Gentherm Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 30, 2024

There are 9 speakers on the call.

Operator

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ying Zheng Brentano, SVP, Investor Relations.

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 will make forward looking statements within the meaning of federal securities laws. These 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 this call, we will also 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 and investor presentation. On the call with me today are Phil Eiler, President and Chief Executive Officer and Matteo Anversa, 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 atgenthem.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. I am proud of Gentherm's strong execution to start the year. While the global automotive environment remained volatile in the Q1 and near term light vehicle production volumes softened compared to what was forecasted by S and P Global just 2 months ago, we continue to see strong demand from our customers for our thermal comfort, massage and lumbar solutions, winning 80% of our quoted pursuits for thermal and pneumatic solutions during the quarter. We secured nearly $530,000,000 of automotive new business awards, a record for the Q1.

Speaker 2

Adjusting for the impact from foreign currency exchange and one time recoveries, our Automotive Climate and Comfort Solutions revenues, which include primarily CCS, seat heaters, steering wheel heaters and lumbar and massage comfort solutions outperformed the light vehicle production in our relevant markets by approximately 300 basis points in the Q1 with many new launches and ramp ups still to come throughout 2024. On the profitability front, our Fit for Growth 2.0 initiatives drove over 200 basis points year over year improvement in gross margin rate through supplier cost reductions, value engineering and increased productivity at the factories. Before I cover the details of the quarter, I'd like to share some exciting news fresh from the automotive news award ceremony held last night on Slide 4. At Gentherm, we pride ourselves on our industry leading innovative product portfolio. And I am extremely pleased to share that we won the Automotive News, ACE Innovation Partnership Award for our partnership with General Motors for launching Climate Sense, the industry's 1st scalable software driven automotive microclimate solution.

Speaker 2

If you recall, we are launching 2 ClimateSense production programs with General Motors this year. In addition, we previously announced a breakthrough scalable ClimateSense software award for nearly all future architecture, General Motors, ICE and electric vehicles. ClimateSense was recognized as one of the 33 finalists globally for the overall Automotive News PACE Award. Automotive News PACE Awards identify and recognize automotive suppliers for their technological innovation in product and process that has reached the commercial market. I would like to congratulate the global Gentherm team for winning such prestigious awards for bringing to market game changing innovations.

Speaker 2

Now turning to our Q1 automotive highlights on Slide 5. In the Q1, we launched our automotive solutions on 27 different vehicles across 13 OEMs, including BMW, General Motors, Great Wall, Honda, Lee Auto, Stellantis, Subaru and Volkswagen. We continue to see expanded application of CCS solutions. In the Q1, our CCS solutions were launched on the BMW 5 Series, Chevrolet Traverse, GMC Acadia, Honda Prologue, Subaru Forester, Volkswagen Magotan and a popular BEV with 1 of the largest global EV manufacturers. In addition, we launched our first CCS solution on Lee Auto's L9 and L8 flagship SUVs, as well as our hands on detection enabled steering wheel heat solutions on multiple vehicle platforms for Le Auto.

Speaker 2

As I mentioned on previous calls, software and electronics are fundamental to our strategy. As the automotive industry prepares for the proliferation of software defined vehicles, we expect to add incremental electronics and software features to our ClimateSense and WellSense platforms that will enable greater energy efficiency, more personalization and novel comfort and wellness experiences. To prepare for the increased demand for resources and competencies, I'm very excited to share that we have established an extended advanced engineering lab and team in Hyderabad, India with the support of an established partner. The India location will focus on the development of software and technologies that aim to improve agility, scalability and efficiency in product development. Now on to Slide 6, where as I mentioned, we secured a Q1 record of $530,000,000 of automotive new business awards, winning 80% of our quoted pursuits in the quarter.

Speaker 2

And I'm pleased to announce that we continue to grow our business with our largest customer, General Motors. And we recently won a Conquest high end lumbar and massage award for their next generation truck platform, including the Chevrolet Silverado and GMC Sierra. With this win, we will supply our entire suite of climate and comfort seating solutions, including seat heat, PCS, lumbar and massage, as well as multifunction electronic control units and ClimateSense software for our largest customer on their largest platform. I'd like to recognize our global team for winning against significant competition. We won several CCS awards in the quarter.

