Gentherm Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 21, 2024

There are 9 speakers on the call.

Operator

Greetings and welcome to the Gentherm 4th Quarter and Full Year Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Yijing Brentano, Senior Vice President of Strategy, Corporate Development and Investor Relations for Gentherm.

Operator

Thank you. You may begin.

Speaker 1

Thank you, and good morning, everyone, and thanks 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, and actual results may differ materially.

Speaker 1

We undertake no obligation to update them except as required by law. Please see Gentherm's earnings release and its SEC filings, including the latest 10 ks and subsequent reports for discussions of our risk factors and other risks and uncertainties underlying such forward looking statements. During the call, we may discuss non GAAP financial measures as defined by SEC Regulation G, including certain pro form a measures related to the Alfmeier acquisition. Reconciliations of these non GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and investor presentation. On the call with me today are Phil Eiler, President and Chief Executive Officer and Matteo Enversa, Chief Financial Officer.

Speaker 1

During their comments, Phil and Matteo will be referring to a presentation deck that we have made available on our website atjanthem.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.

Speaker 2

Thank you, Yijing. Good morning, everyone, and thank you for joining us today. Let me start with Slide 4 for our 2023 highlights. I'm extremely proud of what the Gentherm team achieved in 2023 despite a continuously challenging operating environment. Demand for our thermal comfort, massage and lumbar solutions continues to accelerate.

Speaker 2

We secured new automotive business awards of $900,000,000 in the 4th quarter, which brings us to $2,600,000,000 in 2023, setting a new quarterly and annual record. Our strong award momentum continued to drive revenue growth. We achieved record revenue for automotive, medical and total company for the full year 2023. In addition, we also achieved record annual revenue for climate controlled seats, seat heaters and steering wheel heaters in 2023. It's worth noting that adjusting for the impact from foreign exchange, the UAW strike and one time recoveries, our core thermal product lines include CCS, seat heaters and steering wheel heaters outperformed the production in our relevant markets by nearly 400 basis points in 2023.

Speaker 2

On the cost front, we continued our disciplined approach to managing operating expenses. We've reduced adjusted operating expense as a percent of revenue from 20% in 2018 when we launched our first Fit for Growth initiative to 16% in 2023. We delivered the highest annual adjusted EBITDA in company history, an increase of more than 30% compared to 2022. And we generated nearly $120,000,000 of cash flow from operations and repurchased over $90,000,000 worth of Gentherm shares. The new business wins, record revenues and key product lines, improved profitability and solid cash flow generation demonstrate strong execution by the Gentherm team.

Speaker 2

Now turning to Slide 5. Let me highlight a few key pillars that drove our record 2 point $6,000,000,000 in new automotive awards in 2023. First, at the top left of the slide, our core thermal products continue to expand globally, particularly in high content product categories such as CCS and hands on detection enabled steering wheel heaters. We won awards in 2023, which spanned across all ranges of vehicles from the likes of BMW, Cadillac, Mazda and Li Auto and BYD in China. 2nd, in pneumatic lumbar and massage, we are growing our market share and winning awards at a rate that is well above our original expectations.

Speaker 2

We have won Conquest Pneumatic Lumbar and Massage Awards with BMW, General Motors, Jaguar Land Rover, Lee Auto, Mercedes Benz, the Lantus, Volkswagen and 1 of the largest global EV manufacturers. These wins confirm the strength of our combined product offering leveraging the Alkmeier acquisition. It's important to point out that a growing number of OEM customers want the combined thermal and pneumatic lumbar product, especially from an independent supplier who integrates with many seating providers. This is one of the unique value propositions that Gentherm offers. Let me remind you of a few key combined awards that we have won since the beginning of 2023.

Speaker 2

We won a highly desirable and contested award with BMW for CCS, heat and pneumatic lumbar and massage for their next generation electric and ICE X Series SUVs, which include the X5, 6 and 7 and the IX5, 6 and 7. We won a combined CCS, seat heat, lumbar and massage full system award with Jaguar Land Rover for their new Jaguar BEVs. We've significantly grown our content with 1 of the largest global EV manufacturers winning steering wheel heat, seat heat, CCS and pneumatic lumbar awards across multiple car lines. Finally, we won 3 CCS awards with Lee Auto on their plug in hybrid L9 and 2 future electric SUVs. In addition, we won 2 combined CCS and pneumatic massage awards from Leaauto on a future electric and plug in hybrid SUV.

Speaker 2

Moving to the bottom left on Slide 5, our proprietary innovations such as ClimateSense and WellSense, which I will elaborate more on the next slide, have helped us to increase content per vehicle. For example, our ongoing ClimateSense development project with Honda has demonstrated significant savings in HVAC energy consumption by combining seat heat, steering wheel heat and interior heat. As a result, Honda awarded Genther multiple EV programs that include both heated interior solutions and our electronic control units. As we shared on the last earnings call, we won our 1st multifunction electronic control unit award from General Motors. And today, I'm pleased to announce one of the most important strategic awards in Gentherm's history.

