Greetings. And welcome to the Gentherm Fourth Quarter and Full Year Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Yijing Brentano, Senior Vice President of Strategy, Corporate Development and Investor Relations for Gentherm. 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, including certain pro forma measures related to the Alfmeier acquisition. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and 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. Let me start with slide 4 for our 2023 highlights. I'm extremely proud of what the Gentherm team achieved in 2023 despite a continuously challenging operating environment. Demand for our thermal comfort, massage and lumbar solutions continues to accelerate. We secured new Automotive business awards of $900 million in the fourth quarter, which brings us to $2.6 billion in 2023, setting a new quarterly and annual record. Our strong award momentum continued to drive revenue growth. We achieved record revenue for Automotive, Medical and total company for the full year of 2023. In addition, we also achieved record annual revenue for climate controlled seats, seat heaters and steering wheel heaters in 2023. It's worth noting that, adjusting for the impact from foreign exchange, the UAW strike and one-time recoveries, our core thermal product lines including CCS, seat heaters and steering wheel heaters, outperformed the production in our relevant markets by nearly 400 basis points in 2023. On the cost front, we continued our disciplined approach to managing operating expenses. We've reduced adjusted operating expense as a percent of revenue from 20% in 2018 when we launched our first fit for growth initiative to 16% in 2023. We delivered the highest annual adjusted EBITDA in company history, an increase of more than 30% compared to 2022. And we generated nearly $120 million of cash flow from operations and repurchased over $90 million worth of Gentherm shares. The new business wins, record revenues and key product lines, improved profitability and solid cash flow generation demonstrate strong execution by the Gentherm team. Now turning to slide 5. Let me highlight a few key pillars that drove our record $2.6 billion in new Automotive awards in 2023. First, at the top…

Okay. Thank you, Phil. Let me start on slide 10 and focus on the most significant items in our fourth quarter results. For the quarter, product revenues increased by 7% compared to the same period of last year. If we adjust for the impact of foreign exchange, our overall product revenue increased by 5%. Talking to the Automotive segment, Automotive revenues were $354 million, reflecting a 7% increase compared to the prior-year period. Adjusting for positive foreign currency translation and excluding the negative impact or the UAW strike, phasing out of the non-automotive electronics business, as well as one-time benefits from recoveries in both periods, Automotive revenues increased 10% against a difficult prior-year comparison. Actual light vehicle production in our key markets of North America, Europe, China, Japan and Korea increased 13% year-over-year. It is worth noting that our regional revenue mix is different from the actual production market. Adjusting for our regional revenue mix primarily as a result of our smaller percentage of revenue from China, our revenue growth would have outperformed production growth by approximately 150 basis points. We saw growth in the majority of our product lines, and more specifically, our steering wheel heaters revenue increased by 22% compared to the prior-year period, due to higher demand of our hands-on, detection-enabled steering wheel heaters with VW and Buick. Automotive cables revenue increased by 15% due to higher volume with Bosch and Samsung. BPS revenue increased 11% due to higher volume with Mercedes, primarily delayed timing from the third quarter, as well as higher price recoveries. TCS revenues increased by 6% due to higher volume with Hyundai Kia, BMW and the start of production at one of the largest global EV manufacturers. Seat heater revenue increased by 5% due to the ramp up on our electric vehicle for…

