Q4 2021 Sensata Technologies Holding PLC Earnings Call
Good morning, and welcome to the since auto fourth quarter 2021 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone.
Keypad. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Jacob Sayer, Vice President Finance Investor Relations.
<unk>. Please go ahead.
Thank you Andrew and good morning, everyone I'd like to welcome you just saw this fourth quarter earnings Conference call. Joining me on today's call are Jeff Cotai.
<unk> President Paul Bowers income some thought as chief financial Officer.
In addition to the financial results press release, we issued earlier today, we will be referencing a slide presentation. During today's conference call. The PDF of this presentation can be downloaded off his investor relations website.
This conference call is being reported and we will post a replay webcast on the Investor Relations website. Shortly after the conclusion of today's call.
As we begin I'd like to reference inside of the Safe Harbor statement on slide two.
During this conference call, we will make forward looking statements regarding future events and 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 discussed in our Form 10-Q , and 10-K as well as other subsequent filings with the SEC.
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.
Our GAAP to non-GAAP financials included including reconciliations are included in our earnings release in the appendices of our presentation materials.
The company provides details of its segments segment operating income on slides eight and nine of the presentation, which are the primary measures management uses to evaluate the performance of the business.
Jeff will begin today with highlights of our business during the fourth quarter and full year 2021.
He will then provide an update on our recent progress and our key electrification insights strategic growth areas.
Paul will cover our detailed financials for the fourth quarter of 2021, including revenue growth and market outgrowth by business unit.
Andy will also provide financial guidance for the first quarter and full year 2022.
We will then take your questions. After our prepared remarks, now I'd like to turn the call over to <unk>, CEO and President Jeff Cote.
Thank you very much Jacob and welcome everyone.
Like to start with some summary thoughts on our strong performance during the fourth quarter and full year 2021.
As outlined on slide three.
While automotive production declined substantially during the quarter compared to prior year due to supply chain shortages. We responded effectively to deliver our customers orders against strong consumer demand and produce solid financial results for shareholders.
Delivering $935 million in revenue or growth of three 1% from the prior year period.
The guidance range, we provided in October .
We once again produced strong market outgrowth, well above our target range.
As a company, we delivered 800 basis points of outgrowth during the quarter and 960 basis points for the year.
Since 2018 on average we have produced 640 basis points of outgrowth annually.
This demonstrates and sort of secular growth potential.
Vital role we play for our customers.
Paul will discuss our strong revenue outgrowth in more detail.
Since Saddam was awarded a record $640 million up new business wins during full year 2021.
Nearly half of it coming from our megatrend growth factors.
We expect these new business wins to translate into <unk> future revenue outgrowth.
Since that is revenue outgrowth to market is increasingly driven.
By our rapidly growing positions in the megatrend areas of electrification and insights we continue to invest in these growth initiatives, both organically and inorganically.
Zero in smart witness expanded our capabilities in the telematics and insights ecosystems well.
Lithium balance their sharar joint venture spear power in Sendai and added to our differentiated electrification product and solution offerings.
During the fourth quarter, we benefited from a resilient and flexible and focused organization that continues to successfully navigate the ever changing supply chain landscape and deliver on our customers' needs.
We are working diligently to soup to limit the effects of supply chain challenges, including working with our customers to offset these cost commercially.
Despite these elevated cost we delivered $198 million and adjusted operating income during the quarter representing.
Representing 21, 1% and operating margin for the fourth quarter.
Full year revenue grew by 26%.
Operating margins for the year were 21, 1% and adjusted EPS grew by a very impressive 61%.
I'd like to recognize the innovation agility and hard work of our entire team in achieving these strong results.
As you May recall since auto published its first sustainability report in September .
We're very proud of our progress in these areas.
Surely every products and Saddam makes today results in a cleaner safer and more efficient world.
We also take our responsibility to reduce the carbon emissions from our own operations and our supply chain seriously.
To that end, we established specific goals in each area of environment, social and governance in line with leading companies around the world and we made good progress in 2021 against these goals.
For example, since <unk> Board of Directors is now 36% diverse and we are investing $3 3 billion in energy saving capital improvements during the coming year.
We will report out on our continued progress and an updated sustainability report later this year.
Moving to slide four.
<unk> is making excellent progress in winning new business in electrification components subsystems and full turnkey solutions.
In part because we take a holistic view of electrification and its growing impact on all of the markets we serve.
During 2021, we saw a dramatic uptick in the amount of new electrification business awarded Tucson Saada.
Amounting to $270 million in annual future revenue.
We are discussing with customers additional opportunities representing a future pipeline of over 1 billion in potential new electrification business.
Revenue from electrification efforts across our business was $260 million in 2021 inch.
Including automotive heavy vehicle off road and clean energy solutions.
We are expecting a greater than 50% increase in revenue in 2022 from these efforts.
And electrification revenue in automotive is expected to grow over 70%.
Supporting our view that battery electric content per vehicle reaches two times that of internal combustion engine vehicles within five years.
As an example of the expansion of sensing and electrified solutions, we were awarded new E motor temperature and position sensing business with a large European OEM representing.
Representing over $30 of content per electric motor.
And this content doubles and vehicles with dual motor configurations.
During the quarter, we acquired <unk> to add their differentiated current sensing isolation monitoring and simulation technology <unk> expansive offerings.
These are critical components in transportation as well as industrial high voltage energy storage architectures.
