Gentherm (THRM) Q3 2026 earnings call transcript

Thank you, Greg. 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 security clause. 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 GenFerm's earnings release and its SEC filings, including the latest 10K and subsequent reports for discussion with 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 to 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 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. Good morning, everyone. Let's begin on slide three. When John and I joined Gentherm in January of 2025, we made it an imperative to diversify the business and to capitalize on Gentherm's capabilities to further expand into new markets. October 1st marked a defining milestone in Gentherm's evolution. We have emerged as a fundamentally different company, a global leader in innovative thermal and precision flow management technologies with a more diversified portfolio, incremental secular growth drivers, enhanced margin expansion opportunities, and stronger cash generation. There are three key takeaways I want to highlight.

First, our expanded end market exposure creates a more resilient business. We retain our leadership position in automotive while adding meaningful exposure to attractive growth markets, including power generation, commercial vehicles, and heavy-duty equipment. The broader exposure provides greater diversification, expands our addressable markets, and creates additional avenues for sustainable, profitable growth.

Second, the combination creates complementary thermal and precision flow management platforms. Modine's mission-critical heat exchanger technologies optimize equipment performance across multiple industries. By combining heat exchangers, valves, fans, and our complementary thermal management expertise, we can develop integrated solutions for emerging applications and expand beyond the products we offer today as individual businesses. As an example, in a liquid-cooled energy storage system, the battery coolant loop passes through a plate heat exchanger to transfer heat to the external environment.

Fans blow air over the exchangers to dissipate heat, while valves adjust coolant flow to the exchanger and control system pressure. This integrated setup ensures the energy storage system stays within its safe operating temperature window, maximizing life cycle and efficiency. We are not simply adding products and markets. We are expanding our ability to solve more complex customer problems and capture a broader range of growth opportunities.

Third, we have a clear path to delivering a significant strategic and financial value. We have the capabilities, commercial opportunities, and operational improvement levers to build a business generating more than $3.5 billion in revenue and over $500 million in adjustable EBITDA by 2030. with more than $1 billion in adjusted, unleveraged free cash flow over the next four years. We remain confident in delivering $25 million in cost energies as previously communicated. However, we are most excited about the significant commercial opportunities ahead of us. As stated in the past, India represents an attractive growth opportunity for Jemther with annual production of nearly 5 million light vehicles and more than 20 million two-wheels. Over the past year, GenTherm has engaged heavily with customers that enter the region, and we have received consistent feedback.

GenTherm needs a footprint in India. Modine's established presence in the country has already unlocked a new GenTherm Business Award for air-moving devices representing approximately $25 million in lifetime revenue with one of India's major light vehicle manufacturers, and shipments are expected to begin in the fourth quarter of 2027. This early proof point reinforces our thesis that establishing a local presence creates greater commercial access in India, where demand for climate-controlled seeding is growing and the addressable market for valves is significant.

We are also adopting some of the operating disciplines that have delivered results at Modim. The Modim team has used the 80-20 philosophy to drive meaningful operational and financial improvements. We are in the early stages of deploying that approach across GenTherm with a focus on prioritization and financial returns. I will close by emphasizing one point. GenTherm is proud of its heritage and confident in the future of its automotive business. However, we have proven we are more than automotive with recent launches in home and office and medical. We are not just an automotive seat component supplier looking for adjacent markets.

Together with Modine, we are a fundamentally different company with a more diversified business, a stronger platform for growth, and clear opportunities to create significant long-term shareholder value.

Please turn to slide four for an update on our business and several key performance highlights. Let me start with the operating environment. Industry light vehicle production volumes were down year over year, but demand for our products remained relatively stable throughout the quarter. At the same time, macroeconomic and geopolitical developments continue to drive increased uncertainty and volatility. We are also managing additional margin pressures from material cost inflation, including freight.

Our teams are addressing these headwinds through disciplined commercial actions and focused operational execution. We remain committed to protecting profitability while positioning the business for sustainable growth. Our core automotive business continues to deliver growth over market across all regions and product categories, reinforcing our confidence in the business and the strength of our customer relationships. We secured $555 million in automotive new business awards during the quarter, bringing our year-to-date total to more than $1.6 billion. We remain on track to secure at least $2 billion in awards for the fourth consecutive year. This continued commercial momentum reflects the value our technology portfolio delivers to the OEMs.

We also reached an important product milestone with the launch of our first ever Pulse A massage system in the automotive market. This technology delivers an enhanced massage experience and we see meaningful opportunities to extend its reach beyond automotive. Customer interest in the home and office market remains encouraged. During the quarter, we signed an agreement with a furniture component distributor that expands our access to customers through a differentiated commercial model.

