Gentherm (THRM) Q2 2026 earnings call transcript

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 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 findings, including the latest 10K and subsequent reports for discussions of our risk factors and other significant assumptions, risks, and uncertainties underlying such forward-looking statements.

During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G. Thank you, Greg. Good morning, everyone. Let's begin on slide three for an update on our business and the market. Strong commercial execution, where we continue to significantly outperform the market, combined with operational discipline, resulted in an excellent first half, positioning Gentherm to deliver a solid year. Based on this performance, we are raising our full year 2026 guidance. We continue to monitor the macroeconomic and geopolitical environment, and at the same time, we are proactively managing inflationary pressures through discipline, commercial actions, and operational execution. As we look ahead, our priorities remain clear. We are focused on executing our strategy, capitalizing on the opportunities within our control, and driving sustainable, profitable growth for our shareholders.

Strategic profitable growth is a cornerstone of our strategy, and we continue to achieve critical milestones that position us for long-term success. We have confidence that Gentherm's automotive business will grow over market, while we continue to build momentum beyond the light vehicle market. During the quarter, Gentherm products were selected by two leading North American-based furniture brands in the home and office market. In less than a year, we have successfully deployed our core technologies with five new customers and have visibility to $50 to $100 million of revenue in this market by 2028, A strong proof point that our technology platforms are readily transferable beyond automotive and that we are moving with speed to capture these opportunities.

In the medical market, we remain focused on refreshing the product portfolio and expanding our customer commercial channels. I am pleased to announce that we have received FDA 510K clearance for ThermoFix, an innovative new solution developed by leveraging our proven automotive technology and intellectual property. This is another powerful example of our ability to transfer differentiated automotive innovations into new markets where they solve meaningful customer challenges. Our patented solutions combine conductive air-free patient warming with securement technology to help prevent both hypothermia and patient movement during robotic surgical procedures.

We are actively commercializing Thermafix and expect initial sales in the third quarter. We are encouraged by the strong market interest, and as adoption grows, we believe Thermafix has the potential to establish a new standard of care while further validating the scalability of our technology platforms. In addition, on July 1st, we completed the strategic acquisition of innovative medical equipment. IME is the provider of the ThermoZone Therapy Device, which is a non-opioid thermal therapy solution designed to support pain management and recovery through controlled hot and cold therapy utilizing thermal electric devices.

It is a great example of a strategic, disciplined, bolt-on acquisition that accelerates our strategy. This acquisition builds upon our market-leading capabilities and thermal management while expanding our patient product portfolio. IME has a strong growth trajectory and broad reach into veteran administration hospitals and clinics, enabling attractive cross-selling opportunities of our combined thermal management portfolio. Please turn to slide four, where I will discuss some of our second quarter highlights. The Gentherm team delivered a solid second quarter, reflecting the consistent execution of our strategy and reinforcing our confidence in the path we are on. We secured approximately $690 million in automotive new business awards during the quarter, bringing our year-to-date total to more than $1 billion.

These awards were in line with our expectations and reflect continued customer demand for our differentiated technologies. Just as important, our pursuit pipeline remains healthy, giving us confidence that 2026 will be another robust year for new business awards. Product revenue reached a quarterly record of $416 million, driven by automotive climate and comfort solutions growth that continue to outpace underlying light vehicle production. This performance exceeded our expectations and demonstrates the value we continue to create from differentiated technologies and disciplined commercial execution.

Operationally, we continue to build momentum in the second quarter. Our initiatives to improve labor efficiency, equipment utilization, and inventory management are delivering measurable results, While the operating system we are implementing is driving greater rigor, consistency, and accountability across the organizations. These improvements are strengthening our foundation to expand margins, positioning us to deliver higher cash flow conversion over time.

Overall, we are executing well across the business. We are winning with customers, improving the quality of our operations, and investing in the capabilities that will support profitable growth. Moving to slide five. As we approach the close of our combination with Modine Performance Technologies, I am increasingly confident in the strategic value this transaction will create. Together, we are building a fundamentally strong company, one with greater scale, broader capabilities, and a more diversified portfolio position to deliver sustainable long-term growth. This combination transforms Gentherm into a global leader in thermal and precision flow management solutions.

