Q2 2021 Sensata Technologies Holding PLC Earnings Call
Good day and welcome to Sensata technologies second quarter of 22, 1 earnings conference call.
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Mr. Jacob Sayer, Vice President of Finance. Please go ahead Sir.
Thank you Keith and good morning, everyone I'd like to welcome you here just inside of the second quarter of 2021 earnings Conference call. Joining me on today's call of Jeff quotation side of the CEO and President and Paul Badminton sort of thought of 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 call the.
The PDF of this presentation can be downloaded from since all of his investor Relations website.
This conference call is being recorded and will the post a replay of webcast on our Investor Relations website. Shortly after the conclusion of today's call.
As we begin I'd like to reference the side of the Safe Harbor.
Arbor statement on slide 2.
During this conference call, we will make forward looking statements regarding future events or the financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from the projections described in such statements.
Factors that might cause such differences include but are not limited to those 2.
And our forms 10-Q, and 10-K well the other subsequent filings with the SEC.
On slide 3 we show GAAP sort of thought of GAAP results for the second 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.
Q2, non-GAAP financial measures.
Conciliations of our GAAP to non-GAAP financial measures are included in the earnings release and in our presentation materials. The company provides details of at the segment operating income on slides 11, and 12 of the presentation, which are the primary measures management uses to evaluate the performance.
On the business.
Jeff will begin today with highlights of our business during the second quarter of 2021. It will then provide an update on our recent progress in our key some sort of insights and electrification strategic growth areas.
Paul will cover our detailed financials for the second quarter of 2021, including organic.
Nick and market outgrowth by business unit, our segment reporting and provide financial guidance for the third quarter and updated financial guidance for the full year 2021.
We will then take your questions. After our prepared remarks, now I'd like to turn the call over to inside of the CEO and President Jeff Cote day.
Thank you Jacob and why.
Everyone.
I'd like to start with some summary comments on our strong performance during the second quarter of 2021 as outlined on slide 4.
The business recovery, we have experienced the beginning in mid year 2020 continued during the second quarter.
Welcome and we responded effectively to increased customer demand.
Which drove 72% revenue growth from the prior year to a record 993 billion.
Slightly above the guidance range, we provided in April.
While automotive and heavy vehicle production for the period came.
<unk> for the expectations because of the semiconductor chip shortage, the industrial business was somewhat stronger.
In addition, we benefited from during the second quarter from OEM efforts to replenish channel inventories.
We delivered 209 million.
In low end adjusted operating income during the quarter, representing 21, 1% operating margin.
Higher sequentially.
As well as substantially higher than prior year period.
This underscores our leading industry positions our success in pursuing strategic.
The factors and the strength and flexibility of our manufacturing and commercial model.
Looking at our performance year over year.
Growth once again delivered strong market outgrowth, well above our target ranges.
For the second quarter of 2021, we produced 2800.50 basis points of outgrowth in our heavy vehicle off road business.
And 990 basis points about growth.
We have automotive business, excluding estimated inventory growth.
Since the beginning of 2018.
We have produced 950 basis points of outgrowth on average in our heavy vehicle off road business.
615 basis points of our growth on average.
In our in our automotive business.
Paul will discuss our revenue outgrowth in more detail.
Since on a today is in a substantially stronger financial position and in part because of our excellent performance over the past year.
For example, we generated 120.
Average of $1 million on free cash flow in the second quarter.
Our current cash balance of $1.9 billion positions inside of well to continue to acquire businesses that will expand our presence in the critical growth factors of insights and electrification where.
Where we have already shown an important.
<unk> initial success.
Based on our business wins in the first half of this year and the robust forward pipeline, we are confident that our new business wins in 2021.
Will exceed last year's strong level of $465 million.
These new business wins.
The demonstrates customer content instant sada and fuel our ability to deliver strong outgrowth in the coming years.
We continue to invest on our growth initiatives in areas driven by underlying megatrends and increased our organic investments to $14 million.
In the second quarter from $7 million in the second quarter of last year.
These investments allow us to pursue significant opportunities and expand our product portfolio in high growth areas.
On slide 5.
The share an update on our meaningful progress and some sort of insights.
I'll remind you that we provided a teach in on our strategy and positioning in this area in early June.
A replay of that presentation remains on our website.
The insights initiative addresses a market that is large and fast growing and we are pleased.
By the traction we are gaining already with both current and new customers across various sectors.
Our revenue is on pace.
2.
To achieve $100 million annualized in 2021 and grow in excess of 20% per year over the next several years.
We have a substantial pipeline of over $800 million of business opportunities that have been identified and we are working diligently to close these opportunities to fuel growth.
Our efforts in this area of enabled us to close $20 million, a recent new business Awards.
At.
At this point, we have a very strong backlog of committed orders representing 100% of the revenue we expect to generate from insights for the balance of 2021.
These accomplishments demonstrate the value we generate for our customers.
Included in those new business wins is a large.
The win with a global transportation services business to track their refrigerated containers.
This win alone is worth over $10 million in revenue per year on average as it rolls out.
In addition, we were awarded a $6 million order from a large insurance carrier to drive growth of their.
Image based insurance offering.
