Sensata Technologies

Good day and welcome to Sensata's fourth quarter and full year 2025 financial results conference call. All participants will be in a 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 a 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 James Entwistle, Senior Director of Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon, everyone. I'm James Entwistle, Senior Director of Investor Relations for Sensata, and I would like to welcome you to Sensata's fourth quarter and full year 2025 financial results conference call. Joining me on today's call are Stefan von Schuchman, Sensata's Chief Executive Officer, and Andrew Lynch, 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 on our Investor Relations website. 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 such differences include, but are not limited to, those discussed in our forms 10-Q and 10-K, as well as other filings with the SEC. We encourage you to review our GAAP financial statements in addition to today's presentation. Much of the information that we will discuss during today's call will relate to non-GAAP financial measures. Our GAAP and non-GAAP financial measures, including reconciliations, are included in our earnings release, in the appendices of our presentation materials, and in our SEC filings. Stefan will begin the call today with comments on the business. Andrew will cover our results for the fourth quarter and full year of 2025, as well as our financial outlook for the first quarter of 2026. Stefan will then return for closing remarks. We will then take your questions. Now, I would like to turn the call over to Sensatus Chief Executive Officer, Stefan Von Schipman.

Thank you, James, and good afternoon, everyone. Let's begin on slide three. As I typically do at the start of our earnings calls, I would like to begin today with an update on Sensata's transformation journey. Throughout the year, I've spoken about our transformation through a framework of three key pillars, operational excellence, capital allocation, and growth, along with the various initiatives which underpin them. These key pillars for value creation are fundamental to everything we do. Initiatives that we discussed this year are simply building blocks laying a foundation on which we build our future. As we enter 2026, I'm proud of the work we did to put those building blocks firmly in place and I'm excited to share more about the next phase of our transformation. Before we get to the next phase of our transformation, I would like to take a moment to acknowledge the magnitude of what we accomplished this year and to thank the Sensata team for their tremendous work. Our team demonstrated resilience and determination to perform continuously, overcoming the many challenges that came our way and always delivered on our commitments. I'll share more proof points in a moment, but at a high level, as we reflect on the year, the outcome of our three pillars approach is compelling. With our focus on operational excellence, We reported results at or above the midpoint of our guidance ranges every quarter this year. With our focus on capital allocation, we created urgency to improve cash generation, reducing both gross and net leverage, and returning capital to shareholders. And with our focus on returning to growth, we overcame structural challenges in our business and end market mix, ultimately returning to outgrowth in the second half of 2025 and returning to revenue growth in the fourth quarter. We have a structured way of working, starting with a measure-based approach to prioritize hitting our targets. To compound value over time, we continuously raise the bar, setting new targets incrementally higher than the previous ones. This way of working is now ingrained in our organization and is embedded in everything that we do. Maintaining this rigor requires determined, resilient leadership. Let's turn to slide four, as I would like to highlight the industry-leading executive team we have assembled over the past year. Our leadership team is a balanced mix of new talent with best-in-class industry experience and proven sense out of performance. The team has demonstrated that they will rise to meet the challenge of the moment, and I'm confident that we have the right team in place to lead us through the next phase of our transformation journey. With that, let's turn to slide five, and I'll share a bit more about this past year's transformation. This year's performance demonstrates not only the progress we made, it also sets a benchmark for the organization we expect to be. finished 2025 with a strong fourth quarter capping off a year in which we met or exceeded our expectations across each of our key metrics for four consecutive quarters the results are proof points for the progress we made across each of our key pillars let's start with operational excellence we exited the year with q4 adjusted operating margin of 19.6 percent representing a 30 basis points of year-over-year margin expansion, despite headwinds from tariffs. With that strong finish in 2025, we delivered on our commitment of 19% adjusted operating margin for the year. This was a major inflection point for us, and it was the first year since 2021 without year-over-year margin contraction. This is a testament to the resilience we have instilled in this business and the seriousness with which we take our commitment to a margin floor of 19%. Free cash flow has been an area of significant focus, and we believe our progress is a leading indicator of the impacts to come from the operational improvements we are making. We made significant strides in improving free cash flow this