Greetings, and welcome to the Gentherm 2016 Fourth Quarter and Full Year Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer section will follow the formal presentation, during which we ask the callers to limit themselves to one question or two questions and then return to the queue. As a reminder, this conference is being recorded. It is now my pleasure to introduce our host, Josh Clarkson (00:29), Investor Relations for Gentherm. Thank you. Mr. Clarkson (00:32), you may begin.

Thank you, operator, and good morning, everyone, and thank you for joining us today. Gentherm's earnings results were released earlier this morning and a copy of the release is available at gentherm.com. Additionally, a webcast replay of today's call will be available later today on the Investor page of the Investor Relations section of Gentherm's website. During this call, representatives of the company may make forward-looking statements within the meaning of the Federal Securities laws. Statements reflect current views with respect to future events and financial performance, and actual results may materially differ. Please see the company's SEC filings, including the latest 10-K and subsequent reports, for discussions of various risk factors and uncertainties underlying such forward-looking statements. During the call, the company may discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in the company's earnings release. On the call, we have Dan Coker, President & Chief Executive Officer; and Barry Steele, Chief Financial Officer. Management will provide a review of the results, after which there will be a Q&A period. I would now like to turn the call over to Dan. Dan?

Yes. Good morning. And thank you very much, and good morning to everyone, and thank you for joining us for our year-end and fourth quarter 2016 review. We are going to stick with our format, and I'm going to give a very brief introduction. Barry will give you all of the details, the activities of our fourth quarter and our summary for 2016, and then we'll open the floor and address questions. In general, while the company performed very well during 2016, we achieved about $918 million revenue run rate, which was a very strong year. We generated about 32% gross profit, which for us is right on target for us and our year-end earnings per share was about (02:19 – 02:26) of being a growth company. 2016 was a hard year in some of our areas, particularly at our Global Power Thermoelectric Unit. That had a very, very difficult year and it was driven by a very hard year in the oil and gas industry. But in general, the company is very pleased with the performance and we're excited about what's happening in 2017, 2018, and 2019 and beyond. So with all of that said, we're going to turn the phone over to Mr. Barry Steele, our CFO, for his normal copious detailed analysis. Barry?

Thank you, Dan. Thanks everybody for joining us today. Our net earnings of $26 million, which made this the strongest quarter of 2016, included a couple unusual effects, in addition to the purchase accounting impacts related to our strategic acquisition. These include an unrealized foreign currency gain of $6.3 million and a one-time expense related to our management reorganization of $2 million. The currency benefit was mainly the result of the stronger U.S. dollar in the quarter. We hold a significant amount of our cash in U.S. dollars at our foreign subsidiaries. We also have a significant intercompany current account between our U.S. subsidiaries and our foreign subsidiaries. These balances, which have grown during the year, are market adjusted each period resulting in an unrealized gain in the current quarter of the period and both gains and losses in other periods. The management organization expenses mainly comprise of severance expense and other costs for several eliminated management positions. This adjustment in our management team will help orient our team to our strategy, but also lower annual operating expenses by about $3 million making room for our cost structure – in our cost structure for new investments earmarked to support our product expansion and other growth-oriented initiatives. Adjusting for all these effects, our more normal diluted earnings per share would've been about $0.68 for the quarter compared to a similarly adjusted diluted earnings per share amount of $0.61 for the 2015 fourth quarter. Our revenue for the quarter grew to $236.5 million, which is an increase of $24.3 million or about 11% compared with the prior year fourth quarter. This included 5% growth or a $6.9 million increase in revenue for our Automotive segment, and a very strong $19.6 million in new revenue from the company we acquired earlier this year,…

All right, Barry. Thank you very much for that very good and detailed report. Christy, we'll open the floor for questions, if you're ready.

Your first question comes from the line of Samik Chatterjee with JPMorgan.

Hi. Morning, Dan; morning, Barry. So firstly, I just want to catch up with you on the 2017 guidance. You highlighted a couple of headwinds on the 2017 guide related to prior, which is FX and softer production. What are you seeing in terms of offset? Are you seeing stronger growth elsewhere, maybe like in CSZ, which is driving that reiteration of the guide and if you could quantify how much of the – how much of an effect on 2017 as the production cuts that you've seen recently from your customers?