Speaker 2

In the Q4, we won a breakthrough scalable climate sense software award for nearly all future architecture, General Motors, ICE and electric vehicles. Through this award, Gentherm's proprietary ClimateSense software features will be enabled across all General Motors vehicles equipped with C key climate controlled seats and steering wheel heating. This will allow Gentherm's intelligent software solutions to bring increased comfort control and energy efficiency. Let me summarize my discussion regarding our award momentum by reminding you of a key differentiator for our company. Gentherm is an independent partner that can cooperate with any combination of the 50 plus vehicle OEMs and 30 plus fleet manufacturers globally, including those that are vertically integrated.

Speaker 2

To create truly differentiated solutions, our unique value proposition resonates with customers as demonstrated by our win rate of approximately 80% of our quoted pursuits for thermal and pneumatic solutions in 2023. Turning to Slide 6, let me share a little more on how we're leading the industry in key innovations. Starting with ClimateSense, the world's 1st scalable software driven automotive microclimate solution. It uniquely delivers personalized thermal comfort for each occupant in the car by coordinating localized convective, conductive and radiant heating and cooling to provide optimal comfort while also reducing vehicle energy consumption and extending range. Cognizant software seamlessly integrates with vehicle and HVAC controls to optimize the temperature for passengers individually.

Speaker 2

In addition to ClimateSense, our advanced engineering team continues to integrate our thermal products with lumbar and massage products to create innovative full system solutions. The combination of heating and cooling the body with massage, including our industry's first proprietary pulsating massage, Pulse A, is opening vast opportunities for solutions that promote health and wellness experiences. Also, alertness enhancements and physical recovery in the car. As a result, at the Consumer Electronics Show in January, we unveiled WellSense, a software defined consumer experience that delivers customized in cabin comfort sensations that promote alertness, wellness and well-being. It was great to see some of you at our booth experiencing WellCents firsthand.

Speaker 2

The technology leverages science based physiology research as the foundation for a proprietary software that orchestrates heating, cooling, lumbar and massage comfort effectors. The WellSpence software development kit, which includes over the air feature upgrades can be integrated into any software defined vehicle architecture. Trends are shifting towards consumers using their vehicles as a third living space outside the home or office, offering an additional revenue opportunity for OEMs to address consumer health and wellness needs. Launch of our proprietary WellCents is the next evolution of our software enabled technologies, which positions Gentherm at the nexus of health, wellness, comfort and energy efficiency. Lastly, I'd like to officially introduce our next generation integrated thermal lumbar and massage hardware system, ComfortScale.

Speaker 2

ComfortScale is a modular solution, which combines several distinct thermal and pneumatic components into one integrated system. We believe ComfortScale will drive significant performance improvement for our customers, as well as labor cost and logistics reduction for the OEMs and seat manufacturers. Comfort Scale can be integrated with any foam and with any seat. It's adaptable for all OEMs and all Tier 1 seat manufacturers. It's scalable from an entry level lumbar and seat heat system all the way to a high end pulse A massage and CCS system.

Speaker 2

I'm proud of the Gentherm technology team for bringing to market innovative, differentiated proprietary solutions such as ClimateSense, WellSense and ComfortScale. These innovations are expected to significantly increase Gentherm's content per vehicle and position us to be a strong contributor to software defined vehicles of the future. Now turning to our Q4 automotive highlights on Slide 7. In the Q4, we launched our automotive solutions on 21 different vehicles across 13 OEMs, including BMW, Ford, Geely, Toyota and Volkswagen. We continue to see expanded application of our CCS solutions.

Speaker 2

In the Q4, our CCS solutions were launched on the Ford Ranger, Mazda CX90, Toyota Tacoma and the BEV truck with 1 of the largest global EV manufacturers. I'm pleased to share that Gentherm's ClimateSense was named a finalist for the prestigious 2023 Automotive News PACE Awards, with winners to be announced in April of 2024. In the Q4, Gentherm was also named a winner of the Business Intelligence Group 2024 Big Innovation Award for our ClimateSense technology. And ClimateSense was also recognized as a winner of the 2023 Reuters Drive Honor in the reducing emissions category. These awards are clear recognitions of the impact ClimateSense can deliver through personalized comfort and reduced vehicle energy consumption.

Speaker 2

I'd like to congratulate the Gentherm team for receiving these coveted recognitions. Now on to Slide 8, where as I mentioned, we secured a quarterly record of $900,000,000 of awards in automotive in the 4th quarter. We received 8 steering wheel heater awards across 7 OEMs. Importantly, we won hands on detection enabled steering wheel heater awards with BMW, Geely, General Motors, Lee Auto and Nissan. We won several CCS awards in the quarter.

