THRM

Greetings, and welcome to the Gentherm first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Yijing Brentano, Senior Director, Investor Relations. Thank you. You may begin.

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 in its SEC filings, including the latest 10-K, 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.

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, Chief Executive Officer, and Jonathan Douyard, Chief Financial Officer. During their comments, they will be referring to a presentation deck that we've made available on the Investors 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. Let's begin on Slide 3. I want to start by saying that the Gentherm team demonstrated strong execution in the first quarter. Over the last year, we've spent a lot of time improving our operating system. We've been focused on fundamentals that are core to operating in an efficient, consistent manner in all aspects of the business. I visited Gentherm sites in multiple countries over the last three months and was able to observe changes in how we operate all locations versus last year. The teams are engaged in targeted actions for growth in new markets. Factory floor space occupation and efficiency are increasing, and the teams are adopting tools we've put in place to drive financial rigor. I was pleased to see these efforts starting to produce tangible results in the quarter.

The first quarter also demonstrated our ability to execute in a dynamic environment, and we are confident in our ability to continually improve our operations. After spending a year with the team putting tools and processes in place, we concluded that realigning our operating model and structure would drive increased speed and transparency across the organization. Therefore, during the quarter, we initiated an organizational realignment that reduced spans and layers to increase agility and provide a concentrated focus on internal improvements as well as the ability to accelerate our growth platforms. This realignment positions us well to deliver key financial and operational priorities going forward. Strategically, this quarter marked an inflection point in our journey to transform Gentherm. We took action to position the company for sustainable, profitable growth with our announcement to combine with Modine Performance Technologies.

This transaction transforms the company with an expanded product portfolio and broader end-market exposure. We continue to execute our priorities and strategy even though the environment around us remains dynamic. Since our prior earnings call, the macro and geopolitical environment has changed significantly and is creating an increased level of economic uncertainty. Despite these recent events and other macro issues over the last year, light vehicle production schedules have remained relatively stable, which has allowed us to focus on operational improvements. We continue to assess key data inputs, including dealer inventory levels and customer schedules, as well as collaborating directly with our customers to get real-time insights on future demand. That said, headwinds are beginning to emerge across the globe. These include direct cost increases in logistics due to lane disruptions and fuel surcharges, as well as cost increases of petrochemicals used in raw materials.

In addition, we are now starting to see cost inflation flow through to other materials, which are being indirectly impacted due to increases in processing-related costs. We continue to monitor developments in real time, and we are working closely with our suppliers and customers on a variety of mitigation strategies. We are preparing to implement pass-through or reimbursement mechanisms on applicable costs. We have actions ready to execute both commercially and operationally. We will remain agile, and we are confident in our ability to navigate through volatility and uncertainty. Now please turn to Slide 4, where I will discuss some of our first quarter highlights. The first quarter financial results were above our expectations. We secured $395 million of automotive new business awards, which were well-balanced across region, customer, and product. The pursuit pipeline looks robust for the remainder of the year.

We made significant progress on our organic growth initiatives, including key announcements with KUKA HOME and our new medical product, ThermAffyx, both of which I will discuss further in a few moments. Our product revenues for the quarter were $394 million, a quarterly record for the company, driven by strong Automotive Climate and Comfort Solutions growth over market. We delivered solid first quarter margin performance, driven by continued progress on our operational excellence initiatives. The business systems we've put in place are beginning to have a meaningful impact, driving improved execution and expanded margins. As we build on this momentum, we remain confident in our ability to deliver sustained performance improvements over time. Turning to Slide 5. One of our top priorities over the last year has been scaling our existing products and technologies with new markets, new applications, and non-traditional customers to deliver strategic profitable growth.

During the first quarter, we continued to prove the broad applicability of our technology beyond automotive through our achievements in home and office, as well as medical. We officially launched and began supplying production parts to KUKA HOME, which is a leading global furniture manufacturer. Since mid-2025, Gentherm played an important role as a collaborative innovation partner with KUKA, which led to co-branding of Enhanced Comfort by Gentherm. The launch this quarter also demonstrates our ability to generate revenue quickly in home and office market by utilizing our core assets and standard kit methodology to maintain the performance, quality, and consumer experiences established in automotive applications. In March, Jon and I spent time in China at KUKA headquarters with their CEO and senior leadership team discussing our partnership. There is mutual interest in scaling Gentherm products across additional KUKA HOME platforms.

Beyond KUKA, our momentum in home and office is accelerating. Earlier this month, we were selected by a leading North American furniture brand to supply our climate and comfort products. This marks our fourth consecutive quarter securing a new home and office customer. We anticipate starting production with this customer later this year. Separately, in our medical business, we announced our FDA 510(k) submission for a new innovative product that is expected to redefine the standard of care for robotic surgeries. Our patented ThermAffyx system combines conductive air-free patient warming with securement technology to help prevent both hypothermia and patient movement on the inclined surfaces used during robotic procedures. We have been vocal about the importance of refreshing our product portfolio in the medical segment and believe this innovative new solution will be a key contributor to accelerating our annual revenue.

