Greetings and welcome to the Gentherm’s Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Greg Blanchette, Senior Director, Investor Relations. Thank you, Mr. Blanchette. You may begin.

Thank you. Good morning, everyone and thanks for joining us today. Gentherm's earnings results were released earlier this morning, 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 will make forward-looking statements within the meaning of federal securities laws. These 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 this call, we will also 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 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, Greg, and good morning, everyone. Thank you for joining our second quarter 2024 earnings call. While the global automotive environment continues to be challenging, the Gentherm team delivered another strong quarter of automotive new business awards, above market revenue growth and continued profitability improvement. With $660 million of automotive new business awards in the second quarter, this brings us to $1.2 billion year-to-date. In addition to our continued strong thermal awards progress, we continue to see an acceleration in new business awards for our lumbar and massage solutions. In the almost 2 years since Alfmeier became part of Gentherm, we've won Pneumatic Conquest Awards with 9 OEMs globally. We continue to gain traction with our customers and are winning new business awards that have substantially exceeded our original expectations. Most recently, we won our very first Pneumatic Lumbar and Massage Award with Hyundai on a next generation Genesis SUV. This breakthrough award includes for the first time, our proprietary Pulse A Massage Technology, which I will discuss in detail a bit later. This conquest award was enabled by Gentherm's strong relationship with Hyundai combined with our industry leading pneumatic technologies. Hyundai has been a great longstanding partner for Gentherm and we're thrilled to bring this new innovative technology to market. For the second quarter, we achieved record quarterly revenue of $376 million and outpaced the growth of light vehicle production in our key markets. Adjusting for the impact from foreign exchange and one time recoveries, our Automotive Climate and Comfort Solutions revenues outperformed the light vehicle production in our key markets by 500 basis points in the second quarter. This revenue growth was led by our pneumatic lumbar and massage solutions. When we announced the Alfmeier acquisition, we said that we expected to be able to expand Alfmeier's…

Thank you, Phil. Let me turn to Slide 9 and focus on the most significant items in our quarterly results. For the quarter product revenues increased by 1% compared to the same period of last year. And if we adjust for the impact of foreign exchange, our overall product revenue increased by 2%. Starting with the automotive segment, automotive revenues were 364 million up approximately 1% compared to the prior year period. And adjusting for negative foreign currency translation, the phasing out of the non-automotive electronics business as well as one-time benefits from recoveries in both periods, automotive revenues increased by approximately 3%. Actual light vehicle production in our key market of North America, Europe, China, Japan and Korea decreased slightly year-over-year. As Phil mentioned earlier, revenues from our automotive, climate and comfort solutions outperformed actual light vehicle production in our key markets by 500 basis points. Now for a discussion of year-over-year revenue by product line as outlined in the table in the press release. Excluding the impact of foreign exchange, we saw growth in several of our product lines and more specifically, revenues from lumbar and massage increased by 23% due to the ramp up of the VW NQB platform and higher volumes and take rates on several models with Ford. Steering wheel heaters revenue increased by 10% compared to the prior year period due to the start of production of Li Auto L6 and a battery electric vehicle in Asia with one of the largest global EV manufacturers. Valve systems revenue increased by 7% due to higher sales with VW, CCS revenues increased by 2% due to higher volumes with a global EV manufacturer, ramp up on Li Auto L9 in Asia and BMW 5 series in Europe. And these were partially offset by lower volume on…

Thank you. [Operator Instructions] The first question comes from the line of Matt Koranda with Roth Capital Partners LLC. Please go ahead.

So just wanted to maybe discuss the bookings environment briefly if we could. So the $660 million sounds like a relatively healthy run rate, I guess it is down a touch from last year. So maybe just, if you could discuss sort of the dynamics at play with the slight decrease year-over-year. And also just curious about the conquest wins you have with Toyota and, and some of the Japanese OEMs. It sounds like that may be picking up steam. And so just curious if to get your take if there's additional opportunity that you see out there. Did Alt Meyer help in any way? Sort of why are we seeing that opportunity come to pass?

