Sensata Technologies

Good day, everyone, and welcome to Sensata's first quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please send to 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 and one using a touch-tone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Jacob Sayre, Vice President of Finance. Sir, please go ahead.

Thank you, Jamie, and good morning, everyone. I'd like to welcome you to Sensata's first quarter 2022 earnings conference call. Joining me on today's call are Jeff Cote, Sensata's CEO and President, Paul Vasington, Sensata's Chief Financial Officer, heavy vehicle off-road. In addition to the financial results and other press releases 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'll post a replay webcast on our Investor Relations website shortly after the conclusion of today's call. As we begin, I'd like to reference Sensata's safe harbor statement on slide two. During this conference call, we will make forward-looking statements regarding future events for 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 those differences include, but are not limited to, those discussed on our forms 10-Q and 10-K, as well as other subsequent filings with the SEC. We encourage you to review our GAAP financial statements in addition to today's presentation. Most of the subsequent information that will be discussed during today's call will relate to non-GAAP financial measures. Our GAAP and non-GAAP financials, including reconciliations, are included in our earnings release and in the appendices of today's presentation materials. The company provides details of its segment operating income on slides 10 and 11 of the presentation, which are the primary measures management uses to evaluate the performance of the business. Jeff will begin today with highlights of our business results during the first quarter. He will then provide an update on recent progress in our key electrification and insights, strategic growth areas, as well as share details about our recently announced acquisition of Dynapower. Paul will cover our detailed financials for the first quarter, including revenue growth and market outgrowth by segment and business unit. And he'll also provide financial guidance for the second quarter and full year 2022. We'll then take your questions after our prepared remarks. Now I'd like to turn the call over to Sensada's CEO and President, Jeff Coté.