By bringing together two highly complementary businesses, we significantly expand our product portfolio of mission-critical technologies, strengthen our innovation capabilities, and create a platform with greater opportunities to serve our customers across a broader range of applications. Equally importantly, this transaction meaningfully diversifies our end market exposure. Our light vehicle mix will decrease from approximately 97% today to roughly 63% while expanding our presence in attractive, growing markets such as commercial vehicle, off-highway, and power generation. This creates a more balanced business with multiple growth engines. The combined company will have a clear path to exceed billion in revenue by 2030 with an attractive financial profile supported by margin expansion robust cash flow generation and disciplined capital allocation Together, these strengths position us to invest in future growth, realize the benefits of the combination, and create long-term value for our shareholders.

I am excited about what lies ahead. The strategic rationale for this combination is compelling. Our integration planning is progressing well, and we believe the combined company will be better positioned than ever to deliver differentiated solutions for customers and superior returns for shareholders. I will now hand it over to John to discuss an update on our integration activities and highlights for the quarter.

Thanks, Phil. Now turning to slide six. Since our last update, we have continued to work closely with the Modine team and have made significant progress toward the closing of the merger. Our primary focus is to ensure performance technologies can operate as a standalone division of Gentherm on day one, and now we are positioned to deliver on value creation opportunities. Based on progress to date, we expect closing of the transaction to occur early in the fourth quarter, as we have completed many key signed-to-closed deliverables and expect to close out the remaining items in the coming months.

As Bill noted, we remain excited about the combined business and will continue to keep you updated as we approach closing.

Please turn to slide 7 for a review of the second quarter financials. Revenue of $416 million was up 11% compared to the same period last year. Revenues excluding foreign currency translation increased 9.5%, exceeding our expectations driven by higher automotive volumes. Automotive climate and comfort solutions revenue increased 14.1% year-over-year, or 12.7% XFX, and included strong outperformance across all regions and product categories. From a product perspective, Lumbar and Massage Comfort Solutions delivered another strong quarter of revenue growth at 38% year-over-year.

Geographically, China performed well once again with trends from recent quarters continuing, including production increases from domestic Chinese OEM program launches and higher take rates from global OEM customers. Turning to profitability, we delivered $48.8 million of adjusted EBITDA for 11.7% of sales, compared to 12.2% in the second quarter of last year. Strong operating leverage and benefits from operational excellence initiatives were offset by anticipated headwinds related to inflation recovery timing and planned footprint-related inventory reductions, as well as warranty accruals in both our automotive and medical businesses. On a reported gap basis, diluted earnings per share were $0.14 in the quarter. This was impacted by approximately $0.55 per share related to merger and restructuring expenses. Adjusted diluted earnings per share were $0.75, up 39% compared to $0.54 per share in the second quarter of last year.

Adjusted free cash flow is approximately $16 million year-to-date, in line with our expectations and historical seasonality, while CapEx was $14 million, now $9.5 million compared to the prior year as we continue to scrutinize spend.

Moving to the balance sheet, we ended Q2 with net leverage of 0.3 terms, and we have liquidity of $502 million. Please turn to slide 8 where I will discuss our 2026 guidance, which excludes any impact related to our plan combination with Modine Performance Technologies.

Given our strong first-half performance and second-half revenue visibility, we are raising our 2026 full-year guidance for revenue, adjusted EBITDA, and adjusted free cash flow. At the midpoint, we expect revenue of $1.6 billion, representing roughly 5% growth for the year, compared with a decline in light vehicle production forecasts of approximately 3%, positioning us to deliver mid-to-high single-digit revenue growth over market.

We expect adjusted even to be in the range of $185 to $200 million, implying a midpoint margin of approximately 12%. As previously discussed, we expect margins to remain lower in the third quarter before rebounding in Q4.

Turning to cash, we estimate adjusted free cash flow between $85 and $100 million, with CapEx in the range of $45 to $55 million, or approximately 3% of sales.

Overall, we delivered strong first-half results and are pleased to raise guidance for the full year. Our recent trends indicate that Gentherm is at an inflection point for growth. We will continue to execute with discipline while remaining focused on strategic actions to drive long-term value.

Now, let's turn to slide 9. Before turning it back to Bill, I'd like to reinforce our financial flexibility and strengths, which supports a disciplined and balanced approach to capital deployment. In the quarter, we secured $800 million of committed financing through the combination of a $550 million five-year revolving credit facility and a $250 million term loan that supports the MODIN transaction.

Upon closing, we expect our net leverage ratio to be approximately one turn, providing ample liquidity to deliver on our strategy. Our target is to maintain a net leverage ratio of one to one and a half times over time. In addition, we expect that the combined Gentherm and Modine business will generate significant cash flow in the coming years.

