Q3 2020 Sensata Technologies Holding PLC Earnings Call
Morning, everyone and welcome to <unk>.
No idea Q3 2020 earnings conference call.
All participants will be in a listen only mode.
[laughter], placing all conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to question.
To ask a question you May press Star and then one using a touchtone telephone.
To withdraw your question you May press Star and if you.
Please also note todays event is being recorded at this time.
I'd like to turn the conference call over to Mr., Jacob Sayer VP of finance Sir. Please go ahead.
Thank you Jamie and good morning, everyone I'd like to welcome you to <unk> third quarter 2020, <unk> earnings conference call joining.
Joining me on today's call are Jeff Good day sought a CEO and president and Paul.
Not as Chief Financial Officer.
In addition to the financial results press release, we issued earlier today, we will be referencing a slide presentation during today's conference call.
The beauty of this presentation can be downloaded from some thought its investor relations website.
Post a replay of today's webcast shortly after the conclusion of today's call.
As we begin I would like to reference Sensata is safe Harbor statement on slide two.
During this conference call, we will make forward looking statements regarding future events or the financial performance of the company that involve certain risks and uncertainties come.
<unk> actual results may differ materially from the projections described in such statements.
Factors that might cause such differences include but are not limited to those.
Discussed in our forms 10-Q, and 10-K as well as other subsequent filings with the FCC.
On slide three we show some taught us GAAP results the third quarter of 2020, we.
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 our non-GAAP financial measures.
Reconciliations of our GAAP to non-GAAP financial measures are included in our earnings release and in our presentation materials.
Company provides details of its segment operating income on slides 10, and 11 of the presentation, which are the primary measures management uses to evaluate.
Yes.
Jeff will begin with key highlights of our business during the third quarter and first nine months of 2020.
He will then provide an update on recent progress in our key smart and connected electrification mega trend growth areas.
Paul will cover our detailed financials for the third quarter of 2020, including organic and market outlook by business unit.
Describe our financial and balance sheet progress in the quarter.
Then provide select financial guidance for the fourth quarter of 2020.
Well then take your questions after our prepared remarks.
Now I would like to turn the call over to Sensata CEO President Jeff Kodak.
Thank you Jacob and welcome everyone.
I'd like to start with some summary thoughts on our performance as outlined on slide four.
A rebound from walk down quarantines instituted by governments around the world was dramatic in our end markets during the third quarter.
Our revenue grew 37% in the quarter sequentially.
788.3 billion.
Even higher than the updated financial guidance that we provided on September eight.
It is a strong testament to the flexibility and resiliency of our manufacturing model and supply chain that we were able to capitalize on improving markets and support our customers as they say rapidly ramped up production during the quarter.
I'd like to recognize the agility and hard work of our entire team in achieving these results.
We continue to deliver strong market outgrowth.
For the nine months of 2000, <unk> first nine months of 2020.
We delivered 840 basis points of outgrowth in our heavy vehicle off road business and 610 basis points in our automotive business.
We now believe that the inventory build by our automotive customers in the first half of the year, what's consumed in the third quarter.
We continue to be confident that we will sustain our market outgrowth for 2020 in the range of 600 to 800 basis points for our heavy vehicle off road and 400 to 600 basis points for automotive consistent with our long term goals and supported by our higher levels of new.
Business wins.
During the quarter, we closed over $95 million up new business wins, bringing us to more than 320 million year to date.
This pace is tracking ahead of last year, and we believe our ability to close new business. Despite the disruptions of the pandemic.
Caused by the pandemic clearly demonstrates the mission critical nature of Sensata is products.
Sensata today is in a very strong financial position.
We generated a 100 million in free cash flow in the third quarter, and 213 billion year to date and.
And we have taken several steps to enhance our financial position and flexibility.
We are aligning our cost structure to demand levels through our restructuring program and cost controls are expected to generate savings of 60 to 65 million.
Next year.
During the quarter, we raised 750 million in unsecured debt for a 10 year note issued.
Issued at historically low interest rate of 3.75%.
Lowering our overall cost of capital and extending the maturity of our capital structure.
And we repaid our revolving line of credit lowering our interest cost, giving improving giving improving financial markets and customer stability.
Finally, as I will discuss in more detail momentarily, we continue to invest in our mega trends growth initiatives and achieved a meaningful milestone in smart connected.
We recently reached agreement with the first fleet manager to install and operate our smart and connected suite of hardware and data services within their heavy commercial vehicles on a subscription basis.
Enabling this effort to move from trials to commercialization.
Additionally, our progress on in our Mega trend.
Expectation Mega trend continues to advance not just an automotive and other electrified equipment, but also what areas of smart grid infrastructure.
Year to date, we have closed 140 million in electrification business wins.
On slide five I want to provide an update on the meaningful milestone we achieved in our smart connected initiative.
As we've shared before we have been testing proof of concepts of our full stack technology offering with several leading fleet managers for the past year.
Recently, we signed our first commercial agreement in the smart and connected space with a top 25, North American fleet manager.
Demonstrating our ability to move from selling hardware to providing data insight.
The fleet manager has opted for a full subscription model paying for the hardware maintenance and support and ongoing data analytic services on a monthly subscription basis per vehicle over the life of the agreement.
Well. This initial award is small we're planning to demonstrate the value we bring before fanning out across the remainder of their fleet.
Several other proof of concept trials are also moving forward toward commercialization.
We are confident that others will understand the value of our solution.
On this basis, we continue to believe that our smart and connected fleet management initiative opened 6 billion in addressable markets for Sensata by 2030.
We're very pleased that Weve reached a new stage of initial commercialization with this exciting solution.
And the newer equipment space, we expect several leading Oems to join this program expanding the 90 million and new business wins announced to date for smart connected solutions.
Additionally, we are investing in expanding our technological know how and smart connected.
Moving beyond heavy commercial vehicles into light duty vehicle prognostics.
Through third party collaboration.
Adding to the long term opportunities ahead of us with our differentiated solutions.
Moving to slide six.
Electric in electrification, we are expanding the solutions, we provide for critical applications across all end markets we serve.
During the third quarter, we closed another 32 million in electrification new business wins.
Bringing our year to date total to 140 million.
These business wins demonstrate important ongoing progress against our long term target to transform the electrification mega trend from opportunity to material revenue for Sensata.
This pace of business wins, so far this year is much faster than last year.
Despite the pandemic and these wins are expected to generate significant revenue growth for sensata in the coming years.
For example, we're expanding our capabilities and charging infrastructure and smart grid applications through third party collaboration.
That's overall electrification trends accelerate the increased opportunities for our solutions across all end markets represents an estimated $6.5 billion addressable market for Sensata by 2030.
