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

Thank you, Andrew. And good morning, everyone. I'd like to welcome you to Sensata's Fourth Quarter 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 in Sensata's Investor Relations website. This conference call is being recorded and we'll post a replay webcast on the 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 2, 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 such differences include but are not limited to those discussed in our Form-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 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 segments -- segment operating income on Slides 8 and 9 of the presentation, which are the primary measures management uses to evaluate performance of the business. Jeff will begin today with highlights of our business during the fourth quarter and full-year 2021. He will then provide an update on our recent progress in our key electrification and insights, strategic growth areas. Paul will cover our detailed financials for the fourth quarter of 2021, including revenue growth and market outgrowth by business unit. And he will also provide financial guidance for the first quarter and full-year 2022. We will 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 very much, Jacob, and welcome everyone. I'd like to start with some summary thoughts on our strong performance during the fourth quarter and full-year 2021 as outlined on Slide 3. While automotive production declined substantially during the quarter compared to prior year due to supply chain shortages, we responded effectively to deliver our customers ' orders against strong consumer demand and produced solid financial results for shareholders, delivering $935 million in revenue or growth of 3.1% from the prior year period above the guidance range we provided in October. We once again produced strong market outgrowth. Well above our target range. As a company, we delivered 800 basis points of outgrowth during the quarter and 960 basis points for the year. Since 2018, on average, we have produced 640 basis points of outgrowth annually. This demonstrates Sensata's secular growth potential and the vital role we play for our customers. Paul will discuss our strong revenue outgrowth in more detail. Sensata was awarded a record $640 million of new business wins during full year 2021, nearly half of it coming from our megatrend growth factors. We expect these new business wins to translate into Sensata's future revenue outgrowth. Sensata 's revenue outgrowth to market is increasingly driven by our rapidly growing positions in the megatrend areas of electrification and Insights. We continue to invest in these growth initiatives, both organically and inorganically. Xirgo and Smart Witness expanded our capabilities in the telematics and Insights ecosystems. While Lithium Balance, joint venture, Spear Power, and Sendyne added to our differentiated electrification product and solution offerings. During the fourth quarter, we benefited from our resilient, and flexible, and focused organization that continues to successfully navigate the ever-changing supply chain landscape and deliver on our customers ' needs. We are working diligently to…

Thank you, Jeff. Key highlights for the fourth quarter as shown on Slide 7 include revenue of $934.6 million, an increase of 3.1% from the fourth quarter of 2020. Adjusted operating income was $197.6 million, an increase of 1% compared to the fourth quarter of 2020, primarily due to acquisitions and favorable foreign currency, somewhat offset by lower organic volume and higher megatrend spend. For the full-year 2021, record revenue at $3.8 billion represent an increase of 25.5% over 2020. Adjusted operating margin of 21.1% represented an increase of 260 basis points from the prior year, and adjusted earnings per share of $3.56. An impressive increase of 61.1% from 2020 and the same level of earnings per share we set in 2019. Now, we'd like to comment on the performance of our 2 business segments in the fourth quarter of 2021, starting with Performance Sensing on Slide 8. Our Performance Sensing business reported revenues of $685.1 million, a decline of 0.6% compared to the same quarter last year. This was driven primarily by the 16% market decline in automotive offset by our substantial market growth of 520 basis points in automotive, and 1700 basis points in heavy vehicle, off-road, as well as revenue from acquisitions. Automotive customers appear to have consumed a small amount of inventory bill earlier in the year. Performance Sensing operating income was a $185.6 million with operating margins of 27.1%. Segment operating income increased due to acquisitions and favorable foreign currency offset by the impact of lower organic volume. As shown on Slide 9, Sensing Solutions reported revenues of $249.5 million in the fourth quarter of 2021, an increase of 14.7% as compared to the same quarter last year. This was driven primarily by growth in the industrial markets and strong market outgrowth, including the launch…