This important win represents an instance, where we displaced an incumbent supplier.
And yet. Another example, since sort of insights recently, 1 wireless gateway and wheel and sensor business from a leading north American heavy duty trailer.
Expense should manufacturer.
To enable tire inflation and monitoring and a contract worth over 9 million of an annual revenue once that program launches.
These wins will fan out over time generating recurring revenue for our business as our customers adopt our solution set.
Moving to slide 6 since Sada is making excellent progress in winning new business in electrification.
In part because we take a holistic view of electrification and its growing impact on all of the segments we serve.
While the electric light vehicles capture a lot of attention.
2 was electrification also includes electrified heavy vehicles and the charging infrastructure necessary to support this ecosystem.
Sensata is already a leading provider of high voltage protection on Evs and charging infrastructure.
As the underlying industries.
Trees that enable electrification become more widespread.
We intend to be a key participants.
Supporting our growing base of customers.
Across our businesses, we have developed a substantial pipeline of over $600 million and electrification of new business opportunities.
Is that our sales and engineering teams are cultivating.
In the past 2 years that pipeline has generated over $280 million in design wins that are in the development phase and in the coming years are expected to be incremental.
To our more than $200 million in estimated revenue.
Revenue from electrification solutions in 2021.
We continue to win new electrification business at an accelerated pace.
During the quarter, a large premier European heavy vehicle OEM.
Awarded since sort of the design for a power distribution unit to help.
Power of their future electric commercial vehicles.
Power distribution units combined contractors fuses and battery management systems, all provided by Sun Saada.
These strategically important business win.
It's worth over $11 million in annualized revenue once it launches.
Okay.
Our joint venture with Charade electronics announced last quarter.
<unk>, our electrical protection capabilities to mass market vehicles.
And other electrified equipment, requiring medium voltage electrical protection.
This JV is already being awarded new design wins, including the battery protection contact.
Contact our business of a.
The large European OEM, intending to produce evs for the China market worth over 6 million of annual revenue.
In addition at the higher voltage and we recently were awarded.
In contact or designed from a north American OEM.
Using these contractors for their of electrified pickup trucks worth more than $18 million in annual revenue.
Utilizes that gigabyte robust solution.
Later in the year, we will webcast a teach in covering our electrification initiatives. So that listeners can gain a better understand.
Many of our offerings in this space the of.
All of the market and our go to market strategies in this key growth vector for Sensata.
In sum I am pleased with our progress against these initiatives, which supports our increased investment to pursue these large fast growing markets driven.
Understand secular trends.
As 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 partner.
Partnerships within these megatrends.
I'd now like to turn the call over to Paul.
Thank you Jeff.
Key highlights from the second quarter as shown on slide 8 include.
Record revenue of $992.7 million, an increase of 72, 2% from the.
Given by 1 of 2020.
Organic revenue increased 62, 9%.
The acquisition of absorbing the increased revenue by 4.4% and.
The changes in foreign currency increased revenue by 4.9%.
Adjusted operating income was $209.3 million an increase of 179.
The second compared to the second quarter of 2020.
Primarily due to higher revenues, partially offset by elevated costs.
Related to the industry wide semiconductor chip shortage.
It's been the support megatrend growth growth initiatives.
And higher incentive compensation aligned to improved financial performance.
The second quarter of 2.
<unk> thousand 20, the prior year comparison quarter included $21.6 million of savings related to temporary furloughs and salary reductions in response to the negative impact of <unk>.
COVID-19 on our markets and business.
Adjusted net income was $151.4 million.
An increase of 447%.
The scent compared to the second quarter of 2020.
Largely due to the significant increase in operating income.
Adjusted EPS was <unk> 95 in the second quarter, an increase of 428% compared to the prior year quarter.
Now I will discuss our performance by end market in the second quarter.
On 'twenty 1.
As outlined on slide 9.
Our organic revenue increase of 62, 9% year on year.
Is comprised of overall end market growth of approximately 45.
4%.
Estimated customer inventory restocking of 6.
2000 <unk>.
The market outgrowth of 1140 basis points for Sensata.
Our heavy vehicle off road business posted an organic revenue increase of 95, 7%.
Representing end market growth of 57, 6%.
Estimated growth of 9.
6%.
Due to customer inventory restocking.
In 2000, and 850 basis points of market off road.
Our China on road truck business continued to post better than expected growth.
On the accelerated adoption of N of 6 emissions regulations.
And we are benefiting from both the wave of.
1 part of chemical operating controls being installed the new off road equipment.
In the early stages of radar installations on heavy vehicles as the safety feature.
We do expect market outgrowth remained high for the balance of the year or of heavy vehicle business.
Of the NSX regulations in China.
Of led to substantial.
<unk> increased content per truck.
Our automotive business posted an organic revenue increase of 74, 9%.
Representing the end market growth of 56, 1%.
Estimated growth of 8.9% due to customer inventory restocking.
990 basis.
The electric points of market outgrowth.
Our automotive business benefited from new product launches in powertrain and emissions safety.
And the electrification related applications and systems.
Vehicle inventories, especially in North America remain at historic lows.
Signaling of tailwind to automotive market growth.
