Q2 2023 Sensata Technologies Holding PLC Earnings Call
Speaker 2: Good day and welcome to Syncytolide Technologies Q2 2023 earnings call.
Speaker 2: All participants will be in the tsunami mode.
Speaker 2: Should you need assistance, please signal a conference presence by pressing the star key followed by zero.
Speaker 2: After today's presentation, there will be an opportunity to ask questions.
Speaker 2: To ask a question, you may press star then 1 on your touchtone phone. To withdraw your question, please press star then 2. Please note, this event is being recorded. And now we'll turn the conference over to Mr. Jacob Sayer, Vice President of Finance. Please go ahead.
Speaker 3: Thank you, Keith. And good morning, everybody. I'd like to welcome you to Censata's second quarter 2023 earnings conference call. Joining me on today's call are Jeff Cote, Censata's CEO and president, and Paul Vasington, Censata's chief financial officer.
Speaker 3: In addition to the financial results press release we issued earlier today, we will be referencing a slide presentation during today's conference call.
Speaker 3: The PDF of this presentation can be downloaded from Sinsada's Investor Relations website.
Speaker 3: This conference call is being recorded and will be posted to replay webcast on our investor relations website shortly after the conclusion.
Speaker 3: We'll post a replay webcast on our investor relations website shortly after the conclusion of today's call.
Speaker 3: As we begin, I'd like to reference Censada's safe harbor statement on slide 2.
Speaker 3: During this conference call, we will make forward-looking statements regarding future events or the financial performance to the company that involve risks and uncertainties.
Speaker 3: The company's actual results may differ materially from the projections described in such statements.
Speaker 3: Factors that might cause such differences include, but are not limited to, those discussed in our forms, 10Q and 10K, as well as other subsequent filings with the SEC.
Speaker 3: We encourage you to review our GAAP financial statements in addition to today's presentation. Most of the information that we will discuss during today's call will relate to non- GAAP financial measures.
Speaker 3: Our GAAP and non-GAAP financials, including reconciliations, are included in our earnings release and in the appendices of our presentation materials.
Speaker 3: The company provides details of its segment operating income on slide 7 and 8 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 second quarter.
Speaker 3: You will then provide a few updates on exciting electrification product launches.
Speaker 3: Paul will cover our detailed financials for the second quarter, updates on capital deployment, and he will discuss our financial guidance to the third quarter of 2023.
Speaker 3: We'll then take your questions after our prepared remarks.
Speaker 3: Now, I'd like to turn the call over since I was CEO and president, Jeff Kote.
Speaker 4: Thank you, Jacob, and welcome everyone. I'll start with some summary thoughts on our robust performance during the second quarter, as outlined on slide three.
Speaker 4: During the second quarter, we produced a record, 1,062,000,000 in revenue, up 4.1% from the prior year period, and above our guidance range.
Speaker 4: Despite a 140 basis point headwind from Ford Currency.
Speaker 4: Adjusted operating income of $206 million was at the top end of our range.
Speaker 4: Adjusted operating income margins increased by 40 basis points from the prior year period or 110 basis points.
Speaker 4: on a constant currency basis.
Speaker 4: Adjusted net income moved higher by 15% to 149 million.
Speaker 4: and adjusted earnings per share grew 17% from the prior period, or 23% on a constant currency basis to a record 97 cents. Our customers supply chain show meaningful signs of returning to normal. Consequently, we believe customers reduced.
Speaker 4: Channel inventory to better align material on hand with their production.
Speaker 4: We estimate this impact was approximately 20 million or 200 basis points across the company in the second quarter, concentrated in automotive and heavy vehicle off-road.
Speaker 4: Taking that into account, market outgrowth for the last 12 months remained within our target range of approximately 535 basis points.
Speaker 4: As we've said, outgrowth can be lumpy in any quarter, and the second quarter results continue to be impacted by electric vehicle launch schedules.
Speaker 4: We remain confident in our long-term out-growth range, given our business wins.
Speaker 4: new product development activities, and future launch schedules.
Speaker 4: All growth to market since the beginning of 2020 has averaged 735 basis points.