Thank you, Jacob, and welcome, everyone. I'd like to start with some summary thoughts on our strong performance during the first quarter, as outlined on slide three. While production across all of our end markets declined nearly 6% during the quarter compared to last year due to supply chain disruptions and shortages, Our business model, which includes acquisitions and market outgrowth, served us well. As a result, we produced solid financial results in the quarter for shareholders, delivering $976 million in revenue, or growth of 3.5% from the prior year, above the guidance range we provided in February. We once again demonstrated strong market outgrowth above our target ranges, As a company, we delivered 790 basis points of outgrowth during the quarter. This includes 140 basis points of pricing recovery. Paul will discuss our strong revenue outgrowth in more detail. Quoting activity for new business awards has been extremely active during the first quarter, and we are currently on track to exceed the record 640 million in new business wins we secured last year. More than half of these new business wins are in our megatrend growth factors, and we expect them to translate into Sensata's future revenue outgrowth. Sensata's current revenue outgrowth is increasingly driven by rapidly growing positions in megatrend areas, including electrification and insights. We are investing more in these areas, and we believe this increased organic and inorganic investment which for the full year is expected to impact our margin index by about 250 basis points, is the right trade-off to expand our exposure in these fast-growing areas. Acquisitions completed in these areas over the past year contributed 410 basis points to company-wide revenue growth in the first quarter. And this is in line with our targeted acquired revenue growth. I'll share more details regarding our latest acquisition, Dynapower, in a moment. During the first 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. The war in Ukraine and the COVID-related lockdowns in China are currently having minimal direct impact on our business. but we are watching these situations closely as these and other external factors could potentially impact near and longer term demand. Also, continued inflationary impacts on input costs have led us to become more agile, and we aim to offset these costs with commercial pricing actions. The timing of these actions impacted first quarter results, but we are confident that the full year impact will be limited and will allow us to continue to deliver on our promise of strong, differentiated operating profits. I'd like to recognize the innovation, agility, and hard work of our entire team and the support from our customers in achieving these strong results. Sensata is in a strong financial position today. We have more than $1.6 billion of cash on our balance sheet. We generate significant free cash flow each year and our net debt to EBITDA ratio is within our target range of 2.9 times. Acquisitions in the megatrend areas of electrification and insights continues to be our primary focus for capital allocation, as this activity drives our strategy and long-term sustainable growth for the company. In addition to acquisitions, we have deployed capital for our share repurchase program, and today, we announced the addition of a quarterly dividend of 11 cents per share starting next month. We are confident that our business will continue to generate sufficient cash flow to execute on this balanced capital allocation program. Moving to slide four, Sensata is continuing to make excellent progress in winning new business in electrification, building upon our success in 2021. As an example of Sensata's continued strength in thermal management, we received multiple new business awards for thermal management sensors in electric vehicles this quarter, representing $9 million in annual revenue. These primarily support heat pump architectures preferred by electric vehicle makers due to their low power usage. Additionally, We were awarded a new tire management business opportunity from a leading electrification manufacturer. This win represents more than $40 million in annual revenue. This solution is unique in the industry today because it combines tire pressure with temperature and tread depth in a single sensor to provide a more complete picture of tire health, which will drive higher efficiency and safety. Revenue from electrification efforts across our business was $260 million in 2001. We continue to expect greater than 50% increase in this revenue in 2022. And our first quarter results and order pipeline support this forecast. As shown on slide five, we are pleased to announce that we have agreed to acquire Dynapower. Dynapower is a leader in power conversion and energy storage solutions. They offer a comprehensive suite of high voltage inverters, converters, and power rectifiers, as well as aftermarket sales and services. This transaction will be funded using cash on hand. Pending customary regulatory approvals, we expect to close the transaction in July. Dynapower is a fast-growing business. It is expected to generate over $100 million in annual revenue in 2022 and grow in excess of 30% per year over the next several years to more than $300 million in revenue by 2026. They are profitable with 20% EBITDA margins expected this year. And as a result, the acquisition is expected to be $0.05 accretive to Sensata's EPS in the second half of the year. Like Sensata, Dynapower focuses on mission-critical, highly engineered, differentiated solutions that create customer stickiness and enjoy higher margins. They are experts in DC to DC conversion, power inversion, and rectifier control, and are the only power control supplier to focus across renewable energy, industrial, and defense applications. Dynapower has a well-earned reputation for deep technical knowledge, product quality and longevity, and high customer responsiveness. Dynapower is headquartered in Burlington, Vermont, and we look forward to welcoming their 200-plus employees to the Sensata team. Dynapower is a natural extension of Sensata's electrification strategy, as shown on slide six. We are focused beyond the electric vehicle opportunity to the broader electrification ecosystem, including renewable energy generation, storage, and usage. Dynapower solutions handle the high voltage needs of renewable power generation and large-scale battery energy storage for industrial and defense applications, as well as areas where rapid energy use is required, such as green hydrogen production and DC fast charging for electric vehicles. These are large and fast-growing segments with a $1.1 billion addressable market this year and are expected to grow over 25% per year toward over $3.2 billion addressable market by 2026. As discussed during our electrification teach-in, Sensata's strategy is to build a $2 billion electrification business by 2026. Our current electrification revenue, growth in the market, and new business wins to date give us confidence in achieving the organic revenue target of $1.5 billion. Dynapower is expected to provide over half of the targeted $500 million acquired revenue as part of this goal. Dynapower's leading high-power conversion capabilities help unlock synergies with Sensato Zolta and Spear Power Energy Storage Solution businesses and utilize electrification components such as high-voltage contactors, fuses, current sensors, inverters, and battery management systems already in the Sensata portfolio. Furthermore, data power's capabilities combined with Sensata's global presence and manufacturing expertise will allow us to pursue the large and fast-growing opportunities in front of us. In summary, Dynapower accelerates Sensata's journey to become a leading provider across electrification industries, continuing our progress in this very exciting megatrend. This is a key component of our objective to deliver higher growth and long-term shareholder value. On slide seven, we share an update on our continuing progress in Sensata Insights. Sensata Insights delivers actionable data to our customers and their partners to drive operational efficiency, cost savings, and safer operations. As evidence of the value and nature of our solutions, we were awarded a new business wins worth over $19 million during the first quarter, putting us on track to double our Insights business wins this year compared to last year. The Insights growth initiative generated $75 million in revenue in 2021. And as we mentioned, we expect to double this in 2022. Our performance during the first quarter and our bookings to date support this goal. An example of new product development in Insights is a jointly developed solution with Osea, an innovative wireless power technology company. that enables safe storage and charging of telematics devices for use in high value properties, such as shipping yards and distribution centers. This novel solution won a top 20 products award for 2022. We're also pleased with the acquisition of Elastic M2M during the quarter. Elastic M2M is a pioneer in delivering flexible, scalable, and cost-effective and intuitive IoT analytics for telematics service providers and their end customers. Their IoT cloud platform utilizes machine learning and artificial intelligence capabilities to digest and analyze an increasingly rich amount of data from connected assets to enable customers to make better operational decisions. we see sizable markets that we can pursue with these broadened technology solutions. In summary, I'm really encouraged that we are making excellent progress on our megatrend growth initiatives. As I've said before, we see numerous opportunities to utilize our strong financial position, engineering capabilities, supply chain, and customer relationships to meaningfully enlarge the addressable markets through both organic efforts and through bolt-on acquisitions and partnerships in these areas. Now I'd like to turn the call over to Paul.