Well, the biggest impact we've seen so far in 2017 was our carryover from 2016, when the customers here in North America, particularly Ford and GM adjusted their production schedules to balance their inventory. They took shutdowns and that was a bit of an impact on our 2016 fourth quarter, and we'll continue to be – have some carryover impact in the first quarter of 2017. The odds are very long, but that will actually not impact our overall business in 2017. Our non-automotive groups look like they're going to be – have a very strong year. The CSZ group has a couple of very strong initiatives, probably lead by one of our product lines, the Hemotherm blood warming device. We're seeing extremely strong demand in the marketplace for this device and we also see strong demand for all of our products as we continue to move CSZ into a growth mode expanding their capabilities by adding our own direct sales force and expanding production capabilities internally. We also see our GPT unit – the global energy group is going to have a much better year than 2016. We're beginning to see our quarter backlog get stronger and we're beginning to see activity in the natural gas fields, which is our primary marketplace. I'm not really sure if I had addressed all of your questions. If you have any follow-up for that, I'll give you a free chip on that.

Great. Thanks, Dan. Just a quick follow-up. So you now have $177 million of cash on the balance sheet and you also have a share repurchase authorization out there. How are you thinking in terms of using the cash on the balance sheet between like acquisitions and share repurchases?

Well, we're keenly interested in adding any capabilities we can through acquisition. As you know, we are constantly looking for opportunities to add to our product portfolio and expand our market breadth around the world. So that's the number one thing we generate and retain cash for. We have announced that we have a stock repurchase program in place. That is targeted at being able to make sure that when we see our stock price in the marketplace drop below some clear targets for value that we will take action to be able to buy back those shares of stock in the marketplace, which we consider to be a strong value. So, our prime use for the cash that we have and that we generate is to fund growth through acquisition of new product opportunities and market expansions.

Got it. Great. Thank you.

Thank you.

Your next question comes from the line of Gary Prestopino with Barrington.

Hey. Good morning, everyone.

Good morning, Gary.

Couple of questions here. Just in terms of the magnitude of R&D expense and SG&A expenses in 2017, as a percentage of revenue, should they stay fairly stable as we model out 2017 as they were as a percentage of sales in 2016?

I think that – Gary, it's a good question. I think that you'll see that we're not expecting any major new projects or launches of new additional expenses. I think you'll probably see us plateau and you'll see normal expansions for general increases in terms of inflation and some special projects. But I think you can model pretty much the run rate that we're at right now.

Okay. And then, in the press release, you talk about new products and future growth drivers. We know about the battery thermal management, battery management systems, electronic solutions, but what other things are you – could you maybe talk about that you're working on automotive interior thermal management and medical thermal management devices? You mentioned the blood warming product, but could you maybe give us just a little look-see into some of the other things that you may be working on?

Well, in the medical products area, we're focusing on trying to keep patients comfortable and helping in the rehabilitation of patients. So there is a large group of things that we're looking at and working on today. The medical product industry takes some work to get products introduced and screened into. We're taking all the steps necessary today and have for this past year of ownership of CSZ group, been preparing for growth. We've added production capacity. We've added engineering design capacity. We've added office space. We're adding to the facilities and to the team to get ready to launch the initiatives that we want to see for growth for them. You've also seen some announcements that we're adding our own direct sales force. Those team members are being brought in and trained right now and we expect to see them bring in lots of new opportunities for that business. So, there's no particular single project we're working on at this time, but there are a lot of projects that we're working and looking at reviewing for growth for CSZ. All the other products that we're working on, of course, are in development and the ones that we have announced we announce them when we get a customer commitment. When we get a customer order we announce that that order has been achieved. The other products such as the interior heating and cooling zonal projects that you have mentioned, we have been working on for several years and we're beginning to see very good traction in the marketplace, lots of interest. But we don't have any custom commitments at the moment, and we'll continue to work on those until we do.

Okay. Thank you.

Your next question comes from the line of Matt Koranda with ROTH Capital.

Hi, guys. Thanks for taking my questions.

Good morning, Matt.

Good morning.

Early morning to you.

Thank you. Gross margins are really strong this quarter guys. Just wanted to see if you could call out if there was any benefit from peso and hryvnia devaluation versus the dollar during the quarter? And then also maybe we could just discuss sort of – is this the new run rate that we would expect for 2017? Any puts and takes there?

In general, I would say, I'm going to let Barry answer the details, but in general, I would say that our gross margins are right on our targets. These are exactly where we would like to be, somewhere in that low to mid-30% range. Our model is designed to operate in this range. And we're very pleased with the successes of that. And there are some impacts to a strong dollar. And Barry will give you the details on that, but yeah, we're very happy where the gross margins are, and we think those are (17:10 – 17:16).

