Q3 2022 Sensata Technologies Holding PLC Earnings Call
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Water Technologies' Q3, 2022 earnings call all participants will be in listen only mode did you need assistance. Please signal conference specialist by pressing the star key for like Crazy right.
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I would now like to turn the conference over to Mr. Jacob Sayer VP Finance. Please go ahead.
Thank you Sarah and good morning, everyone I'd like to welcome you to this inside its third quarter 2022 earnings Conference call. Joining me on today's call are Jeff quotations on as CEO , and President and Paul <unk> 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 from <unk> Investor Relations website. This conference call is being recorded and will play a post a replay webcast on our restaurant relations website. Shortly after the conclusion of today's call.
As we begin I'd like to reference inside a safe Harbor statement on slide two during.
During this conference call, we will make forward looking statements regarding future events or the financial performance of the company that involve risks and uncertainties.
The company's actual results might differ materially from the projections described in such statements.
Factors that might cause such differences include but are not limited to those discussions our forms 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, 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 and non-GAAP financials are including reconciliations are included in our earnings release and in the appendices of our presentation materials.
The company provides details of its segment operating income on slides nine and 10 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 for the third quarter. You will then provide updates on several of our growth initiatives. All will cover our detailed financials for the third quarter and will also provide financial guidance for the fourth quarter.
Well then take your questions. After our prepared remarks, now I'd like to turn the call over to <unk>, CEO and President John <unk>.
Thank you Jacob and welcome everyone.
To start with some summary thoughts on our strong performance during the third quarter, which is outlined on slide three.
Our underlying markets returned to growth in the quarter. Despite continued supply chain disruptions.
We produced 650 basis points of market outgrowth.
And 330 basis points of acquired growth during the quarter.
Despite foreign exchange currency exchange rate changes, representing 330 basis points of headwind to revenue, we produced solid financial results for shareholders delivering $1.018 billion in revenue.
Seven 1% from the prior year period.
With higher margins sequentially.
Excluding greater headwinds related to unfavorable foreign exchange rates.
Our results are above the high end of the guidance range, we provided in July .
Quoting activity for New business Awards was extremely active during the quarter as well as year to date.
And as a result, we have already exceeded the 640 million a record level of new business wins, we were awarded in all of last year.
Securing $840 million of new business wins in the first nine months of this year.
Approximately 70% of these wins are in our electrification growth factor, which.
Which translates into some sort of future revenue outgrowth.
Our a direct outcome of our megatrend investments over the past several years.
During the quarter, we closed the previously announced acquisition of Donna power.
A leader in mission critical highly engineered power conversion solutions.
Focused across renewable energy generation industrial and defense applications.
Donna power is on a run rate to generate more than 100 million in annualized revenue and approximately 20% operating margin this year.
As we have mentioned, we expect market dynamics and Donna powers offering to provide 30% revenue growth per year over the next several years.
During the third quarter, we benefited from our resilient flexible and focused organization that continues to successfully navigate the fast changing supply chain landscape and deliver on our customers' needs.
Continued inflationary impacts on input costs that led us to become more agile.
To offset these costs with commercial pricing actions as a result, our margins have steadily improved on a sequential basis.
And we expect this to continue in the coming quarters.
I'd like to recognize the innovation agility and hard work of our entire team and the support from our customers in achieving these strong results.
We recognize that the economic outlook appears weaker today and we are closely monitoring with our customers across diverse business segments to understand their underlying demand.
We are carefully managing our cost structure, including targeted cost reductions to prepare the organization for uncertain market conditions.
Sensata has a very experienced management team and we have weathered economic challenges successfully in the past and we are confident we will emerge stronger and with even better growth prospects after any market disruptions.
Since ATA is continuing to make excellent progress in utilizing in house and acquired capabilities to better serve a broadening base of customers and win new business in our electrification growth area.
As we outlined during our electrification teach Ed we are participating in the global efforts to reduce greenhouse gas emissions that are leading to substantial investments in renewable power generation better ways to store and use energy and the ever increasing pace of conversion to battery.
Electric light and heavy duty vehicles.
IHS now expects nearly one third of all light vehicles produced in 2026 will be battery electric or plug in hybrids.
From one quarter at the beginning of this year.
