Gentherm Incorporated (THRM) Earnings Call Transcript & Summary

Next presentation, which is from Gentherm. We're very excited to have here with us Phil Eyler, the company's President and Chief Executive Officer.

Phil, I wanted to talk, first, about ClimateSense because this seems to be one of your more technologically advanced products. You've talked about being so important to the future of the company. So a few questions there to start. Just first of all, for those in the audience that might be a little bit less familiar, what is ClimateSense? What does it do exactly? What are the benefits to automakers, to consumers? And perhaps you can touch on what role you see for ClimateSense and battery electric vehicles also. And I know it's right now more in like the development phase and sometimes you're limited in what you can say. You have named General Motors as one of the development partners, I think, you have. So whatever update you can give there on development would be helpful. And then just thoughts on when development might translate into award and when award might translate into revenue.

Great. Well, first of all, thank you, Ryan, for inviting me today. I'm really excited to be here to talk about some of the exciting activities at Gentherm. And of course, you pointed out rightly that ClimateSense is really Gentherm's most important future endeavor when it comes to advancing technology. It's -- quite frankly, we feel like we're on the front edge of disrupting climate in the future vehicle with our ClimateSense solution. And it really starts with what's happening in the space, and that is this migration of 2 critical factors. One is electric vehicles. And just talking about heating and ventilation in a vehicle, the technology really hasn't changed in over 50 years with just minor incremental improvements. And in electric vehicle, power consumption and range are extremely important, let alone the comfort factor. So that's one really important vector that we saw as a big opportunity for us to create something unique that could solve a host of problems in the future. And then, of course, just the general trend that consumers are demanding more features that enhance individual comfort and individual satisfaction in a vehicle. So we really looked at those 2 opportunities and designed ClimateSense to be the future of the internal automotive climate of the future. So what is ClimateSense? First of all, it's a human-centric approach -- an individual human-centric approach to climate. It's really a microclimate solution, where we take our deep knowledge of the science of human thermophysiology, more or less how humans behave under thermal load and thermal change and how comfort is reached in a scientific way. It's really not about just heating one space to a common temperature leading to human comfort. You can be very precise in which part of the body you apply heating and cooling to achieve comfort. And so we've taken that. A lot of it came from our medical division. We have a pretty extensive scientific knowledge in our patient temperature management from medical that we folded back into this ClimateSense solution. So we've taken that science of thermophysiology and have created an intelligent algorithm that can take many factors and sensor inputs into this algorithm and adjust the human factors and the algorithm and software deciding the right utilization of the hardware, the conductive, convective and air moving devices and resistive devices around the body to create comfort. And it's kind of a long and sort of technical way to describe it, but essentially, what you get at the end of this is best-in-class comfort and tailored around what an individual wants in the passenger vehicle and only for the individual seats in the car. We're not trying to heat and cool the whole cabin, we're trying to pinpoint the climate solution to the individual. The other thing this does, it allows dramatic reduction of the HVAC, the classic heating and ventilation system in the vehicle, anywhere from 50 to even more reduction in the size of an HVAC system. And you mentioned GM. GM is one of our partners among many others. So happens that GM led a presentation of our technology at the SAE conference on thermal technologies this past year. And we demonstrated our development results in Chevy Bolt, and the results are pretty stark, pretty amazing. We showed -- first of all, let's talk about power consumption. In the cold weather cycle, through GM's evaluation, we showed anywhere between 50% and 70% power consumption reduction within the HVAC system. Now let's translate that to what's really important to electric vehicle owners in that range. This showed, if you look at the cold cycle, when you power up an HVAC system at about minus 7 degrees C, so a little below freezing, your range drops 40% with the classic HVAC system. With our ClimateSense system, the reduction is only 10%. So 30 points improvement in overall vehicle range just through the optimization of thermal management in a car. Pretty dramatic. Really -- that statistic surprises a lot of people. But if you look at power management and -- or power utilization in a car outside of the powertrain, the HVAC system is the largest draw on power in a car. So this ClimateSense solution is really important to the OEMs. It's driving lots of interest. We've got a handful of development partnerships with OEMs, actually working also with Lear on their seating concept. They're really innovative into seating concept. We're proud to be partners with them on that project. And we really see this as something that's going to be the future of the company.

