Q1 2022 Sensata Technologies Holding PLC Earnings and Acquisition of Dynapower Company LLC Call
Good day, everyone and welcome to some thought as first quarter 2022 earnings conference call.
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At this time I'd like to turn the conference call over to Mr. Jacob Sayer, Vice President Finance, Sir. Please go ahead.
Thank you Jamie and good morning, everyone I'd like to welcome you to some thought as first quarter of 2022 earnings Conference call. Joining me on today's call are Jeff could take its.
Inside of CEO , and President <unk>, Chief Financial Officer, and Denise Naga Wallets.
Executive Vice President of sensing solutions in heavy vehicle off road.
In addition to the financial results. Other press releases, we issued earlier today, we will be referencing a slide presentation. During today's conference call. The PDF of this presentation can be downloaded as always investor relations website.
Conference call is being recorded and we will post a replay webcast on our Investor Relations website. Shortly after the conclusion of today's call.
As we begin I'd like to reference <unk> Safe Harbor statement on slide two.
This conference call, we will make forward looking statements regarding future events or the financial performance of the company that involve.
All risks and uncertainties.
The Companys 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 on our forms 10-Q, and 10-K as well as the 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 will be discussed during today's call will relate to non-GAAP financial measures.
Our GAAP and non-GAAP financials, including reconciliations are included in our earnings release and in the appendices of today's presentation materials.
The company provides details of its segment operating income on slides 10, and 11 of the presentation, which are the primary measures management uses to evaluate the performance of the business.
Jeff will begin today with highlights of our business results during the first quarter.
He will then provide an update on recent progress and our key electrification and insights strategic growth areas as well as share details about our recently announced acquisition of diner power.
Paul will cover our detailed financials for the first quarter, including revenue growth and market outgrowth by segment and business unit and it will also provide financial guidance for the second quarter and full year 2022, well then take your questions. After our prepared remarks.
Now I would like to turn the call over to some sort of CEO and president Jeff Gotcha.
Thank you Jacob and welcome everyone I'd like to start with some summary thoughts on our strong performance during the first quarter as outlined on slide three.
While production across all of our end markets declined nearly 6% during the quarter compared to last year due to supply chain disruptions shortages.
Our business model, which includes acquisitions and market <unk> served us well.
As a result, we produced solid financial results in the quarter for shareholders.
<unk> $976 million of revenue or growth of three 5% from the prior year above the guidance range. We provided in February .
We once again demonstrated strong market outgrowth above our target ranges as.
As a company, we delivered 790 basis points of outgrowth during the quarter.
This includes 140 basis points of pricing recovery.
Paul will discuss our strong revenue outgrowth in more detail.
Quoting activity for New business Awards has been extremely active during the first quarter.
And we are currently on track to exceed a record $640 million in new business wins, we secured last year.
More than half of these new business wins or in our megatrend growth factors and we expect them to translate into <unk> future revenue outgrowth.
Since our current revenue outgrowth is increasing driven by rapidly growing positions in megatrend areas, including electrification and insights.
We are investing more in these areas and we believe this increased organic and inorganic investment.
Which for the first which for the full year is expected to impact our margin index by about 250 basis points.
Is the right trade off to expand our exposure in these fast growing areas.
Acquisitions completed in these areas over the past year contributed 410 basis points to company wide revenue growth in the first quarter.
And this is in line with our targeted.
Acquired revenue growth.
I'll share more details regarding our latest acquisition of power in a moment.
During the first quarter, we benefited from our resilient flexible and focused organization that continues to successfully navigate.
The ever changing supply chain landscape.
And deliver on our customers' needs.
The war in Ukraine, and the Covid related Lockdowns in China are currently having minimal direct impact on our business but.
But we are watching these situations closely as these and other external factors could potentially impact near and longer term demand.
Also continued inflationary impacts on input costs.
I have led us to become more agile and we aim to offset these costs with commercial pricing actions.
The timing of these actions impacted first quarter results, but we are confident that the full year impact will be limited.
And will allow us to continue to deliver on our promise of strong differentiated operating profits.
I'd like to recognize the innovation agility and hard work of our entire team.
And the support from our customers and achieving these strong results.
Since that is in a strong financial position today.
We have more than $1 6 billion of cash on our balance sheet we.
We generate significant free cash flow each year.
And our net debt to EBITA EBITA ratio is within our target range of two nine times.
Acquisitions in the megatrend areas of electrification and insights continues to be our primary focus for capital allocation as this activity drives our strategy.
Long term sustainable growth for the company.
In addition to acquisitions, we have deployed capital for our share repurchase program and today.
We announced the addition of a quarterly dividend of 11 cents per share starting next month.
We are confident that our business will continue to generate sufficient cash flow to execute on this balanced capital allocation program.
Moving to slide four since Ida is continuing to make excellent progress in winning new business and electrification building upon our success in 2021.
As an example of since that is continued strength in thermal management, we received multiple new business awards for thermal management centers and electric vehicles this quarter, representing 9 million in annual revenue.
These primarily support key pump architectures preferred by electric vehicle makers due to their low power usage.
Additionally, we were awarded new tire management business and a new tire management is this opportunity from a leading electrification manufacturer. This.
This win represents more than $40 million in annual revenue.
This solution is unique in the industry today, because it combines tire pressure with temperature and tread depth.