Speaker 2

Of note, we won the new Ford Bronco, several Great Wall models in China, Hyundai Genesis G80, a Hyundai Fuel Cell EV and Volkswagen Tayron. In addition, we won a CCS award for a midsize crossover for 1 of the largest global EV manufacturers for the North America market. This is on the heels of winning the CCS awards for Europe and China for this EV manufacturer in the Q4 of 2023. It's worth noting that this EV manufacturer has some combination of our Climate and Comfort products across all their vehicle platforms and regions. In addition, we received 17 steering wheel heater awards across 9 OEMs.

Speaker 2

Importantly, we won hands on detection enabled steering wheel heater awards with Geely, General Motors, Lee Auto, Mercedes Benz and Volkswagen. On the pneumatic comfort front, we won Lumbar Awards for the Audi Q5 and Volkswagen ID4, both in China. In addition, we continue to strengthen our relationship with Li Auto, Lee CCS and pneumatic solutions for the Leigh M6. These wins confirm our strong market leading position in thermal and pneumatic comfort. We are seeing strong interest from a growing number of OEM customers for ComfortScale, our combined thermal and pneumatic lumbar and massage product.

Speaker 2

Comfort scale can be integrated with any foam and with any seat. It's adaptable for all OEMs and all Tier 1s. This is one of the unique value propositions that Gentherm offers. In addition, our innovative, differentiated proprietary solutions such as Climate Sense, Wealth Sense and Comfort Scale position us to be a significant contributor to software defined vehicles of the future and continue to increase Gentherm's content per vehicle. Now let's turn to Slide 7 for a discussion of our Medical business.

Speaker 2

I'm pleased to share that we have entered into a new partnership agreement with U. S. MediQuip for both Blanketrol equipment and MaxiTHERM light consumables as well as field services. This is our 2nd key partnership agreement to provide world class patient temperature management solutions to the U. S.

Speaker 2

Healthcare market and after our successful first partnership with SourceMark Medical, a certified minority supplier. In addition, we added 21 new hospital customers in China in the Q1, including Shaanxi Hospital at the Chongqing Medical University. We continue to gain momentum with Astopad resistive patient warming technology as a result of increased demand for more sustainable solutions. In the Q1, revenues from Astopad grew 36% year over year. We remain laser focused on growing both the top and bottom line in Medical, leveraging large partnerships, distribution channels and white label opportunities.

Speaker 2

Before I turn the call over to Matteo, I'd like to close with a couple of key highlights. Gentherm is an independent partner that can cooperate with any combination of the 50 plus vehicle OEMs and the 30 plus seat manufacturers globally, including those that are vertically integrated to create truly differentiated solutions. Our award momentum over the last couple of years is a true testament of this key differentiator. Let me give you two examples on Slide 8. 1st, for the BMW flagship next generation electric and ICE X Series SUVs, including the X5, 6 and 7 and the IX5, 6 and 7.

Speaker 2

We have won Climate and Comfort awards that include CCS, Heat Heat, interior surface heat and pneumatic lumbar and massage. 2nd, as I mentioned earlier, we will supply our entire suite of Climate and Comfort seating solutions, including Seat Heat, PCS, lumbar and massage as well as the multifunction electronic control unit and Climate Sense software for the General Motors for their next generation truck platform, including Chevrolet Silverado and GMC Sierra. Expansive Climate and Comfort Conquest wins on large vehicle platforms like these demonstrate that our unique value proposition resonates with customers. Turning to Slide 9, you will see that Gentherm's anticipated compound annual revenue growth rate to be above 14% between 2020 2024 compared to the corresponding growth in light vehicle production of under 4% in our relevant markets for the same period. This is a strong testament that our focused growth strategy is translating into above market revenue growth.

Speaker 2

Now let me summarize. Our first quarter results continue to validate the effectiveness of our strategy and demonstrate our unique positioning to deliver profitable growth. The industry environment remains volatile and dynamic. Nonetheless, our relentless focus on strong operational execution, innovation and cash flow generation, along with our record performance on new business awards, positions us well to continue to drive shareholder value over the long term. With that, I'll turn the call over to Matteo for a little more color on the financial results.

Speaker 3

Thank you, Phil. Let me turn to Slide 10 and focus on the most significant items in our Q1 results. For the quarter, total revenues decreased by 2% compared to the same period of last year, consistent with our expectations. If we adjust for the impact of foreign exchange, our overall product revenue decreased by 1%. Starting with the Automotive segment, automotive revenues were 345,000,000 dollars reflecting a 2% decrease compared to the prior year period.