Thanks, Matteo. Now, let me summarize on slide 13. I want to thank the global Gentherm team for continued strong execution in 2023, delivering record new business wins, record revenues and record adjusted EBITDA. In 2024, our Climate and Comfort business is expected to grow more than 8% with expanding margins. In order to accomplish this and our long term growth, we're laser focused on three priorities in 2024. First, we're confident in our ability to continue the strong momentum of winning new Automotive business awards and maintaining our industry leading market share, given our large pipeline of opportunities. We will also execute on our unprecedented award backlog to ensure a successful ramp up with our key customers. Second, as Matteo just mentioned, we will execute on fit for growth initiatives to expand margins in the near term and position the company to achieve high teens adjusted EBITDA margin rate over time. And third, we will aggressively bring to market and expand our industry leading and proprietary next generation solutions, such as ClimateSense, WellSense, Pulse A massage and ComfortScale. Now, let me wrap up with Gentherm's unique investment thesis on slide 14. First, we're a pure play leader in thermal and pneumatic comfort. It's also important to highlight the benefit of being independent. We can work with any OEM and any seat manufacturer to create scores of innovative and unique configuration and solve for all of their applications. Second, the global automotive market is large. And more importantly, the thermal and pneumatic comfort market is growing at a much faster pace than the automotive market. We expect to see a much higher rate of adoption of our products into vehicles, and we're extremely well positioned to capitalize on this opportunity. Third, we provide unique, innovative and energy efficient solutions that are key to the vehicles of the future. Our technology is best-in-class and often a generation ahead of our competition. Finally, our track record of execution against our strategy, along with our robust financial discipline, will enable us to deliver high return growth outpacing the market. Now with that, I'll turn the call back to the operator to start the Q&A.

[Operator Instructions]. Our first question comes from the line of Matt Koranda with ROTH-MKM.

Just wanted to start out with the award environment and the $900 million in awards that you reported for the fourth quarter. Looks like a pretty big uptick sequentially and year-over-year. Just wanted to get a sense for how much of that was combined thermal and pneumatic technology in the awards. And then also on the GM award, just wanted to clarify what exactly you mean by the term architecture? Not to dumb it down too much, but do you just mean GM vehicles that incorporate multiple Gentherm products like steering wheel heat and CCS, et cetera? Just a bit more on that software solution and sort of what it does for your growth for the next few years would be helpful.  Phil Eyler: I'll start with the first question on the awards mix. It's probably better to put it in terms of the full year than just a specific quarter. But as we pointed out, our pneumatic business is growing at a faster rate than we expected. Consumer pull, especially from our traditional Gentherm longstanding customers, to replace other competitors and to grow in those customers has been tremendous. And definitely, as I point out with some of the examples, we're seeing this gradual shift to combined solutions for multiple reasons, the efficiency of supply and supply chain, plus improved performance being the primary drivers. But if you look at the total awards for the year, we would have had a record on the thermal products alone. And then, of course, add on top of that the growing pneumatics and combined awards, really tremendous year. And the pipeline is still strong going forward. Let me shift to the ClimateSense question with General Motors. Essentially, what this means is that our ClimateSense software will be embedded in nearly all vehicles of the GM future architecture in the future, and that's really the way they're designing their vehicle around, allowing these kinds of features to be more prevalent. So we're really excited about it. It really unlocks the ability to orchestrate any thermal seating or steering wheel application and really fits into our scalable view of how we're implementing ClimateSense, so that really ClimateSense is going to be the fundamental control of these microclimate devices. And that will help us to scale the content from, I would say, today's kind of normal CCS all the way up to that full content of ClimateSense over time with that customer.

Maybe just one for Matteo. The fourth quarter, it looks like you made some adjustments or you provided sort of a hypothetical adjustment for what automotive revenues would have been without the UAW strike and then the non-automotive electronics phase out. Maybe just wanted you to provide a little bit more color on how you got between sort of the plus 5% to 10% adjusted revenue growth in Automotive. And then for the outlook, it does look like you guys are including some decent outperformance versus production, which would be a return to sort of the normal state for Gentherm. Can you just talk about how that phases through the year? I think you had mentioned more launches toward the latter half of the year. So any sense you could give us for relative growth rate versus production in the first half versus the second would be great.  Matteo Anversa: Maybe let me start with the first one. Actually, in the press release, we outlined a little bit with a table. You really have a couple of things happening, the impact of the strike in the quarter was about almost $9.5 million, which was clearly lower than what we had anticipated in the last earnings call. And then when we're adding back the non-automotive electronics revenue, which was about $2.7 million, and then we had about $3.5 million of one-time customer recoveries, meaning that we're not expecting those to repeat, and then the foreign currency impact. So when you break it down, this will how you get to the reported number of growth to be about 10% that we alluded in the press release and the comments. On the cadence, I think was your second question, we're expecting revenue for sure, as I mentioned in my prepared remarks, to be lower in the first quarter, and then we continue to grow progressively throughout the year. And so, it's difficult to project and pinpoint what the outgrowth will be in every quarter. But overall, the reason why the second half revenue will be higher than the first half is primarily driven by timing of new launches, which are coming out in the latter part of the year.