In a single sensor to provide a more complete picture of tire health.
Which will drive higher efficiency and safety.
Revenue from electrification efforts across our business was $260 million in 2001.
We continue to expect greater than 50% increase in this revenue in 2022.
And our first quarter results and order pipeline support this forecast.
As shown on slide five we are pleased to announce that we have agreed to acquire diner power.
Power is a leader in power conversion in energy storage solutions.
They offer a comprehensive suite of high voltage Inverters converters and power rectifiers, as well as aftermarket sales and services.
This transaction will be funded using cash on hand.
Pending customary regulatory approvals, we expect to close the transaction in July .
Donna power is a fast growing business. It is expected to generate over $100 million in annual revenue in 2022.
And grow in excess of 30% per year over the next several years to more than 300 million in revenue by 2026.
They are profitable with 20% EBITA margins expected this year and as a result, the acquisition is expected to be <unk> accretive to <unk> EPS.
In the second half of the year.
<unk> got a power focuses on mission critical highly engineered differentiated solutions that create customer stickiness and enjoy higher margins.
They are experts in DC to DC conversion power inversion and rectifier control.
The only power control supplier to focus across renewable energy industrial and defense applications.
Donna power has a well earned reputation for deep technical knowledge product quality and longevity.
And high customer responsiveness.
Datapower is headquartered in Burlington, Vermont, and we look forward to welcoming their 200 plus employees to this insider team.
Power is a natural extension of Sensata is electrification strategy as shown on slide six.
We are focused beyond the electric vehicle opportunity each of the broader electrification ecosystem, including renewable energy generation storage and usage.
Donna power solutions handle the high voltage needs of renewable power generation and large scale battery energy storage for industrial and defense applications as.
As well as areas, where rapid energy use is required.
Such as green hydrogen production and DC fast charging for electric vehicles.
These are large and fast growing segments with a $1 1 billion addressable market. This year and are expected to grow over 25% per year toward over $3 2 billion addressable market by 2026.
As discussed during our electrification teychenne since <unk> strategy is to build a 2 billion dollar electrification business by 2026.
Our current electrification revenue growth in the market and new business wins to date give us confidence in achieving your organic revenue target of $1 5 billion.
Power is expected to provide over half of the targeted 500 million of acquired revenue as part of this goal.
That empowers leading high power conversion capabilities help unlock synergies, what's inside of Solta and spear power energy storage solution businesses and utilize electrification components such as high voltage contactor is fuzes current sensors, Inverters and battery management systems already in.
That's inside our portfolio.
Furthermore, data powers capabilities combined with <unk> global presence and manufacturing expertise will allow us to pursue a large and fast growing opportunities in front of us.
In summary, Diana power accelerates since Idose journey to become a leading provider of cross electrification industries.
Continuing our progress in this very exciting megatrend.
This is a key component of our objective to deliver higher growth and long term shareholder value.
On slide seven we share an update on our continuing progress in since a lot of insights.
Since a lot of insights delivers actionable data to our customers and their partners to drive operational efficiency cost savings and safer operations.
As evidenced as evidence of the value add nature of our solutions, we were awarded a new business wins over worth over 19 million during the first quarter.
Putting us on track to double our insights business wins this year compared to last year.
The insights growth initiatives generated $75 million of revenue in 2021, and as we mentioned, we expect to double that in 2022.
Our performance during the first quarter and our bookings to date support this goal.
An example of new product development and insights as a jointly developed solution with I'll say up and innovative wireless power technology company.
That enables safe storage and charging of telematics devices for use in high value properties, such as shipping yards and distribution centers.
This novel solution won a top 20 products award for 2022 from a heavy duty trucking magazine.
We are also pleased with the acquisition of elastic M to M. During the quarter.
Elastic M to M is a pioneer in delivering flexible scalable and cost effective and intuitive Iot analytics.
For telematics service providers and their end customers.
Their Iot cloud platform utilizes machine learning and artificial intelligence capabilities to digest and analyze an increasingly rich amount of data from connected assets to enable customers to make better operational decisions.
We see sizable markets that we can pursue with these broadened technology solutions.
In summary, I'm really encouraged that we are making excellent progress on our 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 the addressable markets.
Through both organic efforts and through bolt on acquisitions and partnerships in these areas.
Now I'd like to turn the call over to Paul.
Thank you Jeff.
Key highlights for the first quarter as shown on slide nine include revenue of $975 8 million.
An increase of three 5% from the first quarter of 2021.
Adjusted operating income was $182 5 million a.
A decrease of seven 9% compared to the first quarter of 2021.
Primarily due to lower volumes inflationary material and related supply chain costs net of higher pricing.
And investments in our megatrend growth areas.
Now I'd like to comment on the performance of our two business segments in the first quarter of 2022.
Starting with performance sensing on slide 10.
Our performance sensing business reported revenues.
$717 7 million, an increase of 4% compared to the same quarter last year.
This was driven primarily by our market outgrowth of 650 basis points.
As well as revenue from acquisitions.
Looking back it appears customers built approximately 20 million of inventory in the first quarter of last year that we are excluding from the outgrowth calculation.
Performance sensing RV income was $186 million.
With operating margins of 25, 2%.
Segment operating income declined due to lower organic volumes and inflationary material and related supply chain costs somewhat offset by higher pricing.