To date, we have closed electrification new business wins with some of the largest and the most innovative automotive Oems around the globe.
In our core markets. The average content on battery electric vehicle down materially exceeds that of the average income combustion internal combustion vehicle.
Sensata generates approximately $50 and content in these battery electric vehicles as compared to 38 to 40 on average in internal combustion engine vehicles, representing a significant growth opportunity for the company as electrified vehicles increase and become a larger portion of the vehicle fleet World.
Why.
Sensata has the strongest offering in this segment for longer range, it's shorter charge time electric vehicles.
All evidence indicates that this is where the industry is heading.
While the automotive space will be a large beneficiary of electrified mega trends the projected growth from winding electrification should benefit all of our end markets.
We are pleased with our demonstrated progress against our Mega trend initiatives and intend to continue these efforts to expand Sensata has applications for these areas organically through third party collaboration and through acquisition.
We see numerous opportunities to utilize our strong financial position and significant cash flow to meaningfully expand our addressable markets through several bolt on acquisitions within the megatrend areas.
These acquisitions should bring unique offerings that position us to grow quickly as large and fast growing markets.
We continue to believe that investments in electrification and smart and connected will further our end market diversification increase our long term growth rate and provide important competitive advantages as these trends trends for our world now.
Now I'd like to turn the call over to Paul.
Thank you Jeff.
Key highlights for the third quarter.
As shown on slide include.
Revenue of 788.3 million.
The decrease of 7.2% for the third quarter of 2019.
Organic revenue decreased 7.5% largely due to the impact.
The COVID-19 pandemic.
Changes in foreign currency increased revenue by 5.3%.
Sequentially from the second quarter reported revenue increased 36.7%.
Reflecting substantial rebound in our markets.
Adjusted operating income was 154.8 million.
A decrease of 22.4% compared to the third quarter of 2019.
Primarily due to lower revenues lower productivity our manufacturing operations.
Revenue mix.
Higher incentive compensation line to improve financial performance.
Partially offset by savings from cost reduction programs.
Adjusted net income was 103.6 million.
Decrease of 28.3% compared to the third quarter 2019.
Adjusted EPS was 66 cents in the third quarter, a decrease of 26.7%.
Compared to the prior quarter.
On September eight we update our financial guidance for the third quarter.
Based on shipments to date.
Our order book and market information available at that time.
Throughout the quarter, we saw continued strengthening.
Especially within our North American and European automotive end markets.
Which enabled us to exceed a higher revenue and earnings earnings guidance that we provided in September.
Now I will discuss our performance by end market in the third quarter 2020 as outlined on slide nine.
Overall, we reported an organic revenue decline of 7.5% year on year.
Got an overall end market decline of approximately 12.3%.
Representing market outgrowth of 480 basis points for the company.
Our industrial business decreased 2.2% organically.
Global industrial end markets remain weak.
Strong growth in factory automation medical equipment.
This includes sensors ventilator manufacturers.
Mitigated some of the market decline.
Our aerospace business decreased 24.4% organically.
Reduced OEM production.
Lower air traffic.
Which has negatively impacted our aerospace aftermarket business.
New product launches primarily in the defense market.
Partially offset the significant aerospace market decline.
Our heavy vehicle off road business posted inorganic revenue decrease of 7.8%.
Representing 860 basis points of outgrowth as compared to 16.4% and market contraction.
Our China on road truck business continued to post better.
Better than expected growth.
Accelerated adoption of NSX emissions regulations.
While our China on road business grew in the third quarter we.
We experienced substantial declines in both.
Europe and the Americas.
As production levels in these geographies declined year over year.
Year to date, we have delivered 840 basis points of outgrowth and.
And the heavy vehicle off road business.
Our automotive business posted organic revenue decrease of 7.9%.
Automotive production was down 4.1% during the quarter.
Production ramp rapidly through the quarter, creating challenges for all the demand that was presented to us.
This drove customers worked down inventory from their supply chain.
Which had a negative 6.7% impact.
On revenue.
Against that backdrop, our autumn the automotive business had market outgrowth of 290 basis points as expected.
Led by continued new product launches and emissions.
Lets vacation and safety related applications and systems.
Year to date, we have delivered automotive outgrowth.
Of 610 basis points as compared with our long term target range 400 to 600 basis points.
Now I'd like to comment on the performance of our two business segments in the third quarter of 2020.
Ill start with performance sensing on slide 10.
Performance sensing business reported revenues of $580.9 million, a decrease of 7.6% compared to the same quarter last year.
Excluding the positive impact from foreign currency of 0.3% performance sensing organic revenue decreased 7.9%.
On a sequential basis.
Foreman sensing revenue grew a dramatic 51% in the second quarter.
As OEM customers ramped up production through the quarter to replace production loss.
For the prior quarter shutdowns.
Sequentially from the second quarter.
Our automotive business reported an increase.
59%.
In our heavy vehicle and off road business reported an increase of 26%.
Demonstrating the strength of the market rebound.
Performance sensing operating income was 151.6 million.
The decrease of 10.9%.
Compared to the same quarter last year with operating margin of 26.1%.
The decrease in segment operating income.
It was due primarily to lower revenue also contributed to productivity headwind in manufacturing.
And unfavorable revenue mix.
Somewhat offset by savings from restructuring other cost reduction actions.
Sequentially.
Performance sensing generated incremental margin of 46% on a higher revenue.
Despite the profit and margin headwind caused by second quarter temporary cost reductions not continuing.
As shown on slide 11.
Sensing solutions reported revenues of 207.4 million in the third quarter of 2020.
The decrease of 6.2% as compared to the same quarter last year.
Excluding the positive impact from foreign currency of 0.2% sensing solutions organic revenue decreased 6.4%.
On a sequential basis sensing solutions revenue grew 8% in the second quarter as.
OEM customers ramped up production through the quarter.
Sequentially from the second quarter our.
Our industrial business reported an increase of 7%.
In our aerospace business reported increase of 17%.
So I think solutions operating income was 58.2 million a decrease of 18.6% from the same quarter last year.
Operating margin of 28.1%.
The decrease in segment operating income was primarily due to lower revenue also contributed.
Edwin manufacturing.
Unfavorable revenue mix somewhat offset by savings from restructuring cost reduction actions.
Sequentially.
Sensing solutions generate incremental margins of 50, 15%.
The higher revenue.
Which reflects the impact second quarter temporary cost reductions not continuing.
Unfavorable revenue mix within the segment.
Corporate and other costs.
Not included in segment operating income was 61 million in the third quarter of 2020.
Excluding charges added back to our non-GAAP results corporate and other costs were 53.4 million.
An increase of $12.8 million for the prior year quarter due.
Due to higher global incentive compensation costs.
