Yijing Brentano - Gentherm, Inc. Phillip Eyler - Gentherm, Inc.

Barry G. Steele - Gentherm, Inc.

Dan Drawbaugh - B. Riley FBR, Inc.

Steven L. Dyer - Craig-Hallum Capital Group LLC Matt Koranda - ROTH Capital Partners LLC

Thank you, Brock, 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 Security Laws. Statements reflect our current views with respect to future events and financial performance, and actual results may differ materially.

Please see Gentherm's SEC filings, including the latest 10-K and subsequent reports for discussion 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 financial measures due to 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 Barry Steele, Chief Financial Officer.

Please note that during their review of the results, Phil and Barry will be referring to a presentation deck that we have made available on our website at www.gentherm.com/events. After their prepared remarks, we will be pleased to take your questions.

Now, I'd like to turn over the call to Phil.

Thank you, Yijing. Good morning, everyone, and thank you all for joining us today.

I've now been with Gentherm for five months. I continue to believe in the untapped potential in this organization.

I've personally met with all of our top customers in the last few months and found a lot of existing support for Gentherm as a thermal technology partner. Every one of these customers are extremely excited about our efforts around customer focus and continued innovation.

I'm now an even stronger believer in the growth opportunities ahead in delivering technology solutions in today's vehicles and even more importantly, the rapidly evolving car of the future. Now let's move on to the quarter.

Our first quarter results reflect challenging market conditions especially in the North America automotive market. Nonetheless, I'm pleased to see that many areas of growth and we are gaining momentum on market launches.

This morning, we reported product revenues up $261.9 million in the first quarter, an increase of 5.1% from the same period in 2017. In our Automotive segment, we had growth of 8.2%.

This included the acquisition of Etratech and favorable currency translation, both of which were expected. However, on an organic basis, the Automotive segment declined by 2.2%.

The continued decline in North America vehicle production and the greater than market decline for two of our most important customers met a slower than expected recovery in our CCS business. However, we're already seeing the CCS trend reverse in the second quarter as we have previously predicted.

Revenues from all other automotive product lines grew year-over-year. The Industrial segment declined by 20%, the reason for which we'll more fully describe later.

We reported adjusted EBITDA of $33.6 million in the quarter and we're disappointed with our performance there. While some of the decline was expected, we still have cost issues that are being addressed.

We're taking decisive steps and have kicked-off a formal program to identify areas where cost savings can be achieved without impacting our growth plan. This program is expected to yield savings in the coming quarters and will significantly right-size our cost structure for future years.

In total, our results in the quarter were mixed and Barry will provide more details on the financials later on in the call. While we started out the year soft, it was primarily the month of February where we came in lower than expected.

We saw March rebound, and so far, April is running on plan. Overall, our outlook is intact and we still expect to meet the 2018 financial guidance we gave you on our earnings call in February.

On that same call, I talked about the work, we were just beginning to examine all aspects of our business and develop an enhanced strategic plan with the primary goal to drive shareholder value through accelerated revenue and earnings growth. We've put a full court press digging into all aspects of Gentherm's business with a critical eye to what we can do to most effectively capture the opportunities before us.

As a reminder, the strategic plan will address one; continued and accelerated revenue growth in the short- and mid-term through our core product and expanding portfolio; two, developing an automotive product and technology solution strategy which will address the opportunities of the car of the future; three, a diligent portfolio analysis of all businesses and product lines. This means, there'll be no sacred cows in this review.

And finally, four, short- and long-term operating margin expansion opportunities. Let me give you an update on our next steps.

Our management team and board of directors will be reviewing and finalizing our strategic growth plan over the next two months. We're then planning to host a strategic update meeting in New York on June 27th to share more details around our initiatives with you.

Event details and registration will be available shortly. Now let's review some business highlights from the quarter.

Please turn to slide four in our presentation deck. Despite the industry driven decline, we saw continued strong execution by our team in the first quarter with launches of systems on 42 different nameplate models across 21 OEMs.