Based on the forecast supporting our 2030 financial targets, we would expect to generate over $1 billion of cumulative, unleverged free cash flow through 2030. We believe we have the necessary capacity to execute the Modine merger, support the combined business, and efficiently deploy capital to drive shareholder returns. As we think about priorities, first, we will invest organically with a focus on return-driven investments that will drive profitable growth or expand margins.

We recently demonstrated this capability to our successful entry into the home and office market, as well as the upcoming launch of Thermafix. Second, we remain committed to returning capital to shareholders through repurchases, particularly in times of value dislocation. Earlier today, we announced a new stock repurchase authorization of up to $400 million over three years. This authorization, which is nearly three times our previous program, reflects our confidence in the cash generation of the combined company and provides additional capacity to opportunistically return capital to shareholders. It is our current expectation that we will be repurchasing shares upon the closing of the Modine transaction.

Lastly, we believe that M&A will serve an important role for the company in achieving our strategic growth priorities. We continue cultivating a wide range of opportunities that are aligned with our core technology platforms and attractive growth markets outside of light vehicle.

While at the low end of our targeted range, our recent acquisition of IME is a great example. From a strategic perspective, IME brings highly complementary products, technology, and commercial channels. As well as needed scale to Gentherm's medical business.

IME also brings an attractive financial profile with projected 2026 full-year revenue of approximately $17 million and 20% even of margins. As part of Gentherm, we believe that IME can double its revenue and reach at least high teams ROIC by 2030, with returns covering cost of capital by year two. Moving forward, we will continue to target M&A opportunities that are strategically and financially compelling as a lever to accelerate our strategy and enhance returns.

In summary, the combination of a strong balance sheet, significant free cash flow generation, and a disciplined approach to capital deployment position Gentherm to simultaneously invest for growth and return capital to shareholders, all while continuing to operate in a comfortable leverage framework. We believe this ultimately results in substantial long-term value creation for our shareholders. I'll now hand it back to Bill for some closing remarks.

Thanks John I am pleased with the progress we have made in the first half of the year and even more excited about the opportunities that lie ahead We are executing our strategic priorities improving the performance of our operations and continuing to strengthen the foundation of the business Every quarter we make tangible progress that reinforces our confidence in the strategy we have in place Looking forward, we remain focused on disciplined execution, profitable growth, and creating long-term value for our shareholders. With the momentum in our core business, the expansion of our technology into new markets, and the transformational combination with Modine Performance Technologies, we are building a fundamentally stronger company, One that is more diversified, more resilient, and better positioned to deliver growth, margin expansion, and increased cash flow.

I am confident that we have the right strategy, the right team, and the right capabilities to capitalize on the opportunities ahead and deliver value for our customers, our employees, and our shareholders.

With that, I will turn the call back to the operator to begin the Q&A session.

Yeah, I would say, Ryan, the awards were pretty well distributed. I wouldn't call it any specific region program or customer that really drove it. So I think the commercial team on the auto site did a really nice job of texturing some broad wins there. And actually, it was exactly what we expected. If you remember when we talked, there was some conversation around Q1. Was that too light? And we told you, don't worry, we have a good pipeline. And we remain confident in the second half, so it still looks like another robust year for awards.

Yeah, so the purchase price is $34 million. So as we look at the transaction, it's a $17 million business today, obviously pro forma for the year. We expect significant growth as we talked about the business doubling here over the next couple of years. So we really like the growth profile of the business and how it fits internally. Profitability, 20%, EBITDA with opportunity expansion from that perspective as well. So, you know, we'll contribute in the second half of the year contemplated in what we put out from a guidance perspective. You know, but really think it's a good fit for where the medical business is and what it needs to scale and grow here.

Yeah, so on the ThermoFix side, as I said before, 510K clearance, all good. We are now producing, we are in the clinical trial period, so we are in the process of getting ready to ship to hospitals over 50, as we talked about before with the clinical trials. So we're excited. Demand looks strong. Everybody's excited about the product. They like the problems that it solves that they currently have in that space. So, you know, we're very optimistic on that one. I think the great thing about IME, to put it in perspective, so IME does hot-cold therapy utilizing thermoelectric devices, which is kind of the core of how our business was born, if you remember. But IME is largely in the Veterans Administration Hospitals and Clinics.