Speaker 3

Adjusting for negative foreign currency translation, phasing out of the non automotive electronics business as well as one time benefits from recoveries in both periods, automotive revenue remained relatively flat. Actual light vehicle production in our key markets of North America, Europe, China, Japan and Korea decreased by 1% year over year. And as Phil mentioned earlier, revenues from our automotive, climate and comfort solutions outperformed light vehicle production in our key markets by approximately 300 basis points. We saw growth in several of our product lines, excluding the impact of foreign exchange, and more specifically, steering wheel heater's revenue increased by 10% compared to the prior year period due to the start of production of Li Auto L6 and a battery electric vehicle in Asia with 1 of the largest global EV manufacturers as well as several Mercedes and Stellantis programs. Automotive cables revenue increased by 6% due to higher volume with Bosch and Samsung.

Speaker 3

Seat heater revenues increased by 3% due to growth with several GM models in Asia. CCS revenue increased by 2% due to the start of production of Li Auto SUVs as well as a battery electric vehicle in Asia with 1 of the largest global EV manufacturers. Revenues from lumber and massage and valve systems remained relatively flat ex FX. Revenues from a few of our product lines decreased year over year ex FX and specifically VPS revenue decreased 33% due to the end of production for the Jeep Wrangler 48 volt BTM and the BMW E Mini Cell Connecting Board as well as the volume ramp down for the Mercedes 48 volt BTM. And as a reminder, we announced on the last earnings call that we are phasing out certain battery performance solution products.

Speaker 3

Electronics revenue decreased 25%, primarily due to the phase out of non automotive electronics. Other automotive revenue decreased by 55 percent or $5,000,000 primarily due to one time material inflation recoveries received in the prior year period. Turning to medical. Medical revenues increased 5% ex FX, primarily as a result of higher FilterFlow and Astopad sales. Moving to adjusted EBITDA.

Speaker 3

Adjusted EBITDA in the quarter was $44,000,000 up from $42,000,000 in the prior year period. The adjusted EBITDA rate for the Q1 was 12.2% and this compares to 11.4% in the Q1 of last year. The 80 basis point year over year improvement was driven by Fit for Growth initiatives, including supplier cost reductions, value engineering activities and net productivity at the factories as well as lower freight costs. And these were partially offset by annual price reduction and negative impact from foreign exchange. Operating expenses were $71,000,000 in the quarter compared to $63,000,000 in the prior year period.

Speaker 3

And if we adjust for acquisition, integration and restructuring costs as well as non cash stock compensation expenses in both periods, operating expenses were $60,000,000 relatively in line with the prior year. Finally, adjusted diluted earnings per share in the quarter were $0.62 per share compared to $0.49 per share in the Q1 of last year. Our effective tax rate for the quarter was approximately 19%, lower than the guided range of 26% to 29% due to a onetime benefit related to the Alfmeier acquisition. Now moving to the balance sheet on Slide 11. Our cash position at the end of the quarter was approximately $125,000,000 and our net debt stood at 97,000,000 dollars Net debt increased sequentially by $24,000,000 as a result of increased working capital and higher capital expenditures.

Speaker 3

Our net leverage ratio was 0.5 at the end of the first quarter, well below our target of 1.5 times. Based on the trailing 12 month consolidated adjusted EBITDA ended March 31, we had approximately 2 $78,000,000 of remaining availability on our line of credit and the total available liquidity as of March 31 was $403,000,000 Now let me turn to Slide 12 for our 2024 guidance. We are reaffirming our 2024 guidance as discussed in the prior earnings call. We're expecting revenue to be in the range of €1,500,000,000 to €1,600,000,000 assuming a euro to U. S.

Speaker 3

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 30 basis points of FX benefit year over year, the midpoint of our guidance implies an organic revenue growth rate of approximately 5%. We continue to assume 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 be between 12.5% 13.5%. And as a reminder, our guidance assume a 50 basis points headwind associated with the start up cost of our new plants in Morocco and Mexico and product engineering and launch cost associated with our record new awards.

