Greetings. Welcome to the Gentherm Inc. Fourth Quarter and Year-End 2021 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. I will now turn the conference over to your host, Yijing Brentano, Corporate Development and Investor

Relations. Thank you. You may begin. Thank you, and good morning, everyone. And thanks 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 Securities laws. Statements reflect our current views with respect to future events and financial performance. And actual results may differ materially. We undertake no obligation to update them, except as required by law. Please see Gentherm's earnings release and its SEC filings, including the latest 10-K and subsequent reports for discussions of our risk factors and other risks 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. During their remarks, Phil and Matteo 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 for joining us today. I'm extremely proud of what the Gentherm team was able to accomplish in 2021, and what was a continuously challenging operating environment. As you can see on slide four, full-year automotive revenue outperformed light vehicle production in our key markets by approximately 13 percentage points, achieving the highest annual automotive revenue in the company's history and we secured near record automotive awards of $1.6 billion. In addition, we delivered record adjusted EBITDA, record cash flow from operations, and record free cash flow in 2021. Finally, we have clearly expanded our position as a leading supplier in the rapidly expanding electric vehicle market, which I will elaborate on in a few minutes. On the operations front, I would like to recognize our manufacturing and supply chain teams for working tirelessly to minimize the impact of volatile customer demand, escalating freight costs, material cost inflation, and of course, the global semiconductor shortages, including the anticipated supply gap with one of our suppliers in the fourth quarter, that we mentioned on our last earnings call. Matteo will provide details about our fourth quarter and full-year financial results in a few minutes. Now, turning to the automotive highlights on slide 5. In the fourth quarter, we launched our automotive solutions on 15 different vehicles across 11 OEMs, including BMW, Ford, Geely, General Motors, Hyundai, and Toyota. We continue to see momentum for our CCS product and launch on the Lincoln Zephyr, Nissan Ariya EV, Nissan Pathfinder, and Infiniti QX60. Of special note, our CCS solution is now launched on Range Rovers MLA platform, including plug-in hybrid and mild hybrid vehicles. While our cable business has been traditionally on internal combustion vehicles, I'm pleased to share that we launched the high-voltage cable…

Okay. Thank you, Phil. Let me turn to Slide 10 and focus on the items that most significantly impacted our fourth-quarter results. For the quarter, [Indiscernible] revenues decreased by 14% compared to the same period of last year and if we adjust for the impact of FX, our overall product revenue decreased by 13%. To starting with the Automotive segment, Automotive revenues were $237 million corresponding to a 15% decrease compared to the prior period. Adjusting for foreign currency translation, automotive revenue decreased by 14%, approximately 200 basis points below actual light vehicle production decline in our key markets of North America, Europe, China, Japan, and Korea. As a reminder, in the fourth quarter of 2020, we had a significant amount of new launches with very high take rates, and as a result, we had a record quarter in automotive revenues and outperformed light vehicle production by 20 percentage points in the year-ago period, which makes for an extremely tough comparison in the current year quarter. When comparing Q4 revenue results by product line with the record quarterly results achieved the previous year, most product lines decreased with the exception of BPS and other automotive. And more specifically, BPS revenues increased 1% as a result of higher sales of the self-connecting board solution on the BMW E MINI, increased take rate of the 48-volt Mercedes C class, and higher sales of air-cooling BTM, to General Motors. Other automotive revenues, increased by 79% due to higher sales of neck conditioners, and heated interior products. All the other automotive product lines declined primarily due to the lower production volume and difficult year-over-year comparisons. In addition, let me highlight a couple of unique factors that negatively impacted our fourth quarter. First, as Phil mentioned earlier, as anticipated, there was a semiconductor supply gap…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Matt Koranda with ROTH Capital. Please proceed with your question.

Hey, guys. Good morning. Thanks for taking the question.

Hey, Matt.

Good morning, Matt.