Line to our improving financial performance and higher higher Mega trends investments.
Somewhat offset by savings from cost reduction initiatives.
Items added back to our non-GAAP corporate operating expenses include restructuring related and other costs and financing and other transaction costs.
Mehrotra investments were $8.8 million during the third quarter.
The increase of 3 million from the prior quarter.
We currently expect approximately 33 million.
Mega trend related spend this year.
Hard to design develop differentiated solutions for our customers this should generate substantial long term growth.
Further our end market diversification.
Historic operating profit.
Operating margins on slide 10 and 11.
Reflect the reclassification of Mega trend costs.
Operating segments into corporate and other.
Slide 13 shows some thought as third quarter 2020 non-GAAP results.
Adjusted operating income was down 22.4% compared to the same quarter last year and adjusted operating margin decreased 390 basis points.
19.6%, which is still near the top of our peer group and.
Represents an attractive operating income margin profile.
Especially considering how the pandemic has affected operating conditions.
The decrease in adjusted gross profit and adjusted operating income large.
Largely reflect the lower revenue as we have experienced the impact of the open 19 pandemic.
And the related operating pretty to be challenges.
We took action early during the pandemic to align our cost structure to a lower demand profile, while continuing to invest in mega trends that are shaping our markets to be able to deliver long term sustainable growth.
Incentive compensation costs are also rising.
And are aligned to increasing our income as our end markets continue to recover the low point in the second quarter of this year.
Adjusted net income declined 28.3%.
Compared to the same quarter last year.
Decrease reflects lower adjusted operating income.
Higher interest expense related to our bond issuance in the third quarter of this year.
Higher taxes due to jurisdictional profit mix.
Finally, just.
Adjusted EPS was 66 cents down 24 cents for two.
26.7%.
Compared to the third quarter of 2019.
As the decrease in adjusted net income.
It was partially offset by the benefit of share repurchases and intervening periods.
On slide 14, we.
The strong financial and balance sheet management Sensata during the pandemic as resulted in.
Improved liquidity.
During the third quarter, we generated 100 million free cash flow.
Representing a 96% conversion rate of adjusted net income.
This brings free cash generation of $213 million year to date.
Represent representing a nearly 100% conversion rate.
Last quarter, we announced a series of actions and structurally reduce our semi variable costs by about.
10% to align our cost structure to expected lower demand levels and to achieve expected 60 65 million in savings from these actions.
Achieve the targeted 7 million savings from these programs in the third quarter and.
And expect to achieve $11 million to $12 million in savings during the fourth quarter.
During the store during the third quarter, we took advantage of historically low interest rates.
Raised 750 million 10 year unsecured notes offering.
Extending the maturities and sovereign debt profile and lowering our cost of capital.
Given improving market conditions, and strengthening financial markets repaid our revolving line of credit we had drawn in April.
Inside of the net debt to EBITDA was 3.6 times at the end of September.
Slightly above our target operating range 2.5 to 3.5 times.
Our capital expenditure guidance for the full year 2020 is now 110 to 120 million 10.
$10 million lower than prior guidance based on the benefits of continued capital controls.
Over the past nine months.
We have taken significant actions to strengthen our financial position.
With improving economic and business conditions.
We're focusing on meaningfully expanding our addressable market too small.
Both on acquisitions and partnerships and strengthen our position within both our existing business segment.
Our growing mega trend initiatives.
These acquisitions as well as partnerships and third party collaborations should bring unique capabilities and offerings that position us well to intersect large and fast growing markets.
By way of example building on the pre Joe Electronics acquisition.
We announced last quarter.
For the third quarter, we signed a partnership agreement under for digital radar object detection for heavy vehicles space.
To expand our heavy vehicle safety offerings.
In February 2021, we'll evaluate an early redemption.
Our six our current notes due 2026, depending on market.
Financial conditions at that time.
And our stock repurchase program remains on hold.
[music].
We're providing financial guidance for the fourth quarter of 2012 as shown on slide 15.
Our guidance assumes our customers and we.
And keep our manufacturing facilities open.
Alright resurgence in the coven, 19, pandemic and central government responses.
Try to prevent the spread of the virus.
As a result of improving economic conditions and better stability and strength.
Customer order patterns.
For the fourth quarter of 2020, we expect to generate revenue between $810 million and 850 million.
Representing the reported revenue decrease between 4% and flip flop.
Year on year.
And reported revenue increase between 3% and 8% sequentially from the third quarter.
At the midpoint of guidance.
We expect a foreign currency will increase revenues year over year by approximately 7.5 million.
Excluding the impact of foreign currency.
We expect to report inorganic revenue decreased.
5%.
1% in the fourth quarter.
Our current bill rate is approximately 90% 96% of the rare.
Revenue guidance midpoint.
For the fourth quarter.
Based on our third quarter experience.
See our fill at a more reliable indicator of revenue in the coming quarter.
We also continue to monitor leading economic indicators and third party forecasts helped form our view of future market demand.
We expect to report adjusted operating income.
Between 160 million and 176 million.
On the bottom line, we expect reported adjusted net income between 100 million.
14.
Which would represent a decline of 29% to 20% compared.
Compared to the fourth quarter of 2019.
We expect to report adjusted EPS between 64 cents and.
72 cents, which includes a one cents positive impact.
Foreign currency guidance midpoint.
In summary.
Sensata delivered strong financial performance.
For the first nine months of 2020, despite the challenging environment.
And we expect to continue.
Just to continue into the fourth quarter as demonstrated by the financial guidance, we're providing today.
Driving this performance is our continued ability to achieve our secular market outgrowth targets.
Excluding 400, 6400 to 600 basis points for our automotive business section.
600, 800 basis points or heavy vehicle business.
Now, let me turn the call back to Jeff for closing comments, Jeff. Thanks, Paul I'll wrap up with a few key messages on slide 16, before we go to Q and a.
Sensata has responded very well to the rapid upswing in many of our end markets demonstrating the flexibility of our manufacturing base and the resiliency of our supply chain.
Enabling us to capitalize on the improving end markets.
Our ability to respond quickly to shifting demand positions us very well as a trusted source for our customers.
We are delivering attractive end market growth, we remain confident in our ability to continue to deliver this end market outgrowth for full year 2020, and expect to maintain this performance into the future.
Based upon our strong new business wins.
We continued to deliver strong free cash flow, which demonstrate sensata is resilient financial model.
We continue to invest in Mega trends and other growth initiatives that are opening up large and rapidly growing opportunities for sensata across all of our end markets and we are making excellent progress.
Evidenced by the first commercial fleet adoption for our smart connected sleep initiative.
And by the 140 million in electrification new business wins, so far this year.
