Okay, let's go ahead and kick it off here. Welcome to day two of Baird's Global Consumer, Technology & Services Conference. Thanks for joining us. My name's Luke Junk. I'm the Baird analyst covering electronic solutions and vehicle tech, and very happy today to introduce you to Gentherm, the market leader in both thermal and pneumatic devices for automotive, while the company's also entered into an agreement to acquire Modine's Performance Technologies business, which we'll get into this morning. Very happy to have Bill Presley, CEO, seated furthest to my left, Jon Douyard, CFO, seated directly to my left for the discussion today. Before we jump into Q&A, Bill, why don't you just introduce and set the table.
Thanks, Luke. Just a little bit about who Gentherm is and where we're going. As Luke said, we're a $1.5 billion innovator of thermal management and pneumatic comfort technologies. Our core technologies really center around four platforms, which are thermal management, which is managing heat, air moving devices, which are fans, pneumatic solutions, and valve systems. Those all work together to combine to make systems that deliver either heating and cooling or pneumatic solutions like lumbar. Currently, we're 97% auto revenue and three percent medical, but we do have a strategy to shift into a broader market diversification. Like I said, at our core, we're a flow management company. In automotive, we supply over 50 different OEMs. Many of the products I'm sure you all know or use, heated and cooled seats, heated steering wheels, those are our products. On the medical side, we focus on patient thermal management.
The medical business is currently about $50 million. We're in the process of reinfusing the products in that business, and we expect that product to snowball and double the size of that business here by 2030. We're bringing our first new product to market this year called ThermAffyx, which is a solution that handles positioning and thermal management for robotic surgery. We're very confident in our core business. We expect to grow mid-single digits over market. We put out a number of $1.7 billion next year, and we have visibility to that number driven by strong automotive launch activity, as well as our adjacent market pursuits are really gaining traction, four quarters in a row, selling our products into the home and office. We're bringing the same type of technology we do in automotive to motion furniture and sofas.
As we said, the new medical products are entering the market. Margin expansion will be driven by that. The strong growth in automotive and the adjacent markets is going to allow us to scale our existing assets. We're going through a footprint transition right now, where we're consolidating footprint in every region. That will be completed by the end of 2027. The improved mix with home and office, medical, and the other adjacent markets, and that growth that we're getting from our core business that we're in today will allow us to really scale and leverage the assets we have in place. We really expect the gross margin to flow through at a meaningful conversion rate. Now, as I said, we're very intent on shifting into other markets, so we're not so light vehicle dependent.
We accelerated that strategy and that transition in January by announcing the combination of Gentherm with Modine Performance Technologies. This creates a market leader in thermal and precision flow management technologies. Modine, I'm very excited about this. Look, this is a well-run business. It's not a distressed asset. Well-run business, solid management team, and that management team is coming over with the business, and we intend to run them as a division so that we don't lose the DNA that's made them successful. The markets that they are in, they're only 20% light vehicle. The other markets are construction, agriculture, mining, commercial vehicle, and the very rapid growing power generation market. I'm very excited about that. I think the thing I'm most excited about is the product integration and development opportunities that we see.
At our core, we share the common expertise of thermal and flow management technology and the ability to engineer and manufacture those complex systems. Together, we can integrate Gentherm's existing valve and fan technology into Modine systems, and we can develop new products for rapidly emerging markets. Day one, we'll be a $2.6 billion company delivering over $320 million in EBITDA, and we see tailwinds already for that to grow to $3.4 billion. Commercial vehicle on the Modine side is coming out of a trough. Power generation will be their fastest-growing product line, really driven by the rapid expansion of data centers and the need for backup power in the data center industry. We see very solid fundamentals, like we said, in our core automotive business. All that will grow and continue to push us to $3.4 billion with solid EBITDA. Commercially, we're stronger together.
We have established commercial channels in the markets that we can cross-sell into. I've already talked about the product integration opportunities. Modine opens up new geographies for us. We've been trying to push into India. The barrier there has been actual physical footprint. Modine already has physical footprint in India. That creates a new market. We're very confident in our opportunity, our ability to harvest those opportunities. We're looking at ourselves as a $3.5 billion-plus company, generating over $520 million in EBITDA by 2030. I feel like we're well-positioned. We're executing the strategy well. We're shifting the market. We have a clear path to margin expansion, and I'm very excited and think our best days are ahead of us.
Okay. Well, thanks for that. I want to start, Bill, you and Jon have moved on from, I think you've characterized it as understanding the plumbing of the company.
