Greetings, welcome to the Gentherm Year-End and Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. At this time, I will turn the conference over to Yijing Brentano with Investor Relations. Ms. Brentano, you may now begin.

Thank you, Rob, 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. 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 or investor presentation. 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 as our core business, which include Automotive and Gentherm Medical. After their prepared remarks, we will be pleased to take your questions. 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 in 2018, which Matteo discussed on our 1Q 2019 earnings call. These adjustments continue to impact some of our previously reported fourth quarter 2018 financial items. This resulted in $2.4 million being reclassified from a contra revenue item into SG&A for the fourth 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 first quarter 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 both 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. In my comments this morning, I’d like to provide you a brief recap of our accomplishments on both the consolidated level and in each of our two core business units and then turn the call over to Matteo to provide more financial details on the fourth quarter and cover our guidance for 2020. As we look back at the year just completed, I believe there are three key takeaways. First, we effectively executed against our strategic growth plans, building and extending our core businesses. Second, we successfully completed the repositioning of our portfolio, divesting and or exiting non-core businesses and product lines. And third, we anticipated the challenging headwinds facing our industry and our company and proactively repositioned our cost base. In addition, we simultaneously improved our productivity. These two initiatives combined enabled us to remain well positioned to drive earnings growth and shareholder value. As a result in 2019, we expanded our gross and operating margins, increasing operating income by 16% and we generated record free cash flow. Accomplishing these achievements in such a challenging environment clearly demonstrates strong operational execution across our enterprise. Now, let’s go over this in a little bit more detail. Please turn to Slide 4. In 2019, we faced strong macroeconomic and automotive industry headwinds, including a nearly 6% decline in global vehicle production and continued weakening of major foreign currencies. In addition, the strike at General Motors, our largest customer, had a significant impact on our revenue. Despite the challenging environment, we delivered solid financial results for the year. 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 0.6% decrease…

Thank you, Phil, and thank you to everyone joining the call. So we’ll start on Slide 8, and focus my prepared remarks on the item that impacted our fourth quarter results. In the fourth quarter, our product revenues decreased year-over-year by $25.6 million or 10%. Automotive revenues decreased by 5.8% and Industrial revenues were reduced by 54% due to the disposition of the GPT and CSZ industrial chamber businesses in 2019. So starting with Automotive. If we adjust for the impact of FX, our Automotive organic revenues decreased by 4.6%. Now as you may recall, our fourth quarter was also negatively impacted by the GM strike. And if we adjust for the effects and the impact of the GM strike, our Automotive revenues would have been down 0.5%, compared to a decline in the global vehicle production of approximately 4.4%. So our Automotive business outpaced the market once again as a result of the continued strength in our BTM product line where revenue increased by approximately 4% due to the PACE award-winning BTM solution with Daimler. In addition, we saw an increase of 28% in Other Automotive as a result of the strong take rate of thermal cup holders with BMW. Conversely, CCS revenue decreased by 9.5%, or 8.4% if we exclude FX, primarily due to the GM strike, lower automotive production levels, new platform changeover effect as well as vehicle cancellations. Seat Heater revenues decreased 6.5% or 5.8% if we exclude FX, primarily due to the GM strike and lower production volumes at Mazda. Steering Wheel Heaters revenue decreased 5%, or 4% if you exclude FX. Now if we exclude the impact of the GM strike, we would have seen an increase in Steering Wheel Heaters as a result of higher revenues from Ford vehicles. Similar to last quarter,…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question will be coming from the line of Chris Van Horn with B. Riley FBR. Please proceed with your questions.

Good morning everyone and congrats on the quarter.

Hi Chris, thank you.

Thank you, Chris.

First on the gross margins, obviously, you were able to expand in a declining revenue environment. Maybe could you highlight, I know you said there's some fixed cost leverage and better supplier agreements, was there any main driver there, or was it just a multitude of things? And then kind of along that question, imagine Fit-for-Growth had a lot to do with it. And where are we in Fit-for-Growth relative to where we were kind of a year ago?