Based on stable future.
Our industrial business increased 29, 2% organically as global industrial end markets continued to recover in the quarter.
Strong growth in heating ventilation and air conditioning, new electrification of launches and supply chain restocking benefited our industrial business.
For the first of our aerospace business increased 26% organically.
Reflecting somewhat improved OEM production and air traffic.
What drives our aerospace aftermarket business.
New product launches, primarily in defense and improvements in aftermarket.
The enabled our aerospace business to grow faster than market this quarter.
1 of the reasons, our outgrowth to market is so high this quarter.
Is that the comparison revenue in the second quarter of 2020 was unusually low.
Reflecting widespread plant closures in response to the COVID-19 outbreak.
Slide 10, deconstruct this dynamic for you.
Showing what.
Would happen if we compare this quarter's outgrowth from a normalized quarterly revenue figure instead of the low point in 2020.
The resulting adjusted outgrowth of 1640 basis points for heavy vehicle off road.
640 basis points for automotive.
Are still well above our target ranges.
These numbers are more appropriate figures the compared to other quarters on a standalone basis.
Now I would like to comment on the performance of our 2 business segments in the second quarter of 2021.
Starting with the performance sensing on slide 11.
Our performance sensing business reported record revenues of.
$741.9 million.
An increase of 92, 6%.
Compared to the same quarter last year.
Excluding the positive impact from foreign currency of 5.8%.
And the positive impact on the <unk> acquisition of 6.6%.
Performance sensing the delivered.
Livered, 82% organic revenue growth.
The performance sensing operating income was $202.1 million.
The increase of 232, 6%.
As compared to the same quarter last year.
With operating margins of 27, 2%.
The.
In the segment operating income was primarily due to higher revenues.
Somewhat offset by elevated costs related to the industry wide.
On the conductor chips shortage.
The prior year quarter included savings related to temporary furloughs and salary reductions.
Performance sensing generated incremental margin.
<unk> of 43% in the second quarter and higher organic revenue as compared to the prior year period.
As shown on slide 12.
The solutions reported revenues of $250.8 million in the second quarter of 2021 and.
The increase of 31.1 per.
<unk> percent as.
As compared to the same quarter last year.
Excluding the positive impact from foreign currency of 3.1%.
The <unk> solutions delivered 28% organic revenue growth.
Sensing solutions operating income was $76.5 million an increase of 30.
1.1% from the same quarter last year.
The operating margins of 35%.
The light performance sensing.
The increase in segment operating income was primarily due to higher revenues.
Somewhat offset by elevated costs from the industry wide semiconductor chip shortage.
And again on the prior year core.
<unk> savings related to temporary furloughs and salary reductions.
Sensing solutions generate incremental margin of 37% in the second quarter on higher organic revenue as compared to the prior year period.
On slide 13 corporate and.
Other operating expense is not included in segment operating income were $74 million in the second quarter of 2021.
Excluding charges added back to our non-GAAP results corporate and other costs were $67.7 million.
An increase of $27.8 million from the prior year quarter.
And clearly, reflecting higher research and development and business development spend to support our megatrend growth initiatives and higher global incentive compensation costs of.
Alliance of our improving financial performance.
The prior year quarter included temporary savings from furloughs and salary reductions.
We currently expect approximately $50 million to $55 million and megatrend related spend in 2021 of.
Up 70% from 2020 to.
The design and develop differentiated sensor rich and connected data solutions for the fast growing.
And transformation of Mega trend vectors of elect.
Expectation and since on the insights.
Slide 14 chosen sort of second quarter of 2021 non-GAAP results.
Yeah.
Adjusted operating income increased 179, 1%.
Paired to the same quarter last year on.
On the adjusted operating margin.
The increased 810 basis points.
The 21, 1%.
The increase in both adjusted gross margin and adjusted operating margin largely reflects the rapid increase in revenue.
From depressed levels experienced last year due to the COVID-19 pandemic.
We acted early during the pandemic.
To reduce our cost structure, while continuing to invest in megatrends.
Net are shaping our end markets that we believe will enable us to deliver long term sustainable growth.
We've included an adjusted operating income margin walk from.
From the second quarter of 2020 for.
For the second quarter of 2021.
Why.
As shown on slide 15, we generated $127 million of free cash flow during the second quarter representing.
Representing an 84% conversion rate of adjusted net income.
For the full year, we expect free cash flow conversion to be approximately 85% of adjusted net income.
On the full year 2021, we expect capital expenditures to be in the range of $160 million to $170 million.
The inside of the net debt to EBITDA ratio was 2.7 times at the end of June 2021.
The increasing earnings and free cash flow generation.
We expect our net leverage ratio to be near the bottom of our target operating range of 2.5 times.
The 3.5 times by the end of this year absent further acquisitions.
We are providing financial guidance for the third quarter of 2021 as shown on slide 16.
We expect to generate revenues between $920 million of $950 million for the <unk>.
Third quarter of 2021.
Representing the reported revenue increase between 17% and 21% compared to the third quarter of 2020.
Excluding the impact of foreign currency and the zero of acquisition.
We expect an organic revenue increase of 12% to 16% in the third quarter.