Speaker 4: I'm also pleased that we remain on track to achieve our long-term goal of 2 billion in electrification revenue across the company by 2026. With that revenue growing strongly in the second quarter, in a moment I will outline exciting new product launches that will help further propel that growth.
Speaker 4: At the beginning of 2023, we outlined a shift in our capital deployment strategy based upon our confidence in our capabilities to effectively intersect the electrification growth factor and deliver innovative solutions to our customers.
Speaker 4: We continue to execute that strategy during the second quarter, removing variable rate debt from our balance sheet and returning capital to shareholders in the form of debt repayments, the dividend, and share repurchases.
Speaker 4: Considering current interest rate trends, that decision has made strong business sense.
Speaker 4: Our capital allocation strategy reduces risk in our capital structure.
Speaker 4: Lower interest expense improves adjusted net income and earnings per share as well as return on an invested capital.
Speaker 4: The end markets and Sonna servers are expected to experience significant change over the next 10 years, as our customers transform their businesses.
Speaker 4: product portfolios to adjust to decarbonization trends.
Speaker 4: Electrification will impact all the end markets we serve.
Speaker 4: And as we have done repeatedly over our history, we've adapted to market trends. Sonsata is focused on continually innovating to help customers solve their mission-critical, hard-to-do engineering challenges on this path toward electrification.
Speaker 4: As shown on slide four, I'd like to share some thoughts on new products that will help drive our electrification revenue going forward.
Speaker 4: In renewable power generation, solar energy developers and others are poised to benefit from global initiatives to decarbonize sources of energy.
Speaker 4: including last year's inflation reduction act in the United States, which provides significant long-term funding to this industry.
Speaker 4: To address a key need for this industry, we are launching a fifth generation line of inverters that contains three times the power density of its predecessor, creating a highly attractive value proposition.
Speaker 4: We are launching a fifth generation line of inverters that contains three times the power density of its predecessor creating a highly attractive value proposition for customers.
Speaker 4: These products, which are watching this quarter, are designed to enable new solar and other renewable energy installations to connect seamlessly to the electricity grid.
Speaker 4: Serving the needs of these installations represents a fast growing 2.5 billion addressable market for Sonsata.
Speaker 4: In addition, we have launched a new battery management system.
Speaker 4: To help address the electrification needs of material handling work truck and bus OEMs.
Speaker 4: The BMS is an intelligent component of the battery pack, responsible for advanced monitoring and management of current.
Speaker 4: Think of it as the brain behind the battery. It plays a critical role in assessing the battery's safety, performance, charge rates, and longevity.
Speaker 4: Since SOT is N3 battery management system, it's ASL-C and ISO certified off the shelf and offers software flexibility.
Speaker 4: thus reducing development time and cost for customers.
Speaker 4: These battery management systems seamlessly manage the very high power requirements that OEMs face and represent a $350 million addressable market by 2028.
Speaker 4: I'll now turn the call over to Paul. Thank you, Jeff.
Speaker 4: Key highlights the second quarter as shown on slide six include.
Speaker 4: Record revenue with $1.62 million increased with 4.1% from the second quarter of 2022.
Speaker 4: We have new growth growth reflected market growth of approximately 2.5%.
Speaker 3: Inventory contraction of approximately 2%.
Speaker 4: in market outgrowth of approximately 2.9%.
Speaker 4: as well as the net impact of acquisition and investors in the quarter.
Speaker 3: Harsley offset by foreign currency headwinds. The adjusted operating income was 206 million and increased to 6.2% compared to the second quarter of 2022.
Speaker 4: This increase was probably due to high revimes, pricing.
Speaker 5: and productivity improvements.
Speaker 5: Firstly, offset by the impact from acquisitions and investors last year.
Speaker 5: by the intract from acquisitions and investors last year and the inferior movements in foreign currencies.
Speaker 5: Adjusted operating margins improved 110 basis points from the prior period on a constant currency basis.
Speaker 5: due to operational improvements within the business.
Speaker 5: This represents very strong 39% incremental margins on a constant currency basis.
Speaker 5: and over 80% incremental margins organically.
Speaker 5: Record adjusted earnings per share of 97 cents in the second quarter, grew 17% in the prior quarter, faster than adjusted our income due to lower interest expense.
