Sensata Technologies

Good day and welcome to the Sensata Technologies Q1 2020 earnings call. All participants will be in listen-only mode. Should you need assistance, please take to our conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I'd now like to turn the conference over to Mr. Jacob Sayre, Vice President of Finance. Please go ahead.

Thank you, Keith, and good morning, everyone. I would like to welcome you to Sensata's first quarter 2020 earnings conference call. Joining me on today's call are Jeff Cote, Sensata's CEO and President, and Paul Vasington, Sensata's Chief Financial Officer. We are also joined by Paul Chawla, EVP of our automotive business, and Vineet Nagarwala, EVP of our industrial, HVO, and aerospace businesses, will be available to provide additional market-specific insight during Q&A. In addition to the earnings release we issued earlier today, we will be referencing a slide presentation during today's conference call. The PDF of this presentation can be downloaded from Sensata's investor relations website. We'll post a replay of today's webcast shortly after the conclusion of today's call. Before we begin, I would like to reference Sensata's safe harbor statement on slide two. During the course of this conference call, we will make forward-looking statements regarding future events or the financial performance of the company that involves certain risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in our forms 10-Q and 10-K, as well as other subsequent filings with the SEC. On slide three, We encourage you to review our GAAP financial statements in addition to today's presentation. Most of the subsequent information that we will discuss during today's call will be related to non-GAAP financial measures. Reconciliations of our GAAP to non-GAAP financial measures are included in our earnings release and in our webcast presentation. The company provides details of its segment operating income on slides 11 and 12 of the presentation, which are the primary measures management uses to evaluate the business. Jeff will begin today's call with a review of our overall business during the first quarter, particularly the impact from COVID-19 and our responses, as well as the strong financial position of the company. He'll also discuss some thought of revenue outgrowth relative to our underlying markets during Q1 and provide an update on recent progress in some of our key megatrend growth areas. Paul will then cover our detailed financials for the first quarter of 2020 provide insight into our financial model and describe leading economic indicators that we use to estimate the future performance of our businesses. We will then take your questions after our prepared remarks. Now, I'd like to turn the call over to Sensato's CEO and President, Jeff Cote.