Yes, so the – so let me give you the – if you look at the fourth quarter of this year versus last year, so the 80 bips improvement. A couple of key factors, the biggest one, which is about 150 basis points was the labor productivity of the factories. If you may recall, the fourth quarter of last year the productivity was a little bumpy. So that's why this quarter the magnitude of this amount is a little higher than what we have experienced in the prior quarters during the year. Then the supplier cost reductions was another 120 basis points as we continue to drive sourcing cost out. And then the impact of the Fit-for-Growth combined with the lower premium freight, lower maintenance cost again most of it related to the improved productivity was another 50, 60 basis points each. And then these positive impacts were partially offset by the normal, annual price reduction, which is about 200 basis points. And then obviously the impact of the lower volume and the wage inflation makes the rest. So that's kind of to give you kind of an idea on the quarter. I think we feel good where Fit-for-Growth is. I think we continue to make very good progress. We completed about $44 million of the $75 million of identified actions and more to come for coming future.

I’d only add to that, Chris, that if you recall in previous quarters we've discussed that we're turning more attention to cost of goods sold reduction in our Fit-for-Growth project. So although we're still seeing improvements in OpEx, we're pretty excited about the momentum that our operations team is gaining on driving down variable costs.

Okay, great. And then just want to focus on the awards, obviously really strong quarter, maybe could you highlight the cell connecting board and what – is that technology competing with other types of technologies or are other players doing exactly what you're doing? And I imagine the market for that is going to be significant, and maybe some just highlights around that.

Sure, yes, thanks for asking that one. We're really excited about about the cell connecting business that we're starting to build. It's based on the same thin foil technology that we previously announced with the LG Chem heater that's going into the Jeep Renegade. And basically it's a proprietary technology that uses a mechanical manufacturing process as opposed to most of the competing product which uses chemical etching. So that's the real competitive differentiation from a process standpoint. And we think that puts us in a really good position from a cost standpoint, flexibility standpoint, provides more functionality for our customers and then also, as we pointed out on the comments, it's more environmentally-friendly. So there's a lot of advantages there. We've got a ton of interest. The first win was huge with a premium OEM in Germany. So I think that's – it's going to be one of our fastest growing products in our BTM line over the coming years.

Okay. Got it. And then climate sense, obviously I know it's still in development, but it seems like every quarter – there's more and more people looking at it and it feels like it's really going to be a really strong product. Now obviously, I think, the low-hanging fruit will be electric vehicles, but I imagine there's still people looking at it from more of a traditional drivetrain perspective. And I know timing is difficult, but if you could give us a sense of how it's progressing and where you see it maybe in the next six to twelve months.

Yes, continue – every quarter, we make good progress on the development. The GM – last quarter, we talked about the GM presentation that we did together with them at the SAE Conference, which was, I think, a pretty important milestone to get the message out there with really good customer test results. And that's creating even more interest. So we had a total amount of – we're up to a total of seven development projects and those are with customers in all regions. And we continue to refine the product and the solution, both the mechanical side of it, but most importantly the software and the algorithm side continues to get sharper and we're able to really optimize the comfort and the energy management of the system and optimize that mix with our algorithm. And so obviously we're quite optimistic, we're investing heavily in it and believe that that's going to be a core driver to long-term growth. And we do expect still sometime between now and when an award will come. Most of this is being developed for cars in the 2023 and beyond range at this point in time because of the significant architecture change that would be required.

Okay. All right, great. Thanks for all that color. I appreciate the time.

Thanks Chris.

Thanks Chris.

Our next question is from the line of Ryan Brinkman with J.P. Morgan. Please proceed with your questions.

Hi, thanks for your comments on coronavirus. Can you share what you are seeing in terms of the latest relative to the restart of production at your customers in China? Can you remind us of who your major customers are in that market? And what have you assumed for China production in your 2020 guide? And how at this stage should we maybe think about the cadence of sales and earnings tracking for the overall company in 2020 in light of the factor?

Well, I’ll start with – first of all, we're happy to say that our plants are gradually ramping up, majority of people are in the plants operating now our team has done, I think, an incredible job of managing that whole process as many other suppliers I'm sure are doing the same. We're seeing the same ramp up effects that you've probably heard from everyone else. They're slow to ramp up. Our customers are – see, the predominant business comes from the global OEMs who have JVs in China, customers like GM, SGM and Volkswagen, just as examples, and then to a smaller extent but still important extent the domestic OEMs. So that's been obviously extremely slow to ramp up and that's most of the impact that we're seeing on the $5 million to $10 million Q1 expectation. That said, we're working really hard to make sure that the supply chain is being managed on a daily basis. We've got a SWAT team in place that are managing that daily and doing a good job of keeping the flow going, obviously with challenges. And as this slow ramp up extends we expect more challenges to come on that front. When you look at our total revenue for the year as a company we had 7.4% in 2019. So you can kind of use that as a representation of the potential impact for the year and then as we said, Q1 $5 million to $10 million.