The regulatory approval process remains on track, and we expect the ThermAffyx system to begin generating revenue later this year. Overall, we remain committed to repositioning the company for growth by taking our technologies outside of light vehicle markets, and we achieved several important milestones during the quarter. Let's turn to Slide 6. In January, we took a major step in transforming Gentherm by announcing our agreement to combine with Modine Performance Technologies, creating a market leader in thermal and precision flow management. The more we work with the Modine team, the more excited I get about bringing this business into the Gentherm family. This is a well-run business with a great team. Through our work together, we are learning techniques and processes that Modine used to transform their business, and we intend to harness those lessons for the good of Gentherm.

We have emphasized the importance of expanding our business beyond the light vehicle segment, and Modine is accelerating our access to critical growth markets, including power generation, commercial vehicles, and heavy-duty equipment. This intentional shift in our end market exposure positions us for increased value creation. We are particularly excited about the new product and market opportunities this partnership unlocks and are more confident than ever in our combined growth trajectory. When we map out the next five years as a combined company, we see a clear path to generating $3.5 billion in revenue and more than a $500 billion of earnings. I will now hand it over to Jon to discuss an update on the transaction and highlights for the quarter.

Thanks, Bill. Now turning to Slide 7. Since the announcement, we have been working diligently with the Modine team to define and execute a project plan that ensures a timely, seamless closing of the merger. We have established an integration management office comprised of key stakeholders, and in March, we held a kickoff integration summit with business and functional leadership from both teams at our headquarters here in Michigan. Through the summit and ongoing interactions, the teams are focused on ensuring that the business can operate effectively on day one, and that we are well-positioned to deliver on value creation opportunities post-merger. As we talked about at announcement, we intend to operate Modine Performance Technologies as a standalone division of Gentherm, similar to how the business is managed within Modine today.

Given this structure, the primary integration areas relate to corporate systems and functional support, not on highly complex integration of facilities or organizations. In terms of other recent transaction highlights, we were pleased to receive HSR clearance to close from the Federal Trade Commission in March, a key regulatory milestone. Our teams continue to prepare for the S-4 filing, and the inputs into that process remain on track. Overall, we still expect this transaction to close later this year and are excited about the potential for the combined business. We will continue to keep you updated as the year progresses. Please turn to Slide 8 for a review of the first quarter financials. Overall, first quarter results were above expectations as revenue was higher, driven by stronger automotive volumes and outperformance in China. Revenue of $394 million was up 11.3% compared to the same period last year.

Revenues excluding foreign currency translation increased 7.2%. Automotive Climate and Comfort Solutions revenue increased 13.6% year-over-year, or 9.8% ex FX, as we continue to see strong growth over market across all regions and product categories. We had particularly strong performance in China during the quarter, driven by the ramp-up of production on new program launches with domestic Chinese OEMs. This comes as a result of our intentional focus to shift revenue mix and better represent the local market. In addition, we saw increased take rates in China from global OEM customers as they look to remain competitive in the market. From an automotive product perspective, it was another strong quarter of revenue growth for our Lumbar and Massage Comfort Solutions, which grew 33% year-over-year.

As we have discussed in the past, we expect to see this strong growth trend continue in this product into the future as we continue to launch previously won programs. Turning to profitability, we delivered $49.3 million in Adjusted EBITDA, or 12.5% of sales, compared to 11.1% of sales in the first quarter of last year. The 140 basis points increase was primarily driven by operating leverage and strong net material performance, partially offset by annual price reductions and higher labor costs. On a reported GAAP basis, diluted earnings per share were $0.14 in the first quarter. This was impacted by approximately $0.70 per share related to merger and restructuring expenses. Adjusted diluted earnings per share were $0.84, up 65%, compared to $0.51 per share in the first quarter of last year.

Cash flow continues to be a point of emphasis for the company, and while we did have a typical seasonal operational cash outflow, the team delivered an $8 million improvement year-over-year. Additionally, CapEx purchases of $5.6 million were down $9.2 million year-over-year as we continue scrutinizing new investments. From a balance sheet perspective, we ended Q1 with net leverage of 0.2 turns, and we have liquidity of $456 million, giving us ample capacity to support our strategic priorities moving forward. Please turn to Slide 9, where I will discuss our 2026 guidance, which excludes any impact related to our planned combination with Modine Performance Technologies. As Bill mentioned in his opening remarks, the operating environment has been dynamic since we introduced guidance in February. Despite the stronger first quarter performance, given the high level of uncertainty in the macro environment, we are maintaining our full year guidance at this time.