We launched programs with a host of our strong technologies in the quarter, including CCS, seat heating, steering wheel heat and advanced cabling and Battery Thermal Management. The launches included Audi Q3 and Q5, Kia K9, Subaru Tribeca, Tesla Model X, the Toyota Avalon and several others.

We also successfully launched a CCS program with our first Chinese OEM, Changan on their C301 Sedan. On another exciting note, the U.S.

National Renewable Energy Lab, NREL, has confirmed in a study with Gentherm that our actively cooled CCS has given greater potential energy savings than passive ventilation found in our heat vent systems. Some of you might know that OEMs could already apply for carbon credits for Gentherm's full suite of CCS technologies in both heat vent and actively cooled thermoelectric versions because of the reduction in CO2 emissions through reducing the load on the central HVAC systems in vehicles.

The recent study confirmed that the actively cooled CCS solution more than doubles the reduction in CO2 emissions compared to the heat vent solutions, increasing the savings per vehicle from as much as $85 to as much as $190. On this basis, General Motors has submitted a request to the U.S.

Environmental Protection Agency asking them to recognize this greater benefit and increase the allowable off-cycle carbon credit for actively cooled thermoelectric CCS seats. To put all this in perspective, actively cooled CCS can qualify for approximately the same amount of carbon credits as the engine start-stop feature.

Gentherm is the only provider of such systems on the market and we believe this will drive growing adoption of our actively cooled CCS seating products. We're also in active discussion with regulatory agencies in China and Europe to recognize the same benefit in those markets.

Moving to Battery Thermal Management, we launched two air cooling BTM programs, one in the Audi A8 and also the Geely KC-2. Also, I hope you saw our announcement this morning of the launch of the industry's first thermoelectric BTM solution for 48-volt lithium-ion batteries with the latest model year of the Mercedes S-Class EQ boost.

We're very pleased that Daimler AG has relied on Gentherm to help solve the difficult thermal challenges of 48-volt lithium-ion battery systems. This industry-first system on the Mercedes S-Class is a testament to Gentherm's unique expertise in thermal management, our global footprint and our R&D and manufacturing capabilities.

With the transition to electric vehicles over the coming years, and an industry forecast of up to 14% of global new vehicles sales in 2025 being 48-volt miles hybrid systems, we are well-positioned to grow our business in BTM and other battery-related technologies. Before I discuss the platform awards we have received over the past quarter, I want to share with you that we've also realigned our global sales organization to strengthen our culture of customer focus and accountability.

We have created a key account structure with customer business units. Our sales and engineering teams are being invited to an increasing number of exclusive technology days at OEMs showcasing our expanded capabilities.

I believe this will help us continue to fuel automotive growth. Now, on to slide 5, where you can see that we're also continuing our strong track record of winning new business.

The first quarter was a record quarter in terms of awards for us. We received more than $375 million in new program awards across 14 different customers.

More importantly, approximately 50% of those awards were for CCS giving us even greater confidence in the CCS revenue turnaround. Over the last five quarters, we have won over 90% of the CCS opportunities available to us.

During the quarter, we won an additional seat thermal comfort award from General Motors. Gentherm has been awarded an extensive portfolio of business including conquest wins for the next generation of climate controlled seats, heated seats and electronics for 30-plus vehicle lines worldwide.

General Motors has been a longstanding customer of Gentherm and we're proud to have earned GM's trust with additional awards further strengthening our exclusive strategic partnership in global thermal comfort systems. In addition, we won multiple climate controlled seat awards on premium and other platforms including Acura RDX, Jaguar E-PACE and the Lincoln MKC.

Importantly, we're also increasing content per vehicle, winning additional awards including rear seat heating and cooling for the Hyundai Genesis and Kia ON. We also won a follow-on award with Ford for our proprietary Intelligent Position System Memory Seat Module.

This technology uses sophisticated algorithms to control both seat movement and memory position functions as well as climate features in the seat and potentially other software-driven features such as steering column and brake pedal positioning. Our system offers a differentiator in terms of smaller package, lighter weight and less cost compared to modules in the market today, giving us a unique strategic advantage.

