Q1 2021 Sensata Technologies Holding PLC Earnings Call
Good morning, and welcome to the Sensata technologies first quarter 2021 earnings conference call.
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I would now like to turn the conference over to Jacob Sayer, Vice President Finance. Please go ahead.
Thank you Andrew and good morning, everyone.
To welcome you to some thought as first quarter 2021 earnings Conference call. Joining me on today's call are Jeff quotations out as CEO and President Paul.
Some thought as Chief financial Officer.
The financial results press release, we issued earlier today, we will be referencing a slide presentation during today's conference call.
The PDF of this presentation can be downloaded from simple as an investor relations website.
We will post a replay of today's webcast. Shortly after the conclusion of today's call.
As we begin I'd like to reference <unk> Safe Harbor statement on slide two during.
During this conference call, we'll make forward looking statements regarding future events or the financial performance of the company that involve certain risks and uncertainties.
Actual results may differ materially from the projections described in such statements.
That might cause differences include but are not limited to those discussed in our forms 10-Q, and 10-K as well as other subsequent filings with the SEC.
On slide three we show GAAP since on GAAP results for the first quarter of 2021.
We encourage you to review our GAAP financial statements. In addition to today's presentation.
Most of the subsequent information that we will discuss during today's call will relate to non-GAAP financial measures reconciliations of our GAAP to non-GAAP financial measures are included in our earnings release and in our presentation materials.
The company provides details of its segment operating income on slides 12, and 13 of the presentation, which are the primary measure management uses to evaluate the business.
Jeff will begin today's call with highlights of our business during the first quarter of 2021.
He will then provide an update on our recent progress and our key electrification and smart <unk> connected megatrend growth areas.
Paul will cover our detailed financials for the first quarter of 2021, including organic and market outgrowth by business unit, our segment reporting and provide financial guidance for the second quarter and updated guidance for the full year 2021.
Well then take your questions after our prepared remarks now.
Now I'd like to turn the call over to <unk> CEO and president.
Okay.
Thank you Jacob and welcome everyone.
Like to start with some summary thoughts on our performance during the first quarter of 2021 as outlined on slide four.
Business recovery, we experienced during the second half of 2020 gained steam during the first quarter. Our agile response to increased demand drove 22% revenue growth from the prior year period.
A record $942 5 billion.
We delivered 198 billion and operating income during the quarter, an increase of 61 4 million and 330 basis point expansion in margin from the prior year period.
This growth is a testament to our leading market positions and the strength and flexibility of our manufacturing and commercial model.
We continued to capitalize on improving markets and supported our customers as they return to higher levels of production during the quarter.
The combination of more robust demand are strong market growth and the acquisition of <unk>.
That's enabled us to raise our financial guidance for the full year.
I'd like to recognize the innovation and hard work of our entire team in achieving these strong results.
Looking at our performance year over year, we once again delivered strong market help growth.
For the first quarter of 2021, we produced a thousand and 70 basis points of outgrowth in our heavy vehicle off road business.
At 910 basis points of outgrowth in our automotive business.
Since <unk> is in a strong financial position.
We generated 77 million of free cash flow in the first quarter and we took additional steps to further enhance our financial position and flexibility.
During the first quarter, we redeemed our six net quarter notes that were due in 2026 and.
And issued new notes due in 2029, and a historically low interest rate of 4%.
These transactions extended the average maturity.
Lowered our total cost of fixed debt by 80 basis points to four five per cent.
We are confident that our new business wins in 2021 will exceed last year's level of 465 billion.
This solidifies our ability to continue to deliver strong outgrowth in the coming years.
In smart and connected we closed the previously announced acquisition of <unk> technologies on April one.
Greatly expanding our ability to provide data insights to transportation and logistics customers and adding a new customer base as well for these solutions.
We continue to invest in our megatrend growth initiatives and increased our organic investment to $12 million in the first quarter from 6 million in the first quarter of last year.
These investments will allow us to pursue significant market opportunities.
We also achieved a meaningful milestone in electrification through a joint venture with Charade electronics, which I'll talk more about on the next slide.
Moving to slide five some sort of takes a holistic view of electrification and its growing impact on the markets we serve.
Electrification is not just about electric light vehicles to us, but it includes heavy vehicles and charging infrastructure necessary to support this ecosystem.
We see additional opportunities in industrial and grid applications, some of which are more nascent today.
Since <unk> is already up later.
Leading provider in high voltage protection on Evs, and charging infrastructure and we intend to participate in areas of the evolving market that enable electrification to become more widespread.
Our joint venture with Charade electronics extends our electrical protection capabilities to mass market Evs and other electrified equipment worldwide.
<unk> will contribute access to its ceramic high limitation contactor intellectual property.
These contractors are optimized for medium voltage applications in the 150 to 400 Amp range common in mass market vehicles.
They will also dedicate engineering resources and contribute manufacturing equipment to the JV.