It's a multimillion unit vehicle production jumped in just nine months.
We intersect these growth areas with engineered solutions for our customers designing high voltage electrified systems.
We also help our customers convert and store energy with high voltage converters Inverters and rectifiers.
To better meet the power demands placed on electricity grids by end users.
In this rapidly growing area for some sort of we have more than doubled our business wins from last year in the first nine months of this year.
We continue to expect to increase our electrification revenue to more than 2 billion by 2026 as.
As content on battery electric vehicles grows at twice that of traditional combustion engine vehicles and as industrial electrification applications grow rapidly.
We are well on track to achieving the near term goal of electrification revenue growing 50% this year compared to last year and we expect this growth rate to continue.
On slide five we highlight our progress in high voltage junction boxes.
Specific area of growth for its insider within electrification.
So it's not as high voltage junction boxes or system level solutions that enable customers to electrify their equipment as.
As we expand our capabilities in electrification, our customers and our customers refine their electrification architectures for the future. We are responding to demand for more integrated and thermally efficient system level solutions that meet increasing power requirements.
We have previously announced meaningful business wins in this area with several global customers, including the single largest piece of business and since hadas history last quarter.
More recently since Saddam was chosen again by a large European heavy vehicle OEM.
To provide charging units for their electrified platforms that will launch starting in 2025, representing more than $16 million in annual revenue.
This is an area of significant growth opportunity for some sort of.
The addressable market is growing rapidly and is expected to reach 7 billion by 2030.
In addition to the 250 million in annual business. We've already won that will launch in the next few years. We are currently discussing with customers potential additional new business, representing over 500 million of annual revenue.
Yeah.
Well, we typically share more information about our new growth factors in these quarterly updates.
It is important to note that our core safe and efficient growth drivers first and sort of are growing significantly and profitably.
Providing funding for other investments.
Our heavy vehicle business has been outgrowing its markets for several years now driven by global emissions regulations.
Increases in electronic control applications.
The expansion of our insights business.
Looking forward. This business will also benefit from global tire pressure regulation in heavy vehicles.
As you know since <unk> is a leader in tire pressure sensing.
And when we have one new heavy vehicle tire pressure sensing business for the past few years based upon the robustness of our solution and our ability to solve unique application challenges in the heavy vehicle market.
These sensor programs are beginning to launch now.
We expect more than 40% annual growth in this application over the next five years as it becomes a 100 million annual revenue stream generating great margins for society, given our scale and leadership in this category.
This is another example of house insiders core sensing activities continuing to drive growth for the company.
Now I'd like to turn the call over to Paul.
Thank you Jeff.
Key highlights for the third quarter as shown on slide eight include revenue of $1 billion $18 million in it.
Increase of seven 1% in the third quarter of 2021.
Revenue growth reflected strong outgrowth across the company of 650 basis points.
Market growth and acquisitions, partly offset by customer inventory movements.
Foreign currency headwinds.
Adjusted operating income was $197 3 million a decrease of one 8% compared to the third quarter of 2021.
This decrease despite higher revenue.
It was printed was primarily due to unfavorable movements in foreign currency.
Investment in the Megatrends of electrification and insights.
Customer mix and the divestiture of our connect semiconductor test and thermal business during the quarter.
Also global supply chains continue to be constrained.
Margins improved sequentially and we expect this trend to continue in the coming quarters.
Excluding unfavorable foreign currency impacts.
Results were above the high end of our financial guidance for the quarter.
Now I'd like to comment on the performance of our two business segments in the third quarter of 2022, starting with performance sensing on slide nine.
Our performance sensing business reported revenues of $754 5 million.
An increase of six 8% compared to the same quarter last year.
Automotive revenue increased from higher pricing.
New product launches and marketing in market growth lessened by customer inventory movements.
All somewhat offset by unfavorable foreign currency.
Last year, we estimated approximately $70 million and inventory was built in the third quarter.
And this quarter, we estimated approximately $20 million of inventory came out of the channel.
Growth in heavy vehicle off road revenue reflects strong outgrowth and the impact of acquisitions and insights megatrend.
Offset somewhat by declining markets 5 million an inventory built in the third quarter last year.
Foreign currency.