Just last one for me and I'll turn it over. But the 2026 guidance change that you guys made, looks like a change of about $250 million at the midpoint relative to your earlier guidance you provided. I think the battery performance solutions growth was supposed to be about $150 million of that. So just wanted to understand sort of where are we taking out incremental revenue? It sounds like you guys mentioned just a little more reticence on the part of OEMs on EV production. Any other items to call out in terms of the change there for 2026?  Phil Eyler: Clearly, the BPS, you called out the right number at the midpoint was $150 million growth of BPS. We're actually going to see a decline of BPS, so not just a loss of the growth, but actually a decline from now until that time period. So that's going to be the biggest driver of the reduction. And then, as you pointed out, we expect to see a delayed ramp up of some of the EVs that we are targeted on just based on feedback from our customers and what we're seeing in the market expectations. The second, the next factor is related to North America vehicle production in 2026. We're actually seeing a decline in a few of our large North America OEMs outlook for 2026 based on the S&P global outlook, which kind of makes sense to us. So that's going to be a factor as well.

Our next question comes from the line of Glenn Chin with Seaport Research Partners.

Congrats on all the wins and the win rate. Just sort of following on Matt's line of questioning. There's been a lot of delays, deferrals in EV launches, production, et cetera. I assume that's already reflected in – there's nothing further to be reflected in the awards that you just booked, the $900 million in this quarter. But is it possible to dimension, Phil, what sort of revisions might have to be made to prior bookings, notwithstanding the fact that you're talking about it for 2026? But any ways you can dimension for us, for example, what percent was EV related perhaps?  Phil Eyler: It's tough for us to break down the percent EV in the awards because some of the awards – in fact, many of the awards are cross platform. Just to give an example, the BMW X series wins that I called out is on both the ICE and the EV. So that's more of a combined number. But I would say, to the best of our ability, we built that into our plan for 2024 and then 2026 as well. We clearly still believe in EVs as a driver for future growth. As that becomes more clear in those out years beyond 2026, obviously, we'll start to build that into our outlook.

Just follow-up on the GM architecture question. Can you give us a sense of the timing there? When do these launch?  Phil Eyler: They will take a couple years before that new architecture goes in.

Our next question comes from the line of Ryan Sigdahl with Craig-Hallum. Capital Group.

Just staying on GM and ClimateSense, is that award or the architecture for ClimateSense, is that included in the Q4 awards? And then also, is any of that included in the 2026 targets, given it'll take a couple of years?  Phil Eyler: Yes, it's included in both.

On content, you historically have talked about 2x to 4x higher content for ClimateSense. Is that a good rule of thumb for this award?  Phil Eyler: I think it scales. Given the fact that the software will orchestrate any level of climate seating and steering wheel, it could span all the way from, let's call it, an entry vehicle that has low content all the way up to the higher content, so we'll have to see how that plays out across their portfolio over time. But we definitely are seeing a movement for tire content, as we have ClimateSense control in a car.

On the BPS cell connecting product, you guys launched a very large award with BMW just a few quarters ago there. I guess is the assumption that that sunsets after this platform?  Phil Eyler: Yes, it is.

