Good morning and welcome to the Sensata Technologies First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I'd now like to turn the conference over to Jacob Sayer, Vice President, Finance. Please go ahead.

Thank you, Andrew and good morning everyone. I'd like to welcome you to Sensata's first quarter 2021 earnings conference call. Joining me on today's call are Jeff Cote, Sensata's CEO and President; and Paul Vasington, 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. We will post a replay of today's webcast shortly after the conclusion of today's call. As we begin, I would like to reference Sensata's Safe Harbor statement on Slide 2. 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 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 Slides 3, we show Sensata's GAAP results for the first 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 non-GAAP financial measures. Reconciliations of our GAAP to non-GAAP financial measures are included in our earnings release and in our presentation materials. The company provides details of its operating segments on Slides 13 and 14 of the presentation, which are the primary measures management uses to evaluate the business. Jeff will begin today's call with key highlights of our business during the first quarter 2021. He will then provide an update on recent progress in our key Electrification and Smart & Connected Megatrends growth areas. Paul will cover our detailed financials for the first quarter of 2021, including organic and market outgrowth by business unit, segment reporting, corporate expenses and balance sheet progress in the quarter and provide financial guidance for the second quarter and updated guidance for the full-year 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 Cote.

Thank you, Jacob and welcome everyone. I'd like to start with some summary thoughts on our performance during the first quarter of 2021 as outlined on Slide 4. The business recovery we experienced during the second half of 2020 gained steam during the first quarter. Our agile response to increase demand drove 22% revenue growth from the prior year period, a record 942.5 million. We delivered 198 million in operating income during the quarter, an increase of 61.4 million and a 330 basis point expansion in margin from the prior year period. This growth is a testament to our leading market positions and the strength and flexibility of our manufacturing and commercial model. We continue to capitalize on improving markets and supported our customers as they return to higher levels of production during the quarter. The combination of more robust demand, our strong market outgrowth and the acquisition of Xirgo, has enabled us to raise our financial guidance for the full year. I'd like to recognize the innovation and hard work of our entire team in achieving these strong results. Looking at our performance year-over-year, we once again delivered strong market outgrowth. For the first quarter of 2021, we produced 1070 basis points of outgrowth in our heavy vehicle off-road business and 910 basis points of outgrowth in our automotive business. Sensata is in a strong financial position. We generated 77 million of free cash flow in the first quarter. And we took additional steps to further enhance our financial position and flexibility. During the first quarter, we redeemed our six and a quarter Notes that were due in 2026 and issued new Notes due in 2029 at a historically low interest rate of 4%. These transactions extended the average maturity and lowered our total cost of fixed debt by…

Thank you, Jeff. Key highlights for the first quarter as shown on Slide 10 include record revenue of 942.5 million, an increase of 21.7% from the first quarter of 2020. Organic revenue increased 18.8% and changes in foreign currency increased revenue by 2.9%. Adjusted operating income was 198.1 million, an increase of 44.9% compared to the first quarter of 2020 primarily due to higher revenues, savings from cost reduction programs and favorable foreign currency, partially offset by elevated costs related to the industry wide semiconductor chip shortage, higher spend to support Megatrend growth initiatives and higher incentive compensation aligned to improve financial performance. Adjusted net income was 137.6 million. An increase of 65.4% compared to the first quarter of 2020, largely due to higher revenues and improved operating performance in the quarter. Adjusted EPS was $0.86 in the first quarter, an increase of 62.3% compared to the prior quarter. Now we discuss our performance by end markets in the first quarter of 2021 as outlined on Slide 11. As I mentioned a moment ago, we reported organic revenue increase of 18.8% year-on-year. This compares with overall end market growth of approximately 10.9% representing market outgrowth of 790 basis points for Sensata. Our heavy vehicle off road business posted on organic revenue increase of 32.8% representing end market growth of 22.1% and 1070 basis points of market outgrowth. Our China on road truck business continued to post better than expected growth on the adoption of NS VI emission regulations and we are also benefiting from a wave of electromechanical operator controls being installed in new offered equipment. For the past three years HVOR has delivered an average 780 basis points of market outgrowth. Our automotive business posted organic revenue increase of 19.3%. Automotive production rebounded from the year ago period, growing…