On February 22nd we'll webcast a teach in covering our electrification product and solution set and customer use cases.
So listeners can gain a better understanding of the rapidly evolving market our offerings and our go to market strategies in this key growth factor for Sun Saada.
We hope that you can join us.
On slide five we share an update on our continued progress and since <unk> insights.
The insights initiative addresses the large and fast and grow fast growing telematics space and.
And we're pleased by the traction we are gaining.
As evidenced by the value added nature of our solutions, we were awarded new business were $37 million during 2021.
And we have identified a pipeline of more than 200 million in potential future business wins.
We are discussing with customers.
The insights growth initiatives generated $75 million of revenue during 2021 and is expected to grow by greater than 100% in 2022.
An example of a large recent win includes a tire pressure and gateway solution that will be installed by a leading heavy duty trucking firm with a total contract value of $17 million.
This solution enables the fleet to remotely monitor tire condition across their trucks to streamline their maintenance efforts saving money, while also preventing accidents and roadside events.
I'm also pleased by the progress we've made and quickly integrating smart witness into our insights business and we are already winning business on a combined basis.
Smart witnesses video solution comprised of proprietary software and hardware purpose built for telematics service providers.
And they were given an innovation award at the recent consumer electronics show.
In summary, I'm really encouraged with our continued progress in these megatrend growth initiatives.
As I've said before we see numerous opportunities to utilize our strong financial position.
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 areas.
Now I'd like to turn the call over to Paul.
Thank you Jeff.
Key highlights for the fourth quarter.
As shown on slide seven include.
Revenue of $934 6 million.
An increase of three 1% from the fourth quarter of 2020.
Adjusted operating income was $197 6 million, an increase of 1% compared to the fourth quarter of 2020.
Primarily due to acquisitions and favorable foreign currency somewhat offset by lower organic volume and higher megatrend spend.
For the full year 2021.
Record revenue of $3 8 billion representing.
An increase of 25, 5%.
Over 2020.
Adjusted operating margin of 21, 1%.
Representing an increase of 260 basis points from the prior year and adjusted earnings per share of $3.56. An impressive increase of 61, 1% from 2020 and the same level of earnings per share we set in 2019.
Now I would like to comment on the performance.
Of our two business segments in the fourth quarter too.
2021, starting with performance sensing on slide eight.
Our performance sensing business reported revenues of $685 1 million.
The decline of <unk>, 6% compared to the same quarter last year.
This was driven primarily by the 16% market decline in automotive.
Offset by our substantial market growth of 520 basis points.
Automotive and 1700 basis points in heavy vehicle off road.
Well as revenue from acquisitions.
Automotive customers appear to have consumed a small amount of inventory built earlier in the year.
Performance sensing operating income was $185 6 million.
With operating margins of 27, 1%.
Segment operating income increased due to acquisitions and favorable foreign currency.
Offset by the impact of lower organic volume.
As shown on slide nine.
Sensing solutions reported revenues of $249 5 million in the fourth quarter of 2021 and.
An increase of 14, 7% as compared to the same quarter last year.
This was driven primarily by growth in the industrial markets and strong market outgrowth.
The launch of new industrial electrification applications.
Sensing solutions operating income was $74 5 million an increase of five 4% from the same quarter last year.
With operating margins of 29, 8%.
The increase in segment operating income was primarily due to higher volumes, partly offset by higher supply chain costs.
On slide 10.
And other operating expenses not included in segment operating income were $72 8 million in the fourth quarter of 2021.
Excluding charges added back to our non-GAAP results corporate and other costs were $61 million.
An increase of $2 5 million in the prior year quarter.
Reflecting higher research and development and business development spend.
To support our megatrend growth initiatives.
We currently expect between 60 and $70 million and megatrend related spend in 2022 to design and develop differentiated sensor rich connected solutions for the fast growing and transformational megatrends vectors of electrification and insights.
As shown on slide 11.
We generated $117 million and free cash flow during the fourth quarter.
Free cash flow was impacted in the quarter by our decision to increase raw material purchases in order to maximize production flexibility given the widespread parts shortage in our supply chain.
For the full year 2022, we expect free cash flow conversion to be approximately 80% of adjusted net income.
And we expect capital expenditures to be in the range of 165 to.
$175 million.
Since August net debt to EBITDA ratio was two eight times at the end of December near the bottom end of our target operating net leverage range.
Since August primary use of cash on hand is to acquire businesses.
We'll extend our position within our key growth vectors of electrification and insights.
We expect our net leverage ratio to decline to two two times by the end of 2022, excluding the impact of further M&A.
In addition, we resumed our share repurchase program in the fourth quarter purchasing 48 million worth of shares and the board recently issued a new share repurchase authorization in the amount of $500 million.
We are providing financial guidance for the first quarter of 2022.
Shown on slide 12.
Our expertise our expectations are based upon the end market outlook as shown on the page.
We are more conservative than IHS IHS regarding global light vehicle production in the quarter down 9% versus down 2% on a revenue adjusted basis.
The revenue component of our guide include market outgrowth completed acquisitions and foreign exchange.
We do not expect supply chain inventory at twin wind during the quarter.
Our current fill rate is approximately 96% of the revenue guidance midpoint for the first quarter.
Yeah.
At the midpoint adjusted operating income margin is expected to be 18, 5%.
Which includes the impact of lower organic revenue.
In normal price movements, when compared to the same period last year.