Yes
having come into the organization in 2025, to something that's more of a full organizational realignment relative to core Gentherm before you walk into the Modine transaction around climate comfort, valves, and medicals. Why was now the right time to move into this new structure? More importantly, what does it help unlock?
As you said, Luke, we took the first year on the job, Jon and I joined January of last year, to really understand the plumbing, understand the products, understand the markets. One of the things we saw is frankly, the organization was very top-heavy, and it was slowing down decisions. It was limiting speed and agility. Because it was a regional structure, we had duplicate structure in every region, a general manager in every region, and a lot of the conversations were somewhat non-value-add, intercompany transfer pricing, all of these types of things. We realigned the company around function and then core platform. Now we have Climate and Comfort led by a single general manager, and under him globally, there is a single leader for each function. It removed a lot of the cumbersome scale. It removed layers of management.
To be clear, the majority of the reorg was at director and above. We really consolidated the decision making and authority to make us more efficient, to make us faster, and to make us be able to react to the customer desires quicker. That also positioned us for the Modine transaction because now Modine will come in as its own division, similar structure under a single president, Jeremy Patten, who currently runs it today.
With that foundation now being put in place, why is now the right time to do this Modine transaction, Jon? Jon or Bill, yeah.
Yeah. I think as we've looked at the portfolio, starting off at the beginning of last year, really, we rebuilt the M&A funnel to focus on the four core technology platforms that Bill talked about. As we worked through that process, Modine was a name that continued to come up as a leader in thermal management, in very adjacent markets, in attractive markets to us. As we went through the analysis throughout the middle of last year, we were able to make a connection with the Modine team. We approached them and suggested that we wanted to take on their entire Performance Technologies segment. The more we learned about the business in terms of engineering design capabilities, those types of things, we got more excited about it. The transaction is structured as a Reverse Morris Trust.
There's an equity component of it, as well as a distribution back to the team. What we like about that structure is that it puts our balance sheet in a great spot post-transaction. We'll be levered just under a turn or about a turn. It provides us a lot of capacity to continue to execute the strategy and use it as a platform to grow from in a business that's going to continue to have a really strong balance sheet, and cash generation capability. A lot of flexibility, whether that's an M&A path or whether we go down a share repurchase path, depending on timing and availability. We've got complete flexibility from a capital allocation perspective, we're really excited about the teams coming together.
The only other thing I would say is the business, we're at the beginning of the power gen growth story for their platform, and then commercial and off-highway have really been in a trough for a number of years. The timing from that perspective, we view as very favorable as well.
Yeah. In terms of getting ready to execute the transaction, I know you've established an integration management office, had a kickoff summit a couple of months ago here. What does readiness for day one look like, and where are those work streams right now sitting mid 2025?
Yeah.
We had the teams together again last week in Racine, Wisconsin, which is where Modine is based. We've got engagement on both sides from a work stream perspective. We feel very comfortable with where we are in terms of bringing these two businesses together. It is, as Bill mentioned, a standalone segment coming into Gentherm. There are certainly entanglements from a corporate perspective and things like treasury and IT, and tax. We feel like we've isolated them very well, have very good visibility, and the teams are aligned in executing that plan. We expect to close the transaction early Q4, and we feel like the plans are in place to be able to do that effectively.
Bill, I know you've been working on the revenue pipeline here as well. Can you just talk about some of the actions you've taken?
Yeah
workshopping this and where you can be from a jumping off point when you actually close the deal?
Yep. Right now, as you guys know, we can't represent ourselves as one company, the revenue streams synergies are really working around the integration management office, and we're focused on three things. I would say the low-hanging fruit there is we have catalog parts and valves and air moving devices that Modine uses today. We know that there's an integration opportunity there. We know that just from going through BOMs and looking at their technical schematics and what's available. Number two, Modine has technologies that fit perfectly, specifically with our valves and air moving devices for emerging industries, things like data centers, power generation. The teams have been looking at the gaps that the two companies have together and individually thinking about what they need to bring that together to offer a more value-added commercial proposition to those markets. That's really on the technical side.
Number three, we've evaluated Modine's India footprint through the integration management office. India represents a big opportunity for Gentherm, both from climate and comfort, because they make millions of two-wheelers a year, and there's a need for climate and comfort solutions over there, as well as our valve business. Our valves, we sell them into power sports now in the U.S., but that valve business would translate directly into the India market. The barrier for us there has been, you want to do business in India, you need brick and mortar. In India, you need a presence. We don't have that organically. It's been very slow. Modine has a management team there, a business development team there, brick and mortar manufacturing facility there. That opens that up. The third one, really is the cross-selling of the commercial channels.
