Good day and welcome to Sensata Technologies Second Quarter 2022 Earnings Call. All participants will be in listen-only mode. . Please note that this event is being recorded. I would now like to turn the conference over to Mr. Jacob Sayer, Vice President of Finance, Investor Relations. Please go ahead, sir.

Thank you, Cole. And good morning, everyone. I'd like to welcome you to Sensata's second quarter 2022 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 releases 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 webcast on our Investor Relations website 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 risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause these differences include, but are not limited to, those discussed in our Forms 10-Q and 10-K as well as other subsequent filings with the SEC. We encourage you to review our GAAP financial statements 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 and non-GAAP financials, including reconciliations, are included in our earnings release and in the appendices of today's presentation materials. The company provides details of its segment operating income on slides 7 and 8 of the presentation. These are the primary measures the management uses to evaluate the performance of the business. Jeff will begin today with highlights of our business results during the second quarter. He will then provide an update on recent product developments. Paul will cover our detailed financials for the second quarter, including market outgrowth, and he'll also provide financial guidance for the third quarter and full-year 2022. 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 very much, Jacob. And welcome, everyone. I'd like to start with some summary thoughts on our strong performance during the second quarter as outlined on slide 3 of the presentation. While our markets declined 90 basis points due to supply chain disruptions, shortages and lockdowns, and foreign exchange rates represented a 220 basis point headwind to revenue, our strong business model produced 650 basis points of market outgrowth and 280 basis points of acquired growth during the second quarter. As a result, we produced solid financial results for shareholders, delivering a record $1.021 billion in revenue or growth of 2.8% from the prior-year period. With revenue and margins in line with the guidance we provided in April, quoting activity for new business awards was extremely active during the quarter. And we remain on track to exceed the record levels of new business wins we secured last year. More than half of these new business wins are in the growth vectors, including the largest single business win in our history, which I'll discuss more in a moment. And we expect these wins to translate into future revenue growth. Sensata’s current revenue outlook is increasingly driven by our rapidly growing positions in electrification and insights. And we're investing more in these areas. And we believe this increased organic and inorganic investment, which for the full year is expected to impact margin by 220 basis points is the right trade-off, to expand our exposure in these fast growing areas. After the quarter ended, we closed the previously announced acquisition of Dynapower. They are a leader in mission-critical highly engineered and differentiated solutions in DC to DC conversion, power inversion, and rectifier control. Most importantly, they are the only power control supplier to focus across renewable energy, industrial and defense applications. Dynapower…

Thanks, Jeff. Key highlights for the second quarter as shown on slide 6 include revenue of $1.021 billion, our highest quarterly revenue ever, the increase of 2.8% from the second quarter of 2021. Revenue growth reflected strong outgrowth of 650 basis points and acquisitions, partially offset by market declines in foreign currency. Recall, automotive and heavy vehicle customers built approximately $34 million of inventory in the second quarter last year that we are excluding from the outgrowth calculation. Adjusted operating income was $193.8 million, a decrease of 7.4% compared to the second quarter of 2021, primarily due to continued supply chain challenges impacting volumes and productivity and investments in our megatrends. Inflationary impact on input costs for components were offset by higher customer pricing. These results were largely in line with our financial guidance for the quarter except for unfavorable foreign currency impacts from remeasuring foreign debt monetary assets to the US dollar, coupled with a significant weakening in the Chinese renminbi during the quarter. Sensata’s threshold differentiated target adjusted operating margin remains 21%. And we are working our way back to this profitability level while adjusting to current challenging markets and investing in growth. Now I'd like to comment on the performance of our two business segments in the second quarter of 2022, starting with Performance Sensing on slide 7. Our Performance Sensing business reported revenues of $746.9 million, an increase of 0.7% compared to the same quarter last year. The decline in automotive revenue despite market growth and higher pricing was driven primarily by the $25 million of inventory built in the second quarter of last year and favorable foreign currency and the timing of new product shipments and customer mix. Growth in heavy vehicle off-road revenue reflects strong outgrowth, including higher pricing and acquisitions, offset somewhat by…

