Gentherm Incorporated (THRM) Earnings Call Transcript & Summary

Okay. I think we can start, get going. Maybe some people trickle in with the next presentation, which is a fireside chat with Gentherm. Very happy to have with us here, Phil Eyler, Gentherm's President and Chief Executive Officer. Phil, thanks for coming to the conference.

Ryan, pleasure to be here. Thank you.

I get some general industry questions, but I thought to start with leverage to vehicle electrification, which is obviously such a big investor focus and theme of CES. And could you talk about your ClimateSense product? It's not just levered electrification, right? It's a luxury product. And yet at the same time, I think it offers some special benefits to electric vehicles. You've got 2 awards for the product. Maybe you can tell us what you can about those awards. One of them is public, right, and whatever you can tell us about the other. And what your strategy is, too, for securing future awards. And then just generally, what you think the potential is for ClimateSense over time.

Sounds good. Well, let me give a little bit of a backdrop on climate management in EVs and why climate is such an important initiative for us. A lot of people aren't aware that the HVAC system in an electric vehicle is the second largest consumer of power in the vehicle, second to the electric drive train. And so it's a big -- managing the climate in an EV is a significant challenge for OEMs when it comes to balancing passenger comfort with being able to get the most range possible, especially on the cold and hot weather cycle. So there's kind of a major issue there that needed to be addressed. And as the leading player in the market for localized thermal solutions, we saw an opportunity there and created a proprietary microclimate solution called ClimateSense. The concept there is that we would, in each individual seat within a vehicle, create intelligent microclimate that would heat on a personalized basis or cool each passenger in the car as opposed to what I'll call the antiquated method, which is to just funnel air into the entire cabin and try to heat the entire cabin up and cool the entire cabin. So this methodology of a microclimate is much more efficient. On top of that, it's more effective at providing comfort to the passenger. Our solution uses -- kind of surrounds the body with conductive and air-based heating and cooling devices. But probably what's most important for our ClimateSense solution is that it utilizes an algorithm embedded in electronics, a software-based algorithm that takes into account the science of thermophysiology, which we're, we believe, one of the world experts on. And thermophysiology is really the understanding of how body behaves under heating and cooling and what makes a person feel more comfortable and what makes a person feel less comfortable. So we're able to apply heating and cooling to specific parts of the body to get that person to a comfort level, physically and psychologically, in a way that speeds comfort, but also takes the minimum power consumption. So that's the whole concept behind it. And we've been working on that for a number of years. We -- as you pointed out, we have announced our first production award. It's with Cadillac on the Cadillac CELESTIQ. We've been working with GM for quite some time. In fact in the past, some of the programs that we worked on proved, through their General Motors testing, that in the -- for example, in the cold weather cycle, you can reduce power consumption of an HVAC system by 70%. You can extend the range of the vehicle between 30% and 35% in those cold weather cycles, and you have good performance also in the hot weather cycle. So it's a really significant impact. That led to a lot of great work with General Motors. We're really excited to announce ClimateSense launching on CELESTIQ later this year. General Motors made quite a big deal. We were very pleased and surprised about how much press they put into ClimateSense. In their press release, we were one of only 3 suppliers that were announced by name in that press release. So we're really excited to be partnering with them. We've also won a follow-on award with General Motors on a more high volume EV version of an SUV. We can't say what vehicle yet, but hopefully, we can do that soon. That will go into production in 2025. So with General Motors, when talking about ClimateSense, our focus is really heavy with general motors. We want to launch successfully on the first platform. We like to continue, of course, to win new vehicles and expect to do that. So that's a top priority. We're also seeing a lot of interest from other OEMs, especially since the announcement of the CELESTIQ, and working on a handful of development projects and some exciting opportunities with other OEMs. And obviously, we expect that this is something that's going to take off for us.

Very interesting. And next, I wanted to ask about -- I saw this press release from Harman yesterday, your former employer, right, where they talked about their Ready Care sort of in-cabin sensing technology could be leveraged by Gentherm to use your ClimateSense technology to implement some sort of intervention to prevent driver drowsiness or -- maybe you could just talk a little bit about that. A bolt of cold air to the face or the neck to prevent you from going off the road? Or how is this going to work?

Well, we're really excited about the collaboration with Harman on the Ready Care. But before I get into the details, one of the areas we're really focused on outside of the mechanism of bringing the driver, a passenger to comfort is what other solutions can ClimateSense bring if you have significantly contented thermal solutions in a car. And we're really looking at how can we add value over the life of the vehicle really beyond just comfort. And the areas that we're looking at are, of course, therapies, heating, and cooling. Of course, we're talking a little bit about our massage and lumbar to help not only provide basic comfort, but to create an experience for passengers so they feel better than they did getting out of the car than when they did getting in. But on top of that, how can we also engage these effectors. We're one of the few suppliers that have all of these connection points with the human body. And there are so many different opportunities to capitalize on that. And the opportunity that we're working with Harman on is basically there -- they've developed this Ready Care system that is an advanced driver monitoring system that can determine if a driver is losing focus or is drowsy; and in order to increase safety in the driving cycle, they can take action. So we have connected with their API in that system to be -- to show what could be done there. And in this case, it is exactly -- almost exactly as you said, providing a rush of cold air to the body through our CCS solution, our ClimateSense, the CCS devices. And we actually can manipulate that with our ClimateSense algorithm to be the most effective. It could be a ramp up of cooling and then a ramp down depending on what feedback we're getting from the Ready Care driver monitoring system. So it's a nice closed-loop way of managing that.