Speaker 5: Record adjusted earnings per share of 97 cents in the second quarter, grew 17% in the prior year quarter, faster than adjusted output income due to lower interest expense, a lower cash tax rate.
Speaker 5: in a lower share count.
Speaker 5: On a constant currency basis, adjusted rank for share would have been $1.2 representing 23% growth on the prior period.
Speaker 5: Now I would like to comment on the performance of our two business segments in the second quarter of 2023, starting with performance sensing on slide 7.
Speaker 5: Our performance sensing business report revenues of 757.4 million.
Speaker 5: an increase of 3.5% compared to the same quarter last year.
Speaker 5: Automotive revenue increased through the market growth, content launches.
Speaker 5: and higher pricing, partially offset by the unfavorable revenue mix, inventory destocking.
Speaker 5: Slow new product launch ramps in Fort currency. Growth in heavy vehicle off-road revenue reflects market and content growth.
Speaker 5: Carcy offset by inventory destocking and unfearable form currency.
Speaker 5: Performance-sensing operating income was $191.1 million, with operating margins of 25.2%.
Speaker 5: Segment operating margins increased year-rear, largely due to improved pricing.
Speaker 5: Segment operating margins increased year-rear, larger due to improved pricing, higher volumes and productivity.
Speaker 5: partially offset by unfavorable foreign currency, excluding the foreign currency impact.
Speaker 5: performance sensing operating margin would have been 26%. At the start of the quarter, Cinsada moved the reporting of certain material handling products from heavy vehicle off-road in performance sensing.
Speaker 5: to industrial incensing solutions to reflect changes in our reporting structure.
Speaker 5: Prior periods having stated to reflect the change.
Speaker 5: As shown on slide 8, SanSync Solutions reported revenues of $304.7 million in the second quarter.
Speaker 5: an increase of 5.5% as compared to the same quarter last year.
Speaker 5: Industrial revenue increased due to strong acquired revenue growth and electrification Offset somewhat by weaker markets
Speaker 5: especially in HVAC appliance.
Speaker 5: in appliance and unfavorable for our currency.
Speaker 5: Aerospace revenue increased strongly in the quarter due to market, pricing, and content growth.
Speaker 5: Sensing solutions operating income with 84.2 million with operating margins of 27.6%.
Speaker 5: The decrease in segment operating margin was primarily due to the net margin impact of the sections and the gestures of 400 basis points.
Speaker 5: Excluding the foreign currency impact, Sensing Solutions operating margins would have remained the same at 27.
Speaker 5: the foreign currency impact, Sensing Solutions operating margins would have remained the same at 27.6%.
Speaker 5: On slide nine, corporate and other operating expenses, not included in segment operating income.
Speaker 5: for 81.5 million in the second quarter of 2023. Adjust it for charges excluded from our non-GAP results.
Speaker 5: Corporate and other costs were $68.1 million.
Speaker 5: a decrease from the prior year quarter, primarily reflecting cost controls and lower incentive compensation.
Speaker 5: We expect to invest 60 to 70 million in mega-term related research and development this year to design and develop different-rate solutions to address trends impacting our customers' businesses.
Speaker 5: New business wins are a leading indicator of future outgrowth to market.
Speaker 5: Given the long cycle nature of our business, new business winds are tied to trends in our end markets.
Speaker 5: Given the long cycle nature of our business, new business wins are tied to trends in our end markets and are best viewed on a multi-year basis.
Speaker 5: We expect to sign approximately 600 800 million of new business wins this year.
Speaker 5: representing a three average of nearly 800 million a substantial increase from prior period averages.
Speaker 5: Moving to slide 10.
Speaker 5: Our capital deployment strategy is steadily improving returns to shareholders.
Speaker 5: as indicated by our improving return on investment capital of 9.8%.
Speaker 5: Sput 50 basis points from the end of 2022.
Speaker 5: We generated 68 million in free cash flow during the second quarter of substantially from the prior period.
Speaker 5: In 371 million free cash flow over the last couple of months, representing 65% conversion of a Justin and Inca.
Speaker 5: For the full year 2023, we expect free cash with conversion to be approximately 75% of adjusted net income.
