Sensata Technologies

Good day and welcome to the Sensata Technologies fourth 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 touchtone 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, Jason, and good morning, everybody. I'd like to welcome you to Sensata's fourth quarter 2020 earnings conference call. Joining me on today's call are Jeff Cote, Sensata's CEO and President, and Paul Basington, Sensata's Chief Financial Officer. In addition to the financial results press 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 will post a replay of today's webcast shortly after the conclusion of today's call. As we begin, I would like to reference Sensata's safe harbor statement on slide two. During this conference call, we will make forward-looking statements regarding future events or the financial performance of the company that involve certain risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause those 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 slides three and four, we showed some GAP results of the fourth quarter and full year 2020. We encourage you to review our GAP financial statements in addition to today's presentation. Most of the subsequent information that we will discuss during today's call will relate to non-GAP financial measures. Reconciliations of our GAP to non-GAP financial measures are included in our earnings release and in our presentation materials. The company provides details of its operating segments, on slides 13 and 14 of the presentation, which are the primary measures management uses to evaluate the business. Jeff will begin today's call with key highlights of our business during the fourth quarter and full year 2020. He'll then provide an update on recent progress in our key electrification and smart and connected megatrend growth areas. Paul will cover our detailed financials for the fourth quarter of 2020, including organic and market outgrowth by business units, our segment reporting, corporate expenses, and balance sheet progress in the quarter, and provide financial guidance for the first quarter and full year 2021. We'll then take your questions after our prepared remarks. Now I'd like to turn the call over to Sensata's CEO and President, Jeff Coté.

Thank you, Jacob, and welcome to the call, everyone. I'd like to start with some summary thoughts on our performance as outlined on slide five. The rebound from commercial lockdowns and quarantines instituted by governments around the world in response to COVID-19 earlier this year continued in the fourth quarter. Our response to that rebound enabled our revenue to grow 15% in the quarter sequentially to $906.5 million, consistent with the updated revenue guidance that we provided on January 8th. and significantly higher than what we had anticipated during our third quarter earnings call. This growth is a testament to our leading positions and our strength and flexibility of our manufacturing model. I'm proud that we were able to capitalize quickly on improving markets and support our customers as they return to higher levels of production during the quarter. I'd like to recognize the agility and hard work of our entire team in achieving these strong results. Looking at our performance year over year, we continued to deliver strong market outgrowth. For the fourth quarter of 2020, we produced 990 basis points of outgrowth in our heavy vehicle off-road business and 970 basis points of outgrowth in our automotive business. Continuing the trend we saw in the third quarter, inventory in the supply chain and in our customers' finished goods has continued to come down, a trend most pronounced in automotive. This sets us up very nicely for revenue growth in 2021. For full year 2020, we delivered market overgrowth above our target ranges for both heavy vehicle off-road and automotive. We are confident that we will sustain our outgrowth for 2021 in the range of 600 to 800 basis points for heavy vehicle off-road and 400 to 600 basis points for automotive, consistent with our long-term goals and supported by our new business wins. Since Sodom today is in a strong financial position, we generated a record $240 billion in free cash flow in the fourth quarter. a conversion rate of 178% adjusted net income, and $453 million for the year, a conversion rate of 130%. And we are taking several steps to further enhance our financial position and flexibility. We continue to benefit from incremental savings from the restructuring program announced last summer. These actions generated savings of $12 million in the fourth quarter, and they are expected to generate annualized savings of $60 to $65 million starting in 2021. While market uncertainties and supply chambers remain, our business and customer visibility has improved significantly, and we have reinstated full-year 2021 financial guidance today. Later this quarter, we intend to redeem our $750 million six and a quarter notes due in 2026, which will lower our overall cost of capital. During the fourth quarter, we closed more than $145 million in new business wins, bringing us to more than $465 million in new business wins for the year. This is higher than our five-year average of $440 million and solidifies our ability to continue to deliver market outgrowth in the coming years. We believe our success in closing a higher level of new business wins in 2020, despite the disruptions caused by the pandemic, clearly demonstrates the mission-critical nature of Sensato's products. Finally, as I will discuss in more detail momentarily, we continue to invest in our megatrend growth initiatives and achieved a meaningful milestone in electrification by acquiring Lithium Balance. This brings Lithium Balance's battery management capabilities in-house, expanding important e-mobility system offerings in heavy vehicle and industrial applications, and enlarging our position within the evolving energy management solution space. In Smart and Connected, we began installing sensors and vehicle area networks on our first fleet customer's equipment and collecting revenue on a recurring subscription basis. We are pleased that