In addition, we continue to believe that the overall market environment may provide interesting opportunities to further strengthen our portfolio through strategically important value creating acquisitions.
We are pursuing technology collaborations and partnerships with third parties to expand our technological capabilities and accelerate our mega trend commercialization.
And finally.
As we emerge from this recessionary period caused by the pandemic well.
While we may not return to peak margin rates in the short term, we do expect to deliver industry, leading margins for our shareholders, while increasing investments in our growth opportunities and our people.
Now I'd like to turn the call back to Jacob.
Thank you, Jeff given the large number of listeners on the call. Please limit yourself to one question each and a follow up if we have time, we'll circle back to the group for further questions.
Jamie please assemble the queue in a roster.
Okay, ladies and gentlemen, we will now begin the question and answer session to ask a question you May Press Star then one using a touchtone telephone.
You are using a speakerphone, we do ask you. Please pick up your handset before pressing the key.
So tell your question you May press star into once.
Once again that is star and then one to ask a question.
Our first question today comes from Mark Delaney from Goldman Sachs. Please go ahead with your question.
Yes. Good morning, Thanks, very much for taking the question the revenue guidance for Fourq, you as well by the street and trends are very good improvement opened the company can speak a bit more on some of the recent order trends that has been witness stand and I think the fill rate that's implied in that Fourq two outlook is 96% compared to 88% last year. So I'm going to understand is there something.
That is seen and it's in that order book the suggestion order rates are going to be slowing in the fourth quarter compared to what it experienced a year ago or is that simply conservatism to account for some of the uncertainty for factors such as Covance.
Yes, Mark Thanks for the question. This is Jeff and so there was a sequential recovery again into the fourth quarter about a 5% sequential that leads us to about 2% off for fourth quarter versus last year, obviously auto continues to recover.
If you are notably turns positive from a revenue standpoint quarter over quarter Thats been at 18 month trend on.
If you are.
Industrial tends to be a little seasonally lower in the fourth quarter and obviously the Aero business. As we know is still lagging it's 23% down from last year. You noted the fill rate 90, 96%.
Absolutely thats higher than it typically is we do remain cautious regarding lockdowns, we all see the news about what's going on on the positive side, we feel as though all of our customers have done.
An amazing job of figuring out how to continue to stimulate demand or with their end customers. We've also all time of tremendous job in terms of keeping our supply chain to open.
But given.
Those concerns and also given that the last couple of quarters have seen some volatility in order rates from the time, we entered the quarter till when we exited the quarter. We are remaining a little cautious about.
But I'm very optimistic.
Mystic about where things would go October started off quite strong which gives us a view that things will continue to be strong, but just just watching the news and making sure that we're being cautious about where things could go mark.
That makes a lot of sense. Thanks for that and for my second question is hoping to better understand EBIT margins and.
Jeff you made some comments about.
That being an industry, leading margins, but maybe not quite at peak peak rates, maybe you could dive a little bit more into that topic. I mean is there anything in the fourth quarter impacting margins that we should be aware of.
We are investing in some of these mega trends and talked about a lot of really exciting things, there, but any incremental investments or other factors influencing margins in the fourth quarter and any kind of commentary about what you might consider to be industry, leading but not peak margins as you're thinking about next year, especially as you're starting to implement this.
Fully implement this cost reduction program, Thanks Omar markets all.
So thinking about the movement sequentially.
Increased investment in Mega trends.
We've got some integration spend related to.
Before acquisition.
So have still have the covance sort of disruption that's happening in the supply chain.
And then a little bit of higher incentive comp as our numbers continue to improve so those would be that kind of.
Headwinds against the stronger volume growth that we're seeing sequentially.
Thanks Mark.
Our next question comes from the stock from RBC Capital markets. Please go ahead with your question.
Thanks very much.
I just wanted to.
Talk about.
The restructuring to align to the man.
Saving the $60 million to $65 million.
When you announced that you talked about.
Reading some lower end market demand, but now it does appear that that demand is recovering faster than expected leasing some end market. So.
Are those numbers still valid or does some of that go away.
We look forward.
So Jeff I will take it its Paul yes about the numbers are valid there related to restructuring actions.
Lot of savings is people related so as to continue to execute on those restructuring programs are all done as I said, we're implementing over the course of this year and move into next year.
As we continue to.
To implement those those programs and generate that savings.
And some of that savings ultimately gets may get offset with a higher investment our megatrend initiatives, but that's to be determined as we develop our 2021 plant.
Okay, and then just on the electrification I was wondering.
Obviously, some positive developments here with the awards and the higher CBB commentary can you just remind us how big of the electrification businesses today and then.
Aside from the higher CPV, what about the margin profile of that business goes I assume it's it doesn't have the scale.
Yes today, so where are they today and where can they go in the future.
Yes, so when you think about the total company that's the way we think about.
The current electrification business and the.
The opportunity for the for the business in terms of that 6.5 billion Sam.
For Acacia represents only about 5% when I think of that new trend of electrification. Obviously, we've got a our legacy controls business that serves as a self setting circuit breaker.
In the market and I Wouldnt necessarily include that in the broader electrification theme, but it's a small portion today, but which are very rapidly growing at its a target area that we're looking at around high voltage components and broad grid infrastructure, which will be needed to really allow the mega trend to continue to move in this direction, we were seeing very.
Positive signs from our customers everybody's continue to invest in this trend.
Regulation continues to support this trend the big Envios almost half of our almost half our embryos. Thus far this year. We're in this area.
And we're continuing to develop not only organic.
Capabilities, but also look at M&A to focus on this as well.
Thanks, Jeff.
Our next question comes from Nick Carter off from Longbow Research. Please go ahead with your question.
Hi, Good morning, guys. Congrats on good results.
I was wondering if you can talk a little bit about the you mentioned favorable mix in both performance and sensing maybe can you unpack that a little bit and talk about the puts and takes in the fourth quarter gross margin and maybe how much of a call that cost expect into the fourth quarter I think.
While you mentioned about 60 or $65 million in Q. Thanks.
The mix is and we've got a performance sensing business has auto with each of you are that the industrial aerospace business, the latter being more profitable as look for Q3 to Q4, you can see this is a pretty significant decline, which is seasonal and normal in nature, our industrial business.
And our and our aerospace business still continues to.
It will be down as Jeff mentioned, almost 2020 to 25 years. So those two business those two sub parts of our business.
Our driving down the.
Our credit answer when mix to some extent. It's also our automotive business is really having very quickly and that is our lower margin business. When do you think it before.
Business units that we have.
All right just the dynamic of.
Well they are in terms of recovery cycle and that profitability across our portfolio of businesses.
Okay.
US with the SEC, so yes, it probably costs.
Hey, they've been running somewhere in the $5 million to $10 million required it's just depending on.