Speaker 5: Consistent with SINSATA's long-term average.
Speaker 5: Capital expenditures are expected to be in the range of 170 to 180 million for 2023.
Speaker 5: We paid down the balance of our outstanding variable rate term loan during the second quarter.
Speaker 5: Our net leverage ratio was 3.2 times at the end of June 2023.
Speaker 5: and we expect this to decline to below 2.5 times by the end of 2025, primarily from strong, three cash flow generation.
Speaker 5: During the quarter, we returned 25 million to shareholders and the form of screen share and?
Speaker 5: we would turn 25 million to shareholders in the form of sherry purchases. In addition,
Speaker 5: We recently announced our Q3 quarterly dividend of 12 cents per share that is expected to be paid on August 23rd to share holders of record on August 9th.
Speaker 5: We are providing financial guidance for the third quarter.
Speaker 5: of 2023 as shown on slide 11.
Speaker 5: Our expectations.
Speaker 5: are based upon the end-market growth outlook shown on the right side of this page.
Speaker 5: We are aligned with IHS estimates for automotive production on a Sonsata Revenue Weighted Basis.
Speaker 5: Foreign exchange represents an expected 6 million headwinds to revenue, a 90 basis point headwind to adjusted operating margin, and a 3 cent headwind to adjusted EPS in the third quarter.
Speaker 5: excluding the impact of FX.
Speaker 5: adjusted operating income margin expectations for the third quarter represent a 60 basis point improvement from the prior year period.
Speaker 5: Our current fill rate is approximately 90% of the revenue guidance midpoint for the third quarter.
Speaker 5: This is consistent with fill levels we experienced pre-pandemic.
Speaker 5: and represent a return to normalcy of customers' supply chain dynamics. Looking to the full year 2023, we now expect foreign exchange to be a $49 million headwind to revenue and a 20 cent headwind to the global economy.
Speaker 5: Suggested earnings per share given current exchange rates.
Speaker 5: adjusted earnings per share given current exchange rates. Now let me turn the call back over to Jeff and close the comments.
Speaker 4: Thank you, Paul. Let me wrap up with a few key messages as outlined on slide 12.
Speaker 4: Sensata's business, organizational model and growth strategy are strong, resilient and validated.
Speaker 4: as we deliver mission-critical, highly engineered solutions required by our customers.
Speaker 4: While end markets are expected to remain volatile due to inflation, higher interest rates, the risk of recession in various geographies and geopolitical events, Sensato's strong management team in the North directorate, and damaging behaviorne patterns, many do girls in other
Speaker 4: provides proven experience in navigating choppy markets. We continue to execute on our growth initiatives as we transform the business to focus on rapid growth opportunities across all the end markets we serve.
Speaker 4: We are making excellent progress in electrification as demonstrated by strong new business wins and significant revenue growth.
Speaker 4: Our success in driving this transformation allows us to focus now on strengthening our financial returns through improved margins.
Speaker 4: stronger free cash flow and higher returns on invested capital.
Speaker 4: As shown by the examples I discussed today, we continue to innovate for our customers, solving their difficult engineering challenges and providing differentiated solutions.
Speaker 4: to a widening array of customers, while specifically leveraging our expanding electrification product set.
Speaker 4: Solving mission-critical challenges enables Sinsata to earn long-term customer trust as demonstrated by our expected 600 to 800 million in new business wins this year and by delivering industry leading margins for our shareholders.
Speaker 4: I'm pleased with our progress in delivering on Cincinnati's long-standing vision to help create a cleaner, safer, more electrified and connected world.
Speaker 4: not just for our customers' products, but also through our own operations.
Speaker 4: we strive to meaningfully contribute to a better world. We are making good progress on achieving our ESG targets, and I encourage you to read our latest sustainability report which describes the long-term sustainability and success of the company for all of its stakeholders. And finally, I'm very excited about sharing our innovation with you.
Speaker 2: Would you please introduce the first question? Yes, thank you. We will now begin the question and answer session. To ask a question, you would press star then one on your touch tone phone. If you are using a speaker phone, please pick up your hands at before pressing the keys. To try your question, please press star then two. This time we will pause momentarily to assemble the roster.