Speaker 3

Due to the revenue cadence that I just mentioned and one time cost associated with our new plants, we expect the adjusted EBITDA margin rate in the second quarter to be in line with the first quarter and for the rate to improve in the second half. 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 I would like to thank the global Gentherm team for continued progress on our Fit for Growth initiatives, which allowed us to deliver an 80 basis point improvement in adjusted EBITDA margin rate in spite of market volatility. And with that, I will turn the call back to the operator to begin the Q and A session.

Operator

Thank you. We will now be conducting a question and answer Our first question comes from Matt Koranda with ROTH Capital Partners. Please proceed with your question.

Speaker 4

Good morning. Just wanted to start with the growth outlook. It sounds like we're still expecting sort of a higher second half revenue run rate than the first half. Just wondering on a relative basis in terms of growth for the second quarter, how we're thinking about growth relative to light vehicle production? Are we still expecting to outperform sort of the light vehicle production forecast, which I think stands at sort of a low single digit growth rate in the second quarter?

Speaker 2

Good morning, Matt. This is Phil. I'll take that one. I think the way to think about it is it will be a gradual increase in revenue for us throughout the course of the year as we kind of forecasted when we laid out our guidance. And that's driven heavily by new vehicle SOPs based on our very strong backlog of new business awards and also the ramp up of programs that are just launching here early in 2024.

Speaker 2

So pretty excited about the launches that are coming and those will gradually be phasing in, which give us pretty strong feeling of our guidance for the remainder of the year.

Speaker 4

Okay. And then just a follow-up on that. I guess given the reiteration of the guide, we even though you guys said the Q1 was a little choppy in terms of production and what it came in relative to sort of the expectations or the forecast from some of the industry groups, no change to, groups. No change to any of the launch schedules that you're seeing. Just wondered if you could maybe comment, Bill, on sort of what you're seeing in terms of launch environment and SOP for some of the key programs that you have in the second half?

Speaker 2

Well, we had a few puts and takes throughout Q1. But in general, all of the SOPs that were in our plan to launch are launching or have launched. A few of them had a little bit of a delayed start and those were documented by those customers. But they're back on track as far as we know it and the remainder of the year is looking pretty much on our plan.

Speaker 4

Okay. Got you. And then just maybe one more on the margin front for Matteo. It sounded like you were suggesting that sort of the margin rate should continue the margin rate we saw in the Q1 should continue into the Q2. And then we see some improvement in the back half of the year is sort of how you're thinking about the full year.

Speaker 4

Maybe just if you could unpack for us specifically what you're seeing in terms of EBITDA margin run rate in the second quarter. And then in terms of the second half, what are the good guys that sort of boost us in the back half of the year, maybe just a bridge on a year over year basis in terms of where we're getting that margin improvement from?

Speaker 3

Sure, Matt. So let me first address your question. On the Q2 specifically, I think we are starting well based on where we closed the Q1. We are off to a good start and particularly to highlight on the positive side some of the acceleration that we have seen on the Fit for Growth side of the actions. Taking cost out of the building material as well as accelerating some of the taking cost out of the bill of material as well as accelerating some of the negotiations with our sourcing partners.

Speaker 3

So we are very pleased on where the Q1 ended, probably a little better than what we were forecasting when we had the last earnings call. As we enter the 2nd quarter, we're going to have a couple of dynamics happening. We are expecting a slight sequential increase in revenue, should that should obviously help us also on the margin side, continued progress on the Fit for Growth. But on the other side, we will have a little bit of timing on the start up cost of our new plants in Morocco and in Monterrey, which where the cost will increase sequentially in the Q2 compared to the first. So that's why in my prepared remarks, I indicated the 2nd quarter adjusted EBITDA margin rates to be pretty much in line with what we've seen in the Q1.

Speaker 3

So these are the puts and takes. As far as the margin progression towards the second half of the year, so at a high level, we are expecting an incremental volume to Fios Point and that will help us to continue to improve the profitability. But this will be partially offset by the start up cost and the new plants. And if you look at the math, so if we are assuming the Q2 adjusted EBITDA rate to be similar to the first, then the midpoint of our guidance implies that the second half EBITDA rate will be towards the higher end of our annual guidance range. And that's what we are expecting to happen, thanks to the continued progress on the Fit for Growth actions as well as the volume.

Speaker 4

Okay, very clear. I'll leave it there guys. Thank you.

Speaker 3

Thank you. Thanks, Matt.

Operator

Our next question comes from Luke Junk with Baird. Please proceed with your question.