Speaker 2

Of note, we won the new Hyundai Grandeur, Hyundai QV, the Kia EV5, Nissan X Trail, a midsized crossover for 1 of the largest global EV manufacturers, a new Great Wall plug in hybrid SUV and the new Rivian electric delivery van. I'm also pleased to share that we're growing our business with our largest customer General Motors, winning a highly contested CCS and multifunctionelectronic control unit awards for their next generation truck platform, including the Chevrolet Silverado and GMC Sierra. In addition, as I mentioned earlier, we also won our first ClimateSense Software Award for nearly all future architecture, General Motors, ICE and Electric Vehicles that will enable ClimateSense control thermal seating and steering wheels. This is truly a breakthrough win for Gentherm. It showcases the value our proprietary software provides for our customers.

Speaker 2

With software defined vehicles expected to grow in the global market in the coming years, Gentherm is perfectly positioned to increase hardware and software content to enable greater energy efficiency, personalization and novel comfort and wellness experiences. These wins confirm our strong market leading position in thermal and pneumatic comfort. I'd like to recognize the global Gentherm team for securing a company record of $2,600,000,000 of new automotive business awards in 2023. Now before I discuss the medical highlights, I'd like to provide a brief update on our battery performance solutions. If you recall, Gentherm invented an innovative and proprietary thin foil flexible circuit product line that can be used as either a battery cell heater or a cell connecting device.

Speaker 2

However, in the past year, we have not secured any new cell connecting awards based on the mechanical structuring process. There are 2 fundamental reasons for this. First, OEMs and battery makers are becoming more conservative in both technology selection and pace of production for EVs. Customers are choosing to remain with the current chemical etched and wire based connection solutions despite the environmental and technical benefits of our technology. 2nd, where we have had the opportunity to win, the margin and return profiles would have been well below our company business case requirements.

Speaker 2

Consequently, we have decided to pause our pursuit of self connecting opportunities for the foreseeable future. Although we will continue to pursue select battery heating and cooling opportunities, we expect our BPS revenue to gradually decrease over the next few years. We've reassigned the majority of our BPS resources to work on our unprecedented new business awards in thermal, pneumatic and electronics. Now let's turn to Slide 9 for a discussion of our Medical business. The Medical team delivered record revenue in 2023 with a strong finish in the Q4 growing 15% year over year.

Speaker 2

In the Q4, we added 26 new hospital customers in China, including Tongxi, a top tier hospital. In the U. S, we successfully launched a group buy program with 1 of our key customers, Health Trust Performance Group. We were awarded Blanketrol system upgrades throughout their member hospitals in the 4th quarter. And in Europe, we've converted competitors' convective warming accounts to resistive technology with our ASTO pad as a result of increased demand for more sustainable solutions.

Speaker 2

As we shared on previous earnings calls, we've adapted our go to market model in the medical business to leverage large partnerships, distribution channels and white label opportunities. Consequently, we have reduced the size of our in house sales team to improve our cost structure in medical. And we are laser focused on growing both the top and bottom line in this business. With that, I'll turn the call over to Matteo for a little more color on the financial results and to discuss 2024 guidance.

Speaker 3

Okay. Thank you, Phil. Let me start on Slide 10 and focus on the most significant items in our 4th quarter results. For the quarter, product revenues increased by 7% compared to the same period of last year. If we adjust for the impact of foreign exchange, our overall product revenue increased by 5%.

Speaker 3

Starting with the Automotive segment. Automotive revenues were $354,000,000 reflecting a 7% increase compared to the prior year period. Adjusting for positive foreign currency translation and excluding the negative impact of the UAW strike phasing out of the non automotive electronics business as well as one time benefits from recoveries in both periods, automotive revenues increased 10% against a difficult prior year comparison. Actual light vehicle production in our markets of North America, Europe, China, Japan and Korea increased 13% year over year. It is worth noting that our regional revenue mix is different from the actual production market.

Speaker 3

Adjusting for our regional revenue mix primarily as a result of our smaller percentage of revenue from China, our revenue growth would have outperformed production growth by approximately 150 basis points. We saw growth in the majority of our product lines and more specifically, our steering wheel heaters revenue increased by 22 percent compared to the prior year period due to higher demand of our hands on detection enabled steering wheel heaters with VW and Buick. Automotive cables revenue increased by 15% due to higher volume with Bosch and Samsung. VPS revenue increased 11% due to higher volume with Mercedes, primarily delayed timing from the 3rd quarter as well as higher price recoveries. CCS revenues increased by 6% due to higher volume with Hyundai Kia, BMW and the start of production at 1 of the largest global EV manufacturers.

Speaker 3

CityTeeter revenue increased by 5% due to the ramp up on our electric vehicle for a global EV manufacturer in Europe and the ramp up of the MLA platform with GLR. Lumber and massage revenue increased by 3% due to the start of production on vehicles with BMW, MVW in Europe as well as higher volumes with Ford. Valve systems revenue increased by 1% due to the higher sales in Europe. Electronics revenue decreased 9% due to the phase out of nonautomotive electronics and other automotive revenue decreased by 8% primarily due to the material inflation recoveries received in the prior year period. Turning to the medical business, Medical revenues increased 15%, primarily as a result of higher blanket raw sales in the U.