Speaker 2: And this morning's first question comes from Walgie Mohan with Bank of America. Yes, thank you so much. Good morning. Jeff, your outgrowth in the first half is well below your long-term outgrowth. As you look over the next 12 months, can you talk about some of the puts and takes, and do you expect if inventory will start to go up?
Speaker 2: On the margin front, you had very, very strong incremental margins in the quarter that you noted. How should we think about the sustainability of these very strong incremental margins? Thank you.
Speaker 4: Great, thanks Wamsi. So we discussed last quarter the expectation regarding outgrowth in the first half of this year given some
Speaker 4: well publicized delays around some electrification platforms that we're on. But again, we want to emphasize outgrowth and NBOs for that matter as indicators of long-term success. So we have no concerns regarding our long-term outgrowth. We're very comfortable with the 400 to 600 range.
Speaker 4: range of outgrowth. The last year, last 12 months, it's been 535 basis points.
Speaker 4: The last three years, a little more than three years, it's been 735 basis points. So I would encourage all to look at that as a long-term measure, not to look at an individual quarter in terms of the outgrowth. There are puts and takes regarding launches, mix of business and so forth that will impact that on our short-term measures. So I don't want it to confuse the view around secular long-term growth that we're very confident in.
Speaker 4: and we're sharing with investors the indicators around new business wins that will support that long term. Regarding the inventory question, the couple of end markets where we're able to understand what inventory is or at least we have a model that we believe gives us a view into inventory is around the automotive market. During the second quarter about 20 million unwound that would
Speaker 4: lead us to believe there's still about 20 million, but it's getting to the point Wamsie where it's not a meaningful portion of inventory. We do really feel as though the order patterns from our customers and their inventory planning process is getting back to normal. I would credit that to
Speaker 4: not only changing market dynamics, but also how Sensata has served that market. If we are successful in delivering to our customers when they ask it, they'll get back to more normal order patterns and they won't carry extra inventory. So we're seeing that for sure and I wouldn't expect it to be meaningful, but we'll continue to call out.
Speaker 5: has the capacity to serve more volume, and so you're seeing that in the inframammal margins.
Speaker 5: this quarter where we were getting some better volumes, we were able to convert that at higher contribution rates. And for the foreseeable future, that's the kind of leverage I would expect until we get to a point where we need to start adding capacity again to support incremental growth. But that would be the expectation, at least for the foreseeable future, in terms of what we should convert incremental volume at.
Speaker 5: in that 35 to 40 percent range.
Speaker 2: Thanks, Mark. Thank you so much. Thank you. And the next question comes from Mark Delaney with Goldman Sachs.
Speaker 6: Thank you very much for taking the question. Your revenue guidance assumes the auto end market is down 5% year on year in 3Q. I believe you said you're assuming something similar to IHS, but maybe you could elaborate a bit more on what you're seeing by region from your customers, and are you specifically trying to incorporate a strike in North America later in the year?
Speaker 4: that is again returning to more normal seasonality in the business. So if you look back to 2018 and 19 we saw a 4 to 6 percent decline from Q2 to Q3 associated with normal seasonality. So that is again another indicator to us regarding more normal patterns in terms of the business that it has been anything but normal.
Speaker 4: over the last several years and so I would view that decline from Q2 to Q3 as more normal. And also is down 2% from Q3 of last year. Where that's coming from is market, right? So it's our market estimation across all markets is down five and a half percent.
Speaker 4: third quarter of last year to a third quarter of this year. We also have about a 60 basis point headwind associated with foreign exchange. So that's the driving factor obviously around the overall expectation regarding revenue down a quarter year over year on a quarter basis. Regarding individual markets as we indicated we're right on top of...
Speaker 4: And what we're seeing is on a year-over-year basis, HVOR recovering a couple hundred basis points, ARROW going up 4 or 5%, and then industrial, which is a very broad, diversified industrial market down dramatically, and I think the best indicators of that are around PMI across the world. Remember, we have some concentration there on HVAC, major room appliance, light...
Speaker 6: I don't know if you've tried to incorporate it all within the range of guidance or just any more color on how you're thinking about that potential headwind in 3Q if that does in fact come to fruition.