Income from acquisitions and favorable foreign currency.
As shown on slide 11, sensing solutions reported revenues of $258 1 million in the first quarter of 2022.
An increase of 13, 2% as compared to the same quarter last year.
This was driven by strong outgrowth, including the launch of new industrial electrification applications and acquisitions somewhat offset by declines in the aerospace market.
Sensing solutions operating income was $72 5 million an increase of eight 4% from the same quarter last year with operating margins of 28, 1%.
The increase in segment operating income was <unk>.
I'm really due to higher volumes and higher pricing.
Somewhat offset by inflationary material related supply chain costs and.
Higher selling expenses to support business growth.
On slide 12, corporate and other operating expenses not included in segment operating income were $76 1 million in the first quarter of 2022.
Adjusted for charges excluded from our non-GAAP results.
Corporate and other costs were $68 $968 9 million.
An increase of $7 1 million from the prior year quarter.
Primarily reflecting higher research and development and business development spend to support our megatrend growth initiatives.
We continue to expect between 60 and $70 million and megatrend related spend in 2022.
To design and develop differentiated solutions for the fast growing and transformational Megatron vectors of electrification and insights.
We are confident that the increase in the spend this year is the right long term trade off and it's supported by record new business wins and rapid revenue growth. We are experiencing in these transformational megatrend related areas.
Moving to slide 13.
We generated $12 million in free cash flow during the first quarter.
$344 million in free cash flow over the last 12 months.
Free cash flow in the quarter was impacted by our decision to increase inventory.
To ensure continuity of supply to our customers.
And then in anticipation of volume growth in the coming quarters.
It was also affected by an increase in your accounts receivable, reflecting growth in our business and the impact of revenue linearity in the quarter.
Annual bonuses and acquisition related incentive compensation for achieving key milestones for both feet in the quarter.
For the full year 2022 weeks.
We expect free cash flow conversion.
To be approximately 75% to 80% of adjusted net income and.
We expect capital expenditures to be in the range of 165.
$175 million.
Since all of the net debt to EBITDA ratio was two nine times at the end of March and within our target range.
Pro forma for the acquisition of Diamond power.
<unk> net debt to EBITDA ratio would have been three six times.
<unk> primary use of cash on hand is the acquired businesses that will extend our positioning within our key growth factors of electrification and insights.
Given the strength of <unk> balance sheet and expected future free cash flows.
We also look to return capital to shareholders.
Finally, we repurchased $67 million of our shares in the first quarter.
And earlier today, we announced the initiation of a quarterly dividend of 11 <unk> per share.
It is expected to be paid on may 26th to shareholders of record on may 11th.
We are providing financial guidance for the second quarter of 2022.
As shown on slide 14.
Our expectations are based upon the end market growth outlook as shown on the right side of the page.
We remain somewhat more conservative than IHS production.
Automotive estimates for both the quarter and full year.
Even as a recently lowered their estimates reflect impacts from the war in Ukraine and the recent the recent COVID-19 related Lockdowns in China.
Yeah.
The revenue components of our guide include market outgrowth completed acquisitions.
<unk>.
We do not expect supply chain inventory to unwind during the quarter.
But we remind investors that approximately 25 million of inventory was built by automotive customers in the second quarter of 2021.
Increasing revenue in that period and complicating the year on year comparison.
Our current fill rate is approximately 95% of the revenue guidance midpoint.
For the second quarter.
At the midpoint adjusted operating income margin is expected to be 19%.
Which includes the impact of lower volumes.
Inflationary material and related supply chain costs, partially offset by higher pricing.
And our investments for growth and megatrend related areas, including acquisitions as.
As we rapidly scale these growth vectors.
As we mentioned last quarter, we expect productivity improvements throughout the balance of the year in.
In addition to sequential revenue growth to lead to improving adjusted operating margins in each of the quarters. This year.
We are reiterating our financial guidance for the full year 2022, which is which does not include data power.
As shown on slide 15.
We expect lower market estimates that I will discuss in a moment.
We offset by stronger expected outgrowth and higher pricing during the balance of the year.
Revenue growth between eight and 12% includes the impact of markets outgrowth completed acquisitions and FX.
We do not expect the roughly 110 million of inventory built by automotive customers during 2021 to.
To reoccur, where unwind in 2022.
At the midpoint adjusted operating income margin.
It is expected to be 27%, which.
Which includes the benefit of higher volumes higher.
Higher prices offsetting inflationary pressures.
And investments in our megatrend growth areas.
Even our recent foreign currency changes, we have updated our estimates for the impact of foreign currency exchange rates.
Both our revenue and adjusted EPS.
Yeah.
On slide 16, we provide our updated estimates for OEM production growth for 2022 as compared to 2021.
We currently expect automotive production decrease of approximately 4% this year.
With declines in Europe , and China from our prior expectations, partially offset by increased growth expectations in North America.
Our outlook at this point remains somewhat more conservative.
Current IHS automotive production estimates on a regionally weighted basis.
Have you vehicle off road market is now expected to contract by 5% this year as electronics and other part shortages curtail production machinery.
As Jeff highlighted earlier since almonds organic revenue outgrowth.
790 basis points for the first quarter as shown on slide 17.
Well above our target range.