Thank you, Paul. And let me wrap up with a few key messages as outlined on Slide 16. Sensata's business and organizational model is strong, resilient, and reliable. We deliver mission-critical, highly-engineered solutions required by our customers. We aim to outgrow the markets we serve in total by 400 to 600 basis points per year. We are confident in our ability to sustain this attractive end market outgrowth based on our record levels of new business awards and our large and expanding pipeline of new opportunities. We continue to invest in our megatrend growth initiatives that are opening up large and rapidly growing opportunities for Sensata across all our end markets. We are making excellent progress in Electrification and Insights, both organically through strong new business wins and inorganically through bolt-on acquisitions or joint ventures. We are targeting adding 400 to 600 basis points of inorganic revenue growth annually. We will continue to innovate on behalf of our customers, solving their hard to do engineering challenges, incensing in electrical protection. We will also continue to provide differentiated, Electrification and Insights solutions to our broad array of customers. Solving these mission-critical challenges enables Sensata to continue to deliver industry-leading margins for our shareholders while also increasing investments in our growth opportunities 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 customer's products but also through our own operations. We believe we are meaningfully contributing to a better world. We're on our way to achieving the targets laid out in our first sustainability report, bolstering the long-term sustainability and success of the company for all of its stakeholders. We look forward to reporting more about our progress in these areas in future updates. Now, I'd like to turn the call back to Jacob.

Thank you, Jeff. We'll now move to Q&A. Given the large number of listeners on the call, please limit yourself to one question each. Andrew, go ahead and start the Q&A roster.

We will now begin the question-and-answer session. If you are using a speaker phone, please pick up your handset before pressing the keys. Again, please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. The first question comes from Wamsi Mohan with Bank of America. Please go ahead.

Yes. Thank you. In your last call, you had called for about $9 million in supply chain headwinds year-over-year in the fourth quarter, and it seems like it came in much lower, impacting you by just a penny headwind. Why was it so much better than expected, and why is that benefit not flowing into the first quarter where it seems to be hitting you relatively hard again, if I'm interpreting your comments and numbers correctly? Thank you.

Hello. This is Paul. I think we've done a better job than expected around trying to recover costs from customers, and so that's worked out quite well. But the cost keep rising and so we're chasing it a bit. And so as we look at the first quarter, material prices and conditions around labor have continued to rise. We continue to work with customers recover a large portion of that cost. But in the first quarter to bear impact and throughout the rest of the year and we have a number of different productivity initiatives that we have to fall back those impacts on which continuing to improve the performance of our sites, restructuring out costs, and being more cost-effective, and also the benefit of volume leverage as we see revenues growing sequentially through the year. So you can see a big step-up in Q2, Q3 and Q4, and that's with the supply chain starting to soften up a bit and getting better supply from customers and our customers are from our suppliers. And our customers also seeing better supply conditions.

Thank you. Wamsi. Can we have the next question, please?

The next question comes from Scott Davis with Melius Research. Please go ahead

Good morning guys.

Hi Scott.

Hey Scott.

I am going to ask this, may be a little bit of a long question, hopefully not too long for you. But the four acquisitions that you made seem interesting, can you give us a little bit of color on what gaps they filled for you and how they're integrating and how you plan on integrating them and maybe some early read on what you're seeing or what you like about those deals? Specifically, something -- a little bit more color, I think I'm looking for.

Yeah, Scott, I'd be glad to. So they're really to fill out our portfolio of offering around these megatrend areas. So we've been very clear for the last several years that the era of IoT or Insights and Electrification were focused areas for us as a company. And we've been investing more organically through the funding that we described as megatrend spend in our corporate segment, but we've also been very clear that our M&A activity was going to be focused in these two areas. And we also talked about the fact that it's going to be more of a serial approach as opposed to a big bang approach. And so I think it's less about filling gaps, it's about building out our portfolio for the future based upon what we're hearing from our customers, and where the markets are going. And every time we identify and other opportunity, it rounds out that solutions set in terms of where, how we go-to-market, what the offering is, and other capabilities. In terms of your question regarding integration, it's a great question because some of these businesses are very different in terms of the solution that they're providing and also the markets that they go after. You know that the bulk of our core business is a long cycle OEM business. And when you're going after your Insight opportunity with a large fleet, that's -- that can be a much shorter cycle approach and you need to bring something to market in a quarter, not in 5 years. So from an integration standpoint, we're running these as business units within our segments. They have separate general managers to run these businesses, and we're being very mindful to make sure that we retain the great talent that we brought in and that we're executing in the market. In terms of early read, we're expecting significant growth from these two factors. In 2022, we quoted that in the Electrification side, fifth we're expecting 50% or greater growth as a company on the Insights side over a 100% growth. Now that's a mix of organic and inorganic. But it's pretty impressive in terms of what the team's been able to build in a very short period of time by focusing on these segments. And we believe it justifies a little bit heavier and in terms of investment going into 2022. And so you see that in our megatrend spend in our guide for the year. So sorry for the long-winded message, but it's a very good one and I appreciate the opportunity to share some thoughts.

