the ClimateSense bullet that you have on slide 5. You mentioned new and follow-on development projects. Could you give us a little more color there just in terms of is it -- are you progressing quicker than you thought because it seems like every time we talk during the quarter, it seems like more and more ClimateSense opportunities are arising? And then maybe any update on timing of potential awards or the product rollout?
Sure. Yes. First of all, let me talk about the follow-on. There's a couple of follow-on development projects with the US OEM that we announced previously. We completed the first phase of that development project and we had some very specific targets in terms of climate comfort performance and efficiency -- power efficiency gains, especially related to range extension on this EV that we were working on. That was very successful. And as a result, that extended into 2 more very specific development platform. So with that OEM, we're really optimistic and excited about the progress. That's continuing.
The other one with a European OEM is a brand new award and one that's kind of ensued after many months of working with this OEM and discussion. Now we have a very specific project on a very specific platform. So lots of activity there and obviously it's difficult to say when a potential award would come, but we're certainly moving at a very fast pace with that technology.
And then last from me, how do you see the mix of SG&A versus R&D spend progress for 2019? And then if you can look out maybe in the out years, how do you see that mix progressing and where you're kind of putting the dollars in those areas?
Hi, Chris, it's Matteo. I would expect pretty much the mix that we have had for the first 6 months will pretty much stay in line with what you will see for the remainder of the year. So if you take about $200 million, we got about $120 million is SG&A and $80 million is net R&D. And the $80 million includes the R&D income that we receive from our customers. So that's kind of the way I would split it.
[Operator Instructions]. Your next question comes from Gary Prestopino from Barrington Research. Please go ahead.
Phil, I would assume that most of that delta in the IHS data is as a result of China, right? And about 9% of your sales are in China, is that correct?
About 10% of our sales, yeah are in China.
But most of the delta between the expectations that IHS had and then what actually happened I think is a result of China, is that a correct assumption?
It's definitely heavy weight in China. Yeah, we're seeing it in other markets as well but if you look at the number, China is highest. Yeah.
Okay. So going forward now, I mean you're definitely gaining share, got some great new products out there. Obviously, I think there's going to be a tamp down on your expected revenue growth. Can we expect maybe as an offset to that, that you guys would find more expense savings on the Fit-for-Growth initiative as you go through your planning? I mean it's supposed to be about $75 million by 2021. Is there a possibility that you could increase that?
Yes, and as a matter of fact, what I pointed out was that we have good line of sight to achieve our cost, profit and return outlook, even as we face this volatile market. So I'm feeling really good about our ability to manage the costs and also manage our product portfolio so that we're really going after higher margin business.
Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Eyler for closing remarks.
Well, thanks, everyone, for joining our call today. As I've consistently shared in the past, we remained very focused on execution, innovation and cost improvement. Also, we're perfectly positioned to capitalize on the automotive technology trends of the future, including electrification, connectivity and personalization and autonomous driving. I'm extremely proud of our team's ability to take swift operating action in light of the current challenges in the macroeconomic environment and with global automotive production levels. I'm confident that our efforts will allow us to deliver significant shareholder value in the future. We appreciate your interest and support and look forward to keeping you apprised of the progress.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.