Speaker 4: Thanks. Yeah, great. Thank you. Forgot that one. So we are obviously keeping a very close eye on that. The indications that we hear from our customers is that's potential for more of a late Q3, early Q4 impact.
Speaker 4: We are not seeing anything associated with order patterns that would suggest that anybody's preparing for that, although I think everybody's watching it very closely. And it is not contemplated in our guide. And so obviously if there is a nearer term impact associated with that, then we'll, you know, the impact on our...
Speaker 4: revenue will be commensurate with the impact on overall production levels that result from anything on that. So we were hoping for a positive outcome on that, but we're watching it very closely. But it's not contemplated in our billion bid point of guide range.
Speaker 4: commensurate with the impact on overall production levels that result from anything on that. So we're hoping for a positive outcome on that, but we're watching it very closely, but it's not contemplated in our billion midpoint of guide range. Thanks Mark for the question.
Speaker 7: Thank you. And then I ask the question comes from Matt Sheeran with Stifel. Yes, thank you. I'm hoping you can update us on pricing trends. It looks like it's been a tailwind for the last couple of quarters, less so in the coming quarter. So what's happening there in terms of pricing particularly in the auto market?
Speaker 5: comparing some more difficult cons. So the absolute increase order record will be more challenging, but we're still positive on the pricing side.
Speaker 7: Okay, great. And Jeff, could you update us on Insights, the telematics business? I know you made a lot of investments there. Could you give us an update on the business and attraction you're seeing?
Speaker 4: Yeah, absolutely. So remember that the premise here is that the telematics ecosystem broadly, logistics and supply chains, benefit from more information. It makes their systems and their process more efficient and safe. We have a lot of sensors that can bring data to that. Our acquisitions have been around collecting that sensor data on equipment.
Speaker 4: very nicely but it's become increasingly clear as a company that our future is electrification. We'll continue to focus on insights as we will continue to focus on safe and efficient applications in other powertrains but the future in terms of the trend and the acceleration of the trend associated with electrification.
Speaker 4: is the area that we really need to be investing. Our mega-trend investments have been disproportionately in the electrification area for some time now and will continue to invest in insights as a growth vector but electrification is the future of the company given where our customers are going.
Speaker 2: Got it. Okay. Thank you. Thanks, Bob. Thank you. The next question comes from Christopher Grin with Oppenheimer.
Speaker 4: Thank you. Good morning, guys. I want to vote at any comments or expectations, aspirations around the market capture. You see since out able to harness for the compact power fives. So on the the inverter side is that would you refer to Chris?
Speaker 4: Yes, Jeff. Yeah, so recall last July we acquired Dynapower, which was an industrial grade converter business serving that market. The business has performed very well and we're really excited about the opportunity here associated with these new product launches that will really play well in terms of the new noise claim.
Speaker 4: areas that will continue to see very strong investment from governments around the world. So we feel great about that and we're going to continue to make sure that we execute a market to bring that. This is part of our electrification strategy. I think that most tend to think of Sensata as a component play with OEMs. This is building on our view that with the electrification of all this equipment there will be...
Speaker 2: Thank you. Thank you.
Speaker 8: Good morning. Thanks for taking the question. Just want to circle back on the auto trends, and if you could just maybe help us understand the magnitude, at least on a relative basis, of the auto headwinds you saw this quarter. So I'm thinking channel inventory to stocking, you call that out as 200 bps overall, maybe if we could comment on auto specifically plus
Speaker 4: Absolutely. So we're not anticipating more channel destocking in our guys right now. So it's largely driven by the overall market, IHS forecast production to be down 4% in the third quarter versus third quarter of last year.
Speaker 4: That's going to come largely in China. So China is expected to be the one that's down the most. And so we're pretty much mirroring the impact associated with that. So that's the big driver in terms of really auto decline year over year and quarter over quarter, but also the company given the fact that.
Speaker 4: or not reflected in the Zerklerot look, Jeff? They're absolutely reflected in the guide. We're comfortable with being able to stay within that 400 to 600 range in the last 12 months. But we know that some of that mix will continue to be a drag to the in quarter overall outgrowth range.