Thanks, Scott. Can I -- can we have the next question, please?

Yes. The next question comes from Christopher Glynn with Oppenheimer. Please go ahead.

Thanks. Good morning, everyone. I wanted to talk about the $640 million of the net new business wins, up quite a bit over the prior year. Maybe you had some nice, chunky wins in there, but Electrification’s really coming on for you. Just curious if you think you can replicate that number or if a little more volatile path over the next couple of years is more in the cards.

Yes. Thanks, Chris, we're really excited about it. So I'm glad that you're noting the significant amount of wins. Before I dive into the -- some of the details, I'd tell you that it accelerated throughout the year as well, which was equally impressive, especially given what -- the commentary Paul provided in terms of cost inflation, going back to our customers to engage with them regarding recovery. We're not seeing that impact our ability to win business with our customers, which is great. In terms of the acceleration here, 465 base last year, 400 the three -- on average, the three years prior. You’re -- as the business grows, you're going to see a natural lift on this, but obviously the NBOs are growing faster than that, as we really focus on these Megatrend areas. And we gave a little bit of insight into what the opportunity set looks like. In Electrification, we have over a billion-dollar group of business that we're pursuing. Now, obviously, we're not going to get all of that and we have over $200 million of opportunity just in the Electrification and Insights here, plus all of the other core business aspects that we're pursuing. So we're going to continue to try to push this to make sure that we can deliver on our 400 to 600 basis points of outgrowth going forward. And we feel really good about the success that we're seeing.

Thank you, Chris. Can we have the next question, please?

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

Yes. Thanks. Good morning. I wanted to just ask a clarification question regarding your commentary of inventory build customers. I think you talked about $90 million. Is that still a headwind that you're seeing this quarter? I think you said that you don't see it playing out in 2022. I just want to clarify that.

Sure. I'll try to answer that one for you. So this year, we shipped into customers about $90 million more than production. So that was a nice tailwind. We serve our customers well based on what they order. We're not expecting that to repeat next year. So we want to be very clear that that $90 million is a year-over-year headwind revenue. In the fourth quarter, which is included in that $90 million impact, we did -- it does look based on our analytics at -- our customers did consume some of that inventory that was built up during the earlier part of the year.

Thanks Matt for the question. Can we have the next question please?

The next question comes from Mark Delaney with Goldman Sachs. Please go ahead.

Yes, good morning and thanks very much for the opportunity to ask a question. I'm hoping to talk a little bit more on the investments to the company is making to target any fast growing areas we're having some nice order momentum and the impact it's having on margins. I think the '22 margin talks about a 90 BPS headwind. Could you be a little bit more specific on the buckets that add up to that 90 BPS megatrend, I think, is a big part of it, but seems like there's some others. But at a higher level, when do you think the company will be at a point where it's making these very important investments but also where margins would actually start to expand as revenue grows. Thank you.

Yes. Mark, let me touch on the commercial side and why we're doing it and then Paul can provide a little bit of color in unpacking regarding the investment and impact on margin. So hopefully the growth rates that I described in terms of 2021 to 22 in these various specific growth factors is evidence that it's a worthwhile effort to invest in these growth areas. In addition, the level of new business wins and the percent of them that are coming from these growth factors, hopefully is validation. Obviously, we're seeing that in terms of customer engagement and opportunities that we have. But we understand that we need to show our investors proof points that this incremental investment is worthwhile in terms of investing into grow the business going forward. It's the direction of where a lot of our customers and the industries are going. It's a great opportunity for us. And I think we've shown some very early -- very strong proof points that it's gaining momentum and it's a well worthwhile investment.