That's interesting. And maybe just a follow-up on that because it improves the range so much, you can see the government would be interested. They wanted to improve efficiency, et cetera, it sort of reminded of a stop-start with something that consumers sort of like tolerated in order to increase the range. To what extent does ClimateSense though actually, even potentially improve comfort over a traditional HVAC system.

Well, it's dramatic. Because it's so individualized and personalized. As I said, the current HVAC system really focuses on kind of a consistent temperature across the whole cabin. And every person has their own preference when it comes to climate. So our vision of the future and where we're taking this technology is to really customize a solution using, of course, our technologies, but partnering with companies who are developing cloud-based solutions and electronics in the vehicle so that we can deliver just the temperature that a person wants at certain parts of their body to achieve comfort quickly. And I know, Ryan, you had the fortune -- I'm going to lead you into this question, yes, the fortune of trying out ClimateSense when you visited us not too long ago. So maybe you can give a little bit of color.

I certainly gushed about it. I think, in my note, I talked about being surprised at how pleasant it felt, the hot air sort of blowing on my neck on a typically frigid November day in Detroit. The window was rolled down and I felt comfortable. It was really sort of interesting. Another high-technology area is battery thermal management. I think it's as -- or even higher technology really. Can you talk about what do you -- provide the investors an overview on what battery thermal management is? What the latest developments are there? And you had an exciting win recently, right, with the BMW MINI Electric, which I thought was interesting, because when you first started with battery thermal management, it was kind of to optimize the temperature of like small lithium-ion or mild hybrid 48-volt, and this is a full BEV, right, a full BEV. So talk about that and maybe how you think about the total addressable market for BTM may be evolving or changing as a result of focusing on these increased different types of vehicles.

Yes. Well, it's another second question that ties right back to electric vehicles. So you can see, I think that Gentherm is probably not too many companies that are better positioned to the transition of electric vehicles. This is really all good upside for us because of, of course, the thermal management technologies and ClimateSense, but also battery thermal management. The bottom line is for improved reliability, performance and lifetime of a battery, super-crucial to manage the extreme temperatures of a battery to optimize that. So we've put a lot of innovation, investment and research into developing products that can help OEMs improve that. And we've done it with 4 kind of core products that we've launched so far, and of course, we're working on more in this pipeline. But the first was for, as you said, 48-volt mild hybrid batteries. We created a thermoelectric-based heating and cooling device for 48-volt. In fact, it was a PACE award-winning product in our partnership with Daimler in their 48-volt solution. And 48-volt is, who knows how much penetration we're going to see on 48-volt, but that's been a very successful project. And we're looking to roll that out with more OEMs. On top of that, we have an air cooling solution. That's a pretty complex. It's moving air kind of a blower of air, but it's -- we do very intense simulations of the requirements for battery cooling with that product. And then we -- so those are the 2 products we do, primarily for mild hybrids. Then you get into plug-in hybrid and full EV, which kind of have similar solution sets. And one of the products that we announced, the big award this past year, was on a conductive battery heating technology that utilizes a very advanced thin, flex circuit basically that is in connection with the battery cell and heated and extreme cool temperatures. That award was with a large Asian battery manufacturer. We already have -- they already have it slated for production coming up in Q1 of 2020. And we're hopeful that starts to take off in the space. And then finally, we've used that same experience and technology to launch our fourth product, which is cell-connecting devices. Those can be -- they can be combined as heaters as well or could just be used as stand-alone connection devices, and that's the award with one of the -- with BMW that they're just launching soon with -- or just recently launched with the BMW MINI, and of course, we've got a runway of launches that we're hoping to announce in the near future with that product as well. And what that does is basically connects the lithium-ion cells, and it's for use in monitoring voltage and temperature of the cells.