Our current fill rate is approximately 98% of the revenue guidance midpoint for the third quarter.
Our current fill rate of appear stronger as compared to previous quarters and.
Physician customers in the industrial and China Transportation industries, having.
Have extended their order lead times, the better ensure supply.
We estimate this extended ordering raises or Phil on approximately 6%.
As compared to other periods.
We expect to.
Some method of operating income between 189 million of $199 million.
At the midpoint adjusted operating income margin is expected to be 27%, which.
Which includes 140 basis points of increase operating costs associated with the global semiconductor chip shortage.
Net of customer recovery actions.
Reported net.
On the bottom line, we expect reported adjusted net income between 130 million.
$140 million and adjusted EPS between <unk> 82 and 88.
Which includes the 1 cent increase from foreign currency at the guidance midpoint.
At the bottom of the slide.
Actions have provided an adjusted operating income margin walk from.
From the third quarter of 2020 to the third quarter of 2021.
We are tightening the range of financial guidance for the full year 2021 on raising the midpoint as shown on slide 17.
For the full year 2021.
While the degree.
[noise] uncertainty remains in particular from the impact of the semiconductor chip shortage.
We are anticipating a continuation of the improved and more stable economic.
The business conditions.
We are also anticipating return of normal seasonality.
Which includes sequentially lower revenue in the third quarter.
Free of market share to the second quarter.
And roughly flat fourth quarter revenue as compared to the third quarter.
Accordingly.
We now expect to generate revenues between $3.77 billion.
And $3.84 billion.
For the full year 2021.
Representing a reported revenue increase between.
As from 4% of.
The 26% year on year.
Excluding the impact of foreign currency in the circle of acquisition.
We expect an organic revenue increase of 19% to 21% from 2021.
We expect to report adjusted operating income between 782.
<unk> thousand $818 million.
Which reflects expectations for higher costs on.
On the global semiconductor chip shortage and other inflationary impacts somewhat offset by recovery actions, we are pursuing with our customers.
At the midpoint of our expectation for adjusted operating income margin is 21%.
On the bottom line, we expect to report adjusted net income between 500 of $44 million.
576 million.
On an adjusted EPS between $3.42.
And $3.62.
Which includes the <unk> benefit from foreign currency at the midpoint of guidance.
At the bottom of the slide we provide.
Adjusted operating income margin walk.
For 2020, and 21 to show the moving pieces impacting margins.
On slide 18.
We provide our revised estimates for OEM production growth for 2021 as compared.
The expectations, we shared in late April.
We currently expect automotive.
And the introduction.
To rebound this year from last year.
The pace lower than expected in April given further production slowdowns caused by the global semiconductor chip shortage.
We are diverging from IHS production estimates for the year.
With a forecast for auto production that is more conservative than IHS.
Automotive.
We currently expect global automotive production to grow 5% for the year as.
As compared to IHS at 9% in their July update.
In addition, we are expecting third quarter automotive production for our markets to be about flat.
With production reported in the second quarter of this year.
On the other.
Jess.
Our heavy vehicle off road.
The industrial end markets are now expected to grow faster and to talk to 2021.
And we shared in April.
And in line with its normal pattern, we expect our industrial business to be seasonally lower in the second half.
As compared to the first half of 2021.
The hand, these assumptions underpin our current outlook for revenue and earnings this year.
In sum.
So inside of delivered an excellent second quarter.
With record revenue, despite broad supply chain disruptions.
We expect the solid performance to continue throughout 2021.
As demonstrated by.
The guidance, we're providing today.
Now, let me turn the call back over to Jeff for closing comments.
Thanks, Paul Let me wrap up quickly with a few key messages as outlined on slide 19.
Since sort of has responded very well to the rapid improvements in many of our end markets.
The finish of demonstrating the strength flexibility and reliability of our business and organizational model.
This enabled us to capitalize on the recovery in the end market demand and deliver on customer orders.
Our quick response to shifting demand positions us well as a trusted resource.
For our customers.
We are delivering consistently robust end market growth.
We remain confident in our ability to sustain this attractive end market outgrowth into the future based upon our strong levels of new business Awards.
And our large and expanding pipeline.
<unk> of the.
New opportunities.
We continue to invest in our megatrend driven growth initiatives.
That are opening large and rapidly growing opportunities for some sort of across all of our end markets.
We are making excellent progress.
And it's inside of insights on electrification.
Vacation as evidenced by the results so far this year as well as our new business wins in both areas.
We continue to believe that the overall business environment provides interesting opportunities to further strengthen our portfolio through strategically important.
Creating acquisition.
<unk> or 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 increasing investments in our growth opportunities and our people.
And finally I am excited about Sensata has longstanding mission.
To help create a cleaner safer and more connected world.
Not just for our customers' products, but also.
So through our own operations.
We believe we are meaningfully contributing to a better world.
We are incorporating ESG considerations into our strategy to bolster our long term sustainability and success of the company for all of its stakeholders.
We look forward to reporting more in the future on this topic now.
Now I'd like to turn the call back to Jacob Thank.
Thank you, Jeff given the large number of listeners on the call, let's I'll try to limit yourselves to 1 question each.