Speaker 3

S. Moving to adjusted EBITDA. Adjusted EBITDA in the quarter was 49,000,000 dollars up from $41,000,000 in the prior year period. The adjusted EBITDA rate for the 4th quarter was 13.4%, the highest profitability rate in 8 quarters. This compares to 11.9% in the year ago period.

Speaker 3

The 150 basis points year over year improvement was driven by lower freight cost, fixed cost leverage on higher sales volume, productivity at the manufacturing facilities and supplier cost reductions. These were partially offset by wage inflation and lower price recoveries relative to the prior year period. It is worth noting that sequentially, adjusted EBITDA margin rate rose 40 basis points, driven by higher manufacturing productivity and supplier cost reductions. Operating expenses were $64,600,000 in the quarter compared to $66,200,000 in the prior year period. If we adjust for acquisition, integration and restructuring costs as well as non cash stock compensation expenses in both periods, operating expenses were $59,500,000 up from $52,800,000 in the Q4 of last year.

Speaker 3

The year over year increase of approximately $7,000,000 was primarily driven by higher incentive compensation, partially offset by higher R and D reimbursement. Finally, adjusted diluted earnings per share in the quarter were $0.90 a share compared to $0.47 per share in the Q4 of last year. Our effective tax rate for the year, adjusted by the impact of the medical goodwill impairment recorded in the 2nd quarter was approximately 23%. This amount is lower than the guided range of 28% to 32% due to the one time benefit as a result of a tax entity restructuring in Europe that was implemented in the Q4 of the year. Moving to the balance sheet on Slide 11.

Speaker 3

Our cash position at the end of the quarter was approximately $150,000,000 and our net debt stood at 73,000,000 dollars Net debt increased sequentially by $20,000,000 due to the $61,000,000 share repurchases executed in the 4th quarter, partially offset by cash generated from operating activities. Our net leverage ratio was 0.4 at the end of the 4th quarter, well below our target of 1.5 times. Based on the trailing 12 month consolidated adjusted EBITDA ended December 31, we had $278,000,000 of remaining availability in our line of credit and the total available liquidity as of year end 2023 was $428,000,000 Now before I discuss the 2024 guidance, I would like to thank the global Gentherm team for the disciplined financial management in 2023 that allowed us to deliver a 200 basis point improvement in adjusted EBITDA margin rate year over year on a pro form a basis despite significant inflationary headwind. In addition, I'm proud of the team for the strong free cash flow generation, which enabled us to return approximately $90,000,000 to our shareholders through share repurchases. Now let me turn to Slide 12 for our 2024 guidance.

Speaker 3

We are expecting revenue to be in the range of $1,500,000,000 to $1,600,000,000 assuming a euro to U. S. Dollar exchange rate of 1.1 and light vehicle production in our relevant markets decreasing at a low single digit rate in 2024 versus 2023. Adjusting for approximately 50 basis points of FX benefit year over year, the midpoint of our guidance implies an organic revenue growth rate of 5%. It is worth noting that if we exclude BPS, Automotive Cables and Valve Systems, our Climate and Comfort revenues are expected to grow more than 8% excluding foreign exchange.

Speaker 3

Our guidance assumes higher revenue in the second half compared to the first half as a result of the timing of new program launches. Adjusted EBITDA margin rate is expected to improve to 12.5% to 13.5%. Our guidance assumes a 50 basis point headwind associated with the startup cost at our new plants in Morocco and Mexico and product engineering and launch costs associated with our record new awards. Due to the revenue cadence I mentioned earlier and the impact of contractual price downs, which will be offset in the second half of the year by supplier cost improvements and productivity actions, we expect the adjusted EBITDA margin rate in the Q1 to be below our full year guidance range and for the rate to steadily improve throughout the year. As a result of above mentioned items and one time costs associated with our new plans, we expect adjusted EBITDA margin rate in the Q1 of 2024 to be slightly lower than the Q1 of 2023.

Speaker 3

Our full year effective tax rate is expected to be in the range of 26% to 29% and capital expenditures to be in the range of 65,000,000 to 75,000,000 dollars 2024 CapEx will be higher than prior years due to increased investments for the ramp up of new capacity, including the 2 new plants to support our record new awards. Due to our decision to pause the pursuit of BPS cell connecting board opportunities that Phil mentioned earlier, combined with a decline in vehicle production forecast in our largest region of North America, as well as the uncertainty on the timing of ramp up of electric vehicles, we are revising our 2026 outlook that we provided in our strategy discussion in February of last year. We now expect 2026 revenue to be between $1,900,000,000 to $2,000,000,000 And as a result of the reduction in the revenue outlook, adjusted EBITDA margin rate is now expected to be approximately 16% in 2026. We continue to execute on our Fit for Growth initiatives and specifically we are targeting $80,000,000 net savings by 2026 across work streams, including SG and A, sourcing excellence, value engineering, manufacturing footprint, automation and product profitability. In 2023, the team delivered over $10,000,000 of savings and we are currently implementing additional projects that will yield another $45,000,000 of savings by 2026.