Depending on the electrical architecture and features present in the seat, the estimated system savings is between $15 and $50 per seat with this platform, a substantial savings in the automotive industry. Importantly, the acquisition of Etratech gave us further credibility in electronics and software, which strongly supported the follow-on award.

Our ability to consolidate multiple modules into one ECU with innovative software solutions positions us to add more value for our customers and bring more potential for increased content per vehicle. Finally, I'm pleased to see continued growth in our existing business in China, with two follow-on awards for Air Cooling Battery Thermal Management applications from Geely.

Now let's turn to slide 6 for a discussion on our Industrial segment. In Cincinnati Sub-Zero, we're seeing synergies among the industrial chamber and medical business with increasing sales of chambers to hospitals and for testing medical devices.

In addition, we see significant opportunities to increase our penetration of the sizable patient thermal management market. Also, I continue to see opportunities to leverage our growing body of technical knowledge and expertise in thermophysiology resulting from this business to improve our products in the Automotive market.

Now let me review some of the accomplishments from this business during the quarter. In the chamber business we grew sales of ultra-low temperature freezers for DNA Storage to hospitals and research centers around the world including the Mayo Clinic, the number one rated hospital in the United States.

We secured a contract for multiple specialty freezers from a prominent Airframe manufacturer in the United States. In addition we delivered a chamber to LivaNova/Tandem Life for testing heart pump controllers.

In medical, we leveraged our dual modality capability and won a Blanketrol III award with a large Integrated Delivery Network System of 35 hospitals in the Pittsburgh area. Finally we're also gaining momentum in international markets.

We've received increased patient thermal management orders from our Middle Eastern distributor. Now turning to Global Power Technologies on slide 7.

We completed the largest development project in GPT history for Thermoelectric Generator model S1100; updating a key element of our core TEG product line. The S1100 received the official Quad Certifications which is required for Classified Areas.

This is critical in oil and gas operations. This will sustain and enhance a major offshore differentiator for us.

Last quarter I talked about the new market opportunities in methane reduction. We're seeing an increasing opportunity pipeline for TEG based methane reducing systems driven by aggressive regulatory changes.

In addition, we continue to penetrate new markets globally and received our first order in India from ONGC Offshore in the quarter. So, in summary, as I mentioned at the beginning of my remarks, the results of the quarter were mixed, but there're many important areas of progress that give my team and I confidence that we are well-positioned to deliver significant positive results for shareholders.

I certainly haven't changed my view as to Gentherm's potential. Our unique technologies, our ability to produce innovative solutions and our sustainable competitive advantages remain.

I'm confident that along with this talented Gentherm team, we will be able to demonstrate that potential to you. Now, let me ask Barry to give you a little more color on the results of the quarter and then we'll be ready to take your questions.

Barry?

Thank you, Phil. If you look at slide 8, you'll see that during the first quarter of 2018 our product revenues increased by 5% to $261.9 million over the prior year.

Underlying this increase were higher product revenues in our Automotive segment of $18.2 million offset by a decrease of $5.6 million in Industrial. The Automotive increase which represents 8.2% growth, included both the acquisition-related benefit of Etratech totaling $15.2 million and a favorable effect of currency translation of about $10.5 million.

Adjusting for these impacts, the Automotive segment declined organically by 2.2%. This decrease reflects both weak automotive production volumes especially in our most important markets and with two of our largest customers.

On a pro-forma basis, however, Etratech grew by nearly 20% when taking into account its prior year first quarter revenue before the acquisition. According to IHS, automotive production was down 2.6% in North America during the first quarter, a market that generates nearly half of our automotive product revenues.

Even more importantly, production volumes for two of our top customers were significantly lower. North American production for General Motors, which represents approximately 15% of our product revenues, was down 8.6% during the quarter compared to the prior year and Hyundai vehicle production, which is about 8% of our sales, was down 5.7% in North America and off 3.8% in Korea.

These market changes along with a tough prior year comparison related to the impact of a technology shift on certain vehicle programs to our lower priced heat vent solution impacted the product revenues of climate control seats, or CCS, disproportionately to other automotive products. This is because CCS revenues are concentrated in the North American market and that GM and Hyundai are both important CCS customers.