We expect revenue to be between $1.5-$1.6 billion, representing approximately 3% growth for the year against a recent industry report where our key markets are expected to decrease approximately 2%, positioning us to deliver mid-single digit revenue growth over market. For Adjusted EBITDA, we expect to be in the range of $175-$195 million, which implies a midpoint Adjusted EBITDA margin of approximately 12%. From a quarterly perspective, we expect the revenue profile to be spread fairly even throughout the year. However, we do expect margins to be depressed in the second and third quarter, and there are a couple of factors driving this. First, building on Bill's earlier comments, inflationary impacts stemming from the current geopolitical environment are expected to drive approximately $20 million in incremental costs during the year, recognizing that this estimate remains fluid and is evolving real time.

Although we expect to mitigate a meaningful portion through commercial and operational initiatives, including benefits from the realignment, timing differences between cost realization and recovery are likely to create additional margin pressure. Additionally, as we work to finalize our global footprint transitions later this year, we will begin depleting our inventory bank builds in the second quarter, which will have a negative impact to gross margins. Turning to cash, our estimate of adjusted free cash flow remains between $80-$100 million, with CapEx in the range of $45-$55 million, or approximately 3% of sales. Overall, we were pleased with our start to the year and are focused on strategic actions to accelerate profitable growth and reinforce operating discipline to drive long-term value. With that, I will hand it back to Bill for some closing remarks.

Thanks, Jon. Turning to Slide 10. I want to outline what we've accomplished, the key priorities today, and how we will evolve. We are on a multi-year journey to deliver sustainable value creation. 2025 was reinforcement of the foundation that we will build on going forward. We established our strategic framework to deliver shareholder value, which focuses on profitable growth, operational excellence, and superior financial performance. This drives everything we do. To drive profitable growth, we've simplified and segmented into four technology platforms to clearly define our core competency and identify attractive markets outside of the light vehicle market where our products are applicable. This product and market alignment was a catalyst for reshaping our M&A funnel. We also saw opportunities in the business to operate more efficiently.

During 2025, we focused on building core components of an operating system through business process standardization and increased utilization of assets to drive margin and cash generation improvements. We started reaping some of the benefits of that stronger operational rigor during the first quarter of 2026. With this foundation now in place, Gentherm is at an inflection point. The addition of Modine Performance Technologies accelerates our transformation. This action is the first step in establishing a product portfolio of mission-critical components across broad end markets. Our shared core competency of precision thermal and flow management allows us to scale into attractive markets together through cross-selling and integration. In addition, our complementary product expertise allows us to gain broader customer insights and provide more integrated solutions that pursue new high-growth opportunities. Gentherm continues to focus on the core business as we are confident in our ability to scale revenue and expand margins.

We are actively launching products into new markets to deliver profitable growth while realigning the organization to drive speed, efficiency, and accountability. As we move into the future, Gentherm will scale into attractive markets while improving profitability and cash flow. We will leverage best practices from Modine Performance Technologies to outperform our peers. Despite the risk we may have in front of us during the months ahead, we are confident we have the right strategic plan established to drive performance improvements in the long run. We have built the foundation, we have a clear vision, and we are focused on execution. We will continue our relentless pursuit of building a more resilient company. We are at the beginning stages of transforming Gentherm into more than an automotive component supplier, where we will grow sustainably with differentiated and scalable technologies.

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

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. The first question is from Nathan Jones from Stifel. Please go ahead.

Morning, everyone.

Morning, Nathan.

I guess I'll just start off with a question about the $20 million incremental costs you talked about. Can you just maybe provide us a little more color on how much of that passes through contractually to customers versus what you've got to go out and renegotiate, versus potentially methods that you can offset that internally? Just any more details you can give us on that.

Yeah. Contractually, we're not on a simulator or escalator with any customers, just because the scale of what we buy in any one product isn't large enough to be meaningful to them. We'll have to go out, Nathan, and we'll have to work through recovery mechanisms with the customers on all of that.

You expect the cost-

Just some perspective though.

Sorry, the cost will hit pretty much immediately, and it'll take a couple of quarters to catch up with that pricing?

Yeah. Timing-wise, we expect the cost to start hitting in Q2. We think Q2 is going to be a definition of recovery mechanisms with the customers that we agree to, and then it'll just be that timing disconnect where they'll start flowing in Q3, Q4.

Okay. I guess my second question then, I'm going to ask one about the internal operating structure changes. I think those are important things to highlight. You talked about reducing spans and layers to increase focus. Can you maybe just provide a little more color on what you're doing there? How you think that catalyzes, either whether it's growth or it's margin expansion or it's both. Just more color around those changes and how you think they improve the business, please. Thank you.