Speaker 3

These actions are expected to deliver nearly 70% of our $80,000,000 goal. And in addition, we have a pipeline of projects that positions us to achieve the remaining 30%. As we continue to identify and implement additional Fit for Growth actions, we'll gain momentum on our path to a high teens adjusted EBITDA margin rate over time. And with that, I'll turn the

Speaker 2

call back to Phil for some closing remarks. Thanks, Matteo. Now let me summarize on Slide 13. I want to thank the global Gentherm team for continued strong execution in 2023, delivering record new business wins, record revenues and record adjusted EBITDA. In 2024, our Climate and Comfort business is expected to grow more than 8% with expanding margins.

Speaker 2

In order to accomplish this and our long term growth, we're laser focused on 3 priorities in 2024. 1st, we're confident in our ability to continue the strong momentum of winning new automotive business awards and maintaining our industry leading market share given our large pipeline of opportunities. We will also execute on our unprecedented award backlog to ensure successful ramp up with our key customers. 2nd, as Matteo just mentioned, we will execute on Fit for Growth initiatives to expand margins in the near term and position the company to achieve high teens adjusted EBITDA margin rate over time. And third, we will aggressively bring to market and expand our industry leading and proprietary next generation solutions such as Climate Sense, Well Sense, Pulse A Massage and Comfort Scale.

Speaker 2

Now let me wrap up with Gentherm's unique investment thesis on slide 14. First, we're a pure play leader in thermal and pneumatic comfort. It's also important to highlight the benefit of being independent. We can work with any OEM and any seat manufacturer to create scores of innovative and unique configuration and solve for all of their applications. 2nd, the global automotive market is large, and more importantly, the thermal and pneumatic comfort market is growing at a much faster pace than the automotive market.

Speaker 2

We expect to see a much higher rate of adoption of our products into vehicles, and we're extremely well positioned to capitalize on this opportunity. 3rd, we provide unique, innovative and energy efficient solutions that are key to the vehicles of the future. Our technology is best in class and often a generation ahead of our competition. Timely, our track record of execution against our strategy, along with our robust financial discipline will enable us to deliver high return growth, outpacing the market. Now with that, I'll turn the call back to the operator to start the Q and A.

Operator

Thank you. At this time, we'll be conducting a question and answer Our first question comes from the line of Matt Koranda with Roth MKM. Please proceed with your question.

Speaker 4

Hey, guys. Good morning.

Speaker 5

Good morning, Matt.

Speaker 4

Good morning, Matt. Good morning, Matt. Good morning, guys. So just wanted to start out with the award environment and the $900,000,000 in awards that you reported for the Q4. It looks like a pretty big uptick sequentially and year over year.

Speaker 4

Just wanted to get a sense for how much of that was combined thermal and pneumatic technology in the awards? And then also on the GM award, just wanted to clarify what exactly you mean by the term architecture? Not to dumb it down too much, but do you just mean GM vehicles that incorporate multiple Gentherm products like steering wheel heat and CCS, etcetera? Just a bit more on that software solution and sort of what it does for growth for the next few years would be helpful.

Speaker 2

Thanks, Matt. I'll start with the first question on the awards mix. It's probably better to put it in terms of the full year than just a specific quarter. But as we pointed out, our Pneumatic business is growing at a faster rate than we expected. Consumer pull, especially from our traditional Gentherm, long standing customers to replace other competitors and to grow in those customers has been tremendous.

Speaker 2

And definitely, as I pointed out with some of the examples, we're seeing this gradual shift to combined solutions for multiple reasons, the efficiency of supply and supply chain plus improved performance being the primary drivers. But if you look at the total awards for the year, we would have had a record on the thermal products alone. And then of course, add on top of that the growing pneumatics and combined awards, really tremendous year. And the pipeline is still strong going forward. So shifting to let me shift to the ClimateSense question with General Motors.

Speaker 2

Essentially, what this means is that our ClimateSense software will be embedded in nearly all vehicles of the GM future architecture in the future. And that's really the way they're designing their vehicle around allowing these kinds of features to be more prevalent. So we're really excited about it. It really unlocks the ability to orchestrate any thermal seating or steering wheel application and really fits into our scalable view of how we're implementing ClimateSense. So that really ClimateSense is going to be the fundamental control of these microclimate devices.

Speaker 2

And that will help us to scale the content from, I would say, today's kind of normal CCS all the way up to that full content of ClimateSense over time with that customer. Hope that helps.

Speaker 4

Okay. Yes, very helpful. Thanks, Phil. Then maybe just one for Matteo. The Q4, it looks like you made some adjustments or you provided sort of a hypothetical adjustment for what automotive revenues would have been without the UAW strike and then the non automotive electronics phase out.

Speaker 4

Maybe just wanted you to provide a little bit more color on how you got between sort of the plus 5% to 10% adjusted revenue growth in automotive? And then for the outlook, it does look like you guys are including some decent outperformance versus production, which would be a return to sort of the normal state for Gentherm. Can you just talk about how that phases through the year? Just curious about I think you had mentioned more launches toward the latter half of the year. So any sense you could give us for relative growth rate versus production in the first half versus the second would be great.

