Great. Thanks for joining us for this session. I'm Ryan Brinkman, the US Automotive Equity Research Analyst at J.P. Morgan. Very happy to have Phil Eyler, President and Chief Executive Officer of Gentherm, as well as, Matteo Anversa, Executive Vice President of Finance, Chief Financial Officer, and Treasurer. Wears a lot of hats. Phil's gonna take you through a couple slides, and then we'll engage in some discussion.
Great. Thanks, Ryan. We're honored and excited to be here today, and it's certainly an interesting time in the automotive sector, so lots to talk about. I just wanted to take a few minutes and give a little bit of an overview of Gentherm, some of the latest happenings with the company and hopefully frame up some of the discussion we'll have in the fireside. So let me just start really quickly with kind of the Gentherm investment thesis. First of all, Gentherm is a company that is really a pure-play leader in thermal and pneumatic comfort and management in the space. We are the global leader, have a strong market share position in this space, and we're really excited about the space that we operate in.
We believe it's at the epicenter of some very important trends, especially in the automotive industry, around health, wellness, comfort, and energy efficiency, especially as it relates to the interior experience in the vehicle. And, you know, as a company that provides human-centric thermal and massage and lumbar solutions and many others, we're very, very focused on the consumer, the passengers, the drivers, and we think this is a huge opportunity for car companies to differentiate over time. And we're laser-focused. We stay very laser-focused in that space because we believe we have the opportunity to win, to command significant market share, and to drive outsized margins in our space. Number two is that the automotive market, albeit very dynamic these days and difficult to predict, is a large market.
If you look at our products, the thermal products and the pneumatic products, the penetration is actually quite low, with a lot of opportunity to grow within the space. So we have a unique growth story, we believe, in especially in our automotive business. If you look at penetration, for example, of one of our core products, which is Climate Controlled Seats, both heating and cooling of the seats, current penetration is around 10% to 12% of global production have that technology. We see that growing to about 24% to 25% by 2030, so some nice tailwinds in terms of growth. That's a pretty high content product, just as an example. And as I said, consumer demand for this product continues to increase both in penetration rates, adoption of new vehicles, and content.
More seats are being added, more, internal, solutions, more electronics, and more software, which we'll talk about. Number three is really around innovation. Gentherm is a company that was founded on innovation, that focuses on staying a generation or at least two-- one or at least two generations ahead of our competition, both in the hardware... And we'll talk about, the anchor to our future in a few minutes, which is really around systems. And then finally, if you look at our business, we're really proud of our consistent execution around our strategy, which is two-pronged. One is focused growth. I mentioned that we are laser-focused in our spaces, and we don't get distracted. We really target our investments in those areas of high return, where we're experts.
And then secondly is around driving margin expansion and cash flow expansion. We have a clear path to high teens EBITDA over time. We're executing on that, and we're proud at our disciplined approach to capital allocation, and we can talk more about that in a second. So what makes us confident in the growth of the company? Really, in automotive, it's a long cycle business, and you have to win business today that's gonna launch in two years from now, or even more. And we've been winning business at a record pace in the company. You look at 2023, we won $2.6 billion in lifetime awards, by far a record for the company. Our previous record was $1.8 billion, so really proud of that.
We're at $1.2 billion, halfway through 2024, so great momentum, and we're winning at a very high rate versus competition. The last several quarters, about 80% win rate, across all our portfolio in terms of dollar opportunities. So we believe we're absolutely well-positioned, and we're building that backlog of business for strong growth. Let me just talk about some of the core areas, and we'll dive into these more in the Q&A. Of course, expanding our core thermal business, that's where the company started. We're a market share leader there. I mentioned the climate control seats. We have about 60% market share in climate control seats. Steering wheel, heated steering wheel, and hands-on detection, we have about 60% market share globally.
And then on the more mature product, the seat heating, we've got about 40% market share, so you know, we think we're doing really well in the thermal side of the business, and we continue to win at a high rate. We're expanding in Asia. That's a really big vector for us. Growing with Chinese domestic OEMs, especially the EV players, and then we're really excited about Japan. We just announced the launch of the Toyota Tacoma and the Toyota Camry, which is, if you know our company, Toyota is a pretty small revenue stream as of now, and looking to grow that. Obviously, the pneumatic side of the business, we acquired Alfmeier a couple of years ago, a small German company focused on pneumatic massage and lumbar technology.