This approach allows us to reach additional customers more efficiently and convert opportunities that may not have been previously serviceable. Wins like this reinforce our confidence in the opportunity to build a $100 million home and office business by 2028.

Turning to medical we made important progress on both product innovation and commercial expansion Following FDA clearance we successfully launched the Thermafix patient safety system with initial sales beginning in the third quarter. This is another demonstration of our ability to leverage proven automotive technologies and intellectual property and apply them in new markets. We've also completed the strategic acquisition of innovative medical equipment, the provider of the Thermosome Thermotherapy device.

This acquisition expands our patient thermal management portfolio and extends our commercial reach into the Veterans Administration healthcare system. IME is performing well, and the GenTherm team is focused on opening channels to cross-sell our complementary thermal management solutions across the combined customer base. Together, the Thermafix launch and the IME acquisition directly advance two of our key medical priorities, refreshing and expanding our product portfolio and broadening our commercial channels.

Both actions demonstrate how we are translating our strategy into tangible outcomes. Stepping back, the message is straightforward. Our teams are delivering across the priorities that matter most. We are securing profitable new business to grow above market and automotive, expanding into new markets, refreshing our product portfolio, broadening our commercial reach, and improving operational execution.

With that, I'll turn the call over to John.

Thanks, Bill. Please turn to slide five. Our third quarter highlights reflect both short and long-term commercial progress. Overall, automotive new business awards were $555 million. In addition, revenue of $405 million was up 4.7% compared to the same period last year, or 4.4% when excluding foreign currency translation.

Automotive Climate and Comfort Solutions revenue increased 8.8% year-over-year, or 8.5% of XFX, outpacing actual light vehicle production in our key markets by 12 percentage points. This growth included strong outperformance across all regions, led again by China, where our sales to domestic OEMs exceeded our sales to global OEMs for the first time, a key indicator that our intentional focus to better represent the local market is gaining traction. From a product perspective, Lombard and Massage Comfort Solutions delivered another strong quarter of revenue growth at more than 25% year-over-year. These results included the initial pulse A revenue, as Bill noted earlier.

Turning to profitability, we delivered $45 million of adjusted EBITDA, or 11.1% of sales, compared to 12.7% in the third quarter of last year.

Strong operating leverage was offset by headwinds related to net material costs, inflation, and foreign exchange. FX was primarily impacted by the year-over-year movement in the Mexican peso. them. On a gap basis, diluted losses per share were $0.08 in the third quarter. This was impacted by approximately $0.37 per share related to merger and restructuring expenses. Adjusted diluted earnings per share were $0.33 compared to $0.73 per share in the third quarter of last year.

The decrease was primarily attributable to a higher tax rate driven by the timing and treatment of M&A expenses. These impacts are more normalized on a year-to-date basis where adjusted diluted earnings per share were $1.90 compared to $1.78 per share in the prior year. Adjusted free cash flow was approximately $59 million compared to $72 million in the prior year. We ended Q3 with net leverage of 0.4 turns and liquidity of $494 million.

Following the closing of the Modine transaction on October 1st and the payment of the $63.5 million special dividend, we estimate that pro-formin net leverage post-Energies with 0.8 turns below our prior estimate of one turn.

We previously indicated our intent to repurchase shares once the Modine transaction was closed. Since October 1st, we have repurchased approximately 2 million shares for a total of $60 million.

With $340 million remaining on our authorization and the current trading levels of GenTherm stock, we expect to remain active throughout the fourth quarter. As Bill indicated earlier, GenTherm is a different company post-transaction with a strong growth outlook, and we believe the future of this business is currently underappreciated. Please turn to slide six.

Before discussing our guidance, I want to echo Bill's comments regarding our combination with Modine Performance Technologies. Having now worked with the Modine team for over a year and worked closely over the last few weeks, our appreciation of the business's potential has grown, and our confidence in the value of this transaction has only increased. The team is engaged and energized, and most significantly, excited about the growth opportunities ahead in both their traditional and non-traditional markets.

The integration is progressing well, and we are focused on delivering our synergy target and accelerating commercial opportunities. We continue to believe our combined business has a compelling outlook with a strong balance sheet, multiple growth engines, and a clear path to margin expansion. As an update to our prior communication, while we cannot yet comment on Modine's most recent quarter performance, we have updated our view of the combined company's trailing 12-month pro forma financials through June 30th of 2026. This update results in revenue of $2.7 billion in adjusted EBITDA of $346 million, which is up $20 million, with improvements seen in both businesses when compared to the prior pro forma period. Starting with 2026, we've updated our full year guidance to reflect the expected fourth quarter financial contribution from Modim, which includes approximately $275 million of revenue, approximately $28 million of adjusted EBITDA, and approximately $15 to $20 million of free cash flow.