And are you able to talk about the content per vehicle opportunity for cell-connecting relative to some of the earlier battery thermal management products?

It's pretty similar. It's kind of a wide range, depends on the number of cells per vehicle. If you have a cell-connecting device or a heater, it's -- you're going to have that for every cell in the vehicle. So even though the individual device for each cell connector may not have a lot of content, you're going to start approaching the -- certainly, let's call $50 to $100 per vehicle potentially with those.

Interesting. I thought to ask, too, about multifunction electronic control units or ECUs. It's part of the business. Some of our other suppliers are engaged in that. I think there's less awareness of your participation here. It came up on the last earnings call that you're going to start supplying for Ford's partner in China in ECU that controls not just your climate control seat, right, but also some other things in the car that you don't -- memory seat, even the exterior mirror did I hear? So how should we think about this business? How much of the capability came via Etratech? Is this something we could see you controlling not just your own products, but other people's products in the car in the future as well?

Yes. So first of all, the kind of -- the start of this is we, as a company, made a decision some years ago that, on all of our climate solutions in the vehicle, wanted to develop our own hardware, software and controllers for those products. So that was the starting point. And as you just pointed out and, of course, I have pretty significant experience with HARMAN and saw a lot of consolidation of electronics, and I looked at this as another opportunity for us to see if we could provide some value. We already have ECUs in the car in partnership with the OEMs and we've been successful at coming up with some pretty novel ways to reduce the number of ECUs for certain OEMs. We started it with Ford and launched on Lincoln. Notably, the Navigator and the Explorer have launched this product and a few others. And this basically is a combination of the memory seat module and the climate controls in one ECU. And basically, we've designed this proprietary algorithm, in that case, that controls any kind of motor, brushless DC motor in the car and allows also the OEMs to come up -- to utilize a cheaper motor, for lack of a better term. So there's a nice cost savings on top of the integration. And then, of course, we talked about the launch of Changan recently, where we're also controlling mirrors. So you can see -- I expect to see more of those opportunities for us to sort of integrate those capabilities. And we use that as a starting point, going back to ClimateSense, to build our software development team, which really internally is doing an awful lot of the work to develop this algorithm around ClimateSense. So electronics and software is really an important part of where we're going as a company.

Great. Thanks. And obviously, there's a lot of runway to grow over time via these new product introductions we've been talking about. Also I just wanted to review it, if you can, what are the penetration rates for some of your various existing thermal management products like traditional seat heating, heat/vent, heat/cool, I don't know, steering wheel heaters, et cetera. It will be great if you could just sort of highlight where you think that industry is now in terms of penetration and then where it could potentially go over the medium or the long term to just let the investors sort of gauge better the growth potential?

Well, I think that's a very important point. I'll talk high level first and then I'll talk about some of the specifics. One of the exciting things I think about Gentherm is that we have a stable of products in production now, where demand is growing and take rates are growing in the automotive space and adoption in new vehicles is growing. So we have kind of a natural growth of our current product line on top of these future innovations and disruptive technologies that in 3, 5, 7 years should see incremental growth on top of that. So let's talk about some of our current products. Of course, heating technology is sort of a stable of our product line. And if you look at seat heat, as an example, in terms of number of vehicles penetration rate, it's a little under 30% right now, and we're projecting that by 2025, that would start to approach 40% overall. And when you talk about our other product lines, Climate Control Seat, which is heating and cooling, basically, the combination of those, right now, a little less than 10% take rate. This is market overall, and we expect that to approach 20% by 2025. And certainly, the evidence in terms of the awards that we've been getting, the new vehicles, and movements we've seen in terms of demand and take rate by consumers is certainly validating that. On top of that, you have heated surfaces, heated steering wheel is a big part of our growth story. We see that over time catching up to heated seats. In fact, most -- it has -- if anecdotally you look at the surveys we've done, it has a very high satisfaction rate by consumers. So we expect that to really take off and continue to grow.