Operator, please assemble the Q&A roster, yes. Thank you we will now begin the question and answer session.
The question you May Press Star then 1 on you touched on phone if youre using a speakerphone. Please pick up your handset before pressing the keys to the try your question. Please press Star then 2.
Time, we will pause momentarily to assemble the roster.
And the first question comes from Moms email hang on with Bank of America.
Yes, thank you and congrats.
So on the solid results I was wondering if you could delve a bit deeper into your inventory assessment of that.
You broke it out which is which is very helpful. Where do you think this in incremental inventory is building and do you think that that gets absorbed in calendar <unk> or does the guide include some sort of the buildup.
Of inventory and just a follow up on that.
You noted the sort of more kinds of it of auto outlook versus IHS is that just purely based on supply constraints and does not set up for a better according to GAAP.
Given the given the fact that your auto production view has come.
On the materially for the rest of the 21. Thank you.
While the.
And Jeff on I will take that in terms of the inventory estimate.
How we do that is we have some sensors that we ship.
Very high market share and based on the number of units we ship versus the production.
We triangulated on a certain.
Amount of our parts that are going into customer inventory versus going in to produce vehicles. So it is an estimate but we think it's a pretty good estimate.
And that's automotive and in the heavy vehicle, we do know that some of our customers are having initial provisioning for their end of 6 <unk>.
On platforms and that inventory will stick and stay in their inventory levels. So we.
<unk> a good feel for it it's not a perfect answer, but it's a good estimate.
In terms of what we're seeing around the second half of this year. We do think some of this inventory will unwind them well.
I'll bring you back to last year in the third quarter of fourth quarter of 2020, we did see inventory. We did believe inventory levels were depleting at our customers.
And they were building inventory, we think in the first half and then the second half of this year, we will see some unwind so.
So it is having somewhat of an impact sequentially on our revenue.
And the automotive business and on.
On the second part of your question 1 of you on the automotive outlook.
I think youre right Thats the primary driver of.
Of our more conservative outlook supply chain constraints.
It's been well publicized there are some significant challenges associated with it you see it as consumers in terms of lead times for vehicles number of inventory days on North America at an all time low.
Having lived through that over.
Last year experienced of the challenges associated with it we're taking a more conservative view for the balance of the year and your AD added comment regarding the outlook for next year I think is absolutely right, even with a recovery of 5% of an auto globally year over year.
Here, we see this substantially below where the peak markets for auto have been historically.
So theres still a lot of tailwind for automotive growth off the markets that we're seeing in 2021.
Thanks, a lot of them.
Thank you and the next question kind of some of some challenges with J P. Morgan.
Hi, good morning, Thanks for taking the question Jeff.
Wanted to ask you more on the acquisitions come in that you had on I think sounds like.
Given where the leverage is and given the kind of the success you are having you sounded a lot more aggressive about book swing of acquisitions can you give us some color.
About like the pipeline of opportunities Youre looking at what areas are you really more focused on and besides kind of insights and electrification are you looking at any of those kind of pillars of growth that you want to kind of fall to invest it. Thank you.
Yeah, great. So I, you know I'm not sure it's a more aggressive stance on M&A.
Of a strong pipeline we've had some good execution on M&A and joint venture related activity already this year with lithium balance zero the sharar joint venture. So we feel as though we've got some really good momentum we will stay very disciplined the.
Focus areas are around Megatrends. So that's the.
The exclusive focus of our M&A related and joint venture related activity.
There'll be more bolt on cereal so of the goal is to create more M&A growth every year, rather than lumpy M&A growth.
And the criteria for M&A will be accretive revenue growth.
Differentiated margins.
<unk> and again, we will we will maintain our discipline in terms of evaluating opportunities and making sure. We're highly confident we'll be able to generate returns for shareholders as well as expanding our presence in these markets that we're pursuing.
Hopefully that's helpful. Thanks.
Thanks Amy.
Thank you and the next question comes from.
Luke junk with Baird.
Hey, good morning, Thanks for taking the question, Jeff just wondering if it'd be possible the breakout the $200 million and forecast 2021 of electrification revenue that you had in the deck by the 3 major end markets the auto industrial and the heavy vehicle and maybe also if you could speak to the relative growth rates you've seen this year between those as.
Well at least qualitatively.
Yes, so it's going to be more disproportionately weighted toward auto given that's where the business.
Is focused in terms of the ratio of our overall company revenue So I would say.
Broadly apply the same end markets.
<unk> exposure, we're seeing very substantial growth there we quoted that last year, we had about $120 million of electrification business. So you can see of substantial growth now some of that is coming as a result of the shift from internal combustion engines to electrified, but we see a lot of content growth there we've talked.
Many other occasions regarding the fact that the transition to electrified platforms as a tailwind for us in terms of content per vehicle on also content per piece of equipment.
And the opportunities, we see them as being even more significant outside of light vehicle auto rates. So.
I'll talk about power distribution units for commercial vehicles the amount of.
Opportunity, we have to serve broad infrastructure plays in terms of charging stations, we've talked about that so we see this as being a pretty broad based play on terms of growth opportunity for us as the company.
When you.
