Sensata Applied sciences Holding plc (NYSE:ST) This autumn 2022 Earnings Name Transcript

Sensata Applied sciences Holding plc (NYSE:ST) This autumn 2022 Earnings Name Transcript January 31, 2023

Operator: Good day, and welcome to the Sensata Applied sciences Fourth Quarter 2022 Earnings Name. All contributors will likely be in listen-only mode. . After at present’s presentation, there will likely be a possibility to ask questions. . Please notice this occasion is being recorded. I would now like to show the convention over to Mr. Jacob Sayer, Vice President, Finance. Please go forward.

Jacob Sayer: Thanks, Jason, and good morning, everybody. I would wish to welcome you to Sensata’s fourth quarter 2022 earnings convention name. Becoming a member of me on at present’s name are Jeff Cote, Sensata’s CEO and President; and Paul Vasington, Sensata’s Chief Monetary Officer. Along with the monetary outcomes, press releases we issued earlier at present, we will likely be referencing a slide presentation throughout at present’s convention name. The PDF of this presentation will be downloaded from Sensata’s Investor Relations web site. This convention name is being recorded, and we’ll publish a replay webcast on our Investor Relations web site shortly after the conclusion of at present’s name. As we start, I would wish to reference Sensata’s Secure Harbor assertion on Slide 2.

Throughout this convention name, we are going to make forward-looking statements concerning future occasions or the monetary efficiency of the corporate that contain dangers and uncertainties. The corporate’s precise outcomes could differ materially from the projections described in such statements. Components that may trigger these variations embody, however will not be restricted to, these mentioned in our Types 10-Q and 10-Ok in addition to different subsequent filings with the SEC. We encourage you to evaluate our GAAP monetary statements along with at present’s presentation. Many of the info that we’ll talk about throughout at present’s name will relate to non-GAAP monetary measures. Our GAAP to non-GAAP financials, together with reconciliations are included in our earnings launch and within the appendices of our presentation supplies.

The corporate offers particulars of its section working revenue on Slides 9 and 10 of the presentation, that are the first measures administration makes use of to judge the efficiency of the corporate. Jeff will start at present with highlights of our enterprise outcomes throughout the fourth quarter and full-year 2022. He’ll then present updates on our new enterprise wins and key progress initiatives. Paul will cowl our detailed financials for the fourth quarter, and he may also present monetary steerage for the primary quarter 2023. We’ll then take your questions after our ready remarks. Now, I would like to show the decision over to Sensata’s CEO and President, Jeff Cote.

Jeff Cote: Thanks, Jacob, and welcome, everybody. I would like to start out with some abstract ideas on our efficiency throughout the fourth quarter and full-year as outlined on Slide 3. Through the fourth quarter, we produced $1,015 million in income, up 8.6% from the prior yr interval, regardless of a 360 foundation level headwind from international foreign money. Adjusted working margins moved greater by 70 foundation factors sequentially to twenty.1%, as we proceed to deal with bettering our margins to our goal degree of 21%. For the full-year 2022, we produced a document $4,029 million in income, which is up 5.5% from the prior yr. Our underlying markets have been pressured final yr by continued provide chain disruptions and we skilled a 240 foundation level headwind related to international foreign money.

Nonetheless, for the full-year, we produced 820 foundation factors of market outgrowth, persevering with our above goal efficiency for the third consecutive yr. We admire the dedication and experience of our Sensata workforce members who contributed to those outcomes. Quoting exercise for brand new enterprise awards was extraordinarily lively throughout the yr. Because of this, we achieved a second consecutive yr of document wins. In 2021, we achieved document new enterprise wins of greater than $640 million. And in 2022, they exceeded $1 billion. Much more notable is that roughly 70% of those wins are in our electrification progress issue, which can drive Sensata’s future income outgrowth and are straight because of the incremental investments now we have remodeled the previous a number of years.

Throughout 2022, we additionally made substantial progress towards our environmental, social and governance objectives. We lowered our greenhouse gasoline emissions depth by greater than 10% final yr, reaching our 2026 goal 4 years sooner than anticipated. As well as, Newsweek named Sensata as one among America’s Most Accountable Corporations for 2023, 2023 general ninth within the expertise {hardware} sector and first in Massachusetts. All of us anticipate extra change ultimately markets Sensata serves over the subsequent 10 years than now we have seen prior to now 50 and as our buyer remodeled their enterprise and product portfolios to regulate to decarbonization tendencies. Many gear classes are electrifying and important funding is being made international infrastructure to help this pattern.

It’s a strategic crucial to allow this transformation for our prospects, and we’re very happy with our accomplishment so far as we execute on this technique. As proven on Slide 4, over the previous three years, now we have made important investments together with each acquisitions and inner growth efforts to develop our merchandise, expertise and capabilities our prospects want as they rework their companies. The business success ensuing from these investments is obvious. Final yr’s awards included the one largest enterprise win within the firm’s historical past and represented a considerable shift in our enterprise towards electrification associated areas. Sensata largely serves lengthy cycle finish markets, which underscores the good thing about pivoting to the place the market goes, and we admire our traders’ endurance by means of this funding cycle to safe our vivid future.