Thanks, Paul. Let me wrap up with a few key messages as we outlined on slide 14 of the presentation. Sensata business, organizational model and growth strategy are strong, resilient, and reliable as we deliver mission critical, highly engineered solutions required by our customers. While we expect end markets to be volatile in the near term due to inflation, rising interest rates, geopolitical events, and further COVID responses, we have a strong management team experienced at navigating choppy markets. We are confident in our ability to sustain attractive end market outgrowth based on our record levels of new business awards, our diversifying customer base and our large and expanding pipeline of new opportunities. We continue to invest in our megatrend-driven growth initiatives as we transform the business to focus on these rapid growing opportunities across all of 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 and/or joint ventures. Whatever market volatility we experience in the coming quarters, we are confident Sensata will emerge stronger and better positioned in these fast growing markets because of these investments. And importantly, we are maintaining our long-term target of 21% adjusted operating margins, which we believe these investments will help us attain. We continue to innovate on behalf of our customers, solving their hard-to-do engineering challenges and providing differentiated solutions to an ever-broader array of customers. Solving mission-critical challenges enables Sensata to deliver industry-leading margins for our shareholders, while also increasing investments in our growth opportunities and in our people. And finally, I'm pleased about our progress in delivering on Sensata’s longstanding 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 meaningfully contributing to a better world. We are making progress to achieve the targets laid out last year and updated in our recently published sustainability report, bolstering the long-term sustainability and success of the company for all of its stakeholders. Now, I'd like to turn the call back to Jacob.

Thank you, Jeff. We'll now move on to Q&A. And given the large number of analysts in the queue, please limit yourself to one question each. Cole, go ahead and assemble the Q&A roster.

. Our first question today will come from Wamsi Mohan with Bank of America.

I was wondering if you could share some color on where we stand with supply chain bottlenecks. And is your weaker end market assumption related to weaker demand or supply constraints? And for a clarification, can you just help us think through your implied guide? At the midpoint for fiscal fourth quarter, EPS, it’s about $1.14, which is in line with the Street but it's a somewhat large step up from the $0.85 midpoint in the September quarter, but the revenue levels are not materially different. And can you can you help us think through what are the drivers that are accounting for that increase? I know you mentioned pricing but just curious if you could bridge that.

Let me hit on the supply chain question that you mentioned and then I'll let Paul address the guide. So, on the supply chain, it's been a long haul here, right? We've been through a lot over the last 18 to 24 months. My sense is the bottlenecks are moving around a little bit. Dare I say that things are abating a little bit in terms of ability to get raw material from our suppliers. In terms of the impact on demand, we clearly are still seeing instances where our demand is being limited by supply chain challenges, but the ultimate raw demand from our customers is getting closer to that demand, and hence the caution that we're expressing in the guide today. We're starting to see things tighten up in terms of overall ultimate demand from our customers, and we want to reflect that. But, certainly, from a supply chain standpoint, we have a complex business, a global business, and we see that moving around, but I feel as though it is getting a little bit better in terms of the overall impact. Obviously, this is tied to the material inflation side of things as well. And although that's not completely behind us, I feel as though it's mitigated considerably versus where we were in the fourth quarter of last year and the first half of 2022. Hopefully, that provides some color for you.

In the fourth quarter, our operating income is about $201 million, and that's about $7 million increase from the Q3. And the EPS, you quoted $1.14, but midpoint would be about $0.91. So maybe I'm not sure what the disconnect is there. But when we go sequentially from Q3 to Q4. So, Q3 has informed the revenue base on our current fill at 95%. We do expect better pricing from Q2 to Q3, better cost management from Q2 to Q3. So, that – despite the lower revenue from Q2, Q3, we're holding profit basically flat. And that from Q3 to Q4, we’re up about $7.5 million, $8 million. That's partly due to higher volumes sequentially and higher pricing and a little better, again, on the productivity side. So, that translates into $0.91 cents of EPS in Q4. So, taxes are running about 9.5% of operating income. So, hopefully that triangulates and helps clarify the sequential expectations. I guess the only other thing I would say on the top line, the improvement in Q4 is largely in automotive and Q3 to Q4 largely comes from China production improvements, our heavy vehicle business stays pretty flat across the second half and our industrial business comes down in its normal seasonal pattern where the second half is weaker than the first half.

And the next question will come from Mark Delaney with Goldman Sachs.

Questions on the inventory that you spoke to. Let’s say your customers – I understand you're not expecting any further increase in inventory in your guidance relative to the $110 million that was built last year. But can you talk about – do you expect customers to be reducing inventory, in particular, as you're now thinking – and production might be lower. I'm wondering if you're trying to bake in any inventory reduction? And if not, maybe you can talk about why you don't think customers will take inventory down.

We indicated in the second quarter we run a model. We run a model which has informed us about our high market share parts, were they in line with production than they were? So, we didn't see any inventory contraction. We inventory builds called out in the narrative. So, as you go forward, given we didn't see any inventory contraction so far this year, we're not taking anything into the second half.

And our next question will come from Samik Chatterjee with J.P. Morgan.

Hi, this is MT on for Samik Chatterjee from J.P. Morgan. I just wanted to ask regarding the operating margin walk for the full year. Like, relative to your prior guidance and prior walk, you had mentioned tailwinds from volumes, which obviously you are not now expecting, given the lower estimates for full year auto production. But I see a new supply chain headwinds impact negative of 0.6%, which were not available prior. So, can you please help me understand, like are these additional supply chain headwinds that you're facing right now? Or what's the case here?