We are making good progress offsetting increased operating cost associated with global supply chain challenges.
With customers, we continue to face rising material and labor inflation.
In addition, we are increasing investments for growth and megatrend related areas as well and then our recent acquisitions, which will have lower margins than our core business.
That's to rapidly scale these new growth vectors.
<unk> adjusted operating margins typically declined sequentially.
The fourth quarter to the first quarter, primarily due to annual pricing changes with customers and this year are further impacted by the rise in inflation.
This decline typically offset by productivity improvements throughout the balance of the year.
And we expect this to be the case again in 2022, particularly as revenue grows through the year.
We're also providing financial guidance for the full year 2022 as shown on slide 13.
Our expectations are based upon an end market outlook that I will discuss in a moment.
Revenue growth between 8% and 12% includes the impact of markets, our growth acquisitions and foreign currency.
We do not expect the roughly $90 million of inventory built in the automotive supply chain during 2021 so.
To reoccur in 2022.
At the midpoint, but.
Adjusted operating income margin is expected to be 27%.
Which includes volume leverage and productivity more than offsetting price and input cost inflation impact and increased investments for growth.
On slide 14, we provide our estimate for OEM production growth for 2022 as compared to 2021.
We currently expect currently expect automotive production to increase approximately 7% this year.
Once again, our outlook is more conservative than current IHS automotive production estimates as.
As we see production constraints from global supply chain shortages lifting slowly through the year.
As Jeff highlighted earlier, some solid organic revenue.
The market as shown on slide 15.
Has grown annually.
Since we set those targets at the end of 2017.
On average over that time, the company has delivered 640 basis points outgrowth and last year, we delivered 960 basis points of outgrowth.
Looking forward, we are simplifying the outgrowth target.
Companywide target of 400 to 600 basis points of revenue growth above markets.
For 2022 weeks.
We expect to be at the top end of that range.
Each of our businesses will continue.
Continue to contribute to that as a little some higher and some lower in any period.
So that in aggregate, we reflect the value of our innovative engineered solutions for all customers through revenue that grows faster than underlying markets.
In addition to the organic revenue growth over market. We also intend to grow by acquiring businesses that give us access to <unk>.
Fast growing differentiate application.
That address our customers' needs are.
Our long term target is to acquire new revenue streams.
Additional 400 to 600 basis points of inorganic M&A revenue growth since on each year.
Our acquisition engine is warming up we achieved 250 basis points of acquired revenue growth last year rising to 370 basis points in the fourth quarter.
Now, let me turn it back to Jeff for closing comments.
Thanks, and thank you Paul and let me wrap up with a few key messages as outlined on slide 16.
Since all those business and organizational model is strong resilient and reliable.
We deliver mission critical highly engineered solutions required by our customers.
We aim to outgrow the markets we serve in total.
By 400 to 600 basis points per year.
We are confident in our ability to sustain this attractive end market outgrowth.
Based on our record levels of New business Awards.
And our large and expanding pipeline of new opportunities.
We continue to invest in our megatrend growth initiatives that are opening up large and rapidly growing opportunities first insider across all our end markets.
We are making excellent progress in electrification and insights both organically through strong new business wins, and inorganically through bolt on acquisitions or joint ventures.
We are targeting adding 400 to 600 basis points of inorganic revenue growth annually.
We will continue to innovate on behalf of our customers.
They're hard to do engineering challenges in sensing and electrical protection. We will also continue to provide differentiated electrification and insight solutions to a broad array of customers.
Solving these mission critical challenges enables <unk> to continue to deliver industry, leading margins for our shareholders. While also increasing investments in our growth opportunities and our people.
And finally I'm excited about since side as long standing mission.
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 meaningfully contributing to a better world.
We are on our way to achieving the targets laid out in our first sustainability report bolster.
Bolstering the long term sustainability and success of the company for all of its stakeholders.
We look forward to reporting more about our progress in these areas in future updates.
Now I'd like to turn the call back to Jacobs.
Thank you, Jeff well now move to Q&A.
Given the large number of listeners on the call. Please limit yourself to one question each Andrew go ahead and start the Q&A.
[noise] roster.
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 to withdraw your question. Please press Star then two again.
Please limit yourself to one question at this time, we will pause momentarily to assemble our roster.
The first question comes from.
<unk> Mohan with Bank of America. Please go ahead.
Hi, yes. Thank you.
In your last call you had called for about 9 million and in supply chain headwinds year over year in the fourth quarter and it seems like it came in much lower impacting you by just a penny headwind.
Why was it so much better than expected and why is that benefit not flowing into the first quarter, where it seems to be hitting your relatively hard again, if I'm interpreting your comments and numbers correctly. Thank you.
And while it's Paul.
I think we've done a better job and.
And inspecting around trying to recover costs from customers and.
So that's worked out quite well.
But the cost keep rising and so we're chasing it a bit.
And so as we look at the first quarter material prices and inflation conditions around labor have continued to rise.
We continue to work with customers recover a large portion of that cost, but in the first quarter, it's a bigger impact than throughout the rest of the year. We have a number of different productivity initiatives that we have to fall back those impacts whether it's continuing to improve the performance of our sites restructuring out cost and being more cost effective and also the benefit of volume leverage as well.
See revenues growing sequentially through the year. So you can see a big step up in Q2, three and four and that's with the supply chain, starting to soften up a bit and getting and getting better.
Better supply from customers and our customers.
