Greetings, and welcome to Gentherm, Inc. First Quarter 2018 Earnings Conference 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, Investor Relations and Corporate Communications.

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…

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…

Thank you, sir. At this time, we will be conducting a question-and-answer session. Our first question today comes from Christopher Van Horn of B. Riley FBR. Please go ahead.

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.

The next question comes from Steve Dyer of Craig-Hallum. Please go ahead.

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.

Our next question comes from Matt Koranda of ROTH Capital Partners. Please go ahead.

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.

There are no further questions at this time. I'd like to turn the call back over to Phil Eyler for closing remarks.

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.

This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.