In terms of – if you want to talk about the change in the last guide to this guide, the second half is down because of volume. That and currency headwinds are the two biggest drivers for the change in both revenue and operating income. The supply chain is still challenging, still short on parts. There's still demand out there we can’t serve. And so it continues to be an ongoing problem, particularly in our heavy vehicle business in China where COVID continues to impact our customers and their factory production. So, we continue to see that as a disruption in terms of being able to serve those customers as they're not producing product. So, it continues to be an issue. We're calling it out as it is not something that's dramatically improving. It's expected to slightly improve, but it's still holding us back.

Our next question will come from Luke Junk with Baird.

Just maybe a bigger picture question given the economic backdrop. Jeff, you had mentioned in your prepared remarks that you're preparing the organization for this uncertain market dynamic. And just be curious, any specific steps that you're taking to batten down the hatches a little bit on a go-forward basis?

Luke, I'd be glad to address that. So, let me let me frame the broader picture and then I'll address how we're preparing for that outcome. So, I don't think it's any surprise to anybody that the markets are fairly choppy right now. But I believe we're managing it very well in that environment. And we've been there before. So we know how to do this, whether it be supply chain, impact on inflation, fears of recession around the world, lockdowns in China, monetary policy that's impacting interest rates pretty rapidly. With that backdrop, which is driving an expectation for the full year, market down about 1% across all our markets, foreign exchange down 2% across all our currencies, and inventory headwind 3% because the inventory that was built last year won't repeat. So that's starting 6% down. Despite that, we're forecasting 5% up as a company. And that's due to the model. It's acquired revenue and it's outgrowth to markets that's driving that. And so, the focus is there. We're going to respond to what the market indicates. We started the year expecting 10% to 12% growth. We were building for that. We want to make sure that we're continuing to invest in long-term growth of the business and we are a long cycle business. So, we have to keep an eye on that to invest now for revenue that will be generated two, three, five years from now. But what we mean by managing is just keeping a very close eye on those indicators, doubling down on our understanding of current pipeline, having more conversations with customers regarding what they're seeing in the market, and making sure that we keep a close eye on cost structure to be able to respond to that as opposed to jerking around in any dramatic fashion. We want to prepare for all ranges of outcomes. Now, we want to be prepared to respond to a positive surprise in terms of market outlook as well. So, again, as a management team, we're capable of doing that. We have intent to make sure that we manage that. But it's really around making sure we get the pricing, understanding the ultimate demand, managing our cost structure, and planning the parts and inventory to deliver on whatever customer demand is thrown at us. And so, it's not new territory. It's probably not a surprise to folks, but we're good at it and we're going to manage through this.

And our next question will come from Nik Todorov with Longbow.

Jeff, I want to ask a question about the big win you talked about. So, can you please first share if this is on the light vehicle side or a heavy vehicle offroad? Which end market it is? And also related to that, how should we think about the potential size of future battery disconnect unit wins, given the size of this one is pretty meaningful?

Given the magnitude, I don't think it's a surprise that it's in the light vehicle market. To get to this level of inventory – this is an over $1 billion total contract value opportunity. So, it is in light vehicle. But it's not applicable only for light vehicle. It really is a solution set that we can burn across all of our markets. And again, not just in transport. So, think of a bunch of other end markets where electrification infrastructure and buildout needs to occur. So, the size of market is enormous, right? This is one opportunity that's over a billion dollar contract value for a couple of platforms with one customer. So, the ASP on this is hundreds of dollars, not $1 or $5 or $10. So, with the opportunity to make very quick. And we've outlined on the slide some of the other opportunities that we've announced and we've won already that gives you a feel for the magnitude of this. And so, it's an extension of all the capabilities that we've built up organically. As you look at the product category, a very large portion of what goes into these devices, into these systems are products that Sensata has differentiated itself, and so we feel really well positioned.

Our next question will come from Chris Snyder with UBS.

is correct. Good benchmark to run into 2023? Or is it opportunity of scope for positive incremental tailwinds next year, whether it's just any thoughts on that would be appreciated.

You're incredibly broken out. So I think we got every other word here. But I think your question is the margin profile going forward. So, in the prepared remarks – and we're targeting 21% as our – where we think we should be performing in the current market environment and investments we need to make to continue to grow into the future. We’re obviously not there right now. We understand the drivers, and so we're going to continue to work to that 21%. The improvement sequentially is about 30 basis points from Q2 to Q3, so 19%, 19.3%. And then, 50 basis points, going from 19.3% to 19.8%. That, again, is a combination of continued better pricing and some better cost management. We're not getting the benefit of volume leverage. So, as volumes move up, we would expect significant contribution to the bottom line from that higher volume. But, unfortunately, in the current environment we're operating, we're not seeing significant improvement as we move from the first half to the second half overall for the company.