From our suppliers.
Our customers also seeing better supply conditions.
We have the next question please.
The next question comes from Scott Davis with Melius Research. Please go ahead.
Good morning, guys.
Thanks, Scott as Scott.
Hi.
Can I ask just maybe a little bit of a long question hopefully not too long for you, but the four acquisitions that you've made some interesting can you give us a little bit of color on what gaps they filled for you and how they are integrating and how you plan on integrating them and.
Maybe some early read on <unk>.
And what Youre seeing or what you like about those deals specifically something a little bit more color I think I'm looking for.
Yes, Scott I'd be glad to so.
We're really to fill out our portfolio of offering around these megatrend areas. So we've been very clear for the last several years.
The area of Iot or insights and electrification where focus areas for us as a company and we've been investing more organically through the funding that we describe as mega trend spend at our corporate segment.
But we've also been very clear that our M&A activity was going to be focused in these two areas.
Also I've talked about the fact that it's going to be more of a serial approach as opposed to a big Bang approach.
And so I think it's less about filling gaps it's about building out a portfolio for the future based upon what we're hearing from our customers and where the markets are going.
And every time, we identify another opportunity it rounds out that solution set.
In terms of.
How we go to market what the offering is.
Other capabilities in terms of your question.
Regarding integration.
It's a great question because some of these businesses are very different in terms of the solution that they are providing and also the markets that they go after.
You know that the bulk of our core business is.
A long cycle OEM business.
And when you're going after.
Insight opportunity with a large fleet.
That can be a much shorter cycle approach and you need to bring something to market in a quarter not in five years.
So from an integration standpoint, we're running these business units within our segments.
They have <unk>.
Separate general managers to run these businesses.
And we're being very mindful to make sure that we retain the great talent that we brought on and that we're executing in the market in terms of early read.
We're expecting significant growth from these two vectors in 2022, we quoted that in the electrification side we're.
We're expecting 50% or greater growth as a company on the insight side over 100% growth now that's a mix of organic and inorganic.
But it's pretty impressive in terms of what the team's been able to build in a very short period of time by focusing on these segments.
We believe it justifies a little bit heavier and in terms of investment going into 2022, and so you see that in our megatrend spend in our guide for the year.
So sorry for the long winded investments.
Very good one.
Creating the opportunity to share some thoughts thanks Scott.
Can we have the next question please.
Yes. The next question comes from Christopher Glynn with Oppenheimer. Please go ahead.
Thanks, Good morning, everyone.
Wanted to talk about the $640 million of the net new business wins.
Up quite a bit over the prior year.
You know what maybe you had some nice chunky wins in there, but electrification is really coming on for Ya. Just curious if you think he can replicate that number or if.
You know a little more volatile path over the next couple of years is more in the cards.
Yeah. Thanks, Chris we're really excited about it I'm glad that you're you're noting the significant amount of wins before I dive into the some of the details I would tell you that it accelerated throughout the year as well, which was equally impressive, especially given what the commentary Paul provided in terms of.
Cost inflation and going back to our customers to engage with them regarding a recovery.
Not seeing that impact our ability to win business with our customers, which is which is great.
In terms of the.
The acceleration here.
465 base last year 400 is the three year on average the three years prior.
As the business grows you're going to see a natural lift on this but obviously the <unk> are growing faster than that.
As we really focus on these megatrend areas when we gave you.
Yeah, a little bit of insight into.
What the opportunity set looks like in electrification, we have over $1 billion group.
Group of business that we're pursuing now obviously, we're not going to get all of that and we have over 200 million.
Of opportunity just in the electrification of insights Europe , plus all of the other Corp.
[noise] aspects that we're pursuing so we're going to continue to try to push this to make sure that we can deliver on our four to 600.
Basis points of outgrowth going forward.
And we feel really good about the success that we're seeing.
Thank you Chris So we have the next question. Please.
The next question comes from Matt Sheerin with Stifel. Please go ahead.
Yeah. Thanks, Good morning, I wanted to just ask a clarification question regarding your commentary about inventory build at customers. I think you talked about $90 million is that still a headwind that you're seeing this quarter. I think you said that you don't see it playing out in 2022 I just wanted to clarify that.
Sure I'll try to answer that one for you.
So this year.
We shipped into customers about $90 million more than production.
So that was a nice tailwind we served our customers well based on what they ordered.
We're not expecting that to repeat next year. So.
To be very clear that that $90 million a year over year headwind.
Revenue.
In the fourth quarter, which is included in that $90 million. In fact, we did we did it does look based on our analytics.
Our customers did consume some of that inventory that was built up during the earlier part of the year.
Thanks, Matt for the question we have the next question. Please.
The next question comes from Mark Delaney with Goldman Sachs. Please go ahead.
Yes, good morning, and thanks very much for the opportunity to ask a question I'm, hoping to talk a little bit more on the investments the company is making.
Again, these fast growing areas, where having some some nice order momentum and the impact it's having on margins.
I think the 22 margin work out to about a 90 bps headwind could you be a little bit more specific on the buckets that add up to that 90 bps Mega trend I think is a big part of it but it seems like theres, some others, but at a higher level. When do you think the company will be at a point, where it's making these very important investments.
But also where margins would actually start to expand its revenue growth. Thank you.
Yes.
Let me, let me touch on.
The commercial side and why we're doing it and then Paul can provide a little bit of color on unpacking regarding the investment and impact on margin.