this business is gaining significant momentum, with quoting activity growing dramatically with future fleet customers. Moving to slide six, Sensata takes a holistic view of electrification and its impact on the markets we serve. We have expanded our capabilities in the e-mobility space beyond components to deliver hardware and software systems. The acquisition of GigaVac positions Sensata as a leading provider of high-voltage protection on EVs and charging infrastructure. We are broadening our focus beyond automotive to e-mobility applications in heavy vehicle and charging infrastructure, as well as into broader industrial and grid applications. This is because we see a great deal of customer need, which Sensata is uniquely positioned to address. During the fourth quarter, we closed another $40 million in electrification new business wins, bringing our annual total to $180 million. including four of our top five NGOs in 2020. We are increasing our capabilities in charging infrastructure and smart grid applications, including our recent acquisition of Lithium Balance. Moving to slide seven, we are expanding the electrification solutions we provide for critical applications across all the end markets we serve, but especially in automotive. and it aligns well with the fast-growing interest in production of electric vehicles around the world. Today, the rapid introduction of new electric vehicles to the market provides a tailwind to Sensata revenue growth. Our content VEBs represent a 20% uplift in content value as compared to internal combustion engine vehicles. This content uplift is derived from a broad array of Sensata sensors and other components that we designed into battery electric vehicles. Some of these are carryover from internal combustion vehicles, such as brake pressure and tire pressure sensors, while others are unique to EVs, such as contactors and electric motor position sensors. We have broadened and deepened our portfolio to support this expanding market segment. In 2020, our EV-related revenue represented approximately 5% of our automotive end market, as compared to EVs representing approximately 3% of vehicles manufactured globally. So we feel confident we can grow along with the accelerated growth of EVs. To date, we have closed new electrification business with many of the largest and most innovative automotive OEMs around the globe, whose logos are shown on this slide. We are proud to have existing business or design wins on future EVs with nearly every automotive OEM with an announced EV launch. Helping these OEMs launch the next generation of EVs represents a significant growth factor for Sensata as electric vehicles increase in number and become a larger percentage of the total vehicle fleet worldwide. As part of our holistic approach to electrification, Sensata seeks to be a partner of choice for heavy vehicle and industrial OEMs transitioning to electrified solutions as well. We recently acquired Lithium Balance after a two-year collaboration that began when we acquired a minority stake in this company. Over that time, we have jointly won business with new electric truck and bus designs with several OEMs that bring over $250 of content per vehicle to Sensata. Battery management solutions in heavy vehicle and industrial applications will represent an incremental $500 million of serviceable market for Sensata by 2030. In addition to battery management systems for heavy vehicle and industrial applications, Lithium Balance also provides battery energy storage solutions under the Zolta brand that will establish Sensata's toehold in this very fast-growing space. which is estimated to exceed $6 billion in addressable market by 2030. On slide 9, I want to provide an update on the meaningful milestone we achieved in our smart and connected megatrend initiative. During the quarter, we began to roll out our first smart and connected installation with a top 25 North American fleet manager. demonstrating our ability to move from selling hardware to providing data insight on a monthly recurring subscription model. Several additional fleet trials are also moving toward commercialization this year. We've gained significant momentum, with more than $140 million in total contract value having been quoted, representing more than $45 million in potential annual contract value with five fleet managers. Our expanded offering now includes the deployment of full-stack solutions that help unlock value for fleets, including functionalities such as a vehicle area network, cloud-based data analytics and insight delivery, web portals, mobile apps, and integration with third-party telematics service providers. We're pleased by the increasing interest and continue to believe that our smart and connected fleet management initiative opened $6 billion in addressable market for Sensata by 2030. Reaching and then expanding commercialization with this exciting solution demonstrates its power to dramatically improve safety and reduce cost across commercial truck fleets. In addition, in the new equipment space, we expect to close incremental new business with several leading heavy vehicle OEMs this year, building upon close to 100 million in new business wins closed to date for smart and connected solutions. As we capture more of this 1 billion addressable market in the OEM space, we are confident that our new business wins will convert into revenue as OEM production commences. In closing, I'm pleased with the progress against the megatrend initiatives, and this progress supports our increased investment in this area as we pursue these large, fast-growing market trends. We intend to continue our efforts to expand Sensata Solutions for these areas organically and through third-party collaboration and through acquisition as appropriate. As I've said before, we see numerous opportunities to utilize our strong financial position our engineering capabilities, supply chain, and customer relationships to meaningfully enlarge our addressable markets through organic efforts as well as bolt-on acquisitions within these megatrends. I'll now turn the call over to Paul.