Morning, guys. Just wanted to start off on the cadence of revenue in 2022, especially in light of your comments about IHS, and your view relative to the industry. Any help on that front, in terms of how we should think about relative growth that you're expecting for the industry versus digest this forecast, and then how you guys assume take rate trend in the first half to help us out with revenue expectations?

Sure, Matt. I think we're basing everything on a couple of factors. Let me start off by saying first and foremost that demand for our product remains really high. There's significant indicators from the market that our product is really desired by consumers, dealers, etc. It's just a matter of continued volatility that we see at the moment. Number one, customer order cancellations are still there at a pretty high rates. We have to factor that in. Of course, we're in the middle as Matteo just mentioned, we're in the middle of the most difficult period that we faced when it comes to chip supplier volatility. Even in some cases, there are customers that we've had to work with to reduce their orders to us to match up with the supply that we have of chips, so that's one. We're also looking closely at all the orders and forecast from our customers. And when we look at the first-half, especially U.S., Europe and Korea, we see that -- we view that the IHS estimates are a little bit high in those countries. So maybe that's what's driving Q1 and Q2 lower. We are getting good feedback from customers and indications from semiconductor suppliers that the second half is going to be recovery. A gradual recovery, and if things pan out, we believe second half is likely to be a pretty strong period of time. So that's what's all built into our demand so a little bit lower expectations in the first half with some nice ramp-up in the second half. Got it, that's helpful, Phil thanks. And then is a good way to view sort of the supply chain headwinds that you guys are thinking into the guidance roughly the spread between the first half and second half EBITDA margins. So like call it 600, 700 bits of margin pressure relative to the second half. Be a way to think about supply chain headwinds. And maybe just if you can just walk us through where you're seeing sort of the most tightness since you're kind of going through the toughest environment right now, [Indiscernible] to get a better understanding of sort of where we feel and see tightness in this [Indiscernible].

Matt, let me give you maybe a little bit of color on what we have seen in the margins on the first half and the dynamics that we are facing. I'm going to start actually from where -- pick just from where Phil left. The fact that we are dealing with the supply gaps on our hand is a completely different dynamic from what we experienced for the majority of 2021. And this management of the supply gap comes with the significant amount of cost which is, again, in the form of premium freight, spot buys that really will impact the profitability in the first half of the year. And related to that, as you know, we are working with customers to get cost recoveries that where we have been actually pretty successful if you look at, for example, the fourth quarter, we were able to recall about almost 60% of the non-inflationary costs. However, the timing of these recoveries tends to be lumpy. And if you look at the amount that we were able to recover in the fourth quarter, this amount really reflects negotiation that started much earlier in the year. Therefore, when you take everything into consideration, I would expect the -- in the first half to have higher cost net of recoveries compared to what we have experienced in the fourth quarter. Then, I'm going to add a couple of other items. We are expecting inflation that -- both in terms of labor inflation, but most importantly, supplier inflation, where in the particular -- in the second half of 2021, we were able to mitigate through volume rebates from suppliers that will come also in 2022, but those tend to come later in the year. So we won't -- we will not have that in the first half of 2022. And then the last item I would highlight, we have annual customer price reduction that generally kick-in in the first half for each year. And we are planning to be able to mitigate some of these price reductions through negotiations with customers. But obviously the positive impact of these effects will come later in the year and not in the first half. It gives you a little bit the context of what we are expecting to occur in the first half, compared to the second half, just one final point just to put things into context, if you look at 2021 despite of all the challenges that we had, we had almost $70 million of loss revenue due to the supply gaps. We had $25 million incremental cost of goods sold in the form of premium freight spot buys in about $10 million of recoveries. When you adjust all of this, we would have hit about almost 18% EBITDA rate in the year, if you normalize for the supply chain impact. So I think overall, in spite of all the challenges, the team did a fantastic job in mitigating those.

Very detailed and helpful, Matteo, thank you. And then just lastly, I'm going to bring you up in this one. But on the bookings front, $540 million, a very nice step up sequentially and year-over-year. You guys called out several programs, but just curious if you can put it one on just mix of bookings and what you're seeing on that front in terms of shaping expectations around CCS versus Battery Performance Solutions side of things, and steering wheel theaters, which sounded you may have been heavy in the quarter on those. But just any color you can provide around the mix of bookings or quantify it, that'd be very helpful.