Yes, its labor inefficiencies on logistics inefficiencies and supply chains have been disrupted and thats all the elevated costs related to protecting.
Our place so theyre running five to 10.
On average every quarter.
A more some quarters are higher than that.
Or under that range.
Thanks for that guys. Thank you.
Our next question comes from emit Darien any from Evercore. Please go ahead with your question.
Yes, Thanks for taking my question guys.
I guess first off just on the December quarter Guide I think the implied assumption is auto production is down four or 5% in December but just maybe talk about what are the geographical assumptions or what if auto production and Im curious do you think this guy could prove to be conservative as the one you had in September because inventory.
Inventory audit ecosystem still seems to be fairly lean at this point.
Yes, So let me let me touch on where you think automotive will be.
Thank you got it right about four or 5% down year on year in the fourth quarter North America, we're calling it about down 3% versus fourth quarter last year Europe, 2%, So a pretty significant snap back in terms of performance sequentially in Europe, China is down right. So thats another big changes China.
Was in a growth mode, and now is down 7% versus fourth quarter of last year, and then Japan and Korea are down 10% as well.
With that from a overall production rate it isn't in permit third to fourth quarter of about 1.7 billion units based upon Sensata is mix.
But still lower than where they were a fourth quarter of last year.
And I'd just add that we're pretty much on top of the.
Estimates for Q4 that we adjust our our business mix compared to the production.
And the I just.
Estimates and see a little bit more negativity on the market than what you would see on the pure just numbers when you exclude tailwind.
No that's really helpful and I guess as a follow up.
Yes, I mean, there's about a really impressive recovery I think from the bottoms of collateral operationally.
I'd love to get your perspective on what do you think gets you to go back to the buyback program and re initiate that.
What triggers that are you trying to wait for and.
End market and demand to get better or are you going to wait for this deal the debt pay down to happen I guess, what triggers the buyback to come back would be helpful guidance.
I think we try to lay out for you how are you thinking about capital deployment going forward.
Im really excited about the opportunities on the M&A side to continue to grow.
Our business is in into the Mega tradition, either organically or inorganically in so that thats, probably we think of the priority that's where the priority is right now.
The call of the six our quarters is a highly NPV driven transaction. So we like the economics around doing that but that will that will be determined like if assuming economic conditions remain good certainly would would be.
Is that in.
Getting that value for the company and share repurchases are still an important part of our capital deployment strategy, you see them as a third leg.
Third.
Of the three options that we have right now.
Still important but probably de emphasizing that are different from the other two.
Thanks.
Thank you.
Our next question comes from Simeon got Rob from JP Morgan. Please go ahead with your question.
Yes, hi, Thanks for taking my question this is but one.
So just one question from me thank you.
Will you guidance.
Sensing solutions do you expect the end market to decline, 13% to 14%. So if you could just help us think about.
Between industrial and aerospace what are you thinking about taking segments, how much improvement good expecting industry had and we didnt have the space I mean defense continues to be strong make are you seeing any signs of hitting.
I think in the other subsegment. Thanks sure yes, sure. So on the industrial side fourth quarter are still 9% down from prior year on a revenue basis.
Thats.
Seasonally usually the fourth quarter is a little bit lower for the industrial business and then on the aerospace side and still down pretty dramatically 26% versus prior year.
So that's what we're seeing in terms of the.
The end markets there so the Paul if you want to add.
No I think that.
Thanks.
Our next question comes from Luke junk from Baird. Please go ahead with your question and good morning, guys. Thanks for taking my question first just wanted to better understand the first commercial agreement for your heavy vehicle and off fruit Smart connected fleet management offering maybe if you could just comment on how the revenue breaks down from a just a model.
We'll standpoint between more onetime aspects in terms of sort of front end sales and the recurring piece and then you also said $90 million of smart connected business wins in total year to date and just wondering if you could kind of add a little more color on that as well. Thanks.
Yes, I'd be glad to so it so it's a first our commercial.
Experience with this in terms of closing business and as I'm sure you know fleets don't do a big Bang in terms of how they roll this out they start with a pilot they roll it out to additional vehicles and then they continually expand that over time and that's what we would expect across not only this one fleet manager that we've been we've engaged.
But the other is that we're in the process of having pilots with so it's a small start at a small revenue base to start with but it's a it's a clear indication that this solution provides value and the fleet managers are engaging with us to roll it out and as I mentioned.
A lot of these fleets in the aftermarket have Todd.
Tens of thousands of vehicles right. So the magnitude.
The addressable market that we've talked about 6 billion is real based upon a.
Conservative view of our fan out across that market and so.
Different different fleet managers will choose different.
Business models that contract structures on that so at this particular fleet manager wanted a full subscription basis, so in that environment.
We didnt buy the equipment or build the equipment.
We work together to install it and then they pay us on a subscription basis over a six or seven year time.
Others will choose to buy equipment upfront and then just pay for data services. So every model will be slightly different and we will tailor it to the interest and the desire of the individual fleet manager, but very excited about the opportunity very excited about bringing it to commercialization in a very short period of time.
And looking forward to providing more updates as we continue to defend this out with other customers and with this particular customer.
So look I mentioned as well the $90 million in Apios important to note that to the OEM market rather than in the aftermarket. So those will be with the truck and trailer manufacturers rather than lead manager so more traditional hardware sale.
Great Great point shakeup. So it's important to note we've talked about this in the past, but the foundation of our smart and connected initiative here is around tire pressure and on road truck and arm at their unique requirements associated with enabling tire pressure, which introduces the notion of up or a vehicle area network, which is.
Foundation for collecting lots of additional sensor data up to feed it.
Information and insight into the cloud. So that's the part that's being implemented at Oems and we're doing the same thing in aftermarket with a broader suite of offerings.
Okay, great. Thank you for yeah. Thanks, Rolla, that's Super helpful. And then maybe just as a follow up maybe a more of a hypothetical so the inflection coming next week if of course Theres a change in administration on the button and has signaled that he would move to raise fuel economy standards fairly sharply above even the prior level contemplated under the Obama.
The administration is.
What that impact might look like in your business in terms of the clean and efficient driver and ultimately how does SATA win with stricter fuel economy standards in the U.S. potentially.
Yes its.
Regulation and environmental policy is a long term game.
And it's not something that can change overnight, but the trends are very positive in terms of being favorable to what it is that we offer as a company what our value proposition is and.
And I would I would view that way tilt toward more input.
Environmentally friendly and more regulatory driven policy.
To over time be quite positive for us as a company and so hard to know exactly how that will stand out, but certainly we feel as though even with the current administration. The opportunities are significant if there is a shift towards more.
