Good morning and welcome to Gentherm Inc. 2022 Third Quarter Results Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Yijing Brentano. Please go ahead.

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 comments, 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 pleased with the solid performance of the third quarter, during which we achieved the highest quarterly revenue in company history on an organic basis. In addition, during the quarter we closed the acquisitions of Alfmeier and Dacheng Medical, which expanded Gentherm value proposition in both automotive and medical. With the addition of Alfmeier and Dacheng , we grew 37% year-over-year or 44%, excluding the impact of foreign currency translation. Adjusting for foreign currency translation and the Alfmeier acquisition, automotive revenues increased 29% year-over-year in the third quarter, outperforming actual light vehicle production in our key markets by nearly 300 basis points. The integration of the two acquired businesses is well underway. I am pleased to share that we are progressing on schedule and have already implemented actions that will enable us to realize 20% of our cost synergy goals, starting in 2023. More importantly, our customers are already benefiting from Gentherm expanded value proposition. Demand for our thermal and pneumatic massage and lumbar comfort solutions, especially in the EV market continues to be strong, as evidenced by the milestone achievements of our third quarter. First, we want our inaugural combined award for thermal and pneumatic comfort with one of the largest global EV manufacturers which is also one of the largest awards on a single EV in our history. Second, we recently announced that the 2024 Cadillac Celestiq EV will be the first to market vehicle to feature Gentherm climate sense for zone microclimate system as standard equipment. These awards underscore the growing traction of our innovative solutions. During the third quarter, we continue to face one of the toughest operating environments with material and labor cost inflation, semiconductor shortages and other supply chain challenges. Nevertheless,…

Thank you, Phil. Let me turn to slide 7, and focus on the items that are most significantly impacted our third quarter results. For the quarter product revenues increased by 37% compared to the same period of last year, including the contribution from the acquisitions. If we adjust for the impact of acquisitions and FX, our overall product revenue increased by 27%. Starting with the automotive segment, automotive revenues were 322 million, corresponding to a 38% increase compared to the prior year period. Adjusting for the 41 million contribution from Alfmeier and foreign currency translation, automotive revenue increased by 29%. This compares to a 26% increase in the actual light vehicle production in our key markets of North America, Europe, China, Japan and Korea and as Phil just mentioned, we outperformed the light vehicle production volume by nearly 300 basis points. Excluding FX impact revenue increased in all the automotive product lines compared to the prior period. And more specifically, steering wheel heaters revenue increased 38% year-over-year primarily due to higher sales on multiple GM platforms, as well as continued growth from one of the largest global EV manufacturers. BPS revenue increased 35% due to higher demand of our proprietary battery thermal management solutions on the Jeep Renegade and [Indiscerenible]. TCS revenues increased by 31% due to higher sales to GM, Ford and Stellantis for the trucks and SUVs. CP revenue increased by 30% due to higher sales on GM SUVs, and several Toyota and Honda models. Electronics revenue increased by 6% due to higher sales of our multifunction ECUs to Ford, and the growth in automotive electronics was significantly offset by decline in non-automotive electronics sales. Revenues increased by 4% due to higher sales with several customers. Our automotive revenue increased by 33% due to higher sales or net…

Thank you very much. We will now begin the question and answer session. [Operator Instructions] The first question comes from the line of Matthew Koranda with ROTH Capital. Please go ahead.

Hi, guys. Good morning. And thanks for taking the questions. Just wanted to start off with the award environment. And wanting to see I think last quarter, you guys were able to break out Alfmeier versus sort of core Gentherm awards. Honestly, if you could at least maybe directionally speak to the breakdown there. And then also on the thermal and pneumatic awards, is there more in the pipeline that combines the two? Or is that just sort of a one off? When there was kind of a quick one, just that was opportunistic? Or maybe if you could just kind of characterize the size of the pipeline that it has the combined two words that be helpful.

