Q2 2020 Sensata Technologies Holding PLC Earnings Call
[music].
Good day and welcome to the sample technologies second quarter 2020 earnings call.
<unk> expense will be in listen only mode should you need assistance. Please signal a conference specialist pressing the stocky followed by zero. After today's presentation, there will be an opportunity to ask a question to ask a question you. My press Star then one on the Touchtone phone to withdraw your question. Please press Star then too.
Please note this event is being recorded.
I'd now like to turn the conference over to Mr., Jacob Sayer, Vice Vice President Finance. Please go ahead.
Thank you.
Good morning, everyone.
I'd like to walk.
Second quarter Twentytwenty earnings Conference call.
Joining me on todays call aren't you.
She president.
So it's not as Chief financial Officer.
Actual results press release issued earlier today.
Turning to slide presentation during today's conference call.
This presentation can be downloaded from sort of Investor relations website.
A replay of today's webcast shortly.
Today's call.
Yeah.
Sure Joe referenced.
Our first came in slightly.
During the course of this conference call.
Looking statements regarding future events.
The company.
Certain risks and uncertainties.
Actual results may differ materially from injections described in such statements.
Factors that might cause such differences include.
Not limited to those discuss it all forms 10-Q.
Well the other subsequent filings from yesterday.
On slide three we show GAAP results were up 2020.
We encourage you to review our GAAP financial statements.
His presentation. Most of this has been information that we will discuss during today's call will relate to our non-GAAP financial measures.
Lesions or GAAP to non-GAAP.
Our included in our earnings release ended up Cherry Hill.
Well I see television segment operating income on slide 10, 11 of the presentation, which are the primary Missouri's management used to evaluate the business.
Jumbled again with a review of our overall business trying to second quarter.
I'm talking about with my team and a strong financial position the company well discuss because revenue growth relative to our end markets during the second quarter and first out 2020.
Well that provide an update on recent progress and some of our key mega trend growth areas, including the recent acquisition personal electronics.
I will then cover our detailed financials for the second quarter quite a description of changes in our financial modeling liquidity position.
Insight into what we're expecting for our end markets for the balance of the year.
Hi, select financial guidance for the third quarter of 2020.
Then take your questions after our prepared remarks.
Let's turn the call over to Sensata, CEO and President John.
Thank you check up and welcome everyone.
I'd like to start with some summary thoughts on our performance outlined on slide four.
[noise] Sensata recognize the global impact of Kobe 98 early.
And we took a wide range of actions designed to protect our employees.
Lots to meet the central customer demand.
While enhancing our financial flexibility.
Our focus on these priorities and quick action helped us navigate through this unprecedented and part of it.
These actions will help position sensata to emerge from this worldwide disruption stronger so that we get a better serve our customers employees and shareholders.
Well as their communities in which we operate.
The lock downtick warranties that were instituted by governments around the world in response to the spread of covert 19 caused by the end markets, we serve to decline almost 40% during the quarter.
Our strong market Oh growth during the quarter offset a portion of this market decline.
Which resulted in our deck revenue contraction 33.9 per se organically.
For the first half our net revenue decreased 22.3%.
We delivered market Oh growth of 750 basis points and our heavy vehicle offered business and 890 basis points at our automotive business for the second quarter.
And 840 basis points, and 750 basis points through the first half of 2020, respectively.
Certain customers have delayed some of their product launches for the second half of the year, which will impact our market growth in Q3 in Q4.
However, we continue to be confident that our market growth for 2020 and beyond.
Be sustained in the range of 600 800 basis points for heavy vehicle off road.
At 400 to 600 basis points for automotive.
In part due to our continued new business wins.
During the quarter, we closed over 125 billion of new business wins as part of 225 billion, a new business wins for the first half of 2020.
This pace is faster than our average new business wins over the past five years.
Fluid at 108 million electrification wins.
We believe these new business wins demonstrate the mission critical nature of Sensata is products as our customers have continued to award new business to us even in the midst of covert 19 related shutdowns.
From a demand standpoint.
Customer sites reopened in May and ramped up production in June.
This trajectory has continued for the first half of July.
On that basis, we anticipate sequential improvements in the third and fourth quarters. This year.
However, we remain cautious regarding the impact that potential cope with 19 surgeons related shut downs may have on this recovery trend.
Despite the challenges we believe we're in a strong financial position.
And have taken the steps necessary to enhance our fans financial flexibility.
For example.
We generated 45 million free cash flow in the second quarter and 114 million year to date.
We reduced capital expenditures for the year and aggressively managed our working capital.
We lowered our operating expenses in the second quarter through a number of temporary measures and have since implemented permanent cost actions that will align our cost structure to more normalized demand.
Paul will address these cost actions later.
We are seeing enough stability in the markets, we serve and our order book to provide financial guidance for the third quarter.
Finally, as I will discuss in more detail, we continue to invest in capabilities that will drive our future growth with our acquisition of pretty cool electronics.
It was a challenging quarter, but we're pleased with our accomplishments.
Now I'd like to discuss our performance by end market in the second quarter of 2020 as outlined on slide five.
Overall volume during the second quarter was lower at both the first quarter of 2020, and the second quarter 2019.
We reported revenues of 576.5 million, which represents an organic organic revenue decline of 33.9% year on year.
Against the overall end market decline of almost 40%.
Our industrial business decreased 14.6% organically.
Driven by pandemic related shutdowns at a global industrial market slowdown of approximately 15.2%.
Oh performance in the industrial business was primarily due to growth in our medical equipment business in particular, providing sensors to ventilator manufacturers.
Our aerospace business decreased 39.4% organically.
Reduced production drove 32% end market decline and grounding of planes impacted our aerospace aftermarket business.
Global Air traffic is currently down 50% from the beginning of the year, which is better than the trough levels in April that were down 80%.
Our heavy vehicle offered business posted organic revenue decrease of 31.5%.
Oh perform a 39% end market contraction.
Representing 750 basis points above market growth.
Our China on road truck business continued to post strong growth.