[Operator Instructions]. Our next question comes from line of Ryan Brinkman with J.P. Morgan.

Just another one on the recent win with GM. Understand your share of GM seat comfort business will rise, but is there something about this award that also makes you think that maybe the penetration of seat comfort products within GM could materially increase, either because the vehicles – it's offered in more vehicles, more trim levels or maybe because it's designed right into electrical architecture? Or maybe because the synergies and economies of scale that both you and GM might realize by compromising and expanding the offering could afford a lower price point to GM or hopefully the consumer helping to drive the penetration? Just trying to understand if this is more about increasing your share versus competitors of these products or maybe about driving the penetration of the products? Which would you say is that the bigger opportunity?  Phil Eyler: I think there's probably some of all those points. I think those are very astute points. But I think the biggest thing – to kind of break it down, on EVs, we definitely expect to see a higher penetration rate and content on EVs. And certainly, that could apply to any kind of electrified vehicle, by the way, whether it's a fully VR or a plug-in hybrid. And mainly because, obviously, you get the comfort benefit, but you also get the range extension, and that remains a clear, important feature for our customers. If you look at the ICEs, we're really excited that ClimateSense is going to orchestrate climate seating in ICEs. And the reason is very compelling value proposition for consumer comfort because it really becomes seamless. In essence, what you're doing is you're focusing on the passenger or driver relative comfort level at that microclimate location, and not necessarily the entire cabin. And so, this is really starting to pay off for us. So I think that's also going to help drive content penetration on ICEs as well.

I wanted to ask a couple of questions too around the pause of the BPS cell connecting, starting with – I remember you highlighting some strengths of your product, like it was lighter weight and more environmentally friendly than some of the competitors' solutions. And there's thought to be this growing need for cell connecting and battery health monitoring. So, maybe you could just help us understand what may be changed there in the market. I wonder if maybe the solution was incorporated into more comprehensive battery management systems, technologies that the other suppliers were offering? Or what would you say changed there?  Phil Eyler: Well, no, I don't think it has anything to do with the battery management system architecture. That I think is basically the same. And to be frank with you, the fundamental shift that we're seeing is related to our competition, especially chemical etch competition. That space is loaded with capacity. And I believe, personally, that the level of accepted pricing because of that excess capacity is putting us in a very difficult position when it comes to pricing competition. There's no doubt, our customers have confirmed to us that our product provides extremely beneficial sustainability benefits and technical benefits, which revolves around the material selection and, as you pointed out, the lightweight. But, frankly, the drive towards lower cost batteries is winning the day, and that's – chem etch is kind of taking it there. So we're in a position that, if that pipeline is not going to be in front of us in the near term, makes more sense for us to divert our resources and investments and focus into the areas that are seeing accelerated growth, which is our climate and comfort products, thermal and pneumatic.

And the second question there, also on the BPS is, that product, the cell connecting was once thought to maybe pick up the slack left by an earlier product, which was the thermal electric temperature regulation, not of the big batteries, of course, we've got air cooling, but of these smaller batteries that might be applicable for 48 volt or micro hybrid type vehicles, and that was with some European OEMs or maybe some luxury OEMs. It's something that was rolling off. And that was understood to be – I think because 48 volt didn't really pan out like the industry once thought, but it just seems like in the very recent past here or just kind of in the fourth quarter, there's been some more scuttlebutt about it, including with the cyber truck having officially launched and Elon Musk saying on X that he was mailing to Jim Farley and Mary Barra a packet with all the technical details, explain why they need to double down as well, which will decrease the cost for everybody. And Jim Farley responded positively on Twitter to that, saying that maybe they need to push again. Just curious if there's any potential for that market to come back to life or is there some other competitive dynamic going on there to where maybe the thermoelectric regulation isn't as attractive as was thought or is it just the market smaller? What are your thoughts for 48 volt is going, what you might potentially be able to provide that?  Phil Eyler: I'm not optimistic on the thermal electric BPS product for 48 volt. And the primary reason is the architecture for 48 volt systems is a little different when you look at what you mentioned on EVs, especially. The 48 volt that in the past has been used has been really used as a drivetrain boost. And to do that, they require a lot of utilization of those batteries, creating a lot of heat, and that's where our cooling product really became pretty important. We do see some opportunities on 48 volt with air cooling, and we are winning some business and we called that out in the last couple of quarters with different customers. Hyundai Kia is an example. We're going to be cooling all of their 48 volt batteries using our air cooling devices. So, there's some of that built into our outlook. Certainly, the 48 volt thermal electric BPS with Mercedes will gradually decline over time. It's not going to be a digital decline, but it will steadily decline. So if you net all that out, and we do have some built-in wins with our MSP based battery heating as well, using the same technology as the CCB, but netting all that out, we're seeing a net decline in revenue of BPS through 2026.