I'm very satisfied with the steering wheel heater in my Jeep Cherokee, and I bought my wife a Volvo XC90 and I was thinking this will be like the best steering wheel heater ever because it comes from Sweden. And actually, it wasn't quite as warm as the Cherokee, but yes, it's a huge part of satisfaction. It just feels great when it pipes up.

Well, we do the Jeep and not the Volvo. So that's good. That's good to hear.

I knew that when I asked the question. Okay. I wanted to ask about within seat heating, heat/cool versus heat/vent, maybe just what are the differences in -- between these products in terms of their capabilities, in terms of to the content per vehicle opportunity for Gentherm? And then can you revisit your market shares in each of the categories. Is this still, I think, 100% in the heat/cool, right? What is it in heat/vent? And then a few years ago, you'd spoken about a shift from heat/cool toward heat/vent has -- having -- previously maybe having had a detrimental impact. But more recently, you've been talking about a shift back toward heat/cool. So just curious what is driving that trend?

First of all, just a quick explanation. Heat, we have basically 2 products. We call them CCS Vent and CCS Active, which basically -- CCS Vent is more or less a ventilated product for cooling. So it basically takes the air in the cabin and funnels it through a ventilated seat. So you more or less get a flow of air that's at the same temperature as the cabin. And that certainly has -- there's been a big shift over the last 5 years or so towards that being the predominant solution because it is less expensive and provides a good, solid performance. We're clearly the market leader there. So we're happy about that growth. And then there's CCS Active, which utilizes a thermoelectric-based heating and cooling device embedded in the air-moving device. And basically, what that does is it uses the Peltier effect to either heat actively or cool actively the air that passes through this. So you can -- the benefit of this product is you can cool the air that's flowing around the body at the seat at a lower temperature than the cabin temperature. So it's much more effective overall. But it is more costly. And of course, that's good for us because there's more content in the vehicle. So we have a mix of those 2 product lines. We definitely saw some years ago, especially before the big movement to electric vehicles started happening and maybe when the demands for fuel efficiency weren't quite as high, we saw a quick shift to the ventilated solution because people would just wait for the air conditioning and use that as the cooling device. We're starting to see a move back more to active control because it -- first of all, it's -- that's proven to be a better comfort solution. Secondly, through our studies with NREL and then approved by the EPA, we've proven that it has about double the positive impact on fuel economy savings in the car in terms of that performance. And so those 2 things have sort of come together just to pick up the steam on the interest there. And of course, as OEMs look towards electric vehicles, that becomes even more important. So we just announced last year, BMW awarded us with Active CCS for the BMW 7 Series. And obviously, we think that's a nice one to start the ball rolling, even more with other OEMs. So we'll see how that plays out, either are good for us. They're both growing in the market. And they're both going to have a place, depending on what kind of solution an OEM is looking for.

And is it still 100% share in the Active? And why don't you think that competition has entered into that space?

Well, we definitely know competition has solutions that they're pushing. And as of now, we're the only player on the market.

So they have capabilities just no -- they don't have any awards, basically.

Yes. Nobody else has launched with that, yes. So I expect others will. This is not something you can expect to have control of the market forever. But the good thing is that we're developing advancements of that technology to improve performance, reduce cost, create a more systemic solution that also uses software and algorithms to control the flow across the thermoelectric devices. So we're certainly not sitting still waiting for competitors.

I wanted to follow up on something that you said earlier about the improvement in efficiency as a result of CCS Active. Just what have you or your customer, really, I think GM, in particular, been able to demonstrate to the government in terms of the efficiency improvements in the ability to get these so-called GHG or greenhouse gas credits. And what is the benefit to the automaker from using -- from getting those credits maybe from a financial perspective? And then how do you -- can other automakers beyond General Motors get those credits too? And how do you think that will drive demand for CCS Active over time?