Performance sensing operating income was $188 6 million.
With operating margins of 25%.
Segment operating margins declined year over year due to customer mix and favorable foreign currency.
Dilutive impact of acquisitions and.
And the impact of persistent supply chain challenges.
As shown on slide 10.
Sensing solutions reported revenues of 263 seven.
7 million in the third quarter.
An increase of seven 8% as compared to the same quarter last year.
This was driven by strong outgrowth and clean the launch of new industrial electrification applications and the benefit of acquisitions and clean energy that is net of the divestiture of connects all somewhat offset by an unfavorable foreign currency.
Dancing solutions operating income was $73 6 million with.
With operating margins of 27, 9%.
The decrease in segment operating margin was primarily due the impact of acquisitions and clean energy.
Inflationary impacts on material logistics tempered by higher customer pricing.
And the impact of operating in a constrained supply chain.
On slide 11.
Corporate and other operating expenses not included in segment operating income were $76 4 million in the third quarter of 2022.
Adjusted for charges excluded from our non-GAAP results.
Corporate and other costs were $63 3 million <unk>.
The decrease from the prior year quarter, primarily reflecting lower incentive compensation.
Foreign exchange impacts.
Partially offset by higher research and development and business development spend.
Our megatrend growth initiatives.
We expect between 65 and $70 million and maritime related spend in 2022.
The design and develop differentiated solutions for the fast growing and transformational megatrends vectors of electrification and insights.
We currently anticipate about the same level of spend in 2023.
We are confident that this investment is the right long term trade off as it has enabled our record new business wins $840 million. So far this year.
And our rapid revenue growth we are experiencing in these areas.
Moving to slide 12.
We generated $57 5 million and free cash flow during the third quarter and.
242 million 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 in uncertain markets and from acquisition related compensation payments.
For the full year 2022, we expect free cash conversion to be approximately 65% of adjusted net income, reflecting higher inventory levels to ensure continuity of supply for customers.
Capital expenditures are expected to be in the range of 135 or 40 right.
And so it is a net debt to EBITDA ratio.
With three six times at the end of September just above the top end of our target range.
And so all of those primary use of cash on hand, as the acquired businesses will expand our position within our key growth vectors of electrification and insights.
Our balance sheet is strong with more than $1 1 billion of cash.
No debt maturing before October 2024.
Absent further M&A, our net debt to EBITDAR ratio is likely to approach three four times by year end.
Which is within our target range.
Given this financial strength and expected future free cash flows.
Also look to return capital to shareholders.
Consequently, we repurchased $98 million of our shares in the third quarter.
And recently announced a quarterly dividend of 11 cents per share is expected to be paid on November 23rd.
To shareholders of record on November nine.
Okay.
We are providing financial guidance for the fourth quarter of 2022 as shown on slide 13.
Our expectations are based upon the end market growth.
The growth outlook as shown on the right side of the page.
We remain more conservative than IHS on automotive production estimates for the quarter because of extended macroeconomic risks.
Foreign exchange represents a $15 million greater headwind to revenue.
In the fourth quarter than we expected in July of this year, when we last provided guidance.
Our current fill rate is approximately 93% revenue guidance midpoint for the fourth quarter.
At the midpoint.
Adjusted operating income margin is expected to be 19, 9%.
50 basis point increase from the third quarter of this year.
It reflects the benefits of higher volumes tempered by persistent supply chain challenges higher pricing more than offsetting inflationary impact on input costs.
Investments for growth and megatrend related areas, including acquisitions as we rapidly scale these growth factors.
Unfavorable impacts from foreign currency movements, and the divestiture of our connect business.
We expect margins will continue to improve sequentially.
As we work our way back where our medium term target margin of 21%.
While still addressing challenging market conditions.
Favorable foreign currency exchange rates and investing in growth.
On a preliminary basis looking into 2023.
We expect foreign exchange to be a two 9% headwind to revenue.
And then 11 cent headwind to earnings per share given current exchange rates.
Now, let me turn it back to Jeff wasn't comments.
Paul Let me wrap up with a few key messages as we outlined on slide 14.
So the <unk> business organizational model and growth strategy, our strong resilient and reliable.
As we deliver mission critical highly engineered solutions required by our customers.