Okay, thanks. And then I think on the 3Q call you had commented you might address the 2021 target in early 2020. I see in the press release you are planning now to update it in June around the time of the Detroit Auto Show. Is that change in timing primarily a function of wanting to get a better understanding of the coronavirus outlook and interest? Broadly speaking, how would you characterize the company's performance sense, those figures were first provided in June, 2018, do you think that you are on track or even ahead of plan relative to what is under your control, but you're just dealing with a lower of volume environment? Is that how you'd characterize it? I'd be interested.

Yes, I'll go back to the first. It's more about the fact that we want to give a comprehensive overview of where the company's going, including the financial targets, which we've locked in to that specific day. So we actually have the time, date, location all coming together on that June 9. So that's really what's behind it. Of course, that gives us a more time to see what's happening with this dynamic market. On top of that, back to your second question, we definitely are happy with the progress we're making, and we're ahead of what we expected when it comes to cost. Fit-for-Growth has already been achieved, the $75 million. I expected it to take all of 2018 to achieve the identified projects on that front. And on top of that, I think we've done a great job of proactively managing the change in the dynamics of the market.

Great, thanks a lot.

The next question is from the line of Justin Clare with Roth Capital. Please proceed with your questions.

Hi, everyone, thanks for taking my questions.

Hi, Justin.

I guess, first off, so given the strong level of awards you saw in Q4 and then in 2019, I was wondering if you could talk about your market share for your various products. Do you believe you're taking meaningful share in heated and cooled seats – heated seats or with other product lines here?

I think so, Justin, we're – our win rate would give me confidence that we're doing that. We're taking on – we're winning business with customers that haven't been our customers in the past. And we measure our hit rate, and its' about – it's above 80% for the year on our core business. So yes, I have a good feeling that we're – I don't have the specific number to share with you, but the momentum certainly would tell me that's happening.

Okay, great. And then battery thermal management sales slowed a bit in Q4. I know there was a number of different factors that impacted Q4. But can you talk about why BTM sales took a pause in the quarter? And then how we should think about growth moving forward in 2020?

Yes, we talked about it in the last earnings call that we were seeing declining orders from Mercedes for the quarter and that did come through, a little bit better than we expected but it did come through – I don't say declining is the wrong word, but less than we had previously expected. So that was it. We still see ongoing growth of our BTM business as we head into 2020 though.

Okay, great. And then just one more for me. For 2020, can you talk about your gross margin expectations for the Automotive segment and then for the Medical business? I think for Medical, you've indicated margins are roughly in the 50% range. Is that a number we should be thinking about going forward here?

I think – I would say – let me make a comment, more – overall comment on the gross margin guidance. I think on one side, we are really pleased with the progress that we made with the manufacturing productivity and the sourcing savings throughout 2019 and we will be keeping focusing on these couple of items also in 2020, which obviously will benefit mostly the Automotive gross margin. However, as you know, every year, we face headwinds that we need to overcome, mostly with the price reduction with our customers, which is about 2%, 2.5% every year, wage inflation. And the other aspect that, I think, is important to consider is that we are launching some new programs, particularly in BTM. And generally, when we launch new programs, we face a little higher cost at the manufacturing sites to make sure that the launch is done properly. So also this one is an aspect that we considered in our guidance for the gross margin. But with that, I think we are comfortable that we continued implementing the Fit-for-Growth actions as well as increasing revenue, which will give us its cost leverage that we are on the right path to achieve our target of 30-plus gross margin in the future. And then back to your question on Medical versus Automotive, the Medical margins are – gross margins are clearly higher than Automotive. So that helps us a little bit in the – in terms of mix in 2020 versus 2019, as we are projecting growth in revenue Medical at a faster pace than Automotive.

Okay, thanks guys.

Thank you.

Thank you, Justin.

Your next question comes from the line of Ryan Sigdahl with Craig-Hallum. Please proceed with your questions.

Hey guys good morning. And congrats on the good quarter.

Thanks Ryan. Good morning.

As it relates to the revenue guidance, and you kind of alluded to it there that you expect faster growth in Medical this year, but – at least directionally, so guidance is negative 1% to plus 3% for the year growth in Medical. Directionally, are you expecting growth in Automotive in 2020 within your guidance?