Sure, thanks, Matt. First of all, we’re pretty pleased with the amount of awards in the quarter, typically that quarter is a little bit on the lighter side just in terms of activity. So it was good quarter. In terms of the breakdown as our typical practice, we’re not going to break down the specific products in our awards portfolio, but I will say that the thermal awards were significantly higher than the pneumatic awards in the quarter. Getting to your second question about the combined awards yes, we definitely see that interest starting to build with several customers, makes a lot of sense for a couple reasons. One is to bundle some of the technology integration. And the second one is from a purchasing standpoint, you’re typically going through the same decision makers as the OEMs. And so it makes a lot of sense for them to negotiate a package. So that’s kind of what we’re seeing, but we’re certainly really excited about that first combined win with large global EV manufacturer.

And then just on the outperformance verse production in your respective regions I mean, not to nitpick that you guys are typically a little bit higher in terms of outperformance relative to production and just curious if you maybe you can give a little bit of color on sort of what you’re seeing in terms of maybe production mix or any kind of holdups on the supply chain front that are causing that kind of lower level of outperformance relative to production regions?

Good question, Matt. Yes, it was, in many regards, very good. Outperformance quarter. unfortunately we did have a couple unique headwinds that I’ll point out. On the good side, demand was very high for our core products, especially CCS and steering wheel heat, those grew significantly with higher take rate and launches. We saw a nice increase in EPS. In fact, I think it was the highest quarter on record for us with EPS. And that’s with a lot of the ramp ups of the Jeep battery heater. And then of course, we launched the BMW 7 series plug in hybrid in the quarter. So a lot of good momentum there compared to market. Headwind wise are two factors. The first one is if you look back at 2021 third quarter, we actually had a 15 percentage point outperformance versus 2020 third quarter. so it was pretty tough cop. That quarter included a lot of new launches, which typically bring a kind of a spike at the beginning of the launch. So that comparison was a little bit difficult. And then the second one which is meaningful is around electronics, and some unique activity in the quarter, which Matteo mentioned, we have a non automotive electronics business that’s kind of built into our overall automotive revenue base. That’s a result of the Tech acquisition that happened several years back, back in 2017. We made the conscious decision to start phasing out some low margin customers in a quarter and saw a decline in revenue as a result of that. And then also there were within that bundle of customer of products and customers, there were some customers where we withheld shipments during inflationary cost recovery negotiations. Actually, if you just look at that non automotive electronics and take that out of the mix, we would have outperformed 600 basis points, rather than 300 basis points just on that factor alone. So that’s the breakdown for it.

And then just on the gross margin front, maybe one from Matteo wondered if maybe you can kind of disaggregate some of the puts and takes on gross margin within the quarter on a year-over-year basis, just because he called out wage material freight, I think all buyers a bit lower on the gross margin front, and then FX impacted. So just wondering if you can kind of maybe least give us relative sizing of those negative headwinds on gross margin so you can get a better sense for how to model going forward. And then how much did I guess volume and price sort of help you to the good side on gross margins?

Sure Matt hi, good morning. So let me take that. So first of all, I think the dilutive impact of the acquisitions on the gross margin rates in the quarter was about 280 basis points. So if you normalize by that, you really see a decline year-over-year from 28.5% to 27% on a comparable basis. So it’s about 150 basis points. And let me start with the pressures about 230 basis points was driven by the material in wage inflation. Then higher regular freight and -- was about another 230 bips. And then the effects impact due to the depreciation of the Euro and the Korean one primarily compared to the U.S. dollars was about 70 bips. So these were the primary negative drivers. On the positive side, you see that the volume was the bigger one. And then also the positive impact of the price recoveries from customers that we started to talk about in the last earnings call. And we are pretty pleased on how things are progressing. So that’s kind of the breakdown.

And then just last one for me on the outlook, it looks like not a whole lot has changed. Although I did notice that in the EBITDA margins from acquisitions, it looks like you did bring that one down a little bit too low single digit EBITDA margin. Just wondered if you could give a little bit more color on sort of what you’re seeing on that front and I will leave it for others.