Yeah, fully agree. So Mark the 90 BPS is a combination of both the increase investment in the Megatrend organically, which we call out and respond. And it's also the impact of the acquisitions that as I mentioned in the prepared remarks, have a lower margin than the core business, so they are not going to expand larger, they are going to -- there's going be a margin dilution for a period of time as we scaled up. I think that's the right investment. You can see in the way it's helping in terms of for the proof plan, I would say is in the NBOs, and its future technology that we see huge revenue opportunity in key growth factors that we're investing in. And yes, over time, as these businesses start to scale, and we start to be able to create modular designs which we can leverage volume on. It will become much more profitable thing are today and that is the strategy. And that is something we have shown historically, we do extremely well.

Thanks, Mark, for the question. Can we get the next question, please?

Yes. The next question comes from Samik Chatterjee with JPMorgan. Please go ahead.

Great. Hi. Thanks for taking my question. I guess I wanted to ask on the inorganic M&A revenue group target of 400 to 600 clearly that implies you have to what you've been doing already to some extent. So I want to kind of get your thoughts around it. Is it you acquired a fair amount of assets recently that you're targeting to try and sort of keep the size similar, trying to do more of the same, or are you trying to sort of now look at larger size acquisitions? And maybe if you can talk about the pipeline, how you think about that pipeline shaping up between automotive related to maybe other segments that are non-auto. Thank you.

Yeah. Glad to address that. So the focus is going to be in the Megatrend areas, right? So we haven't provided any surprises during 2021. We've talked about Electrification, Insights being the focus area in the acquisitions, and the joint ventures that we've done have been in those areas. So we're going to stay focused on that. Our goal is serial M&A, so it's not lumpy. That does not mean that if a great opportunity comes along that's more sizable we wouldn't entertain that, but that's not the focus area for us. It's to make sure that every year we can show some level of growth; 400 to 600 basis points is the target against this inorganic growth initiative in the focused areas to drive our strategy. It's going to stay financially disciplined. So we're not going to do deals just to get to that and we're going to be very transparent regarding our progress. And it took some time to build the funnel. Right? So we really started this in late 2020 in terms of our serial M&A strategy. We executed against 2021 with some deals growing in the year, April with and then some later in the year. So we were able to achieve 2.5% in organic growth in 2021. Obviously, the lapping effect of those transactions results in about 2.5% already baked for 2022, which is in the guide that we provided, but the guide does not include or assume any additional M&A. If we do M&A, that will be in addition to what we've produced there and that's what we're going to execute against and continue to try to stay focused on doing just that.

Thanks, Samik, for the question. Next question, please?

Yes. The next question comes from Steven Fox with Fox Advisors. Please go ahead.

Hi. Good morning. I was wondering if you could dig into your thinking on the markets for '22. I know you don't want to give any specific outgrowth there, but maybe sort of where you think you're benefiting from outgrowth generally, thanks.

Yeah. The outgrowth and -- so company-wide, we believe we'll be on the high end of our range that we provided of 400 to 600. HVOR has really been an area that we benefited significantly from in terms of outgrowth due to a lot of different reasons in terms of market trends, but also the offering set that we have in that market. And we would expect HVOR outgrowth to continue. The market itself in HVOR is -- we're forecasting globally will be pretty flat this year. In the first quarter, it's going to be down pretty dramatically, about 13%, 14%, that's variable by-market. In the first quarter, I think every market that we serve is down a little bit, but China on-road is down more than the most of the other categories. And for the full year, we would expect some modest growth everywhere, but in China on-road. And so that's a little bit more color in terms of unpacking the HVOR business.

Thank you.

Thanks, Jim. the next question, please.

