Greetings, and welcome to the Gentherm, Inc. Second 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. It is now my pleasure to introduce your host Yijing Brentano, SVP, Investor Relations and Corporate Communications. Thank you. You may begin.

Thank you, Jessie, 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 Relations section of Gentherm's website. During this call, we may make forward-looking statements within the meaning of the 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 discussions 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 to their comparable GAAP financial measures are included in our earnings release. On the call with me today are Phil Eyler, President and CEO; and Barry Steele, Chief Financial Officer. Please note that during their comments, Phil and Barry will be referring to a presentation deck that we have made available on our website at gentherm.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.

Thank you, Yijing. Good morning, everyone, and thank you all for joining us today. It was great to see many of you at our Strategy Update event in New York City in June. My team and I are committed to disciplined execution towards our strategic goals which we presented to you there and driving shareholder value. Our second quarter results reflect both improvements in our core automotive business and the solid initial progress we're making in lowering our operating expenses. This morning, we reported second quarter product revenues of $263.8 million, an increase of 8.4% from the same period in 2017. In our Automotive Segment, we had growth of 11.6%, which included the acquisition of Etratech and favorable currency translation. More importantly, on an organic basis, the Automotive segment saw growth of approximately 2% despite headwind in North American vehicle production. Our Industrial segment revenues declined by 16.7%, primarily related to the timing of custom projects in both our power generation and industrial chamber businesses. We're seeing encouraging trends in our medical business as our direct sales force delivered both year-over-year and sequential revenue growth in the quarter. We reported an increase in adjusted EBITDA to $35.5 million in the quarter. Adjusted EPS of $0.58 improved $0.05 or 9% year-over-year. In total, our results in the quarter were in line with our expectations, and Barry will provide more details on the financials later on in the call. Overall, our outlook remains intact and we are focused on meeting the 2018 financial guidance that we provided to you at our Strategy Update in June. Now let's review some business highlights for the quarter, beginning with slide 5 in our presentation deck. As I just mentioned, we saw a return to organic growth in our Automotive business despite the decline in North…

Thanks, Phil, and thank you to everyone joining the call today. I'll start on slide 9 where you can see that during the second quarter of 2018, our product revenues increased by 8.4% to $253.8 million over the prior year. This increase included $25 million in higher revenues in our Automotive segment, partially offset by a $4.6 million decline in the Industrial segment. The automotive increase included both the acquisition-related benefit of Etratech totaling $15.2 million and a favorable effect of currency translation of about $6.5 million. Adjusting for these impacts, the Automotive segment grew organically by 2%, fully offsetting the organic decline during the first quarter. On a pro forma basis, Etratech grew by nearly 7% when taking into account its prior year second quarter revenue before the acquisition. The Automotive segment increase was in spite of a decline in automotive production volumes in North America. According to IATA, automotive production was down 2.5% in North America during the second quarter, a market that represents nearly half of our automotive product revenues. Even more importantly, production revenues for two of our top customers were significantly lower. North American production for Ford Motor Company, which represents approximately 11% of our product revenues, was down 13% during the quarter compared to the prior year, and Hyundai vehicle production, which is about 8% of our sales, was down 10% in North America and off 5% in Korea. These market changes along with our 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 Seat, or CCS, disproportionately to our other automotive products. This is because CCS revenues are concentrated in North America and that Ford and Hyundai are both important CCS customers.…

Thanks, Barry. Well, I know many of you either joined us in person or listened into the webcast of our Strategy Update on June 25, I wanted to quickly review the four key overarching strategies guiding where we are moving the company going forward to drive improved shareholder returns as we discussed at that meeting. These strategies are, one, focusing our growth on key businesses and product categories to drive sustainable above-market growth, attractive ROIC and strong technology synergies. Two, extending our technology leadership through innovation in both current and new product categories with the focus on five key areas, including thermophysiology, software and electronics, simulation, thermal engines and system integration. Number three, expanding our margins and driving return on invested capital through the Fit for Growth program, which is supported by a globally recognized consulting firm. And number four, optimizing our capital allocation, prioritizing opportunistic share repurchases, CapEx projects to drive organic growth, investing in core innovation and prudent bolt-on acquisitions to accelerate core growth. Now moving to slide 13, let me give you a quick update on two of these key pillars of our overall strategic plan, beginning with our plans to divest or wind down our non-core businesses. Intense work has begun on the process of searching for buyers for our CSZ, Industrial Chamber business and Global Power Technology business. We are engaging outside experts to help us with the process. Given the very early stages of these efforts, we do not yet have visibility into the timing of those divestitures. With respect to the product lines we plan to exit, we are well along in that process. We have finalized actions to exit the furniture business. We're winding down projects related to aviation, and we've sold the battery management electronics and industrial battery pack businesses Moving…

Thank you. At this time, we will be conducting the question-and-answer session. Our first question is coming from the line of Christopher Van Horn with B. Riley. Please proceed with your question.