So <unk> will contribute $9 5 billion and dedicated application engineers and sales people and we plan to consolidate the financials of the JV in our P&L.
The JV will provide medium voltage contactor to transportation Oems in China.
And since Saddam we'll sell the product line to customers elsewhere in the world.
This JV expands our contact our capabilities in the automotive market to vehicles that have shorter range is in longer charging times, which are more common in Asia.
This enables <unk> to offer a broader electrification solutions set for electric vehicle manufacturers globally and increases our total addressable market by more than 500 million by 2030.
We are enthusiastic about this new partnership and the opportunities it provides.
As I mentioned electrification is to us is more than <unk>.
And since <unk> seeks to be a partner of choice for heavy vehicle and industrial Oems transitioning to electrified solutions as well.
So the thought is a leading provider of electrification solutions for charging station Oems, including those shown on slide six.
In addition, we recently signed an exciting business wins.
With new commercial EV powertrain supplier highly on an E b commercial truck manufacturer workhorse, extending our electrification efforts.
During the first quarter as previously announced we completed the acquisition of lithium balance to add battery management systems to our product capabilities.
We're expanding our capabilities in the E mobility space beyond components by developing hardware and software solutions, including battery management solutions for heavy vehicle and industrial applications.
This also represents an incremental 500 billion in addressable market for Sensata by 2030.
Moving to slide seven we are expanding the electrification solutions, we provide for critical applications across all end markets, we serve but especially in automotive.
The rapid introduction of new electric vehicles provides a healthy tailwind for sensata as revenue growth.
Our content <unk> represents a 20% uplift in content value as compared to the internal combustion vehicles of similar class.
There's content uplift is derived from a broad array of some sort of sensors and other components that we design into battery electric vehicles in many cases using the same underlying technology product families that we use in internal combustion vehicles.
Additionally, certain sensors carryover directly from internal combustion vehicles, such as brake pressure or tire pressure sensors.
We also designed additional sensors or devices unique to <unk>, such as contact or as an electric motor position sensors.
We are broadening and deepening our portfolio our product portfolio to support this expanding market.
Our automotive addressable market is large today and growing rapidly.
Applications in the internal combustion vehicles make up most of our automotive addressable market today and this space is expected to continue to grow over the next 10 years.
Even with the shift in type of vehicles produced.
In addition, while the electrification applications that we serve represent a smaller market today. They are expected to grow very rapidly until they become an even larger opportunity than internal combustion engines for sensata by 2030.
As a result, we are expecting a doubling of our automotive addressable market by 2030.
On slide eight I want to provide an update on another meaningful milestone we achieved in our smart <unk> connected initiative.
We closed the acquisition of <unk> technologies on April one and.
And welcome to turbo team its capabilities and its customers Tucson Sato.
<unk> is a leading telematics and data insight provider for fleet management across the transportation and logistics segments.
They bring a comprehensive suite of telematics asset tracking devices cloud based data insight solutions as well as emerging sensing applications and data services.
<unk> is complementary to and meaningfully extend sensata is organic smart and connected solutions for our commercial fleet managers and is consistent with some sort of strategy to move beyond serving vehicle Oems and engaging with the broader transportation and logistics ecosystem.
<unk> expands our smart connected addressable markets 215 billion by 2030 by adding cargo container and <unk>.
Eight vehicle fleet management to our heavy vehicle Oems and fleet focus.
<unk> is a fast growing business is it is it is expected to generate more than 100 million in annualized revenue in 2021.
It grow in excess of 20 per cent per year over the next several years.
We already have committed orders for more than 80% of the revenue, we expect <unk> to generate for the balance of 2021.
<unk> was also very profitable.
With approximately 50% gross margins and 25% EBITDA margins and requires little capital expenditure.
Also during the quarter, we were pleased to sign up another top 25, North American fleet customer and began installation of our solutions set demonstrating our ability to move from selling hardware to providing data insight solutions on a monthly recurring subscription model.
Later in the quarter, we'll webcast a teach in for investors covering our transportation and logistics data insight initiative.
So listeners can better understand this offering the evolving market and our go to market strategies.
I'm pleased with our progress against our megatrend initiatives, which supports our increased investment to pursue these large fast growing markets driven by secular trends.
We intend to continue our efforts to expand Sensata solutions for these areas organically through third party collaboration and through acquisitions.
I've said before we see numerous opportunities to utilize our strong financial position, our engineering capabilities supply chain and customer relationships to meaningfully enlarge our addressable markets through organic efforts as well as bolt on acquisitions.
And partnerships within these mega trends.
I'd now like to turn the call over to Paul Paul.
<unk>.
Thank you Jeff.
Key highlights for the first quarter.
Cash flow shown on slide 10.
Include record revenue of $942 5 million and.
An increase of 21, 7% from the first quarter of 2020.
Organic revenue increased 18, 8%.
Changes in foreign currency increased revenue by two 9%.
Adjusted operating income was $198 1 million.
An increase of 44, 9% compared to the first quarter 2020.