Well, we expect we expect markets to be volatile in the near term due to high inflation rising.
Rising interest rates and geopolitical events, we have strong management team experience in navigating choppy markets.
We are confident in our ability to sustain attractive end market outgrowth.
Just on our strong track record of continuous improvement.
Our record levels of New business awards are diversifying customer base, and our large and expanding pipeline of new opportunities.
We continue to invest in our megatrend driven growth initiatives as we transform the business to focus on these rapid growth opportunities 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.
Whatever market volatility we experienced in the coming quarters. We are confident that's insider will emerge stronger and better positioned in these fast growing markets because of these investments.
We continue to innovate on behalf of our customers solving their hard to do engineering challenges and providing differentiated solutions to a broad array of customers.
So I'll make mission critical challenges enables insider to enhance long term customer retention.
And deliver leading industry margins for our shareholders, while also increasing investments in our growth opportunities and our people.
And finally I'm pleased about our efforts in delivering on some sort of long standing mission to help create a cleaner safer and more connected world.
Not just for our customers' products, but also through our own operations. We believe we are meaningfully contributing to a better world.
We are making good progress to achieve targets laid out last year and updated in our most recently published sustainability report.
Bolstering the long term sustainability and success of the company for all of its stakeholders.
Now, let me turn the call back to Jacob.
Thank you, Jeff will now move to Q&A.
Given the large number of listeners on the call. Please limit yourself to one question each.
Sir if you would introduce the first question. Please.
Thank you.
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Our first question comes from.
<unk> with Bank of America. Please go ahead.
Yes. Thank you.
So you noted the margin improvement here sequentially, which it which has been nice to see see it come through but I think you'll also recently.
Noted an expectation of achieving 21% operating margin next year.
Can you talk a little bit about the key drivers that get you there from from this exit rate close to 20% in the fourth quarter and maybe some of the kids options that underpin that margin improvement. Thank you.
It's Paul.
Good morning.
As we've talked about either.
Mature procure material our previous discussions the drivers of margin improvement come from it.
Improved volumes and better pricing execution, which we're seeing and the trends now that we're producing.
And adjusting our cost structure to what likely will be a you know a more subdued 2023, just given where things are today.
But those three things will be the key drivers, we're going to continue and invest in the Mega trials at the same level and we are investing today, because obviously, we're seeing great results with 840 million of new business wins so.
Those would be the key underpinnings to next year that will continue that way.
Work on over the next quarter and provide guidance in February .
Our next question comes from Mark Delaney.
Please go ahead.
Yes, good morning, and thank you very much for taking the question you mentioned in your prepared remarks about being in close dialogue with your customers about the weaker macroeconomic backdrop can you elaborate more on what customers are saying on this topic and also clarify whether its insider has seen macroeconomics impacted orders either in <unk> or quarter to date. Thanks.
Yes, Mark I'd be glad to so all of our customers are monitoring the same metrics. We are to make sure that they are prepared for any eventuality.
I want to be careful not to temper things too much we'll see where things land obviously in the third quarter things ended up better than we had anticipated and we've always said that we will be able to deliver on that so if you look at the individual end markets that we serve during the third quarter three of the four of them ended up better than <unk>.
We thought.
Auto we expected about a 13% growth had actually grew about 26% again, we delivered on that H P. A wire was the only one that was down and we expected it to go down about 8% it was down 11.
Era, we expected up about four it was up about eight and then in the industrial side, we expected it to be down about 4% of it was only down one.
That's that constant dialogue with our customers is really to get a longer term view.
It's also to make sure that we can deliver in the near term for them because you'd know that given how we're designed into their products. If we can't deliver they can't make product.
And we don't want to be the bottleneck in that process. We don't we don't believe we have been.
Our big a bottleneck.
We're watching that trend closely you see in North America that inventory days increased slightly but our view is there is still significant demand in the larger end markets that we serve that is still not being served so well continue to watch it.
Third quarter was a was a good outcome, we're expecting another $1 billion, our fourth quarter and it will continue to give you a perspective on that as we talk with customers, but also look at the broader macro environment.
Our next question comes from Matt Sheerin with Stifel. Please go ahead.
Yes. Thanks.