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

Good morning and thanks for taking the question. Jeff, hoping you could touch on your outlook for organic Megatrend spending this year. Last quarter, I think you'd given an indication initially of $50 million to $55 million in spend or so versus the $60 million to $70 million or outlook that you outlined today. What's you’re the upside there? And especially, is there any updated perspective you can provide on the mix of spending between your major growth opportunities? Thank you.

Sure. So we spent about what we said we were going to in 2021. Fourth quarter was a little bit lower, primarily due to vacation schedules and other things that brought down. That spend in the fourth quarter wasn't at all due to our lack of continued commitment around that. And we thought long and hard, we believe in incremental investment in this area, given the success that we're seeing is justified. It's not a significant ramp. It's another $10 million on the high-end, $60 million to $70 million for the year. But we will continue to be much disciplined in terms of our approach on that and make sure that we're allocating that investment to where we're seeing commercial success with our customers. In terms of the split, it -- the majority is in the Megatrend -related areas. There are some other -- some small amounts of spending there that are new growth opportunities within each of our end markets. But the vast majority of it is in Electrification and Insights. And equally split maybe a little bit more slanted more toward the Electrification given the magnitude of the opportunity that we're seeing there and the need to invest long-term with our customers regarding this trend.

Thanks, Luke. On the question, we get the next question, please.

Yes, the next question comes from Nick Todorov with Longbow Research. Please go ahead.

Yeah, thanks and good morning everyone. I have a question on the EV wins. Maybe can you help us understand the mix between that? Maybe if you think about between components versus subsystem solutions versus turnkey solutions. And how do you expect that mix to trend over time?

Yeah, great question. The vast majority is on OEM wins on components. You'll note that -- and automotive focused as well. So that's where the wins are. When you start talking about subsystems and turnkey solutions, you're migrating out of automotive into heavy vehicle off-road industrial applications. And most notably, Spear Power is an example of one of those turnkey solutions where we're providing energy storage solutions into specialty vehicle markets. So it's different than a component play, but the vast majority of the NBO wins that we experienced in 2021 were in the markets that you know well in terms of automotive. And it gives us again more confidence in our line of sight to double the content. So it's all connected in terms of our commitment to get to that double content per vehicle and battery electric in the next five years.

Thanks for the question. Can we get the next question, please?

Yes. The next question comes from Chris Snyder with UBS. Please go ahead.

Thank you. I believe in the prepared remarks, the company said it expects Electrification auto revenue to grow 70% in 2022. Could you disclose how much of this is organic and then what type of unit growth is underpinned by this forecast so we can get some visibility into electric content per vehicle expectations.

Yes. So yes. -- So automotive specifically. And as I just mentioned on the prior caller's question from Nick, that's marginally on the component side, and we're expecting that to grow 70%. It will grow faster than our expectation for battery electric vehicles. So again, it supports the notion that we're going to see double the content per vehicle as this market grows. I think it is important also to note that most forecasters, and we would forecast that over the next 3 years, all types of vehicles will grow in terms of market. So the automotive market is nowhere near peak, so our forecast would be that over the next 3 years we see growth across all of those segments. Internal combustion engines as well. But then after that 3, 4-year market starts to crossover where battery electric vehicles become a faster grower and then you start to see some obsolescence on the internal combustion side.

And so plug-ins and battery electric expected to grow about 40% unit’s production from '21 to '22, and we're growing around 70%, so significant outgrowth to the production, which drives up our content per vehicle. About five bucks.

Thank you, Chris. Thanks, Chris. Can we get the next question please?

Yes. The next question comes from Shreyas Patil with Wolfe Research. Please go ahead.

Hey, thanks a lot. Just when I was wanted to just, two things just wanted to confirm. How should we be thinking about typical incremental margins for the business? I think in the past you've talked about maybe 35% to 40% flow-through. And then you mentioned, obviously, the acquisitions would convert at lower incremental initially. But should we be assuming that or how should we be thinking about how long it will take to get those -- to get the margins on those programs up to corporate average or where you are today and then potentially even above that to support margin expansion. Thanks.