Yes. So if I look back what we were expected about three months ago, I would say that the organic business performed a little better than that we were thinking of the last earnings call. If you recall, we were expecting for the second half the organic business to be at about 15% EBITDA and actually legacy Gentherm closed at about 14.8 in the quarter. So I will say the organic business was a little better. And maybe the acquisitions were a little worse and we can talk through quickly about primary Alfmeier. We had a couple of discrete items that occurred in the quarter, primarily on the manufacturing side. And that we’re working through with the team. And that created a drag of about 60 basis points in the in the quarter which we are expecting also to continue in the fourth quarter. So that’s really the dynamic that is happening. But overall given our year-to-date performance, in order to hit the midpoint of our annual guidance we are expected to deliver about similar amount of revenue in the fourth quarter compared to the third, which is maybe a little more conservative, pessimistic that what IHS or S&P Global is currently forecasting for our revenue market in the fourth quarter. And then on the margin, we need to achieve about, a little bit above 11% EBITDA margin in the fourth quarter, which is really in line with what we did in the third, if you adjust for the incentive compensation adjustment that I mentioned in my prepared remarks plus one extra month of OPEX coming from the two acquisitions. So that’s how we are seeing it for the remainder of the year.

Maybe I’ve just follow up on the Alfmeier manufacturing issue that you mentioned, just any more color on sort of what specifically that is that you can kind of share with us?

Sure, I’ll jump in on that one. Well, first of all, I think that when you look at the core Alfmeier business it withstanding some of these short term effects would have been pretty close to what we expected. But there definitely are some short term issues. One example of that is the ramp up of the next generation, SMA valve set for the pneumatic product there. We’re launching a new valve that controls all the future products. And that’s right, the middle of a ramp up. And as typical for new technologies, the upfront costs of those ramp ups content tend to be pretty high. And that’s kind of what we’re working through. But good line of sight to get that worked out over the next couple quarters.

The next question comes from the line of Luke Junk with Baird. Please go ahead.

Thanks for taking the questions just a couple of for me first one is start with a question on the joint thermal and pneumatic when two parts of this question first with Alfmeier closing in August. Can you just speak about the speed that this came together at and what it signals about the state of that integration overall? And then second is you had this conversation or are having other conversations I’m just wondering, how customers are looking at thermal and pneumatic? Is this a case of have two products being jointly booked? Or are you starting to see real integration between the two products that customers are already contemplating?

Hi Luke. Yes, I mean, the timing was good on the first award. There were two packages that were out at the same time. And immediately, when we made the announcements, a lot of interest by that OEM came together and looked at the opportunity to bundle that. But that is very consistent now with what we’re seeing with other customers. It makes a lot of sense to have, where you can have one supplier who can integrate these things, because you can do a little bit more effectively. So I would say, to be honest with you the interest from customers, almost more than we can handle and combining these products, both in terms of bundling. So there is that factor of bundling up from a purchasing standpoint. But there’s a lot of interest on how do we make the combined products more effective and efficient for the OEMs. But especially for the end consumer performance but also from a technology and cost standpoint. So those are a little bit longer term, because in those cases, we’re going to work with the customers on potential literal integration of product as an example, electronics makes a lot of sense to combine these two technologies. And, of course there are opportunities to kind of put together the physical thermal product with the pneumatic product. Those are going to take a little bit more time. But certainly this idea of bundling the awards is something that we see going forward.

And then my second question, either Phil or Matteo might make sense to just this one, just want to better understand what’s in the gross margin right now? So of course, this is the first quarter of Alfmeier , which con that out was super helpful. Thank you for that. What I’m wondering about is the cost recovery component that is in the margin today, and not how that looks in absolute terms. But if we zoom out and look from 10,000 feet just to what extent the recoveries are in the third quarter margin relative to your bigger expectation for recovery in total and what might still be coming as we look to the fourth quarter and beyond as you progress in those conversations? Thank you.