Thank you, Paul. And let me wrap up with a few key messages which are outlined on Slide 20. Sensata has responded very well to the rapid improvements in many of our markets demonstrating the strength, flexibility and reliability of our business and organizational model, which enabled us to capitalize on the recovery in end market demand. Our ability to respond quickly to shifting demand positions as well as a trusted resource for our customers. We are delivering attractive end market outgrowth. We remain content in our ability to sustain this attractive end market outgrowth into the future based upon our strong levels of new business wins. We continue to invest in Megatrends and other growth initiatives that are opening large and rapidly growing opportunities for Sensata across all our end markets. We are making excellent progress in electrification, as evidenced by our new business wins as well as the acquisition of Lithium Balance and our joint venture with Churod Electronics, which extends our electrification offerings. In smart connected we are very pleased to have completed the acquisition of Xirgo Technologies, and to welcome that team and that customer base to Sensata. We continue to believe that the overall market environment may provide interesting opportunities to further strengthen our portfolio through strategically important value creating acquisitions and/or joint ventures. In addition, we are pursuing new technology collaborations and partnerships with third parties to expand our capabilities and accelerate our Megatrend growth. We expect to continue to deliver industry leading margins for our shareholders, while also investing in our growth and our people. And finally, I'm excited about Sensata's long standing mission to help create a cleaner, safer and more connected world not just for our customers' products, but also through our own operations. We believe we are having a meaningful contribution to a better world. We are incorporating ESG considerations into our strategy to help ensure the long-term sustainability and success of the company for all stakeholders. We look forward to report more in this topic in the future. Now I'd like to turn the call back to Jacob.

Thank you, Jeff. Given the large number of listeners on the call, let's try to limit ourselves to one question each please, Andrew, please assemble the Q&A roster.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Craig Hettenbach of Morgan Stanley. Please go ahead.

Yes, thanks. Jeff, can you just talk about the design activity, how it's trending in EVs compared to last year? And then also on the charging front, I don't think that gets as much attention. But you mentioned a couple of wins and activity there, if you can just expand on that.

Yeah, I'd be glad to. So all of our customers' are investing heavily in the electrification trends that are occurring and the governments around the world as they put together plans for investment in these areas, it just builds on the momentum that we're seeing. And so there are a lot of conversations going on with customers across all of our end markets on this front. It's a really exciting time as we build our capabilities. And we have more to talk with our customers about. And so we see that trend continuing to accelerate. It is important to note Craig, and we talked about it in our comments that there are roadmaps, product roadmaps associated with core products that our customers already have that will continue to provide opportunity for us that we're investing in. And what I'm referring to is internal combustion engines as well. But we're really trying to do the best we can to balance the investments in the things we're serving for our customers that are already on the books that will propel growth with the things that will generate growth in the future, and we think we're doing a good job balancing that.

Thanks Craig.

The next question comes from Samik Chatterjee of JP Morgan. Please go ahead.

Good morning, guys. This is Vignesh on for Samik Chatterjee. Thanks for the update. Can you hear me?

We can yes.

Yeah. So if you could give me some color on the Churod Electronics joint venture, would this be an incremental mass market you would be looking to address with Churod? Or is this a step towards solidifying market share for bigger?