So we don't see a lot of tailwind coming from it, although generally for the year, compared to the prior year, we see lower cost for the peso and the hryvnia slightly. So we wouldn't call out the fourth quarter as being meaningful in terms of the change in currency, except for the top line. We had about $2.5 million in lost top line revenue in the fourth quarter, just from the decrease in the euro that we saw – and the Chinese currency during the fourth quarter. So we probably would actually beat the guidance on the top line if it wasn't for currency, for that small adjustment. But for profitability, it's about the same as we've seen for the entire year.

All right. That's helpful, guys. Just one more maybe on CCS growth outlook for the year. I know that the release says that you see challenges in the coming year for growth in the years ahead. But just wanted to see if you could put any more color around that in terms of just what's causing some of the challenges this year, in particular, and then why the confidence further out?

We don't really have any other things to add to this. The comment is as we have said in the past year, we expect some continued headwind for growth in the CCS area with continued strength in the heat and vent systems as they continue to grow and takeover a larger portion of the mid-range and entry level vehicles. So, you're going to see continued headwind on the CCS business segment and that will be augmented by other products and other areas. And we will expect to see the growth in that area continuing and pick up in 2018, 2019 and 2020. We're very excited about some of the new innovations that are coming in our CCS products. We're beginning to introduce these now to our customers, and we'll see some very good growth from that again in the future.

Got it. I'll jump back in queue. Thanks, guys.

Thanks, Matt.

Your last question comes from the line – actually, your next question comes from the line of Steve Dyer with Craig-Hallum.

Good morning, Dan, Barry.

Good morning.

Good morning.

Just following up on Matt's question on CCS. I know in the past year, is it more a function of new businesses coming more from heat-vent than heat-cooled, or are you actually seeing some program switch from heat-cool to heat-vent? And if so, would you expect most of that to be behind you or does that sort of continue for a while?

Steve, the phenomenon where we see some customers making some switches to their portfolio, actually introducing heat-vent where they didn't have it before in some of their products is really a forward-looking phenomenon. We've seen a little bit in the past year, but will affect us more as we get through 2017. Keep in mind that when we look at switches, it isn't always at lower price but sometimes additional content we're able to capture. So, generally it's a lower price, but we view it as a positive effect more because our customers looking at having two solutions to go-to-the-market with and that covers more potential products that they have in the marketplace.

Okay, that's helpful. And then you talked about a little bit of contribution from BTM at the end of the year. Are you able to quantify that or maybe how it ramps into 2018, whether it'd be by number of programs, et cetera?

It's going to be pretty small in the fourth quarter. The exciting thing for us is that we'll actually be shipping real product versus our production by the end of the year. It doesn't really start to become meaningful until 2018. If you recall, we announced that our revenue – sorry, annual run rate will be around $35 million to $40 million when it gets to full rough ramp up on both projects that we have, both contracts. I think about 18 months and that 18-month period starts with the end of this year.

It's a little too early to tell right now and give a forecast of numbers and growth rates at this point.

Got it. Okay. Last question for me. It sounds like early this year, there's been some inventory rebalancing, et cetera. Maybe the year has started a little bit softer than past years have. Would you expect kind of revenue growth year-over-year to ramp as the year goes on, second half to be better than first half?

Yeah. The early indications are that the first quarter has been a little bit light, driven by the North American business being – some inventory adjustments. Particularly Ford and GM have backed off a little bit and it's primarily just to adjust inventory. They ran hard in the fourth quarter and now they're – they had a little bit of extra stock. So, we don't see any indications that there is a dramatic reduction in demand. The North American marketplace is running at an all-time high rate. And, frankly, customers are still buying like crazy. So, we don't see any indications in the rest of the markets worldwide that would cause us to be concerned about 2017's automotive rates. Europe is still running at a good rate, but they're not running at records. And the Chinese market is stabilized. They're not doing fantastic but they're doing good. And we see a generally good (22:35 – 22:46).

Okay. And then, I guess, I know you don't get into the quarterly guidance so much, but just directionally, how should we think about the March quarter versus December?

I think it's sequentially higher, but keep in mind that we had an easy comp and that we didn't own CSZ in the first quarter.

Yeah. That was going to be my point. The first quarter, we're going to be getting – picking up a quarter from CSZ, which we didn't have last year. So you'll see some substantial growth for us by that. But in the automotive business, I think you'll see about the same as you saw in the fourth quarter.

Great. Thank you.

Our last question comes from the line of Matt Koranda with ROTH Capital.

