Gentherm Incorporated (THRM) Earnings Call Transcript & Summary

Hi. I'm Ryan Brinkman, the U.S. autos analyst at JPMorgan. Thanks for joining us for the 2021 JPMorgan Automotive Conference. We're going to get started with our next presentation. Very happy to have with me here on the screen today, Phil Eyler, the Chief Executive Officer of Gentherm. Phil, how are you doing this morning?

Great. Good morning, Ryan. Happy to be here with you today.

Terrific. We're glad to have you. We're just going to launch into Q&A here. And as I'm asking my questions, I just wanted to remind the investors that they can also submit their questions. We want to get those answered too. So through the conference website, you can type your questions in, and I'd be more than happy to ask them on your behalf. So, Phil, let's get going then. Maybe a good place to start is with the new the ClimateSense award that was announced on the last earnings call, right? So this is your first production award. We've been waiting for it for a while. Can you remind us of the content per vehicle gains that you expect for this program? Or you might be limited by what you can say by this particular program, I understand, but the content per vehicle gains for ClimateSense generally, maybe relative to your traditional climate comfort solutions revenue per vehicle. And you did confirm this was for a battery-electric vehicle. You mentioned that it would be small volume. We've imagined ClimateSense being most appealing for battery electric vehicles because of the ability to have the system to allow a less intense HVAC, right? So thereby improving range. But I'm curious if there is also a luxury aspect to ClimateSense. My curiosity was piqued because you said it was low volume. And typically, the most expensive vehicles tend to be lower volume, not always. So I thought maybe it could be luxury. To what extent is ClimateSense not just economical but also luxury? For example, the neck conditioning, the heated and cooled surfaces, those seem like features that -- like luxury features, right? So anything more you can tell us about your first ClimateSense award, whether it was high end as well as EV. And again, if you can't talk too much about that particular program, just -- how are automakers thinking about -- how are they looking at ClimateSense? Is it more about improving efficiency, more about thermal comfort, both? What do you think?

Well, first of all, Ryan, we're -- obviously, we're super excited to have our first production award. We've been working on this for years now, developing it to a state that can kind of take the confidence of the customer to that next level. So it is a small volume. It is electric vehicle award, and it's a 2024 model year. That's about all we can say, given the confidentiality nature of it with our customer. But -- in terms of content, I can -- I think what I'll do is talk more generally about ClimateSense and answer probably a lot of the questions you just asked. ClimateSense, just as a refresher for those who haven't heard of it, is -- it's our innovative microclimate solution. One could think of it as an individual climate zone around each passenger in the car. And of course, the idea behind ClimateSense is to really optimize this combination of thermal comfort for the passenger and make it personalized and individualized, utilizing really the secret sauce to this whole thing is an algorithm, a control algorithm based on the science of thermophysiology, which is our expertise, and that is how the human body responds to heating and cooling. And then you're combining that with thermal effectors all around the body: resistive, air-based, can be a lot of different modalities at a lot of different points on the body. Obviously, on the seat, on the -- all the touch points in the car where the body touches the steering wheel, the footwell, the neck. So it's really a big, kind of, expansion of our climate comfort systems. And the driver of it is it's improved comfort, for sure. So you mentioned luxury. It definitely is something that will take the thermal experience in the car to a complete new level with that personalization and really customizing it for each passenger in the car. Each person gets their own select experience through this system, that's the concept. So there is a luxury side to it, but it's not necessarily meant for luxury alone. It's meant really to transform the experience in the car but at the same time, significantly reducing the power consumption of the vehicle, especially for EVs. So EVs are really the fundamental driver for this. And we have already done studies with customers that have shown, in the cold weather cycle, between a 50% and 70% reduction in power utilization for the climate system. So what you get out of the system is a dramatic reduction in HVAC power needs and requirements. As you think about it, you're moving away from heating and cooling the entire cabin to really isolating it to each individual passenger. And if only 1.3 passengers per car is the average, obviously you're wasting a lot of power to heat or cool the entire cabin. So that's the thought behind it. Content-wise, it's -- what we've said is anywhere between 2 and 4x, the content of kind of our more contented current systems. And that's -- this award is more on the higher end of that, for sure. Obviously, we're super excited. So our focus now really is executing. Anyone out there who's launched a new product in the automotive space, you're really measured by your first launch. So we're really doubling down on the success of that launch.