Speaker 3

Sure. So maybe let me start with the first one. Actually in the press release, we outlined a little bit with a table. You really have a couple of things happening. The impact of the strike in the quarter was about almost $9,500,000 which was clearly lower than what we had anticipated in the last earnings call.

Speaker 3

And then when we are adding back the nanomotive electronics revenue, which shows about 2,700,000 And then we had about $3,500,000 of one time customer recoveries, meaning that we're not expecting those to repeat and then the foreign currency impact. So when you break it down, this is how you get to the reported number of growth to the about 10% that we allotted in the press release and the comments. On the cadence, I think, was your second question. We are expecting revenue for sure, as I mentioned in my prepared remarks, to be lower in the Q1 and then will continue to grow progressively throughout the year. And so it's difficult to project and pinpoint what the outgrowth will be in every quarter.

Speaker 3

But overall, the reason why the second half revenue will be higher in the first half is primarily driven by timing of new launches, which are coming out in the later part of the year.

Speaker 4

Okay. That makes sense. And then just last one for me and I'll turn it over. But the $26,000,000 guidance change that you guys made looks like a change of about $250,000,000 at the midpoint relative to your earlier guidance that you provided. I think the battery performance solutions growth was supposed to be about $150,000,000 of that.

Speaker 4

So just wanted to understand sort of where are we taking out incremental revenue? It sounded like you guys mentioned just a little more reticence on the part of OEMs on EV production. Any other items to call out in terms of the change there for 20 26?

Speaker 2

Sure, sure. Yes, I mean, clearly the BPS, you called out the right number at the midpoint, was $150,000,000 growth of BPS. We're actually going to see a decline of BPS. So not just a loss of the growth, but actually a decline from now until that time period. So that's going to be the biggest driver of the reduction.

Speaker 2

And then we'll be, as you pointed out, we expect to see a delayed ramp up of some of the EVs that we are targeted on just based on feedback from our customers and what we're seeing in the market expectations. The second the next factor is related to North America vehicle production in 2026. We're actually seeing a decline in a few of our large North America OEMs outlook for 2026 based on the S and P Global outlook, which kind of makes sense to us. So that's going to be a factor as well.

Speaker 4

Okay. Very helpful, guys. I'll jump back in queue. Thank you.

Speaker 3

Thanks, Matt.

Operator

Thank you. Our next question comes from the line of Glenn Chien with Seaport Research Partners. Please proceed with your question.

Speaker 5

Good morning, folks, and congrats on all the wins and the win rate, very encouraging. Just sort of following on Matt's line of questioning, there's been a lot of delays, deferrals in EV launches, production, etcetera. I assume that's already reflected in or there's nothing further to be reflected in the awards that you just booked, the $900,000,000 in this quarter. But is it possible to mention, Phil, what sort of revisions might have to be made to prior bookings, notwithstanding the fact that you're talking about it for 2026, but any way you can dimension for us, for example, what percent was EV related perhaps?

Speaker 2

Well, we don't it's tough for us to break down the percent EV in the awards because some of the awards, fact, many of the awards are cross platform. Just to give you an example, the BMW X Series win that I called out is on both the ICE and the EV. So that's more of a combined number. But I would say, we to the best of our ability, we've built that into our plan for 2024 and then 2016 as well. I mean, we clearly still believe in EVs as a driver for future growth.

Speaker 2

As that becomes more clear in those out years beyond 2026, obviously, we'll start to build that into our outlook.

Speaker 5

Okay, very good. Thanks. And then just a follow-up on the GM architecture question. Can you give us a sense of the timing there? When do these launch?

Speaker 2

It will take a couple of years before that new architecture goes in. Okay.

Speaker 5

Very good. That's it for me. Thank you.

Speaker 2

Thanks, Glenn. Thanks, Glenn.

Operator

Thank you. Our next question comes from the line of Ryan Sigdahl with Craig Hallum Capital Group. Please proceed with your question.

Speaker 6

Hey, good morning guys. Just staying on GM and Climate Sense, is that award or the architecture for Climate Sense, is that included in the Q4 awards? And then also is that include any of that included in the 2020 6 targets given it will take a couple of years?

Speaker 2

Yes, it's included in both.

Speaker 6

Got it. And then on content, you historically have talked about 2x to 4x higher content for ClimateSense. Is that a good rule of thumb for this award?

Speaker 2

I think it scales, given the fact that this software will orchestrate any level of climate seating and steering wheel. It could span all the way from, let's call it, an entry vehicle that has low content all the way up to the higher content. So we'll have to see how that plays out across their portfolio over time. But we definitely are seeing a movement for tire content as we have climate sense control in the car.

Speaker 6

Got it. And then just on the BPS cell connecting product, you guys launched a very large award with BMW just a few quarters ago there. I guess is the assumption that that sunsets after this platform?