Conservative policies from an environmental standpoint, it could it can't it has to help us in the long run.
Excellent.
Our next question comes from David Kelley from Jefferies. Please go ahead with your question.
Hi, Good morning, guys. Thanks for taking my questions I guess first one starting with automotive I believe in the prepared remarks, you referenced challenges to support outsized customer demand ramp.
Just curious if there were any one time costs such as over time in the quarter to meet more.
More aggressive industry snap back than we all expected.
No.
It should.
We run our business very lean managing our cost of demand.
As tightly as possible and with the rapid improvement in the end market.
And we were able to serve all the demand that our customers were ordering for product.
So that had some of an impact on the amount of revenue we were able to generate in the quarter.
Long cycle business, we have some long lead time guidance. It takes a little time to get caught up and we'll get caught up but it did create a little bit of a bump in terms of our ability to generate all the demand that was out there yes.
The only thing I'd add to that is that it.
In the third quarter.
You know that the trend to improve dramatically through the quarter and so given the guidance that we provided when we as July.
Probably the sense that.
July was strong, but not as strong in September and so the.
Growth of demand during the quarter was quite strong we're going to approach that a little bit differently in the fourth quarter given that the demand is there. So October we're starting out strong to make sure that we don't have a December.
That has a high demand that creates challenges to deliver but again don't want to go back to the.
The teams efforts on this managing through the very steep decline in the second quarter and managing cost and everything that needs to be done as a result of that and then the snap back managing that a real testament to the team's capabilities.
Okay, great. Thanks, Thats Super helpful and maybe as a follow up and line, but that demand discussion should we think about or outgrowth in auto is beginning to normalize you target 4% to 6%.
In the 4% to 6% range going forward or should we expect some ongoing variability as production slowly or perhaps continued aggressively returned back to normal.
You know, we had called out that the third quarter would be a little bit lower for auto given that.
Coven related launch delays right in the second quarter as customers were preparing for launch of the third and fourth quarter. They had some challenges in terms of people being able to do what they needed to in terms of testing product and so forth and preparing for launch. So we called that out that became true 290 basis points of.
Growth in the third quarter for the automotive business Fortunately, our other businesses offset it so as a company we're at 520 basis points of outgrowth there.
Theres always some level of variability by quarter by business, but again I would point to the fact that given that we are a long cycle business for most of our end markets that we serve.
We are able to see what that outgrowth is going to look like they plan for these launches we.
We know what the new business wins are so we have a high degree of confidence in the long term being able to maintain in that range I am not necessarily any given quarter, but long term for sure.
Thank you David.
Our next question comes from Brian Johnson from Barclays. Please go ahead with your question.
Yeah. Thank you.
Very quick housekeeping question and then the real question. That's keeping question is there anything changing between operating income and EPS in the fourth quarter I, just my math on getting a little lighter than implied by the EBIT upside versus consensus.
Yes, I think below the line you have three things that drive in its balance sheet hedging of currency exposures.
I, obviously interest expense is rising because of the new bond deal.
Higher coupons on the revolver.
And taxes are rising a little bit in terms of mix.
Profit.
Okay. Thanks.
Good question on the electrification offsets that you.
Outlined our though.
In actual vehicles right now or is it more the products on your shelves half those potential.
Im sorry, the potential for what in terms of how do you see.
You bet.
Oh I got you. So the $50 of content you are referring to right is that something that actually customers fill Don or you just have a shelf in your store that they could if they wanted their gift that no no no no no no. So these these are designed in products for.
For vehicles for battery electric vehicles that have fit.
50 or greater of content in them.
It's not just you know we have a product for when it went in if they chose to buy it. So it's designed in its sold business that generates that content per vehicle okay.
Okay, and if you were to think about the market share of these opportunities versus what youre sensors that go the combustion engine equipment do you see any meaningful difference more concentrated less concentrated.
Yes, well a little the wins on the electrification side tend to be a little more lumpy and what I mean by that is there are there bigger because the platforms that our customers are are creating tend to be larger and fanned out across a larger number of vehicles.
So.
The wins are a little bit more lumpy. Therefore, the product categories tend to be a little bit more lumpy as well in terms of the overall opportunity by Todd, but there are many opportunities in the electrified vehicle space that were either serving today, we're pursuing that.
We believe will will continue to allow us to be benefits that will benefit from this trend that we're seeing.
Yes, just final follow up question, there GM announced the LTM skip forward with.
Wireless battery sensing was it different company, though they highlighted publicly.
Micros thing like that.
For the solution does that mean that do you still have an opportunity on the GM platforms that.
Competitor to your or did they just choose to highlight a different part of the platform that.
Not quite the same as what you're selling.
For battery management, it's not us Thats doing battery management, but we're certainly we have an opportunity to serve other component within GM for that platform.
Thanks, Brian.
Our next question comes from Wamsi Mohan from Bank of America. Please go ahead with your question.
Yes. Thank you.
Can you maybe talk about how we should think about incremental margins heading.
Heading into 2021, especially given that you have some material cost initiatives that you have underway.
Into next year and I have a quick follow up.
Good ones.
Also we we're not we're not giving guidance for 21, but I will say that with the.
Growing volume I mean, we do expect it to continue at this pace that would drive nice incremental margins from the incremental volume.
If we stay at these levels, obviously, the repositioning actions will help.
We're going to continue to invest in the Mega trends in our growth initiatives and as Jeff talked about continuing to invest our people.
We have a pay for performance model, so with greater profitability greater incentive compensation within the next year or so so I do think margins will expand next year. If revenues continue at these prices at these levels.
So Paul just to clarify, though that the conversion rate itself, the incremental margin conversion rate itself, but the drop through should be higher than than historical on those incremental.
That's right from your time, maybe I would say I look.
Look a lot like what we've seen on the way down.
All the way up we'll see incremental margins higher than normal at some point, we're going to have to.
Investment cross back into the into the business. So that'll start eating into the incremental right now were working.
Environment, where we have the capacity.
Margins dropped a lot because we weren't sure.
It will to adjust it out are semi variable and fixed costs.
Same phenomenon the way way back up.
More of a variable model right.
Right.
As a follow up I mean, just sort of segways into this but more on a on a 2020 basis and if you look at.
The revenue guide that you gave at the start of the year pre coed and where we're ending up it's about $500 million lower on on revenues and about $1.50 lower on EPS roughly.
What do you say substantially all of that is co led for revenues or do you think that there were other moving pieces in there and then what about on the decremental margin side can you maybe parse that again into into coal that versus the restructuring versus the mega trend spends or anything else that you think is.
Thank you.
Hi level.
I think we've done a good job delivering on our targets. So I think we've executed that things are within our control and so the outlook is and has been strong. Most of this is not all this is market related.