Speaker 5

Good morning. Thanks for taking the questions. Maybe to just bridge off the last question there. Fit for Growth showing some nice returns in the Q1 gross margin here. Mitte, you mentioned that some things are tracking even ahead of your expectations at this point.

Speaker 5

I don't know if it would be possible to update us just where we stand on a run rate basis and as we move through the remainder of 2024, if there would be any potential upside or just in general how to frame Fitbit Growth as an incremental contributor this year? Thank you.

Speaker 3

Yes. So maybe let me use the Q1 as a kind of a proxy on what we are seeing. So the 80 basis points improvement year over year was, if I unpack this improvement you have on the positive side, gross productivity at the factories created a margin expansion of 170 basis points. Fit for Growth, specifically around sourcing savings and value engineering, was 160 basis points of margin expansion. And then we had a little bit of a lower freight cost, about 20 basis points.

Speaker 3

And these were offset by wage inflation, which is about 120 basis points drag, And then the annual price reductions of that we always see at the beginning of the year accounted for about 80 basis points. And all in all, actually if you look at the gross margin of the company, we were able through these actions to improve the gross margin rate compared to last year in spite of the lower revenue by more than 200 basis points. So we are pleased really where we are on the gross margin side and what the team did. The fit for growth in total, at a high level, we so as you know, we are counting on $80,000,000 of net savings between 2023 2026. We have achieved about $10,000,000 last year, as we said in the prior earnings call.

Speaker 3

And all the projects that we have either implemented or we are implementing are expected to deliver about 75% of the $80,000,000 And we have a good line of sight to the remaining 25%. This is the latest status on Fit for Growth.

Speaker 5

Okay. Thank you for all that detail. For my follow-up, maybe a bigger picture question, Phil, and then just be around the market reaction to your booking of the Software Centric Climate Sense booking with GM. Just curious if it's changing the threshold to book with other customers given the modularity, if you've seen a competitive reaction as well or do you think there'd be structural barriers to them?

Speaker 2

Not seeing any competitive reaction, but we've certainly seen growing interest from customers around the world. We're in active discussions with several of those. We've also been actively presenting demonstration vehicles with ClimateSense and including the ClimateSense software, which is driving not only interest for the software itself, but also continuing to guide OEMs to add more content to the vehicle as they're seeing the benefit of not only the software, but also more hardware content in the vehicle. So we're really optimistic and excited. Obviously, we're getting really close to launching SOP with General Motors.

Speaker 2

And so this will become a nice proof point for us as the vehicles hit the market. And clearly thrilled to be working with a progressive OEM like GM, who has really bought into this as a solution. And I think that was capstone last night with our partnership award at the PACE Awards by General Motors for our Climate Sense collaboration. So more to come, but we're feeling really excited about how we've eased the implementation of Climate Sense going forward.

Speaker 5

Thank you for that. I'll just leave it there.

Speaker 3

Thanks, Luke.

Operator

Our next question comes from Glenn Chin with Seaport Research Partners. Please proceed with your question.

Speaker 6

Great. Thank you. Good morning, folks. Hi, Glenn. Just some questions around the awards.

Speaker 6

So congratulations, another record booking quarter. Specifically on the conquest high end lumber and massage award for GM's next generation truck platforms. So you mentioned the full size pickups, but does the award also include the SUVs, which I think historically have carried even more content than the pickups?

Speaker 2

It's the truck platform so far. But obviously, trucks are the flagship for General Motors. So the level of confidence that they have in us for this product line, I think is clear.

Speaker 6

Okay. Very good. And then just some detailed questions about the other awards. So the impressive content you have in the BMW X Series, what heated surface content do you have there? And what is hypothetical high end CPV on these vehicles?

Speaker 2

Well, we don't give CPV for individual vehicles. That's a customer confidential information. But in terms of interior heat, it will be multiple surfaces that will be used to warm the body on touch and to enhance radiative heat as well.

Speaker 6

Okay. And then similar on the Prolog, Phil, what content do you have there? Just curious since it's an EV?

Speaker 2

Yes, multiple surfaces. So for example, the door and armrest and in some cases, areas under the steering wheel, wheel well kind of areas.

Speaker 6

Okay, interesting. And then the Ford Bronco, I mean, that's not a new vehicle. Was this Conquest or is that new content for that vehicle?