In addition to the production-related decreases, our annual customer price incentives decreased revenue by approximately $5.7 million or about 2% of Automotive segment revenue. As we look forward to the coming quarters, we believe that this trend will reverse.

For example, in North America, automotive production for the 2018 second quarter is expected to increase over the prior year by 2.5% and sequentially by 3.6%. And while we see GM and Hyundai continuing to be lower in the second quarter, on a year-over-year basis, they both are expected to produce sequentially higher volumes as compared to the first quarter.

Also during the second quarter, while we continue to expect a year-over-year decrease in CCS due to the tough comp, we expect the downward trend for CCS to reverse, resulting in a sequential increase from the first quarter run rate. New program launches scheduled for the second half of the year are expected to help offset that market-related decline.

In our Industrial segment, lower sales were primarily related to lower Hemotherm revenues, our blood heater cooler product, and the timing effects of large custom projects at GPT. You may recall that during the early part of 2017, we were experiencing a significant benefit at CSV in Hemotherm sales due to regulatory issues at one of our competitors.

Also, GPT revenue was only $4.6 million for the quarter, mainly due to the fact that no custom projects shipped during the period whereas several shipped during 2017's first quarter. This is an issue of timing for these large programs.

The gross margin for the first quarter was 30%, which represents a decrease from 34.2% in the first quarter of 2017. The three main causes of this decline are a shift in product mix, the timing of automotive customer price decreases as compared to related cost improvements, and launch costs of our new Battery Thermal Management product.

Product mix was unfavorable due to the lower Industrial sales which have higher normal gross margins than the Automotive business as well as lower CCS product revenues within Automotive. As I mentioned earlier, our annual customer price decreases were about $5.7 million during the quarter.

This was only partially offset by reductions in our production and raw material cost during the quarter. However, this is mainly a timing issue.

We expect that this timing difference will balance out by the end of the year. The new thermoelectric based Battery Thermal Management product line was launched at the end of 2017 fourth quarter.

This business is expected to ramp to a $50 million to $60 million run rate by the end of 2019, but was only $1.3 million in the 2018 first quarter. In its early stage, production expenses which reflect fixed costs for the much higher volumes and temporary launch expenses unfavorably impacted our gross margin.

Our operating expenses increased by $7.6 million or 15%. This amount includes $2 million in currency translation increases, excuse me, and $2.2 million of additional operating expenses coming from recently acquired Etratech.

The remaining increase is mainly due to higher spending for research and development activities covering a wide variety of products and technologies. Our effective tax rate was 19% for the first quarter.

This is lower than our 24% guidance, mainly due to discrete items recorded in the quarter related to non-recurring intercompany transactions that shifted the weighting of our earnings to jurisdictions having lower statutory tax rate. We continue to expect an approximately 24% tax rate for the balance of the year.

However, that amount could be as much as 2 percentage points higher or lower depending on various factors including the final calculations for the impacts of U.S. tax reform.

Turning to the balance sheet on slide 9, our cash decreased by $32.7 million mainly due to a $35 million pay down on our revolving line of credit. This represents the first installment of the repatriation of cash that is now more possible as a result of the U.S.

tax reform. We plan to make further payments throughout the year.

Increases in our working capital during the quarter which are mainly related to seasonal timing of revenues in the first quarter compared to the fourth quarter as well as capital expenditures of $8 million offset cash coming from our normal operations. After the repayment, our total debt now stands at $109.2 million and our revolving credit line availability increases to $256 million.

Total liquidity is approximately $326 million, when adding our cash to the undrawn revolver. Now let's discuss our guidance, which is summarized on slide 10.

As you saw in today's press release, we are reaffirming the full year 2018 guidance which we initially provided back in February on our year-end earnings call. And as you heard Phil say, despite starting off the year a bit soft, we are confident that we can deliver on the objectives we initially set for the year.

With that, let's turn the call over to the operator to begin our Q&A session. Operator?

Good morning. This is Dan Drawbaugh on the line for Chris.