So hopefully the growth rates that I described in terms of 2021 to 'twenty. Two in these very specific growth factors is evidence that it's a worthwhile effort to invest in these growth areas. In addition, the level of new business wins and the percent of them that are.
Coming from these growth factors hopefully as validation.
Obviously, we're seeing that in terms of customer engagement and opportunities that we have but we understand that we need to show our investors proof points that this incremental investment is worthwhile in terms of.
We are investing in to grow the business going forward, it's the direction of where a lot of our customers and the industries are going.
It's a it's a great opportunity for us and I think we've shown some very early.
Very strong proof points that it's it's gaining momentum minutes well worthwhile.
While investment.
Fully agree.
So mark.
The 90 bps is a combination of both the increased investment in the Megatrends organically, which we call out in the slides.
And it's also the impact of the acquisitions that as I mentioned in the prepared remarks have lower margins than the core business. So they're not going to expand margins are going to they're going to be a margin dilution for a period of time as we scale them up I think it is.
The right investment you can see it's helping in terms of where the proof point I would say is in the N B O S.
And its future.
Future technology that we see huge revenue opportunity in these key growth factors that we're investing in and yes over time as these businesses start to scale and we start to be able to create.
Modular designs for which we can leverage volume on it will become much more profitable. They are today and that is the strategy and.
And that is something we have shown historically, we do extremely well.
Thanks, Marc for the question, we get the next question. Please.
Yes. The next question comes from semi <unk> with J P. Morgan. Please go ahead.
Great Hi, Thanks for taking my question.
I guess I wanted to ask on the inorganic M&A revenue growth target of 400 to 600.
Clearly the employees you have to ask me, what you've been doing already to some extent so wanted to kind of get your thoughts around it is that you have quite a fair amount of assets.
I said recently that you're targeting to try and sort of keep the site similar to try and do more of the same or are you trying to sort of now look at larger size acquisitions and maybe if you can talk about the pipeline and how you think about the pipeline shaping up between automotive related to maybe some other segments that are non auto. Thank you.
Yes, I'd be glad to address that so.
The focus is going to be in the megatrend areas right. So we havent.
Any surprises during 2021, we've talked about electrification insights being the focus area and the acquisitions and the joint ventures that we've done have been in those areas.
So we're going to stay focused on that.
Our goal is serial M&A. So it's not lumpy that does not mean that if a great opportunity comes along that's more sizable we wouldnt entertain that but that's not a focus area for us is to make sure that every year, we can show some level of growth.
400 to 600 basis points as the target.
Against this inorganic growth initiatives in the focused areas to drive our strategy. It's got to stay financially disciplined. So we're not going to do deals just to get to that and we're going to be very transparent regarding our progress.
And it took some time to build the funnel right. So we really started this in late 2020 in terms of our cereal M&A strategy.
We executed against that in 2021 with some deals early in the Air April what Serco and then some later in the year. So we were able to achieve two 5% in Oregon organic growth in 2021.
Obviously, the lapping effect of those transactions results in about two 5% already baked for 2022, which is in the guide that we've provided but the guide does not include or assume any additional M&A. If we do M&A that will be in a in addition to what we produce there and that's what we're going to execute.
Instant and continue to try to stay focused on.
Doing just that.
Thanks for the question.
Next question please.
Yes. The next question comes from Steven Fox with Fox Advisors. Please go ahead hi.
Good morning, I was wondering if you could dig into your thinking on H B O. Our markets for 'twenty. Two I know you don't want to give any.
Specific outgrowth, there, but maybe sort of where you think you're benefiting from outgrowth generally thanks.
Yeah. The outgrowth. So companywide, we believe we'll be on the high end of our range that we provided of 400 to 600 H.
<unk> has really been a.
An area that we benefited significantly from in terms of outgrowth due to a lot of different reasons in terms of market trends, but also the offering set that we have in that market.
And we would expect HBO, our outgrowth to continue the market itself and H B O R.
We're forecasting globally to be pretty flat this year and.
In the first quarter, it's got to be down pretty dramatically about 13, 14% that's variable by market.
In the first quarter I think every market that we serve is down a little bit, but China on road is down more than the most of the other categories and for the full year, we would expect some modest growth everywhere, but in China on road.
And so that's a little bit more color in terms of unpacking, the H B O our business.
Thanks, Jim.
The next question please.
The next question comes from Luke Young with Baird. Please go ahead, good morning, and thanks for taking my question, Jeff, hoping you could touch on your outlook for organic Mega trend spending this year last quarter. I think you had given an indication initially a $50 million to $55 million in spend or so versus.
$60 million to $70 million outlook that you outlined today, what drove the upside there and especially is there any updated perspective, you can provide on the mix of spending between your major growth opportunities. Thank you.
Sure so we.
We spent about what we said we were going to in 2021 fourth quarter was a little bit lower primarily due to vacation schedules and other things that brought down.
That spend in the fourth quarter it wasn't at all due to our.
Lack of continued commitment around that.
And we thought long and hard we believe in our incremental investment in this area given the success that we're seeing is justified.
Not a.
Significant ramp that's another $10 million on the high end $60 million to $70 million for the year, but we.
We will continue to be very disciplined in terms of our approach on that.
And make sure that we're allocating that investment to where we're seeing commercial success with our customers in terms of the split.
The majority is in the megatrend related areas. There are some other some small amounts of spend in there that are new.