Yes, thanks Luke. Matt, sorry. No we're really happy about the awards progress in the quarter. If you look at the environment going on and the dynamics this is very healthy and we like the mix of the awards across all of our product lines. It was actually very strong in our pneumatics business. We continue to see significant demand for our technologies, and you can hear that in the specific customers that we announce awards with. So, all in all, I think we're feeling pretty good about the awards rate for the year so far and the momentum still looks good heading into the second half. Keep in mind, last year was quite exceptional year at $2.6 billion. So that will be that's a hard comp for us to go against, but we're still feeling pretty good about two handle in front of the awards number for the year. Talking about Toyota, we're very excited. It's taken years to get our CCS launched with high volume vehicles at Toyota. The first launch with the Tacoma has gone quite well and we're learning a lot through the process, we're really proud to launch on the Toyota Camry and a lot of discussions are active within the Toyota network on how to continue that growth. It's all been on thermal so far. Obviously, we're presenting our pneumatic solutions to customers around the world, including multiple customers in Japan. And so far, we don't have any awards with pneumatic in Japan. So I think that's a really nice opportunity going forward.

And then maybe one for Matteo, just on the margin guidance. I guess to be above the midpoint of the range that you provided, it sounds like at least in aggregate, we've got to be above 13% EBITDA margin in the back half of the year. And so I guess that does imply only a bit more modest pace of margin expansion. I'm just curious what's driving sort of the margin improvement? What are the bigger buckets of the margin improvement in the back half of the year? It sounds like there's still planned startup drag, which I think you said 50 bps, but if you could just clarify that one. And then also, I guess, between productivity and some of the supplier cost reductions that you've been implementing, maybe if you could just discuss sort of where we're seeing some sources of improvement or decelerate a little bit there for the back half of the year?

Yes, sure, Matt. So let me maybe start from the last portion of your question and unpack a little bit what happened in the quarter, because it's important to put the remainder of the year into perspective. So year-over-year, we expanded the adjusted EBITDA margin by about 200 basis points. Fit-for-Growth in the second quarter drove the majority of it about 160 bps. Net productivity at the factory was about 30 basis points expansion. Also we were able to manage as we continue to drive better productivity in our Mexican plants. Premium freight a little better than last year, which has also accounted to about 30 basis points of margin expansion. And so these were the positives and then we had the on the negative side the annual price reduction, which was only a drag of about 70 basis points, which is definitely lower than what we anticipated at the beginning of the year and even lower than our pre inflation historical average, which generally range between 100 basis points, 150 basis points. So very proud quite frankly of where the team has been so far. We are clearly as of the end of the first half at about 12.8% EBITDA rate, which is definitely ahead where we were last year and ahead of where we were planning to be, entering the year. So now moving to the second half, our guidance implies basically a second half EBITDA rate of about around 14%. I point back to some of the comments that I made in the prepared remarks, second quarter, sorry, third quarter is going to be sequentially a little lower, primarily due to the fact that we were able to defer some of the startup costs of the plans from the second quarter into the third. And then the fourth quarter will pick up an EBITDA rate above 14%, and that's driven by, I would pinpoint three, four factors. Number one, revenue in the fourth quarter will be higher than the third. And that's going to drive, further margin expansion. This is driven by program launches, just, Lincoln Navigator, the Jeep Wagoner, the continue increase in volume thanks to the VW MQB Pneumatics, just to name a couple. Then in the fourth quarter, we will have the full run rate of purchasing savings. This is pretty normal for us. All the volume rebates, so the majority of the volume rebates with suppliers tend to kick in in the fourth quarter. I talked about the timing of the start top cost of the plans and then in the fourth quarter we will start to see some of the benefits of moving the production out of Greenville into Monterey. And that's another key driver of the improvement of the EBITDA rate, later in the year. And then a little bit more productivity of the factories is always happens in the fourth quarter. So that's kind of the dynamic, and what's going to happen second half versus first half.

Thank you. Next question comes from the line of Luke Junk with Baird. Please go ahead.

Phil, just to start hoping you could discuss just some of the puts and takes on the updated sales guidance, both at an overall industry level and customer specific dynamics, especially in years of conservatism you may have built in, just given what's been obviously a choppy production backdrop and some variability on the customer basis.