As a result up the adoption of and Essex emissions regulations.
Well, our trying to present business grew in the second quarter, we experienced substantial declines in both Europe and the Americas.
As production levels in these markets declined.
Our automotive business posted organic revenue decrease a 41.6% outperforming a 50.5% global end market production contraction.
Representing 890 basis points of market outgrowth.
This outgrowth continues to be led by ambitions electrification and safety related launches as well as slightly better pricing.
The China automotive end market grew 4.3% in the second quarter versus the prior year snapping back from the first quarter shutdown related declines.
We do expect the recovery in Europe, and the Americas to be more measured where plants were shuttered for the average of six to seven weeks and the second quarter.
I interests, and we expect that the global automotive market will grow sequentially from the second quarter into the third and fourth quarters.
During the first quarter, we attributed a portion of automotive revenue growth to supply chain inventory building, especially with Chinese customers.
Automotive inventory movements in the second quarter were negligible, although we do believe that there was a shift from China to Europe and North America.
We expect global inventory at our customers to return to normalized levels by the end of the year.
Moving to slide six I want to share some updates about important progress, we're making in our key mega trend initiatives.
We continue to believe investments in electrification smart and connected and autonomous Mega trends.
Well further our end market diversification.
Increase our long term growth rate and provide important competitive advantages as these trends transform our world.
Despite the impact of covert 19, we do not see evidence that customers are slowing their investments in these areas.
To provide greater transparency into our mega trend spending.
And the operating performance of our segments, we're moving the costs of these investments from the reporting segments to corporate and other.
Paul will discuss this in more detail.
And electrification, we're expanding the solutions, we provide for critical applications across all end markets we serve.
During the second quarter, we closed another 50 million in electrification new business wins.
Now 108 million year to date.
As electrification trends accelerate driven by broad legislation such as the European Green New deal they presented increasing opportunities for our solutions.
Represented expected 6.5 billion addressable market for Sensata by 2030.
In smart and connected we continue testing proof of concepts with several leading fleet managers and are working to turn these efforts into orders by the end of this year.
As part of this initiative. We're also working with several telematics companies that will transmit data collected by Sensata is vehicle area network to the cloud in order to provide valuable insights to fleet managers.
Our smart and connected initiative opens up unexpected 1 billion in OEM and 7 billion in fleet management addressable market for Sensata by 2030.
In addition, we are increasing our focus on high growth areas such as industrial Aiotv.
Smart manufacturing buildings and infrastructure.
These segments represent fast growing opportunities that will benefit dry and drive new business end market growth for our industrial business unit.
Moving to slide seven on the autonomy front on July 1st we closed a small but important acquisition that represents an early step into advanced driver assistance applications.
Recall electronics based in Boise, Idaho is a leader in developing radar object detection application.
For heavy vehicles, providing crucial blind spot detection and side turn assessed functionality.
Their solutions improve efficiency and overall safety.
We believe pre go is well positioned to benefit from upcoming you vulnerable road user and other object detection regulations.
And expands our addressable market by 600 million in 2030 with sticky mission critical content.
Well currently as small business with approximately 15 million in net revenue pretty goes growth potential is substantial.
And we believe its differentiated offering will drive strong margins.
We see substantial subsidy synergies between pre going sensata, as well, including leveraging our strong OEM relationships and supply chain.
We're pleased with our progress against these mega trend initiatives and intend to continue these efforts that expanded sensata is markets provide strong growth and differentiation for our future.
I'd now like to turn the call over to Paul.
Thank you Jeff.
Do you highlights for the second quarter.
As shown on slide nine include.
Revenue 576.5 million.
Decrease of 34.8%.
Second quarter 2019.
Organic revenue decreased 33.9% largely due to the impact of the Kobin 19 pandemic.
And changes in foreign currency decreased revenue by 0.9%.
Adjusted operating income was 75 million decrease of 63.4%.
Appeared to the second quarter 2019.
Primarily due to lower revenues productivity headwinds.
Manufacturing facilities operating at significantly lower capacity.
Elevated costs that they've got our employees.
And local government restrictions, which altogether impacted our ability.
To align our cost to contracting end markets.
These items were partially offset by temporary cost reductions in the quarter.
Including salary reductions.
In furloughs as well its savings from repositioning actions taken last year.
Adjusted net income was 27.7 million.
The decrease of 81.6% compared to the second quarter of 2019.
Doing business reported revenues a $385.2 million.
A decrease of 42 per cent compared to the same quarter last year.
Explain the negative impact from foreign currency, 9% performance dancing reported and organic remedy trees.
39 three per cent.
Our automotive business reported inorganic revenue decrease of 41.6%.
The outpaced and market like 890 basis points.
<unk> Avenue outgrowth with strong and all major and markets led by new Central launches in mission critical emissions electrification and safety applications.
Pregnant was favorable when compared to the prior year border.
Or have your vehicle off road business reported inorganic revenue decrease of 31.5%, but outpaces and market by 750 basis points.
Primarily from accelerated contact growth in China on road truck business.
Driven by the adoption or M S six emission regulations.
Consequently, we expect our content growth related to <unk> on road truck to moderate and the second half of this year.
Performance standing Army income was $68 million, a decrease in 65% of compared to the same quota last year.
Performance testing profit as a percentage of revenue with 15, 8%.
The decrease in segment operating income.
Due primarily to lower revenues.
Manufacturing facilities offering it significantly lower capacity.
An elevated operating costs related to Kobe 19.
Somewhat offset by temporary cost reductions in the quarter.
As well as savings from <unk> restructuring actions taken last year.
[noise] is shown on slide 11.
Some solutions reported revenues of $191.3 million.
And the second order of 2020 <unk>.
[noise] decrease of 20 per cent as compared to the same for the last year.
Explain the negative impact from foreign currency seven per cent.
Stamping solutions organic rabbit decreased 19, 43%.
And the second quarter revenue in our industrial business decreased 14.6% organically.
As industrial and markets contracted 15.2%.