New growth opportunities within each of our end markets, but the vast majority of it is in electrification and insight.
And.
Equally split maybe a little bit more slanted more towards the electrification given the magnitude of the opportunity that we're seeing there and the need to invest long term with our customers regarding this trend.
Thanks Luke.
Question can we get the next question please.
Yes. The next question comes from Nick <unk> with Longbow Research. Please go ahead.
Yes, Thanks, and good morning, everyone I have a question on the E V wins, maybe can you can you help us understand the mix between that maybe if we think about between components versus subsystem solutions versus turnkey solutions and how do you expect that mix the trend over time.
Yeah, Great question. It's the vast majority is on OEM wins on components.
You'll note that Tom.
And automotive focused as well so that's where the bulk of the wins are when you start talking about sub systems, and turnkey solutions youre migrating or out of automotive into heavy vehicle off road industrial applications and most notably you know spear power is an example of one of those turnkey.
<unk>, where we're providing energy storage so.
Aleutians into specialty vehicles markets, so different than a component play, but the vast majority of the enviable wins that we experienced in 2021 were.
In the markets that you know well in terms of automotive and it gives us more confidence in our line of sight to double the content. So it's it's all connected in terms of our commitment to get to that double content per vehicle and battery electric in the next five years.
Thanks for the question when we get the next question. Please.
Yes. The next question comes from Chris Snyder with UBS. Please go ahead.
Thank you I believe in the prepared remarks, the company said it expects electrification auto revenue to grow to 70% in 2022 could you disclose how much of this is organic and then what type of unit growth is underpinned by this forecast. So we can get some visibility into electric content.
Your vehicle expectations.
Yes, so yes.
Yes, so automotive specifically.
Just mentioned on the prior caller's question from Nick that's largely on the components side.
And we're expecting that to grow 70% it will grow faster than our expectation for battery electric vehicles.
Again it supports the notion that we're going to see double the content per vehicle as this market grows.
I think it is important also to note that.
Forecasters and we would forecast that over the next three years.
All types of vehicles will grow in terms of market. So the automotive market is nowhere near peak so our forecast would be that over the next three years, we see growth across all of those segments internal combustion engines as well.
But then after that three four year market starts to crossover where battery electric vehicles become a faster grower and then you're starting to see some obsolescence on the internal combustion side, so plug ins and battery electric is expected to grow about 40% units production from 'twenty, one 'twenty two and we're growing at around 70. So.
Significant outgrowth to the production, which drives up our content for vehicle.
About five bucks.
Thank you Chris Thanks, Chris we get the next question. Please.
Yes. The next question comes from trace <unk> with Wolfe Research.
Please go ahead.
Hey, Thanks, a lot.
When I was wanted to just to think just wanted to confirm.
How should we be thinking about.
Typical incremental margins.
For for the business I think in the past you've talked about maybe 35% to 40%.
Flow through.
And then you know you.
You mentioned, obviously the acquisitions would convert at lower Incrementals initially but.
Should we be assuming that.
Or how should we be thinking about how long it will take to get to get the margins on those programs up to.
Corporate average or where you are today.
Then potentially even above that.
The margin expansion.
Yeah.
So if you look back historically on average.
Maybe we haven't been as clear as we should be but on average our incremental profit on incremental revenue runs at about 30%.
That's about what we saw in 'twenty one.
And for 'twenty to unpack, it and you back out the impact of our growth investments and.
The acquisition impacts.
We're largely in that range. So that's a pretty good benchmark to use but as we said in the past subject to other things that may happen, such as increasing our megatrend investment or.
We haven't yet inorganic efforts around driving our growth vectors. So.
I think that's a good proxy in normal times, 30%.
As we go forward in terms of driving better margins in the acquired business we certainly.
But that will come with scale and that will come with <unk>.
Designs that are more marginalized that we can create the scale from today not the case a lot of new designs and activities in the market around new developing works that may make it a little bit more fragmented and more challenging to get that volume that we normally would expect.
But over time, we will we will achieve that we will get there and we expect these businesses.
With similar business model to have similar margins to.
Our core business. Some some businesses will have higher cost to serve but they will be extremely grateful that we think that's okay.
Thanks for the question. The next question please.
The next question comes from Jim Suva with Citi. Please go ahead.
Thank you and your prepared comments I believe you mentioned around $90 million all access.
Shipments into your customers or the channel.
My question is does that do to your customers or sub assembly years.
It's just not having enough parts to complete the entire automotive cars equal or are they sitting on that.
Somewhere or in the supply chain or was it you know.
<unk> got a concern of not having enough components, where your customers are.
You know ordering a little bit more.
To make sure Theres no hiccups or was it like a catch up from 2020, because we've been in the supply chain issues.
For a couple of years now thank you.
So I guess, Kevin I can tag team I would start with we continue to be.
A very good supplier to our customers and so that demand was placed on us and we deliver to that demand.
Our analytics based on some parts that we have that have really high market share in 2021. It was clear that we were shipping more product to customers and they were producing which give which gives us the $90 million of buildup of our parts and their warehouses or in cars that are partially complete or almost fully complete we do not expect.
That that build up again in 2022.
And so it's a year over year headwind of $90 million to our revenue growth.
We're just trying to illustrate but we continue to serve our customers extremely well.
We serve to their demand.
And we worked for her to do that.
We're very proud of that outcome.