That acquisition has been a huge success for us. We're winning at a record pace on pneumatics. We have about 30% market share in that space now, and believe that's gonna be growing pretty significantly. We'll talk about some of the wins there, but we've had 9 conquest wins since the time of the acquisition, as we've taken that technology to Gentherm's great customer portfolio. And we just won a breakthrough new technology called Pulse-A, which will be the industry's first pulsating massage, and that will be with Hyundai on the Genesis platform. As we've combined thermal and pneumatic, we see a great opportunity to combine these systems.
There's a big demand from the OEMs, that they wanna see this combination of thermal and pneumatic working together seamlessly, and I'll talk more about that in a bit, but that puts us in a prime position. Increasing vehicle content, one area that a lot of people don't know about Gentherm is, we manufacture all of our own electronics, we design our own electronics, and we implement our own software for our products. That's really helping us to expand ourselves into not just a component provider, but a system provider. And we think that's really a key connection to our future. I'll talk about that, a couple of those technologies in just a second. And then, you know, from that, starting to differentiate with software. In fact, we just announced a few quarters ago, our first-ever software award with General Motors.
So software only for ClimateSense. So ClimateSense in the future will be on virtually all General Motors vehicles. Last thing about differentiation for Gentherm is we have a very differentiated business model, which is that of an independent partnership model. So we can work with any OEM around the world. We currently have 50+ customers, and we can work also with 30+ seat manufacturers and any combination thereof. We really think that positions us in a very unique way, and our customers are letting us know that that's very attractive to them. I'll talk real quickly about the innovations. I think Ryan will talk about this in a second, but ClimateSense is our unique microclimate solution, driven by the science of the human body.
We actually designed an algorithm that controls the heating and cooling of the human body, to minimize the use of power in the vehicle and maximize the comfort of the driver and passenger. The next platform is WellSense, which is a software-driven solution that provides health and wellness solutions for passengers. So think about special treatments for lower back pain with massage and heating and cooling, alertness routines, relaxation. Especially if you're driving in New York, this is a great technology to have, to kinda chill out on your drive home. So we can talk more about that. Fits perfectly into the software-defined vehicle. Our idea is that we would create routines that can be sold to consumers over time in their ownership of the vehicle. And the last one I would talk about is ComfortScale.
This one's more of a hardware-driven system. You know, obviously, in the past, the business model is to sell the blower, the CCS product, the heater mat, the lumbar, the massage, and the electronics as separate devices. We've created a platform called ComfortScale, which basically consolidates these into one device, and can deliver that to the OEMs or the seat manufacturers in their plants, drastically reducing labor, and as you know, labor is becoming a bigger and bigger factor. Our customers are very excited about this. So this combination of technologies, we believe, will really help us increase content per vehicle, over time, and staying on the front edge with proprietary solutions. On that ComfortScale, I wanna give you a hot-off-the-press piece of news.
We've talked in the past about our remarkable relationship with General Motors. In fact, we've announced, if you look at the left side of this slide, component wins with CCS, with heat, with ClimateSense software, ECUs, massage, and lumbar on the truck platform that's coming. It's the Sierra and the Silverado. Obviously, for us, it's the largest platform in our portfolio and one of the largest for General Motors. So we've already won all those components. I wanna announce that we have, we're converting all of that into full ComfortScale award. This will be our first ComfortScale award, and we believe the first of its kind on the market, which basically will integrate lumbar, massage, heating, CCS, all into these consolidated devices.
So, excited about that, and obviously, we can dive more in the Q&A. With that, I will turn it over to you, Ryan.
Great. Thank you. Maybe just one place to start, because I have gotten some questions over the past couple of days about a press release on Tuesday, that Matteo will be CFO through September first, and then he'll go on to a larger cap company in an industry that's hopefully less stressful, Logitech.
It's not that bad.
Gotten questions from, really mostly Logitech, investors. You know, what kind of CFO is Matteo? And, you know, I really associate you with the Fit for Growth initiatives. But I want to give Phil the credit because he came in and branded that in 2018. And what a good branding, I think, because, you know, there were so many irons in the fire previously, and not a lot of, you know, discipline around operating expense before you came, 'cause it was like this skunkworks type company. And I think your message to the team and to the investors was, "We're going to cut, we're gonna focus, but that's not gonna hurt us.