Primarily due to higher revenues.
Moving from cost reduction programs.
And favorable foreign currency.
Partially offset by elevated costs related to the industry wide semiconductor chip shortage.
Higher standard support megatrend growth initiatives.
Higher incentive compensation in line to improve financial performance.
Adjusted net income was $137 6 million.
An increase of $65 four per cent compared to the first quarter of 2020.
Largely due to higher revenues and improved operating performance in the quarter.
Adjusted EPS was <unk> 86 cents in the first quarter.
An increase of 62, 3%.
Moving to the prior year quarter.
Now I will discuss our performance by end markets in the first quarter of 2021.
Outlined on slide 11.
As I mentioned, a moment ago, we reported an organic revenue increase of 18, 8% year on year.
This compares with overall end market growth of approximately $10 nine per se.
Representing market outgrowth of 790 basis points person saada.
Our heavy vehicle off road business posted an organic revenue increase of 32, 8%.
Presenting end market growth of $22 one per cent.
In 1070 basis points of market outgrowth.
Our China on road truck business continued to post better than expected growth in the adoption of NSX mission.
Regulations.
We are also benefiting from a wave of electromechanical operator controls being installed in new offered equipment for.
For the past three years.
<unk> has delivered an average 780 basis points of market outgrowth.
Our automotive business posted organic revenue increase of 19, 3%.
Automotive production rebounded from the year ago period.
Growing 10, 2%.
Our automotive business product market outgrowth of 910 basis points in the first quarter.
Led by continued new product launches and powertrain emissions safety.
Electrification related applications and systems.
For the past three years automotive has delivered an average of 560 basis points.
Our market outgrowth.
Our industrial business increased 16, 8% organically.
Global industrial end markets continued to recover in the quarter.
Strong growth in heating ventilation and air conditioning.
New electrification launches.
In supply chain restocking benefit in our industrial business.
Our aerospace business decreased 22, 4% organically.
Reflecting reduced OEM production and much lower air traffic.
Which continues to negatively impact our aerospace aftermarket business.
New product launches I'm really in defense.
Partially offset the significant aerospace market declined this quarter.
Now I'd like to comment on the performance of our two business segments and the <unk>.
First quarter of 2021, starting with performance sensing on slide 12.
Our performance sensing business reported record revenues of $714 5 million.
An increase of 25 six per cent compared to the same quarter last year.
Excluding the positive impact from foreign currency of three 2%.
Performance sensing organic revenue increased 22 four per cent.
Performance sensing operating income was $195 8 million.
An increase of 45 percentage compared to the same quarter last year.
With operating margin of 27, 4%.
The increase in segment operating income was primarily due to higher revenues.
Savings from cost reduction actions.
Favorable foreign currency.
Somewhat offset by elevated cost line.
The industry wide semiconductor chip shortage.
Performance sensing generated incremental margin of 42% in the first quarter on higher revenue.
As compared to the prior year period.
As shown on slide 13 sensing solutions reported revenues of 228 million in the first quarter.
2021.
Greece of.
A 10, 9% as compared to the same quarter last year.
Excluding the positive impact from foreign currency of two 1%.
Sensing solutions organic revenue increased eight 8%.
Sensing solutions operating income was.
With $66 9 million.
An increase of $18 four per cent for same quarter last year.
With operating margin of $29 three per cent.
Like performance sensing increase.
Operating income was primarily due to higher revenues.
And savings from cost reduction actions.
Somewhat offset by elevated costs from the industry wide semiconductor chip shortage.
Sensing solutions generated incremental margin of 46% in the first quarter.
Revenue as compared to the prior year period.
On slide 14.
Corporate and other costs.
Not included in segment operating income was $68 6 million in the first quarter of 2021.
Excluding charges added back to our non-GAAP results corporate and other costs were $61 8 million.
<unk> was $8 six line from the prior year quarter.
Primarily due to higher research and development and business development spend.
To support our megatrend growth initiatives higher global incentive compensation costs aligned to our improving financial performance.
We currently expect approximately $50 million to $55 million and.
The megatrend related spend in 2021.
To design and develop differentiated sensor rich data insight solutions for the fast growing.
Transformational megatrend vectors of electrification.
In smart connected.
Slide 15 shows <unk> first quarter.
2021 non-GAAP results.
Adjusted operating income was up 44, 9%.
Compared to the same quarter last year, and adjusted operating margin increased 330 basis points to 21%.
The increase in both adjusted gross margin adjusted operating margin.
As it reflects the rapid increase in revenue from depressed levels.
Experienced last year due to the impact of COVID-19 pandemic.
We acted early during the day to reduce our cost structure.
<unk> to invest in Megatrends.
Using our end market that we believe will enable us to deliver long term sustainable growth.
We've included an operating income margin walk from the first quarter of 2020 to the first quarter of 2021.
Showing the margin benefit from price volume and productivity.
As well as the impact of certain cost increases including costs associated with the global shortage of semiconductors.