This includes price increases in the first quarter of 140 basis points.
Largely offset material cost inflation.
Looking forward.
We continue to expect that outgrowth for 2022 will be above our target range.
Each of our businesses will contribute to that total some higher and some lower in any period. So that in aggregate we reflect the value of our integrated engineered solutions all customers revenue that grows faster than underlying markets.
In addition to the organic revenue growth over market.
We also increased revenues by acquiring businesses that give us access to fast growing differentiate applications that address our customers' needs.
Our long term target is to acquire new revenue streams.
Add an additional 400 to 600 basis points of inorganic M&A growth Doosan Psi each year.
We acquired 410 basis points of revenue growth in the first quarter within the target range now.
Now, let me turn the call back over to Jeff for closing comments.
Paul Let me, let me wrap up with some key messages as outlined on page or slide 18.
<unk> business and organizational model is strong resilient and reliable.
As we deliver mission critical highly engineered solutions required by our customers.
While our customers markets are cyclical we aim to outgrow these markets 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 driven growth initiatives that are opening large and rapidly growing opportunities person sort of across all of our end markets.
We are making excellent progress in electrification and insights.
Organically through strong new business wins, and inorganically through bolt on acquisitions.
<unk> 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 solving their hard to do engineering challenges.
We will also continue to provide differentiated 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 Idose longstanding mission.
To help create a cleaner safer and more connected world.
Not just for our customers' products, but also through our own operations. We believe we are meaningfully contributing to a better world.
We are on our way to achieving the targets laid out in our first sustainability report last year bolstered.
Bolstering the long term sustainability and success of the company for all of its stakeholders.
We look forward to sharing our progress through an updated sustainability report to be published during the second quarter.
Now I'd like to turn the call back to Jacob Thank you, Jeff well now move to Q&A given the large number of listeners on the calls on the call. Please limit yourself to one question each Jamie please assemble the Q&A roster.
Ladies and gentlemen, once again, if you'd like to ask a question. Please press star and then one.
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Our first question today comes from <unk> Mohan from Bank of America. Please go ahead with your question.
Yeah. Thank you good morning, and congrats on the deal.
So when we look at your two Q trajectory here it is a bit weaker but you maintained your full year guidance. Despite the end markets are.
We grew both on auto and H B O R. From your prior assumption. So can you maybe help us understand what the offsets are is it is it pricing is it inventory build or is it something else and and to the extent that it has increased.
Growth what is it that that's giving you a higher content growth where Cisco prior assumptions. Thank you.
Yeah. So let me share some high level thoughts. So obviously Q1 came in better than we anticipated. So that was a that was in the positive column, but as we do look at the second quarter in terms of impact on overall demand continued supply chain challenges and really exacerbated supply chain challenges associated with deeper in the supply chain not necessarily caused by.
The us but caused by some of our customers other suppliers, that's causing them to have slightly lower demand second quarter is going to be a little lower than what we had originally forecasted.
Internally I know, we didn't provide second quarter specific guidance back in February , but it's coming in a little bit lower.
As you noted content or outgrowth is higher that's a combination of acceleration of events that we've always expected to accelerate in terms of the mega trends, that's going to naturally drive more outgrowth for us as well as pricing so first.
In the first quarter pricing was a little bit muted. It recovered most of the cost, but overall pricing impact in the first quarter was about one and a half per cent positive we're expecting that to go up a little bit more in the latter part of the year and then obviously the M&A.
In fact, or the acquired growth will help us as well. So there's a there are several items on the positive and negative side overall market. We think is a little bit lower but on the other side of our strategy in terms of outgrowth and.
Inorganic growth, we're seeing those businesses that we acquired performed quite well and they will contribute to offset some of that.
Hopefully that gives you a sense of things thanks for the question.
Yeah.
Our next question comes from Mark Delaney from Goldman Sachs. Please go ahead with your question.
Yes, good morning, and thanks very much for taking the question I was hoping to better understand some of those price cost dynamics.
Could you be more specific about how much higher your expecting cost to be from raw materials and supply chain logistics cost and you spoke a bit around what pricing.
Did versus costs in the first quarter, but how much incremental pricing is now baked into guidance for the full year can.
Can you also talk through your.
Your confidence in being able to fully pass through those price increases in customers' willingness to accept them.
Hey, Mark it's Paul so the.
The traction we're getting on the pricing side, it's continuing to improve every quarter.
As Jeff said it was a bit of a headwind in Q1 still a little bit of headwind in Q2, when we expect it to become a tailwind in Q3. So the pricing continues to grow as material cost cost start to flatten out. So it's more of a second half improvement off the first half and like I said, we're doing a really great job and commercial teams in terms of being able to.
For customers too.
A lot of that cost on.
And to.
Continue to make us very competitive financially.
Thanks, Marc for the question.
Our next question comes from Matt Sheerin from Stifel. Please go ahead with your question.
Yes, Thanks, and good morning, I wanted to get back to your full year guide.
Specifically on the transportation side.
Looks like Jeff.
Just backing in to the rest of the year guidance Youre looking at a fairly big step up in Q2, I'm, sorry, Q3, and Q4 in automotive.
Is that or the expectation is that production that customers will finally start to improve and as supply improves.
What gives you that confidence that we're going to see that step up.