Yes, the only thing I would add Jim is a point that you actually made which is if you look at the year over year. If you go back to 2020, we do believe we left 2020 with with many of our customers depleted versus a normal average so some of that growth in inventory during 'twenty two was to get to get back to <unk>.
Normal levels.
Ed.
Call it half was to get back to normal levels and the other half was to build inventory then at some point will unwind, but we're not assuming that it will happen.
Certainly in 2000 early part of 2022 or for the balance of the year.
Thanks, Jim a question we get the next question. Please.
The next question comes from Brian Johnson with Barclays. Please go ahead.
Hey, Deane this is Jason Stewart Riley on for Brian .
Maybe just back to the cost question, which we address first.
As we think about sort of your success in recovering.
Elevated costs in for Q <unk> last.
Last year, moving moving to this year elevated costs some of which you know it may not be recovered right away, but the balance of the year I think as you mentioned Paul you know they are kind of some some definite.
What were some of our seven.
Initiatives in place to get those back you know I guess, specifically when it comes to getting costs.
Recoveries back from customers any indication on sort of what percent of elevated costs.
Wet weather that's material whether that's labor.
Customers are willing to sort of give you back and what the timing of that is because it sounded like in the remainder of the year. The initiatives were more cost related rather than recoveries related. So is there a potential upside to the margin target. If you know recoveries kind of come in better than expected.
Well I would say that in each of our businesses.
Activity to offset these rising whether it was the impact of the chip shortage, because we're expediting lots of material or rising material and rising labor.
By business and how you do that commercially.
And some of our market and some of our business. It is more challenging you know they really wanted to see the detail of what the cost work I think our teams have done exceptionally good job working with our customers based on their expectations and getting recovery and that recovery has accelerated throughout 2021 with the challenges of that material prices are rising day, one out of.
2022 suppliers or raising prices and we have to continue to knock that down through a number of a number of activities. One is working with customers recover more to is being more productive and we have lots of levers on the productivity side to drive our costs down and to be more efficient and as volumes grow throughout the year, we're going to get the benefit of that.
Volume leverage on our fixed cost.
It's a combination of things, but we feel pretty comfortable that we can achieve.
The outcome that we set out here in terms of productivity improvement and the only thing I'd add to that would be.
The nature of how we've gone. After this has has obviously changed as the fact pattern has evolved right. So early 2021, we were absorbing a lot of those costs. When there was a question as to whether or not <unk>.
Cost inflation, we were seeing was more transient or sustained second half of the year with surcharges.
We go into 2022 and beyond.
It's it's it's not a surcharge anymore, we're adjusting prices our customers understand that they are doing that in the markets that they serve.
And it's never an easy conversation with customers, but it's understandable everybody understands that.
There is cost inflation occurring broadly in the market and some sort of needs to respond to that to continue to make sure that they perform for the shareholder.
Thanks, Jason for the questions next question. Please.
The next question comes from David Kelley with Jefferies.
Please go ahead.
Good morning, guys. Thanks for taking my question, maybe just on the industrial end market stepped down in 2022 that that you're expecting.
Can you talk about where you see pull back or maybe give us a sense of demand and order patterns in industrials and just curious if there's any conservatism here following the strength of your 2021 industrial revenue growth.
Yeah. It's a great question, we have a fairly diversified industrial market base that we're serving so what you're pointing out is something we're constantly looking at to try to understand what's going to happen in the industrial market.
It's very diversified in terms of the market that we serve and where you said it we're calling basically flat for 2000, and 2020 up a little bit call. It 3% in the first quarter of the year.
And we'll continue to unpack that but it's it's a wide base, we tend to look at things like PMI index and other very high level indicators as well as our fill rates in the individual quarter. So the fact that the first quarter is going to be a little bit stronger.
It means that we'll watch it closely to see how that trend holds through the balance of the year.
Thanks, David for the question next question. Please.
The next question comes from Joe Giordano with Cowen. Please go ahead.
Good morning, everyone.
To.
Clarify on the cost recoveries and auto I.
Are these like visible visible to you with a like a defined start date like do you kind of know that price kicks in like in the second half or something like that just based on these discussions on averages and is there like a certainty that those discussions have already kind of crystallized into something and it's just the timing of when when that kicks in.
So so let's just split the two I mean, if you're talking about.
Productivity that our automotive customers expect to see every year typically happens at the beginning of the year every year. The coffee business awards that you have a certain level of productivity and price downs.
That they would expect may kick in we had a year because we get the benefit of being on those platforms for five to 10, if not longer years.
Specific to the recovery.
And I don't know if its we want to get too much into the into the plumbing here, but.
Our commercial teams worked with our supply chain to understand the rising costs that we're incurring whether it's material or logistics costs.
By customer and then we use that information to work with our customers to have them share in a portion of that cost and the more the better obviously, but what is a very.
Integrated activity within <unk> within our business to then present that to our customers as Jeff said, we did that in the midst of a lot of supply chain shortages or a lot of demand expediting to customers customers hand to mouth product and now we're moving to more.
More long term view of these costs rising costs are likely to be with us and so we're taking a different commercial approach.
To get better pricing over time to reflect that higher cost base that we're at we're likely to experience for a period of time.
Thanks, Joe for the question can we go to next question. Please.
Yes. The next question comes from Michael <unk> with Sternberg capital markets. Please go ahead.
Hey, guys. Thanks for taking my question I was wondering if you could provide a little bit more kind of quantitative detail around some of the the cost headwind.