Speaker 4: But remember when that when those launches come back will that'll that'll be a pickup right so If something pushes out of a quarter or out of a first half of the year eventually Our customers will need to pick that up and that will overlap other opportunities that we are also Anticipating so it's not lost revenue. It's just deferred revenue that we have to contemplate it
Speaker 9: Hi, thank you for taking the question. So I just wanted to ask about the row to 21% margins. And I know it's a longer term target, but I just wanted to understand what the biggest levers will be to get there from the COVID-19%. I know you guys mentioned volume last time, but any incremental information?
Speaker 9: would be great. And I also wanted to ask you guys whether you've seen any ease from commodity and fire costs coming down which might be a tailwind. Thank you.
Speaker 5: Let me test the second part of that money. The money for us is so. So I guess there's two things. One, one of we've been very prescriptive about the impact that current is having year-to-year. So benchmarking ourselves to 21% margin that we've demonstrated in the past. If you adjust for currency, you know, with 110 basis points, headwind in the second quarter.
Speaker 5: And then just to be consistent with what we've done in the past, volume will be the largest driver of our margin increase over time. We're, I think, executing well on the pricing inflation dynamic, where manager, cross-structure structure very efficiently, as the volumes start to come back, particularly in businesses like our industrial business, we'll see very, very significant incremental margins of...
Speaker 4: constant currency basis and so although volume has the biggest variable impact on margins.
Speaker 4: for an exchange is a meaningful impact on the margin profile of the business, which obviously is the way outside of our control. On the supply chain side, we're starting to see if we talked about the fact that we're starting to see supply chain challenges baked considerably. And I would say that's pretty broad-based. Remember those that we have long-term engagement with our customers.
Speaker 4: we can continue to show significant productivity in terms of our overall cross-structure that will drive margin profile in the business. We've been, over the last three years, in an environment where we've been challenged on that and it's completely been turned upside down. What has been productivity year over year has been...
Speaker 4: inflation year every year. And so in 2023, we're anticipating continued inflation on our COG's cost structure, but hopefully we'll start to bend that cost curve as we go into 24 and 25 to get back to a more normal business model of productivity quarter-reporter in your year.
Speaker 4: year. And so in 2023, we're anticipating continued inflation on our COGS cost structure, but hopefully we'll start to bend that cost curve as we go into 24 and 25 to get back to a more normal business model of productivity quarter over quarter and year over year. Thanks for the question.
Speaker 2: Thank you. Thank you.
Speaker 7: Hey, thanks a lot for taking my question. Yeah, maybe just following up on one of the other questions earlier. So Q3, your guidance to 20% margin, X currency. We are seeing auto production improving some of the industrial and market headwinds that you're experiencing at the moment.
Speaker 7: potentially going to moderate as we look out to next year. And so clearly the volume should be a tailwind as you get back to 21% margin. But just maybe on this topic of supply chain, how do we think about when that starts to benefit the supply chain?
Speaker 7: the business and are there any other puts and takes to think about as we as we look towards that 21% margin level.
Speaker 4: Yeah, so I'll take a crack at it and Paul you can add and correct me where I get it wrong.
Speaker 4: The impact in terms of cost structure associated with inflation and what would normally be productivity for us has been improving. So if you look back to 2021-22 where it was a very significant impact in terms of negative productivity in our cost structure, that's coming down in 23. And as I had mentioned to the panelists,
Speaker 4: 20%, right, so that shows improvement. That's with more foreign exchange headwind and with a decline in overall margin, or excuse me, a decline in overall volume, which impacts margins. So listen, we're going to continue to aim toward the target profitability that we've identified, but given the environment that we're working in.
Speaker 4: exchange, we are marching toward the outcome that we've aimed for. It's taking longer given the other factors that we've talked about.
Speaker 9: Okay, thank you. Thank you. Thank you. And the next question comes to Jojo Danna with J.D. Cowan.
Speaker 7: Yeah, it's morning. Can you talk about China specifically in the quarter? I know last quarter, like the mix is on favorable, given where the production was coming from. And I know this quarter Tesla had a big production in China. So can you talk about how that looked and what you guys did? And maybe comment about the structural dynamics in China. And like.