Yes, you're reading it right. If you look at the company wide in the first quarter as market was down 6% second quarter, we expect market to be down again off of second quarter of last year call it two or 3%.
So the first half from a market standpoint, there's a net decline we are expecting that to pick up it's coming in a couple of specific areas. It is around automotive will recover off of the first half of the year I've also some of our.
Our insights driven revenue will increase in the second half of the year. So we're seeing some pockets, where we see an increase versus last year, but I think youre absolutely right the <unk> business.
Hey, Zack that Mark overall market dynamic has come down.
The European market expectation has come down in China has come down slightly as well, but there are pockets of opportunity that will offset some of that.
Thanks, Matt for the question.
Okay.
Our next question comes from Cemig Chatterji from Jpmorgan. Please go ahead with your question.
Yeah, Hi, good morning, Thanks for taking my question I guess, Jeff.
Mentioned in your prepared remarks, the visibility that you have in relation to wins for Duane Duane to already being on track the flips between 'twenty, one and I wanted to dig into that debate within the student.
Early in the yield what are you seeing in terms of maybe you can share what's the run rate.
Compared with this time last year in terms of your wins and some investors would have assumed that given the macro some of the quoting activity would have moderated but you are seeing that X rate. So is it really being driven by auto Oems or is it more on the industrial side. If you can share some color there.
Thank you.
Yeah, I think that's the key here is remember were in were primarily serving long cycle businesses. So there has not been a slowdown in an opportunity in terms of.
The Ngos and the quotes that we've had it's been very robust we mentioned in our teach in that we have over $1 billion.
The N B O is that will be quoting during 2022.
In electrification alone. So the quoting activity is quite high right now in terms of trajectory what I would tell you is it was an extraordinarily strong first quarter and it was an extraordinarily strong through the fourth.
First four months of the year.
Sitting here towards the end of April .
And we're not expecting that trend to continue but we're well ahead of our last year of run rate of 640 on an annualized basis and so we have a lot of confidence in that.
Again more than half of them are coming in the areas that we're focused associated with electrification electrification and insights and again remember electrification is broadly not just auto electrification, but but all of the end markets that we serve.
So that opportunity set continues to grow and we're having some tremendous success in terms of selling our offerings through to our customers, giving us again continued confidence in that outgrowth longer term.
Thanks for the questions.
Okay.
Our next question comes from William Stein from True Securities. Please go ahead with your question.
Okay.
Oh, yeah. Thanks for taking my question and congrats.
On the acquisition and the good results I'm, hoping you can speak in a little bit more detail about that.
The war in Ukraine, and the Covid comes in Shanghai.
As to how you see these influencing the markets you serve overall and then your business specifically I think in your prepared remarks it sounded like.
This isn't having neither of them had material impact, but I wonder if you could maybe dig one before us. Thank you.
Yeah, I'd be glad to and I'm glad you asked the question because it's not having an impact but that doesn't mean that it's not causing disruption more broadly in the supply chain right. So when it impacts our customers. There is movement in terms of order book they swap out some orders for others based upon the need that they have based on what <unk>.
Ponant theyre able to procure to allow them to make vehicles or other equipment and so there is volatility in the market, but the team has done a very good job in terms of managing through that.
Additionally, there is minimal revenue or supply chain in the region right. So when we talk about direct impact.
That's the impact us inside of where we're not dramatically impacted directly associated with that but the knock on effect associated with volatility in the market. We're managing through right now to have an end result, which doesn't impact our business in a meaningful way, but we're watching it closely like everyone is in terms of the longer term impact of this.
Of this conflict in the region on the on the European markets overall demand and so forth, but right now.
When you look at our order book is <unk> 95 per cent filled against our guide for the second quarter, we're not seeing that impact as we sit here today.
Finally, I would add is that the market itself is assuming a decline in production in China in the second quarter.
So we're embracing that and seeing.
Out of that into our guidance for Q2, and actually a little bit more conservative there.
And the market so that is having an impact in Q2, but we expect that reverses in the second half so it's more timing than absolute demand.
Well thank you.
Our next question comes from Luke Young from Baird. Please go ahead with your question.
Good morning, and thanks for taking the question, Jeff is just hoping to unpack Diana powers exposure, a little bit better on slide five in the presentation. You showed their clean energy exposure at about 55% of sales is it possible to parse that out a little bit more relative to some of the applications that you have highlighted this morning and to what extent if at all are you including.
Legacy exposures, there such as mining for clean tech related materials or similar things.
Yeah.
Yes, Hi, this is Nate I'll take your question so.
Dino power brings to us some really exciting opportunities to expand it and markets into the clean energy space and this is running the gamut from renewable energy so working closely with the solar fields as well as green hydrogen extraction, which is supporting the electrolysis process as well as microwave.
So it really runs the gamut and we're really pleased with the end market exposure in the portfolio they've done up operating system.
Thanks, Luke for the question.
Our next question comes from Joe Spak from RBC Capital markets. Please go ahead with your question.
Ah Thanks, maybe maybe just some quick clarifications.
You know the <unk> you mentioned that the inventory non repeaters are now $110 million headwind I think it was 90 prior but you also said 20 million in the first quarter. So is that is that the delta or is part of that increase the remainder of the year and then on slide four the 40 million E V win for a tire imagine system I just want to.
Clarify that or are you, including such business in your electrification classification and if so what is that.