Yes, maybe I can break down the guidance a little bit for you and just give you some of the key elements that went into it. Certainly, as everyone well knows, the IHS estimates of vehicle production continue to be dynamic right up to the moment of this call almost and now down 2% is the estimate. I have to say though, we're definitely seeing, in addition, further headwinds for some of our customers with our product. I'll give you some examples. Ford has a little bit of outsize decline as compared to the market, and they're a large customer of ours. In addition to that, we have some large customers that are Japanese OEMs, Honda and Nissan, that have a little bit more effect on our revenue. That said, we're seeing really nice growth with several customers, some of our large customers and then bringing on new customers. So that's helping to offset that. We'll also continue to see full year effect of sedans that were canceled by some of our North America customers last year. And then obviously, as we mentioned, some early impact of the coronavirus in China creating some more headwind. But if you think about our products, certainly, Medical, BTM and steering wheel heat, we expect above company average growth. Most of our headwinds and challenges would be in more of the mature core climate products, which we expect to be kind of on the relatively flat side given the headwinds. That said, on the core business, the CCS, CT, Cable business, we're still quite confident in the longer term growth given our strong win rate and new products that we'll be launching in the upcoming year that will help us offset these headwinds.

Great. You talked about a lot of the headwinds from kind of the OEMs. What, if any, benefit or uptick are you expecting from GM now that you'll have them basically fully ramped back up to production?

Yes, it's good that they ramped back up. We haven't seen any further uptick though as compared to kind of the normal run rate. We continue to win new business and ramp up new vehicles, which helps us grow with them. So that's – I think that's a good summary there.

And then shifting over to R&D, it was down 9% in 2019, 12% looking back two years. Given kind of your operating expense guidance and the remaining $31 million to be realized in your Fit-for-Growth initiatives, do you expect further reduction in R&D spend in 2020? Or are we at a good kind of run rate here?

Yes. I would say – I would actually – would expect kind of the opposite dynamic. The Fit-for-Growth actions that we have to still implement and the benefits are all growth, right? And – but we – as we continue to win awards, and we won several awards in the prior few quarters, as you well know, I would expect the R&D cost actually to go slightly higher because we have to invest in more engineering resources to make sure that we properly launch the awards that we won. So that's the way I would think. So if you look at the mix between SG&A and R&D, I would expect a little more reduction on the SG&A versus the R&D.

Great, thanks guys. Good luck. That’s it from me.

Thank you.

Thank you.

The next question is from the line of Scott Stember with C.L. King. Please proceed with your questions.

Good morning. And thanks for taking my questions.

Sure, thanks Scott.

Maybe just talk about CCS, some of the new awards. Can you maybe talk about the composition, whether active versus passive, and anything else you can give us, just given the trends and the appetite from your customers as they continue to put this kind of [indiscernible] in their vehicles?

Yes. So CCS, great momentum in CCS awards for the year, that's about quarter of our awards in the year. So really excited about the momentum. As I said, the win rate is very high. Still continues to be more weight on the CCS win side than the CCS active, although, as we've previously talked about, we do continue to win CCS active awards and see more interest being developed, especially looking more towards electric vehicles and how much more benefit the OEMs are seeing there with energy efficiency. But definitely, the recent award with BMW has garnered a lot of attention with other OEMs, and we expect to continue to see more opportunities there with the active side.

Got it. And just from a high-level perspective, including talk about comparisons year-over-year, when do we anniversary the elimination of the Industrial businesses that you have sold or discontinued?

So one of the two businesses was sold earlier in the year in the first half and then the GPT business was sold on October 1. So really, the fourth quarter of 2020 would be the first quarter where really we're not going to see any impact on that when we do the year-over-year comparison.

Got it. All right that’s all I have. Thank you.

Let me clarify one thing on an adjusted basis, though. Remember that, as I said in my prepared remarks, in the fourth quarter, we took a $5.9 million charge for the GPT business that you're still going to see. But when we report 2020 on an adjusted basis, you're not going to see the discontinued businesses.

Got it. Thank you.

You bet.

Thank you. We have reached the end of the question-and-answer session, I will now turn the call over to Phil Eyler for closing remarks.

Great. Thanks, everyone, for joining our call today. As I've consistently shared with you in the past, we remain very focused on operational 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 the global automotive production environment. While we expect continued industry headwinds in 2020, the momentum in new awards along with expanding demand for our new technologies and our continued focus on productivity position us very well to deliver significant long-term shareholder value. We appreciate your interest and support, and look forward to keeping you apprised of our progress.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.