We've been trying to break into commercial ag, mining, and construction. We view these as attractive markets because they're different from light vehicle. They're near adjacents. We understand how to apply the technology. Organically trying to develop that channel has been slow. I explained it to somebody the other day like Tupperware. I said, "Hey, Tupperware is a brand name, high quality product. Generally, anybody that uses it likes it. When a stranger shows up at your door with a bag of Tupperware, you're generally reluctant to open the door. When a relative walks in the door carrying the product, you listen to the pitch." Right? Modine brings that credibility. When they walk into John Deere, they talk about farm first. Then they go into the product.
Modine team, during the integration meetings, has been very confident, and they said, "Hey, these are all 100 horsepower plus platforms that we sell into. They're closed cab, they have satellite radios, they have air conditioning. We're confident we can cross-sell your product." Conversely, they would like a path into some North American OEMs on the light vehicle side, and we have very strong relationships there and can open the doors. Feel pretty confident by 2030 that we'll hit that $100 million revenue synergy.
Yeah. Obviously, power gen an interesting angle of this deal as well. You mentioned, I think it's six percent of pro forma sales if our number right. Can we just talk a little about the positioning there in terms of what Modine actually does in Climate Solutions and if you envision bringing valves or some of the Gentherm portfolio into that opportunity?
Yeah. What Modine really does on the power gen side, and power gen is exploding, power gen provides backup energy for data centers. That's really the primary market. Modine does the heat exchangers that go on front of the large internal combustion engine generators. Whether they're diesel or liquid natural gas, they do the heat exchanger. That market's growing. They're very confident in it. They're very well positioned with what we would say are the top three producers or OEMs of those. We absolutely intend to bring Gentherm product into that with Modine. When you look at the technical circuit, every one of those heat exchangers requires a valve for fluid or air management. Every one of those heat exchangers requires an air moving device to pull air through the heat exchanger. That is not anything that Modine has in their catalog today.
With our technical expertise on those products, that's one of the opportunities that we can innovate and integrate together.
Mm-hmm. Is it a direct channel to market in terms of the Caterpillar, the Cummins of the world? Who is the customer ultimately?
You named them.
Yeah, that's exactly who they do.
Yeah.
Now I don't have to say I named them.
I know Modine obviously is working on this as well, but it seems like this is pretty separate and distinct from their efforts, that there wouldn't be any risk of channel conflict or anything like that.
None. Where Modine Climate Solutions or Remanco plays is they're really in the data center with full-blown HVAC centers. They want to be a pure HVAC play. This is outside of the data center. It's not a channel that they're currently in.
Commercial vehicle and heavy duty are also pretty big chunks of pro forma revenue. I think they build up to about 30% of the company. You're assuming mid-single-digit growth. Can you just talk about where you see the market growth right now? Obviously, if we think through the lens of light vehicles, typically an outgrowth story, so what should we look at in that front as well?
Yeah. I think if you look at commercial vehicle and that sector over the last couple of years, it's been declining to flat. I think as you look across companies reporting in that space today, there's talk of early signs of growth potentially as early as the back half of this year into next year. We really feel like that part of the business is at a bottom, and it creates an opportunity for us. As we look at forward projections, we're in that mid-single digit range. I think we feel like we're, to Bill Presley's point earlier, we're buying a solid company where the team has done a tremendous job in positioning it for when growth returns.
We feel like we're getting it really at the early stages of growth, both from a commercial vehicle perspective, and then you've got the power gen piece as well. I think excited about the timing of when the acquisition will close and when we expect to see a market rebound.
Let's talk about the light vehicle portfolio. Climate and comfort grew about 10% ex FX. That was more like mid-teens outperformance in the first quarter. Full-year guide implies about five points, I think upside maybe you've said would be high single digits. Can you just walk us through the bridge in terms of what was maybe more episodic in the first quarter and the sort of girding of the full year outgrowth assumptions?
Yeah. We had a really strong first quarter. I think just to set the stage, we did just about $1.5 billion last year. Our midpoint is about $1.550 billion, which represents three percent growth. To Luke's point, we had double digit or close to 10% growth in the first quarter. We continue to see strength here as we're in the second quarter, so we would expect maybe not as good a performance, but potentially pushing something similar in the second quarter, which as you look at how the year balances out, it's probably pushing us closer to the higher end of our revenue guidance range. Overall, we haven't seen any changes from a production perspective.