And revenue in our aerospace business decreased 39, 4% organically.
A a doctor I'm reductions in commercial OEM production.
[noise] substantially weaker aftermarket.
Nothing solutions operating income with 55 $8 million a decrease of 28, 2%.
I'm the same quota last year.
Sensing solutions profit as a percentage of revenue was 29, 2%.
The decrease in summit segment operating income was primarily due to lower revenues.
Manufacturing facilities operating it significantly lower capacity.
An elevated operating costs related to coke in 19.
Summit offset by temporary cost reductions in the quarter and savings from restructuring actions taken last year.
Oh, <unk> mentioned earlier, where I'm moving costs related to growth investments and emerging megatrends, they're impacting in shaping our end markets from our business segments to corporate another.
This change provides better insight into the underlying operating results of our business segments.
[noise] increased visibility into our ongoing megatrend investments.
<unk> it to increase from approximately $25 million and 2019.
[noise] to approximately 35 million this year.
The operating profit and operating margins on slide 10, and 11 reflector B classification of these costs.
[noise] to help with your modeling when you provided quarterly reconciliations of the segment results for fiscal year 2019.
And the first quarter of 2020 and the appendix.
Corporate and other costs not included in segment operating income, we're 47 5 million and the second quarter of 2020.
Excluding charges added back to where non gap results.
Corporate and other cost for $44 million.
A decrease a $3.4 million from the prior year quarter.
Do a lower incentive compensation.
<unk> lower global support costs from temporary cost actions.
[noise] favorable foreign currency.
Somewhat offset by higher megatrend investments.
Fly 12 shows and saw the second quarter 2020 <unk>.
<unk> results.
Adjusted gross profit Depriest 47, 2% as compared to the same quota last year to 165 $4 million.
And gross margins decreased 670 basis points to 28 seven per cent.
The decrease in gross profit and gross margin reflect lower revenues largely due to Kobe 19.
Productivity headwinds for manufacturing facilities offering it significantly lower capacity.
Elevated cost a safeguard our employees and local government restrictions.
Which altogether impacted our ability to a liner costs.
The contracting and markets.
R&D costume true 17, 6% and SG&A coursing through 15, 90%.
Saint <unk> last year.
With both benefiting from temporary salary reductions.
[noise] furloughs this quarter.
Savings from reposition repositioning actions taken last year.
Favorable foreign currency.
As a result, adjusted operating income was down 63, 4% compared to the prior year Porter.
Our tax rate.
Is it per cent of adjusted private.
Before taxes, 18.2% and the second quarter.
950 basis points compared to the prior year quarter.
Primarily do jurisdiction jurisdictional profit mix.
Taxes, a percentage of EBIT was eight 4%.
Oh of 140 basis points compared to the prior year quarter.
We expect taxes presented to EBIT and the second half of this year.
To remain consistent with the second quarter.
Finally, adjusted EPS with 18 cents.
70, 586%.
As compared to the second quarter of 2019.
As a decrease in adjusted net income.
It was partially offset by the benefit of share repurchases and intervening periods.
Sounds like 13, we provide a breakdown other types of spend the makeup or cost structure and their relative size the net revenue.
The majority of our cost a variable.
These are followed by somebody available costs, which are structural and scale to some extent with revenue, but requires specific management connection to drive change.
And the remainder fixed costs.
And the second quarter, we incurred year on your decremental gross margins 48%.
A 500 basis points improvement from the first quarter of 2020.
Despite a significantly dropping touching man and the second quarter.
[noise] spreads 719 to North America in Europe.
During the second quarter or manufacturing plants were running it significantly reduced levels.
However, better alignment of a manufacturing cost.
To the lower volume moderated some of the impact related to this fine contraction.
Manufacturing constantly elevated during the second quarter.
Two protecting safeguard our employees to comply with government mandates to pay our direct labor, despite not being needed due to a reduced production levels.
From higher break off as logistics supply chains remain disrupted.
The temporary help mitigate these higher manufacturing cost during the quarter.
[noise] do salaries from management by 25 per cent and implemented employee furloughs.
Thereby at achieving savings of approximately $22 million.
Which exceed her our previous savings expectation of 15 to $29.
Recognizing the potential an extended economic recovery, we've taken a series of actions <unk>.
Destruction reduce or semi variable caused by about 10%.
So and achieve unexpected $60 million to $65 million in savings next year.
We have rigorously analyze our operations expect that these changes will better line or cost structure.
<unk> levels that we anticipate over the coming quarters.
These cost saving actions were <unk> be largely implemented implemented throughout the second half of 2020 and.
And will generate increasing savings that should be progressive the remainder of the year into early 2021.
What about 7 million of savings expected and third quarter of 2020.
This includes an action to reduce our workforce affecting approximately 980 positions worldwide.
[noise] restructuring charges related to this workforce reduction include $35 million to $39 million and people related charges and $8 million to $10 million insight related closure costs.
During the second quarter, you'd recognize 26 million of charges related to these actions.
July 14th demonstrates and thought as strong liquidity physician.
We enter the second quarter was approximately $800 million in cash on the balance sheet.
On April 1st we drew down for $100 million from a revolving line of credit.
[noise] additional financial flexibility.
But 45 million free cash flow generated during the second quarter.
Excellent the quarter with $124 billion in cash on him.
We have substantial buffers to our leverage covenants are dead agreements and the first outstanding maturity of our that is not until October 2023.
When a 500 million unsecured note becomes do.
Consequently, we're confident are liquidity position is sufficient to enable us to whether a severe downturn.
Three cash flow during the second quarter of 2020, it was 162% of adjusted net income.
A dramatic improvement.
Compared to 66% of adjusting that'd come in the same corner last year.
We manage working capital effectively during the quarter, reducing inventory by 25.5 million.
Or five per cent sequentially from the first quarter.
A cat R capital expansion guidance for the full year 2020 remains 120 230 million.
And we are on track to the first half of 2020.
Lastly are starting to purchase program remains on hold.
Until and Margaret condition show greater improvement instability.