Well, yes. So we worked with NREL and performed a study that proved essentially that the utilization of Active CCS of the vehicle could have a pretty dramatic effect on the power consumption and reduce the -- basically what allowed a passenger to do is set the temperature higher in a car when it's cold outside, and thus reduce the consumption of the HVAC system. And that led to a very specific carbon credit solution. It was about double the carbon credit of a ventilated system. So we have both of those solutions in the mix. GM was one who took advantage of it based on their fleet of vehicles that has or had Active CCS. They were able to get in the neighborhood of $50 million in back credits. So it is a new credit that's in the climate-based credit portfolio for OEMs to utilize. And that's certainly sparked a lot of interest and given us another benefit. Now these credits are very complex. An OEM basically has a cap on overall credits they can take that cut across all of these opportunities in a vehicle. And so they'll choose our product when it makes sense. And one of the interesting things about our product that's maybe a little different than, let's say, tinted windows that also -- just to use an example of another credit, is that our product is a markup feature in a car. It's an add-on feature that provides value after the base-level car is sold. And so it's a little bit more of an interesting economic analysis by the OEMs. To really take advantage of the credits, they'd like to have 100% penetration. Of course, we would like to have 100% penetration, but most OEMs are managing our technology as something that's an add-on in what are their feature sets.

Okay. Let me see if I can remember your mission statement here: to create and deliver extraordinary thermal solutions to make material improvements in everyday life in terms of comfort, wellness and health and energy efficiency. Maybe...

Did you memorize that?

Yes. Wanted to ask about the health and wellness aspect. First of all, you've got this whole medical business that we haven't talked about, maybe just an overview of that. But also like how your understanding of the patient or the consumer -- the human, how that translates from medical into the automotive world? And what the synergies there are?

Yes. Our medical business is it's going to approach $40 million in 2019. And obviously, we're expecting more growth. So it's strong. It's been growing at significant double-digit rates for us. It's totally focused on patient temperature management. So we don't try to do anything beyond that. It's really right in our sweet spot as a company, utilizes very similar thermal delivery technologies, and we're starting to look at more opportunities to use common software concepts and so forth. But the application, of course, is quite different. The purpose of our product in medical is to improve outcomes in the operating room and in critical care situations. And we've supported and led studies along with many of the thought leaders in the medical space that have shown that managing the body temperature, keeping at a regulated level significantly improves outcomes in the hospital. And so that trend is really picking up. More and more hospitals are starting to take that really seriously, and that's been good for us. We're still a very small player in that space. But I believe, we've -- we're a company that has the most significant portfolio of solutions that the hospitals want to look at. Now the great thing about that business, obviously, it's growing. It's still a small part of our business. We would love it to get to a couple of hundred million to give us a little more scale there. But why it's so strategic is we learned so much about the human body through our scientific work in medical. And we can feed that right back into what we're doing in automotive. And of course, that's beneficial for the pure solutions. But it also positions us very well as a thought leader in the automotive space. We're the only company that can come in and talk about what we're doing in the hospitals, what we're doing with patients, how we can translate that into our health, wellness, comfort solutions in the car. So that's really at a high level. Of course, we're really excited about what we can do to overlap our product and innovation road map between the 2 businesses to help us grow in both areas.

Interesting. Thanks. I've got a couple of more questions, but are there any in the audience? There is one in the back there. You could shout or walk up to the mic maybe for the webcast purpose. Thank you, [ Jose ].

[indiscernible] also how your content evolves? [indiscernible] You've already mentioned you are very well positioned. [indiscernible] how about names like [indiscernible] Volkswagen.