Good morning. Thank you for taking the question.

Hi, Chris.

Seeing as it's on the forefront of everyone's mind and you did call it out a little bit in the press release, just curious around the tariff impact potentially to guidance – is it in your guidance? Any products that you could maybe call out that you've identified that were in the July 6 list? And then, any sort of strategy around finding alternative suppliers or other ways to source those products?

So, Chris, we've added about $3 million to $5 million in cost for the new tariffs into the second half.

Chris, to answer your second part of it, absolutely we're looking at all options to offset that $3 million to $5 million. Of course, if nothing were to be done, you could basically double that for the next year. But we have some good ideas on ways to mitigate that both through supplier activities, through some production relocation activities on our side and in some negotiations both with suppliers and potentially with customers. So, obviously we're not just going to accept the full amount, but that's what we're looking at right now.

Okay, great. Thanks for the color. Okay. With that out of the way, the full system award that you mentioned, it seems like a great opportunity set for you. Could you get a little bit more detail, you don't think – I don't know if you can give specific pricing, but how does it relate pricing-wise or opportunity-wise to some of the other things you're doing in the controller business. And is anybody else kind of offering this full set solution or are you kind of first movers here?

So, in terms of pricing, I'll just give you a general sense, obviously it's increased content which is what we're going after, adding more content per vehicle in our CCS suite of solutions. It also includes, importantly, the memory seat module, which we announced some pretty big activities on those, especially with the Ford intelligent positioning system that we announced last quarter. So, all those things obviously are exciting for us because, number one, they give us more content in the vehicle and number two, provide more value for the OEM customers in terms of ECU reduction going forward. So, as far as I know, I'm not aware of anyone else in our specific space that offers that solution.

Okay, great. And then, when you think about the launch phase of BTM and some of the programs coming online, it seems like that's going to be trailing off in the back half. And I just was curious, how long do you see those launch phases lasting, and is it the right way to think about it is you see kind of a slower, not a slow decline, but a decline over the back half of this year and maybe a little bit into 2019 as these ramp up?

Yeah. I think, what you said is about right. The second half of the year is our primary ramp up period, which by the time we hit 2019, we should be clicking pretty good.

Okay.

As with any new technology launch, obviously we're very focused on launching it correctly, get the quality right, and we're putting the amount of resources and cost necessary to assure that.

Okay. Thanks for the time. I'll hop back in the queue.

Thank you, Chris.

Thank you. The next question is coming from the line of Gary Prestopino with Barrington Research. Please proceed with your question.

Hey. Good morning, everyone.

Good morning, Gary.

Quick question. You said that – hi – of the $800 million of new business that you signed up, was it 46% with CCS or was it 40%?

46%, that's correct.

Okay, so 46%, that's on a six month basis. Can you give us any idea of how that was split between the quarters? I guess, what I'm trying to get at is, are you seeing more of an acceleration in CCS in your new business awards on automotive?

We're definitely seeing an acceleration in CCS awards, but I think if you look at the split, it's about the same, roughly equivalent.

I mean, opportunities can very quiet a bit just based on what vehicle programs are being awarded or being in the market basically (00:30:17) got to look at it on a long-term just individual quarter.

No, that's fine. I'm just trying to get – I'm happy with the progress.

We're seeing a nice weighting towards conquest wins in the CCS market too, which for us is pretty exciting.

Okay. And then, Barry, as far as the tax rate goes, you said there's going to be variation there, but what caused the tax rate to be down this quarter versus where you think it's going to be the back half of the year?

It's basically discrete items, Gary.

Yeah.

We have some intercompany transactions that basically switch different – our taxable income to different jurisdictions. We have variations in our different tax rate. So that's one thing. That was related to repatriation of our cash. And then, the windfall tax is basically when we have stock option exercises, we'll get a tax deduction in excess of and the expense that we booked, that benefits the quarter as well. Those are all discrete items that you booked individually in the quarter, not as part of your estimate.

Sure. Are there going to be these similar discrete items, so do you think – you said 24% for the back half of the year, right?

Yes. There is very good possibility that we'll have other discrete items in the second half.

Okay. Thank you.

Thank you, Gary.

Thank you. Our next question comes from the line of Matt Koranda with ROTH Capital. Please proceed with your question.

Hey, guys. Good morning.

Good morning, Matt.

First question is on CCS. Just in terms of the sequential increase that was good to see, should we expect sequential growth for the rest of the year?

That's what we're seeing so far, yes.

I'm noticing more domestic China OEMs in your deck. So, maybe if you could call out what is CCS penetration like for you guys, what kind of domestics currently? And then, is there much quotation activity with them at the moment? Is that contributing at all to the wins that you presented?