On slide 15, I saw a number of economic indicators that we track.
To help us as future demand for our products and solutions.
I just as our primary third party source of information on future automotive production.
In addition, we monitor key economic indicators.
Such as consumer confidence and we communicate routinely with our automotive customers.
[noise] alignment on future demand expectations, which all strongly influenced our view the end market.
For a heavy vehicle and off road business, we use various production forecasts from third party firms.
Such as L. M C for on road production levels and K G. P for offer a production levels.
We also evaluate economic indicators they gave the health of our heavy vehicle off road customers and the market's they serve.
Which we believe strongly correlated to the demand for our products.
These indicators include.
[noise] load factors inventory sales ratios building permits industrial production craft theaters and farm Sherry.
Public statements from our large customers in the construction agricultural sector sectors also help the form our view of the market.
For industrial business, we evaluate regional P M I data.
And forecast for GDP and housing starts develop afford looking view industrial demand.
They're strong correlation with our historical industrial revenue.
[noise] for aerospace expectations for future O M commercial and defense production and passenger miles flown.
Are good indicators of future demand for aerospace products and aftermarket services.
Slide 16 provides details on and market performance year on year for the second quarter.
And expectations for the balance of the year.
This data reflects our view of our end markets leveraging information from third party forecasters.
As well as customer order patterns and commercial engagements.
The data on this page.
[noise] presents what we know today and the subject to change his customer and economic conditions change.
North American automotive production levels are expected to improve sequentially from the second quarter.
As a result of improving vehicle sales.
Which are currently historically low levels.
And from Oem's ramping up production.
In Europe customer in business confidence are expected to improve.
Driving vehicle registrations, and OEM fashion production levels, well above the low levels and the second quarter.
And in China.
After historic dropping GDP auto production during the first quarter vehicle production of snapped back and the second border.
And is expected to moderate to the third and fourth borders.
Well I have just as a primary data source for developing light vehicle production expectations by region.
Our market expectations for North America in Europe, and shown on the page.
Are more conservative in Iowa chess.
Reflecting our expectation for summer related shutdowns in Europe.
And it continued trend of lower customer product take rates.
Relative to initial orders during the quarter.
Have you beautiful and markets habit in decline globally since the second quarter of 2019.
Toby 19 related shutdowns cause a sharp drop in the first glitter in China.
It's Fred to North America in Europe during the second quarter.
Celebrating your already downward cycle.
However, heavy vehicle.
Offer a production declines year on year.
[noise] are expected to he's in the third and fourth quarters with T economic indicators pointing to sequential growth from the second quarter.
Industrial and markets fared better than other markets and the second quarter.
P M I in all areas of the world improve sequentially.
Percentage year on year declined for the balance of the year and the industrial space are expected to improve from the second quote corner levels.
The defense portion of the aerospace and market is expected to remain study this year, while commercial production.
Is expected to improve from very low levels and the second quarter.
As Jeff mentioned early earlier, we expect to the company and moderate decrease in market outgrown.
The second half of 2020 as compared to the first half of 2020.
However, we are coffee the full year and longterm outgrows.
Who remain in the expected ranges.
In summary.
Do the improvements in and markets from the second word we expect since orders revenue performance to improve sequentially each quarter through the balance of the year.
In April we weren't you are <unk> are full year guidance of the negative impact.
The Kobe 19, pandemic crazy, great uncertainty and unpredictably for our business.
During our first quarter call, we highlight our intention to resume providing financial guidance as soon as practicable.
As a result of improving economic conditions.
And better stability in both customer order patterns and global supply cheese, we're providing financial guidance.
The third quarter of 2020th shown on slide 17th.
Ah guys assumes our customers and we are able to keep our manufacturing facilities open.
Spike potential resurgence resurgent and the Kobe 19 pandemic.
And government responses to try to prevent this part of the virus.
For the third quarter of 2020, we expect to report revenues between 675 million.
705 million, representing our reported year over year revenue decrease.
Between 21% 17 per cent.
At the mid point of our guidance, we expect that foreign currency will decrease revenues year over year by approximately four $4 million.
Sweeney impact of foreign currency, we expect to report an organic revenue decrease.
Per cent to 17% and the third quarter.
A personal right and approximately 94% of the revenue guidance mid point for the first quarter.
We expect to report adjusted operating income between $110 million.
And $124 million.
On the bottom line, we expected for adjusted net income between $60 million and 74 million.
Which would represent a decline of 58% to 49% compared to 232019.
We expect operating margins will expand from cute too level sequentially in Q3.
Primarily due to a higher revenue.
This includes an unexpected increase of approximately $15 million.
And operating expenses sequentially and the third quarter.
[noise] is temporary caution directions, and the second quarter.
And and as the financial benefits from our semi variable cost reduction programs begin to ramp up.
We expect to report adjusted EPS between 38 cents and 46 cents.
Which includes a <unk> positive impact from foreign currency at the guidance mid point.
We're not currently providing full year financial guidance until longer term visibility improves.
And closing Echo Jeff combo.
But while we are really awesome I'm pregnant.
<unk> bye.
I'm very proud aren't router I've ordered.
Yeah, maybe some different progress and strengthening our business during the corner despite significant challenges.
We are working diligently to insurance and Saddam emerges from this time is a stronger and more resilient company.
Oh now turn the call back to Jeff.
Thank you Paul.
Before turning over to Q&A I wanted to wrap up with a few key messages has outlined on slide 18.
We continue to monitor all of our and marketing customers to ensure their resources are balanced against forecasts and prioritized against critical growth opportunities.
We have taken the necessary actions to align our cost with the market.
We remain confident in our ability to deliver attractive and market outgrowth, but a full year 2020 and into the future and there's confidence is supported by strong at two business wins.
We continue to deliver a solid free cash flow.
Which demonstrates <unk> resilient financial model and we ended up order with more than 1.2 billion in cash on hand.
We continue to invest in our Megatrends and other growth initiatives that are opening up significant new markets person shot up and we are making excellent progress as evidenced by the 108 million in new business Wednesday electrification, so far this year and their customer engagement bunch of <unk>.