So IME serves over 200 Veterans Administration Hospitals and Clinics, and they have almost zero channel access to where we are today. Conversely, we serve hospitals through select partnerships, distributors, and GPOs, and we have zero access to the Veterans Administration today. So there's a very, very strong cross-selling opportunity between those markets.

Thanks, Brian.

Yeah, Nathan, I think, I mean, if you look at growth, as we talked about, it's relatively broad-based across both products as well as regions from an outperformance perspective. You know, we point to China being really strong based on launches, based on increased take rates, but it's really, I would say, broad-based. I think as we get to the second half of the year, you do run into some tougher comps that are impacting your over-year growth rates. But we've consistently said that this business can grow mid-single digit over time, and we're very confident in the ability to do that based on the visibility that we have, As well as just the industry dynamics in terms of penetration and take rates or adoption.

And so, you know, we would expect that mid-single digits. It might not be linear every single year. Some might be a little higher or lower, but very confident in the trajectory of the automotive business and the opportunity to grow there.

Are there any changes in targets by 2028 or estimates of what the TAM is here Yeah Nathan I would say that the so yeah you right The first awards that we announced and we were public with Vertuca and they a Chinese manufacturer one of the largest in the world The other two that we now added in North America are very large They name up publicly before we can name so announcements will come out But they are quite large What I would say is the wins with them were more sizable than what we had won with KUKA, but that's a result of them pulling more content quicker. KUKA's strategy was to be first to market with Gentherm, so we anticipate that that will continue to expand.

Overall, we're excited about the home and office market. You know, latest data that we have in talking to the manufacturers is, you know, the TAM in that market for us is over $500 million. The TAM is over $500 million. So we're still confident in that number that we put out there, 50 to 100 million by 2028. But see, no possibility of not being at least at 50.

Thanks, Edwin.

Yeah, thanks, Bridget. I think the, you know, in terms of the 27 number, you know, we're not in a position to update that at this point. I think we feel highly confident that we'll be at the $1.7 million or higher as we head into 2027. And I think as you look at the second half of the year, you probably wouldn't be the first person to call us conservatives. But, you know, we're looking at, you know, there's certainly a level of uncertainty that's out there. We do have some of our runoff businesses, which has more of an impact in the second half of the year than the first half in terms of end of program on some of those product lines.

That's a bit of a headwind. But based on the visibility we have, we're comfortable with where the midpoint guidance is at this point.

Yeah, I would say we've become very much, very confident in our ability to capture the $100 million plus that we talked about by 2030 and cross-selling. It goes back really to the three pillars we talked about, right? Cross-selling into the other markets, opening up the India region for us, which we currently are not in today, as well as product development and integration between the two companies. So very confident in the $100 million plus number, and as you and I have talked before, over half of that will come up from the VALS business, which is a business that we find very attractive.

Thank you. Good talking to you.

That is correct, Lenny. It's based on the Pell-Pier effect, and the thermoelectric device either heats or cools the fluid that is flown through the thermosome device. I get my thermos mixed up.

And so is that to say could this have been developed in-house then, Bill? I mean, certainly the core technology is there to develop it in-house. We still have thermal electric devices that we have, right, and that we use for active heating and cooling. So IME is a super strong fit for our core technology, super strong fit for our patient thermal management, which is based on, you know, thermal electric devices. And we're super excited about the cross-selling and our access now to the Veterans Administration and providing IME with access to our channels.

Certainly, they're competitive. You know, just by the nature of that, they're competitive-type devices. I would say that IME has shown a strong growth trajectory and very strong market adoption. So, you know, what's really interesting about this technology is it's pain management without opioids, right? And that's really the magic of the device is it provides that. So, we see a lot of potential in the market. We see a strong growth trajectory. And again, we're excited about taking this into our existing channels.

Yeah, I'll run right at that one. And the reason we called that out and put that in there was because we didn't want us to really, we don't want anything to match the operational progress that we're making in the discipline. And we had an instance on the auto side last year when we started setting up our key performance indicators and really started tracking things as a percentage of sales and driving numbers into the operations. We observed some trends in our KPIs that made us look at a product and make some mechanical robustness improvements in that product late last year. It's a very specific product with specific customers. In the first half, we saw increased claims, and you'll see that this actually goes back to 2020.

So we made the decision based on the robustness improvements we made last year, plus the trends that we saw, you know, to get this out in front of us and take the accrual. So we don't view this as something that continues in the run rate.