Yeah, so let me let me touch on the Churod joint venture. First, it's bringing to us a new aspect of high voltage contactors, which have a high-levitation feature that many of our customers are requesting, as part of there are queues as we work with them. So it's a key product capability that they bring. And as I mentioned, it adds this mid voltage amperage, 150 to 400, which is something we've talked about as not having addressed with the acquisition of GIGAVAC. We were focused on the higher voltage applications, which we continue to believe will be the future for electric vehicles. But there's going to be a point in time here, where the transition from internal combustion engines to electrified vehicles, there'll be a big market associated with this mid voltage range. And this allows us to go after a broader segment of the market. The JV will focus on China. And we have the right to use this technology outside of China and North America and Europe. And as we mentioned, we will consolidate the results of this in our financials, and then we'll show a minority interest in the financial statements to transfer the portion of the profits associated with this. It's going to start building over time, we're already engaging with customers on selling this product portfolio. But it will build over time. And we were excited about the future in terms of what this JV can bring to us as a combined company for both us and for Churod.

Thanks for the question.

The next question comes from Wamsi Mohan with Bank of America. Please go ahead.

Hi. Yes, thank you. Congrats on the strong execution. I was wondering if you could comment on the semi shortages. You clearly are making in some cost headwind here that you're seeing from that. Are you baking in any revenue headwinds as well? And related to that when I look at your guidance, you obviously have very strong performance, both in 1Q and guiding very strongly for 2Q. When I think about the full year, the organic revenue beat seems to be about - upside seems to be about 80 million for the second half. But earnings seem to be somewhat down on an organic basis for the second half, the incremental earnings associated with that. So I was just wondering if you could help us think through what are the incremental costs that you're baking in, in the second half of the year. Thank you.

Yeah. Great, Wamsi. So why don't I address the semi shortage and then Paul can address the guidance and profitability related questions. So on the semi side obviously everybody knows at this point this is an industry challenge, not a Sensata specific one. I would say that, I think there were many that were hoping that this would dissipate a little bit in terms of concern mid part of this year. I think my view would be that this is going to be something that's going to be around until at least mid next year, rather than going away. We've taken many steps as we've talked about in terms of extending our orders with our suppliers to make sure that we have surety of supply. And one other thing I would mention is that there's a bigger impact associated with standard ASICs. And given its - we're not immune to this, right. We're impacted by the shortage but because of the large portion of our products, our specific designs we have, we have customized ASICs. And so when there is customized ASICs, there's very specific manufacturing capacity that's set up for this. And so I think that because of that high level of design and customization, we may be feeling a little bit less of this than some maybe is associated with those that pull on more standard ASICs. As part of the business model, it's not something we plan to do, but it's a fortunate benefit associated with the very design and nature of our product categories. Paul, why don't you hit on that?

Yeah, Wamsi, just trying to keep it simple, we laid out what the impact of the chip shortage would be for the year. It was about a percent and it's mostly around logistics costs expediting supply chain is compressed. So we're - expedite inbound and outbound serve our customers. You look at the margin profile for the year it's first half and second half are pretty flat. And if you look at year-over-year when you start to unpeel the onion there and you look at the conversion of profit on incremental revenue year-on-year and you just for the acquisition, currency and chip shortage are running in incremental margins in the mid 40s. So I think it's very strong performance. I think it's good for activity, good operating leverage, good cost management in the midst of a very disruptive semiconductor supply chain shortfall.

Thank you, Wamsi for your questions.

The next question comes from Mark Delaney with Goldman Sachs. Please go ahead. Yes, sir. Good

Good morning, and thanks for taking the question. Does the company have details that can provide and whether the higher outgrowth that Sensata reported in the auto segment is being sold through rather than sitting in inventory? And I think investors are asking about the potential for inventory being built up of electronic components because perhaps auto OEMs are stuck waiting for semi ships to arrive. But they're still buying products like sensors and contactors. Or maybe they just want to be building up for electronic products more broadly, given some of the uncertainties related to the global supply chain. Thanks.