And connected.
In addition, we continue to believe that the overall market environment.
May provide interesting opportunities to further strengthen our portfolio.
Throw strategically important to value, creating acquisitions, such as pretty cool electronics.
Now I'd like to turn the call back to Jacob.
Thank you Jeff.
For participants jumping taller in separate locations. This morning, so feel free to direct your questions to one or the other of them.
Also give them a large number of listeners them to call an iced tea each of you to limit yourself to one question in a follow up.
You know so if you would please assembled acuminate roster.
[noise] well now begin the question and answer session to ask a question you may put a stop in one or you touchtone phone.
If you're using a speaker phone. Please the handset before pressing the keys to withdraw your question. Please press style then too.
This time will tell us momentarily to assemble a roster.
[noise]. The first question is from a line of Mark Delaney with Goldman Sachs. Please go ahead.
Yes, the morning, and thanks for taking the question to start out hoping to better understand the reason since out as being more conservative NIH S or in North America, and European Auto production in the third quarter.
Is this conservatism on the partners and saw it on in case, there's cooked covid related factory shut down to that aren't anticipated or or in case retail demand, where where it is often or is it is more about what your customers are telling you they're production bold rates are going to be.
Yeah. Thanks for the question Mark.
So let me just frame it <unk>.
We have a lower than IHS in terms of expectations in North America in Europe and were slightly higher in China.
The neck difference is about one 7 million vehicles are cross that bridge, which is substantial in terms of the impact that that would have on since <unk> revenue.
They were really.
Four key factors that way it into our decision around this.
The first is clearly regarding cautioned associated with potential resurgence and lockout has an impact on demand that that would result in.
There are also some differences between us and what we believe ihs's forecasting regarding the shut down schedule with our customers, which we're tracking on our customer by customer basis.
And then the other factors are relating to just generally understanding our customer order patterns were coming off a period of time, where the volatility in customer order patterns have been substantial and until we get a better feel for the order is it how they will materialize into revenue, we're taking some caution on.
That you'll know that historically, the order patterns going into a quarter is our best indicator of performance and the order, but certainly were coming off a period, where that isn't as much the case.
And then the last factor, which is a smaller one is just the general automotive supply chain and the risk that we wouldn't or our customer wouldn't have a disruption in demand or orders, but there might be some other implication and the broader supply chain. So we're cautioning for all of the factors, which we've outlined.
<unk>, if things turn out better we're prepared to be able to deliver but it's based upon all of that input.
That's really helpful. Helpful dressing. Thank you and for my my follow up question. The company mentioned and prepared remarks about the good wins and electrification and even being an acceleration compared to.
The company was realizing in new wins.
Despite the pandemic <unk>, what do you think is leading to that acceleration and bookings and and maybe you can levels investors about where since autos contact for car stands now for N E V compared to internal combustion engine vehicles. Thank you.
Sure so that that Emil quote was across the company. So it's not just automotive and there's a substantial portion of that that is outside of the automotive market.
My view as to why that's accelerating is that every customer around the world as the electrification trend is continuing it's accelerating their internal programs. We knew that there was going to be eventual escalation as they prepare to launch new platforms that will be more.
Driven toward electrification trends. So that's what we're seeing we had talked about the order books that or the not the order book, but the opportunity booked that we have with our customers, which is very substantial as well and so it is the material, it's basically that opportunity set materializing.
In terms of content per vehicle.
In the U S in Europe, I'll I'll speak generally it's in the high thirties too.
Low forties in terms of content per vehicle when we look at a battery electric vehicle, it's higher than that and 50 range. So with a trend associated with conversion from internal combustion engine to electrification is a positive trend in terms of content per vehicle and therefore revenue for some shada.
Thank you ma'am.
Yeah, there's gonna be of the next question. Please. The next question is from Atlanta of Depot Raj, How Bun with Wells Fargo. Please go ahead.
Hi, good mining off this question is to get.
Just tagging on that comment where you mentioned accelerating and tunnel programs just based on does that extra technician trends.
And Triangulating till you businessmen in the past the businessmen wanted can what it over at three to five year timeframe roughly is that still the same or does that push to electrification change that timeline.
Yeah. So.
It's pretty much the same where it's variable remember the.
$108 million or cross dozens of programs. So there are lots of factors to consider but the general <unk>.
Development time line associated with electric vehicles is equivalent to that up a combustion engine. When we start to talk about wins and some of the other markets. It may be a shorter period that what we might be normally accustomed for automotive or heavy vehicle.
Off road, especially when you go into the industrial markets, but the electrification Windsor knows markets are consistent with those markets, which may 10th tend to be a little bit shorter interrupted the development cycles.
Thanks.
My follow up is.
Your thoughts a little bit of a longer question, but yeah can you talk to how the summer production schedule is shaping up and if I, let's just say V assume stable Macroetch E R.
When can we expect to return to a more normalized level the production by that I don't necessarily be back to pre call. It but more from an equilibrium perspective, I'm, assuming the summer productions, what's cool skewed to the upside a little bit but.
And if you can't focus and if you can just talk to the key regions are you at your up in China on how that normalized production expectations would be from y'all and that would be helpful. Thank you very much.
Sure. So let me speak to this summer shut down question first and then I can go to the comment around normalized demand profile of globally.
So as I mentioned, we are tracking customer shut down at the customer level.
What I would tell you is that the observation I would make based upon reviewing that is that for the most part when you get into the tier level below the Oems.
There's a general theme of canceling summer shutdowns.
And my expectation is that that is to catch up.
To make sure that they are ready to believe be able to deliver it to the broader supply chain when you get to the OEM level, whether it be an automotive or in heavy vehicle or in other markets.
It tends to be a little bit more variable.
Some are continuing the same shut down schedule summer shortening shortening it and some are canceling it altogether and again I suspect that that's largely driven based upon the demand AC their inventory positions how stable their manufacturing operations are and so it's a wide range or cross those but the the point of there at the.