Speaker 2

Yes, it is.

Speaker 6

Great. Thanks, guys.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Ryan Brinkman with JPMorgan. Please proceed with your question.

Speaker 7

Hi, great. Thanks for taking my questions. Just another one on the recent win with GM. I understand your share of GM Seat Comfort business will rise, but is there something about this award that also makes you think that maybe the penetration of seat comfort products within GM could materially increase either because the vehicles it's offered in more vehicles, more trim levels or maybe because it's designed right into electrical architecture or maybe because the synergies and economies of scale that both you and GM might realize by commonizing and expanding the offering could afford a lower price point to GM or hopefully the consumer helping to drive the the penetration. Just trying to understand if this is more about increasing your share versus competitors of these products or maybe about driving the penetration of the products, which would you say is the bigger opportunity?

Speaker 2

Yes, I think it's probably some of all those points. I think those are very astute points, but I think the biggest thing to kind of break it down on EVs, we definitely expect to see a higher penetration rate and content on EVs. And certainly, that could apply to any kind of electrified vehicle, by the way, whether it's a full EV or a plug in hybrid. And mainly because obviously you get the comfort benefit, but you also get the range extension and that remains a clear important feature for our customers. And then if you look at the ICEs, I mean, we're really excited that ClimateSense is going to orchestrate consumer comfort because it really becomes seamless.

Speaker 2

In essence, what you're doing is you're focusing on the passenger or driver relative comfort level at that microclimate location and not necessarily the entire cabin. And so this is really starting to pay off for us. So I think that's also going to help drive content and penetration on ICEs as well.

Speaker 7

Okay, thanks. I wanted to ask a couple of questions too around the pause of the BPS cell connecting. Starting with, I remember you highlighting some of the strengths of your product like it was lighter weight and more environmentally friendly than some of the competitor solutions. And there's thought to be this growing need for cell connecting and battery health monitoring. So maybe you could just help us understand what may be changed there in the market.

Speaker 7

I wonder if maybe the solution was incorporated into more comprehensive battery management systems technologies that other suppliers were offering? Or what would you say changed there?

Speaker 2

Well, no, I don't think it has anything to do with the battery management system architecture. That I think is basically the same. To be frank with you, the fundamental shift that we're seeing is related to our competition, especially chemical etch competition. That space is loaded with capacity. And I believe personally that the level of accepted pricing because of that excess capacity is putting us in a very difficult position when it comes to pricing competition.

Speaker 2

And there's no doubt, our consumers have or our customers have confirmed to us that our product provides extremely beneficial sustainability benefits and technical benefits, which is which revolves around the material selection and as you pointed out the lightweight. But frankly, the drive towards lower cost batteries is winning the day and that's KEMETCH is kind of taking it there. So we're in a position that if that pipeline is not going to be in front of us in the near term, makes more sense for us to defer our resources and investments and focus into the areas that are seeing accelerated growth, which is our climate and comfort products, thermal and pneumatic.

Speaker 7

Okay, that's helpful. Thank you. And then the second question there also on VPS is that product, the cell connecting was once thought to maybe pick up the slack left by an earlier product, which was the thermoelectric temperature regulation, not of the big batteries, of course, and you've got air cooling, but of these smaller batteries that might be applicable for 48 volt or micro hybrid type vehicles and that was with some European OEMs or maybe some luxury arms and some of that was rolling off. And that was understood to be, I think, because 48 volt didn't really pan out like the industry one stop. But just seems like in the very recent past here, just kind of in the Q4, there's been some more scuttle about it, including with the Cybertruck having officially launched and Elon Musk saying on X that he was mailing to Jim Burley and Mary Barra a packet with all the technical details and explained why they need to double down as well, which will decrease the cost for everybody.

Speaker 7

And Jim Farley responded positively on Twitter to that saying that maybe they need to push again. And just curious if there's any potential for that market to come back to life or is there some other competitive dynamic going on there too where maybe the thermoelectric regulation isn't as attractive as it was thought or is it just the market smaller? What are your thoughts for 48 volt is going and what you might potentially be able to provide there?

Speaker 2

Yes, I'm not optimistic on the thermoelectric BPS product for 48 volt. And the primary reason is the architecture for 48 volt systems is a little different when you look at what you mentioned on EVs, especially. This is the 48 volt that in the past has been used has been really used as a drivetrain boost. And to do that, it required a lot of utilization of those batteries, creating a lot of heat. That's where our cooling product really became pretty important.

Speaker 2

We do see some opportunities on 48 volts with air cooling and we are winning some business and we called that out in the last couple of quarters with different customers. Hyundai Kia is an example. We're going to be cooling all of their 48 volt batteries using our air cooling devices. So there's some of that built into our outlook. Certainly, the 48 volt VPS, thermoelectric VPS with Mercedes will gradually decline over time.

Speaker 2

It's not going to be a digital decline, but it will steadily decline. So if you net all that out and we do have some built in wins with our MSP based battery heating as well using the same technology as the CCV. But netting all that out, we're seeing a net decline in revenue of BPS through 2026.