It's gonna help us to grow because we'll have that new focus." And so you started that program, but Matteo, you know, you were driving it, especially as it evolved into Fit for Growth 2.0. So you got, you know, a CFO who knows how to instill operating expense discipline, also been there for a lot of footprint optimization, a lot of baptism by fire with all the change in the auto industry, since you joined, probably more than you bargained for. And so, you know, they said, "Well, that sounds really impressive, but does he know anything about the electronics industry?" Well, actually, Gentherm has, you know, a printed circuit board business.
They don't do as much of the non-automotive electronics anymore, but they do their automotive electronics, and they even get a wire and sensor business. And I said, "He knows a hell of a lot more about semiconductors than he did four years ago and ever hoped to know." So, anyways, maybe just talk a little bit about the departure and Phil, maybe what we should think about next in the CFO role.
Okay. Can I start?
Yes, sure.
So first of all, very, you know, tough decision for me, being 5.5 years with the company. We went through a lot. I think you named a few, COVID, non-COVID crises, and so on and so forth Ukraine, yes. So, but really what I will miss the most is for sure the relationship with Phil and the team. He's been actually the person I worked the most in my career. So very tough decision, particularly considering that, I really think that the bright days are ahead for Gentherm. And Phil just talked about the award that we just secured with GM. That's gonna be a game changer for the company. You know, Logitech is a slightly bigger... is a bigger company, and, it's a new space for me, so it's a way to grow my- continue to grow my career. Tough to say no, and, and also personally, quite frankly, it's a, it's a good time for me to transition to a different part of the country.
So, very tough decision. I will miss the team tremendously, but that's, you know, that's what's behind it. No, no more than that, so.
Yeah. Obviously, we'll miss Matteo, who's been a great partner for me over these years. But, you know, he has positioned us quite well for this transition. His team across all disciplines and all BUs is very strong, so we won't miss a beat. We've kicked off the search already, and I'm actually quite confident that we'll attract a great candidate. I think we're a very unique company in the space. We have a great story and a great mission, and I think people are gonna be pretty attracted to that. And we've seen that pretty consistently on most of the positions that we've filled in the company. So, certainly gonna miss him, but confident, extremely confident in the future of the company.
Absolutely. Maybe one point on Fit for Growth, just to clarify. This is really a cross-functional initiative across the company, led by a very senior person inside Gentherm, and supported by, you know, very high-level people that really drive the execution of the different work streams. So that, you know, this is not gonna get impacted at all. The execution will continue with no change.
Great. First question here, apart from the CFO transition, is on, you know, the evolving expectations for battery electric vehicles. You know, for years, the pace of adoption seemed like it could only surprise to the upside. Now it's starting to surprise to the downside. S&P Global Mobility at the start of the year was expecting 32% growth in global BEV production this year. Now they only expect 10%. You know, what, in your view, accounts for this significant expectations reset? And does this slower growth near term cause you to think any differently about the medium or long-term trajectory? And what do you think the implications are for Gentherm?
Well, I'll start there with the implications long term. We're pretty agnostic when it comes to our product line. Virtually none of our product are designed explicitly for EVs, so they're, you know, they're products that can be integrated in whatever kind of vehicle with any kind of powertrain. So I think long term, how that balances out, the consumer demand for our product is there. It, it's really a consumer experience-driven demand, you know, behind it, so, we feel good about the long-term leveling off of this. Obviously, in the short term, it's been dynamic, and if you look at most of the new vehicle designs and awards over the last 2-3 years, maybe even 4 years, they've been EV focused.
So that definitely puts a little bit of a you know constraint on, I'd say, all suppliers in the space, but especially those who are winning a lot of business with EVs. And it certainly is having an effect on us with delayed launches and a little bit lower volumes for the launches of EVs. So, you know, that's it. I'd say that's kind of where Gentherm's positioned at. We do expect to see ICE volumes pick up to replace some of that over time. When it comes to EVs, we're absolutely believers in EVs in our company. We think that's the future. I think, you know, obviously, the constraints on the consumer are playing a big factor in this.