The success that now we have achieved to-date from our natural and inorganic investments within the progress sectors demonstrates that now we have constructed a powerful basis for future progress. Now we’re targeted on leveraging the advantages of those investments. This consists of finishing the mixing of the companies we have acquired to maximise progress and focusing natural P&L investments in areas the place we’re having the best success. Consequently, as we glance to 2023 and past, we’re specializing in natural progress, bettering adjusted working margins and growing conversion of earnings to money move. Whereas we are going to proceed to return capital to shareholders by means of our dividend and opportunistic share repurchases, bettering free money move will naturally enable leverage to say no and returns on invested capital to enhance over time.

Paul will converse to the precise capital allocation targets later. Throughout 2022, we posted roughly $460 million in income in automotive and industrial electrification areas, up 77% from 2021. Insights posted $175 million in revenues final yr, up 133% from 2021. Throughout our electrification teach-in final February, we forecasted that Sensata would produce greater than $2 billion in electrification income and that Sensata content material in battery electrical gentle autos would develop to double present content material in a comparable inner combustion gentle car by 2026. We’re nicely on our technique to bringing this imaginative and prescient to life. Whereas we nonetheless must ship on the product designs underlying enterprise wins in hand, these awards coupled with our current enterprise and anticipated market progress over the approaching three years, is now adequate to ship on our electrification income goal.

The demonstrated business success from our investments establishes Sensata very nicely to help our prospects of their transformational journeys and to understand our personal thrilling potential. Now, I would like to show the decision over to Paul.

Photograph by Arlington Analysis on Unsplash

Paul Vasington: Thanks, Jeff. Key highlights for the fourth quarter, as proven on Slide 7 embody income $1,015 million, a rise of 8.6% from the fourth quarter of 2021. Income progress mirrored robust outgrowth throughout the corporate of 1,180 foundation factors within the quarter, in addition to acquisitions, partially offset by international foreign money headwinds and general market contraction. Adjusted working revenue was $204.3 million, a rise of three.4% in comparison with the fourth quarter of 2021. This improve is primarily as a consequence of greater volumes, pricing, and productiveness enhancements considerably offset by unfavorable actions in international foreign money. Actually, from investments within the progress elements of Electrification and Insights and a divesture of our join semiconductor check in thermal enterprise final yr.

Adjusted working margins improved 70 foundation factors sequentially to twenty.1%. Adjusted earnings per share within the fourth quarter grew 10.3% from the prior yr quarter and sooner than income. We noticed roughly the identical $5 million decline in channel stock this quarter as we did a yr in the past. So channel stock actions had no affect on our outgrowth within the fourth quarter on a year-over-year foundation. Turning to Slide 8. As we entered 2022, inflation considerably impacted our part and logistics prices at a time after we have been additionally growing investments in our progress vectors. This impacted adjusted working margins considerably main right down to lower from the 21% margin degree that we delivered throughout 2021. Substantial enhancements in pricing to offset elevated prices, higher materials availability and provide chains slowly improved, productiveness enhancements and value management have pushed a gradual improve in adjusting working margin by means of the yr.

Whereas our monetary steerage for the primary quarter features a sequential decline to 19.5% on decrease volumes, we intend to proceed these efforts in return to our goal margin charge of 21% as shortly as attainable. Now, I would wish to touch upon the efficiency of our two enterprise segments within the fourth quarter of 2022, beginning with Efficiency Sensing on Slide 9. Our Efficiency Sensing enterprise reported revenues of $757.7 million, a rise of 10.6% in comparison with the identical quarter final yr. Automotive income elevated from robust content material progress, greater pricing and market progress, partially offset by unfavorable international foreign money. Development in heavy-vehicle off-road income displays robust outgrowth and the affect of acquisitions in Insights, partially offset by declining markets in unfavorable international foreign money.

Efficiency Sensing working revenue was $196.9 million, with working margins of 26%. Phase working margins declined year-over-year as a consequence of dilutive affect of unfavorable international foreign money, acquisitions and product combine. As proven on Slide 10, Sensing Options reported revenues of $257 million within the fourth quarter, a rise of three% as in comparison with the identical quarter final yr. Industrial income decreased from weaker markets, particularly in HVAC and equipment and unfavorable international foreign money. Aerospace income elevated strongly within the quarter as a consequence of robust content material progress, market and pricing. Sensing Options working revenue was $74.4 million with working margins of 28.9%. The lower in section working margin was primarily because of the affect of acquisitions and clear power.

On Slide 11, company and different working bills not included in section working revenue have been $65.5 million within the fourth quarter of 2022. Adjusted for expenses excluded from our non-GAAP outcomes company and different prices have been $65.5 million, a rise from the prior yr quarter primarily reflecting greater analysis and growth and enterprise growth spend to help our megatrend progress initiatives, partially offset by decrease compensation, incentive compensation and favorable international change. We invested $70 million in megatrend-related engineering spend in 2022 to design and develop differentiated options for the quick rising tendencies impacting our prospects, and we count on to spend about the identical degree in 2023. The document new enterprise wins of greater than $640 million in 2021, and greater than $1 billion in 2022, together with our speedy income progress in these areas, clearly demonstrates how Sensata’s increasing capabilities are interesting to our prospects in driving market outgrowth.

