Sensata Technologies

Good day, and welcome to the Sensata Technologies Q3 2021 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 touch-tone 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, VP Finance. Please go ahead.

Thank you, Sarah, and good morning, everyone. I would like to welcome you to Sensata's third quarter 2021 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. This conference call is being recorded, and we will post a replay webcast on our investor relations website 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 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 show Sensata's GAAP results for the third quarter of 2021. 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 relate to our non-GAAP financial measures. Reconciliations of our GAAP to non-GAAP financial measures are included in the earnings release and in our presentation materials. The company provides details of its segment operating income on slides 12 and 13 of the presentation, which are the primary measures management uses to evaluate the performance of the business. Jeff will begin today's call. with highlights of our business during the third quarter of 2021, followed by a quick review of our first sustainability report published recently. You will then provide an update on recent progress in our key electrification and Sensata Insights strategic growth areas. Paul will cover our detailed financials for the third quarter of 2021, including organic revenue growth and market outgrowth by business. as well as segment performance. And he will also provide financial guidance for the fourth quarter of 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 Kotak.

Thank you, Jacob, and welcome, everyone. I'd like to start with some summary thoughts on our strong performance during the third quarter of 2021, as outlined on slide four. The business recovery that began this time last year continued during the third quarter. We responded effectively to increased customer demand, which drove 20.6% revenue growth from the prior year period to $951 million, slightly above the guidance range we provided in July. While automotive production was constrained during the quarter due to supply chain shortages, we were able to deliver our customers' orders and produce strong financial results for shareholders. Looking at our performance year over year, we once again produced strong market outgrowth, well above our target ranges. As a company, we delivered 1,190 basis points of outgrowth during the quarter. However, outgrowth is something that we monitor over a longer period of time than one quarter. And since 2018, on average, we have produced 570 basis points of outgrowth as a company, driven by 1,050 basis points of outgrowth in our heavy vehicle off-road business and 650 basis points of outgrowth in our automotive business. This demonstrates the vital role we provide for our customers in these key markets. Paul will discuss our strong revenue outgrowth in more detail. Sensato's revenue outgrowth to market will increasingly be driven by our enhanced positioning in megatrend areas. We continue to invest in these growth initiatives both organically and inorganically. with Zergo and now the pending acquisitions of Spear Power Systems and Smart Witness, expanding not only our capabilities, but also our access to end markets and product portfolios in these pivotal areas. Already we have seen strong revenue growth coming from our electrification activities, with more than 220 million in estimated revenue this year. We expect continued significant growth in our megatrend areas over the coming years, driven by electrification trends, the infrastructure requirements to support electrification, and the proliferation of IoT on stationary and mobile equipment. Sensata today is in a very strong financial position, in part because of our excellent performance over the past year. We have generated more than $530 million in free cash flow over the past 12 months. And our current cash balance of $2 billion enables Sensata to continue to acquire targeted, innovative businesses that will expand our presence in our targeted growth vectors. During the third quarter, we benefited from our resilient, flexible, and focused organization that continues to successfully navigate the ever-changing supply chain landscape. and deliver on our customers' needs. Not surprisingly, we continue to see elevated costs related to the worldwide material shortages and logistics costs. We are working diligently to limit those effects, including a different commercial approach with our customers. This is a challenging exercise, but very necessary under the current circumstances. Despite these elevated costs, we delivered $201 million in adjusted operating income during the quarter, representing 21.1% in operating margin, substantially higher than the prior year period. I'd like to recognize the innovation, agility, and hard work of our entire team, achieving these strong results during the third quarter. During the quarter, Sensata published its first sustainability report, and we're very proud of our progress in these areas. Virtually every product Sensata makes today results in a cleaner, safer, and more efficient world. We also take our responsibility to reduce the carbon emissions from our own operations and our supply chain very seriously. To that end, we are targeting a 10% reduction in our greenhouse gas emissions intensity by 2026. and we have established a goal to be carbon neutral by 2050, in line with leading companies around the world. In addition, our report addresses sustainability topics core to Sensata's mission, including diversity, equity, inclusion, and responsible sourcing. We believe that diversity benefits our employees, customers, and shareholders, and that a diverse workforce provides or makes us a better company. We have established goals for our leadership team to improve female representation and management roles at Sensata to 30% and to reach 25% racial diversity in U.S. management roles by 2026, while reducing turnover, improving internal development and promotion rates. We are serious about achieving meaningful progress against these goals and consequently are tying a portion of senior executives' short-term incentive compensation to annual improvements. We look forward to keeping all our stakeholders updated on these and other important ESG initiatives in the coming years. Moving to slide six, Sensata is making excellent progress in winning new business and electrification components, in part because we take a holistic view of electrification and its growing impact on all the segments we serve. Electric light vehicles capture a lot of attention, and Sensata provides the manufacturers of these vehicles with not only new EV-specific components, but also with many of our