You know, high interest rates are leading to the high cost of ownership of vehicles. Hopefully, that'll ease in the near term. I think there's also a little bit of a media hype. I think the media hype was probably too much on the upside, and probably it's too much on the downside right now, personally. And, you know, consumers tend to follow that a little bit. So hopefully that can get corrected. Those who have driven and own an EV, I mean, it's a fantastic experience. It really is. So I think it's gonna come back. Just in general, I think the demand in the whole market is challenged as well. As you know, we keep seeing outlook drop and orders drop throughout the year. I think there's...
Personally believe there's a pretty hefty amount of pent-up demand in the market that that's gonna pop. And I think we'll see probably, who knows when it happens, but a little surge in demand, and then maybe it'll come down a little and level off. I think it'll level off a little bit higher than it is right now.
Yeah. And Phil, I'm just bringing up your transcript here f rom July 31st, and it looks like you said, you know, "On ComfortScale, our fully qualified integrated solution is in advanced commercial discussions with several customers and we expect awards in the very near future." But so by very near future, you meant the very-
Right
... very near future, and
Yeah
... you know, we just missed that cutoff because when you go on the call, you give us the US dollar amount, and, you know,
Sure
... this is obviously, you know, the GM truck program is basically, I think, tied with... Actually, since you count the SUV, it's basically probably the largest program in North America.
Yep. Yep.
What does that mean for, you know, lifetime, you know, revenue or, you know?
Well, that's a Q3 award.
Yeah.
We'll talk about it in the next earnings, but...
It's big, right?
Yeah. Well, you know, we already had all the components.
Mm-hmm.
It's really now, you know, the trust that GM has given us to integrate the whole package, and there's some added content, for sure.
Is it a margin thing, too, or?
What's that?
Is it a margin thing?
It's margin-
Margin
... added content and, you know, the assembly process and logistics as well. So we're really gonna control, you know, how this whole thing comes together.
Nice. You know, another question relates to, another big theme, apart from EVs, but which is the, this tremendous growth of the domestic Chinese automakers, right? They were, you know, quick to embrace electrification. Their quality and design have significantly improved, and, they're introducing models oftentimes twice the rate of their global peers, incorporating the latest technologies. BYD was, I think, 13 largest automaker in China, five years ago. Now they're the biggest. And, collectively, they've gone from about 35% share pre-pandemic to 55%, this year. Small outside of China, but with big ambitions. How do you see this trend evolving? And many of the suppliers we cover are still, under-levered to these quickly growing automakers.
What is your exposure, and can you describe any actions you might be taking to try to better position the company to benefit from their growth?
Sure. Well, I think just starting off at a high level, our company is we have a dedicated team in China with our, you know, local product development, customer support, manufacturing plants, the whole thing. So it's, it's really a support for the China market, which puts us in a great position, whether that's a domestic OEM or international OEM. Right now, China represents about 14% of our sales worldwide, and about two-thirds of that is still with the the global OEMs, and one-third is with domestic OEMs, but rising. Our approach has been to be very focused and selective within that, you know, that fast-growing space of many, many, many startup companies and, and more mature, and I think that's been really successful for us so far.
We've looked for partners that we think are gonna be reliable and here to stay, but also who have a vision for consumer experience, you know, have a similar mindset that we have. So we focused on Great Wall, has been a great customer for us. Li Auto is a very fast-growing customer for us. They've had a couple hiccups, but still growing rapidly. BYD, for a few vehicles. You know, if you look at their portfolio, you have to be kind of selective there, and a handful of others, but pretty selective. We're not chasing everything. And I think that's prudent. You know, we don't wanna get stuck with a startup that you know that leaves you in the cold, if you will.
So I think that our approach is working well. If you look at last quarter, we actually grew in line with the market in China, and that was because of the fast growth with those domestic OEMs, offsetting pretty significant declines with some of the global OEMs.
I'm trying to figure out how I can import a Xiaomi SU7. They're sanctioned, right? But this poor, poor man's Panamera is gorgeous. Maybe next on Alfmeier.
Yeah.
It's been a couple of years now since you, you know, brought in, you know, the lumbar and massage capabilities. Maybe just review the ways that this has benefited the company. There were some cost synergies. Those seem to be not the primary benefit, right? You've gotten a lot of revenue synergies, a lot of customer introductions. What's been the trend in new awards since you closed on Alfmeier? How's that tracked versus your original expectation?
