Greetings, and welcome to Gentherm Inc. Third quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I would now turn the conference over to your host, Ms. Yijing Brentano, Investor Relations. Please go ahead.

Thank you, Sian, 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 the federal security laws. These statements reflect our current views with respect to future events and financial performance. We undertake no obligation to update them, 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 the 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 Matteo Anversa, Chief Financial Officer. Please note that during their comments, Phil and Matteo will be referring to the presentation deck that we have made available on our website at gentherm.com/events. In addition, they will refer to performance excluding divested assets and assets held for sale as our core business, which include Automotive and Gentherm Medical. After their prepared remarks, we will be pleased to take your questions. So before I turn the call to Phil, I would like to remind you about certain adjustments related to a reclassification of amortization of customer relationships last year, which Matteo discussed on our 1Q earnings call. These adjustments continue to impact some of our previously reported third quarter 2018 financial items. This resulted in $2.6 million being reclassified from a contra revenue item into SG&A for the third quarter of 2018, which impacted revenue for other automotive as well as revenue for each of our industrial businesses. As Matteo pointed out on our 1Q earnings call, the annual impact for 2018 was $10.2 million increase in both product revenue and SG&A. As a result, the gross margin rate and EBITDA margin rate were also impacted by 70 basis points and 10 basis points, respectively, for full year 2018. Now I'd like to turn the call over to Phil.

Thank you, Yijing. Good morning, everyone, and thank you for joining us today. During the third quarter, the challenging macroeconomic and automotive industry conditions continued. As we move through the year, actual light vehicle production levels have fallen well short of industry estimates every quarter. The strike at General Motors, our largest customer, magnified the impact of the shrinking production volume. Nonetheless, we were still able to deliver strong operating performance in the quarter despite revenues being below our expectations. First, we were able to continue to outperform in automotive versus the key markets that we serve. Excluding the impact of foreign currency translation and the GM strike, our 1.5% decline in organic automotive revenue compares to a decline of approximately 3% in global vehicle production. In our core automotive product line, which excludes cables and non-automotive electronics, we saw growth of nearly 1% in the quarter year-over-year. With the addition of $270 million in awards during the quarter, we have now secured $2.5 billion in automotive awards since the beginning of 2018. Our pipeline of potential awards for the balance of 2019 gives us confidence in our continued ability to outperform the automotive market, even in light of the reduced or delayed level of award activity that we are seeing by OEMs in the near term. Year-to-date, we saw a double-digit growth in Medical as a result of growth for many of our existing products, such as a Blanketrol as well as the addition of Stihler products to our portfolio. On the cost front, we continue to make progress on our Fit-for-Growth activities through purchasing excellent and rigorous cost controls. In addition, we took proactive steps to rightsize our factories for lower volumes earlier in the year when the slowdown in automotive production volume became apparent. This has allowed…

Thanks, Phil, and thank you to everyone joining the call today. I will start now on Slide 8, and focus on the items that most significantly impacted our third quarter. For the quarter, product revenues declined by 8.2% compared to the same period of last year. Automotive revenues declined 4.4%. After adjusting for the impact of foreign exchange, automotive revenues declined 2.8%, outpacing the global automotive production. The industrial segment declined approximately 48%, primarily due to the disposition of the CSZ Industrial chamber business. Excluding the assets held for sale and then impact of FX, our overall revenue declined by 2.8%. The 2.8% year-over-year decline in the automotive segment was a result of the headwind in global vehicle production as well as the GM strike, which impacted our automotive revenues by 1.3%. However, we slightly outperformed the global production in the third quarter. According to IHS latest data, global light vehicle production in the third quarter declined 3.2% year-over-year. Our automotive business outpaced the market as a result of the continued strength in our BTM product line, where revenue increased by 59% primarily due to the PACE award winning in BTM solution that we discussed in the prior quarters. In addition, we saw a slight increase in seat heaters and other automotive. New launches in seat heaters more than offset the continued revenue decline at Volkswagen. Our other automotive increased almost 15% as a result of strong take rate of thermal cupholders with BMW. CCS revenue declined 9.7%, actually 8.2% if we exclude FX, primarily due to the GM strike, lower automotive production level, new platform changeover effect as well as vehicle cancellation. This was partially offset by several new launches and growth with new customers. Steering wheel heaters revenue declined by 8%, primarily due to the lower vehicle production…

[Operator Instructions]. The first question comes from Gary Prestopino from Barrington Research.