So if you look back historically, on average -- maybe we haven't been as clear as we should be, but on average, our incremental profit on incremental revenue reside about 3%. That's about what we saw in '21. And for '22, if you unpack it and you back out the impact of our growth investments and the acquisition impacts, we're largely in that range. So that's a pretty good benchmark to use. But as we said in the past, subject to other things that may happen such as increasing our Megatrend investment over the inorganic efforts around driving our growth factors. So I think that's a good proxy in normal terms, 30%. As we go forward in terms of driving better margins in the part of business, we certainly expect that. But that will come with scale, and that will come with designs that are more marginalized that we can create the scale from. Today, not the case. A lot of new designs and activities in the market around new developing market make it a little bit more fragmented and more challenging to get that volume scale that we normally would expect. But over time, we will achieve that. We will get that and we expect these businesses with similar business model, similar margins to our core business. Some businesses will have higher-cost serve, but they will be extremely growth on that. We think that's okay.

Thanks Shreyas for the question. Can we get the next question please?

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

Thank you. In your prepared comments, I believe you mentioned around $90 million of excess shipments into your customers or the channel. My question is, was that due to your customers or several assembly years just not having enough parts to complete the entire automotive car vehicle or were they sitting on the lot somewhere or in the supply chain or was it the concern of not having enough components where your customers are just ordering a little bit more to make sure there's no hiccups or was it like a catch-up from 2020 because we've been in supply chain issues basically for a couple of years now? Thank you.

So I guess, Jeff and I can talk. And I would start with and we continue to be a very good supplier to our customers. And so that demand was placed on us, and we delivered to that demand. Our analytics, based on some parts that we have that are really high market shares. In 2021, it was clear that we were shipping more product to customers than they were producing, which gives us the $90 million of build-up of our parts in their warehouses or in cars that are partially complete or almost fully complete. We do not expect that build up again in 2022. And so it's a year-over-year headwind of $90 million to our revenue growth. So we're just trying to illustrate, but we continue to serve our customers extremely well, we serve to their demand, and we work hard to do that. And we're very proud of that outcome.

Yes. The only thing I'd add, Jim, is a point that you actually made, which is, if you look at the year-over-year, if you go back to 2020, we do believe we left 2020 with many of our customers depleted versus a normal average. So some of that growth in inventory during '22 was to get back to normal levels. And call it half was to get back to normal levels and the other half was to build inventory that at some point will unwind but we're not assuming that it will happen, in certainly in early part of 2022 or for the balance of the year.

Thanks, Jim. Good question. Can we get the next question comes from Brian Johnson with Barclays? Please go ahead.

Hi, team. This is Jason Stuhldreher on for Brian. Maybe just back to the cost question which we addressed first. As we think about your success in recovering elevated cost in 4Q last year, moving to this year elevated costs, some of which may not be recovered right away, but the balance of the year, I think as you mentioned Paul, there are kind of some definite or some initiatives in place to get those back. I guess specifically, when it comes to getting costs recoveries back from customers. Any indication on sort of what percent of elevated costs, whether that's material, whether that's labor. Customers are willing to give you back and what the timing of that is because it sounded like in the remainder of the year, the initiatives were more cost-related better than recoveries related. And so is there a potential upside to the margin target if recoveries kind of come in better than expected.

I would say that in each of our businesses, the activity to offset these rising, whether it was the impact of the chip shortage because we're expediting lots of material or rising material, arriving labor, it varies by business and how you do there commercially. And some of our markets -- some are business it is a more challenging, you're, they really want to see the detail of what the cost work. I think our teams have done exceptionally good job working with our customers based on their expectations and getting recovery. And that recovery has accelerated throughout 2021. With the challenges that material prices are rising day 1 out of 2022. Buyers are raising prices, and we have to continue to knock that down through a number of activities. 1. Working with customers recover more, 2. To being more productive. And we have lots of levers on the productivity side to drive our costs down and to be more efficient. And as volumes grow throughout the year, we're going to get the benefit of that volume leverage on our fixed costs. For the combination of things, but we feel pretty comfortable that we can achieve the outcome that we set out here in terms of productivity improvement.