Transferring to Slide 12. We generated $184 million of free money move throughout the fourth quarter and $311 million in free money move throughout the yr. Free money move this yr was negatively impacted by will increase in receivables as our enterprise and revenues grew our resolution to hold greater stock ranges to make sure continuity of provide in unsure markets and from acquisition-related compensation funds. For the full-year 2023, we count on free money move conversion to be roughly 75% of adjusted web revenue, reflecting Sensata’s long-term common. Capital expenditures are to be within the vary of $170 million to $180 million for 2023. As Jeff talked about beforehand, acquisitions and natural investments have offered us with the wanted property and capabilities to realize robust management positions and progress within the areas of Electrification and Insights.

Consequently, we count on working margins to enhance and free money move to develop, which can naturally result in decrease web leverage over time. Because of this, we’re updating our goal web debt-to-EBITDA vary to 1.5x to 2.5x, which can seemingly take two years to a few years to achieve. Our web leverage ratio was 3.4x on the finish of December 2022. We returned capital to shareholders throughout the fourth quarter, repurchasing $50 million of our shares underneath our current inventory repurchase authorization, a discount from the third quarter, and we just lately introduced a quarterly dividend of $0.11 per share that’s anticipated to be paid on February 22 to shareholders of document on February 8. As well as, we intend to pay down $250 million of our excellent variable charge time period mortgage throughout the first quarter, which is presently the most costly piece of debt in our capital construction.

Furthermore, we are going to proceed to judge the corporate’s liquidity wants and handle the capital construction in line with our new web leverage goal vary. We’re offering monetary steerage for the primary quarter of 2023, as proven on Slide 13. Our expectations are based mostly upon the tip market progress outlook proven on the appropriate aspect of the web page. We stay extra conservative than IHS on automotive manufacturing estimates for the fourth quarter due to broad macroeconomic and China COVID-related dangers. International change represents an anticipated $27 million headwind to income within the first quarter. Our present fill charge is roughly 92% of the income steerage mid-point for the primary quarter. On the mid-point, adjusted working revenue margin is predicted to be 19.5%, a sequential decline from the fourth quarter, largely reflecting decrease volumes.

This additionally represents an 80 foundation level year-over-year improve from the primary quarter of 2021, on flat income, primarily as a consequence of improved productiveness and pricing. Our first quarter information anticipates that our working revenue on the mid-point grows at 4% and earnings per share will increase at 10% from the prior yr quarter, sooner than the speed of anticipated income progress. Trying to the stability of 2023, we count on international change to be a 1.1% headwind to income and an $0.08 headwind to earnings per share, given present change charges. Given the market and macroeconomic uncertainties going through Sensata and different corporations in our sector, we’re discontinuing our apply of offering full-year steerage, selecting as an alternative to solely information for the upcoming quarter.

We consider knowledge from third-party market forecasters and our prospects is fairly correct such that we will forecast the subsequent few months, whereas visibility into future quarters is presently much less clear, given the broader financial considerations. Now, let me flip the decision again to Jeff for closing feedback.

Jeff Cote: Thanks, Paul. Let me wrap up with a couple of key messages as we outlined on Slide 14. Sensata’s enterprise organizational mannequin and progress technique are robust, resilient and dependable, as we ship mission-critical, extremely engineered options required by our prospects. Whereas we count on finish markets to proceed to be risky within the near-term as a consequence of inflation, rising rates of interest, the danger of recession in varied geographies, and geopolitical occasions, now we have a powerful administration workforce with confirmed expertise in navigating uneven markets. We additionally count on 2023 to be one other yr of above goal market outgrowth for Sensata. We proceed to put money into our progress initiatives as we rework the enterprise to deal with these speedy progress alternatives throughout all the tip markets we serve.

We’re making wonderful progress as demonstrated by robust new enterprise wins and important income progress. This success permits us to deal with strengthening our monetary returns by means of natural progress, improved margins, stronger free money move and return — improve in returns on capital. A part of that is focusing on a brand new web leverage vary of 1.5x to 2.5x over the subsequent two to a few years. We proceed to innovate on behalf of our prospects, fixing their hard-to-do engineering challenges and offering differentiated options to an ever broader array of shoppers, whereas leveraging our expanded product set and capabilities. Fixing mission-critical challenges allow Sensata to boost long-term buyer retention and ship industry-leading margins for shareholders.

And eventually, I am happy about our ends in delivering on Sensata’s long-standing imaginative and prescient to assist create a cleaner, safer, extra electrified and linked world, not only for our prospects’ product but additionally by means of our personal operations. We consider we’re meaningfully contributing to a greater world. We’re making good progress on attaining our ESG targets, and we’ll look to replace them in our upcoming Sustainability Report, bolstering the long-term sustainability and success of the corporate for all of its stakeholders. Now, I would like to show the decision again to Jacob.

Jacob Sayer: Thanks, Jeff. We’ll now transfer to Q&A. Given the massive variety of listeners on the decision, please restrict your self to at least one query every. Jason, go forward and introduce the primary query.

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