Just looking at the gross margin and you factored back in that warranty expense, looks like the gross margin was running at about 30.7%. Given your Fit-for-Growth initiatives that -- and what you're doing with the plant consolidation, Phil, do you think that, that is kind of the high watermark that the company -- or a level the company can maintain going forward, somewhere in the 30% range?

Yes, Gary, I do. I think, obviously it's somewhat going to be relative to the volume levels on a quarterly basis, but certainly if you look at the volume level that we operated in this quarter, we feel very good about 30%-plus being kind of our run rate. We have a good pipeline of continued cost improvements that will help us offset future price downs from our customers. And so we're feeling really good about this range of 30% to 32% that we've been guiding towards longer term.

Okay. And then the -- what you're doing with the factories, that's already in -- that is -- the expense capture that you're getting there from consolidating two plants, that's already in the numbers that you totaled for Firt-For-Growth initiatives that you're targeting?

It is part of our Fit-for-Growth that we're targeting, yes. We won't see the cost benefit from that start to kick in until 2021. And the completion of those projects won't be done until the end of 2021. So you will see the full effect of those really in 2022 going forward.

Okay. And then two other quick ones. On the CCSC, so I think Matteo, you mentioned a lot of that was due to GM. Is that correct? Where the revenues were down almost 10% a lot of that was due -- I know GM is a big client there, but I just want to make sure I got that right.

So let me grab that one too, Gary. The -- yes, the GM stock was a significant part of our decline in CCS. But there are handful of other things too. We talked last quarter about the GM truck transition from the old model to the new model. That continued to have some impact in the quarter, in Q3. And if you look year-over-year, certainly combination of vehicle cancellations, so if you look at sedans across, especially the U.S. customers, that was a pretty significant hit compared to last year, many cars just disappeared. And then market decline. If you look at customers like VW, Honda, Nissan, they have all seen significant sales decline year-over-year in the quarter. We offset -- we did have some nice offsets though. We had new vehicles and new customers come online in the quarter. A few examples of those are, especially in Japan in the quarter, Mazda and Subaru saw some nice increases in the quarter. But that kind of give you a feel for the net impact. We continue to still be very confident in CCS going forward. Just as a note, we in the quarter -- or actually year-to-date, we've won 90% of our CCS acquisition targets, with still very, very, very high hit rate on CCS.

Okay. And then just lastly, the new revenue growth that you have given the decline -- actually the decline this year, that pegged off of core revenues, that's just your core revenue, right? Core automotive and Gentherm Medical, right?

That is correct.

Your next question comes from Chris Van Horn from B. Riley FBR.

Congrats on the execution despite a challenging environment. So just really quick on the guidance. The adjustment on the top line, would you be able to quantify what effect the GM strike had on that adjustment? And what it might have been ex GM strike?

Yes. Let me break that down a little bit in terms of the overall impact there. The strike was over half of that decline in terms of the guidance last period versus this period. 30%-or-so is continued market deterioration, not necessarily correlates to GM. If you look at the overall market, back in -- let's just look at the second half as an example, between July and October, we've seen about a 3.9% deterioration in the market. Take GM out of that equation, about 3.5%, and we're definitely seeing that across our other customers. That's about a 30% impact of the change. We're also seeing some very specific headwinds, mostly market related, but in some of the specific areas, we play outside of the, let's call it, standard automotive product line. So cables continue to be a headwind. We'll keep running into declining revenue from Bosch, most of that related to oxygen sensors on ICE vehicles and especially diesels. We also see continued declines in our forecast from customers related to non-automotive electronic, and we think that's really tied to RV more than anything. We do have 1 discrete item related to -- that we expect to see in Q4, which is a decline in orders from Daimler on their 48 Volt EQ Boost system of which our BTM solution is integral. And this is -- we believe, this is an endeavor production correction for them, and we expect the recovery to come in the next year.