Yeah. The only thing I'd add to that would be the nature of how we've gone after this has obviously changed as the fact pattern has evolved, right? So, early 2021, we were absorbing a lot of this cost when there was a question as to whether or not the cost inflation we were seeing was more transient or sustained, second half of the year with surcharges. As we go into 2022 and beyond, it's not a surcharge anymore. We're adjusting prices, our customers understand that. They are doing that in the markets that they serve and it's never an easy conversation with customers but it's understandable. Everybody understands that there is cost inflation occurring broadly in the market and Sensata needs to respond to that to continue to make sure that they perform for the shareholder.

Thanks, Jason for the question. Can we get the next question, please?

The next question comes from David Kelley with Jefferies. Please go ahead.

Good morning, guys. Thanks for taking my question. Maybe just on the industrial end market step down in 2022 that you're expecting. Can you talk about where you see pullback or maybe give us a sense of demand in order patterns and industrials and just curious if there's any conservatism here, following the strength of your 2021 industrial revenue growth?

It's a great question. We have a fairly diversified industrial market base that we're serving, so what you're pointing out is something we're constantly looking at to try to understand what's going to happen in the industrial market. But it's very diversified in terms of the market that we serve, and we're -- you said it, we're calling basically flat for 2020 up a little bit, you call it 3% the first quarter of the year. And we'll continue to unpack that, but it's a wide base. We tend to look at things like PMI index and other very high level indicators, as well as our fill rates in the individual quarter. So, the fact that the first quarter is going to be a little bit stronger means that we'll watch it closely to see how that trends rolls through the balance of the year.

Thanks, David, for the question. Can we get the next question, please?

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

Good morning, everyone. I wanted to clarify on the past recoveries in auto. Are these visible to you with a defined start date? Do you know that price kicks in in the second half or something like that just on, based on these discussions on averages? And is there a certainty that those discussions have already crystallized into something and it's just the timing of when that kicks in?

So let's just split the two. I mean, if you're talking about productivity that our automotive customers expect to see every year, that typically happens at the beginning of the year. I mean, you're going to the company business awards have a certain level of productivity of price downs that they would expect may kick in in the beginning of the year. Because we get the benefit of being on those platforms for 5 to 10, if not longer years. As specific to the recovery and I don't know if it's -- we might get too much into the plumbing here but our commercial teams work with our supply chain to understand the rising costs that we're incurring, whether its material or logistics costs by customer. And then we use that information to work with our customers to have them share a portion of that cost. And the more, the better obviously. But it is a very integrated activity within our business to then present that to our customers. As Jeff said. We did that in the midst of a lot of supply chain shortages. A lot of demand expediting to customers, customer’s hand-to-mouth product. And that we're moving to a more long-term view of these costs. Rising costs will likely be with us. And so we're taking a different commercial approach to get better pricing over time to reflect that higher cost base that we're, we're likely to experience for a period of time.

Thanks, Joe, for the question. Can we get next question, please?

Yes. The next question comes from Michael Filatov with Berenberg Capital Markets, please go ahead.

Hey guys. Thanks for taking my question. I was wondering if you could provide a little bit more quantitative detail around some of the cost headwinds you're expecting to experience in 2022, right? I mean, there's everything from material cost inflation to logistics and labor costs. Is there any way you could maybe quantify those buckets in terms of the headwinds you're expecting this year and maybe how you anticipate offsetting those? I know you just talked a lot about recoveries and maybe commercial negotiations but also specifically on those commercial negotiations at the start of the year, was there any really material change you were able to accomplish with those negotiations?

Well, as we laid out in the presentation, net, we still think that -- we still believe in our model our guide provides is that we're going to have some margin expansion due to net productivity. And that's a big buck of lots of things, it's price -- it's all things I just talked about. As well as other activities that we're taking on to drive better cost profile for the business. So that net, we will expand our margins through productivity gains. The biggest challenge is material. Material prices rising that's shouldn't be a surprise anybody, it's broad-based, its suppliers using that. The leverage of the supply chain situation to be able to raise prices. And so that is the largest impact. And we are, like I said, working with customers and internally looking for ways to mitigate that rising costs. Labor inflation has also rising around the world. surprise and it depends which jurisdiction, on the contrary. But clearly that's another headwind that we need to be more productive in our manufacturing sites to mitigate that rising costs. And we have good productivity plans within the plans to do that. But a lot of actions, a lot of find actions that we're working as you deliver the outcome on that we've shared with you today.