Good morning, I wanted to ask just on the outlook for auto relative to that.
As the supply chain issues that your customers have been seeing I know that's been a headwind and now you have macro concerns as well.
And any signs that things are improving in terms of your customers their supply chains and inventory and then on the on inventory you did talk about still some headwind you're seeing year over year in terms of customer inventories could you elaborate on that.
Yeah, Let me, let me touch on sort of what where we're expecting from a market standpoint, and then maybe Paul can touch on the puts and takes on the inventory balance that we've seen it's a little complicated given inventory growth last year. So it probably makes sense to touch on that so it's specifically in the automotive market. So second quarter was the was the lowest quarter in terms of.
Overall production rates, but I would I would actually start with the statement that broadly across the globe. There is more demand for vehicles that can be produced but we're seeing that start to abate. It has been abating over the past several quarters to me the fact that North American inventory days.
Crept up a little bit it seems to suggest that that issue is doing some.
But again, we're still in a in a mode, where there's more demand than our customers can produce which is a great position, obviously for our customers to be yet, but it is getting better.
The quarter was the lowest quarter in terms of our production levels that you know close to $19 million at third quarter. We had forecasted 19 million of it ended up about 21, so that was a good outcome and we delivered on that.
Going into the fourth quarter, we would we would forecast a similar rate of around 21, I think IHS is slightly higher than that but last quarter. You'll remember that we were we were guiding to below the pessimistic view of IHS where were more in line with their base case for fourth quarter, but not tremendous growth but steady.
<unk> performance third quarter to fourth quarter.
Yet to be determined what 2023 looks like but the last point I would leave you with in terms of automotive market is is globally even at these levels.
We're still well below the high end of what we've seen historically I mean, we've seen 17 billion units in North America. We've.
We've seen much higher levels in Europe , and China, and we're well, we're well within our what those peak markets higher so if there's a consumer stays resilient.
Our view is that we'll continue to see some growth there, but more to come as we get a better understanding of 2023 I want to touch on inventory, Yeah, I would say I would start with.
One the order book for automotive this quarter was a little bit more stable, we've seen tremendous amount of drop outs at the end of the quarter and previous quarter, we still saw that phenomenon.
But it was less so which is good news it shows a little more stability in the orders are being placed on some thought to deliver.
As it relates to inventory last year.
Based on very high market share parts of the components that we have we get analytics to say you know what what how much was produced by customers how much do we ship into that last year.
Well I think to us our customers built $70 million of inventory in.
In this quarter doing the same analysis looks like or are customers contracted inventory reduced inventory by about 20.
That's a $90 million swing year over year that we've contemplated in our growth profile here.
Probably won't see something similar in Q4, a little bit of contraction is what we're expecting but nowhere near what we saw last year, but we're seeing some contraction and we think that's a problem because production levels are higher and we're not quite shipping.
To that level in terms of units of production.
Thanks, Matt Thanks, Matt.
Our next question comes from Matt Young with Baird. Please go ahead.
Good morning, Thanks for taking the question just a question as it relates to the fourth quarter guidance. If I look at the end market growth, you're looking for markets to be down 2% on the organic growth. However, up about nine at the midpoint, that's better than the typical outgrowth that you would expect in the business just hoping you could unpack what's going on there why.
And if there was any particular pieces of the business who should be zeroing in on thank you.
Yeah. So you you you've interpreted it right. We've always said that outgrowth is not constant across quarter or is it something that you should look at over a year or longer period of time as platforms launch as mix of vehicles.
Have higher take rates it does have some impact on overall outgrowth in our business but.
But we do expect the fourth quarter to be a strong quarter, we had over.
Over 600, we've been over the 600 basis points of all outgrowth each quarter already this year for the last four years, we've been higher than that.
And so we would expect the fourth quarter would be strong, but I think what we're where we continue to be really excited about is the momentum that we see longer term also.
As stated with that outgrowth, given the dynamics, we've talked about the new business wins that we have record new business wins.
<unk> tore two times content on electrified vehicles. This all will drive outgrowth to market as this inevitable shift.
And light vehicle, but also in heavy vehicle markets and in the industrial markets continues to trend so.
Your your interpreting the guide correctly.
Right.
Thanks Luke.