I think there's kind of a typical mix. Pretty heavy on CCS and steering wheel as you just pointed out, and even some pretty large heat programs, a lot of EV action in the quarter, which is really exciting on those products, but then we had a very significant -- certainly strategically significant award with Renault on our battery heater for our new proprietary thin foil product. We mentioned some nice ECU awards. It is a pretty balanced mix across our portfolio, and I think that's pretty consistent with what we see in our pipeline.

One thing I will add though -- sorry. One quick thing to add is, a new emerging product for us is high-voltage cables, which we pointed out, but we're getting ready to launch on that with a couple of platforms, seeing a lot more interest there. About 8% of our revenue as a company is cables. And that's maybe a quiet part of our business, but our expertise in cables has led to an awful lot of opportunities in the EV space, both on Cell Connecting. Most of the business we're getting there is from customers who come to us proactively and we're not out chasing those products a whole lot. We're pretty excited about that starting to pick up a little bit as well.

Pleasure.

[Operator Instructions]. Our next question comes from the line of Luke Junk with Baird. Please proceed with your question.

Good morning. Thank you for taking the questions. Phil.

Morning, Luke.

Wondering if you could give us a broader [Indiscernible] where you stand with your ClimateSense development contracts and maybe more importantly on this front where your capacity internally is to support this activity. Then you checked today plus what I assume is still a very high level of ongoing work with your first customer. How are you looking at your capacity to support further ClimateSense related development activity in 2022, incrementally versus FY '21?

Yes. That's a big challenge for us. We, obviously, all hands on deck with the production contract that we're finalizing development that launches for model year 24, and that's going quite well. But taken a lot of resources, especially on the software side, we're very selective on development contracts and we're really excited about the new one with this European OEM that's a serious one and we're definitely chasing after. We were fortunate to have a little bit of a gap. A slowdown in work on one contract that we completed that led us to be able to shift resources to that one. But absolutely we're, as I point out many times, we're -- we got to be really careful to not over commit on that, to make sure we produce the best results. What adds challenges to that is our electronics team seems to be the team that is the most burdened by a ClimateSense projects. And we're also using that team pretty heavily to work on redesigns of semiconductors, finding new suppliers to offset the challenges we have. So it's certainly, and I think this is the same for all electronics suppliers in the market is it's our biggest challenge is managing those resources, but we've done well so far. We're really excited about bringing our first ClimateSense project to market. And we continue to present the case for ClimateSense to our key customers and continue to get a lot of very positive feedback.

Thank you for that. Second question. Wondering -- I don't know to what extent you can speak to this field, but could you help us better understand the breakthrough nature of the CCS and Seat Heater award with the large EV OEM that you called out on the sides?

I think I have to stick pretty much with what we put in writing at this point. Some of our customers require certain levels of confidentiality in our communication. So it's -- that customer we've had some product, not a huge volume levels with steering wheel and some seat heat. And now that's broken into the CCS, multiple platforms of CCS, and combine that plus some new awards on heat. We're really excited about that, and it also applies importantly to multiple regions with this customer. I think it's really securing our relationship with that customer and worse -- we're really excited about it.

Okay, that's helpful. I appreciate that you could share that. And then if I could sneak this in here, maybe more of a tactical question given the dynamics that you're seeing around chips right now, both in the first -- the fourth quarter and extending into the start of the year, is that influencing the guidance in terms of outgrowth? If I compare the mid-point of the organic growth to what you're assuming on production, that puts the full-year around mid-single-digit outgrowth. Should we look at that and say maybe outgrowth would be more weighted to the back half of the year than the first half? Any comments there would be helpful. Thank you.