Speaker 7: How you see that playing out, like, you're gonna take share and what the, you know, what the opportunity is for you at those players? Yeah, absolutely. So I think the folks know that we had planned a trip to China, we were there in May, we talked about that a little bit.
Speaker 4: in some other venues associated with investor calls or conferences and so forth. That was the first time that we were there as a management team in three years. China has always been fast. That has accelerated during periods of COVID. So I would say that maintaining our presence there is critically important.
continue to accelerate our case of change with those customers is incredibly important. The Chinese companies like BYD as an example have gone from aspirations to win in the China market to aspirations to win in the global market so engaging with those customers is incredibly important for us as a global company.
And we have good relationships there. BYD tends to be fairly vertically integrated, but they have a desire to work with multinational companies as they aspire to grow outside of regions. So engagement with our customers in China continues to be important. We're seeing some really good success. You know how our business has been.
So overall the market isn't growing, the government's doing a lot to try to convert from a more government stimulated economy to consumer. The challenge is that consumers are spending all their money on travel because they were cooped up for three years as opposed to buying durable goods and products that our products would go into. So we're seeing weakness in the overall China market as a result of their economy and what's going on in China.
51% market share this year they have 47 That 47 is consistent with where it was in the first quarter this year Now there was more of an impact in first quarter because first quarter of 22 they had 54% market share So there was a big decline from 54 to 47, but it's stable It seems to have stabilized Around 47 our modeling which suggests that there's a couple hundred basis points have continued
options of a figure number of options on electric vehicles and local brands versus multination. So hopefully that adds some color and provides some help to you.
a bigger number of options on electric vehicles and local brands versus multination. So hopefully that adds some color and provides some help to you.
Yeah, so, thanks. Thank you. And the next question comes on, so I'm going to make sure you with J.B. Morgan. Hello, this is Adelaica McMillan on behalf of the Semicirogy. I just wanted to touch on electrification a little bit more. Can you talk about how Sonsata is thinking of investing in electrification opportunities?
We think of electrification very realistically.
And only about half of our $2 billion target for 2026 will come from the life vehicle automotive market. There'll be other areas that we will continue to play and we're seeing very significant success in terms of new business women, but also growth, right? So you think of electrification in the broader, heavy vehicle market.
require hardening of the grid. It doesn't do the environment any good if we switch to electrification and we generate electric power with
gas or other greenhouse gas emitting applications so they're moved toward renewable energy is definitely an area where we're investing that will see the other half of the billion dollars come from across all of those other end markets outside of life vehicle and Great progress. We've talked about the fact last year of our billion dollars
Resin 19-3."
Thank you. Thank you. Thank you. And then that's Croson Constant Chris Stider with UBS.
Thank you. So I understand the FX impact, but our margins facing the underlying business, proving a bit more significant than you would have thought 12 months ago. Because when we look at the Q3 guide and we take the high end, even if we add back the FX impact, it doesn't seem to show much.
year-on-year margin improvement for the underlying operations, despite all the actions over the last year to try to get these margins higher. Thank you. I would have to say that the improvement in the margins is coming largely from.
the core operations of the business. Now there is some improvement as we go from Q2 to Q3 in terms of we mix up, particularly in our clean energy segment.
But largely this is around executing on driving, pricing about the inflationary cross-work experience, the controlling our costs, getting better throughput through manufacturing sites, managing the inflation pressure around labor with increased automation. All those things are driving, the approved margins. So it is all...
really fundamental blocking and tackling the things that we do really well in terms of driving costs out of business. And as I said before, as the volume starts to improve, we will see significant incremental margins. And the other thing that I would call as our industrial business, which is one of our most profitable, is down significantly over the year, this year, due to weekend markets, we talked about the week PMI.
To jjectyoursay for pleasant comments.
Thank you Keith. I'd like to thank everyone for joining us this morning. Since Otto will be participating in the Goldman Sachs Technology Investor Conference on September 5th out in San Francisco. As Jeff mentioned, we'll also be hosting an investor event the morning of September 27th in New York City.
This will be held both in person and virtually. Registration for that event is now open and the link can be found on our Best of Relation website under events. We look forward to seeing you at one of those events or on our third quarter earnings call at the end of October .