Expecting to experience in 2022, right I mean, there's everything from material cost inflation to logistics and labor costs is there any way you could maybe quantify those buckets in terms of the headwind you're expecting this year and maybe how you anticipate offsetting those.
I know you just talked a lot about sort of recoveries in and maybe commercial negotiations, but also specifically on those commercial negotiations at the start of the year or was there any really material change you were able to accomplish with those negotiations.
As we laid out in the presentation.
We still think that that we saw.
I believe in our model and our guidance provides us that we're going to have some margin expansion due to net productivity and that's a big bucket of lots of things. It's a price that's all.
All the things I, just talked about as well as other activities that we're taking on and to drive better cost profile for the business. So net.
Net net we think we will expand our margins through productivity gains.
The biggest challenge.
As material material prices are rising that shouldn't be a surprise anybody it's broad based it's suppliers using that.
Average of the supply chain.
Situation to be able to raise prices.
And so that that has the largest impact and we are like I said working with customers.
Internally looking for ways to mitigate that rising rising cost layer.
Labor inflation is also rising around the world that you use surprising it depends.
On which jurisdiction in which country, but clearly that's another headwind that we need to be more productive in our manufacturing sites to mitigate rising costs and we have good productivity plans within our plants to do that.
I feel like there's a lot of actions allowed to find actions that are that we're working that should deliver the outcome.
Although we shared with you today.
Thank you Michael for the question.
The next question please.
The next question comes from Amit.
And on me with Evercore. Please go ahead.
Thanks for taking my question.
Apologize if this was addressed already but.
When I think about the 200 basis points of margin drop that's embedded in the March quarter guide due to volume and productivity I believe.
Is it really to decouple this and talk about how much of the headwind productivity issue the supply chain issues versus volume and then as you ramp this up throughout the year.
How about Muslim from mid 18% to 21%.
What's enabling that margin expansion is that these productivity inefficiencies going ob volume kind of kicking in so we had a break those two out that would be really helpful.
So.
Happy to help there.
So when we talked about every.
Every year.
We have new pricing with customers picking on the automotive side, which usually is lower than the year before so that's nothing new.
Dropped sequentially from Q4 to Q1 is very similar on average what you've seen in the last 10 years.
What's different would be the material costs that are rising more quickly set a new pricing effect from suppliers.
And the growth investment, which we should expect more of the time I think talking about things that really is going to drive our future and so it's a combination of the businesses. We've acquired which you noted and also the increased megatrend spend from.
I think 12 million two three or $4 million more in Q1 those are the major drivers.
And as time goes on.
21% margin business as volumes grow we get a lot more.
Profit contribution of the volume scale because.
You don't have to add a whole lot of theres no fixed costs associated with that so we get volume leverage from volume scale.
And Thats, what we expect to happen throughout.
Throughout the year as long as a lot of the actions, we're taking to drive better cost savings start to kick in and we get a lot of traction there.
Thanks, Amit for the question.
And we get the next question please.
Yes, we have a follow up from Chris Snyder with UBS. Please go ahead.
Hey, sorry, I just wanted to follow up on my previous.
Question, you guys kind of talked to 70 per cent auto electrification growth versus around 40%.
The unit growth so that that content per vehicle growth that we're seeing is that more so driven by a higher.
Revenue pie on these next wave you vs that are coming to market or is it more so driven by a similar revenue pie and you're just taking much higher share of that so thanks for letting me hop back in.
Absolutely Chris so the former right. So the scope of the opportunity set that we've identified that we can serve for our customers.
It's bigger.
The share that we're experiencing is pretty similar our goal is to be number one or number two is in the in the particular.
Application or a path to get there that has not changed we want to be a leader.
And so it's really about the size of the pie, becoming bigger given the capabilities that we have as an organization to help our customers deliver on this this this interchange in their markets. So.
That's that's where we are thanks, Chris.
Thanks, Chris for that and we get the.
Next question please.
Yes. The next question comes from Jos <unk> with RBC capital. Please go ahead.
Thanks.
Maybe on the outgrowth and sort of tying some of the EV commentary together.
I know youre talking four to 600 basis points of outgrowth.
Overall, but given that you know the electrification business is primarily related to automotive you would see them in your 50% growth to talk about we're talking about like an easy target of about 1 billion seemingly by mid decade, what type of Alpha specifically in auto is embedded in that.
Yeah, So where we've been on auto outgrowth has been.
Again at the high end of our four what we had quoted is 400 to 600 in the automotive business. So I would expect that as we.
We continue to penetrate the market in terms of these new applications that will continue to see the high end of that range in auto it's going to be a little bit lumpy, depending on when things launch I think you all know that and that's why we were going with the full company outgrowth.
And we will continue to monitor our N B OS that we win with customers that is the best indicator of long term outgrowth that we expect in these businesses, but given the level of Npls that we have one we have a lot of confidence in our ability to continue to do.
Thanks, Joe.
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 operator, I'd like to thank everyone for joining us. This morning, since auto will be participating in upcoming investor conferences sponsored by Barclays.
Aaron Berg and Morgan Stanley during the first quarter and as Jeff mentioned, we also expect offer webinar on our electrification initiatives on February 22nd. So we look forward to seeing you at one of those events or on our first quarter earnings call. In late April . Thank you for joining US This morning and for your interest in <unk> Sada, Andrew you May now end the call.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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