Very interesting. Thank you. And so you've discussed, yes, that the content per vehicle could be 2 to 4x the revenue for Gentherm relative to traditional climate comfort solutions. But have you said before or -- can you say what the overall cost to the automaker is of the ClimateSense approach when also combined with the smaller, I don't know, maybe less expensive HVAC unit? Does the cost to the manufacturer rise or fall? And on a related note, what is the impact on energy usage for an internal combustion engine vehicle. Can automakers expect miles per gallon improvement for ICE vehicles using ClimateSense? Do you expect some ICE vehicles to feature ClimateSense in addition to BEVs? Or if it is a net cost increase to automakers, maybe that investment makes more sense for EVs where you also get that important range benefit. What do you think?

Well, most of the interest is on EVs right now with ClimateSense, and that's because the value proposition is so compelling. What you -- the benefit you get is the significant reduction in the required physical size of an HVAC system and then the power utilization of HVAC, so there's an ability to scale back. Obviously, the amount of power used for the battery gets optimized. And by the way, for EVs, they're -- EVs have an equivalent miles per gallon calculation as well. So there's some work happening on the back end there to see if this can help reduce that impact for an OEM. So there's a multitude of pieces to the equation that the OEMs are kind of analyzing right now to see what is that net reduction. But obviously, it's -- the feedback is very good so far with most of our customers. There's a lot of moving parts in the EV space right now, and we're excited to get to prove ourselves and we're hopeful that, that starts to pick up momentum, not just with the current customer that we're launching with but also with other customers. On the ICE side, definitely ClimateSense has a positive impact to emissions and to miles per gallon, no doubt about that, as does our current climate control seat product. And so we're in discussions with OEMs about, I would say, kind of a middle ground between our CCS and full-blown ClimateSense and will that have an impact on ICEs as well. And we're watching closely legislation as well that might make it a little bit easier to take advantage of our products to support improved credits and so forth.

Interesting. Thank you. I wanted to ask on the competitive environment. So you discussed a 90% win rate on awards in the first quarter, I think it was 81% in the second quarter. It seems pretty high. Is it also higher than like your current market share in the categories in which you're winning the awards? I imagine it is, implying that your market share could then increase in coming years. How do you see market share tracking going forward?

Well, I think certainly, it's -- these are all positive moves in terms of winning conquest awards. That's happening. But you kind of have to look at every technology in and of itself. I mean the percent win rate includes all of our technologies, including our climate and comfort, our CCS, our heat, steering wheel, also includes all of our new battery performance solutions and cables and electronics. So it's all kind of bundled in there. But certainly, if you look at most of our product lines, I feel like we're gaining more ground on the market share side.

Okay. Very helpful. Thanks. And then just more broadly, how would you assess the competitive landscape across your various products? For the most conventional heated seats, I think you're still the largest supplier, but imagine this is probably where you face the most competition. And then when it comes to heat/vent, what does the competitive environment look like there? Are there fewer competitors? And then moving all the way up, I guess, to the heat/cool or the climate control seats with the thermoelectric technology, is there still no competition in this area? Do you expect competition in the future? Have others maybe bid against you and lost? Or are you just not seeing any rival bids for this product still?

Yes. No, I mean competition is pretty much the same as we've seen. There's a stable of competitors, IGB, Kongsberg, some Asian competitors and -- but that's pretty much the same select players that we're competing against. We're doing well in all categories, including one of the most mature product, which is seat heat. Certainly, there is more competition in that product line, but we're pretty excited about our value proposition. We're continuing to innovate that product. We have a great global footprint in terms of manufacturing. Our performance in the supply chain has been stellar. And today, that's very important. Being able to respond close to your customers, we manufacture in all regions, close to our customers, whether they're in China or Europe or North America. And then as you move into CCS, on the CCS product, whether it's vent or active, we tend to do even better on that product line because we have even more technology differentiation and performance track record. But the competition is there. We don't take it lightly. And your last question was around active. We are still the only active supplier on the market. We certainly heard some noise that some competitors are developing an active competitive product. But at least at the moment, we're the only players that I'm aware of that are on the market.