Thank you. The next question comes from Joe Spak with RBC capital markets.
Thanks, everyone.
Maybe just to get back to you.
Auto and the restocking I think last year, you talked about maybe like 30 of $35 million of restocking that seems like another 35. So.
Is the right way to think about that.
Thanks, Lee as the cumulative impact net.
Of of the inventory build or did some of that stuff from last year already already get on wound and then I guess related like when we talk to the automakers. It doesn't really sound like they're kind of stopped taking product because they want to make sure that they can complete the vehicles when they receive missing module.
So.
I'm wondering if this is again.
You're unwind of just conservatism. If you. If you think this can actually play out differently than maybe that the inventory build on lines slowly or bleeds out overtime.
And Joe last year.
If I am correct, I think we talked about inventories being.
<unk> completed in the third and fourth quarter, and then a rebuild of those inventories on the first half of this year.
I said, we use we triangulate on that impact based on centers of the very high market share that we're shipping into the marketplace that are at higher shipment level of in production. So it seems as if our parts of ending up in warehouses to profit.
Cost of possibly be there when they are actually able to get that last module to make sure. They can reduce the cars.
We've been seeing a much stronger growth trajectory because of the inventory growth and we do think something wines unwind in the second half.
But again this is the best our best forecast.
And we will have to see how it plays out in the third.
Joe want to add some some color to what we're experiencing on this front I think your observations are absolutely accurate that our customers are going really deep on this we're having multiparty conversations to make sure that we're being as coordinated as we possibly can regarding what we build.
<unk> to make sure that we can serve the customer because at the end of the day. It doesn't help if there are parts of that or not in inventory in the vehicle can't be produced because of another supplier. So theres a lot of coordinating activity thats occurring on that front to make sure that we.
We can deliver what was a record revenue.
So a lot of lot of work is being done to manage that process.
Thanks, Jim.
And the next question comes from Matt Sheerin with Stifel.
Yes. Thanks, Good morning, I wanted to ask about your commentary about the the input costs, particularly.
Semiconductor of cost for you in Europe.
The ability or inability to pass them along have conditions maintain the same or worsened and do you have any visibility into when your own supply picks up and then in terms of passing through those costs on how are those discussions with customers going.
All.
On the conversation with customers.
Going along as expected in the.
The difficult conversation, but were a strong partner and supplier to them and so to the extent.
We can share of those costs and they are willing to do that and we've had some success.
And so in the second half of the actual underlying gross costs are going up but the recoveries of our.
The cutting that so good progress there.
So that the net impact hasnt changed much from what we communicated back in April.
On the supplier side, Jeff I would say you want to add on here we continue to.
And particularly very being very aggressive here in second quarter of to secure inventory to make sure that we have are.
Our opposition in terms of ensuring supply we've gone into the spotlight on spot markets to buy material and feel like we're really well positioned from an inventory perspective to be able to serve the demand that we're seeing in the second half.
The higher levels of little bit higher, but we're comfortable about just given the the.
On the disruption of is it in the supply chain today.
That's good.
Thank you Matt.
Thank you and the next question comes from Amit <unk> from Evercore ISI.
Good morning, and thanks for taking my question I guess my question is really around the calendar 'twenty 1 guide.
But think about the auto production estimate that you have I think you're speaking of down by 700 basis points, where some.
Strong from 90 days ago.
So I guess the 2 possibly a.
What is driving such a big reduction of your estimate for auto production numbers I think the lowest uplift from any auto.
The ecosystem company, but secondly, you really haven't changed the oral top line. The assumption. So what is the offset the auto production is coming down 700 basis points, we're sort of.
The 90 days ago, but the oral top line it seems to hold up pretty well.
Sure Matt.
Sure.
Trying to lay out for you that the auto production number that we expect from Q3 of flat with Q2, because we don't see any real meaningful change in terms of the supply chain issues at.
All of the industry is dealing with.
So it's flat Q2 to <unk>.
Q3 on net and improves in Q4.
It was up but not as much as with the third party forecasts are projecting.
And I think the the.
This would suggest that the third party forecast, while coming down are not coming down fast enough to reflect what actually happens in the quarter. So.
So we think at some point, we'll get a line there but.
Our estimate and our projection of the automotive production is a good 1 it's an appropriate level given what we're seeing on the supply chain and what we're hearing from customers about their.
Their struggles in terms of ramping up capacity.
As it relates to what's offsetting the.
Heavy vehicle business continues to perform better.
We thank all of our industrial business and so they are offsetting the decline that we're seeing actually more than offsetting the decline we're seeing on the utmost of it.
Thank you on mix it. Thank you and the next question comes from Brian Johnson with Barclays.
Yes. Thanks.
Just wanted to get a sense on thank you for the update on since.
As well both in the stack and the teach in on how you're going after the 800 billion pipeline kind of the timetable for translating that into bookings and then you know given as you pointed out of the teach them. This is a fragmented market around telematics kind of what are you finding is the winning formula too.
The inside secure beds versus the ones that go to the competitors.
Yes, great.
Question. So let me let me start with the pipeline is what would be referred to as contract value rather than a typical sales year of value. So that is a little bit of a departure from how we would as a company company.