Thank you, Michael, for the question. And we, next question, please.

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

Thanks for taking my question. I apologize if this is addressed already. But when I think about the 200 basis points the margin dropped that's embedded in the March quarter guide you to volume and productivity, I believe, is there a way to decouple this and talk about how much of the headwind and productivity issue, the supply chain issue versus volume? And then as you ramp this up throughout the year, I think it's all our margins in from mid 18% to 21%. What's an EBITDA margin expanded? Is that this productivity inefficiency is going away or volume kicking in? To really break those two up, that would be really helpful.

So, happy to help there. We talked about every year we have new pricing with customers on the automotive side which is usually lower than the year before. So that's nothing new. This drop sequentially from Q4 to Q1 is very similar on average to what you've seen in the last 10 years. What's different with the materials, costs are rising so new pricing going to be set from suppliers and the growth investment which we should expect more of the time, I think talking about this because that really is going to drive our future. And so it's a combination of the businesses we've acquired, which you noted, and also the increased Megatrend spend from I think 12 million to 3 or 4 million more in Q1. Those are the major drivers. And as time goes on, 21% margin business, as volumes grow we get a lot more profit contribution and volume scale. And we don't have to add a whole lot of -- there's no fixed costs associated with that. So we get volume leverage from volume scale, and that's what we expect to happen throughout the year. A lot of the actions we're taking to drive better cost savings start to kick in and we get a lot of traction there.

Thanks Amit for the question. Can we get the next question, please?

Yes. We have a follow-up from Chris Snyder with UBS. Please go ahead.

Hey, sorry. I just want to follow-up on my previous question. You guy’s kind of talked to 70% auto electrification growth versus around 40% EV unit growth. So, that content per vehicle growth that we're seeing, is that more so driven by a higher revenue pie on these next wave EVs that are coming to market? Or is it more so driven by a similar revenue pie and you're just taking much higher share of that? So thanks for letting me hop back in.

Yes, absolutely, Chris. So the former, right? The scope of the opportunity set that we've identified that we can serve for our customers is bigger. The share that we're experiencing is pretty similar. Our goal is to be number one or number two in the particular application or a path to get there, that has not changed. We want to be a leader. And so it's really about the size of the pie becoming bigger given the capabilities that we have as an organization to help our customers deliver on this interchange in their markets. So that's where we are. Thanks, Chris.

Thanks Chris for that. Can we get the next question please?

Yes. The next question comes from Joe Spak with RBC Capital. Please go ahead.

Thanks. Just maybe on the outgrowth and sort of tying some of the commentary together, I know you're talking four to 600 basis points of outgrowth overall. But given that the Electrification businesses primarily related to automotive, it would seem and your 50% growth to talking, talking about like an EV target of about a billion seemingly Mednet Gade. What type of outgrowth, specifically in auto is embedded in that?

Yes. So where we've been on auto outgrowth has been, again, at the high end of our 400 -- what we had quoted as 400 to 600 in the automotive business. So I would expect that as we continue to penetrate the market in terms of these new applications that we'll continue to see the high end of that range in auto. It's going to be a little bit lumpy depending on when things launch, I think you all know that, and that's why we were going with the full company outgrowth. And we'll continue to monitor our NBOs that we win with customers that is the best indicator of long-term outgrowth that we expect in these businesses. But given the level of NBOs that we've won, we have a lot of confidence in our ability to continue to . Thanks Joe.

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, Operator. I'd like to thank everyone for joining us this morning. Sensata will be participating in upcoming investor conferences sponsored by Barclays, Wolfe, Berenberg, and Morgan Stanley during the first quarter. And as Jeff mentioned, we also expect to offer a webinar on our Electrification initiatives on February 22. So we look forward to seeing you at one of those events or on our first quarter earnings call in late April. Thank you for joining us this morning and for your interest in Sensata. Andrew, you may now end the call.

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