COVID-19 related costs.
Higher incentive compensation costs and.
And increased investments in our megatrend initiatives.
As shown on slide 16.
We generated 77 million of free cash flow during the first quarter, representing a 56% conversion rate of adjusted net income.
Which was tempered by rising accounts receivable from higher revenues.
And the timing of 2020 cash bonuses paid to employees.
During the first quarter of this year.
For the full year, we expect free cash flow conversion to be approximately 85% of adjusted net income.
For the full year 2021, we expect capital expenditures to be in the range of $160 million to $107 million.
Since that is net debt to EBITDA ratio was two nine times at the end of March.
Through increasing earnings and free cash flow generation.
We expect our net leverage ratio to be near the bottom of our.
Our target operating range of two five to three five times by the end of the year absent further acquisitions.
We are providing financial guidance for the second quarter of 2021 as shown on slide 17.
As a result of improving economic conditions, so for outgrowth in the acquisition of <unk> we.
We expect to generate revenues between $960 million.
$990 million for the second quarter of 2021.
Representing a reported revenue increase between 67%.
72% compared to the second quarter of 2020.
At the midpoint of guidance, we expect a foreign currency will increase revenues year over year by approximately $23 million.
Excluding the impact of foreign currency, we expect non organic revenue increase of 58%, 63% in the second quarter.
Our current fill rate was approximately 96% revenue guidance midpoint for the second quarter.
Our fill rate appear stronger as compared to previous quarters and.
Some customers have extended their order lead times in order to better ensure supply.
We expect reported adjusted operating income between $195 million.
$205 million.
The mid point operating income margin is expected to be 25%.
Which includes a 150 basis point increase in our operating costs.
For the global semiconductor chip shortage.
Basically the entire auto supply chain as well as other sectors.
On the bottom line.
We expect to report adjusted net income between 134 million.
$144 million.
And adjusted EPS between <unk>, 84, and 90 cents.
Which includes a <unk> <unk> increase from foreign currency at the guidance midpoint.
At the bottom of the slide we have provided an operating income margin walk from the second quarter.
2020 to the second quarter 2021.
This includes expected benefits from volume and productivity.
As well as higher costs associated with the semiconductor shortage.
Increased incentive compensation for our employees.
Increased megatrend investments and unfavorable foreign exchange.
As a reminder, the second quarter of 2020.
Included onetime savings of approximately $22 million from furloughs and temporary salary pay cuts.
We are increasing financial guidance for the full year 2021 as shown on slide 18.
For the full year 2021.
While a degree of market uncertainty remains and in particular the impact of the industry wide semiconductor solutions.
We are anticipating a continuation of improved.
Economic and business conditions.
We are also anticipating return of normal seasonality.
Which includes sequentially lower revenue in the third quarter as compared to the second quarter.
And finally higher fourth quarter revenue as compared to the third quarter.
In addition.
Our financial guidance now includes the financial contribution of zircon.
Accordingly.
We now expect to generate revenues between $3 $6 75 billion.
And $3 85 billion for the full year 2021, representing a reported revenue increase between 21% and 26% year on year.
At the midpoint of guidance.
We expect that foreign currency will increase revenues year over year by approximately $58 million.
Excluding the impact of foreign currency.
We expect an organic revenue increase of 16% to 21% in 2021.
We expect to report adjusted operating income between $755 million and $805 million.
Which includes the expected impact of the global semiconductor chip shortage.
Now anticipated to continue throughout the year.
At the midpoint operating income margin expected is expected to be 28%.
On the bottom line, we expect reported adjusted net income between $509 million.
$557 million.
We expect reported adjusted EPS between $3 20.
The $3 50.
Which includes a <unk> <unk> increase.
Our foreign currency at the midpoint of guidance.
At the bottom of slide we provide an operating income margin walk from 2020 to 2021.
To show the moving pieces impacting margins.
While improving revenue and associated productivity have the greatest impact on our operating income margin.
Costs related to the semiconductor shortage.
COVID-19 related costs incentive compensation for our employees.
The megatrend investments also have a meaningful impact.
On our operating income margin.
On slide 19, we provide our revised estimates for OEM production growth for 2021.
As compared to our initial guidance in early February.
Automotive production is expected to rebound sharply this year from last year.
But at a pace slightly lower.
Then expected in February.
Moving further production slowdowns caused by the global semiconductor shortage.
Global automotive production is now expected to grow 12%.
However, our heavy vehicle off road and industrial end markets are now expected to grow faster and.
In 2021, and we had communicated in February.
These market assumptions underpinning our outlook for higher revenue and earnings this year.
In sum.
Since I'm delivered an excellent first quarter, despite broad supply chain disruptions.
We expect this strong performance to continue through 2021.
As demonstrated by the financial guidance, we're providing today.
Driving this performance is our continued ability to achieve our growth targets.
<unk> the secular long term market outgrowth targets 400, 600 basis points for our automotive business.
