Gentherm (THRM) Q3 2025 earnings call transcript

Thank you, and good morning, everyone. 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 filings, including the latest 10K, the 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. Reconciliations of these non-GAAP financial measures for the comparable GAAP financial measures are included in our earnings release and investor presentation. On the call with me today are Bill Presley, President and Chief Executive Officer, and John DuYard, Chief Financial Officer. During their comments, they will be referring to a presentation deck that we've made available on the Investor Section of Gentherm's website.

After the prepared remarks, we'd be pleased to take your questions. Now I'd like to turn the call over to Bill.

Thank you, Greg, and good morning everyone. Our third quarter results showcase improved execution across Gentherm, allowing us to deliver record quarterly revenue and strong operating cash flow. We are committed to the execution of our strategic priorities, while focusing on the day-to-day actions required to drive financial results.

Now, let's turn to slide three to discuss highlights. Third quarter automotive new business awards of $745 million puts us at $1.8 billion year-to-date and on track to deliver a full year above $2 billion. Momentum for lumbar and massage comfort solutions continued as we secured another important strategic conquest win with Mercedes-Benz on one of their highest-value platforms, which includes the S-Class, GLS, GLE, and CLS vehicles. It is important to note that this is 100% incremental revenue for us as we were able to displace a competitor for this award. The platform will include a proprietary pulsating massage system, Pulse A, marking the fourth global OEM to adopt our innovative technology since we introduced it to the market last year.

Securing this award demonstrates we have innovative, highly desirable, and value-added solutions that customers demand from the OAMs, driving continued market adoption, increasing take rates, and revenue growth for our automotive business. Additionally, we achieved record quarterly revenue of $387 million, driven by high demand for our products and improved third-quarter light vehicle industry production versus our prior expectations. Automotive climate and comfort solutions outperformed actual light vehicle production in our key markets by 160 basis points, excluding FX. And we were pleased to see improved performance in China during the quarter. In addition, our operational excellence initiatives are gaining traction, which contributed to operating cash generation of $88 million year-to-date.

Before I finish this slide, I want to share my perspective on recent supply chain news. We are keeping a very close eye on the supply chain and the potential impacts across the industry. There will likely be an impact on OEM production, though it is too early to call at this time. Our teams are working with customers and suppliers to mitigate potential exposure and maintain visibility. The situation continues to evolve and will keep you updated as necessary.

Now, turning to slide four. We continue our relentless focus on our strategic priorities to drive long-term shareholder value. We spoke earlier this year about our strategy of scaling our core technologies across multiple end markets to drive profitable growth. We saw success in the second quarter with wins in power sports and commercial vehicles, and we made further progress on this initiative during the third quarter. Our efforts in the past 90 days have generated a commercial funnel of over $300 million of lifetime revenue, and we are still early in our efforts.

I'm excited to say that we were selected by a large global furniture brand to supply our comfort solutions and are preparing for production to start in Q1 of 2026. The product we will be supplying utilizes existing plant, property, equipment, and installed capacity. We are in discussions with several other furniture brands for our thermal and pneumatic solutions and see this as an attractive adjacent market given the annual volumes, margin profile, and limited incremental investment.

As mentioned, we are preparing to deliver components in Q1 of 2026, demonstrating that the development cycles and time to revenue in these markets is much faster than our traditional automotive business.

Moving to medical, our new product development is progressing, and we are on track for a significant product announcement near year-end. The refresh of the product line in medical is a priority, and we are accelerating plans by leveraging existing automotive intellectual property. Operationally, we continue the rollout of our standardized company operating system across the globe, and we are starting to see early science traction. This is the type of foundational work that will maximize utilization of our existing assets, deliver expanded margins, lower capex requirements, and generate increased cash flows.

In September we brought Gentherm top leadership together for an in summit We used this time to align on strategic initiatives and key priorities including the standardization of global business processes We understand that people are Gentherm's most valuable asset and ultimately drive performance of our business. The leaders left with a clear vision of how we will drive value creation and the sense of urgency at which we must move to deliver the required results. Our global strategic manufacturing footprint realignment plans remain on track to be substantially complete by the end of next year.

We have made significant progress relocating and launching manufacturing processes in Tianjin, China, and Tangier, Morocco. Customers have been supportive, and we are actively shipping production components from both facilities. As we think about employing capital to achieve superior financial performance, we believe that M&A will serve an important role for the company in achieving our strategic priorities. We are cultivating a wide range of opportunities that are aligned with our core technology platforms and provide access to new markets and expand our product portfolio. We will evaluate these opportunities as a lever to accelerate our strategy. And with that, I will turn the call over to John to review third quarter highlights and results. John?

Thanks, Bill. Now turning to slide five. In the third quarter, we secured $745 million of Automotive New Business Awards, one of the highest quarters on record for the company. As Bill discussed earlier, awards were highlighted by a significant win with Mercedes-Benz. Our team did a fantastic job securing this conquest business, which will more than double the annual lumbar massage revenue with this customer after it goes into production in 2028, and it will also support lumbar massage growth into the future.