Terror level, they tend to be stopping summer shutdowns to try to catch up on demand and we're seeing signals of that.
Terms of all of us in our everyday lives in terms of availability.
Products that we want.
Ah supply chain disruptions that have occurred in as demand as snapped back that's created some some issues in terms of availability of product.
In terms of returning to more of a normalised level that as a that is obviously a very difficult question to answer, but let me break it down a little bit geographically to give you a little bit of insight.
So from a China standpoint things have rebounded quite quickly.
Alright, so in the second quarter.
Actually sorry, 10% growth.
And Q2 versus Q2 of the prior year, and we're forecasting growth and the third quarter as well as lower growth and what we saw year over year and the first order, but nonetheless growth. So China has snapped back pretty strongly when you go to the other markets. It's obviously not back to those levels, yet, but it's significantly better and the third quarter and we would expect that.
Trying to continue into the third quarter of course, it gives me into the fourth order as well and so let me give you. Some some data points right. So they have a vehicle off road market was down cue to to cue to about 39%. This is market data not our revenue market data.
And then when you go into the third quarter, we're expecting that to be quarter over corner down only 23% to 24%. So an improvement from the second order, but still pretty significantly off where we were last year at the same time and you see similar trends are cross the other end markets were serving automotive second.
Quarter versus second quarter last year's down to 50% from our market standpoint, when you think of Chew three last year versus Q3, this year about 22% so an improvement.
Sequentially, but not back to those levels and we're watching it very closely things are coming back, but again, we're looking at it with an eye of caution given the disruption that could cause that demand profile to deteriorate.
Thanks.
Did you ask me over the next question. Please. The next question is from Atlanta of stomach touching Gee with J P. Morgan. Please go ahead.
Yeah, Highwood money and thanks for taking the question. This is though but it's gone for stomach. So if I could just start with the industrial and market. Then you highlighted prepared remarks. Thank you expect the outlook.
The young so if I could just ask what are some of the pieces of the business subsegment instead of maybe smell that wasn't the other and if you could also help to think about how big like sports, you'll you'll have it in the medical Lynmouth, we didn't industrial thanks.
Yeah, So the medical and market is not a huge portion of our overall industrial business.
But it is an important wanted we took it obviously very seriously as these customer started to come to us I'll look for help associated with temperature for our pressure centers and the Marcus.
Cross.
Significant parts of industrial we have some big segments associated with material handling.
That's all we serve major home appliances lightning industrial lighting.
So there are a variety of and markets, it's truly a diversified industrial segment.
But it's important to note in this in the second quarter the impact associated with medical devices was about 10 billion dollar impact.
I'll share it with the revenue related to that initiative that we had so it felt good to get the revenue. It felt good to serve the community in terms of being able to deliver on that.
Buddy Thanks for that anything could just ask on the acquisition new meeting the court.
No electronics, you nor did that so maybe for H B O as in Monkey right. Now. So if you could talk about anything else that you see in terms of you have anything that technology for and market, so such as automotive as well in the long term.
Yeah, absolutely so I think that.
Today pre co is largely serving.
On road it off road heavy vehicle markets.
Again, where there is regulation forthcoming associated with vulnerable.
Road users pedestrians in cyclist on the road as you can imagine with a large vehicle that risk that's.
Driver doesn't observed those pedestrians or bicycle list is significant and so there is regulation associated with that it's a very difficult to application because the radar applications need to work with a.
Wide range of truck configurations, and equipment configurations, articulating vehicles and so the radar require the radar solution requires.
A lot of application specific knowledge and software development to make it work in a way that there aren't false positive or negative so that would make the application unusable on the road beyond the heavy vehicle off road market, we see opportunities and other industrial applications as well let so.
And the light vehicles market, but it's certainly something that we would be exploring in terms of going there, but it's more around the industrial.
Eric.
Airport equipment and heavy vehicle off road markets.
But thank you so much.
The next question is from Atlanta of my children with Stifel. Please go ahead.
Yes. Thank you good morning.
It's just wanted to follow up and your commentary.
[noise] term demand trends in auto.
Particularly relative to inventory.
[noise] supply chain you did talk earlier about some headwind there, particularly in North America in Europe, how much does that play into your near term for cats.
Yeah. Thanks, Matt it's not a big number we had talked about the first quarter, there being about $25 million inventory build a specifically as it relates to China customers. We think that migrated away from China into North America Europe during the second quarter sort of equivalent amount, but we're getting to the level, where it's a little bit difficult to distinguish.
The exact amount to be honest with you and that's in terms of the impact, but it's not a huge number and we would expect it to unwind by the end of the year My senses. It's.
Yeah, the volatility of our customer order patterns in terms of what they're seeing from demand is causing them to build a tiny bit of inventory and also just.
Just generally making sure that they have stock available as they build vehicles for the market. So it's not a big number relative to the overall business, but it's something that we thought worthy of calling out.
Okay. Thanks, and then.
Just a question regarding the the the guidance for margins backing into gross margin based on your operating.
Profit and.
<unk> guide it looks really like sick very significant.
Quarter to quarter.
Contribution margin and I know, there's some cost cutting I think you talked about $7 million in savings from the cost cutting initiatives, but what are the other drivers of that and as we looked at.
December.
Based on expectations of sequential grow to we expect a similar margin contribution or not.
I'd like to please sir so.
And the <unk> remarks.
Revenue certainly is gonna drive a lot of March expansion, so so ah revenues coming down.
We were seeing a significant level of detrimental margins, because we were not able to adjust or semi variable in six cost to that volume declined quickly.
But we did we did have significant savings Q2 around for awhile and pay cuts of $22 million. So it should go forward into completely.
Is the revenues right C a similar improvement.
An incremental margins the high 40 40 per cent range, we're gonna see the 7 million come through for those costs actions that we're taking at her permanent.
But we're not we're not going to see the temporary costumed foods can because we're not putting those pay cuts in furloughs in place for for two three.
So that's the $3 million Penguin.