600, 800 basis points or heavy vehicle off road business.
Now, let me turn the call back to Jeff closing comments.
Thank you Paul and let me wrap up with a few key messages, which are outlined on slide 20.
<unk> has responded very well to the rapid improvements in many of our markets demonstrating the strength and flexibility and reliability of our business and organizational model, which enabled us to capitalize on the recovery in end market demand.
Our ability to respond quickly to shifting demand.
<unk> us well as a trusted resource for our customers.
We are delivering attractive end market outgrowth.
We remain confident in our ability to sustain this attractive end market growth into the future.
Based upon our strong levels of new business wins.
We continue to invest in Megatrends and other growth initiatives that are opening large and rapidly growing opportunities for some sort of across all our end markets.
We are making excellent progress in electrification as evidenced by our new business wins as well.
The acquisition of lithium balance and our joint venture with Charade electronics.
<unk> extends our electrification offerings.
And smart and connected we are very pleased to have completed the acquisition of <unk> technologies and.
And to welcome that team and that customer base <unk> Sada.
We continue to believe that the overall market environment may provide interesting opportunities to further strengthen our portfolio through strategically important value, creating acquisitions <unk> joint ventures.
In addition, we are pursuing new technology collaborations and partnerships with third parties to expand our capabilities and accelerate our megatrend growth.
We expect to continue to deliver industry, leading margins for our shareholders. While also investing in our growth and our people.
And finally I am excited about Sensata has long standing mission.
To help create a cleaner safer and more connected world.
Not just for our customers' products, but also through our own operations.
We believe we are having a meaningful contribution to a better world.
We are incorporating ESG considerations into our strategy to help ensure the long term sustainability and success of the company for all stakeholders.
We look forward to report more on this topic in the future.
Now I would like to turn the call back to Jacob Thanks.
Thank you Jeff.
Given the large number of listeners on the call, let's try to limit ourselves to one question each please.
Andrew Please assemble the Q&A roster.
Yes.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question.
Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Craig hitting Buck of Morgan Stanley. Please go ahead.
Yes. Thanks, Jeff can you just talk about the design activity, how it's trending in evs compared to last year and then also on the charging front I don't think that gets as much attention, but you mentioned a couple of wins in activity. There. If you can just expand on that.
Yes, I'd be glad to so all of our customers are investing heavily in the electrification trends that are occurring.
And the.
Governments around the world as they put together plans for investment in these areas.
It just builds on the momentum that we're seeing and so there is a lot of conversations going on with customers across all of our end markets on this front.
Really exciting time as we build our capabilities and we have warranted to talk with our customers about and so we see that trend continuing to accelerate it is important to note Craig we talked about it in our comments that there are roadmaps roadmaps product roadmaps associated with.
Core.
Products that our customers already have that will continue to provide opportunity for us that we're investing in and what I'm, referring to is internal combustion engines as well, but we're really trying to do the best we can to balance the investments and the things we're serving for our customers that are already on the books that will propel growth with the things that.
It will generate growth in the future and we think we're doing a good job balancing that right.
Thanks, Craig.
The next question comes from.
Amit Chatterjee of Jpmorgan. Please go ahead.
Good morning day doesn't make Nissan becoming.
Okay.
Can you hear me.
We can yes.
Yes.
If you could give me some color then on B shoot all day.
<unk> joint venture.
Would it be in Bloomington by market.
Really looking quite good.
This is simple.
The thing about the channel.
Yes, So let me let me touch on the charade joint venture.
First it's bringing to us new aspect of high voltage contactor, which have a high levitation.
Future that many of our customers are requesting as part of their our Qs as we work with them. So it's a key product capability that they bring and as I've mentioned it adds.
This mid voltage.
Amp range $1 50 to 400, which is something we've talked about is not having addressed with the acquisition of Giga back we were focused on the higher voltage applications, which we continue to believe will be the future for electric vehicles, but there's going to be a point in time here where.
The transition from internal combustion engines to electrified vehicles there'll be a big market associated with this mid voltage range.
And this allows us to go after a broader segment of the market.
The JV will focus on China.
And we have the right to use this technology outside of China, and North America, and Europe, and as we mentioned we will consolidate the results of this in our financials and then we'll show a minority interest.
In the financial statements to transfer the portion of the profit associated with this it's going to start building over time, we're already engaging with customers on selling this product portfolio, but it will build over time and we were excited about the future in terms of what this JV can bring to us as.
Our combined company for both us and for sure Rod.
Thanks for the question.
The next question comes from <unk> Mohan with Bank of America. Please go ahead.
Hi, yes. Thank you congrats on the strong execution.
I was wondering if you could comment on the semi shortages.
You clearly are baking in some some cost headwind here.
You are seeing from that are you baking in any revenue headwinds as well and related to that.
When I look at your guidance you, obviously have very strong performance both in <unk> and getting very strongly for <unk> when I think about the full year.
The organic revenue be seems to be about.