Thanks for taking our questions.

Sure, Dan.

So just to start on Battery Thermal Management – and congratulations on the announcement of that Mercedes win. That sounds like a good opportunity.

I think you mentioned $50 million to $60 million run rate in that business by the end of 2019. if I didn't mishear you.

And I'm curious to know what you can share as to what you're assuming in that? I think you had shared last quarter that you had a second customer ramping up.

Do you have any additional customers assumed in that $50 million to $60 million or is that just additional programs at your two customers?

Yeah. Dan, thanks.

Well, obviously we're very excited. To be launching on S-Class is kind of the pinnacle for this technology, but to answer your question, the $50 million to $60 million first of all is only Battery Thermal Management related to our thermoelectric technologies and it's only on the two customers that we've mentioned.

So one is obviously Daimler and the second one is the North America OEM, which we have not announced yet. So that doesn't include you know – there's a ton of work going on right now to expand that product line, especially now that we've reached a point where we're very comfortable with the technology since it's on the market.

So it's right now just those two customers. Everything else will be upside.

Okay. Terrific.

Thank you. And then on the cost savings that you've mentioned, I think you said there could be some impact in the coming quarters.

And then obviously you may have some more long-term opportunities. Can you share a little bit about the magnitude we should be looking at and some of the areas you might be targeting with those cost savings?

So we've basically put in a formal program where we're evaluating line-by-line the cost structure of the business. We're obviously seeing opportunities.

We've got kind of a disciplined program in place to start identifying and tracking the specific measures to reduce those costs but it's still in the early stages. I would expect that you're unlikely to see any significant impact in this year.

It'll be more effective in the coming year and in terms of the details behind it and the magnitude, I think, we'll be ready in June to share some pretty significant details behind that during the strategy session. So we'll hold off until then.

Okay. Fair enough.

Thank you. And then last question from me.

Etratech, year-over-year revenue growth of about 20% on a pro forma basis. You know that seems pretty strong.

Can you share whether there is something going on this year in particular that's boosting that, whether it might be one significant launch or if they're exposed to a certain program that's in high demand or beyond 2018, I'm wondering if you can share any assumptions that you're thinking about for that business?

Well what we find is that, when we combine the two businesses, this is Barry talking, that we have a lot more credibility in that business. So we're winning things, but on a combined basis.

We do see, as we look into the future, continued significant growth rate. So this isn't an anomaly just for this quarter.

We see continued growth as we go forward particularly as we – from just a scale and a credibility standpoint, our joined forces really bring a lot more to the table to offer to our customers.

Okay. Great.

Thanks for taking our questions.

Thank you. Good morning.

Thanks for taking my question. Couple of questions on CCS.

It sounds like maybe we're nearing or are at a kind of a low watermark there. I guess, is that – would you attribute that more just to – it's obviously been declining from a product mix perspective.

You've had that headwind for a couple of years. Are we just sort of at the end of that or I guess, any color around in the good new orders this quarter, how much of that maybe was heat-cooled versus heat vent?

Sure. Yeah.

So Steve basically, we do see this as the bottom; this quarter. And we're already seeing a tick-up sequentially coming in Q2 and I think that's going to be pretty steady from there on out based on past awards and a roll out of new programs and also higher penetration rates in the market.

A lot of the new wins, we'll obviously continue to add to that growth over time. Of course, it takes some time to go through the launch phase of a lot of these programs, but great news is, I think we're out of the decline and we're on the upswing.

When it comes to your second question, the mix of the current wins during the quarter, it's a pretty even split between active and heat vent.

Got it okay. Great.

Thanks. And then it doesn't – I guess is part of that $50 million to $60 million run rate just shifting over to BTM is part of that, that second OEM or anything in there that's sort of from an unnamed OEM yet?

It's only the two OEMs that we've announced so far. We haven't announced any other wins.

Obviously, given the trends in the industry with electrification and 48-volts, we're seeing a lot of interest. And our sales team is very busy working with customers and doing demonstration projects.