Very helpful. Thanks. And I guess a similar question but about ClimateSense then. If your less sophisticated competition still isn't even offering the heat/cool today, it seems doubtful then that they're going to manage the transition to the still more sophisticated ClimateSense-type solutions. I don't know if you'd agree with that. And then also, I've heard you allude to potentially the competition for ClimateSense more coming from HVAC suppliers. What's the latest that you're seeing or hearing there? Would they truly be like competitors in all aspects? Or maybe even if they want to manage blowing the air to create microclimate zones, would they really want to get into the heating and cooling of surfaces, for example? Or might there be an opportunity to still work with or go to market with potentially some of these HVAC players similar to how you're approaching the matter with going to market with Lear? Or -- how to think about that?

Yes. I think HVAC suppliers are who we're hearing talk about similar concepts to ClimateSense, they all have different names. And they're more -- what we understand is they're more around using their core technologies. But certainly, they've talked about partnerships with others to maybe integrate surface-level heating and cooling. We certainly feel great about our positioning. And we've been working on this a long time. Just to restate the unique value for us in what we call the secret sauce, it's around that controls. It's software. It's an algorithm that can personalize the climate solution based on the science of thermophysiology. We feel like we're really well-differentiated there. And that gets a lot of positive attention from our customers. In terms of working with HVAC, of course, I've stated very clearly for a number of years now that we believe partnerships and collaboration are key to success. We're very proud of the work we do with not just the OEM customers but also with Tier 1s and always open to collaborating with those players. Because our belief is the best solution wins, and we have to be flexible to provide that best solution. So on the ClimateSense, though, most of the work we're doing right now or really pretty much all of it outside of some seat-focused projects is really directly with the OEMs. That's where we're doing most of the work. And then in that respect, there's collaboration with HVAC suppliers that's pretty much being managed by the OEMs.

Very helpful. Thank you. And how are you thinking about the potential trend in take rates for products that are oftentimes thought to be lumped in with ClimateSense, but which really could probably just stand very well on their own also, like, for example, neck conditioning, heated surfaces like armrests, flooring, et cetera?

That's a great point. And we've -- since we've started rolling out ClimateSense a couple of years ago, some of our new products that were really designed for ClimateSense have gained a lot of interest. Neck conditioning is one that's definitely picked up a lot of interest, and I would expect to see more and more applications of that on its own as part of an option package in an ICE or really any vehicle. Because the impact of neck conditioning on comfort is -- we've proven through our ClimateSense studies that it's very significant. So I definitely see more growth in that product. Surface heating for cold weather has a very positive impact. The steering wheel is well-documented and well-proven as a positive product. But armrests also have been shown to provide a lot of value. We're working on footwell heating, especially in the larger SUVs. That seems like a really good potential solution. And in some cases, we think it could even eliminate secondary heating units for the far back seats. So we're looking at all those as stand-alone solutions as well as integrated into the ClimateSense platform. And the other thing we're working on is we're actually taking some of the ClimateSense intelligence and applying that to our effectors, our stand-alone effectors. So in other words, a neck conditioner putting more software attached to the actual effector so that if an OEM wants to apply that, they get some of the value of ClimateSense in the individual effectors. And we're starting to think a lot more about that, kind of creating what we call a scalable ClimateSense solution set to make it easier for OEMs to gain some of the value proposition of the full-blown ClimateSense through this transition of EVs over time. And one of the challenges with anybody introducing new technologies in the EV space is OEMs understandably are really in a hurry to launch EVs. So making a big change to architecture that would be kind of required to take the full benefit of ClimateSense, it could be a little bit difficult in their short time frames and may be pushed off to a future generation or next model year. So we're trying to add some potential value through scaling a little bit.