Yep, absolutely. It's intended, first of all, to do a couple things as we mentioned, and I'll get into some quick detail for you, Nathan. If you remember, John and I both started at the same day last year, right? We took a year to thoughtfully understand the plumbing of the organization and how things were running. One of the big messages we got from the broad organization was there is too many hoops, there's too many barriers, we're not moving fast enough, we're not making decisions fast enough. We went through an organizational realignment, and we realigned it really based on product. We segmented out valves as a business unit. Now we have climate comfort valves, and medicals as a business unit within Gentherm Technologies. Over top of that, we'll have a very lean corporate structure.

That was intended to put focus on high growth opportunities, that was intended to drive continual improvement on key initiatives. We're more aligned functionally now as opposed to a complicated matrix across regions. We do expect that will have cost benefits. It primarily was to segment the business, to focus on high growth opportunities, to continue to push the operational improvements and the sustainability there. For the year, though, annual run rate will be about $10 million-ish better on the OpEx, and we expect half of that to hit this year.

Thanks. Second the questions. I'll get back in the queue.

Thanks, Nathan.

The next question is from Ryan Sigdahl from Craig-Hallum Capital Group. Please go ahead.

Hey, good morning, Bill, John. I want to start with the outperformance versus light vehicle production. This is as strong as we've seen in many years here, which was nice. Curious, when I look to guidance, so 14-point outperformance in Q1, you're guiding to five points on the year. It implies a pretty meaningful deceleration kind of throughout the rest of the year versus the industry. Curious if you could elaborate on what the outperformance in Q1 was, why that's going to decelerate, anything from a one-time production orders, et cetera, standpoint.

Yeah. We wouldn't point to anything from a one-time perspective. We really did see strength across all products, all regions. We pointed to China in particular. There was some outperformance there based on some launches that we did in the fourth quarter for some of the domestic OEMs that continued to show strength through the first quarter. As we look at the balance of the year, we certainly do not expect to outperform in the teens range. We'd expect it to moderate. I think at the top end of our guidance, it could push into that high single-digit range. There's nothing specific to point to in terms of Q1 outperformance other than really just broad growth across regions and products.

GM earlier this week, I guess, is suspending its next-gen electric truck program that was set to launch or start in 2028. Curious how much of Gentherm's award backlog was from this program. Do you think you can offset that from a shift with more volume back to the ICE program? Just curious, kind of net positive, neutral, negative, how you guys think about that.

Yeah. Overall, we just think it's neutral for us, Ryan. We've also won the ICE content for the platforms. We just anticipate and based on everything we're seeing, the ICE volumes will compensate for the EV losses.

Very good. Maybe just a quick clarification, and then I'll hop back in the queue. The $20 million of cost increase, is that a gross number, or was that net of mitigation?

That's a gross number and our best view of the annualized impact or annual impact based on what we see today.

Thanks, guys. Good luck.

Thanks, Ryan.

Thank you.

The next question is from Matthew Koranda from ROTH Capital Partners. Please go ahead.

Hey, guys. Good morning. Not to be the dark horse here with the $20 million on incremental costs that you highlighted, but I guess I was curious how much of that is incremental shipping versus material cost inflation that you're factoring in? On the pricing front, is it all offset via pricing, or are there operating efficiencies that you think you'll offset the $20 million with as well?

As you look at it, certainly, a big piece of it is freight related. I'd say maybe a third of it, with the rest coming from commodities. It's commodities that Bill or the product that Bill called out specifically, but it's also incremental processing costs. There's the downstream impact from increased petroleum prices. I think as we look at it, our mechanism from a recovery perspective will primarily be from recovery with the customer. We did point to the fact that the $5 million benefit that Bill talked about from the realignment will likely help offset pieces of that as well and will continue to push operationally. We've got our teams focused on commercial recovery at this point.

Okay. That makes sense. Curious to hear a little bit more about the furniture market opportunity and how it's developed this year, I guess, just given the announcements around KUKA and the incremental wins that you highlighted. Have those catalyzed more discussions for you anyway to characterize the opportunity funnel and how that contributes to 2027 revenue?

Yeah. We'll start, and again, we like the furniture business, Matt, because of just the super quick time to revenue that the industry has accepted and really bought into our standard methodology, our standard kit methodology. We're getting good scale there on our assets with little to no investment. We expect by 2028 that that's clipping somewhere between $50 million and $100 million. You can probably draw a line between now and then to figure out where 2027 is. We expect that to add 1%-2% growth at accretive margins in the coming years.

Okay. Super helpful, guys. I'll leave it there.

Thanks, Matt.

There are no further questions at this time. This concludes the question and answer session, as well as today's teleconference. You may disconnect your lines at this time. Thank you for your participation.