Our next question comes from stomach chatter.
With J P. Morgan. Please go ahead.
Thank you for taking my question.
You just mentioned that the industrial market.
Declined minus 1% due to Europe , but I'd expect to hear something that's worth noting.
And also we had some deal wouldn't be amazed that decline.
How exactly would you explain the 90 days.
He was better than expectations. Despite the BMI is declining.
What exactly you would be missing you can be enforced understanding thank.
Thank you.
I I didn't you were a little I think you were at about a little bit of a bad connection I'm not sure I asked the question was around the industrial markets, which we're forecasting to be down in the fourth quarter gotcha, Okay, and why not why not.
I think it's.
I think it's a comparison to strong comps last year, when things are going very well customers rebuilding their inventory and their and their channels.
What we're seeing going from Q3 to Q4 and its normal seasonal decline and a little bit of weakness in the end markets.
That is being.
Portrayed by the fact that the PMI as a weaker.
What's offsetting that or what would be in a weaker market and strong contact, particularly in our clean energy business.
And so we have market weakness, but we found out from it because we're now launching quite a bit of a new product into areas like infrastructure.
As an example.
Okay.
Thank you for the question.
Yeah.
Our next question comes from Christopher Glynn with Oppenheimer. Please go ahead.
Thanks, Good morning.
So just curious given the success of your electrification and the wins, particularly with the battery disconnect systems I'm wondering if that influences your thoughts on.
Capital allocation, if it might cause you to kind of refocus on the core execution, maybe downplayed chunkier deals and focus on debt reduction I'm, just thinking out loud curious your thoughts.
Yeah, Chris So where we're constantly evaluating our success from an organic standpoint, and looking at capital allocation, but I don't think there's anything that's changed that would.
<unk> dramatically change our perspective on capital allocation and the reason is let me let me sure.
A lot of the core execution of the business is driving their success, but if you look back at some of the acquisitions that we've done.
Associated with Giga back back in 2018, the joint venture where charade in 2021, the acquisition of Sendai and for current sensing lithium balance around battery management.
Those acquired capabilities dramatically accelerated our ability to gain.
Better capability in that market now, we're supplementing that with the 70 million dollar of investment that we're making across the megatrends organically, but we will continue to look at based upon what our customers are looking for understanding what future architectures look like we'll continue to look at where to invest that money organically, but.
Also look to what we can complement with acquired capability activity as well and so you know we're not done yet right. I mean, we feel very good about our progress towards this $2 billion target in electrification, we feel really good about our two times content on battery electric vehicles.
But there's more opportunity out there and I think that given our strong cash generation and strong balance sheet. We should continue to look at opportunities to expand that capability.
I appreciate the question yeah. Thanks, Chris.
Our next question comes from Amit <unk> with Evercore. Please go ahead.
And taking my question Jeff.
Jeff I wanted to just talk a little bit about how do you think the content growth number of shakes out as you go forward with 23, maybe and then inventory that's been in excess of Mcdonald's I think of about 50 people that at this point.
Otherwise somebody to go forward on that that'd be a bit more of a headwind in 'twenty that gets worked out so if anything on content geography's and the inventory number in 'twenty two it would be really helpful.
Yeah, I'd be glad to address it so you don't.
We were a long cycle business. So it's it's oh the opportunities that we're waiting now we'll see revenue.
And you know three to five years from now that is accelerating our customers are increasing or speeding up their design cycles for sure. So what historically had been a five seven year design cycles inside some of our end markets, that's contracted but we'll see content growth grow or or outgrowth grow.
As we get to those out years win.
More of the these are programs watch for sure but for now we're going to stick with our four to 600 basis points, where where we've been above that right. So where you can interpret that we're sticking with the higher end of that range. Given that there is some mixed dynamics that can happen associated with how vehicles actually get produced.
But where we're feeling really good about that outgrowth and its demonstrated in our results and it's demonstrated in the future look in terms of the Ipos that we've won and how they'll play out I think that the remaining inventory balanced question I'll I'll share my thoughts and Paul can jump in.
We I think we were a little surprised that the inventory came down a little bit in the in the third quarter, our expectation would be that.