I think as you look at industry reports, they've come down sequentially over the last couple of months. From an OEM production schedule standpoint, we don't really see any changes at this point, and are confident in where we are for the second quarter and expect that to be positive. We'll see how the second half of the year comes out, but it's shaping up really well.
Can we double-click on China within that as well?
I know that's been a recent contributor to the outgrowth story as well.
Yeah, we had a fantastic performance in China really throughout starting, I'd say, in the back half of last year. First quarter for us was close to 40% growth in China, significantly outgrowing the market. There's really two factors there. We've won a number of programs with some of the key Chinese OEMs over the last couple of years. Those are now in production. We had some big launches at the end of last year, and so we have the momentum from that coming through the first quarter. The other piece is as Chinese OEMs have really increased the level of climate and comfort technology in the vehicle, we're seeing the global OEMs now looking to catch up, and so we're seeing increased adoption rates, increased take rates, and that's really driving the performance in the country. We don't see that changing.
At some point, we'll lap some of that from a comp perspective, but we feel like we're in the market aligning with the right players from a Chinese OEM perspective, and obviously there to support the global OEMs as well. It's come together nicely.
Yeah. Lumbar and massage, of course, has been the star in your auto business, grew over 30% in the first quarter. You've said that trend is going to continue directionally in terms of that strength given previously won programs, a good launch pipeline here. How long, Bill, should we think about that growth profile running out? You've outlined the view through 2028. What about beyond 2028 visibility?
Yeah, just as a baseline, and I'll pivot to lumbar and massage here. If you look at climate control seats, so heated/cooled seats, today about 50% of the seats in the market have climate controlled seats. We see that take rate expanding to over 70% by 2030. Lumbar and massage is probably about five years behind that, on a similar adoption curve. Lumbar and massage right now in vehicles is less than a 30% take rate. If you shifted back five years, lumbar and massage is on that same trajectory. We anticipate lumbar and massage, actually, and climate and comfort to be our fastest-growing product line, and we expect that product line to continue to grow throughout 2030.
Yeah. Can you talk about the awards pipeline in total in light vehicle?
Yeah. Awards are right where we expected them to be. We expect another robust year. First quarter, we booked about $400 million in new awards. Last year, we were right about the same number in the first quarter. Looking at the pipeline that we have for the rest of the year, we would expect 2026 to look a lot like 2025, in that neighborhood.
Yeah. I think the only piece is some of the timing of the large awards is episodic. We had some big wins last year. We talked about the Ford F-Series win. Those things are not repeating every year.
To Bill's point, it'll be a good year for us, where we have visibility to the awards we want to win. Whether we get exactly to where we were last year or not, we'll see, but it's in line with where we expect it to be.
Yeah, I would say the only thing is, because you guys have been vocal with us about the awards don't correlate to the revenue, and we've heard a lot about that, so what are you guys doing? That's why we put that 2027 number out there. We wanted to show you that we had a solid line to growth for 2027 and what the number is so that you could tie that to the awards.
Speaking of that 2027 number, certainly the organic adjacencies are part of the story. Can we start with the furniture market? I think you're looking at maybe one or two points of growth, but at accretive margins. What's some of the work that you're doing on that side of the house right now?
When we broke the technology out into the four core platforms and looked at adjacent markets, home and office was one of the markets that we felt that we could push into. Last year, middle of last year, we started talking to some of the major furniture manufacturers, showing them the technology, showing what it could do, and there was a strong pull from that market. The first award was with KUKA HOME. Most people might not know who KUKA is, but I'm sure you've sat on their products because they manufacture for a lot of different brands. To put it in perspective, Jon and I sat down with the CEO of KUKA back in March over in China. They make five million sofas a year, which is the third the size of the U.S. light vehicle market. five million sofas, just sofas.
What the CEO said to Jon and I, he said, "I think you might be underestimating the market and what we can do together." He said, "I haven't talked to you about recliners. I haven't talked to you about mattresses. We have big opportunity." Since then, we've had four quarters in a row of announcing home and office furniture wins with different OEMs. That business is growing. There's a strong pull there. We've put a business development team in place to make sure that we harvest the opportunity. We see that business being somewhere around $100 million by 2028. The time to revenue in that market is about six months. The best part of that for us is it fills existing capacity and existing equipment. We've made minimal investment.