Upside seems to be about 80 million for the second half, but earnings seem to be somewhat down on the organic basis for the second half the incremental earnings associated with that so.
I was just wondering if you could help us think through what are the incremental costs that you are baking in in the second half of the year. Thank you yep great quantity.
Did I address the semi shortage and then Paul can address the guidance and profitability related questions.
So on the semi side, obviously everybody knows at this point. This is an industry challenge and not us inside a specific one.
I would say that I.
I think there were many that we're hoping that this would dissipate a little bit in terms of concern mid part of this year I think my view would be that this is going to be something that's going to be around until at least mid next year rather than going away.
We've taken many steps as we've talked.
<unk> talked about in terms of extending our orders with our suppliers to make sure that we have surety of supply.
And one other thing I would mention.
Is that.
There is a bigger impact associated with standard Asics.
Given that we're not immune to this right. We're weighted impact were impacted by the shortage, but because a large portion of our products are specific designs. We have we have customized asics and so when there is customized asics, there's very specific manufacturing.
<unk> that set up for this and so I think that because of that high level of.
Design and customization, we may be feeling a little bit less of this than some maybe is associated with those that pull on more standard asics.
Part of the business model, it's not something we are we planned to do but it's unfortunate benefit associated with their very designed and nature of our product categories Paul hit on that one.
Just trying to keep it simple we laid out what the impact of the chip shortage would be for the year.
It was it's about a percent.
And it's mostly around logistics cost expedite its supply chain is compressed.
So we are in.
Expedite inbound and outbound and serve our customers you're.
If you look at the margin profile for the year as the first half and second half are pretty flat.
And if you look at year over year when do you when you start to appeal the items there and you look at the conversion of profit net incremental revenue year on year, when you adjust for the acquisition currency and the chip shortage running in the.
Incremental margin in the mid 40 so.
I think its very strong performance I think it's good productivity good operating leverage good cost management alright.
All right in the midst of a very disruptive semiconductor supply chain.
Short fall.
Thank you great questions.
The next question comes from Mark Delaney with Goldman Sachs.
Go ahead.
Yes, hi, good morning, Thanks for taking the question does it give any other details you can provide on whether the higher outgrowth. That's inside of reported in the auto segment is being sold through rather than sitting in inventory.
Investors are asking about the potential for inventory being built up of electronic components.
Because you know, perhaps auto Oems are stuck waiting for semi chips to arrive, but there still are buying products like centers in contact or maybe they just want to be building that buffer of electronic products more broadly given some of the uncertainties related to the global supply chain.
Mark Great question, where we're spending a fair amount of time understanding whether or not ultimately the demand that we're seeing from our customers is raw demand I think that's the crux of your question.
We're looking at third party indications regarding overall demand you look at things like.
IHS estimates up vehicles, our production and so we look at PMI indicators, which are at a record high in Europe 62.
Asset 59.
China is still in the positive territory. So there are a lot of indications associated with what would drive raw demand for our customers' products and so those are all quite strong we're seeing no indication.
That there is any any meaningful supply chain.
Replenishment or buildup other than maybe in the industrial segment, we see a tiny bit.
Got it.
Indication I would give you is if you look at North American automotive vehicle days.
We're at 39 days at the end of the first quarter. We were at 48 at the end of the year. This is this is extraordinarily low.
We're all seeing the impact of this as consumers in terms of lead times to get products, not just vehicles, but other electronics and so forth.
We're watching this very closely because we obviously don't want to be whipsawed by those we're having extensive conversations with our customers to make sure that we understand raw demand as we prioritize where the manufacturing needs to be.
<unk> to make sure we serve our customers.
And we will continue to report on that but but the short and the short story is we're not seeing any meaningful lot buildup in the supply chain at this point.
Thank you Mark.
The next question comes from Luke junk with Baird. Please go ahead and wondering Jeff hoping you could talk about the is there a good deal, especially any initial feedback that you've gotten with the customers I know, it's still early but I'm wondering about the thesis around channels to market playing out.
As far as you start to engage with those customers.
Yes, so we just closed on April one.
Obviously, we had some engagement with them, but we were very careful during that.
That period, where we were waiting for regulatory clearance.
But you know that we've worked with them for the past year and a half. So we know the management team. We know we are working on some joint customers. It's been received very well. This is an acquisition that is very tightly aligned to our strategy. We've been talking about our initiative associated with smart connected for the last 18 months to two years and this.
Is squarely in that point, there's a lot of complimentary aspects of what this brings to us opens up a much bigger market in terms of not only the offering but the market segments that we'll be able to go after and it's true.
As we've talked about it's a very attractive business in terms of the growth trajectory and the data points that we see now that we have a couple three weeks and that we're able to look more closely at how that the rest of the year is panning out I mentioned that more than 80% of the 2021.
<unk>, who is already in orders from customers. So we're seeing very positive feedback, we're having a lot of engagement with customers who are their customers, where our customers are joint customers and excited about doing this teaching and.