Mark, great question. We're spending a fair amount of time understanding whether or not ultimately the demand that we're seeing from our customers is raw demand. I think that's the crux of your question. We're looking at third party indications regarding overall demand. We look at things like IHS estimates of vehicles production and sold. We look at PMI indicators, which are at record high in Europe 62, US at 59, China is still in the in the positive territory. So there are a lot of indications associated with what would drive raw demand for our customers' products. And so those are all quite strong. We're seeing no indication that there's any meaningful supply chain, or even replenishment or build up, other than maybe in the industrial segment, we see a tiny bit. But an indication I would give you is if you look at North American automotive vehicle days, were at 39 days at the end of the first quarter, we were at 48 at the end of the year. This is extraordinarily low. And I think we're all seeing the impact of this as consumers in terms of lead times to get products, not just vehicles, but other electronics and so forth. We're watching this very closely, because we obviously don't want to be whipsawed by this. We're having extensive conversations with our customers to make sure that we understand raw demand as we prioritize where the manufacturing needs to be emphasized and make sure we serve our customers. And we'll continue to report on that. But the short - and the short story is we're not seeing any meaningful build up in the supply chain at this point.

Thank you, Mark.

The next question comes from Luke Junk with Baird. Please go ahead.

And good morning, Jeff, hoping you could talk about the Xirgo deal, especially any initial feedback that you've gotten with customers. I know it's still early, but wondering about this thesis around channels to market playing out thus far as you start to engage with those customers.

Yeah, so we just closed on April 1. And obviously we had some engagement with them. But we were very careful during that period where we were waiting for regulatory clearance. But you know that we've worked with them for the past year and a half. So we know the management team, we know we're working on some joint customers, it's been received very well. This is an acquisition that is very tightly aligned to our strategy. We've been talking about our initiative associated with smart and connected for the last 18 months to two years. And this is squarely in that point. There's a lot of complimentary aspects of what this brings to us, opens up a much bigger market in terms of not only the offering, but the market segments that we'll be able to go after. And it's a - as we've talked about, it's a very attractive business in terms of the growth trajectory and the data points that we see now that we have - couple three weeks in and we're able to look more closely at how that - the rest of the year is panning out. I mentioned more than 80% of the 2021 revenue is already in orders from customers. So we're seeing very positive feedback. We're having a lot of engagement with customers who were their customers or our customers or joint customers and excited about doing this teaching in the next couple of months so that we can have that management team spend some more time with our investor base to explain in more detail what we're seeing.

Thanks Luke.

The next question comes from Matt Sheerin with Stifel. Please go ahead.

Yes, thanks and good morning. Jeff, I just wanted to ask another question regarding the strength you're seeing in the heavy truck in HVOR market. You talked about some catalysts and drivers in China. But could you talk about what you're seeing in other markets? And I know that '19 and into '20 was in the down cycle and they were just talk about an up-cycle investment cycle. Is that what you're seeing or is it just a rebound off of the bottom here?

Yeah, I think it's a combination of all of the above to be honest with you. So let me touch on Q1 first and let me first touch on the market for heavy vehicle. Across our segments within heavy vehicle, we saw first quarter to first quarter expansion, pretty meaningful expansion in all markets other than European on road, which was still down about 14% versus for the first quarter of last year, but broadly 22%, market recovery across the HVOR market. And then coupled with what is just really, really strong outgrowth over 1000 basis points of outgrowth given acceleration and continued investment or rollout on a variety of programs that our customers have NS VI in China has obviously an impact. But Paul mentioned in the prepared comments, also the continued migration from mechanical controls to electronic controls. So all the investments that we've made over the past three, four or five years and trends that were occurring in HVOR are benefiting us in addition to the market recovery that we're seeing, ultimately dropping what is a 35%, 36% growth year-over-year, and obviously, Q2 was even greater 110% growth with about 56% market growth. As we go into Q2, the only market segment within HVOR that we see declining quarter-over-quarter is China. And it's down a tiny bit, maybe 1% versus Q2 of last year. And similarly on the full year, we see growth across - market growth across all the segments, with the exception of China, which is not new. We had forecasted that ultimately that would be down a little bit for 2021 versus '20.