Additionally, we had another strategic win with GM for our comfort scale solution, which is our patented next-generation integrated thermal and pneumatic hardware system. Last year, we secured our first Comfort Scale award on the full-size GM truck platform, including the Chevrolet Silverado and GMC Sierra. And in the third quarter, GM expanded the solution to its mid-size truck platform, including the Chevy Colorado and GMC Canyon, through a mid-cycle change in 2026.

Comfort Scale is a win-win for all involved. As we receive more content and value-add, OEMs reduce their labor costs and end consumers get an improved in-vehicle experience. This award highlights our close partnership with General Motors and our ability to provide value-added, innovative solutions to our customers.

Next, I want to highlight our success in partnering with Japanese OEMs as we look to drive growth and customer diversification across Asia. We secured multiple awards in the quarter, including one for climate-controlled seats on a Honda platform for the Indian market. Although Gentherm has not historically prioritized this market, on our hunt for strategic, profitable growth, we are evaluating the broader opportunity India may present for our products and will provide updates as we progress.

Moving on to the third quarter launch activity, we again made progress in China as our solutions were included on several new programs with Chinese domestic OEMs, including our thermal solutions with Xiaoping and our full suite of thermal and pneumatic solutions with Li Auto on the I-6, both of which contributed to improved growth over market performance in China. Coupled with a focus on winning new business with domestic OEMs, these launches will shift our customer mix and result in our business being more closely aligned to the overall Chinese market over time.

In Europe, we launched thermal and pneumatic solutions on the all-new Jeep Compass. The Lancet's first introduced this vehicle to the European market in September, and will soon launch it with our content in other regions. This vehicle will be offered in a variety of powertrain options, highlighting the powertrain agnostic nature of our solutions.

Finally, our climate control seat solution is included on Subaru's high volume Forester. This is another great example of the success we have had in expanding our business with Japanese OEMs. Please turn to slide 6 for a more detailed review of the financial results. Overall, third quarter results were above expectations as revenue came in higher driven by increased industry volumes. We also delivered sequential adjusted EBITDA improvement in the quarter. Overall, revenue of $387 million was up 4.1% compared to the same period last year. Revenues excluding foreign currency translation increased 2.4%. Automotive climate and comfort solutions revenue increased 8.6% year-over-year or 7% XFX, which more than offset planned revenue decreases from previously discussed strategic exits. Medical revenue decreased 0.4% year-over-year or 1.6% XFX.

Starting to profitability, we delivered $49 million of adjusted EBITDA, or 12.7% of sales, compared to 12.9% in the third quarter of last year. The 20 basis point decline was primarily driven by higher material costs, including a minor impact from tariffs, expenses related to our footprint realignment, and higher operating expenses, partially offset by operating leverage and favorable foreign exchange. Consistent with our prior communication, the impact from tariffs has been minimal, and our team has done a nice job of working with customers to mitigate our exposure.

Adjusted diluted earnings per share was $0.73 per share, compared to $0.75 per share in the third quarter of last year. On cash, we have generated $88 million of operating cash flow year-to-date, further strengthening our balance sheet. That leverage stands at 0.2 times at the end of the quarter, providing us with ample access to capital to deliver on our strategic priorities. Please turn to slide 7 for a discussion on our guidance for the remainder of the year. Based on our year-to-date performance and current visibility into OEM production schedules, we are increasing the midpoint of our revenue guidance while narrowing our EBITDA range. For the full year, we now expect revenue to be in the range of $1.47 to $1.49 billion, with the increase driven by improved second-half light vehicle industry production versus our prior expectations.

Our outlook for the fourth quarter includes the assumption of seasonally lower revenue versus Q3. This revision does not include the potential impact of supply chain disruptions that Bill discussed earlier. Year to date we have delivered 12 adjusted EBITDA margin and are narrowing our adjusted EBITDA margin range to 11 to 12 for the full year The EBITDA range primarily accounts for the impact of volume as well as the potential timing of year initiative spending including expenses related to footprint transitions and new product introductions On CapEx, we are again reducing our expected range of spend from 45 to 55 million dollars, which reflects an ongoing focus on optimizing current plant equipment while also scrutinizing new projects.

In closing, we are pleased with the results year to date, and our team is focused on finishing the year strong. With that, I will hand it back to Bill for closing remarks.

Thanks, John. Our third quarter results demonstrate improved execution and progress toward our long-term strategic initiatives. We delivered record revenue with strong cash flow and have made notable progress entering into adjacent markets. With innovative solutions and a strong balance sheet, we are well positioned to deliver profitable growth, margin expansion, and increased levels of cash flow. We remain focused on these strategic imperatives that will result in long-term value creation for our shareholders.

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

Yeah, Matt, good morning. It's Bill Presley. I would start with, it's certainly an innovative edge, right? Our solutions provide the OEMs with experience that they can pass on to their customer and price for. So there's a true value-added proposition there, and we have an innovative lead there. Our commercial relationships with our customers are very strong. So I would say our commercial level of interacting directly with the OEMs to impact their product plan versus, you know, attempting to sell through a tier one gives us a position with the OEMs, I think, that maybe not a lot of our competitors share.