Thank you, Jacob. As we shared with you earlier this month, you can see on slide four that we recognize the global impact of COVID-19 early. and took a wide range of steps across our organization designed to first and foremost to ensure the safety and health of our employees while also enabling us to serve critical customer needs and enhance our financial flexibility. These actions position Sensata to emerge from this worldwide disruption even stronger so we can better serve our customers, employees, shareholders, as well as our communities. Working with local, state, and federal government health agencies in many countries, we moved quickly to implement measures to help protect employees and minimize the spread of COVID-19. At a high level, these actions included sanitizing our facilities, instituting safe distancing for our central workforce, Staggering work times, implementing health checks at our facilities, providing paid leave for affected employees, and mandating remote work as much as possible. While it's been a challenge for all of us to learn how to work remotely from our colleagues, we recognize the importance of doing so, especially given that some of our employees are not able to work from home. I'm pleased to report that our teams are stepping up and adapting to the new normal. As I speak today, after brief closures in certain locations, our manufacturing facilities are open and we have sustained production, adjusted for demand levels. Governments have issued shelter-in-place orders and closed non-essential businesses. By working with authorities in jurisdictions where we operate, Most of our manufacturing facilities have been deemed essential. We manufacture critical products for industries such as essential transportation, defense, and medical equipment. So it is important that we keep operating during this crisis. We are in a strong financial position, and we have taken steps to enhance our financial flexibility. We have lowered our operating expenses for the second quarter through management salary reductions and employee furloughs, implemented reductions in discretionary spending, and are ramping down production in certain facilities in line with expected end market demand. For the second quarter, I am taking a salary of $1, and we have reduced the cash portion of our non-employee director's compensation by 50%. All members of senior management are taking a 25% reduction in pay, and we are seeking a similar reduction in pay through furloughs from all indirect employees. We are reducing capital expenditures and managing our working capital very carefully. We drew down on our revolving credit facility to enhance our cash position. More than $1.2 billion in total at the beginning of the second quarter. And we have temporarily suspended our share buyback program. We also withdrew our financial guidance for fiscal year 2020 in early April as our visibility into the economic impact of this crisis became less clear. Paul will discuss leading indicators we are tracking to estimate future revenue shortly. Throughout these unprecedented times, we've proven ourselves to be a strong and reliable partner to our customers as they too face uncertainty and disruption. We are continuing to make progress on our key initiatives around smart and connected and electrification, which I will discuss in more detail momentarily. We have proven ourselves as good stewards of capital, Right-sizing our organization to the environment yet still investing in areas that offer significant long-term growth opportunities. We have demonstrated the integrity of our global supply chain and flexible cost structure under the most difficult times. All of this gives us confidence in our strategic direction and our ability to continue to execute. The continued focus on our strategic direction remains central, and we are aggressively managing our operations during this unprecedented market environment. As shown on slide five, the rapidly escalating worldwide impact of COVID-19 has adversely affected the global economy, our entire industry, especially our employees, suppliers, partners, customers and the communities in which we operate around the world. I'm so proud of how our entire organization has responded to this crisis locally and globally in extraordinary ways. The health and well-being of our employee base is our first concern and we're doing everything we can to protect them from the spread of the virus. Some examples of the extraordinary times in which we currently operate include China reported a GDP decline of 6.8% year-over-year in the first quarter as the government shut businesses. This is the first decline in Chinese GDP since quarterly record-keeping began in 1992. Global light vehicle production in the first quarter dropped 20% year-over-year. And within our industrial markets, we also experienced a 15% decline in global market volumes in the first quarter, driven primarily out of China. Given that the response to the spread of COVID-19 came later in the first quarter for Europe and the US, we expect this slowdown to accelerate in the second quarter. According to the latest automotive production data released by IHS, global production for the second quarter is forecasted to decline 47% year over year. With Europe expected to decline 61%, China expected to decline 9%, and North America expected to decline 70%. Also, according to IHS, for the full year 2020, global automotive production is now expected to decline 22%. In addition, a substantial decline in global GDP is predicted for Q2, which will impact our other end markets. Despite these challenges, Sensata has demonstrated progress in the first quarter on our strategic goals for the year. We delivered significant end market outgrowth despite substantial market declines. We are continuing to win new business and invest in opportunities that once we're through this period of disruption will drive long-term growth for the company. Now let me discuss our performance by end market for the first quarter of 2020. Overall volumes were substantially lower, and we reported revenues of $774.3 million, which represented an organic revenue decline of 10.4%. Slide 6 shows organic revenue performance by end market for the first quarter. I will begin with our heavy vehicle off-road business. HVOR posted an organic revenue decline of 10.7%, outperforming a 20% end market decline. Our China on-road truck business continued to post better than expected growth as a result of strong content performance driven by the adoption of NS6 emissions regulations. Industrial aerospace and other revenue declined 10.4% organically for the first quarter of 2020. Our aerospace business declined 2% organically, with continued content growth offsetting the grounding of flights, reduced production, and a roughly 6% market decline. Our industrial businesses declined 12.3% organically, Thank you for joining us. However, Sensata's strong content growth helped to offset a significant portion of this decline. As facilities begin to reopen and production ramps up in this region, we expect to see substantial recovery. In our North American and European automotive businesses, we saw meaningful revenue declines linked to our customers' closing plants for the last two weeks of the quarter. We still posted 600 basis points of market outgrowth. In addition, we saw OEMs primarily in China build inventory during the quarter, in part to ensure that they have supply when reopening their plants and ramping production. We estimate that to be approximately 310 basis points of growth coming from this inventory build, and we would expect this to unwind in the coming quarters. Despite the underlying challenges in the end markets in the first quarter, we delivered significant revenue outgrowth as shown on slide seven relative to our end markets. Sensata serves high growth segments in all of our end markets. Our competitive position is strong in sensor rich solutions for efficient connected subsystems, as well as cleaner and more electrified equipment. We have secured significant new business wins in recent years that enable us to achieve secular growth and we are on pace to continue to outgrow underlying and market production. Underlying most of our recent new business wins has been regulatory and consumer driven trends towards safer, cleaner and more efficient equipment, which are the fundamental long term drivers of our business. Despite current and market headwinds, We continue to demonstrate significant outgrowth relative to the end markets that we serve in the first quarter, posting market outgrowth of 930 basis points in heavy vehicle off-road, 600 basis points in automotive, and 430 basis points in aerospace. The adoption of NS6 emissions regulations in China and BS6 in India is driving significant new content for us with local HVOR and automotive OEMs. Similar to the EU6 regulations in Europe, these regulations are aimed at reducing emissions. To meet these regulations, OEMs are installing more advanced exhaust control systems that include our high temperature and differential pressure sensors. Similar trends in Europe and North America are driving strong market outgrowth in these regions as well. Moving to slide eight, I want to share some updates on key progress we are making in our megatrend initiatives. We continue to believe these investments will further our end market diversification, increase our long-term growth rate, and provide important competitive advantages as these trends transform our world. Despite the impact of COVID-19, We see no evidence that customers are meaningfully slowing their investments in these areas. During Q1, we closed 15 million of new business with customers for sensing and vehicle area network solutions within our Smart and Connected initiative. This brings the total new business to over 90 million, with a further 75 million being quoted. We are testing proof of concepts within Smart and Connected with some of the world's leading fleet managers. Initial results of four active pilots demonstrate that our solution works very well in real-world environments, so far capturing more than 2 million miles of mission-critical data on trucks and trailers in our customers' fleets in North America, providing them with information on vehicle readiness and reducing downtime and maintenance costs. On the electrification front, we are expanding the products and solutions we provide to include those for critical applications for hybrid and battery electric vehicles, as well as other electric equipment, such as charging stations. During Q1, we closed 50 million in new business wins in the area of electrification. As electrification gradually increases its penetration, it represents an increased opportunity for our high voltage contactor, e-motor position, thermal management, and thermal runaway sensing offerings. The acquisition of GigaVac expanded our electrification offerings into high voltage contactors and fast disconnect devices. We are quickly establishing ourselves as the standard for premium equipment particularly for the most challenging applications with high current levels. During the first quarter, we began production of high voltage contactors in Aguascalientes, Mexico to facilitate growth with a new highly efficient production line. We are pleased with our demonstrated progress against these two initiatives, which offer important long-term diversification as well as significant new market opportunities for Sensata. I'd now like to turn the call over to Paul to review our first quarter 2020 results in more detail and to describe leading economic indicators that we track, after which I will provide some summary comments. Paul.