260 million, that's just that just relates to like an electric powertrain.
Sure do you want to get the inventory question and then ill just so so when we're looking at the.
The growth year over year, we went back and recast Q1 based on our analytical tool, where we use a high market share pressure sensor to kind of gauge the market versus production and what we found is that we were shipping more into last.
Last year into production that was being built so it was like Q2 and Q3, but in Q1, we didn't capture we didn't have the model to do that at the time. So that's a recap of some of the growth really was a headwind because of last year's inventory build so we've excluded that from.
The gross profile and its just a Q1 impact.
And that does represent the delta between the $90 million gets that had 100 110 right now, but it's all it's all isolated to Q1.
When you're in your question on the opportunity in the win as we've talked about a large portion of our solutions or our product categories apply in an electrified environment right.
So there's I think there's a perception that all of our offering to combustion engine platforms goes away. That's that's not true there are a lot of products that port over and in fact have a stronger poll because the efficiency of the system is even more accentuated in an electrified environment, so tire pressure or what.
What we're talking about it as a broader tire management. So we've expanded the offering to include a.
Higher value proposition, given how important tire pressure and management of the tire is in an electric environment. So to answer your the first part of your question absolutely when we're selling our legacy offering.
We're in an electrified platform customer that's that's an electrification win because it's going to last for the duration of electric vehicles.
In terms of your other part of your question the $260 million of revenue, we have a demonstrated 20% uplift today.
When you convert from an IC E application to an electric vehicle application, we've talked about that and so embedded in that $2 60.
Is electrified content, we're providing for E V manufacturer for our customers, 20% demonstrated uplift, but given the wins that we're experiencing and the forecast going forward, we see a line of sight to doubling so as the shift occurs from combustion engines to electrified there'll be significant.
Outgrowth associated with that transition that we're selling in today. Some of it is embedded in those electric vehicles produced but the forward look is dramatically higher in terms of overall content hopefully that helps clarify things like the one thing to add there would be the $2 60 as a companywide figure it's not just on the automotive side. So it also includes <unk>.
Industrial and heavy vehicle electrified revenue, including content that goes into charging stations for example, which is where our industrial business. Thanks.
Thanks, Joe for the question we have the next one.
Yeah.
Our next question comes from Chris Snyder from UBS. Please go ahead with your question.
Well thank you.
The guidance it seems a very strong back half margin recovery. Despite continued ongoing cost inflation.
Thomas the commentary suggests that the majority of this is being driven by price.
I guess my question is.
This expected price improvement already agreed to and we just have to wait for it.
Three the numbers or these price discussions still being negotiated and then also are there any margin drivers into the back half besides price that we should be aware of thank you.
So I would I would comment on the three things so yes pricing pricing does elevate in the second half of the University of the first as we continue to.
Push that.
Commercial excellence activity.
Some of that is already baked in so that still has to be achieved.
I work with customers, but we feel confident in our ability to achieve.
Achieve that outcome second as volumes do increase sequentially from the first half to the second half. So we are getting volume benefit we are getting leverage on that volume and the third would be continued productivity improvements as we always continue to improve our cost structure quarter by quarter and we see some additional cost savings coming in the second half that we did not realize in the first half.
Thanks, Chris.
Yeah.
And our next question comes from Nick Todorov from Longbow Research. Please go ahead with your question.
Yeah, Thanks, and good morning, guys. Just another question around pricing your pricing assumptions for this year changed compared to 90 days ago and it sounds like obviously the outgrowth for Disney is trending above the 406 hundred basis points target can you talk how much of that do you expect to be coming from pricing for the full year.
I mean, a significant portion of the outgrowth going to come from pricing in the second half.
Yeah. The narrative has changed in the last 90 days material costs continue and other cost continued to rise with the inflationary pressures that we're reacting very quickly and proactively to work with customers to.
Pass it all along and as I said, we've been pretty successful in the first half we expect to be more successful in the second half as we gain momentum here, but it is something we have to continue to do as long as the input costs are rising.
We're gonna need to respond this way and like I said, we've been successful so far in doing that and believe we will do better in the second half.
And just to clarify the 790 basis points from their first quarter net of pricing is still above the high end of the range.
And we would expect that we'll continue that but when we look at outgrowth, including pricing, it's going to be even a bit higher given the need for us to implement those commercial actions.
Got it thanks for that.
Yes.
Yeah.
And our next question comes from Amit <unk> from Evercore. Please go ahead with your question.
Yep, Thanks for taking my question.
Just sort of clarify the spike up.
You think about the back half margin expansion that you're embedding a you said it was do you mean that your input costs are going to get any worse in the back half, which is sports type is that or is that something you're thinking because I think the big completely investors, having today the confidence around the operating model might be from 19% to 22%. So I'm just curious given that you had before is your assumption.
Cost stay stable or get worse, I would love to understand that and then Paul I didn't quite get this.
Dino power in the 2022 guide or not yet.
So we're not including Dyno power in the guide.
It's our practice not to do that we haven't closure occurs want to weight loss.
But we gave you what we think the EPS accretion would be.
If we close early in the second half.
Yes, so on the pricing piece.
I would say that.
We've been pretty consistent that material costs have been rising very quickly.
And so in the first half we are a bit behind in terms of offsetting that but.