Well, Luke, I think if you just look in general, I think it's well documented the volatility in the production environment and that really kicked in, even in the second quarter we saw some of our key customers drop off orders. If you look at that, it's also carried into the second half as well. For us, the way we break it down clearly just a general drop with some of our key customers around the world. Some in North America, for example, are carrying high inventory and are reducing production on vehicles that have high content for Gentherm. So that's certainly having an effect. And then, some other customers, EV only producers that are pretty large customers for us have also reduced and announced reduced volumes. So just in general, vehicle production and there are more, some European OEMs, et cetera. Also looking at the second half, even though as Matteo pointed out, we have significant new launches, we have seen some delays of a few of those launches and a little bit of a pullback of the volumes in the early ramp up stage. So that brings down the second half a little bit from where we expected even though we do all the launches are taking place and we will see an uplift, especially towards the end of the year. And then, finally, China. China definitely has brought us some headwinds. You've seen the global OEMs that are operating in China have seen significant reduction in their share in vehicle production in the market. That certainly had an effect on us. We actually ended up in the Q2 kind of flattish in China, which was pretty good performance given that shift, and that's because we've been launching with some EV manufacturers and other domestic manufacturers in China.…

So maybe if we could double click on the specific strength you're seeing in lumbar and massage right now, big uptick sequentially, really big year-on-year growth as those awards you've been talking about are now finally kicking in. Can we expect this kind of year-over-year growth sustaining into the back half? Is there any kind of pull forward we should be aware of here? And then similarly for 2025, you had given some indications that your Analyst Day last year on kind of a growth framework and it seems like you might be even tracking above those levels. Am I seeing that right now?

Yes. I mean, if we look at the back half of the year, we certainly expect to see continued strong double digit growth throughout the course of this year. And that's early launches and ramp ups of wins. So heading into 2025 and beyond, we still continue to see outstanding growth in that business. As you just pointed out, we've actually won awards at a faster clip than we expected with upon the acquisition closure. And we just really couldn't be more proud of what the team has done, in our team around the world certainly led by those Alt Meyer employees that are now part of our Gentherm team have done just a tremendous job and capitalizing on the Gentherm customer network. And so that, that gives us a lot of excitement around the future opportunities for this product. And, add to that adding more content with programs like Pulse A, that are coming in much faster than we expected, definitely we're excited about that growth rate.

And then if I could just sneak one more in for Matteo, just a more specific question on how you're thinking about R&D in the back half of the year. Recognize that there's a tailwind here from the lower BPS spend and there are also some recoveries that help the two key numbers. Just want to calibrate that correct. I think you'd been thinking six and a half percent of sales kind of coming into the year. It's running around 6% year to date. Should we see that up a bit in the back half?

Yes, Luke, the second quarter number were relatively low because of the not only the great work that the team has done in reallocating some of the cost of CCS, but also we had a elevated number of reimbursements, which tend to be a little lumpy. So I would expect in total, R&D cost as a percent of sales to be between, around 6%, 6.3% of revenue for the year. So that's what I would model.

Thank you. [Operator Instructions] Next question comes from the line of Ryan Sigdahl with Craig-Hallum. Please go ahead.

Hi guys, this is Matthew Rob on for Ryan. Just one question here, announced in Q1 a CCS award with a large global EV OEM, this quarter had the lumbar and massage award, from what I assume is the same OEM. Can you speak to how many models Gentherm will be supplying there and when those models will launch?

Thanks for the question, Matthew. We have with this large EV manufacturer, we have content whether thermal or pneumatics on virtually every model.

Thank you. [Operator Instructions] Ladies and gentlemen, we have reached the end of question and answer session. I would now like to turn the floor over to Phil Eyler for closing comments.

Great, thank you. While the operating environment certainly remains challenging, I want to thank the global Gentherm team and our partners and suppliers for the strong execution in delivering another solid quarter of financial and operating results. We continue to win awards at a record pace led by our strong customer relationships, innovative technology solutions and differentiated model as an independent supplier. We deliver the highest quarterly revenue in company history and improved year over year profitability. The margin expansion this quarter gives us confidence in our ability to reach high teens adjusted EBITDA margin rate over time, and we continue to execute against our long-term strategic plan and remain focused on delivering shareholder value. Thank you for your interest in Gentherm. We look forward to keeping you apprised of our progress.

Thank you. This concludes today's teleconference you may disconnect your lines at this time. Thank you for your participation.