As a result, we now expect the midpoint guidance for the full year to be as follows. Revenue of $1.875 billion, adjusted EBITDA of $220 million, and free cash flow of approximately $110 million with assumed capex of $55 million. This update reflects limited changes to GenThurve's prior full-year guidance that was communicated in July. We continue to expect that the legacy GenThurve business will grow mid to high single digits for the year, with revenue trending towards the higher end of the previous range, while we expect EBITDA to remain near the midpoint given the impact of increased inflation, which has accelerated since our July earnings call.

As previously noted, we expect margins to be sequentially higher in the fourth quarter compared to Q3. We look forward to providing a more comprehensive outlook on 2027 in our February earnings call and remain excited about the financial profile of the combined company. We have a high level of visibility to growth, driven by strong automotive and adjacent market launch activity in the legacy GenTherm business, as well as several exciting growth opportunities within Modim, including strong activity in power generation and early signs of recovery in commercial vehicles.

Our view on the new GenTherm is increasingly positive, and we will see our strategic progress translated to improved financial performance as we move forward. I'll now hand it back to Bill for some closing remarks.

Thanks, John. Our achievements year-to-date demonstrate we are on the right track, and we remain focused on finishing the year strong. Our business is growing, we're expanding our technologies into new markets, and the improvements we are making to our operating system are positioning us for margin expansion. With the strength of our existing business and our transformational combination with Modine Performance Technologies we are building a fundamentally stronger company that can deliver long value for our shareholders With that I will turn the call back to the operator to begin the Q session Thank you.

Good morning, Nathan.

Yeah, I think when you look at it overall, the year-over-year drop, I would say about a third of it is related to sort of material inflation and inability to recover.

You know, we don't have formal mechanisms from a recovery perspective with our customers, and so each one is a negotiation, as we've talked about before. I think as we looked at this earlier in the year, there were certainly some commodity impacts, the impact of oil on transportation, those types of things. I think what we saw accelerating Q3 is really on the freight side, which is typically a more difficult conversation with the customer. It takes a little bit longer to materialize. And so there's maybe a bit more of a lag than what we would have anticipated and also some increased inflation there. But the teams are doing a good job working with the customer base to push it through.

But we continue to experience the impact.

Yeah, and I would just say, Nathan, the mindset here is we know inflation is a challenge, but we're not going to be a victim of inflation. We're attacking what we can control. So, you know, if you look deep into our fundamentals, the capacity utilization, the direct labor efficiency in the plants is up. Cost of nonconformance as a percentage of sales like scrap is down. And that doesn't happen by accident. That's the team focused on gaps to standards.

We've removed spans and layers earlier in 26, as you know. We're now working through a standard plan structure to be completed by the end of the year. So where we can offset, where we cannot offset, to John's point, we're having structured commercial conversations with the customer. But it starts with building credibility with the customer by attacking the things that you can control and self-help.

Yeah, I mean, obviously, depending on share price, I think as we look at it today, We think there's pretty severe dislocation in what the future outlook of the company is. We did $60 million in the fourth quarter already. As we noted, there's $340 million open on the authorization. The other limitation we have under the RMT is 10 million shares over a two-year period of time. So there's 8 million shares remaining on that. And, you know, I would expect that we'll do at least what we did quarter to date, again, in the fourth quarter with the opportunity to do more than that.

Thanks, Ethan.

Yeah, I mean, I think the, certainly we expect more on that business going forward. Obviously, we've owned them now for about three weeks.

And so there may be a sense of conservatism in there as well. But when you look at that business, they are certainly experiencing cross pressures. They do have escalators in their contracts, so there is more of a mechanical mechanism to recover that, which creates a bit of a timing lag. And obviously, we've seen prices continue to increase throughout the year, so there's an element of that. But overall, we think the business will operate at a higher level than that going forward. We're just early on in the acquisition, and so that's the current view.

Yeah, I think what we've put out on the legacy GenTherm business, we've put out a $1.7 billion revenue number for 2027. We're still very confident in what that looks like. And I think it will be continued trends with what you're seeing, right? We've had a number of key launches. We talked about Pulse A entering the market today. We've got some medical launches and some favorability from the small acquisition we did there.