Our next question will come from David Kelley with Jefferies.

Wanted to dig into the auto end market assumptions, the more negative outlook for Europe and North America, I guess, is this simply a function of supply chain disruptions continuing to limit production ramp? Or are you also seeing signs of kind of lowered customer demand? And just curious, the incremental weakness relative to your regional assumptions last quarter, is it more pronounced in Europe or North America at this point?

Let's start with sort of some of the facts we're looking at. The HIS’ pessimistic view for the third quarters is around 19.6%. We’re around 18.9%. That’s a little bit lower than them. And then, for the full year, that 700,000 unit gaps turns to about a million unit gap, largely North American based, but some Europe as well, a little bit – we’re a little more positive on the recovery in China. So, of the million gap for the full year to HIS, 1.6 million is in US and Europe and then some recovery in some of the other markets. I think that I would say that it's largely production constrained at this point, right? So, there's more demand for vehicles than our customers can produce. But there's a lot of uncertainty not only regarding supply chain, but energy issues in Europe, risk of potential industrial shutdown and Europe food and energy shortages. And so, we're just making sure that we're being very mindful of what the outcomes could be. All forecasts have come down a little bit. We're a little bit lower than where IHS is. But we're going to – I guess we always have been, if demand gets to be higher, we'll respond to it. In North American market, it's interesting to note that cars on lots are still at a historically low level. I think it ended June at 28 days of inventory on lots. The low point I think was 24 or 26. Historically, that’s 60. So, at some point, and I think we've seen it a lot higher than 65, on average 60. So, there's a month of inventory rebuild at some point that will impact production above where ultimate demand is. And, again, we'll be there to respond to it. So, that's a little bit more color on the auto market. I don't know if…

No, I just – the other thing would be that we use our order book and the fill as a way to triangulate what we think the quarter is going to be in the next quarter. And 95% fill on a billion dollar revenue midpoint, that's consistent what we've delivered, we've had over the last number of quarters. It'll come down to the end of the quarter. We've seen our customers drop orders. That trend has continued. So, we're trying to factor that in as a variable in all this. But just given the fillers, we think a billion dollars in Q3 makes sense. And then, looking forward to Q4, given the end market conditions, the supply chain condition, we think it's a sensible projection for the fourth quarter. And to Jeff’s point, if there's more demand, we’ll serve it.

Our next question will come from Joe Giordano with Cowen.

You guys have done a lot on the M&A side, obviously, to build out the electrification portfolio, everything. I'm just curious how integrated are some of these businesses now? How integrated you see them being in the future? Like, is there a little digestion that needs to happen just operationally to get kind of like a singular Sensata profile there? Or are they still operating somewhat as the business as they were before you bought them?

Historically, we've integrated acquired businesses to the point where essentially they've become product families within our company. That's not the level of integration we're talking about with some of these acquired businesses. Now, they're not standalone entities either. There's obviously certain integration around financial and legal control that we always do. And we describe it as more an integration based upon what the individual business leader needs to achieve the investment case and the underlying opportunity. And so, serve different markets. What I'm talking about here is the insights business and the clean energy solutions business, not the electrification component businesses because they integrate as becoming product families. And so, we want to make sure that we optimize the outcome, leveraging Sensata’s global workforce, our global footprint of suppliers, our infrastructure, but really the go-to-market and the engineering capability is quite unique to these businesses. And so, we want them to run fairly independently, but with a framework of approach and control and management that Sensata would overlay to that. So, it's a little bit of a combination. So, the point is, the integration goes a little faster with that, so you don't have to fully integrate these businesses. And so, we can do more of these acquisitions without a fear of we have to go through a major period of digestion.

Our next question will come from Matt Sheerin with Stifel.

Just in terms of the forward guidance, one thing regarding the divestiture, could you could you tell us what the revenue run rate of that company was, I think, to Qinex?

It would have had about $40 million of revenue in the second half. And it's 30% operating income business. So, very profitable, but does not align with the strategy. Benefiting from the semi cycle right now, but it's a very lumpy business. But in our second half, $40 40 million and about 30%. Dynapower gives you about $50 million in revenue and about 20%. So they're almost offsetting.

The next question will come from Jim Suva with Citi. Hearing no response from Jim’s line, this will conclude the question-and-answer session. I'd like to turn the conference back over to Jacob Sayer for any closing remarks.

Thanks, Cole. I'd like to thank everyone for joining us this morning. We'll be participating in a few upcoming investor conferences sponsored by Jefferies, Goldman Sachs and RBC during the third quarter. We look forward to seeing you at one of those events or on our third quarter earnings call in late October. Thank you all for joining us this morning and for your interest in Sensata. Cole, you may now end the call.

Thank you. And the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.