So let me start with the first part. So overall, what we experienced in the third quarter and I’m talking right now Luke this is legacy, we had about $14 million of lost revenue due to the supply chain disruptions. The majority of which is driven by customers that shut us down due to shortages that are independent from [indiscernible]. And then an incremental, about 8 million cost of goods sold in the form of premium freight, spot buys, incremental normal freight cost that we continue to see in the quarter net of recoveries. So when you adjust for that, also, in the fourth quarter, similar to what we said, in the prior quarters, you really have still about 200 basis points, negative impact in the gross margin, due to the supply chain dynamics that we’re still seeing. Things are a little better compared to the second, we still are incurring these type of costs. Through your second part of the question on the recovery on the price. Overall we are pleased with the performance of the old recoveries. And here, I’m really talking about the work that our team is doing to recover the more systemic part of the evasions is really the material, the wage and the normal freight. Let’s set aside the spot price. As you may recall, we really took an holistic approach. We went after it in four different ways. Number one, reimbursement or onetime cost of the exponential freight and the spot price, which in the quarter were actually about 70%. We were able to recover which is a little higher rate than what we had in prior quarters. So we are pleased with that. But then also the other side was really negotiated price increases and lower and price reduction with our customers to offset the material and the freight inflation. And then obviously last is the achieving better terms on our new business awards, again, in the form of higher prices and better margins. And as you know, we really established a process to partner with our OEMs to try to get appropriate recoveries. And we think that the strategy of delay, a little bit of the negotiation or the recoveries until we had the full pictures, in order to avoid to go back to the customer several times, is really paying off. So far, we would expect in the second half, to achieve about $50 million of pricing increases. We were able to negotiate about 70% of those and we have line of sight in negotiating the remaining 30% in the fourth quarter. So I think we are pleased on how the team is progressing in the areas of price recoveries.

The next question comes from Glenn Chin with Seaport Research Partners. Please go ahead.

Thank you. Good morning, folks. Phil, may I just ask you to expand upon your comments that you expect I think you said supply chain issues, you expected them to persist for some time, just what you’re seeing out there? What leads you to conclude that and then sort of a related issue what you’re seeing from your customers just in terms of OEM production and schedule volatility, etc?

Yes, well, definitely we’re, while we definitely have seen improvements in the quarter, and even seeing some more gradual improvement in early stages of Q4 it’s still pretty darn volatile out there. Typically, there are just surprises that pop up from specific semiconductor suppliers. One of the big challenges in general is just the visibility that we’re getting from the suppliers is much less than in the past. We’re typically seeing somewhere between call it five to eight weeks of visibility. And that’s it beyond that none of the semiconductor suppliers are willing to give firm commitment. So outside of that window we’re just doing our best to try to stay with in front of the suppliers and maintain our allocation properly. But there were definitely cases where promised shipments came in short. We had to expedite. We had to readjust our factories. But all in all, I think our teams did an excellent job of keeping the flow to the best level possible. Definitely on the second part of that, we continue to see, again, not at the same level, but we continue to see pretty significant OEM delivery shortfalls in a short window of time. And that causes quite a bit of disruption in the factories. You get lost productivity in the time when you aren’t producing. And then this is we’re seeing a little bit more of the within a couple of weeks, the volume comes back. And then we’re working overtime and hustling to try to get the parts out. And then even in some cases spending money on expedited freight, which we typically get mostly reimbursed. Those are the big dynamics we’re seeing, still seeing it. Fortunately, it’s a little bit better rate. I don’t see anything right now that tells me we’re nearing the end. So I think we’re going to have to watch it really closely. We have to be agile which I think we’ve done a good job at. And hopefully in the next several quarters, this will alleviate.

Thank you for all the detail. And then I guess, just on the competitive environment Phil can you just tell us has things change there at all? I mean, yesterday, one of your recently acquired primary competitors was talking about some business wins. I don’t know if those are conquest or if it’s new business and likewise, I don’t know if you’re in the business. You guys have won or booked this quarter with conquest or new business. Can you tell us are you gaining share? Or are they gaining share or the pie just growing bigger?