Okay. Got it. The activity -- the award activity level just continues to be impressive, in my view. So your active cool, you've seen a number of wins here. Are you starting to see a little bit more activity on that -- on the Active side? And I think you mentioned it's the first and second row, and maybe some of the dynamics around what OEMs are thinking there as well?

Definitely, we are seeing more interest. Last quarter, we announced the BMW 7 Series award. This quarter we announced the launch on the Land Rover. And many more discussions happening with other OEMs around adding active cool to systems, and I think, that becomes even more relevant with the EVs. And there seems to be a lot more interest around it, as part of incremental solutions going forward on some form of electrified vehicles. So we're pretty optimistic that we're going to see that part of CCS gradually increase, let's say, following the 2021 year as these new awards start rolling in.

Got it. And then just forgot to ask, on the Land Rover and BMW, are those global programs?

BMW is, yes. Land Rover I believe is, yes.

Okay. And then on the BEV cell connecting technology, just remind us of maybe what that does? And any detail you can give around that product and the opportunities that are there?

So this product is the device that literally connects every cell on the battery-packed network in the BMW MINI EV, and the high complex -- this system happens to be a high complex copper wire-based system that has, as you can imagine, exceedingly high performance and reliability standards. We are happy about this one. This gives us a ton of credibility, not only with the BMW but in the market. On the heels of that, we have some very innovative cell connecting technologies that are garnering a lot of interest by OEMs. So we really think that sell-connecting technology will be a big part of our growth in the electrification space.

Okay. Got it. And then the last one for me, with the new hire, it seems like you're starting to get a little bit more aggressive on the Asian front. And I just want to get an update on how you see that expanding, and specifically in China, how you see that business growing in terms of percent of revenue? And is there any margin difference relative to some of your other regions?

Yes. That's I mean, obviously, the -- one of the major objectives is for us to accelerate growth in China. I think we're still very underserved in that market across all of our product platforms. If you look at our business, it's about right now 7% for the year, which is just -- it's too low. And most of our business there is our, let's call it, more traditional product. So we're really going to get aggressive with electronic. Obviously, Helen has quite a background in high-tech product lines, especially in electronic. So we will look at that as a key opportunity as well as pushing to drive battery thermal management opportunities as well as more climate comfort solution. But we'll also look -- we're strategic. What are opportunities to partner in China? Are there specific product lines and solutions that might be unique in China? And we're really looking for that share of our total revenue to grow dramatically over the coming years. In terms of your margin question, we operate at about the same margin right now in China, as we do otherwise worldwide.

Your next question comes from Steve Dyer from Craig-Hallum.

A lot of mine have been answered. I guess, just as you look at the new auto awards, you've touched on it a little bit. They've been a little softer in the last 2 quarters versus the 5, 6 quarters before that, and you sort of referenced in your prepared remarks some delays and reductions. Can you give a little bit more color there to the degree that you are willing what you're seeing there?

Sure. Sure. Yes, we've definitely seen some delays in reductions in the year. The majority of it is -- appears to be kind of delayed decision-making by the OEMs on how they want to architect their vehicles and make decisions on suppliers. We do have a nice pipeline now that we're tracking. I would expect this year to be somewhere between our results of 2017 and 2018. So I still think it's going to close out in a solid manner, but last year was certainly a banner year, and there was a lot of activity last year.

Got it. Okay. And then just jumping over to the ECU business, that business came on really, really strongly last year, and it's sort of been at a run rate flat to down a little bit since then. Is that sort of a function of the program, or programs that it's on? Anything particularly driving that? I know you had a new win in the quarter and then sort of how do you see that business in the future?