The normally referred to the opportunity pipeline that we see.
So and that's.
The way that sort of those types of from more subscription based or recurring revenue based on aftermarket models tend to refer to things.
It's more than telematics right. So at the core of the offering is.
And the ability to take information off of vehicle and get it to the cloud in the form of of telematics device.
But what we're experiencing in terms of engagement with customers as we combined the what was the zero and our internal smart and connected value proposition is a much broader.
We're offering the just the telematics piece right. So some sort of if you remember from the teach ins and sort of brings the ability to get information off the piece of equipment through our very broad based sensing capability and then <unk> brought the ability of you accumulate that get it to the cloud and analyze and provide data insights.
<unk>.
The information that would be more valuable and so that's really the value proposition clearly there are leaders in terms of telematics.
BD poor translation, and so forth, but the real longer term value creation is around that sticky information.
And that's provided.
Once the information gets to the cloud and they can do something with it and that's what we're experiencing more poll from customers as we have a broader solution set.
And it's kind of it's building really nicely the sort of thesis of the investment combining.
With this inside of portfolio is working out quite nicely more and more to come on early days still but we're excited about the opportunity there.
Thank you Brian.
On the next question comes from David Kelley with Jefferies.
Hi, Good morning, everyone, just hoping you could give us a sense of how you're thinking about outgrowth going.
And maybe specifically in autos.
Should we see of continued or do you expect to see of continued step up in the second half hour growth and specifically versus your longer term targets of 400 to 600 basis points and as we think about those out growth drivers is there an opportunity that this kind of continued step up.
And all of those crews more structural.
Yes, so it's a great question, let me start with we're really excited about the fact that we're exceeding the targets, but you you might note that in our prepared comments, we spoke to the <unk> growth over the last 3 and a half years, which in auto was just slightly.
For the 600 basis points.
<unk> was considerably higher.
So let me speak specifically to what's driving that in an H <unk>. The auto 1 we feel great about being at the high end of the range. We will continue to evaluate opportunities to update guidance, but there's a lot of.
There are a lot of opportunities in the pipeline those that we've won that give us confidence that we'll be we'll continue to be quite strong in auto the HBO requires a little bit more digging into because the.
Our growth is being driven by a pretty broad range of opportunities, but there are 2 that are that are quite large in.
In terms of driving it above the average of 600 to 800 in that.
Relates to the <unk> rollout in China.
Which has about another 6 months to a year, where it's until it's fully rolled out. So we would expect that to normalize a little bit there are always other.
Regulatory.
Hello Tory.
Areas that will continue to drive, but NSX was a big 1 driving that so we're a little reluctant to change the 600 to 800 and <unk> and the second is the conversion from mechanical hydraulic to electro hydraulic controls we had seen a pretty.
Significant spike in pole associated with North America, and Europe, and now we're seeing that in China, as well and so that's driving higher content and outgrowth values in the HBO our business. So listen at the end of the day, we're happy about being at or above the ranges will continue to monitor it.
And.
As we go forward and when the new business, we will give updates as to what we're thinking.
Thanks, David.
And the next question comes from Joe Giordano with Cowen.
Hey, good morning, guys.
Hey, Joe.
Can you just talk about your relative positioning within the E like on the different.
I'd sort of platforms like a higher end models versus lower end models of different power requirements on how your house inside of those products are positioned on each of those.
Sure. So you'll recall that when we acquired Giga back back in 2018.
We did that because they had premier positions in the.
The highest and most premier of vehicles and by the way of just to make sure everybody understands when we talk about those higher end vehicles their vehicles that have longer range isn't short of charge times, its not necessarily luxury vehicles and the.
The EV space when we're talking about the technology that we need to bring to bear to solve the helped the customer solve the challenges around charge time in range.
Which is what consumers are pulling.
At the time of that acquisition, we had a belief that that was going to be the direction of where the market was going we think that's still going to be the case, but there will be a lot of the middle market.
Sort of EV market that was underserved without having more broad.
Capabilities. So we added the <unk> joint venture so the mix to allow us to be able to have a broader portfolio. So now I feel as though we're much better represented across all of those categories of electric vehicles.
And we're not done yet right. So we continue to make organic investments and look for partnerships vs.
These acquisitions that will bring more Cape.
Capability to be able to serve these vehicle platforms as all of these customers adopt new models and they build out there.
$5.10 to 15 year strategy in terms of product portfolio. So really good success, we feel as though we're well covered.
The only across.
Models, but geographically as well.
And we will keep keep working on it.
Thank you Joe.
Thank you and that's what's the comes from William Stein with true of Securities.
Great. Thanks for taking my question 1 of the things we've recently learned from some of the semi suppliers and.
Now in the upstream contacts is that we're hearing about auto OE customers.
The content being in sort of opportunistic fashion in order to complete kit and gift cards shipped to customers essentially rolling back some innovation in order to complete the builds I'm wondering if you're observing.
Serving this trend whether it's the.
Affecting your business and if youre contemplating this in the guidance. Thank you.
Yes, so it's an interesting 1 obviously Oems are doing everything they possibly can to get more vehicles out of that as 1 of the tactics that we're using so let me give you. An example, if we had migrated.