Thanks Matt.

The next question comes from Jim Suva with Citi. Please go ahead.

Thank you, and great results and outlook. When you mentioned your fill rate, I believe was like in the 90% quite high. Does that impact pricing for your company products and margins? What I mean by that is, do customers actually pay the same amount or pay a little bit more or a little bit less if they have more visibility and secured supply in a time of uncertainty? And can you actually get above 100%, like by running an extra overtime shift? Or does it just simply not work that way? Thank you.

So it's Paul. I'll take it Jim. It does not affect pricing, specifically. We're not charging. Let people get in the front of the line. We're offering under our purchase orders or contracts that we have with our customers. The fill is stronger, we're seeing on the industrial side a faster fill rate and the learning there is that our customers are ordering sooner in the process to ensure that they get the security supply they're looking for. So the matter really - it's really ordering behavior more than pricing or any other economic behavior. We serve all the demand that we can for our customers. So to the extent they order we're going to serve it and so it would - it could get 100% if everything was ordered by the time, we have this earnings release, but typically that's not the case. And we're normally in the - have been running in the low 90s. So this is a little bit hotter, but it's been identified as to why based on our interaction with our customers.

Thanks, Jim.

The next question comes from Michael Filatov with Berenberg Capital. Please go ahead.

Thanks for taking my question, guys. Just a quick one on Churod, I understand that your content for vehicle for EVs in China is obviously a lot lower than it is in North America and Europe. And it's mainly due to this sort of lower voltage EVs you have in that market. So I'm wondering how does this Churod acquisition change that content outlook for you guys in China and what that will look like going forward.

Yeah, you're hitting on one of the major thesis of why we did this joint venture. It's about expanding the product capabilities. And it's a capability set that candidly is just in higher demand in China right now. And I would expect it would be for the next 10 or 15 years as that market continues to evolve. And so - and that's why the JV is focused on that end market, right. So I had mentioned that the JV itself is going to focus on the China end market, but we were able to negotiate the ability to bring that capability into the other markets that we serve. And clearly, we're having those conversations as well. But it's just - listen when every automaker out there has a different product strategy in terms of how they're going to go about this. And the more capability we can bring both in the form of products and engineering capability is going to make it a better environment for us to be able to participate. And this definitely has the potential to drive that content per vehicle in China in the very positive direction. So that's where we are on that. Thanks.

Thanks Michael.

The next question comes from Joe Giordano with Cowen. Please go ahead.

Hi, guys, it's Rob on for Joe. Thanks for taking my questions. Just two quick ones for me, first, given the strong 1Q beat and for your guidance. I just wanted to see, given that production excellence, we're a little bit handicapped. Just curious if there's anything incremental that we should be aware of that gives you a little bit more caution for the rest of the year than you had coming into Q1. And then just on backlog, how much backlog do you have from orders received the last few quarters that you've been unable to ship? I believe you'll have been under shipping relative to production the last few quarters. Thank you.

Well, this quarter, we actually don't see much inventory dislocation. It was pretty balanced. So when we look at our revenue, and we try to unpack it in automotive, which I think is which speaks specifically to we look at production. We look at our outgrowth, which is our content growth, which we track by partner that's watching as a new platform and again, pricing headwinds. And so the math worked out quite well, where we were serving the market. And we were also outgrowing the market based on our new business when the launch of those new business quarter. So it's a pretty balanced quarter. In the past, we've seen some inventory impacts that affected our revenue, but it was muted in Q2. In terms of the serving demand, we're serving - I think the team has done an unbelievable job in the current conditions that sort of the demand that's out there. And our fill rate is the best indicator we can provide in terms of what the demand is and, in our ability, to serve that demand as of a point in time.

Thanks Joe.

The next question comes from Amit Daryanani with Evercore ISI. Please go ahead.