Yes. It is.
All related or mostly related to koby 19.
In terms of our cost structure, and we've talked about a few times that.
In the first half of the year, we were really were able to get at our south.
To be variable and fixed costs. So we are seeing our cost structure and move in line with our our volumes move more in line with our variable costs. We took actions in Q2 around temporary furloughs that generated $22 million saving so that was a temporary benefit didnt repeat in the second half hour do a permanent cost actions because demand levels are lower.
That would be lower for some.
Some period of time.
I think those are the major drivers of profitability, we're adding we're investing more mega trends that we see a lot of opportunity to grow.
And we want to pursue those opportunities for long term growth so that that is a lever as well.
But for the most part I mean, I think we're just.
Cycling through a much a very depressed by market.
Now starting to recover showing strong results because of it.
Thanks, Wamsi. Thanks, so much.
Our next question comes from Jim Suva from Citi Investment Research. Please go with your question.
Thank you can you just talk a little bit about any visibility you have on channel inventory or sometimes you sell into a middle.
Harness maker or middle aggregator, whether it be Delphi is there other bolt on the automotive side as well as the eight track side.
Yes on the auto side is a lot more transparent to us to be candid auto Hbr aerospace is a huge amount more transparent we talked about the fact that we believe we built about $25 billion of inventory in the channel in automotive in the first half of the year. We believe that that has on wound in the third quarter. We had originally expected that to unwind.
Over the balance of the year, so what unwound quicker than we had thought.
We don't see any evidence that it aerospace H.B.R. added auto that there is any significant inventory build.
And candidly, Jim we judge that based upon discussions with our buyers but also.
Calls, we get if something Doesnt ship on a Friday and it was supposed to add there that supply chain is fairly tight. We don't believe there is a lot of inventory it on the industrial side, it's a little harder you point out that's the one area, where we do sell through some distributors the indications that we get is that.
There's not a ton of inventory build there I think we all experienced this being consumers in terms of going to try to buy major home appliances or other goods. There is a backlog in terms of demand that has not been able to get fulfilled and I would use that as a proxy for I believe in terms of at least our products, whether or not there's any significant pen.
Top.
Inventory in the system.
We're not calling anything else that we're viewing will unwind in the near term.
Okay, and so unwinding does it get you back to equilibrium or as unwinding get you back to a little bit too lean than where you'd like to be if there isn't anything to unwind and so.
I would say that we're probably about at equilibrium now in terms of inventory in the supply chain.
I would say that with the increased demand you might see customers trying to build a little bit more inventory to make sure that they can serve end market demand rather than in a mode of cutting back on inventory that would be where I think we are on the continued great.
Great. Thanks, so much for the details and clarifications.
Excellent.
And our next question comes from Michael Filatov from.
Bambara capital. Please go ahead with your question.
Hi, guys. Thanks for taking my question.
Just wondering if you could update us sort of Boston.
Revenue for give back.
Sort of how that performed that business and high voltage contactors performed relative to the rest of the business and then also sort of broadly speaking I know theres more high voltage contactors and sort of higher performance electric vehicles and I was wondering how many contactors generally speaking on average do you guys have right now on Tvs or BD and how that you see that trending over time.
<unk> business.
Yes, so a couple of points in there so when they get back business, although we're not calling it out directly I would say it significantly.
Significantly down market gig Heck has continued to grow quite nicely.
Thats driven based upon the content growth that we're seeing for their offering that they have.
And so we had a we bought this business we do it what's going to be a very fast grower.
Very accretive growth rates to Sensata overall, and that's what we're targeting from an M&A standpoint.
Businesses that can have differentiated margins, but also be growers that grow at rates much faster than the core business kicking back has fulfilled that in terms of the number of Contactors that same platform system architecture question. There are a number of vehicles out there today that have.
Four to six Contactors in place.
Others have to Contactors in place.
Given the magnitude of the cost associated with Contactors I would expect that overtime.
That will that architecture associate that will push down to fewer numbers, but going in the other direction are pushing in the other direction for more protection and therefore more contactors is that understanding what this application does it protects the most valuable asset in the in the vehicle the battery and it also protects the charging equipment and the park.
[music].
Applying the charge so it performs an incredibly important function.
What we have is that we will always look to take out cost to be more competitive, but we don't view that as being any I think that would be unusual or negative toward our investment case on this particular acquisition.
Thank you Michael.
Our next question comes from Joseph.
Nano from Cowen. Please go ahead with your question.
Hey, Good morning. This is Robert in for Joe Thanks for taking my questions.
I just first wanted to see if you could provide.
A view of what you're seeing in terms of underlying investment auto production facilities is just more like filling existing capacity are you seeing anything different across the various regions.
And in terms of our customers' Joe is that what you're asking more how we're building out our capacity I'm sorry, just if you could be a little more specific.
In terms of your customers like.
Their facilities, where their underlying investments being redirected.
I don't see any meaningful change in terms of our customers where their design.
Designing manufacturing assembling vehicles.
No and no major change on our part either in terms of how we're doing this we just talked about getting back we now have automated.
High speed lines in both China and in Mexico to serve the global automotive market.
And so weve navigated through some of the challenges in terms of trade and so forth that have.
Have expressed but we did it I just haven't seen it resulting in any major change in terms of supply chain development.
Great. Thank you Robert.
Our next question comes from Craig Hettenbach from Morgan Stanley. Please go ahead with your question.
Yes. Thank you Jeff looking at the industrial market beyond what looks to be kind of an industrial kind of recovery here can.
Can you maybe just frame the growth expectations in that market I know what does get a lot more attention given the significant size, but just across the portfolio you have kind of in the mid to longer term what type of growth opportunities to see an industrial.
Yes, great question I appreciate the opportunity to talk about some of the other end markets that we serve obviously industrial is enormous market highly fragmented we have a number of different products and end markets that were serving there you.
You know that the third it's actually the market that's gone down the lesson, but also has recovered the least amount during the year so that different that Todd.
Market.
Concentration in terms of a lot of different areas. Its been very helpful. So third quarter was a very strong quarter for our industrial business. It was only down about 2% really driven based upon the demand for medical device small portion of that overall business, but that really helped it.
And it's it's a target area for us.
So when we start to talk about things like smart grid infrastructure that would fall more squarely in the industrial business certainly I will continue to explore.
All industrial Iot type applications within that business. So.
Lots of opportunity. It's important also to note that the biggest component of that business is our legacy controls business and it's a very profitable business, a very sticky business potash slower growing business and so when you look at that business.
Total our target areas will be on the faster growing areas as opposed to the core.
Core businesses that we have in there that are GDP like growers.
Okay that helps thanks.
Okay.