Hey, guys. Just wanted to follow-up. I have to ask this question because no one else did. So how do you guys feel about your footprint and just the ability to serve customers in North America? There is some sort of border tax or border adjustment tax in place. I mean, just help us understand how you're planning for the various scenarios that are out there. And would any of the scenarios involve shifting capacity into the U.S. in certain cases?

Well, we are as confused as the Trump administration appears to be about what their policies are. Our physical plant and facilities are – in North America are driven by a Mexican presence. That's where we have set up our business. That's the way we run. We don't really have capacities or facilities to be able to make dramatic shifts in our production. Our North American manufacturing base is primarily based upon presence in Canada for our Global Power Systems and a large presence here in the U.S. for our medical products division. Obviously, if the rules change, we will evaluate those rules and change our strategies or adjust our strategies as necessary. From what we've seen so far, there's a lot of rhetoric about a 20% tariff on products produced in Mexico. We have a very good and strong operation in Mexico. They would be described in traditional terms as a maquiladora. So lots of products, materials are gathered from around the world, brought into the Mexican facilities. They are assembled and the value added there is primarily labor and testing. And then those products are distributed to our customers in Mexico, U.S. and in Canada. And we would have to evaluate what impact these tariffs or duties might have on our operations. Obviously, these are cost that would be passed on to our customers. So, it's not exactly an easy thing to do, but it's certainly not easy for us to plan for some unknown threat of an economic war between these countries. So in general, we're going to take a wait-and-see action – sorry, wait-and-see attitude and try to see what really comes out of the government. The administration is making a lot of say, ratably (25:42) noise. The full government has to vote and pass new laws and we'll review those laws and make our plans based on that.

Only thing I would add to that, Matt, is that our manufacturing strategy has been to serve our customers locally. So when we look at our facilities in China and Asia generally, we also have a plant in Vietnam and in Eastern Europe, those plants do not bring – do not bring product back to the North American locations from those plants. They serve those local regions.

Got it. Okay. Thanks, guys. That's helpful.

We have a follow-up question from the line of Gary Frank Prestopino with Barrington.

Yeah. Dan, just on GPT. You said it was starting to show signs of a pick-up. Do you feel that there is going to be – project revenue coming down the pipe for 2017? Or do you just feel that, it's just more of a normalized reset of the capital spending in the Energy industry and we're not going to have that variation in the top line growth that we saw in 2015 versus 2016?

Well, I don't – I would certainly wouldn't describe the oil and gas markets as anything close to normal at this point. There's still a great depression going on in oil and gas. It's much more pronounced in oil than it is in gas. It's been described that oil is global and gas is local. Gas demand is still very strong and it is strong by region around the world and so we've adjusted our strategies to focus on markets where gas – oil – sorry, gas distribution and – sorry, gas distribution and research is high. South America, Southeast Asia, and a little bit into the Mid-East. The activity there is very high. Canada and the U.S., the activity has flattened out a bit, although the demand for natural gas is very strong. That's one of our stronger market segments in this Global Power Unit and we do see the 2017 backlog increasing. 2016 was – it was a 100-year event in oil and gas and we were impacted by that and we continue to be under pressure from the softness in the oil and gas businesses. So we see 2017 as a stronger year. Will it achieve what we saw in 2015? I don't know. There's a very good possibility. You have to remember that that business is not at all like all of the rest of our businesses. It is basically a contract business. So we get contracts, we build the equipment, deliver the equipment and we can only do that when the customers are building pipelines or servicing pipelines. So it's a very good business. 2016 was a very bad year, 2015 was a very good year. We're expecting 2017 to be somewhere probably in between.

Okay. That's helpful. And then just lastly, on the sales force for Cincinnati Sub-Zero, how many individuals will you need to cover the markets that you're serving?

Hopefully, billions and billions. We're starting with our own direct team. We'll add people as the demand requires. But the United States is a very large and diverse marketplace in the medical industry. We're probably going to be adding somewhere around 15 to 30 people in total. We're well into that process now and we're very excited about the caliber of people that we're attracting and the types of opportunities that this new team is going to bring us.

Okay. Thank you.

Okay. Thanks a lot.

Your next question comes from the line of Steve Dyer with Craig-Hallum.

I lied. I have one more. Barry, I know tax rate has been a little bit of a moving target. How should we think about modeling that in 2017?

In our models, we use the low-20%s as we look into the 2017 period, say, anywhere between 22% and 23%.

Okay. Thank you.

Thank you. This does conclude today's conference call. Please disconnect your lines at this time, and have a wonderful day.