In some cases, for us, it's the same internal part number that we sell to automotive that we sell to home and office. That continues to grow. We continue to work the business development channels, and we're excited about that one.
Yeah. Let's talk about the medical side. You mentioned the ThermAffyx, which is going to go into production, I think, late this year is what you've said. Is that right?
July.
Yeah, in July. Okay. That's later this year, technically. Can you talk about the go-to-market there in terms of hospital direct, distributor led, or both, and just how big that product can be, and should we think there's a pipeline behind that as well?
Yeah. Our structure there commercially is first you have to get the contracts with the GPOs. They consolidate for a lot of the offices. Those are the Group Purchasing Organizations. You sell through either select partnerships, distribution, or hospitals. ThermAffyx addresses the need in robotic surgery. These are like the da Vinci tables that tilt the patient, that you have to control normothermia, so you have to maintain body temperature, but you have to keep the patient in position. We brought to market a product that uses high-density foam for positioning with automotive technology that we use in heated seats. What it does, it's the first of its kind in the market that will define standard of care that holds the patient in position and provides the proper patient thermal management.
Today, they cobble that solution together with a couple of different things, and it's not efficient, and it's not providing the best surgical outcomes for the patient. We completed 510(k) submission. We expect to have that approved later this month, actually, and that's going well. The questions we've gotten back from the FDA are pretty mundane. The market is pretty big. Right now the market is probably in the U.S. around $500 million. It will depend on how much of that market share we can capture and push the adoption curve. We did a soft launch in April at the Association of periOperative Registered Nurses in New Orleans, and we had 100 inquiries, 50 signed up for clinical trials, and 66 will be on-site at our Cincinnati facility this month to get trained on the equipment and how to use it.
We're excited about it because there's a capital piece, but really the pad, the pad is a consumable. Every time there's a surgery, it's a consumable. Yeah, we think that will be strong. We expect to have revenue from that this year. As I said, with the training and the clinical trials, we've already started stuffing the channels. That'll be one of the big contributors to growing the medical business. I don't know, Jon, anything.
I mean, we've said the medical business should, it's $50 million today, should be closer to 100. The ThermAffyx is a big piece of that. I think to the second part of your question, there are follow-on products that are currently in development, also leveraging core Gentherm technology from an automotive perspective. You'll see that probably staged closer to
maybe an announcement in 2027, but maybe launch in 2028.
On the time we got left, want to touch on a couple CFO topics. The first one is on the margin side of the equation, there's some nuance as we're going through the year in terms of cost timing, hitting you in terms of some inflation, and then some internal initiatives you're doing to offset that.
Yep.
Can you just give us a feel for the margin flowing through?
2Q through 4Q?
Yeah, we talked in our Q1 earnings call about a $20 million cost headwind related to really what's going on in the Middle East in terms of fuel prices, the impact on raw materials, the impact on processing costs and fuel surcharges, and the like. We do expect a timing lag between when we're incurring those costs and when we expect to recover them. There'll be a little bit of pressure from that perspective in the second and third quarter. We're also in the middle of a footprint transition globally, where we're consolidating capacity in each region. We've built up inventory over the last year that'll flush through the system here through the middle of 2026, which will also put a little bit of pressure on margins.
As we look at ending the year closer to an exit rate, that shows pretty strong improvement as we get into 2027.
On cap allocation, you've described M&A through three different lenses, resilient company, market access, product breadth. Does Modine effectively consume your M&A appetite in the near term, or could we see another deal sooner than the next couple of years?
No, I mean, we look to be active from an M&A front. If we don't do a deal in the next two years, I think we would view that as a negative. We feel like we've got a broader platform to do M&A. We'll certainly look at building the funnel and cultivating the relationships required to be able to get that done. Whether they're the same scale as Modine, it's a pretty sizable transaction for us. They're probably smaller, more in the tuck-in type space. We'll have, as I mentioned earlier, plenty of balance sheet capacity. We feel like we've got the right structure in place organizationally to continue to execute in that areas, and we feel like it's pretty well-defined from that perspective.
Bill, in the time we got left, is there any change in where you'd focus the funnel relative to what we saw you do with Modine?
No, I mean, look, we're focused on broad catalog parts. We're thinking about it less in terms of market and more in terms of product that can reach across markets broadly. We're really focused on the precision flow and the thermal management, and we'll stay focused on those catalog parts that give us broad industry access.
Sounds good. We'll leave it there.