Our next question comes from the line Luke Junk with Baird.

Apologies for the background noise here. Phil, I was hoping we could start with the ClimateSense award with GM. And what I'm really hoping to tease out is just the software opportunity alone versus scaling in hardware over time. I really just want to better understand the materiality, both of the software piece that you announced today and then the underlying controller, understanding that you can add a hardware to that.  Phil Eyler: I wouldn't call it a material revenue driver for us. It is very high margin. But it's more about what it enables than the specific driver of revenue growth for the software. It does open up more opportunity for us on ECUs. And we called out, I think one or two quarters ago, the win on a multifunction ECU for General Motors, so that we think – this helps us to drive content on our electronics as well. But we've specifically made our software really a software product that can be used on any hardware. Our goal is to find ways to get ClimateSense embedded to show the value that ClimateSense generates as thus driving much higher content and penetration. And we believe ClimateSense has the power to do that. So that's kind of what's behind it, I would look at this as really firming up our longstanding strategy of driving software-enabled hardware through our portfolio.

Appreciate you might be able to give us too much here because it's pretty recent, but just curious any feedback following CES on WellSense, specifically, just in terms of customer engagement, maybe any kind of preliminary engineering engagements or just other indicators of interest in the platform?  Phil Eyler: I would say tremendous interest by our customers. It matches exactly what many of our customers have as their vision for differentiating their offerings. And I really want to highlight the impact this product could have on the software defined vehicle architectures. We believe this provides a feature that consumers will continually pay for after the purchase of the vehicle. And I think if you look at a lot of the announced software defined vehicle features that folks have talked about to help them drive revenue, you won't find any that are more compelling than the one we're offering. So I think it really is gaining a lot of traction. Obviously, it'll take us some time to gather some awards and build that in, but I'm really encouraged by the response.

My last question probably for Matteo. Just hoping you could bridge the midpoint of the EBITDA range of 13% versus where 2023 shook out? And really hoping to unpack just the big buckets in terms of what you expect incrementally from fit for growth. You mentioned some supplier cost reductions in the back half of the year. And then just underlying leverage in productivity, just how should we look at those at a high level.  Matteo Anversa: The volume is driving about 160 basis points of margin expansion. The fit for growth actions, primarily supplier cost reductions, value engineering, so taking cost out of our bill of material is driving about 130 basis points of margin expansion. Productivity at the factory gross is about 90 bps. So these are the positives. On the negative side, we're not expecting to have the same amount of price recoveries from the customers in 2024 as we did in 2023. Actually, the environment on the front is getting more and more challenging, so we are expecting a drag of about 160 basis points on price. And then wage inflation, we continue to see elevated labor inflation, in particular in Mexico and in Eastern Europe. So that's about almost 100 basis points. And then the investment in the new clients that I mentioned earlier in the R&D to fulfill the awards that we won. It's another 50 basis points drag. So that's, a high level, the walk for the year.

Thank you. Ladies and gentlemen, this concludes our Q&A session. And this concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.