But we have a tremendous amount of momentum and effort too.
Overcome that and so I would say the pricing rises faster than the assumptions around material costs somewhat material cost start to level out and we catch up.
And that generates that generates positive income in the second half and we didn't have in the first half and then volumes as I said, it's amazing the conversion on incremental volumes profit conversion is very high we expect volumes to grow in the second half above where they were in the first half and the only item I would add is given that we've seen.
Inflationary pressures for the last 18 months when we do a forward look we don't ignore the trend that's behind US. So we do forecast that it's going to continue to some extent now where that ends up I don't know the answer to that there's going to be a lot that's going to have to happen to conclude but we have.
<unk> assumed that the bad stuff stops and we're only getting the recovery.
We're expecting that those inflationary pressures will continue for some period of time.
Thanks, Amit.
Thank you.
And our next question comes from Brian Johnson from Barclays. Please go ahead with your question.
Yes, we'd like to ask you a bit about just contractually in Europe , Theyre, obviously going to trade secrets, but how is the pricing works visa b the automotive suppliers versus your other end markets a lot of tier ones are stuck in contracts with annual productivity price downs and really have to go.
<unk> and bag the Oems for price recovery since you're more of a tier two a very important one however in the auto supply chain are you subject to those same pricing dynamics or do you have more flexibility in pricing your products.
We are so let me start with while we take.
Pricing with our customers very seriously right. So I do not want to be Cavalier regarding this because we do have long term arrangements.
With our customers regarding what normally is productivity based upon volume expectations.
Very frequently we have material adder.
<unk> more frequently we have inflationary clauses that we baked into contracts.
And so where we're trying to adapt to the new world that we're living in but there are instances, where we've had to go to customers and explained to them that the cost to make their product is going up dramatically and in order for us to be a long term viable sustainable supplier for them, we need to have the pricing does.
<unk> and they're they're hard conversations to have but we're having really good success as evidenced by their first quarter results and our expectation is that those results will improve into the latter part of the year, but there are conversations that we must have and I know every company out there is having with their customers.
Hopefully that when you say customers, where do you think it's just a follow on is that truck Oems or is that every.
It could be either as you know, we're largely directed by by the OEM, but often times, we have to go to a tier as well and discussed that so sometimes its a three party conversation.
In terms of what we need to accomplish.
But it can be both in terms of who were ultimately contracted with.
Thanks, Brian Okay. Thank you.
And our next question comes from David Kelley from Jefferies. Please go ahead with your question.
Good morning, guys just in light of the strong industrials outgrowth in the quarter can you talk about industrial order visibility each day in and how maybe we should think about the content opportunity versus that 1% end market decline youre expecting for the full year.
Yes, so historically, our industrial business has shorter lead times, and therefore less visibility into the order of our pipeline.
But given the general market conditions, we're seeing very strong fill in industrial as well well above where we historically have and we're factoring that into our guide you you see that in the form of the fill rate against the whole company, but it's safe to assume that across each of our businesses, we're seeing higher fill than we would normally see.
And so the.
Element of what you're mentioning is we are seeing significant content growth, which we had historically when I say historically three or four years ago, we were not seeing as much in industrial part of that is due to trends that we're seeing are in our clean energy solutions business lands in our industrial segment, and we're seeing trends toward.
<unk> in that area, so think of the Giga back acquisition and the contact or is that go into industrial applications as well as the businesses that we're acquiring that.
Land in that space, So we're seeing more.
Opportunity for outgrowth in that market than we historically would have seen and you see that in the results given our basically our assumption of a flat market on a year over year basis were down 1% on a euro basis.
Yeah.
The strategy is playing out right, we're investing in more high growth market segments.
And we're seeing it in our near term revenue, we're going to see it more in long term revenue as well.
Thanks, David.
And our next question comes from Sherry <unk> from Wolfe Research. Please go ahead with your question.
Hey, thanks, so much.
Last quarter, you talked about kind of the nature of these of the cost inflation, you're incurring this year and it sounded like it's a little more structural related to whether it's wage inflation or tier two price increases. So I'm wondering the the nature of the price recoveries that you're getting are these going to be.
Such that they carry forward for the next few years. If we if we are going to be in kind of a structurally higher price environment.
Or are these sort of one off recoveries in that you'll have to go back to the OEM customers.
Periodically for recovery and then you talked about a step up in productivity in the second half and I just wanted to kind of understand.
You know what are some of them.
What are some of the factors.
That drives the productivity improvement and typically what do you see per year in terms of productivity.
For the business. Thanks.
Yeah. So let me hit the pricing question and maybe Paul can hit their question on productivity. So if you recall when we when we were talking about this last year in the first half of last year, we basically as our company absorbed a lot of the incremental costs that we're experiencing.
With our customers in the second half we started to go back to them and recover a lot of that cost you know sort of in more of what I would describe as a surcharge rather than a pricing change, but during the fourth quarter of last year, we pivoted on that pretty hard to have discussions with customers.
Yeah.
About eight and Asps and average selling price on the piece part change.
And so that gets to your point, where it's a more embedded costs. We don't anticipate that some of these costs will go away.
So the pricing will say, but it is a it's on a customer by customer.
Part by part discussion that we're having but way more of our discussions are around it's a change in price as opposed to it just an adder for a higher.
