Sensata Technologies

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 would now like to turn the conference over to Mr. Jacob Sayre, VP Finance. Please go ahead.

Thank you, Drew. Good morning, everyone. I'd like to welcome you to Sensata's fourth quarter and full year 2023 earnings conference call. Joining me on today's call are Jeff Cote, Sensata's CEO and President, 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 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 of 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 such differences include, but are not limited to, those discussed in Reforms 10-K and 10-Q, as well as other filings with the SEC. We encourage you to review our GAAP financial statements in addition to today's presentation. Most of the information that we'll discuss 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 the appendices of the presentation materials. Jeff will begin today with highlights of our business results during 2023. We'll then provide a few thoughts on our end markets and overall expectations about our financial performance for 2024. Brian will cover our detailed financials for the fourth quarter and full year 2023, updates on capital deployment, and he will discuss our financial guidance for the first quarter of 2024. We'll then take your questions after our prepared remarks. Now I'd like to turn the call over to Insada's CEO and President, Jeff Cote.

Thank you, Jacob, and welcome, everyone. On our fourth quarter 2022 earnings call 12 months ago, we discussed three key themes that would shape our future performance. Those key themes were an unprecedented opportunity in electrification, an updated capital allocation strategy focused on reducing gross and net leverage while deemphasizing M&A, and a focus on our financial performance to drive top and bottom line improvement against a challenging market backdrop. Let me take a minute to provide some thoughts on our progress against these three drivers of our success. As you can see on slide three, our conviction that electrification is a key component of our future continues to rise. Electrification revenue grew approximately 50 percent year over year, to $700 million or about 17% of total revenue in 2023. For comparison, electrification revenue was less than 3% of our total business in 2019. Between 2021 and 2023, we secured more than $1.3 billion in electrification new business wins. The development cycle of programs typically include launch timelines of three to four years after the award. These wins give me great confidence that electrification is an increasingly important driver of our growth. While adoption of electrification technology, especially in automotive, may fluctuate from period to period, this overall trend will only increase. Sensata is well positioned to capture a meaningful share of the electrification market, not only in light vehicles, but also in heavy vehicles and in the industrial infrastructure needed to enable increased electrification. That said, our safe and efficient business continues to deliver significant value to our customers and our company. It provides Sensata with meaningful scale and efficiency, and it is an attractive revenue generator that offsets the fluctuations we may experience. The second key theme was around capital allocation. We made key strategic investments over the past couple years, and based on careful evaluation of where we are seeing the most success, we determined that our best use of capital is to invest in electrification. With a full set of leading edge capabilities now in-house, we shifted away from M&A towards organic growth and reducing our net leverage. I'm pleased that we made good progress this year already as gross and net leverage dropped to 3.8 and 3.2 times, down from 4.7 and 3.4 times, respectively. In 2023, We paid down approximately $850 million of higher interest rate debt by eliminating our term loan in the first half of 2023 and retiring our 2024 bonds last December. We also bought back $88 million of stock in the open market and paid shareholders $72 million in dividends. We remain committed to deleveraging the balance sheet going forward while also opportunistically undertaking share repurchases. Prioritizing our investments is a core component of our overall capital allocation strategy. With electrification as the clear future for our company and the best area of focus for our team, we have narrowed our investments in insights, focusing our efforts there on profitability. We are exploring strategic alternatives for the insights business as we continue to hone our strategic focus and investment priorities. Finally, while Brian will take you through the numbers, let me discuss the third theme around financial performance more broadly. The last several years brought unprecedented change to the end markets that we serve, including the impact of the pandemic, material supply chain disruptions, extraordinary inflation, and end market transformation. Throughout this period, we partnered effectively with our customers, helping them to solve their increasingly complex engineering and operational challenges. However, our business was not immune to these market pressures. And while we have worked to navigate these challenges, there has been a short-term impact to our business in the form of lower than expected revenue and adjusted