Our customers would hold on to that inventory, but upon reflection I mean, we're working to manage our inventory down a little bit as well to make sure. We can generate more cash flow. So logically makes sense, it's an indication to me that not only.
Are we seeing some lessening of that for abating of the supply chain challenges, but I.
I think folks are starting to go.
Go back toward a more normal.
Inventory operating model that was always our expectation that that would correct over time.
Just a question up over what period of time it will correct.
I think that's a.
A.
Good way to think about it I do think we're going to estimate a little bit of contraction like I said it really in Q4, we're in unprecedented times, we've never seen this kind of inventory movement. So I'm trying to model. It out is very challenging but I'm sorry.
So the 23 of them were going to we haven't quite got there yet in terms of what we think that will look like but I'm really we're starting to see it.
Current results.
Becoming more and more relevant as we go forward.
Thanks, Amit for the question.
Good morning.
Question comes I am sure is to tell that.
Please go ahead.
Hey, Thanks, so much for taking my question so.
You know I think.
You alluded to it a little bit before.
And in terms of you know the ability to get back to that 21%.
Margin target.
How should we think about.
The levers that you have to pull if end market demand continues to weaken.
You mentioned you know we are seeing youre, indicating.
Pretty sharp declines in industrial and HBO are in Q4.
I'm just.
Just trying to get a better sense of some of the cost actions that you can take and should we also assume that mega trend spending will continue to grow into next year or are you are you, saying that you'll just maintain a high level of spend.
So I'll answer that last piece right away. So some of the prepared remarks, we said that for 'twenty three we'll we're going to keep our megatrend spend flat so.
$65 million to $70 million of research and development.
Innovation work to continue to intersect these growing trends in electrification inside so we're going to we're going to maintain that.
As we think about 2023.
I'd be cautious about the top line just given the current economic environment operating in and the levers we can control continue to be.
You know more than recovering the input costs that we're seeing in the business and continuing to drive pricing across the business not just in automotive, but across all of our end markets.
It's making sure that our cost structure aligns with the demand profile, which we've done as a company for decades, and so if we see weaker end markets and we're going to align the cost structure to support that which was ultimately take excess costs out of the system.
The business to be bigger and support structure would be bigger so we'll take those costs out to bring down costs improve margins and in a weaker environment. If that's if that ultimately is what we see.
Into 2023, we got to be mindful of currency rates, you know they've been very negative here in the second half of this year versus our guide, we've probably 2021 cents worse off or 10 cents worse off into 'twenty, one set year over year impact on.
On FX in the second half so clearly that's something we're going to have to be very careful and mindful of as we enter 2023 would provide the perspective over and deliver but we're locked in on delivering that you know our goal is to deliver the 21% as our medium term target.
And we will work the cost side of the equation and pricing to help us get there and we're marching towards that right every quarter. This year, we've seen increased margin and even in the third quarter with a slightly lower revenue base than the second quarter. We increased margin. The guide for the fourth quarter was a lower revenue base with an increase in margin profile. So we're.
Hum.
Doing the right things to manage that process and its many levers as Paul mentioned.
I appreciate the question. Thanks for his question.
Our next question comes from Gavin Kennedy with Jefferies. Please go ahead.
Hi team. Thanks for taking my question good to see your 2020 to expectations of 50% growth in electrification was reiterated but we were wondering if you still expect more than 100% group and insights as well this year and related if you could talk about some of those key growth drivers and insights that would be great.
Yeah insights will grow more than hundred percent we're.
We're seeing them.
Really great order book I would say the supply chain is limiting factor there, but even with that limiting factor of weaker supply chain hard to get parts will deliver the hundred percent growth I'm very confident about that.
It's good it's good growth in all the businesses that we've acquired.
In that space, So really excited about how they're executing in a tough end market.
Tough supply chain.
Yeah.
Thanks, Kevin.
Our next question comes from Joe Giordano with Cowen. Please go ahead.
Hey, guys good morning.
Can you speak specifically to priced within auto and what that was in the quarter and what the outlook is there like the discussions you've had to with your customers to raise prices here, how long does that last and when do you have to have like the next round of renegotiations.
Yeah. So.
We've been I think we've been very transparent that.