Good morning. Thanks for taking my question. I want to go back to the calendar '21 EPS guide and I guess if I think about it versus 90 days ago, you're thinking of the guide by $0.11 or so. But the Q1 beat alone was $0.14. And then I think FX in Xirgo, my math will add about $0.10 or $0.11 versus 90 days ago. So in my head, I would have thought Jeff, you would raise the EPS guy by $0.25, not 11. Maybe just touch on what are some of the offsets here that are not enabling that expansion. And then on the semiconductor shortages that already talked a fair bit about this. I feel like if I walk into auto dealership prices are going up. So I'm curious, what is your ability to pass price increases to your customers to offset some of these challenges that over hear?

So Amit, I mean, the biggest one is the chip shortage. I mean, that's over $30 million. I mean, so we're going to add certainly adds somewhere in that 75 million in revenue, low 20% op income, I think currency is a little bit favorable, but - and you call those out, but the biggest issue is the chips, right. So that's impacting our costs, we've called it out, it's - we had about 8 million, 10 million or so in the first quarter, we're going to have another 30 and in the rest of this nine months. And it's also impacting our ability to hit some of the productivity goals that we're looking for because we're dealing with a very compressed supply chain hand in mouth in many cases and so we're not able to get at some of the things we wanted to work on that we saw clear line of sight to dry saving. So those things will get deferred into 2022. But again, I go back and look at the year-over-year, if you look at incremental revenue, the incremental profit is very strong. And if you adjust for acquisitions and the chip shortage and investment in Megatrends and FX, we're in the, like I said, we're in the mid 40s, conversion of revenue, or profit revenue. I think it's really strong performance. And we've tried to lay it out in the margin walks, give you as much information as we possibly can to let you understand how the margin is progressing from '20 to '21.

And I think that's the new information from the last time we provided the guide, I think that the general view was that the chip shortage was going to dissipate by mid this year, that's clear that it's not happening, given a lot of things, including high levels of demand that those companies are seeing right now. And so now we're factoring in that longer term impact associated with it.

EMEA at 20 to 50 basis points in the first quarter and so in the second quarter and obviously, it's much higher than that in the percent and the dollars.

Thanks for the question Amit.

And is there time for an additional question?

We'll take one more Andrew. Thank you.

Okay and that question or question - that question will come from David Williams with Loop Capital. Please go ahead.

Hey, thanks for squeezing me in. Certainly appreciate it. And just want to ask them the heavy vehicle side, if there's any dynamics there that you think maybe is driving that? Is there any of the infrastructure maybe spending from a maybe North American perspective? Or how do you think about that in terms of potential upside as we kind of move through some of these stimulus packages that we're seeing throughout the global economies?

Yeah, so you cut out at the end there, but I think the question was regarding the significant change that we're seeing in the HVOR market expectations versus even three months ago and I do believe that infrastructure spend and a variety of factors are driving that. We mentioned - Paul mentioned in the opening comments, the automotive demand actually is going down a little bit from what we thought it was going to be three months ago, the aerospace is down a little bit from what we expected three months ago, industrial's up a tiny bit. But the big mover here is HVOR. We had anticipated about 6% market growth. Now it's 15%, 17% market growth. And I do believe that infrastructure spend and other factors are driving that - just in general competence. So that's certainly what we're hearing from our customers and what we're seeing in the news and reading about. Thanks for the question.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Jacob Sayer for any closing remarks.

Thank you, Andrew. Sorry, we were not able to get to everyone's call, but won't allow people to get on with their day. I'd like to thank everyone for joining us this morning. Sensata will be participating in upcoming virtual investor conferences, including those sponsored by Oppenheimer, JP Morgan and Evercore during the second quarter. As Jeff mentioned, we'll also - we're also planning a teaching about our smart and connected initiative, including Xirgo this quarter and we'll share details of that event soon. We look forward to seeing you at one of these events or on our second quarter earnings call in late July. Thank you for joining us this morning and for your interest in Sensata. Andrew, you can now end the call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.