Logistics costs that we would expect to go away over time, and obviously, we'll we'll readdress that.
The future as we go forward, but it wouldn't be my expectation that a lot of those cost would would magically go away at some future point in the quarter and we'd need to make sure that we're preparing for that.
Yeah on the productivity side in <unk>.
Get into the weeds here a bit but it is.
Often comes from.
A better better better throughput.
Through the factory, so less less better yields moving manufacturing to higher performing locations, where we get better output at our cost structure.
<unk> is continuously driving more and more efficiency in the plants more automation of our manufacturing processes.
To mitigate the inflation that we're seeing on the labor side. So it's a lot of different levers that we pull consistently within our manufacturing.
As well as we get the leverage on the volume when we don't have to add cost.
To deliver that incremental volume. So there was a bit of quite a bit of operating leverage that we gain as well as volumes increase.
Those are the main things obviously material is a challenge where it used to be a cost savings for us and we're just taking a different approach by.
Dealing with that material inflation that with higher customer pricing and also this is not an unusual phenomenon for our company usually our first quarter is a lower.
Margin quarter for us because typically a lot of our pricing takes effects that affect them and.
And also our Merit increase global Merit increase happens in the first quarter and then we have to digest that throughout the quarter or.
Throughout the year excuse me.
Sure Yes.
And our next question comes from Joe Giordano from Cowen. Please go ahead with your question.
Hey, guys. Thanks for taking my question here Yeah.
I know, we're not we're not how do you think of inventory levels of components at your your customers now I know you are not calling for any build or liquidation, but like how elevated is it didn't like whether you want to think about it in dollar terms or like unit unit terms like where are they right now and you think.
Well, we you know it's difficult for us to know that because we don't get insight, but what we do know how was how many days of inventory that sit in the dealerships, which remains to be pretty lumpy.
We do know that Europe struggling a bit.
So I don't think anything has changed dramatically.
And we saw what they built up we're not assuming that's one wind or or anything new to happens so stable.
And you know if we're still in a situation, where we're still feeling the pressure of making sure we're supply our customers on a real time basis.
Still a lot of pressure on the supply chain. So I don't think things are if anything I think things are starting to get a little bit better, but I think we said back in Q4.
That was the worst it probably still is the worst and things are slightly getting better, but obviously, it's going slow given what we're seeing in the first half.
And are you adding.
Ukraine in Covid in China and that just continues.
<unk> continues to create disruption, but again, we're looking for a better second half which is in line with what the market is expecting.
And and we've seen improvement over the last six months, although it is slow.
Yeah.
Thanks, Joe for the question.
Our next question comes from Jim Suva from Citi. Please go ahead with your question.
Thank you just to again bridge the well the math difference here you just had a spectacular Q1, great results you beat your expectations and everything.
Again, the full year, you're not increasing and I think you said, you're not including the recently announced acquisition.
And the reason why you're not increasing the full year for there is it mostly on the auto side or the H B O R side or you mentioned in your more conservative than the industry consultants out there.
But can you just help US bridge why Q1 stream it is absolutely not low degree.
Rest of the year.
Okay, well I would say Q2 is probably coming in a little lighter than that given some of the macro factors that we're all dealing with.
But that would be in our second half looks a little different than when we started the year where volumes are a little weaker in automotive and HB warm, but we're seeing that our outgrowth and were seeing better pricing environment. So it's the mix has changed a little bit but the outcome remains largely the same.
I get it now okay. Thank you so much.
Jim.
And our next question comes from Michael Philosophe from Bahrenburg. Please go ahead with your question.
Hey, guys. Thanks for taking my question just a quick one I mean, obviously H B O. Our outgrowth has been quite remarkable over the last two years or so and I was just wondering if you could speak to maybe the dynamics that are driving that I know, there's been some regulatory tailwind on T. P. M S.
Other aspects.
But yeah, just just the working dynamics that are driving that outperformance and when should we expect that outgrowth to maybe moderate a bit.
Yeah. Thanks.
I think the one thing we keep bringing up is that we're still getting a very nice tailwind from the adoption of Asics for trucking in China, and we're not at the end of that and that cycles. So that's still benefiting our outgrowth quite a bit here in <unk>.
Q1, and will continue in Q2, and we've talked about are there other levers other launches of new new content for new application starts to pick up whether its tire pressure sensing seeing really nice content growth and operator sensing controls, which is just you know hydraulics electronics and offered equipment.
Thanks, Jonathan.
<unk>.
So the only thing I would add is as we look further ahead.
We see the impact of electrification coming in and we do see much higher content on electrified platforms and redo on traditional views of the platform. So we expect the outgrowth to continue to be in the range that you've guided to.
Thanks, Michael.
Yeah.
Yeah.
And ladies and gentlemen, with that we've reached the end of today's question and answer session.
I'd like to turn the floor back over to Mr. Sayer for closing remarks.
Jamie I'd like to thank everyone for joining us. This morning since auto will be participating in a couple of investor conferences. Later later in the quarter was sponsored by Oppenheimer and Stifel.
We look forward to seeing you at one of those events or on our second quarter earnings call, which will be in late July . Thank.
Thank you again for joining us this morning and for your interest in <unk> Insider, Jamie you can now end the call.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending the presentation. You may now disconnect your lines.
Yeah.