I would agree with what you just said. We certainly have -- as I pointed out, we're in the midst of the most significant challenges we faced on semiconductor shortages. But a fine point of it, as I pointed out, there are some customers where we literally have to constrain their orders proactively working with their ordering team to match our supply of chips. So that's certainly a drag on the first-half. We're keeping our fingers crossed that the recovery starts in the second half with semiconductor supply. That's what we're hearing. That's what the recovery plans would show from our suppliers. So all that is exciting. I do want to point out too. And we mentioned that the fourth quarter was a tough comp for us. And I think if you look at the first quarter of 2021 as a comp going into the early part of the year that was also a really high launch period for us for steering wheel and HOD and a couple of new programs that we launched with high take rate. So that's also a little bit of a headwind in the first quarter of the year.

Great, I appreciate the color I will leave it there, thank you.

Thank you Luke.

Thanks, Luke.

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

Right. Good morning, guys.

Hey, Ryan.

Hey, Ryan.

I just want to follow-up on that breakthrough CCS sort of a newbie. Is this typical timeline of two to three years until it hits production or is there an accelerated interest to that? And then secondly, I can't connect the dots to basically, one EV of note. Are we missing something there?

Yeah. The timeline is -- it is a little bit faster than the two-year typical period. And I'm not going to answer your second question.

Fair enough. As you think about medical growth rates directionally relative to your guidance, you think faster forward there?

I'd say roughly in line. Potential to be faster, but roughly in line with our guidance for next year.

Great. And then on the ClimateSense, so good to see a third European OEM and development projects. You had two OEMs that were on third development projects. Can you comment on status of [Indiscernible] the third, if they've advanced further? Just an update on those two key ones that have been longest duration there.

They're continuing very well, a lot of testing that's happening on those. In fact, some of them gone into exclusive testing, so it allowed us to free up some of the resources to work on this third one, as I mentioned earlier. So all positive but as I pointed out many times in the past, it's a long process. These OEMs are to really get the most of ClimateSense, it's a significant transformation of their HVAC strategy, and that's coming in the middle of a huge effort just to launch EVs. It's obviously taking a little longer than we had hoped with some of these folks. Now, here's the positive side is, as we're doing these development projects, were able to demonstrate the added content, step-wise, that we have. We talked about the enhanced CCS active product, we call IMTM. We think that's an integral part of ClimateSense and that's getting a lot of interest. The net conditioning, a lot of interest,. All the surface level heating and radiant heating, so all these things are getting a lot more attention independently as a result of these development contracts. So obviously, it may take some time to get to full blown ClimateSense, but we see more and more spin-off projects and potential interest in these added content plays as well.

Great. One more for me, just on the cadence throughout the year. Is Q4 decent run rate as you look at production, what your supply chain is to start the year for Q1 and then presumably gradual improvements throughout the year on revenue?

Sorry, Ryan, I didn't quite catch that is. You said a Q4, a decent run rate?

So you did $237 million of revenue in Q4. Is that a decent run rate to start the year for Q1 assuming the similar supply chain production challenges?

Ryan, what I would say, we don't give quarterly guidance. I would reiterate what we mentioned a little bit earlier in the call, where if you look at the cadence. We had expect -- if you look at the -- just the IHS production volume for our relevant market, IHS is expecting the second half versus the first half to be higher by about 5 percentage points, and I think is -- we think it's going to be a little higher than that. And that's the cadence that we are thinking is going to happen.

Great. Good luck, guys. Thanks.

Thanks. Ryan.

Thank you.

Ladies and gentlemen, 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. Thank you. And thanks, everyone, for joining our call today. As I've consistently shared in the past, we remain very focused on operational execution, innovation, and cash flow generation. I am extremely proud of our team's ability to take swift operating action in light of the significant supply chain challenges and fluctuating global automotive production levels, to deliver record adjusted EBITDA and free cash flow in 2021. While we expect continued industry headwinds in 2022, the momentum on awards, along with expanding demand for our new technologies and our continued focus on productivity, position us well to deliver significant long-term shareholder value. We appreciate your interest and support, and look forward to keeping you apprised of our progress.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.