We're in active discussions with several customers around the world on the potential for this technology. So obviously, our expectation is to continue to grow that, but the numbers we've quoted are only the currently awarded programs.

Steve, in the first quarter, it's just the first customer. The second customer will launch later in the year.

Okay. Got it.

Thank you, guys.

Thanks, Steve.

Hey guys. Good morning.

Good morning, Matt.

In terms of the $375 million in new business awards, how much of that was essentially net new versus replacement business?

I don't have the complete breakdown on that, to be honest with you, but it's a blend of the two.

Okay.

Given the fact that it's a record quarter, obviously there's significant new business involved in that and we continue to see awards with new customers as well.

Got it. And then in the quarter on CCS, I know last quarter you guys called out shipments as still remaining in the positive territory in terms of a unit shipment basis.

Were unit shipments positive this quarter? And it was just the factor of pricing and mix headwinds that drove it negative or were the shipments also negative this quarter?

Matt, the shipments were definitely down and I don't have the specifics on what the amount was, but we definitely saw it lower, but well, on the CCS. On the other products within Automotive, the volumes were actually up.

And on a currency-adjusted basis, every other product was positive this quarter on a year-over-year basis. It was just a CCS that was mainly hit.

Okay. Got it.

And I guess you alluded to it, but I just wanted to make sure I understand, for the remainder of the year, you expect sequential revenue growth each quarter in CCS products and that confidence comes from essentially the launch visibility that you have in terms of programs that you're launching on in Q2 through the end of the year. Is that how we should interpret...?

Yeah. Good question.

Q2 obviously we have good line of sight because we're already into Q2 and we have production orders that are relatively reliable for the remainder of the quarter. So that's there.

We're seeing that tick up in Q2. And the rest of the year, as you just mentioned, is a combination of kind of known production in the market and new launches.

So yes, we're seeing that kind of line continue to rise through the year, and with even more launches in 2019, pretty excited about the direction it's going.

Okay. Got it.

And then could you give a little bit more detail on the GM application for credits on active vehicle that you mentioned in the prepared remarks. I mean, what's the process that they have to go through?

And if they get approval, when would you be able to sort of anticipate more significant awards from them?

Well, I think the bottom-line is, number one, given the fact that the NREL supported study, it's already creating a lot of interest by customers. We're giving presentations to most of our large customers around the world.

In terms of timing, it'll take a number of months to get the final approval through EPA. And at that point in time, the OEM customers would be able to see the savings specifically.

And the good news is that they can go retroactive many years with the credits. So there's obviously a lot of incentive for the OEMs to do that.

Got it. Okay.

Just shifting gears to gross margins for a moment here. I think you guys also mentioned that sort of potentially hitting the low watermark this quarter as well.

I know you called out three different particular buckets, Barry, in your prepared remarks, but is there a way to quantify how much launch costs fed into sort of the lighter gross margin this quarter or maybe even on a relative basis call out, which of the three buckets was largest?

The most important was the pricing timing for the annual price downs versus our cost. Again, we can make that up as we get through the year.

The second most important is mix and the smallest is the launch costs for Battery Thermal management.

Okay. Very helpful.

And then lastly, I know you guys reiterated your margin guidance on EBITDA which I think implies you're going to see some decent improvement for the remainder of the year. So should we sort of count on the majority of that improvement coming from the gross margin line or should we be looking for additional reductions in SG&A over the next couple of quarters?

What's sort of the comprising the improvement over the last three quarters here?

Matt, primarily the higher revenue. We have to cover our fixed cost including SG&A and R&D spend rates.

And so when we have higher revenue in the future course, we'll be able to improve the operating margin and the EBITDA margin, but some of the cost reduction efforts should start to kick-in in small ways by the end of the year, I think.

Got it. All right guys.

I'll take the rest of mine offline. Thanks.

Thank you. Thank you everyone for joining our call today.

I feel we're making really good progress towards refining our strategy for accelerated revenue and earnings growth. We remain focused on execution, innovation and cost improvement.

I'm confident in our ability to drive significant shareholder value in the quarters and years ahead and we look forward to seeing many of you in June. Thank you.