Sensata Technologies

Good day and welcome to the Senata Technologies second quarter 2020 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist 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 touchstone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Jacob Sayre, Vice President Finance. Please go ahead.

Thank you, Konstantinos, and good morning, everyone. I'd like to welcome you to Sensata's second quarter to 2020. Jeff will begin with a review of our overall business during the second quarter, including the impact from COVID-19 and the strong financial position of the company. He'll also discuss Centata's revenue growth relative to our end markets during the second quarter and first half of 2020. He will then provide an update on recent progress in some of our key megatrend growth areas, including the recent acquisition of Preco Electronics. Paul will then cover our detailed financials for the provide insight into what we are expecting from our end markets for the balance of the year, and then provide select financial guidance for the third quarter of 2020. We will then take your questions after our prepared remarks. Now I'd like to turn the call over to Sensata's CEO and President, Jeff Cote.

Thank you, Jacob, and welcome, everyone. I'd like to start with some summary thoughts on our performance as outlined on slide four. Sensata recognized the global impact of COVID-19 early, and we took a wide range of actions designed to protect our employees and enable us to meet essential customer demand while enhancing our financial flexibility. Our focus on these priorities and quick action helped us navigate through this unprecedented environment. These actions will help position Sensata to emerge from this worldwide disruption stronger so that we can better serve our customers, employees, and shareholders, as well as the communities in which we operate. The lockdowns and quarantines that were instituted by governments around the world in response to the spread of COVID-19 caused the end markets we serve to decline almost 40% during the quarter. Our strong market outgrowth during the quarter offset a portion of this market decline, which resulted in our net revenue contracting by 33.9% organically. For the first half, our net revenue decreased 22.3%. We delivered market outgrowth of 750 basis points in our heavy vehicle off-road business and 890 basis points in our automotive business for the second quarter However, we continue to be confident that our market outgrowth for 2020 and beyond will be sustained in the range of 600 to 800 basis points for heavy vehicle off-road and 400 to 600 basis points for automotive, in part due to our continued new business wins. During the quarter we closed over 125 million of new business wins as part of 225 million in new business wins for the first half of 2020. This pace is faster than our average new business wins over the past five years and included 108 million in electrification wins. We believe these new business wins demonstrate the mission-critical nature of Sensata's products, as our customers have continued to award new business to us, even in the midst of COVID-19-related shutdowns. From a demand standpoint, we saw improvements month-to-month during the second quarter, as customer sites reopened in May and ramped up production in June. This trajectory has continued for the first half of July, and on that basis, we anticipate sequential improvements in the third and fourth quarters this year. However, we remain cautious regarding the impact that potential COVID-19 surgence-related shutdowns may have on this recovery trend. Despite the challenges, we believe we are in a strong financial position and have taken the steps necessary to enhance our financial flexibility. For example, we generated $45 million in free cash flow in the second quarter and $114 million year to date. We reduced capital expenditures for the year and aggressively managed our working capital. We lowered our operating expenses in the second quarter through a number of temporary measures and have since implemented permanent cost actions that will align our cost structure to more normalized demand. Paul will address these cost actions later. We are seeing enough stability in the markets we serve and our order book to provide financial guidance for the third quarter. Finally, as I will discuss in more detail, we continue to invest in capabilities that will drive our future growth with our acquisition of Preco Electronics. It was a challenging quarter, but we are pleased with our accomplishments. Now I'd like to discuss our performance by end market in the second quarter of 2020, as outlined on slide five. Overall volume during the second quarter was lower than both the first quarter of 2020 and the second quarter of 2019. We reported revenues of $576.5 million, which represents an organic revenue decline of 33.9% year-on-year, against an overall and market decline of almost 40%. Our industrial business decreased 14.6% organically, driven by pandemic-related shutdowns and a global industrial market slowdown of approximately 15.2%. Outperformance in the industrial business was primarily due to growth in our medical equipment business, in particular providing sensors to ventilator manufacturers. Our aerospace business decreased 39.4% organically, Reduced production drove 32% and market decline and grounding of planes impacted our aerospace aftermarket business. Global air traffic is currently down 50% from the beginning of the year, which is better than the top levels in April that were down 80%. Our heavy vehicle off-road business posted an organic revenue decrease of 31.5%, outperforming a 39% end-market contraction, representing 750 basis points of market outgrowth. Our China on-road truck business continued to post strong growth as a result of the adoption of NS6 emissions regulations. While our China business grew in the second quarter, we experienced substantial declines in both Europe and the Americas, as production levels in these markets declined. Our automotive business posted an organic revenue decrease of 41.6%, outperforming a 50.5% global and market production contraction, representing 890 basis points of market outgrowth. This outgrowth continues to be led by emissions, electrification, and safety-related launches, as well as slightly better pricing. The China automotive end market grew 4.3% in the second quarter versus the prior year, snapping back from the first quarter shutdown-related declines. We do expect the recovery in Europe and the Americas to be more measured where plants were shuttered for the average of six to seven weeks in the second quarter. IHS and we expect that the global automotive market will grow sequentially from the second quarter into the third and fourth quarters. During the first quarter, we attributed a portion of automotive revenue growth to supply chain inventory building, especially with Chinese customers. Automotive inventory movements in the second quarter were negligible, although we do believe that there was a shift from China to Europe and North America. We expect global inventory at our customers to return to normalized levels by the end of the year. Moving to slide six, I want to share some updates about important progress we are making in our key megatrend initiatives. We continue to believe investments in electrification, smart and connected, and autonomous megatrends 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 do not see evidence that customers are slowing their investments in these areas. To provide greater transparency into our megatrend spending and the operating performance of our segments, we are moving the costs of these investments from the reporting segments to corporate and other. Paul will discuss this in more detail. In electrification, we are expanding the solutions we provide for critical applications across all end markets we serve. During the second quarter, we closed another $50 million in electrification new business wins, now $108 million year-to-date. As electrification trends accelerate, driven by broad legislation, such as the European Green New Deal, they present increasing opportunities for our solutions. Representing an expected $6.5 billion addressable market for Sensata, In Smart and Connected, we continue testing proof of concepts with several leading fleet managers and are working to turn these efforts into orders by the end of this year. As part of this initiative, we are also working with several telematics companies that will transmit data collected by Sensata's vehicle area network to the cloud in order to provide valuable insights to fleet managers. Our Smart and Connected initiative opens up an expected $1 billion in OEM and $7 billion in fleet management addressable market for Sensata by 2030. In addition, we are increasing our focus on high growth areas such as industrial IoT, smart manufacturing, buildings, and infrastructure. These segments represent fast-growing opportunities that will benefit and drive new business and market outgrowth for our industrial business unit. Moving to slide seven, on the autonomy front, on July 1st, we closed a small but important acquisition that represents an early step into Preco Electronics based in Boise, Idaho is a leader in developing radar object detection applications for heavy vehicles, providing crucial blind spot detection and side turn assist functionality. Their solutions improve efficiency and overall safety. We believe PRECO is well positioned to benefit from upcoming EU vulnerable road user and other object detection regulations and expands our addressable market by 600 million in 2030 with sticky mission critical content. While currently a small business with approximately $15 million in net revenue, Preco's growth potential is substantial and we believe its differentiated offering will drive strong margins. We see substantial synergies between Preco and Sensata as well, including leveraging our strong OEM relationships and supply chain. We are pleased with our progress against these megatrend initiatives and intend to continue these efforts that expand Sensata's markets, provide strong growth, and differentiation for our future. I'd now like to turn the call over to Paul.