Speaker 2

New content.

Speaker 6

Okay. And then just lastly, so you've had long impressive win rates, I think 80% plus for a while, record bookings. This all comes despite at least the perception of increased competition. Are you guys actually gaining share? These conquest wins suggest that you are, at least in lumber and massage anyway, or is the pie just getting bigger?

Speaker 2

Well, it's probably both. We don't totally analyze share on a real time basis. So that's something we'll have to come back to when we run those. But clearly 80% plus win rate in multiple quarters in a row is a strong testament to our positioning as the largest independent provider of thermal and pneumatic comfort. I really believe that that value of being able to provide these solutions to any OEM and any combination of seat manufacturers within those OEMs is something that's really an important differentiator for us.

Speaker 6

Yes, indeed. Okay. Thanks very much. That's it for me. Thanks for all the detail.

Speaker 6

Thanks,

Speaker 5

Glenn. Our

Operator

next question comes from Ryan Sigdahl with Craig Hallum Capital Group. Please proceed with your question.

Speaker 7

Hey, good morning, Phil, Matteo. Maybe just following up on Glenn's last question. You guys are winning at an incredibly impressive rate, 80% this quarter. But what percent of opportunities are you actually bidding on? I guess, are you very isolated in or narrowly focused in what you're bidding on driving that rate?

Speaker 7

Or are you kind of casting a wide net?

Speaker 2

It's a fairly wide net. There are maybe a few out there that we don't see, but we see the vast majority.

Speaker 7

Great. One follow-up on the GM Truck Award. Is that across EVs and ICE models?

Speaker 2

That's ICE.

Speaker 7

Was EVs also out for bid and just wasn't put on or was that not part of the RFP process?

Speaker 2

They're different bids.

Speaker 7

Great. That's it for me. Thanks guys. Good luck.

Speaker 3

Thank you. Thank you.

Operator

Our next question comes from Ryan Brinkman with JPMorgan. Please proceed with your question.

Speaker 8

Hi, thanks for taking my question. I'd like to ask around the drivers of profit in the quarter after it looks like margin tracked nicely above analyst estimates, starting with whether the margin in Q1 tracked higher or lower or in line with your own estimates, as I know your guidance is really for the full year, not the quarters. And then looking at the 80 bps of year over year margin improvement, how much of that increase would you say roughly correlates to expense leverage on the higher sales that would be typically expected versus other more structural factors like the fit for growth initiatives you talked about versus maybe anything else such as less structural or more period specific customer recoveries or any other factor? Thank you.

Speaker 3

Sure, Ryan. So let me take that. Let me start with your first part of the question. Q1 came in, as I mentioned earlier, a little better than what we were expecting a couple of months ago. And this is driven by 2 factors.

Speaker 3

1 is really a great execution by the Fit4Growth team, particularly around negotiate accelerate some of the negotiation with suppliers on material cost reductions as well as the acceleration of value engineering projects taking cost out of the material. And then also the annual price reduction while the environment as expected became more normal on the pricing side. The annual price reduction was a drag of about 80 basis points in the quarter year over year, which is smaller than what the pre COVID and pre inflation rate used to be for a company, which is about 200 basis points. So these are the positives. And more a timing aspect is around the cost that the startup cost of the 2 new plants, which came in a little lighter in the Q1, but will be pushed out to the Q2.

Speaker 3

So there's a combination of really good work by the team as well as a little bit of timing. I think on your second part of the question, I think I answered earlier to I think Luke's question before, but really gross productivity was 170 basis points margin expansion. Fit for Growth was 160 basis point margin expansion. And then these were offset by wage inflation, which still remains elevated, particularly in Mexico and Eastern Europe, which accounted for 120 basis points of degradation. And then the annual price reduction was the 80 bps that I mentioned.

Speaker 3

Volume, to your question, actually was a drag, because year over year volume was actually negative. So we are pleased with the fact that we were able to increase gross margin rate by more than 200 basis points year over year in spite of the lower volume. So that goes to again back to the great work that the team has done on Fit for Growth.

Speaker 2

And Ryan, just I'd be remiss not to highlight the great work our purchasing group is doing very strategic relationship building and negotiating has really accelerated. We're very pleased with that team is doing.

Speaker 8

I appreciate it. Thank you.

Operator

We have reached

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Earnings Conference Call
Gentherm Q1 2024
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