operating margins. This has been disappointing. Specifically, revenue in our automotive business was negatively impacted by region mix, especially in China, where local OEMs have taken share from multinationals. In Europe, where we have less content per vehicle on EVs given our lower market share as compared to diesel or gas vehicles, and in North America from softening EV ramp-ups in the UAW strike. We have also experienced market declines in inventory destocking in our heavy vehicle off-road and industrial end markets, adding to the pressure on growth. Our team did an excellent job in recovering inflationary costs through increased pricing, but these efforts did not fully offset increased expenses. In addition, Business mix has changed, resulting in a decline in our higher margin industrial business. These factors, along with the effect of exchange rates, has led to a decline in adjusted operating margins. Despite these headwinds, we have taken actions within our control to help offset these end market and macro challenges. As we turn to 2024 on slide four, We believe our cumulative end markets will basically be flat to slightly down this year, but we expect to outperform those markets. In automotive, the most recent IHS forecasts indicate that 2024 vehicle production is expected to be down 50 basis points year-on-year. Additional evidence suggests that the automotive end market is returning to pre-pandemic market dynamics, including contractual price reductions. In heavy vehicle and off-road, third-party forecasts indicate that strength in heavy vehicle on-road in China will be offset by weaknesses in North America and Europe, as well as off-road markets, resulting in low single-digit market declines in that market segment for us. Our industrial business, which includes HVAC, appliance, and general industrial, continues to see inventory destocking and a slow global construction market, impacting overall sales expectations. We expect these trends to continue in the first half of the year and begin to subside in the second half of 2024. Finally, our aerospace business, albeit a smaller percentage of our overall business, continues to see strong growth and is expected to be up year-over-year. Taking into consideration this anticipated flat to slightly down year-over-year market backdrop, we expect revenue growth of approximately 2 to 3 percent in 2024. This outlook is based upon continued launches and ramps of certain light vehicle platforms, the launch of new tire pressure sensors on heavy vehicles, the launch of new A2L leak detection sensors in HVAC, and continued growth of our aerospace and dynapower inverter and converter business units. Regarding our adjusted operating margins, structural changes in our business around pricing, revenue mix, and exchange rates have caused short-term margin erosion. We expect margins to increase slightly in the first quarter of 2024, sequentially from the fourth quarter of 23, and then continue to grow sequentially each quarter of 2024 by about 20 to 30 basis points per quarter. We remain firmly committed and confident in reaching 21% or greater adjusted operating margins in 2026, despite these near-term headwinds. As shown on slide five, let me address the impact of mix on our overall business. Mix matters to margins across our business units and product lines. It's noteworthy that even with our recent adjusted operating margin challenges and automotive exposure, Sensata continues to deliver top quartile margins as compared to our peers. As the charts demonstrate, our automotive business concentration increased by two percentage points in 2023, while our higher margin industrial business decreased by a similar amount. This end market and product mix shift reduced operating margins by 40 basis points in 2023 compared to 2022. With an exception that destocking will, with the expectation that destocking will end, our industrial end markets will begin to grow again, reversing some of this trend later in 24. In addition, given our long exposures to Euro and Won, and short exposures to the Pound and Peso, currency rates also impacted our margins meaningfully. By 60 basis points in 2023, On slide six, I want to provide color into our automotive business. In auto, we are currently balancing two key trends, the move to EV from ICE platforms and mix shifts across regions. Further within China, we saw the added impact of share shift to more local OEMs from multinational players. In North America, EVs are 50% ahead of ICE vehicles in terms of average content, given our higher market share among EVs. While in Europe, we are behind at only half the average content on EVs due to lower market penetration on the current generation of EV platforms. We believe new product launches anticipated in 2025 and 26 should close this gap in Europe. In China today, our average content on EVs is slightly higher than on ICE engines or ICE vehicles, but we are behind with local brands compared to multinationals. In 2023, locally produced automobiles comprised approximately 55% of the total market, an increase from the prior year. We work with many local Chinese OEMs today, and our pace of new business wins has accelerated across many product categories, including the development of country-specific contactors, which should help offset this trend. Now, let me turn the call over to Brian.