innovative and differentiated components from traditional vehicles, like braking, tire, and environmental control. Specific to EVs, we also provide and are developing several components that enable safe and efficient operation of electrified platforms, such as high voltage electrical protection, advanced temperature sensing, highly sensitive electric motor position, and next generation current sensing. As an example, during the third quarter, we were awarded new e-motor position business with a large European OEM representing 2.6 million in annual revenue. In addition, we benefit from the upgrading of certain systems in EVs. For example, when the climate control system is upgraded to a heat pump to manage the temperature of both the cabin as well as the battery pack, the sensor package is upgraded and Sensata benefits. In the important area of braking, Sensata is a global leader. During the quarter, we won two new business opportunities that were significant. One with brake system leader Continental for new electronic stability control systems covering both traditional internal combustion engine vehicles as well as a greater than 11 million in new business on electric vehicles that further extends our leadership position in that market. We have described the revenue increase that we received from EVs as compared to internal combustion vehicles in terms of an average 20% uplift in content per vehicle. This is a demonstrated figure based on actual revenues and vehicle production. Our design wind activity within electrification has been growing rapidly. We saw an 80% rise in electrification winds last year And so far this year, approximately 50% of our automotive design wins are with electric vehicles, another dramatic uptick from the prior periods. Looking forward, based upon the business wins we're gaining and the products we are developing, we estimate that our battery electric vehicle content is on path to double that of an internal combustion engine vehicle on average within five years. On slide seven, we show how Sensata is expanding in clean energy solutions, moving up the stack from high voltage components used by large customers with the resources to design these into their electrified offerings to subsystems and full battery energy storage systems for customers in a multitude of end markets. Electrification is happening everywhere. not just in passenger vehicles. Manufacturers of bikes, heavy trucks, material handling equipment, marine vessels, and even aircraft and spacecraft are addressing ever tightening greenhouse gas emissions regulations and taking advantage of falling battery costs to provide electrified solutions to their customers. However, not all of these customers can design all aspects of the electrified solution in-house. Thanks to capabilities we have added via acquisition, Sensata can now provide either the subsystem of assembled components to manage battery charging in the form of a power distribution unit, or using technology from Lithium Balance and Spear Power, we can provide the full energy storage system, including battery management and a customized battery pack. By providing a full suite of offerings, our electrification and clean energy solutions, serviceable addressable market expands dramatically, reaching 15 billion by 2030. As an example of the solutions we offer, during the quarter, a large premier European heavy vehicle OEM awarded Sensada the design for a megawatt-sized charging unit to help power their future electric commercial vehicles. This strategically important business win is worth more than $20 million in annualized revenue once it reaches its expected production run rate. This pivotal development means we can increase our content per heavy truck from the current 100 to 200 on average to more than 1,000 per electric heavy vehicle. In addition, through the pending acquisition of Spear Power, we can provide full battery storage systems for a variety of specialty transportation markets. For example, SPEAR is powering electric ferries, including the upgrading to electric of the Washington State ferry system. These are highly demanding solutions that include very robust safety features proprietary to SPEAR, and we're excited about the role SPEAR is playing in these and other land, sea, and air transportation markets. Similar to what we did for our insights group back in June in early 2022, we'll webcast a teach-in covering our electrification components and clean energy solutions initiatives so listeners can gain a better understanding of our offerings, the evolving markets, and our go-to-market strategies in these key growth vectors for Sensata. We look forward to sharing more details about these rapidly growing and evolving areas then. On slide eight, we share an update on our continued progress in Sensata Insights. The Insights initiative addresses a fast and growing market, and we're pleased by the traction we are gaining with both current and new customers across various sectors. The ongoing widespread semiconductor shortage is constraining our Insights business, and we are unable to deliver on all of that expanding demand. You'll recall that these solutions are designed into customers' fleets. The revenue is sticky, and so our orders are building for future delivery once these shortages subside. Our Insights order book for delivery over the next 12 months now stands at more than $85 million. As evidenced by the value-added nature of our solutions, we were recently awarded new business with telematics service providers and a large global shipping company, together worth more than $9 million in revenue over the next 12 months. I'm also pleased to announce the expansion of our Insight offering with the pending acquisition of Smart Witness, a privately held innovator of video telematics technology for heavy and light-duty fleets. Smart Witness solutions comprise proprietary software and hardware purpose-built for telematics service providers, providing a complementary fit with our insights business. Since its founding in 2007, Smart Witness has been a pioneer in video telematics that expands on traditional offerings to include contextually aware data capture, that enhances the monitoring of vehicles and their surroundings to increase safety and lower insurance costs for fleets. Smart witness systems are logging 50 million miles of information every day. In sum, I'm really encouraged by our continued progress in our megatrend growth initiatives. As I've said before, we see numerous opportunities to utilize our strong financial position, our engineering capabilities, our supply chain, and our customer relationships to meaningfully enlarge our addressable markets through organic efforts as well as bolt-on acquisitions and partnerships within these megatrends. I'd now like to turn the call over to Paul.