Well, you know, we've been... As I mentioned, when we did the acquisition, we had been working on this deal for years, and, you know, the timing worked out, and our focus really was about innovation and technology with Alfmeier. This is a company that has the industry-leading technology throughout the whole system, including, you know, what was in the pipeline, which was Pulse-A, which we're really excited about that. I think it's gonna be a game changer. It's proprietary, and I think it's gonna provide an experience that no other pneumatic massage or lumbar solution can provide. But, you know, the thesis really was around building on a small company that had only a few global customers, mainly in Europe, and bringing Gentherm's customer mix into play.
You know, we had a reasonable plan to ramp that up, and we've done it much faster than we expected. You know, we've won, as I mentioned, nine Conquest Awards with the likes of General Motors, Hyundai Kia, JLR, Stellantis, Tesla. You know, the list, the list is really impressive, and that's already fueling growth. If you look at Q2, that was our fastest-growing product line. We grew over 20% with our pneumatic business, and that, I think, is gonna get even higher throughout the course of the year. And then over the next couple of years, we start rolling out even more of these new business awards. I think that's gonna be our fastest-growing segment for probably two, three years to come at least.
That's great. Wanted to check in on the competition from Lear following its acquisition of Kongsberg Automotive's interior comfort systems business. You know, I've heard you say that your position as the largest independent provider of thermal and pneumatic solutions is a key differentiator with both your OEM and Tier One customers, right?
Yep.
Why would they want to give business to their competitor, right? I think you've got a lot of proof points there, you know, considering the number of wins you've announced since Lear's vertical integration of seat, heating, lumbar, and massage, and given you discussed on the last call that you won 80% of what you quoted on during the quarter, your pursuits. At the same time, you know, Lear's also communicated to investors that it expects to progress from number two in seat heating to number one by 2027 while increasing their share of the lumbar, massage, and ventilation markets also. Could you re-review for us why you think being an independent supplier helps you in the eyes of your OEM customers and other seating suppliers that compete with Lear?
And will you be number one in 2027 in seat heating?
Well, yeah. I think let's talk about how we focus on our customers. I think that's what... That's our focus. You know, obviously, there's competition in the space, but in my experience, if you're laser-focused on delivering the absolute best solution for the customer and the best business model and the best support, that's how you win, and this independent model fits really well in the space. The majority of OEMs direct source this technology, especially if they're larger, and the rationale behind it is, you know, there are multiple seat manufacturers within an OEM's portfolio, and you know, they wanna provide... This experience is so important to customers. They wanna provide this in a consistent way across all their vehicle platforms.
So we work directly with them to develop this technology, customize it. I think GM's a great example, and deliver it, so it guarantees the best solution possible. We can do that with every seat manufacturer in their portfolio. Obviously, they get scaled in with us, so from a commercial standpoint, that's good for them, it's good for us. Then we have a long-term view on how we want this to integrate into their complete vehicle, thermal and pneumatic comfort solution. Of course, the fact that we are the only player in the industry that is really science-driven, I think that's a lot of people miss that. You know, we focus on the human body. We have a complete organization that develops science-based solutions around thermal, around pneumatic comfort.
We follow this process called the three S's, which is science to software to sensation. So the science is the human body aspect, and our PhDs develop these routines, whether it's thermal, pneumatic, or combined. We deliver that to our software team, who turns that concept into a working algorithm or a set of software for the vehicle, and then it gets to implementing all of the effectors the proper way to deliver that experience. It's a real differentiator in the space. But we're, you know, obviously, some of the business is working with Tier Ones, and we're really proud of our relationships with Tier Ones. When they have sourcing capability, we follow the same approach with them. Really proud of our relationship with Mini.
Adient, I think, is a great example of someone we're working quite closely with and have been successful with, and but many more around the world.
You know, sometimes when competing suppliers, one says one thing, one says the other, you know, Aptiv says something about, you know, electrical architecture. Lear says something, you know, I can just kind of weigh what they say.
Yep.
In this case, I can go, and I can ask Adient. I can ask Magna because I cover them. And I feel like, you know, since Lear's acquisition of Kongsberg, you know, Adient's been making your case for you. You know, they've been telling investors, "We don't need to do anything like that. We don't need to go buy, but we can [a] lumbar, but we can work really well with Gentherm, and we can go to market with them, and we'd rather use our capital to buy back stock or, you know, and or pay down debt." And so really just backing up what you have to say.