year, generating a record $490 million at a 97% conversion rate. This conversion rate was an improvement of 21 percentage points from prior year and is significantly higher than any year in our history, aside from the abnormal 2020 pandemic year. With our strong free cash flow, we accelerated value creation through our capital allocation pillar, returning $191 million to shareholders through buybacks and dividends, while also retiring $354 million of long-term debt in the fourth quarter. Our net leverage now stands at 2.7 times trailing 12 months adjusted EBITDA, and with $573 million of cash on hand as of December 31st, we have ample liquidity. Our third key pillar is growth. In our long cycle business, the initiatives we took this year to drive growth will show up in the quarters and years ahead. and we're already seeing compelling signs of progress. We delivered on our commitment to return to outgrowth in the second half of 2025, outgrowing production in Q3 and delivering 4% organic growth in Q4. With this progress, we are doubling down on our growth mandate moving forward. I'm tremendously pleased with the transformation that we've executed this year and the value we created in our first year on this journey. I also want to be clear that we are not done. What we have accomplished sets the foundation for an even brighter future. I'm excited to share more about the next phase of our transformation. Turn to slide six, and I will start by more clearly defining Sensara. Sensara is a uniquely diversified business. We sell sensing and electrical protection products into multiple end markets, with automotive being our largest market. This has at times created confusion. Some see Sensata as an automotive business with exposure to other end markets. Others see Sensata as a diversified industrial business with outsized automotive exposure. Neither view is entirely accurate. As we look towards the next phase of our transformation, we reconsidered how we are organized. We looked at factors such as business cycles, market cycles, customer mix, and go to market strategy. After careful evaluation, we reorganized and started into three operating segments, each with a distinct mandate for value creation and growth. These three segments are automotive, which was approximately 57% of 2025 revenue, industrials, which was approximately 21% of 2025 revenue, and aerospace, defense, and commercial equipment, which was approximately 22% of 2025 revenue. Each operating segment is aligned to market verticals that are clearly delineated by customers, sales channels, growth drivers, and business cycles. Automotive is a relatively mature end market with limited underlying production growth, making this a market outgrowth-driven segment. We enjoy high volumes and revenue certainty tied to underlying vehicle production because our products are designed in on long-lived vehicle platforms. We outgrow production by increasing our content on vehicle platforms, and by positioning the business to succeed on all propulsion technologies. Our ability to grow regardless of propulsion type is an enviable position in the automotive market compared to many of our peers and competitors who are levered primarily to either ICE or EV. This also positions us to grow in all geographies despite differing powertrain trends. Industrials is a highly diversified and primarily short cycle business with a mix of direct to OEM distribution channel and project-based sales. Our industrial segment includes derivatives of sensor products from our other end markets, as well as products developed specifically for industrial applications, such as gas leak detection and certain electrical protection devices. Because the industrial segment is so diversified, it offers the most growth opportunity in terms of new applications or markets for our products. This includes several areas with secular growth, such as thermal management, grid hardening, and data centers. Aerospace defense and commercial equipment is also highly diversified, but is more long cycle and platform driven. The end markets we serve include commercial aviation, defense, commercial trucking, construction equipment, and agricultural equipment. The platform lives in these markets are significantly longer than in automotive, often spanning multiple decades. The applications for our products typically support long service lives, often in harsh environments, leading to much higher specifications and a premium price point for higher durability. Each of the markets we serve in this segment experience cyclical growth. Cyclicality is influenced by macroeconomic factors, as well as by government policies, such as defense spending, environmental standards, tax incentives, and farm subsidies. As a result, we see a confluence of different cycles often affording us the flexibility to manage the segment by balancing contrasyclicality. Historically, the market thought of Sensada as having high automotive concentration and therefore being a market outgrowth business in a low growth market. Sensada's growth history has to a certain extent reinforced that view. As we think about value creation moving forward, We see a much wider field of opportunity, which is best summarized in our three-part growth framework. Let's turn to slide seven. First, we design, produce, and sell sensing and electrical protection products in multiple end markets, each with the different growth dynamics I just described. Second, we leverage our automotive scale and pedigree to our advantage. The high volumes of production certainty afford us the flexibility to manage through market volatility in our other end markets while underwriting growth