Interesting. At GM's EV Investor Day in New York recently, I test drove the Cadillac LYRIQ. And if you try -- if you put your turn signal on and there's a car in the lane next you, and you're going to turn it -- and it beats to warn you. But if you actually start to turn the steering wheel, the seat starts to shake and it gives you like a haptic feedback. And I'm just thinking now that you've got Alfmeier, and at the back of the seat, you can manipulate and -- is it such a stretch that you could do active safety with like haptics in the seat as well? Is that on the agenda?

There are a lot of interesting discussions along those lines, and we can jump to that topic of our lumbar and massage, but we have a proprietary next-generation pneumatic massage system that's called [ Pulse A ] that basically -- and I think you got a chance to experience that when you were in Michigan not too long ago. But essentially, what this does is a typical massage system inflates and deflates a bladder up and down the back. So you get this rolling sensation of massage, where the Pulse A can do the -- can pulsate these bladders after they're full of air. And so basically, it creates a pulsating sensation. And so there are definitely some very interesting applications of that. Besides comfort -- I mean, our focus is going to be around physiotherapy, so that passengers can experience wellness in a car, not just comfort, not just getting from A to B, and we see that as such a huge opportunity. But definitely, there could be safety related or alertness related effects, audio experience related effects that could be done. These are a lot of ideas that we're looking at. And you combine that with the thermal solutions, we're really excited about [ some of the ] opportunities.

Strobe lights. It's interesting because I'm used to thinking of you as leveraged to electrification and now there's an active safety aspect as well. Maybe sticking with electrification, though, but with battery performance solutions, right? Maybe you can talk about your leverage to electrification through this division. Maybe walk through like the history here. We're starting with the thermal management for the 48-volt batteries but more recently progressing into battery cell monitoring and other technologies for battery electric vehicles, the real explosive growth area. What should investors expect from this product area for you going forward?

As you pointed out, it all started off with thermal management. As a thermal company, our engineering expertise on thermal management is very, very strong, and OEMs reached out to us to ask how can we use some of your technologies to manage some of the challenges we face on extreme temperatures with the battery cells. And that started off with a 48-volt battery, which was expected to be one of the primary growth mechanisms in EVs. And of course, that didn't pan out as we expected. But we created a really compelling solution as a thermoelectric-based heating and cooling solution for 48-volt batteries. We launched that with Jeep. We launched it with Mercedes, went across the whole lineup of Mercedes 48-volt mild hybrid vehicles, a very exciting product that we're very proud of. Unfortunately, there's not a lot of demand for that now going forward. But we knew that we had to come up with some interesting solutions for full battery electric vehicles, high-voltage solutions. And by the way, you also mentioned we have air cooling solutions. A lot of people don't know this about Gentherm: we're one of the highest volume producers of air moving devices in vehicles. We ship around 14 million or 15 million micro blowers across the world. And we have a lot of expertise on the intelligent management of air movement and that plays a nice role when it comes to cooling not only batteries but also electronics. We've got some applications with Mercedes, for example, where we're actually cooling the electronics behind displays. So we still look at that as an opportunity going forward. But as you pointed out, an area that has gotten a lot of attention from us is related to a proprietary thin foil flex circuit that we developed and it utilizes a manufacturing process called mechanical structuring. And basically, if you look at flex foils on the market today, most of the technologies you'll find are chemically etched flex foils. That's what's used in most EVs that have flex foils. Our solution mechanically etches the circuit on any kind of thin foil, can be aluminum, can be copper, could be other solutions, and it's complete -- it's 100% environmentally friendly. So fully recyclable, just like your aluminum can that you've got there, as opposed to pretty harmful chemical [ in etching ]. So we're really excited about that technology. We just announced our first go-to-market cell-connecting device with BMW. It's on the BMW 7 Series and it will follow with more plug-in hybrid vehicles utilizing this unique technology. So it's something we're investing in. We're looking at opportunities to grow that business. It's not growing quite as fast as we had hoped, primarily because OEMs are aggressively launching electric vehicles and making changes is hard to get in right now. They want to launch quickly with what's known unless there's some very significantly compelling technology. They've got a lot of interest in ours. I think that you're going to see more and more opportunities for us in that front. We also use this thin foil technology for our battery cell heating and we've launched that with LG across several platforms. And we're getting -- we're working on a platform also with Renault on that.