So I was a little surprised then, when I went to China in May, and I met with James Huang, who runs their Asia Pacific operations, and he was highlighting a recent acquisition, which I hadn't seen them advertise, not an acquisition, a joint venture that they formed with a Chinese company called Jinwo, to develop a mechanical massage. So again, not pneumatics, so kind of like, you know, your thing, too. So I mean, well, I feel like Gentherm can do mechanical massage, and they're in China, so what happened there? And does it mean that other seating Tier Ones might... Is that unique to China there? Could it be replicated? What do you think?
Well, we obviously know every technology out there in the space and look at all of them. Our belief is, with our pneumatic solution and Pulse-A included, we've got the best solution. And it's really important to focus. The pneumatic solutions that we're working on not only provide a great experience, but they scale. It's not a niche technology and, you know, I think, there are always gonna be different solutions that may provide some kind of niche application, but when it comes to fast market acceptance of a technology, we believe we have them.
Mm-hmm. I've got some more questions, but are there any in the audience? As they're thinking of their next question, maybe we can ask on WellSense, which you showed at CES. And it really—it was kinda interesting because it's sort of like ClimateSense, where it just kinda ties in, like, a lot of things that you do. You know, like, with ClimateSense, you've got the surface heating, you've got the steering wheel, you've got the seat and puts it all together. With WellSense, you're tying together things you do, and like the seat heating and cooling and lumbar, but even some things that you don't do, like the sound system and the lights.
So maybe just talk a little bit about that, and, I know you just got the ComfortScale, but, when might we get a, a WellSense award?
Well, you know, we're really excited about WellSense because it really brings together the human body expertise we have, and we're developing, you know, software solutions that capitalize on high content in the vehicle. And there's a nice cycle that's happening there. So we're presenting the WellSense solutions, which really provide unique experiences for consumers. And one thing that I think is so exciting about Gentherm is, basically, when you sit in a vehicle, your body touches and is in close proximity to a lot of points in the car. Basically, Gentherm's there everywhere you're touching, which is very unique. You know, obviously, on the seat, on the armrest, the steering wheel, proximity to the neck, the underbody well, all those, we have product that not just connects with the human body, but it can do something.
And so when we created WellSense, our focus was: what are the different types of solutions that we can bring to passengers in the car that can make them feel better when they get out of the car? You know, there's a refresh mode that we've developed that if someone comes in from a stressful day, there's a routine of massage and heating and cooling that can really make you feel good when you get out. There's a recovery mode that if you just got off the golf course or you get out of the gym, you can come in, and through our understanding of the human body, we know what to do and how to apply heating, cooling, and different kinds of manipulation to the body to make you feel better when you get off.
You know, I'm getting older, and playing golf even makes me sore, so that's one that I'm excited about. But then also working with driver monitoring systems. There's obviously some great technologies that can monitor alertness or focus of drivers, and especially as you get to the different levels of autonomous driving, it becomes really important. But what do you do with that once you do determine what, you know, the state of the driver? Well, we provide the what to do and algorithms around how to, you know, cool the person so that you become more alert, or what kinds of movements to the person to drive alertness. So that's really what's behind it all. We've been demonstrating this to, obviously, at CES, but now to customers. A lot of excitement around it.
One great thing that's already happened is more content. OEMs are seeing this, like, "Yeah, that's something that we believe we could, we could get consumers to enjoy enough to feel good about paying extra after they've purchased the vehicle." So if you imagine, you buy a vehicle, and you've got a basic massage, basic heating and cooling, but then a new solution gets developed by Gentherm, such as, recovery mode, there could be an app, there could be a subscription, different ways to monetize it. That's a new way to monetize, the consumer. And so there's, there's a lot of excitement. People believe in that, the OEMs do. And, and they're starting to add more content in preparation for being able to do that. So there's a nice cycle that, that's happening.
You know, we were talking earlier about how, when you came in in 2018, how you instituted that discipline, and, you know, you made the painful decision to let go of the thermoelectric bed and the office chair and the thermoelectric generator, and you know... But one thing you kept was medical, and, you know, such a strong, I think, strategic coherence there with the base, because you got that calling card that Lear doesn't, right? And you got the PhDs and whatnot. But obviously, well, there's good product there with Blanketrol. It went through a tough first stretch, not because of the product, but because of the end market, right?
Yeah.