$7 million, a savings coming on the $22 million.
The temporary cost reductions not continuing and then the volume wrapping up is really what's driving a significant.
Improvement in operating profit.
Contribution from that higher rubbing.
Thank you.
The next question is from Atlanta, Wednesday, Mohan with Bank of America. Please go ahead.
Thank you have one for Jeff one football Jeff your expectations for a market outgrowth, you've alluded to those getting a little more subdued and the second half given some product lunch push up.
I was hoping you can share some more color on that.
Expecting sequential volume improvement so is the case that.
Anticipating some large programme rohloff or what are the puts and takes here that's driving that on the second half and I will follow up for Paul.
Yeah, great once he thanks for the question so just to make sure that.
The message you got a cross we're still confident that for the full year of beyond will be within the range is that we've quoted we had a very strong first half year.
In terms of content growth or outgrowth.
For the first half we were at.
750 basis points year to date, an automotive and heavy via or 840 basis points through six months. So.
Two above where the normal range was in confidence continues to be there in terms of what we're seeing that will impact the second half, it's largely time phasing.
In terms of the.
It is six regulation, we have to the deadline was July. So there was some pull ahead associated with that and then there's another impact associated with just time out at our customers in terms of their coalbed period. So some of the launch activity that would normally have occurred that was a little disrupted associated with time out of office during this bear.
[noise] difficult time has resulted in some temporary delays in terms of launches that we're going to happen in the third and fourth quarter. This year they are temporary.
Nothing is canceling to any meaningful amount, obviously, they're always some small amounts of omit associated with cancellations as customer the refined this but we're not seeing any major impact associated with the cancellation.
<unk> and the order of magnitude of call at three months to six months.
Pushed through the follow up quarters, So we'll see that coming in later purse part of 2021.
Okay, Thanks, Jeff and Paul you called out $60 million to $65 million in savings in 2021 can you Gotta have I have these are gross or net savings and will there be pretty consistent across the quarters and and should we think of these savings is proportional to your revenue exposure.
Bye market or are they more concentrated an auto in aerospace. Thank you know they're there.
I would say they're spread evenly across the company.
The business are being impacted by the cost reductions bedrooms.
The 60 65 million Ah, it's mostly people, it's mostly related to the workforce reduction or other cost actions that we haven't place around third party spend and productivity improvement that are going to drive to 62 $55 million a lot of it will be implemented this year and the second hassle when we get into the first quarter.
We should be at that run right per quarter. So we should get the full 60 65 in the year.
And with it being at that fool running right pretty much by the end of the first quarter.
So that's.
And that a line that online for the you know the demand that we're expecting over the attendant quarters.
Okay, great. Thank you thanks lemonade extra large.
The next question is from Atlanta, Brian Johnson with Barclay. Please go ahead.
Yes, just wanted to follow up on Decrementals been talk a bit about.
V H S opportunity.
So when we think about the Decrementals 432 on a year over year basis, I think I got the answer which is the roll off sequentially of the temporary cost reduction.
Is what's going to take your Decrementals back to the higher end of the range is that correct.
I would think about is latest that right now.
R R.
A profit impact from volume is moving in line with a variable costs and are available contribution you can see on that pie charts about halfway across the variable. So when we lose a dollar gain a dollar it's about.
45 to 50 per cent impact.
Now, we weren't able to get it to send me variable cost and cute too. So we took temporary actions around throw those in pick up now and Q3 and going to four we're getting out those can be very little costs, and that's where the 60 65 million highlighted the charts about 10% of semi variable cost run into 600 million dollar range. So were taken about 10 per cent of those costs out now that that's just driving.
Ah improvement in cost and so we're getting a combination of volumes are going higher forgetting the variable contribution and now we're getting it that sticky symbol semi variable costs that we weren't able to action.
And the first half of 2020.
Alright that makes sense yeah, yeah. Yeah. My second question is really around your new acquisition and the roller blade as in commercial vehicles, we'd been aware of course of <unk>, others with vision thing systems and that this is it seems a little bit different but it gets to my.
Question, which is when do you think of it <unk> solution. In addition to the sensors, whether it's camera radar ultrasonic. There is of course, a fair amount of algorithms around object identification detection.
<unk> planning are you moving into that space or would you be working with tier ones, who are already acting as seabee a desk Santa graders.
So we're not a great question, we're not going fully up the stack on this but it is a more complicated system than you would normally see in a pressure center or high temperature sensor for an application. So we're providing more information there is more embedded software associated with it.
We're working both which Oems and with tier ones, depending on their choice on how they wanted to develop those overall system architecture, some oem's choose to leverage a tier one and the development of that others want to hold it more closely to what they're bringing to the market in terms of the differentiation there. So.
It does.
<unk>, where where where we.
Ultimate.
Customer approach on how they're doing it but we're part of that overall system, both with tears and and Oems.
And a follow on this logged discussion around lidar coming down.
And the cost.
Is that a market that you have relationships with do you see that coming in to see their commercial vehicles, certainly we've seen mannar trucks C. S.
Or would you want to play a role either there in like vehicle.
Yeah. So this is a radar solution pre code does not have a light or <unk>.
Capability, you know that we have a partnership with <unk> on solid today's lidar that is not at the stage where it's.
Available to bring to market.
So right now it's largely the radar solutions that we're working on with pre coda bring to market.
There's a space that we're referring to.
Okay and is your relationship with Connor exclusive or P C better or different solutions can you take advantage of those.
Yeah, it's it's not exclusive.
But again right now given that we've made the investment are pretty cool and that there are opportunities that are growing very rapidly associated with just the radar dimension.
It's our focus area. We continue to look at other object detection technologies to enable us to continue to build on this platform, but what were.
Announcing today is the small acquisition, but important acquisition are <unk> associated with radar capability.
Okay. Thank you.
Thank you.
The next question is from Atlanta, Georgia, Spak with RBC capital market. Please go ahead.
Thank you very much.
Just wanted to go back to the outgrowth in you talked about that taking a step back.