Sure. Yes, most of the ECU business is related to the Etratech acquisition that took place back in late 2017. And that's where we're seeing most of the decline, is that what I call non-automotive business and I lump RV into that. So RV revenue is down significantly over the last couple of years, and that's had a big impact. That said, we are launching new products. We have announced the Changan product. We now had a full quarter of production for the platform, the first platform for our Ford Multifunction ECU. Just as a reminder, that is an integrated device that controls memory heat module and CCS for Ford vehicles. So pretty excited about that. And obviously, we're aggressively pursuing other opportunities to grow that side of the business. But certainly, it's been a tough run for nonautomotive electronics.

Got it. Okay. And then last one for me. Can you just remind me, I know at one point, you had a little bit longer-term guidance out there and haven't said anything more recently obviously, a lot is changing day-to-day in the auto industry, but do you have this year sort of -- could you remind us sort of the targets or how you're thinking about the next year or two?

Yes. We are obviously -- one thing we announced last quarter was given the dynamic situation in the market, we made a decision to stop giving quarterly updates on our 2021 and beyond estimates with the caveat that we plan on early next year giving some general direction on our future performance, let's call that beyond 2021. So we'll come back in line with that. Obviously, market conditions since June of 2018 have been dramatically pressured downward. So that's an area we'll have to look closely at. I will say that we're ahead of schedule on our margin expansion activities. So when you look at the profitability direction that we have given all along, we still feel very strong that we are in good shape there.

[Operator Instructions]. Your next question comes from Scott Stember from CL King.

Most of my questions have been answered as well, but a couple of items. I appreciate obviously, last year was a better year for new awards, and it sounds like there are some delays, but could you just maybe talk about the level of quotation activity or bidding that you're giving, just to I guess, assure people that there's a lot of stuff in the pipeline that could come through next year that was delayed this year?

Yes. No, there is I think a very nice pipeline of opportunities that we're tracking over the next 18 months. As I said, I think, Q4 is going to be solid. I think we've got a good track on some pretty exciting opportunities there, and that will flow into the next year. And we're seeing more and more RFQs come in for ETM-type product, whether that's battery heating or cell connecting devices. Those 2 product lines, we see a nice flow. And then still, CCS continues -- we continue to see more RFQs for new vehicles and customers related to CCS and our other core products. On top of that, obviously, we've got a nice innovation pipeline that we continue to grow. And I believe, we are well positioned to grow through these innovations within our focused growth strategy.

Got it. And last one for me going to BTM, maybe you touched on that. I guess, early this year, you have given some targets of exit run rates for this year and potentially I think for 2020 as well. Can you maybe just touch on those, particularly now that you have this new, I guess, this fourth leg to the stool that will be helping you out?

Yes. I mean most of those new products that we're adding on are going to obviously launch in outer years. Our first, let's call it, new product line will launch in 2020, and that's the cell heating device. So most of the exit rate that we talked about was related to BTM, and most of that is related to the Daimler and FCA. Unfortunately in Q4, we've seen declines in orders from FCA and then we are seeing an adjustment order from Daimler in Q4, which we expect to come back in Q1. For you, the run rate based on those declines, we're probably close to $30 million run rate as opposed to the $50 million, but we expect that to pick up in 2020.

We have reached the end of the question-and-answer session. And I will now hand over to Mr. Phil Eyler for closing remarks.

Okay. Thanks, everyone, for joining our call today. As I've consistently shared in the past, we remain very focused on execution, innovation and cost improvement. I'm extremely proud of our team's ability to take swift operating action in light of the current challenges in the macroeconomic environment and with global automotive production levels. I continue to be confident that our efforts will allow us to deliver significant shareholder value in the future. Our innovation pipeline continues to grow, and we're well positioned to grow through our focused growth strategy. We appreciate your interest and support and look forward to keeping you apprised of our progress.

This concludes today's conference, and you may now disconnect your lines at this time. Thank you for your participation.