You would talk for a while about the hospital, the care numbers are doing real poorly in the U.S. So you did some restructuring there, and you kinda changed your go-to-market. Maybe talk a little bit about that because it looks like it's starting to pay off, right? In the last quarter, you're growing again. What's changed in medical?
Well, you know, yes, I get lots of questions about the medical business, "Why are you doing that?" And it really, you know, the number one reason is the synergy back to automotive, and it's the differentiator. When we're across the table from the advanced R&D teams at the OEMs, the knowledge that we bring and the credibility of, you know, heating and cooling patients during operations or in intensive care or, you know, we're very heavy in the pediatric centers, you know, for babies who need to be hypercooled after birth and those kind of things. So that expertise we can translate that directly to our human expertise in the vehicle. Of course, it's around, more around comfort and health and wellness than it is necessarily improving the impact of a procedure.
But that is. We believe that's a big advantage. From a business perspective, it's a high gross margin business. The product life cycle is very long in medical, so the amount of capital needed to invest in new products is very modest over time. And, you know, we're not a huge player. The market is $2 billion. We expect to be $50 million-ish here this year. And, so, you know, I think it's with a decent amount of growth, we can get that business where we want it. And we changed. You know, previously, we had been our model of going to the customer was direct to the hospital systems.
That could be, you know, GPOs or small hospitals, and we've changed that to focusing more on doing business with, I'll call them Tier Ones, let's call it. In the automotive terms, we're trying to become a Tier Two to Tier Ones who sell to hospitals now, whether distributors or equipment consolidators or even rental, equipment rental companies, and that is really starting to pay off for us. Gives us more scale. We can reduce the amount of boots on the ground that have to really work the hospitals, which has become much more difficult since COVID. And that's - I think that's driving some of the short-term growth, and, you know, we're gonna keep at it.
Okay, maybe our last question can be on ClimateSense. You know, thinking back to that 2015 presentation, we've been talking about fit for growth. You know, I think there was, like, this slide where I had this, like, arrow, you know, after, like, you were going growth through, was it 2023, 2024? And then there was like, you know, after that, it's ClimateSense. It's just, like, to the moon, you know? And I just feel like, you know, that was before you had lumbar and massage, things like that, all these things that are driving the business now. And you know, first of all, you know, what, what's going on? You've got some on the road right now with the Celestiq, very few, right? I think they built, like, 100 of those per year.
Yeah.
You got the Escalade IQ nine to look forward to. That might be a little bit of inflection. At the same time, though, has ClimateSense changed a little bit? Because I feel like when we were first talking about it, it was, like, gonna be ubiquitous in the industry because it was, like, this game changer for, you know, EVs and whatnot, where you could shrink the HVAC and extend the range of the EV for, like, mass-market EVs. And it was more about, like, an economical thing and a prevalent thing, whereas now, like, you know, there was this, like, the Celestiq is, like, a $350,000, like, ultra-rare car. The Celestiq is $165,000. Like... And I love it.
Yeah.
Like, I've, I've sat in it. The neck condition, it's amazing. But is it more now, like, a luxury, nice-to-have feature, as opposed to we're gonna see it everywhere, and it's gonna be a huge growth driver? I don't think it has to be, because you've got other growth drivers now.
Yeah.
But what do you think?
No, I think it is actually a growth driver for the company. It's, you know, it's gonna have its time. We're launching on the Celestiq, on the Escalade IQ. And what we've done is we've really had to pivot it a little bit to the development cycles of EVs. You know, to get the full content that, like, a Celestiq is gonna have, you do need to justify that added content with the, you know, less spending on the HVAC system, and that hasn't been a priority yet with most OEMs. So we've tried to create a scalable ClimateSense, and I think GM is a great example of what we've done with them. Obviously, we're coming in with pretty high content on the Celestiq.
It'll, you know, scale down a little bit on the luxury side, but we've developed this software platform that can actually provide a fair amount of the benefit, even on a standard CCS. So that's been our approach, which is why GM awarded us the, you know, basically almost cross-car line ClimateSense software. Their intention, I don't want to speak for their intention, but the concept is that you start adding content in the vehicles over time, and you can take more and more advantage of the ClimateSense algorithm. You know, as we started to present that scalable concept to customers, you know, we're seeing a lot more opportunities.
Okay, great. Thanks. With that, we are out of time, so please join me in thanking Phil and Matteo for the great color and insight they shared today.