Okay. Well, if I had the crystal ball on exactly how the EV mix is going to shake out, I would probably really be excited. But it's coming. I think who knows how fast each technology is going to roll out. When you talk about Europe, it seems to me like plug-in hybrid is moving pretty quick and is something that seems to be a quick first step for a lot of OEMs. That's really good for us because we have the lithium-ion cell heating technology and the cell connecting technology. As I said, we've launched with BMW already the cell-connecting technology on their full EV MINI. And we hope to have other nice announcements in the coming year around that. And content-wise, the plug-in hybrid and full EV should probably be our best content on those awards we were able to win. 48-volt, our solution -- thermoelectric-based solution is a great solution, but it isn't used on every 48-volt necessarily. It's really on those cases where they have real difficulties on how they're utilizing the battery in extreme temperatures. So it's a little bit more of a problem-solving type solution whereas the product in the full EV side and plug-in hybrid tends to be there. If you have it, you need that product. Talking about our other product lines in terms of how our content per vehicle and just overall adoption in the market looks. Of course, the premium OEMs like BMW, BMW is -- I use that example a lot because we have vehicles like the X5 is a great example, where we have CCS on the -- in terms of seating thermal technologies, we have heated surfaces, we have heated and cool cup holders. I mean, there's a lot of content in those vehicles. It's a great example. But we're winning lots of business with high-volume manufacturers as well. Our fastest-growing customer, actually, in terms of growth rate is Mazda. And they've got our CCS technology rolling out in every vehicle in Mazda, both heat and CCS. So that's really exciting. We're seeing a lot of the high-volume OEMs launch, not just heat and CCS, but also steering wheel technologies. We announced with PSA a nice couple wins last year, and we're excited because with the PSA-FCA potential merger, FCA is a big customer for us. So that should be really -- that should be something that we can take advantage of.

Many of these accounts [indiscernible].

They don't as of now. We are -- that's an area we're looking into, our OEMs are looking into. But they're not necessarily -- because they don't have the carbon credit system, it hasn't necessarily fit into that. But I will say that our product is proven to reduce emissions. It helps to reduce emissions. So there's a lot of interest by the OEMs just because it's known to help them.

The applied for, that is [indiscernible]

Great. Thanks. One more?

Thanks for sharing your ClimateSense solutions. Just wanted to ask you or if you can share your sustainability or recyclability solutions. For example, have you looked at trapping heat from sun or other natural medium instead of using the power to accentuate what you are already doing with your applications?

Frankly, no, we haven't spent a lot of time on that because our job is to support the OEMs in what their architectures are going to look like. And so what we've tried to do is look at their what does their vehicle power architecture look like? Are they using electrification as ICE, is it a hybrid? And how can we apply our technologies to help them in the most efficient way. So we're really -- I mean our value is to provide that solution and add value to the direction that they're going. So we see, certainly, battery technology is the most effective way for us going forward in our technologies. Of course, when you look at sustainability, we feel like we're really in a great spot for that, overall, in terms of our product lines, but, of course, internally to the company, that we're a large manufacturing company with quite a footprint around the world, and it's something we take very important -- we take very seriously in terms of the way we operate.

I thought to finish by asking one, a follow-up on battery thermal management. So you talked about here the 4 areas that you said currently focused on, and it was 3 areas and 2 areas, I didn't know you were exploring cell-connecting opportunities until you announced the award. What other possible things could you do within the battery space?

Well, we'll have to hold back on it. As you say, maybe -- we're still -- it's still early in some of those technologies, and we're really focused on executing those really well. We've got a couple of launches coming up in 2020. This first one that I hope we can give more color on early in the year in terms of which customer and what we're doing there, that needs to be a resounding success. There is a -- the fundamental technology that's behind that is a -- it's called a machine structuring process. It's behind this flexible circuit thin layer of solution that we've got. We think there could be a lot of opportunities with that. It's a proprietary technology we have, allows us to use aluminum in terms of how we -- the resistive product that we -- and the cell connecting, which is a big advantage for OEMs. So we're interested to see if -- could there be more solutions there. I would say the one area that I can share is we certainly look to the possibility of adding some electronics to that product over time to add a little bit more value.

Very interesting. Thank you. Please join me in thanking Phil for all the great color he provided here today. All right.

Thank you, Ryan.

Great job. Thanks a lot. So it's time to pick up your lunch now. And if we could meet back here at 11:50 for Lear. Thank you.