The next couple of months. So that we can have that management team spent some more time with our investor base to explain in more detail what we're seeing.
Thanks Luke.
The next question comes from Matt Sheerin with Stifel. Please go ahead.
Yes, Thanks, and good morning, Jeff wanted to ask another question regarding the strength youre seeing in the.
Heavy truck and HBO are market you talked about.
Some some catalysts and drivers are in China, but could you talk about what youre seeing in other markets and they know that.
19 million to 20 was.
The down cycle and there were just talking about an up cycle in investment cycle is that what youre seeing or is it just a rebound off of the bottom here.
Yes, I think it's a combination of all of the above to be honest with you. So let me let.
Let me touch on Q1 first.
And let me first touch on the market for heavy vehicle across our segments within heavy vehicle. We saw first quarter at our first quarter expansion pretty meaningful expansion in all markets other than European on road, which was still down about 14% versus fourth first quarter of last year, but broadly 22 per.
Sent market recovery across the <unk> market.
And then coupled with what is just really really strong outgrowth.
Over 1000 basis points of outgrowth given.
Acceleration and continued.
Investment of rollout on a variety of programs that our customers have NSX and China is obviously an impact but Paul mentioned in the prepared comments also the continued migration from mechanical controls to electronic controls. So all the investments that we've made over the past 345 years.
And the trends that were occurring and HBO are benefiting us.
In addition to the market recovery that we're seeing ultimately dropping what is it 35% 36% growth year over year, and obviously Q2 was even greater 110 per cent growth with about 56% market growth as we go into Q2 are the only markets segment within <unk> that we see declining.
Our record is China.
It's down a tiny bit maybe 1% versus Q2 of last year and similarly on the full year, we see growth across market growth across all the segments with the exception of China, which is not new we had forecasted that ultimately that would be down a little bit for 2021 versus 'twenty.
Thanks, Matt.
Yeah.
The next question comes from Jim Suva with Citi. Please go ahead.
Thank you and great results and outlook. When you mentioned your fill rate I believe was like in the 90 per cent is quite high does that impact pricing for your.
Company products and margins what do you mean by that is do customers actually pay the same amount or pay a little bit more or a little bit less if they have more visibility and secured supply in a time of uncertainty and can you actually get above 100% like by running an extra overtime shift or does it just simply not.
That way thank you.
Sorry, it's Paul I'll take it Jim.
It does not affect pricing, specifically, we're not charging solutions, let people get in front of the line.
We're operating under R. R.
Purchase orders or contracts that we have with our customers.
Phil is stronger than we're seeing on the industrial side faster flow rate.
And in the learning there is that our customers are ordering.
Sooner in the process to ensure that they get the security of supply. They are looking for so the matter of really really ordering behavior more than pricing or any other economic behavior.
We serve all the demand that we can for our customers so to the extent the order we're going to serve it and so.
It could get.
You can get 100% if everything was.
<unk> ordered by the time, we have this earnings release, but typically that's not the case and we're normally in the <unk>.
<unk> been running in the low nineties.
So this is a little bit hotter, but it's been identified as to why based on our interactions with our customers.
Thanks, Jim.
The next question comes from Michael Phillips Hall, with Aaron Berg capital.
Please go ahead.
Thanks for taking my question guys, just a quick one on Sharon.
I understand it that your content per vehicle for Evs in China is obviously a lot lower than it is in North America and Europe.
And that's mainly due to day sort of lower voltage GBS you have in that market. So I'm wondering you know how did this charade acquisition change that content outlook for you guys in China, and what that will look like going forward.
Yes, you're hitting on one of the major thesis of why we did this joy joint venture.
It's about expanding the product capabilities and it's a capability set that candidly is just and higher demand in China right now and I wouldn't expect it would be for the next 10 or 15 years as that market continues to evolve.
And so and that's why the JV is focused on that end market right. So I had mentioned that the JV itself is going to focus on the China end market, but we were able to negotiate the ability to bring that capability into the other markets that we serve and clearly we're having those conversations as well, but it's just listen when every.
Auto maker out there has a different product strategy in terms of how they're going to go about this and the more capability we can bring.
Both in the form of products and engineering capability is going to make it a better environment for us to be able to participate and this definitely has the potential to drive their content per vehicle in China in the very positive direction. So.
That's where we are in that one thanks. Thanks Michael.
The next question comes from Joe Giordano with Cowen. Please go ahead.
Hi, guys, it's Rob on for Joe. Thanks for taking my questions. Just two quick ones for me.
First given the strong <unk> b.
Full year guidance I just wanted to see.
Given that production excellence relative of handicaps I'm, just curious if there's anything incremental that we should be aware of it gives you a little bit more caution for the rest of the year than you had.
Coming into Q1.
And then just on backlog how much backlog do you have from orders received the last few quarters that <unk> been unable to ship I believe you all have been under shipping relative to production the last few quarters.
Thank you.
This quarter, we actually don't see much inventory dislocation.