investments. And the high quality and delivery standards in automotive enable us to win in other markets. Third, we use the common characteristics of our most successful programs to set clear guardrails for new business opportunities. That means we stick to our core products and technologies focusing on high volume platform driven business opportunities serving mission critical or regulated applications as we develop growth strategies for each of our segments we have been disciplined about filtering the market for growth opportunities that fit this framework and we're excited about the opportunities we see with that I I would now like to offer a glimpse into the next phase of our transformation, accelerating value creation by delivering growth in each of our segments. Let's turn to slide eight, and I will discuss our automotive segment, where our mandate is to foster our core business while delivering growth across all propulsion types. Recently, we have seen content accretive business opportunities on plug-in hybrid vehicles or PHEVs, and extended range electric vehicles, or EREFs. This vehicle type is particularly attractive for Sensata. Allow me to illustrate as we turn to slide nine. Approximately half of the dollar value of content that we have on a traditional ICE vehicle is outside of the powertrain, and thus is still relevant on an EV. This includes sensor sockets in the air conditioning and brake systems. as well as tire pressure sensors. On a typical EV, we see these same sensor sockets, as well as additional content opportunity from electrical protection sockets in the electric powertrain and charging architecture. In aggregate, our content per vehicle opportunity on an EV is approximately double that of an ICE. In between ICE and EV are various hybrid platforms. A mild hybrid will look more like a nice vehicle, while a plug-in hybrid or range extender will be more like an electric vehicle. Let's turn to slide 10 to unpack this further. In 2026, in an automotive market that is expected to be approximately flat, PF and EREF production is expected to grow 17%, and over the balance of the decade, we expect a 12% CAGR for these vehicle types. The content potential on a plug-in hybrid or range extender is attractive due to the availability of all three socket categories, ice powertrain, high voltage electrical protection, and sensor content outside of the powertrain. As these vehicles win in the market, we expect they will emerge as a meaningful outgrowth driver for us and yet another proof point for our competitive advantage in not being indexed to any single propulsion technology. Now let's turn to slide 11 and take a look at industrials. Our industrial segment has a strategic mandate to deliver growth across three key technology areas, power and peak management, thermal management, and electrical protection. We see demand over these products in multiple areas, including HVAC, appliances, buildings, and microgrid. One of the most compelling growth vectors is data centers, and I'd like to briefly click down to share more about where we see opportunity. Let's turn to slide 12. In the past, we have shared that we have some content in data centers today, but that we are under-penetrated in this market. These opportunities span our key industrial product areas. As you can see illustrated on this page, The content opportunity inside the data center is significant. Turning to slide 13, there are meaningful opportunities outside the data center as well. One of our growth initiatives in 2026 is to expand our share in data centers. What I can share today is that in the fourth quarter of 2025, we stood up an initiative to deliver growth in data centers. We allocated some of our top performers to this critical growth initiative, and as we demonstrated in 2025, we take execution of our initiatives seriously. I look forward to sharing positive updates here as the year progresses. Lastly, I will discuss our aerospace, defense, and commercial equipment segment, starting on slide 14. We serve multiple market verticals in the segment, which can be grouped as aviation, ground transportation, and off-highway equipment. We have a dual mandate for the segment to position the business to weather market cycles and to grow our aerospace and defense business into a more meaningful part of the portfolio. We see ample opportunities for revenue growth in the super cycle that is developing across both commercial aviation and defense. With that, again, I will briefly click down to share a bit more about where we play and where we see opportunity. Let's turn to slide 15. Aerospace is one of our smaller and often overlooked market verticals today, yet it is one of the darlings of our portfolio with high margins and outstanding growth potential. Earlier, I talked about our automotive pedigree. In aerospace, pedigree matters too. Being in flight on commercial airliners is the gold standard, and we're in flight today, both with position sensors and aircraft circuit breakers. Given the backlog for commercial aircraft, we expect meaningful growth from this part of our portfolio. With increased defense spending as a key secular trend, Let's turn to slide 16 and take a look at that sector. UAVs offer high-volume, platform-driven opportunities for both sensing and electrical protection products, perfectly aligned to the growth framework I described. We look forward on future calls to sharing more about our progress on accelerating growth in this key end market. I will now turn the call over to Andrew to offer more insights into Q4 and full year results, as well as to share our outlook for 2026 and guidance for the first quarter.