Those discussions have lagged and but we're gaining significant steam with our with our automotive customers. So if I rewind the clock way back to 2021, we didn't get any of the pricing second half, we got cost recover and really starting in 2022, and we started going after that price. It's it's supportive.
With with <unk>.
With details around the impact that we're seeing associated with material inflation.
Logistics, increasing costs and our customers, although it's always a challenging conversation of our customers are very understanding in terms of what we're experiencing and the tradeoffs, we need to make to make sure that we can get the raw material, we need to deliver the parts for them.
And we will continue to do to have that dialogue and to me I would say the proof that we're we're doing that very well is that we do have record new business wins right. So.
In a environment, where we're having really tough conversations regarding inflation.
Inflationary pressures that we're seeing.
We're continuing to.
She good achievement now year to date, I think will be about a balance on that but we have still some work to do because of those pressures won't stop as we go into 2023, I think there'll be lower but they won't stop and we will continue to have to work this muscle with our teams, but also with our customers going forward.
Thanks for the question.
Our next question comes from Travis Merrill Lynch Securities. Please go ahead.
Well thanks for taking my question I'm, calling on behalf of Wolfe signed this morning.
My first question I'm, just curious if you could provide any clarity on how the bill rate is down to 92% last quarter. It was 95 per cent quarter in 'twenty. One was also 95%.
You could also maybe touch on what you would classify as an optimal level there.
I think that's is reflective of two things.
One it's the order patterns changing a little bit so we're seeing some a reversion back to a little bit more of a normal order pattern than in the past we saw a lot of order early in the quarter because customers were making sure that that replacing worse to get in line for supply I.
So with them with a more normalized pattern, 93% feels like a good place to be in terms of delivering.
The $1 billion of revenue at the midpoint.
95% last quarter, you did a little bit better than the guide. So I think we're right where we need to be I think it's a good indication that we have confidence and be able to deliver it to the midpoint of the guide.
In the fourth quarter.
Thanks, Travis for the question.
Yeah.
Our next question comes from Jim do Bad it's pretty good. Please go ahead.
Thank you how do you guys look at and maybe the answer is it's just not that material. When you see news reports about some of the automakers building 99, 9% of the car and then having to wait for that the Golden screw, where the chip or something I assume it is it your parts they're waiting on.
How do you think about that and how should we think about it how should investors be thinking about it does it impact your outlook materially or are those stories. Just you know a lot of talk in just the materiality of the numbers don't really impact your production outlook numbers.
Yeah. So on the first part of the question are we the impact I'm sure. There are instances, where we are creating.
Creating challenges for our customers, but I would say based upon the conversations I've had with our customers directly.
There were I don't think we're their biggest problem on that front. So you know from US insider standpoint, I feel as though we're delivering against the raw demand that they tell us. So the broader question that you're bringing up around vehicles being largely produced by waiting for a final piece Theres no question that that is happening, but the magnitude of it I.
Think as more of a news.
As opposed to being meaningful I mean, we're talking about maybe a half a million vehicles in a much bigger market place and we're also looking at our instance, right now were in North America, which is a dealer inventory model. There's 32 days of inventory versus our normal model of 60, right. So it's not as though I think I don't.
There's going to be.
Change in terms of what we see in terms of demand for production I think eventually all of those vehicles that are largely produced will help feel fill the funnel of love the vehicle a lot and it's not just you.
U S phenomenon of course, so I.
You know my my sense is that something we should watch, but it's a it's not something that we think is going to have a shock to the system.
The only thing I would add Jim is that.
Just suggest that our customer supply chains were disrupted and so how they order parts and what it might mean to our revenue and we talk about this inventory impact.
That that disruptive supply chain that they have could be affecting when they buy parts Sato.
Anecdotally.
Anecdotally I mean, it probably is causing some of this effect just because we don't have an efficient supply chain.
Thanks for the property industry.
Thanks, Jim.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Nick.
Oh for any closing remarks.
Sure.
I'd like to thank everyone for joining us this morning, and thought it will be participating at upcoming investor conferences sponsored by R. W. Baird really November and early December and the fourth quarter.
We look forward to seeing you at one of these events.
Or at our fourth quarter earnings call in late January . Thank you for joining the meeting and your interest in since up Sarah you can now in the call.
Okay.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.