And then the lumbar massage products continue to operate well. I think on the Modine side, there's been some anticipation of power generation growth in that business and what they've been preparing for. We really start to see that pick up as well. So that'll be a nice addition. We're also seeing early signs of commercial vehicle recoveries through indications from our customers. And so there are some nice tailwinds from that perspective. You know, overall, from an automotive market standpoint, we're still not anticipating growth.

And so we think as we look at the year, we've got a strong growth profile in what's overall a relatively flat market.

Yeah, I mean, I think it's...

Yeah. Yeah, no, completely fair. I think, you know, inflation, the recovery lag, that will continue. It appears like it will continue in 27. We do see the benefit from footprint actions in the legacy janitor and business, the benefit of that in 27. So, you know, we are largely through those actions here in the fourth quarter. So we would anticipate an increase from that perspective.

And beyond that, you know, we're really looking to, you know, Bill talked about some of the operational items that we're really driving the teams on and we'll look to continue to see productivity and efficiency out of the business. You know, the one other piece I would point to, Bill made the comment in his prepared remarks, is just on the 80-20 mindset in general. You know we are early stages within the Gentther business but we do have teams together who are mobilized on specifically looking for margin opportunities and efficiency to you know ultimately reallocate resources and drive growth in the company. We may see some of that benefit as we get into 26 or 27 as well.

So, you know, a lot going on, but we think there's a lot of positive momentum in the company.

Thank you.

Hey, Justin.

Yeah, I mean, I think if you're looking at it, you've got a couple drivers in there. There's a lot of transaction-related costs, but to the extent that you're looking at an adjusted number, you do have an increase in, you know, related to the acquisition of IME. You'll see some additional depreciation in there as well from some of the systems that we put in place. there has been an increase in personnel costs as well in the quarter. And so those, I would say, are the big drivers.

Yeah, I would say based on awards to date with the OEMs, and it's a different model, obviously, than light vehicles. You know, Justin, we have very strong visibility, the $30 million in annualized revenue by 2028 with a pipeline that supports the $100 million target that we've been putting out there. So I would say 12 months in, right? I mean, we started this venture kind of in the middle of last year. The team has built a significant pipeline with significant engagement. As mentioned, we signed a differentiated commercial model with a component distributor during the quarter. So that allows us to service smaller customers that we might not otherwise service just due to scale.

Thanks, Justin.

Yeah, I think on the power generation side, you know, a lot of what they're doing is supporting diesel generation, which is after meter power. A lot of that, you know, is going into the data center. And so the business has been building up a backlog associated with that now for a number of months. It's been working on capacity, and that's really in place to execute at this point. I think when we look at opportunities inside the data center, I mean, Bill gave an example early on that could certainly be applied from an energy storage perspective or even a key exchange or play technology that could be inside the data center. I think as we look at the business, there continues to be a view of broad application of Modine's products outside of their traditional markets.

We alluded to it in the call. But even things like, you know, the medical industry and medical products, athlete exchangers, if you look at what we're working with the team on now is things in, like, industrial HVAC potentially, which is not a place they've played historically. So there's really broad opportunities for their products, and we're going to take a pretty broad view on how we go after the markets there.

It actually remains strong in all regions, so we don't see any regional dependency on the demand for our products. I would say China continues to be strong for us. Third quarter was the first quarter in the history of the company that our domestic sales outpaced our global sales. So we officially sold more to Chinese OEMs in China than we did to the global customers over there, which has been part of our strategy. So we expect that to continue strong. We expect the automotive segment to continue to grow. And we see no weakness there from a demand standpoint.

Thanks, Brian.

Yeah, I think, Nathan, you're right. It's going to be very hockey stick, right? It's going to have a very pronounced tail end. So, I mean, I think appreciably we'll start seeing some revenue flow through in 29. We'll start seeing green shoots of that in 28. But the bulk of that will hit in 2030. As you highlight, the win that we had in India really reinforced our thesis that having footprint and presence, they were opening up that market. And that's a market that we're excited about. And I would say there's a very aggressive hunger between the teams working together on product development. And you heard John allude to some of the things that they're working through that would put us together into markets that we're not in today separately.

Yeah, we talk, you know, as you look at North America, we've largely consolidated our facilities in Mexico at this point. So there's some cleanup in the fourth quarter. When you look at our European footprint consolidation, closing of the Czech Republic, that is on track to be completed this quarter as well. And so we should be relatively clean as we get into January of next year. You know, we haven't put out a 27 number necessarily on that. We did talk about it as being a key driver for us as we look to get back to the 15% margin in the legacy jump there business.

And so we should see a step of function change as we get into 27.

Thanks, Dave.