It was pretty balanced so when we look at our revenue and we try to unpack it.
Particularly automotive, which I think is what you're speaking specifically to we look at production.
We look at our outgrowth, which is our content growth, which we track by part number that's what's marching to a new platform and again pricing headwinds and so the math worked out quite well, where we were serving the market and we're also outgrowing the market based on our new business wins are watching those new business wins for the quarter.
Pretty balanced.
In the past, we've seen some inventory impact that affected our revenue, but it was muted in Q2.
In terms of serving demand we're serving.
I think the team has done an unbelievable job in the current conditions that certain demand that's out there.
And our fill rate is the best indicator, we can provide in terms of what the demand is and our ability to serve that demand as a point in time.
Okay. Thank you Joe.
The next question comes from Amit <unk> with Evercore ISI. Please go ahead.
Yeah. Good morning, Thanks for taking my question.
Let me go back to the calendar 'twenty, one EPS guide and I guess, if I think about it versus 90 days ago, you've taken up the guidance by 11 census, so but the Q1 beat alone was 14, and then I think FX and <unk> my muscle out about 10, 11 cents worse, it 90 days ago.
I guess in my head I would've thought that you would raise the EPS guide by 25 since March 11, maybe you just touch on what are some of the offset to that I'm not enabling that expansion and then on the semiconductor shortages on the road you talked a fair bit about this.
You know I feel like if I walk into auto dealership prices are going up so I'm curious what is your ability to pass price increases to your customers to offset some of these challenges over here.
Yeah.
So I mean, the biggest one is.
The chip shortage.
I mean, that's over $30 million.
I mean, <unk> certainly as you know somewhere in that 75 million in revenue, 20% op income I think currency is a little bit favorable, but and you called those out but the biggest issue is the chips.
So that's impacting our costs you've called it out is we had about.
$8 million to $10 million or so in the first quarter, we have another 30 and the rest of this nine months.
And it's also impacting your ability to hit some of the productivity goals that we were looking for because we're dealing with a very compressed supply chain hand to mouth in many cases, and so we're not able to get at some of the things. We wanted to work on how we saw clear line of sight to drive savings.
All those things will get deferred into 'twenty to 'twenty two.
But you know.
Again, I go back and look at the year over year, if you look at the.
Incremental revenue the incremental profit it's very strong.
If you adjust for acquisitions and the chip shortage in our investment in Megatrends and FX were until like I said, we're in the mid 40 <unk>.
Conversion of revenue and profit guidance I think it's a really strong performance.
And we've tried to lay it out in a margin walks to give you as much information as we possibly can so what do you understand how the margins progressing for 2020 one.
And I think thats, the new information from the last time, we provided the guide I think.
The general view was that the chip shortage was going to dissipate by mid this year, that's clear that its not happening given a lot of things, including high levels of demand that those.
Those companies are seeing right now and so now we're factoring in that longer term impact associated with it.
50 basis points in the first quarter to second quarter, and obviously, it's much higher than that.
And the percentage and the dollars.
Thanks for the question on it.
And is there time for an additional question like one more I think Andrew Thank you.
And that question or question. The question will come from David Williams with loop capital. Please go ahead.
Hey, Thanks for squeezing me in certainly appreciate it.
Just wanted to ask on the heavy vehicle side, if there's any dynamics. There that you think maybe it is driving that is there any of the infrastructure spending from a from a north American perspective, or how do you think about that in terms of potential upside as we kind of move through some of these stimulus packages that we're seeing throughout the.
Global economies.
Yes, so you cut out at the end there, but I think the question was regarding the significant change that we're seeing in the HBO or a market expectations versus even three months ago.
Do believe that.
Infrastructure spend in a variety of factors are driving that we.
We mentioned Paul mentioned in the opening comments the automotive demand actually is going down a little bit from what we thought it was going to be three months ago. The aerospace is down a little bit from what we expected three months ago.
<unk> was up a tiny bit.
But the big mover here is H B O R or we had anticipated about 6% market growth now, it's 15, 17% market growth and I do believe that infrastructure spend and other factors are driving that comp just in general confidence so.
That's certainly what we're hearing from our customers on what we're seeing in the news and reading about.
Thanks for the question.
Thank you. This concludes our question and answer session I would like to turn the conference back over to Jacob Sayer for any closing remarks.
Thank you Andrew.
Sorry, we weren't able to get everyones call, but want to allow people to get on with their day I'd like to thank everyone for joining us. This morning since auto will be participating in upcoming virtual investor conferences, including those sponsored by Oppenheimer JP Morgan and Evercore during the second quarter as Jeff mentioned will also we're also planning a teacher and about our smart and connected initiatives, including <unk>.
<unk> this quarter and we will share details of that event. Soon we look forward to seeing you at one of these events on our second quarter earnings call in late July.
Thank you for joining us this morning and for your interest income.
Andrew you can now end the call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Thank you.
Okay.
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Thanks.
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