Speaker 7

Very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Luke Yunck with Baird. Please proceed with your question.

Speaker 8

Good morning. Apologies for the background noise here. Phil, I was hoping we could start with the ClimateSense award with GM. And what I'm really hoping to tease out is just the software opportunity alone versus scaling in hardware over time. I really just want to better understand the materiality both of the software piece that you announced today and then the underlying compute the controller, understanding that you can add hardware to that over time?

Speaker 2

Yes. Yes. I mean, I wouldn't call it a material revenue driver for us. It is very high margin, but it's more about what it enables than the specific driver of revenue growth for the software. It does open up more opportunity for us on ECUs.

Speaker 2

We've called out, I think 1 or 2 quarters ago, the win on a multifunction ECU for General Motors. So that we think this helps us to drive content on our electronics as well. But we've specifically made our software really a software product that can be used on any hardware. Our goal is to find ways to get ClimateSense embedded to show the value that ClimateSense generates, thus driving much higher content and penetration. And we believe Climate Sense has the power to do that.

Speaker 2

So that's kind of what's behind it. I would look at this as really firming up our long standing strategy of driving software enabled hardware through our portfolio.

Speaker 8

Okay. That's really helpful. Thanks, Phil. And then, appreciate you might not be able to give us too much here because it's pretty recent. So just curious, any feedback following CES on WellCents specifically just in terms of customer engagement, maybe any kind of preliminary engineering engagements or just other indicators of interest in the platform?

Speaker 2

I would say tremendous interest by our customers. It matches exactly what many of our customers have as their vision for differentiating their offerings. And I really want to highlight the impact this product could have on the software defined vehicle architectures. This we believe this provides a feature that consumers will continually pay for after purchase of the vehicle. And I think if you look at a lot of the announced software defined vehicle features that folks have talked about to help them drive revenue, you won't find any that are more compelling than the one we're offering.

Speaker 2

So I think it really is gaining a lot of traction. Obviously, it will take us some time to gather some awards and build that in, but I'm really encouraged by the response.

Speaker 8

Thank you for that. And then my last question probably for Matteo. Just hoping you could bridge the midpoint of the EBITDA range of 13% versus where 2023 shook out. I'm really hoping to unpack just the big buckets in terms of what you expect incrementally from Fit for Growth. You mentioned some supplier cost reductions in the back half of the year.

Speaker 8

And then just underlying leverage and productivity, just how should we bucket those at a high level? Thank you.

Speaker 3

Sure. Look, so the volume is driving about 160 basis points of margin expansion. The Fit for Growth actions, primarily supplier cost reductions, value engineering, so taking cost out of our bill of material is driving about 130 basis points of margin expansion. Productivity at the factory growth is about 90 bps. So these are the positives.

Speaker 3

And then on the negative side, we have we're not expecting to have the same amount of price recoveries from the customers in 2024 as we did in 2023. Actually, the environment on that front is getting more and more challenging. So we are expecting a drag of about 160 basis points on price. And then wage inflation, we continue to see elevated labor inflation in particularly Mexico and in Eastern Europe. So that's about almost 100 basis points.

Speaker 3

And then the investment in the new plants that I mentioned earlier and the R and D to fulfill the awards that we won, it's another 50 basis points drag. So that's at a high level the walk for the year.

Speaker 2

Thank you. That's helpful. I'll leave it there. Sure.

Operator

Thank you. Ladies and gentlemen, this concludes

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Key Takeaways

  • Gentherm set a new record for automotive awards with $900 million in Q4 and $2.6 billion for 2023, driving record revenues across automotive, medical, CCS, seat heaters and steering wheel heaters, and delivering a 30% increase in adjusted EBITDA and nearly $120 million in operating cash flow.
  • The company expanded its thermal and pneumatic portfolio globally, winning combined CCS, seat heat, lumbar and massage awards with BMW, GM, Jaguar Land Rover and leading EV makers, and secured a breakthrough scalable ClimateSense software award for General Motors’ next-gen ICE and EV architectures.
  • Innovation remains a priority with the launch of ClimateSense (software-driven microclimate comfort), WellSense (in-cabin health and wellness experiences) and ComfortScale (modular integrated thermal, lumbar and massage hardware) to increase content per vehicle.
  • In medical, Gentherm achieved record 2023 revenue and expanded hospital partnerships, while it paused battery cell-connecting board pursuits due to competitive pricing and return profiles, forecasting a gradual decline in BPS revenue.
  • For 2024, Gentherm forecasts $1.5–1.6 billion in revenue (≈5% organic growth; 8% in Climate & Comfort), a 12.5–13.5% adjusted EBITDA margin, $65–75 million in capex to support new capacity, and is targeting $80 million of Fit for Growth savings by 2026 to reach a ~16% EBITDA margin.
AI Generated. May Contain Errors.
Earnings Conference Call
Gentherm Q4 2023
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