You know, and I think a really interesting one here is, you know, it included Pulse A. So this is the fourth OEM to adopt our Pulse A technology globally since we introduced it to the market last year. So, you know, in order, I would say it's the innovative edge, the value proposition it provides to their end users and our customer relationships.

Yeah, so that $300 million pipeline, as you mentioned, I mean, that was with just six months worth of work, right? So teams move very fast there, which is very encouraging. I would say in rough numbers, it would be roughly a third what I would call the furniture, a third what I would call specifically commercial vehicle, and a third what I would call other mobility. In order of excitement in that space, the furniture industry seems to be actually pulling rapidly.

So they're talking exciting adoption rates. Their speed to market is quite impressive. I anticipate further rewards in that space that we'll be able to announce, but that revenue will start flowing in 26. On the commercial vehicle side, they're very interested in our fluid systems. So, you know, that's a new market that we're quoting with the valve business that came with Alkmaier. So fluid systems is gaining traction there. And steering wheel technology, specifically like heaters, hands-on detection, which we supply in the light vehicle market. And then other mobility, things that we've talked about like two wheelers, construction vehicles, you know, that's the other third. That one, we'll have to see how it develops, but I would say furniture and commercial vehicle are really gaining traction.

Yeah, Matt, I would just add in terms of time to revenue, I think we did talk about Q1 production on the furniture award. We think that's a $3 to $5 million opportunity, just that one award as we look at 2026. And so to the extent that the team can continue to stack these up, you know, we think it could be a meaningful growth driver, certainly a couple points here as we get maybe later in the 26th and the 27th.

And just piling on to that, make sure it wasn't lost in the script. That's capacity that we already have installed, equipment we already have installed. So it's incremental dollars on existing assets.

Thanks, Matt.

Yeah, I would say, so you touched on the JLR cyber issue. That seems to be behind us now They ramping back up That was more heavy for us in Q3 You touched on the Novellas fire which impacts aluminum I can tell you that No that heavy for maybe Stellantis based on what they said publicly We talk to them on a daily basis Right now they working to mitigate the issue so it difficult for us to see or say what the impact will be Certainly, we haven't seen any meaningful impact in the schedules yet with regard to that. And then the third one, which is widely known that we're watching very closely, is just the next period issue going on between the Dutch government, the Chinese government, and that company on the U. S. trade barriers.

Next period for us right now, our supply chain team has done a phenomenal job of mitigating any direct Gentherm impacts. So we don't see any near-term Gentherm impacts. We've done a good job of finding alternative sources for what we need. The bigger question there will be, who does it impact in the industry? Because they're widely used components. It's likely that somebody will be impacted. Not sure who. So you want to talk about the guidance piece, Jack?

I mean, I think, you know, to Bill's point, you know, the Jaguar piece certainly impacted us. There was a headwind for us in September. There'll be a little bit of hangover from that in fourth quarter. We've contemplated that in the guidance. I think as you look at the fire as well as the Nexperia piece, we're really looking to our customer ADI schedules to adjust our forecast. So there's been a little bit of movement here, I would say, in the last, you know, week or two. That has been contemplated, but we don't want to speculate more broadly than what we have, you know, with communication we have from our customers. And so it's really, you know, the latter of what you said in terms of just visibility and that we have today and the impact on the business.

So we're trying to be transparent as to what we see, but we haven't seen any significant schedule shifts to this point.

Yeah, I mean, the Indian market, you know, as you heard John say, talk about the conquest when that was with the Japanese OEM in the Indian market. But that's our first entry into the Indian market. And although we haven't historically looked at the Indian market, we're actively evaluating that. Look, it's an attractive market to us for a couple of reasons. One is scale, and we have no presence there. Number two is if you look at some of the proof of concepts we're developing on what we call alternative markets, two-wheelers is a huge market in India, and there's a desire there for pool seats. So that's a market that we're evaluating, and it looks like a very good market for us with regard to our valve technology.

So it's something that we're exploring and considering, but it can certainly open up alternative streams of revenue for us. John, I don't know what else you want to add.

Nothing.

Thanks, Ryan.

Yeah, I think a couple points there. I mean, we talked about the impact in the year being about 50 basis points. I think it'll come in a little bit higher than that, just based on the timing of where we are. And in fact, frankly, that we've seen higher volumes in the year that's impacted some of the ability to build inventory.

I think as you look at 2026, we will start to see some of the legacy costs fall off, but we'll also see the impact of sort of the inventory build that we've had this year. And so the real, you know, savings from that is probably late 26, but really more like 2027 in terms of when we see the benefit of the footprint transitions.

Yeah, I mean, when we think about M&A, we look at it, I would say, through a three-fold lens, right? I mean, ultimately, we're trying to build a more resilient company, right? So we're looking for two things. We're looking for something that provides access to markets that we're interested in, and we've been very vocal about becoming more than a light vehicle producer alone. So markets are important. Number two is it has to fit our core strategy, which means they are products that align with our current mission.

So, you know, you won't see us take any wild left turns. So product expansion is important as well, right? So, more resilient company, so it has to fit the right margin profiles. It has to create value. Number two is access to other markets, and number three is broadening the product portfolio.

Thanks, Ryan.