Yeah, a lot activity in the domestic market there. The OEMs are – I would say at least this is my view, they are aggressively trying to keep up with the kinds of comfort features that the global OEMs are implementing. When you look at our share, you asked the question about our share, we're about 50% of the market on CCS in China. So, I think we're doing a really good job of capturing our fair share. We've put in place a really strong key account team for the domestic China market, and that team is obviously aggressively working with the OEMs and marketing our solutions to assure we're right there front and center strategically with the right domestic Chinese OEMs. We're not trying to capture everything, but certainly going after what we perceive as the OEMs that will be most effective for our growth.

Okay. That's helpful. And then, just in terms of the drill down a little deeper, I think you guys said 46% of the $800 million was CCS. Is there any way to give us a sense for what was active heat/cool versus heat/vent in the CCS vents year-to-date?

We're still seeing more of the CCS vent. If you look at the architectures of current vehicles, there are still transition of entry in mid cars to adding the CCS technology. And obviously there's more of those vehicles in the world, so those are quickly transitioning to vent. Although, as you look beyond 2021 launches, we're starting to see the CCS active really pick up. That's pretty consistent with what we continue to see in the first half of the year.

Got it. That's helpful as well. And then, just in terms of the pipeline on BTM notice you guys called out development contracts with two Asian OEMs, wanted to get a sense for sort of what is the gestation period when you signed a development contract between that and sort of a decision point or program award?

It varies quite a bit, but generally if you get a development contract, you go through the process and you're somewhere in the six-month period to a year period of doing the analysis prior to an award, that's on average.

Okay. Last one for me, just on gross margins. I was wondering sort of, I mean, it looks like your guidance does embed EBITDA and gross margin as you called out sort of volume increases, efficiencies set by sort of the tariff headwinds that you're going to be facing in the back half here. So, could you bridge us sort of the 30%-plus gross margins that your guidance implies in the back half and sort of how do we get there? What's more important – are the volume increases sort of the driver, are we counting on quite a bit of sourcing efficiencies, just a little bit of color there just in terms of how we get there?

They're definitely the things you mentioned, but you missed a couple to the Fit-for-Growth activities will start to help our production expenses. You missed the Battery Thermal management will improve as we grow their revenue there, so covering the fixed cost that happens within that product line. The things you mentioned which are exactly right at the higher revenue will get higher – it will help because of the higher contribution margin, and the bouncing out, if you will, of the cost or the price to the customer versus the cost to our supply base for pricing actions.

On that one, Matt, I'm really excited about the work that our operations and purchasing team are doing to bring down costs. Unfortunately once we do those activities, it takes a little while to get the revised – the right cost to flow through our inventory. So that's taken a little longer than we expected, but I expect that will pick up pretty good in the second half of the year.

Can you guys call it one-time launch cost with the Battery Thermal Management launch this quarter, is that possible?

We didn't give a specific number, but keep in mind that there isn't just the launch cost themselves, there's also the fixed costs that are out there to support a much larger business like a depreciation of all the equipment that's in place.

Okay, all right. I'll jump back in queue. Thanks, guys.

Thank you, Matt.

Thank you. Our next question is coming from the line of Steve Dyer with Craig-Hallum. Please proceed with your question.

Thanks. Good morning, guys. A couple of questions that I didn't hear you address, just percentage of new auto awards both overall auto as well as CCS that are new versus existing renewals?

We have more conquest or new wins than renewals, over 50%.

Okay, great. And then, I didn't hear how much if it's material and how much you guys received from the divestiture of the battery electronics impact business?

It was a large number, less than $1 million.

Okay, got it. That's it for me. Thank you.

Thank you, Steve.

Thank you. We do have a follow-up question coming from the line of Gary Prestopino with Barrington Research. Please proceed with your question.

Yeah. Just – Phil, looking at your automotive awards, there seems to be an interior award for the Mercedes S-Class, is that on the feature? Is that specifically throughout the whole interior of the car armrests, floors, et cetera?

Yeah. That one is really very interesting, that's surfaces and a pillow, a rear seat pillow.

A rear seat pillow?

Yeah.

Is that that built into the seat?

It is. It's an attached pillow. It's kind of the head and upper back/neck rest.

That's interesting. Okay. Just trying to understand exactly what that was. And that's for the S-class?

Yes.

Okay. Is that – you see that proliferating throughout the Mercedes model lineup or is it just specifically for the S-Class right now?

It's a little too early to tell on that, but certainly we're seeing a lot more interest in discussions across multiple OEMs about adding these types of comfort features on the luxury side.

Yeah. Okay. All right. Thank you.

Thank you.

Thank you. It appears we have no additional questions at this time. So I'd like to pass the floor back over to Mr. Eyler if any additional concluding comments.

Thank you, operator. Thanks everyone for joining our call today. Just to reiterate, we remain focused on execution, innovation and cost improvement. I'm confident that we'll deliver significant shareholder value in the quarters and years ahead. And we certainly appreciate everyone's support and interest. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.