Yes, I think one important point for us is this quarter was among the highest win rate quarters that we’ve ever had in our core business. So we’re really excited about that, tells us that customers still value our product, and they’re coming to us for those opportunities. In general, kind of the way the market is shaping out we still see the same dynamics in terms of direct source from our OEMs. We haven’t seen any material change there in the mix. That said, there are there are and have always been certain customers and programs that are awarded to the tier one seat manufacturer for the decision on sourcing. And so certainly there’s going to be a mix of opportunities there for us, the competitor you mentioned probably going to keep a lot more product in house. Although Lear remains an important customer for us, and we see opportunities with them. Secondly, we actually see increases in award momentum from other tier ones when they have the opportunity to choose. We’re really excited about our strengthening relationship with Allianz as an example. We’re becoming a preferred collaboration partner with them for both thermal and pneumatic. And so that’s pretty exciting for us. But all at all, we’re seeing good momentum.

Yes sir. We take the next question from the line of Ryan Sigdahl from Craig-Hallum Capital Group. Please go ahead.

Good morning, guys. Just one for us. So on climate sense we’ve seen, it seems like I guess thermal pneumatic comfort, kind of a lot of your advanced technologies are really pulling through especially on EVs. But we have one OEM for climate sense. Two models there now, but I guess, what’s the pipeline look like? Why is other technology advanced technologies pulling through better talk through kind of how you expect the next several quarters and years to play out for climate? Thanks.

Sure. Thanks. Well, obviously, we’re quite excited about the momentum we’re making with General Motors on climate sets. Celestiq we’ve got another wind in the pipeline, and obviously we’re heads down executing on that. We get one shot at the first go to market and we obviously want to be successful there, and then win more for them. So that’s our top priority is to really deliver for them. There are development projects that are happening right now with other customers. We’re being very selective about that, to make sure that they have a pathway to something that’s beneficial. And I think we’re executing and showing good results as expected to those projects, both in the thermal performance for the consumer and the vehicle, but also importantly the gains in battery efficiency and range. That said these changes are big changes from an infrastructure standpoint on the vehicle. And they require a long lead time to integrate climate sense with the overall thermal design of the vehicle to make them standard equipment, which is where you see the most benefit. And so when you talk about full climate sense, you have to match that up with the right timing with an OEM and as you know the car companies are at a fever pitch race to get EVs to the market. So making those big infrastructure changes sometimes has to fall at the right time. There’s definitely lots of interest. People get it. They know this is where the future has to go. So it’s going to take some time. In terms of the other technologies, especially on the thermal side, a lot of those new technology wins are kind of an effect of our climate sense development. We’re able to show climate sense to customers, they start to get excited about not just the full climate sense solution, but some of the different elements of it, some of the different effectors like neck conditioning or more steering wheel heat penetration or putting heat and CCS in the rear seats. So we’re seeing more and more of that start to flow through at the same time. And obviously, now that we have the pneumatic solutions, lumbar massage to go along with it, all that falls right in line with the OEMs movement towards improving the health and wellness and comfort of their passengers which is a huge differentiator for the car companies.

As there are no further questions, this concludes our question and answer session. I would like to turn the conference back to Phil Eyler for closing comments. Over to you sir.

Sure. Thanks, everyone for joining our call. I’m extremely proud of the global Gentherm team for continuing to drive groundbreaking innovation outperforming S&P Global Mobility production metrics, and delivering record quarterly revenue despite a challenging industry backdrop. As I’ve consistently shared in the past, we remain very focused on operational execution, innovation and cash flow generation. While we expect continued market wide changes in the near term, the momentum that we’re seeing on the top line coupled with our stringent cost management positions us well to deliver significant shareholder value over the long term. We appreciate your interest and support and look forward to keeping you apprised of our progress.

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.