I'd have to ask, too, on some of the acquisitions that you did since your conference last year, starting with the larger of the 2, Alfmeier, right, supplier of pneumatic lumbar and massage features, you mentioned. Was the motivation here more, would you say, from a cost synergy or from a revenue -- you got an early win on the revenue synergy front, right? But how would you rate the relative benefits there? And what is the benefit of offering these 2 products into a bundled offering? And with the new -- the 2 companies under one roof, what kind of new types of products might that lead to?

Yes. Well, first of all, it comes back to our focus as a company, and our purpose is really about creating solutions that improve health, wellness, comfort, and energy efficiency. And we're consistently looking at how do we expand our value proposition. And I think a very natural expansion was lumbar and massage, with the physiotherapy side to kind of mesh with thermophysiology. So thermophysiology, physiotherapy, they come together, they work in tandem. That's our vision. It's really that -- that's where it all started, is how do we create a solution that adds more value for customers. And we looked across the different players in the market and really saw Alfmeier as the technology leader. And as you know, Gentherm, we really focus on innovation and technology, being first to market with advanced technologies. And we saw that same type of track record and progress with Alfmeier. And we've been working with them for a number of years and finally found the right opportunity to come together. Alfmeier is the global leader in pneumatic-based lumbar and massage systems. And then maybe to your question, where does the real value creation come? Number one, it's going to be on growth and in a couple of different ways. First, Alfmeier, as a small private German company, really focused on mostly European OEMs and mostly on the luxury side. They had expanded a little bit beyond that. So great, that entrenches us more with the European OEMs. But Gentherm brings 35 OEMs to the table. And we looked at -- immediately, we could grow their business in the U.S., in Asia with Asian OEM customers. And we really saw that as just taking their product and expanding that into our customer base. But the longer-term opportunities are really going to be about creating system-level solutions that bring thermo and physiotherapy together, so the massage, the lumbar, not just for comfort, but also for wellness, for therapies. We really believe there is an untapped opportunity out there to positively affect people with back pain, for example, in the car. Right now, driving a car is actually a net negative on people that have back pain. But what if you flip the script on that and turn that into an opportunity to improve the pain management of people with these situations. So that's the kind of thing that we're thinking about longer term with that addition. I think the one thing that sets us apart from competition is that we develop our own software and electronics. And our vision here is to just keep building on ClimateSense plus the physiotherapy solutions, and you add to that the software, the algorithms and the ability to upgrade and add features over time. The software-defined vehicle is an area we spent a lot of time talking about; how can our solutions enable more opportunities for OEMs around the software-defined vehicle. And a lot of that comes by adding features over time through software updates. I think the therapy example is a great example of that. If we have a ClimateSense solution, we also have installed lumbar and massage as new therapies get developed. Those could just be added to the vehicle through software and these new features can be added if done correctly. So that's the vision of where we want to go with it.

Very interesting. And with regard to the other acquisition you did in 2022, Dacheng Medical, maybe you can talk a little bit about what attracted you to that business, but also more generally about patient thermal therapy in a medical setting, and then how that expertise translates over into the automotive setting. One of your more recent product demos, I was able to experience a feature like the alternating heat and cool, right? And combined with massage, it really was sort of like a physiotherapy in the car. When might we see something like that in production, do you think? And does -- your patient thermal management business, does it enable you to introduce these types of new features to the vehicle, say, before the competition?

Yes. I think it's such a differentiator for us that we have this medical business. And it's laser-focused right now on patient temperature management as you pointed out. So for those who don't know that business, basically what we're doing is we're managing a patient's temperature in the operating room and in the intensive care. And that can be through heating, through cooling. We even induce hypothermia in certain cases with stroke victims and head trauma victims, for example. And so this is a really exciting business for us and besides the -- we believe it's a fast growth business in a multibillion market in the medical space. But the real value for us, because we're mostly automotive, is that deep understanding of the human body and how the human body responds to temperature change. Besides just managing the body's temperature in the operating room, we also do a lot of therapy products. So especially in the orthopedic side. So people who have knee surgery, ankle surgery, shoulder surgery, our cooling products and heating products are used for that therapy. So you start to take that knowledge around thermophysiology that we gain in the medical space and you bring that into solutions for automotive, we believe we're the only company in the world that can do that, that can bring that expertise. Our goal with the business is pretty modest. We'd like to get it -- today, it's a little bit less than $50 million out of our over $1 billion, and we'd like to get it to about 10% of the business. So somewhere down the road, between $150 million to $200 million, I think, is the right size for that business. That brought in the Dacheng acquisition. We're very much mainly a North America-focused business right now in patient temperature management. We want to become a little bit more global. Dacheng is one of the leading providers in China, but they're also selling in other markets around the world. They have FDA-approved product in the U.S. and South America. So this is a really ideal acquisition. They are mainly focused on the consumable products, so wraps and blankets and things like that, which is an area we wanted to grow. It's a great business model if you can get more consumable business in that space. So we're excited about that acquisition. We'll continue to keep our eyes open for smaller acquisitions to help us grow over time. We think we have great organic growth opportunities in the medical space. And as long as it continues to add value and synergy to our automotive business, we'll keep investing there.