Sensata Technologies

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, Rocco, and good morning, everyone. I'd like to welcome you to Sensata's third quarter 2023 earnings conference call. Joining me on today's call are Jeff Cote, Sensata's CEO and President, Paul Vasington, Sensada's chief financial officer, and Brian Roberts, Sensada's incoming 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 Sensada's investor relations website. This conference call is being recorded, and we'll post a replay on our investor relations website shortly after the conclusion of today's call. As we begin, I'd like to reference Sensada's safe harbor statement on slide two. During this conference call, we will make forward-looking statements regarding the future events or financial performance of the company, and these statements 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. We encourage you to review our GAAP financial statements addition to today's presentation. Most of the information that we will discuss during today's call will relate to non-GAAP financial measures. Our GAAP to non-GAAP financials, including reconciliations, are included in our earnings release and the appendices of our presentation materials. The company provides details of its segment operating income on slides 9 and 10 of the presentation, which are the primary measures management uses to evaluate the performance Jeff will begin today with highlights of our business results during the third quarter. He will then provide a few updates on new launches and exciting applications that we've discussed on prior calls, and then provide an update on our progress in electrification. Paul will cover our detailed financials for the third quarter, updates on capital deployment, and he will discuss our financial guidance for the fourth quarter of 2023. 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, Thank you.

Thank you very much, Jacob, and welcome, everyone. I'm very pleased to introduce Brian Roberts. As announced this morning, Brian will be joining Sensata and taking over the CFO responsibilities after the filing of our Form 10-Q next week. Brian is a seasoned financial executive with extensive public and private company executive experience. Brian most recently served as CEO of Tarvada Therapeutics, rising to the President and CEO spot from the CFO role. Brian previously served as a public company CFO at both Insulet and Digitas. He also brings significant public board experience, including eight years serving as audit committee chair at ViewRay Inc. The depth of his experience is described in the press release we issued this morning. We welcome Brian to Sensata and look forward to working with him. I'd like to thank Paul for his nearly 10 years of service to Sensata and wish him well in his upcoming retirement. Paul has been instrumental in guiding Sensata through a significant strategic shift and navigating through the pandemic. We appreciate that Paul will be continuing as an advisor to me and Brian. for the next several months to ensure a smooth transition of this very important role. Now I'd like to move to some summary thoughts on our performance during the third quarter, as outlined on slide three. During the third quarter, we produced $1.1 billion revenue, down 1.7% from the prior year period, and in line with our guidance range. Market outgrowth for the last 12 months remained within our target range at approximately 460 basis points and 660 basis points over the past three years. Strong recent business wins, new product development activities, and the upcoming launch schedules gives us confidence that our revenue growth will accelerate in the coming years. Adjusted operating income was $192 million, or 19.1%, down 30 basis points compared to prior year on a reported basis, and up 90 basis points on a constant currency basis. Adjusted net income moved higher by 5.5% to $138 million, and adjusted earnings per share grew 7% on a reported basis and 16.5% on a constant currency basis. to $0.91 from the prior year period. During the quarter, we took a $21 million charge for our recently announced restructuring program. This program is expected to generate $40 to $50 million in savings in 2024. As we continue to focus our strategy on electrification, harvest the investments of the past few years and actively manage our cost structure. we expect to see the benefit drop to the bottom line. At the beginning of 2023, we shared with investors a shift in our capital deployment strategy based upon our confidence in our capabilities to effectively intersect the electrification growth vector and deliver innovative solutions to our customers without the need for significant new acquisitions. We continue to execute that strategy during the third quarter, returning capital to shareholders through our dividend and share repurchases. Our capital allocation strategy reduces risk in our capital structure, lowers interest expense, and improves adjusted net income and earnings per share, as well as return on invested capital. Paul will detail this information shortly. On slide four, I want to provide an update on two exciting applications that we've mentioned in the past earnings calls. Recent government regulations implemented to reduce greenhouse gases and improve the environment require HVAC manufacturers to switch to new coolants with lower global warming impact, known as A2L or A3 refrigerants. Sensata has leveraged its leadership position in HVAC pressure sensing create a new category of gas detection sensors that detect refrigerant leaks. Since we announced this application this past spring, we have already secured new business totaling $55 million in annual revenue from customers for sensors that we'll be launching later this quarter. Sensata was the first supplier to be awarded UL certification for our solution. which provides a critical benefit to customers and catapults Sensata into a leadership position in this very fast-growing sensor category with a $500 million addressable market expected in the next five years. Another exciting area is electromechanical braking. During the third quarter, we were awarded a large win with a second major brake system provider to support a leading global EV manufacturer, We are already a leader in brake pressure sensors, and these new wins secure a total of 30 million in future annual revenue, as well as our leadership position in force sensors for the next generation of braking solutions used on electric vehicles. Sensata is focused on continually innovating to help customers solve their mission-critical, hard-to-do engineering challenges on their path toward electrification. As shown on slide five, I'd like to share some thoughts on how we intend to reach our revenue goals within automotive electrification. We expect the combination of rapid EV adoption and the increased content on electrified vehicles to drive more than $1.2 billion in automotive electrification revenue for Sensata by 2026, up from approximately $380 million this year. Approximately 90% of this total is already booked. These are through expected market growth as forecasted by IHS or incremental business wins already awarded. Our progress in North America is being realized where we currently have approximately one and a half times the revenue per vehicle on an EV compared to an ICE platform. China and Europe remain as opportunities for us. In China, we currently have approximately 1.25 the revenue per vehicle on a local OEM EV compared to ICE platform. However, the revenue per vehicle on the local OEM EV is about half that of a multinational ICE sold into that market. Therefore, as share shifts to local OEMs from multinationals, Sensata will experience a headwind. This share appears to have stabilized at around 55% for local OEMs, and we will continue to monitor this closely. We have been increasing our pace of new business wins with local OEMs across many product categories, including the development of country-specific contactors through our joint venture with Sherard. In Europe, we currently have approximately half the revenue per vehicle on EVs compared to the same ICE platforms. This will improve as one opportunity is launched, and we continue to win new EV-specific opportunities in Europe. Sensata has established strong customer relationships across the e-mobility market. We supply almost every major automotive OEM and tier across the globe. We have also developed strong relationships with the emerging automakers. As we have shared, we think about the opportunity around electrification holistically. The opportunity does not stop with components to enable electrified equipment. It also covers the infrastructure needed to power all this equipment. In renewable power generation, energy developers and others are poised to benefit from global initiatives to decarbonize sources of energy, including last year's Inflation Reduction Act in the United States, which provides significant long-term funding to this industry. By addressing key needs for this important industry, Sensata revenues from its inverters, converters, and rectifiers are growing rapidly and in line with the investment case we laid out when we acquired Dynapower in mid-2022. Revenue in this area is growing by more than 30% per year. We are confident in this continued growth given accelerated business bookings related to new projects, such as missile defense systems provided by General Dynamics, hydrogen separation and storage at sites being developed by Plug Power, and renewable energy materials development from Freeport-McMoran, for example. Year-to-date new business bookings in this area have been strong, with a book-to-bill ratio of 1.2 and improving. We remain bullish regarding our opportunities in this sector. Now I'd like to turn the call over to Paul.