In the back have even with the impressive.
890 bps and the second quarter an automotive.
You compare that in the corner versus the overall automotive industry and when you look at your exposure, you're actually overweight versus the industry North America and your versus China. So like on a sudden sato waited basis. It actually suggest you did even better than that so.
So as we go forward in North America, and you come back why wouldn't be outgrowth <unk>.
Continue and remain strong and sort of the geographic waiting work in your favor.
So you are right. There is outgrowth is not.
<unk> across all markets, we do tend to see <unk>.
<unk> from new business opportunity standpoint.
And ultimately in the form of contact growth or outgrowth, which new business turned tend to Oprah several years later that there is more concentration.
And China, then there is an other markets and Hey, you look at the content per vehicle China's half of what it is around the rest of the world. So that fact is absolutely true, but all Oems have had challenges associated with product launches and so the aspect of that associated with the disruption that has occurred is not supposed to.
<unk> North America in China.
It's a global challenge that has been.
We're all dealing with so that's the reason for the.
The change going into the second half.
Okay, and then just on the inventory I know you said, it's small and we agree but.
I just wanted to be clear like when you talk about it unwinding by the by year and is that to your <unk>.
Below IHS view of the industry, meaning if I chose is correct. There is a little bit of extra conservatism in there.
Well I'm not sure honestly, if some of the difference between I'll check Austin IHS relates to inventory I'm wanting to be to be true that might be a factor of it.
So it but again, if you're talking 25 million, maybe it's 10 12 million of the 60 Amelia difference that we would have in the third quarter. So they're they're maybe some of that that's not factored it as well that's an accurate statement.
Okay. Thank you very much thank.
Thank you though.
The next question.
Nine of Craighead timber with Morgan Stanley. Please go ahead.
Yes. Thank you question for cats.
Thinking through the the cost savings accident six years $65 million.
Obviously this has been a very unique cycle could to say the least but just how do you think through kind of this environment now you looked at the business. Some changes that you can make just kind of more of an a structural basis kid to improve margins.
Yeah. Thanks, Thanks for the question Craig So let me <unk>.
First start by saying.
This was.
Taking these actions was an incredibly difficult thing to do.
We're talking about our people who are driving the business and so I don't want to minimize it it's necessary we need to take action to respond to the unprecedented market changes but.
I want to sort of formally thank the people who are impacted by this for their contributions over the years. These are very very tough decisions.
Having said that we take.
Lemons and turn them into lemonade in terms of what we do going forward and so as we think about where we're going as we hire back as.
The growth resumes in the business and markets recover.
We'll hire.
In different locations will hire skill sets that are about the future for their company.
We do a lot of work to train and tool people that work with the company for that as well, but clearly will take the opportunity with this market disruption to plan for the future in terms of where we're going as a business. We do that across people, we do that across where we need to manufacturer as well.
Where are engineering needs to be to make sure it's closer to where our customers are so there's no question that when we get based with these very difficult times that we accelerated things that we've considered that.
All right now able to do it in an apartment that's very challenging in terms of the market's that we serve so.
Your point is valid we have.
Done that as part of this program.
And I appreciate that contact and then just as a follow up.
Order motive production just thinking for the full yeah I know it sounds like you guys are a little bit more positive in China.
Made a conscious on north American in Europe relative to IHS, but.
On a blended basis, I think ihs's down around 23% for the year are you close to that blended or how do you think about that for globally.
Yeah, So we're not providing a full year guidance at this point, but.
That you range is consistent with what we're looking at and argue is let's get through the view of the third quarter and as the order a book develops as we get a better feel for the markets and the fourth quarter and as we have continued conversations with our customers will forecast out into the fourth quarter in there.
For what the full year impact is but as we had mentioned we do expect.
A sequential improvement from two two to chew three to into Q for so.
The numbers you were talking are directionally accurate, but refining them will come with time as we get a better view as to what we're seeing.
Got it thanks.
That's correct.
The next question.
Tim Young with city. Please go ahead.
Hi.
Thanks for taking my question I'll pricing, you mentioned better pricing and cue to an automotive market can you talk about a what's driving to buy the pricing and how sustainable either it's.
Yeah. So what we mentioned is that a portion of the outgrowth is due to better pricing.
Most of our contracts with our customers provide for a volume.
Associated with the market.
Obviously, when our customers engage with us and we contract with them. There is an expectation around what that volume will look like.
And when you have major disruption like this.
The volume is lower and so the recovery of that impact could be either in the forum, a better pricing or it could be in the forum.
Who awards on the business.
When were given that choice, we always take new business long-term growth for the company, but there are some instances, where we've seen some better pricing a cross our and market is not just an automotive when you have significant Gibson volume in terms of what we're expecting made a quarter or in a year.
Got it my next question is on the Outgrows.
You mentioned that would you celebrate a little bit in second half can you talk about how much of that in moderation is stupid customary hematoid destocking and how much of that is due to the account I mix. Thanks.
Yeah. So.
It's a combination of those it's a it's another good point.
We put the inventory stocking in there as well that was in there or the first half of the year the $25 million, we talked about that being part of the automotive outgrowth in the first quarter. So if that.
Wines, which we are forecasting that it will that will come out of content.
Tough to judge exactly how much is due to that versus program launch.
Temporary deferrals a product program lunch.
But certainly the 25 million unwinding would be an element of that.
Content decline going into the balance of the year, but I just wanted that that's quantifiable, we know that's $25 million of the overall impact.
Great appreciate it. Thank you. Thank you.
Ladies and gentlemen, we have reached the time on for this call.
Like to turn the conference back over to Mister Jacob sitting here for any closing my mom. Thank you.
And your husband, yes, I'd like to thank everyone for joining us this morning.
So I don't Wanna be participating in the upcoming Jeffries industrial Investor Conference on August five.
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And the RPC industrial Investor Conference on September 14th.
Thank you for joining us this morning and for your interest in center.
Constantinos you may know in the call.
The conference now concluded. Thank you for attending today's presentation you may know disconnect.
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