Our next question comes from Reg Haven from Wells Fargo Securities. Please go ahead with your question.
Hi, good morning, all.
Yes.
Talk about.
And with that same intend the auto as well.
Thats correct.
Cm autos, obviously investments are increasing thanks can you also talk about anything.
Hi, Ken.
No actually waiting Undrawn.
Hi, Matt.
Thanks, Ken.
Yes.
Yes, so I apologize I think I got the nature of the question, but let me repeat it just to make sure. So it's that where the Mega trend investment is being focused across end markets is that the nature of the question.
Yes.
Yes.
Industrial portion and online what's going on.
Okay. Okay. Okay, yes, so are we.
We're being very purposeful that our mega trend our investments our company wide initiatives.
And because we believe that these mega trends will impact all of the markets that we serve now it's critically important that we have a very strong position in electrification in auto so as the trend from combustion engine to electrify platforms continues that we're well positioned for that but make no mistake we are targeting.
Adding capabilities that can serve the broader market.
And so.
Clearly as we looked at the.
Organic development that we have ongoing.
That will serve auto industrial.
The hbr market, a little less so the aerospace opt for obvious reasons I think electrification is a little further out but it serves all of those end markets and you will see that both our organic and our M&A related activity will be focused on all of the markets as we pursue these macro trends.
And that applies to the smart and connected as well, it's more concentration in smartconnect that around.
Transport and.
And logistics change chains.
Our job, but certainly with the focus would be to.
Look at it pretty broadly across a number of market segments.
Got it.
One.
Okay, then show cops.
Heading into 2021 can do able to talk about.
Thanks.
Can you, let us know how do we think about it and then couldn't netting 20, and 20 2021, and if you can help us.
And then just on the inventory situation then.
Yes, Yes, you are correct.
I think the only yen would have finished inventory invested yet.
The influence production in 2012.
Okay, so that sounds.
Thereby identical buyer that makes itself.
Yes so.
Obviously, we're where we're not going to provide specific guidance on 2021, but if you. If you look at all of that third party forecasts. It would suggest that their growth will continue from 2020, where we landed into 2021.
You look at all of our end markets, even at the fourth quarter guide there down fairly dramatically from 2019, and candidly nowhere near peak levels right. So if we pick the automotive market specifically.
We're good we're forecasting call it down close to 20%.
Year over year, the peak auto markets were back in 2016 2017, So we're nowhere near peak automotive market. So our view would be that.
2020.
It is.
Fairly good point in terms of to recover from.
We're not taking that for granted everybody's watching signals to see whether or not there could be a double dip or other impact, but the feeling is that from here or there will be some nice growth potential.
Potential.
Over the next year or couple of years, depending on the rate of recovery certainly the recovery. Thus far this year has been stronger than at least I would have anticipated.
Thanks, Steve.
Our next question comes from Matt Sheerin from Stifel. Please go ahead with your question.
Yes. Thank you just a couple of quick ones from me here. This.
Just regarding the commentary around M&A, Jeff and that being a priority for cash use.
You've also talked about focusing on areas of growth emerging markets all of the things that fit into your.
Technology themes, but.
But could you talk about a little bit more on that strategy, particularly are we continuing to expect more tuck in acquisitions versus the larger deals you did four or five years ago.
Yes, yes.
That just sort of clarify so we've we've kept the pipeline for M&A quite full during this time, although we've been for obvious reasons cautious in terms of capital deployment in the area of M&A other than the one small transaction that we did with Rico.
The near term focus will be on more bolt on bite sized type M&A. So so nothing in our sort of targets a little bit of that billion dollar purchase price or billion dollar purchase price type type range. The targeted areas will be around the electrification and smart.
Acted areas, so electronic equipment broadly not just auto electrified equipment and smart grid infrastructure and also around smart connected transport and logistics that as a focus we're also going to be focused on not only high growth segments, but by businesses that will be highly accretive to sensata is growth rate.
Right. So it's they're not value plays where we are going to buy something we're going to extract cost.
We believe that the the businesses that we're targeting could have differentiated margins, perhaps not at sensata is margin, but differentiated margin.
But very high growth rates, and where we have the ability.
Or the right to play right, so solutions or competencies that we have more end markets, where we have specific knowledge regarding bringing bringing mission critical solutions. So that's our target area not big Big Bang type transformational stuff more bolt on to further our strategy.
Thank you Matt.
And our next question comes from Shawn Harrison from Loop capital. Please go with your question.
Hi, good morning, everybody and thanks for taking the question I guess my inability to remember to hit Star one.
Got out of email SaaS or asking for it.
Exactly more on the guidance specifically a lot of inbound emails just asking about.
If we could either even further define Paul the step up in the Opex sequentially. I know you cited incentive comp and more investments and some other factors, but just is there a way to quantify the exact dollar amount you are seeing step up in opex into the fourth quarters to kind of level set us as we start to then think about 21.
I'd say it's a.
So were up sequentially from Q3, Q4 about 13 half million.
And I would have said.
About the incremental investment we would have been up about 20 with improved volumes. So it's probably 7 million.
Incremental investment you had when you consider the items I mentioned earlier on the call.
Very helpful.
Good question.
Okay, and then as a brief follow up.
Just on the electrification side of it the car Jeff maybe if you could speak to three years out it's $50 of content now.
I think we all expect rates to go up charging time to come down what would that potentially and maybe other items you can add into the vehicle take your contact up two from $50 on average now.
Three years now.
Yes, So I think it's a question of Bob.
The point the item that you pointed out how quickly.
Our customers migrate toward these harder do applications I believe strongly that is the direction that everything will go and that requires.
That types of capabilities that we have.
Given the fact that we believe on those vehicles today, we have $50 of contents based upon where were sold in the <unk>.
Obviously, we're not stopping there.
And will we have a number of organic initiatives underway.
We will continue to drive that door and we'll also without question is target other M&A related activity that will continue to move that north of that number.
And so.
It's a large world out there in terms of that target opportunity don't want to make a specific call on what our target content per vehicle is but there's there's ample.
Space, if you will for us to pursue that can continue to drive that in a very positive direction for us as a company.
And ladies and gentlemen, with that we have reached the end of today's question and answer session.
I would like to turn the conference call back over to take up there for any closing remarks.
Thank you Jamie I'd like to thank everyone for joining us. This morning, Sensata will be participating in the upcoming RW Baird Industrial Investor Conference on November 10.
And then the Milli Us industrial Investor Conference on December nine.
We look forward to seeing you at one of those events or on our fourth quarter earnings call in early February. Thank.
Thank you for joining us this morning and for your interest in Sensata, Jamie you May now end the call.
And ladies and gentlemen, with that we will end today's conference. We do thank you for attending.
You may now disconnect your line.