The next generation sensor with that OEM.
Due to cost reasons, or whatever tighter tolerances or faster.
Faster response time.
<unk> are willing to take a step back to go through the prior generation sensor if the availability of the <unk> is.
Sure.
It doesn't necessarily change.
The ability for them to meet the regulation, but in some instances there of cost implications associated with that so as part of our product road mapping, we purposefully designed on new product to be able to give them a lower cost product going forward and so sometimes.
Is there we're taking a step back we're having the commercial discussion regarding that but the the end of the day. The goal is to help our customers get more vehicles produced so that they can sell more of vehicles and so that's 1 technique that they're using.
And they are looking at a lot of different ways to try to figure out how to get a.
<unk> set.
Chipset to be able to make the cars.
Thanks Bill.
Thank you and the next question comes from Nick Todorov of Longbow Research.
Yes, thanks, guys.
I understand that could be of hard to answer the question, but what is your sense how much of your product could be sitting on partially.
A complete the light vehicles from heavy vehicles right now and.
How should we relate to the inventory per.
You are talking about you talked about.
I don't think we have visibility of where it is in their supply chain, but we estimate of about $25 million of build this quarter.
Things that we ship that went into some somewhat.
<unk> built into of produced vehicle.
Yes, so thats all inclusive right.
It's hard to for us to sort of really gauge where it sits but when we do the math on our revenue growth and we back into the factors we know.
Including production numbers.
We got about 20.
It didn't go line of inventory build in the quarter hopefully that's.
Helpful. Thanks, Nick.
Thank you and that's why she comes from Rod Lache with Wolfe Research.
This is true the tailwind from per ride.
Just a question how should we think about how should we think about bridging from the first half 2 of the second.
5 built here and market production should be higher on automotive.
And you are raising industrial on H, B O arm production and market expectations, but the guidance is implying.
About an 8% decline in revenue and then just quickly if you could help frame the content benefit from the conversion to electronic hydraulics that you mentioned.
Half of war.
Yeah.
Yes, I mean on the revenue piece, it's like I said earlier it's.
The reduction in automotive is being more than offset by improvements in both industrial and each of you are.
I mean, the improvement on an H b of our industrial.
About the same the in terms of the sequential step up or.
Or at least relative to what we guided last time I should say.
On the second part of your question just to make sure I understand it are you looking for a little bit more.
Visibility into what this.
Conversion from mechanical hydraulic to electronic hydraulic is.
H B.
Nature of your question.
It was 1 of the 1 of the reasons youre achieving above the above your prior target in terms of outgrowth I just wanted to understand what the benefit that is to distance on either on like a per vehicle basis. So I guess, just some way to frame that yes got you okay. So.
As Tom let me so the.
The application.
<unk> is an electronic joystick or integrated armrest.
In a agricultural piece of agricultural equipment or construction of equipment or material handling equipment.
So it's not of 5 dollar content items.
Joy Stakes of our integrated armrest can have asps.
Anywhere from $50 up to $600, depending on the complexity of the design.
So it's significant content the volumes obviously are considerably lower.
Then what we would see in the light vehicle market, but the asps are quite high.
Hi, and they drive significant content as that pans out.
Hopefully that's helpful. Thank you rod.
Just to be.
Crystal clear I mean in the second half versus the first half we did talk about our industrial business coming back to its normal seasonal patterns, which is of weaker second half of.
On the first half.
And the heavy vehicle business, while it's experiencing great outgrowth in the fourth quarter of typically is a little bit lighter season.
Seasonally so that kind of accounts for the first half the second half and then also on the automotive business.
The declining a bit due to volume production levels.
Thank you.
Thank you and the next question comes from Michael Phillips, all of the Bahrenburg capital markets.
Thanks, guys just a quick question around aerospace it looks like you're maintaining the market growth expectation for aerospace.
But I think there are some indicators that suggest the.
The market backdrop is improving slightly so just just any commentary around <unk>.
The market growth in the second half and and you know if there's potential for upside, particularly because it's your highest margin business.
Yes, it's the long cycle business.
It is largely the demand is largely in line to be set of OEM production in the air traffic is getting better but.
Space of this the business that's.
Pretty small relative to the rest of the since August so a few million dollars of improved revenue.
I would expect to see in the second half versus the first half and it is very profitable, but it's not going to be a major needle mover. This year, but it is showing signs of improvement which is great news.
But it makes money.
Thank you.
And at this time is there aren't a lot of questions I would like to return the floor to Mr. Jacob Sayer for any closing comments. Thanks Keith.
The thank everyone for joining us this morning since I know, we'll be participating in upcoming virtual investor conferences, this quarter, including Jefferies Technology conference and the RBC.
Abuse of your global Industrial conference during the.
The upcoming quarter as Jeff mentioned, we're also planning of teach them about our electrification of initiatives later in the year and we will share details of that event ahead of time.
We look forward to seeing you on 1 of those events or on our third quarter earnings call, which will happen in late October.
Thank you for joining us this morning and for your interest in some sort of keeps.
You May now end the call. Thank you. The conference has now concluded. Thank you for attending today's presentation and on this.
The connect your lines.