Q3 2023 Sensata Technologies Holding PLC Earnings Call
Okay.
Good day and welcome to the Sensata Technologies Q3, 2023 earnings call.
All participants will be in listen only mode.
Should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May Press Star then one on your Touchtone phone.
To withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Mr. Jacob Sayer VP Finance. Please go ahead.
Thank you Rocco and good morning, everyone I'd like to welcome you to <unk> third quarter 2023 earnings Conference call.
Joining me on today's call are Jeff sorry.
So it's not a CEO and president Paul Rossington since I was Chief Financial Officer, and Brian Roberts, <unk> incoming 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.
PDF of this presentation can be downloaded from <unk> Investor Relations website.
This conference call is being recorded and will post a replay 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.
During this conference call, we will make forward looking statements regarding the future events or financial performance of the company.
Statements involve risks and uncertainties.
The company's actual results may differ materially from the projections described in such statements.
Factors that might cause such differences include but are not limited to those discussed in our 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 to today's presentation.
Most of the information that we will discuss during today's call will relate to non-GAAP financial measures.
Our GAAP to non-GAAP financials, 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 business.
Yeah.
Jeff will begin today with highlights of our business results during the third quarter.
He will then provide a few updates on new launches and exciting applications that we've discussed on prior calls and then provide an update on our progress in electrification.
Paul will cover our detailed financials for the third quarter updates on capital deployment and he will discuss our financial guidance for fourth quarter of 2023, well then take your questions. After our prepared remarks.
Now I would like to turn the call over to <unk>, CEO and President Jeff Good day. Thank.
Thank you. Thank you very much Jacob and welcome everyone I'm very pleased to introduce Brian Roberts as announced this morning, Brian will be joining some sato and taking over the CFO responsibilities. After the filing of our Form 10-Q next week.
Brian is a seasoned financial executive with extensive public and private company executive experience.
Ryan Most recently served as CEO of tornado therapeutics rising to the president and CEO spot from the CFO role.
Brian previously served as a public company CFO at both Insulet and Digitas.
He also brings significant public board experience, including eight years, serving as audit Committee chair and you're right.
The depth of his experience as described in the press release, we issued this morning.
We welcome Brian to send Sato and look forward to working with him.
I'd like to thank Paul for his nearly 10 years of service to send Sato.
Well in his upcoming retirement.
Paul has been instrumental in guiding since sort of three significant strategic shift and navigating through the pandemic.
We appreciate that Paul will be continuing as an adviser to me and Brian.
For the next several months to ensure a smooth transition of this very important role.
Now I'd like to move to some summary thoughts on our performance during the third quarter as outlined on slide three.
During the third quarter, we produced 1.001 billion revenue down one 7% from the prior year period and in line with our guidance range.
Market outgrowth for the last 12 months remained within our target range at approximately 460 basis points and.
660 basis points over the past three years.
Strong recent business wins, new product development activities and the upcoming launch schedules gives us confidence that our revenue growth will accelerate in the coming years.
Adjusted operating income was 192 million or 19, 1%.
The 30 basis points compared to prior year on a reported basis and up 90 basis points on a constant currency basis.
Adjusted net income moved higher by five 5% to $138 million and adjusted earnings per share grew 7% on a reported basis and 16, 5% on a constant currency basis to 91 cents from the prior year period.
During the quarter, we took a $21 million charge for our recently announced restructuring program.
This program is expected to generate $40 million to $50 million in savings in 2024.
As we continue to focus our strategy on electrification.
The investments of the past few years and actively manage our cost structure.
We expect to see the benefit dropped to the bottom line.
At the beginning of 2023, we shared with investors say shift in our capital deployment strategy based upon our confidence in our capabilities to effectively intersect the electrification growth vector and deliver innovative solutions to our customers without the need for.
New acquisitions.
We continue to execute that strategy during the third quarter, returning capital to shareholders through our dividend and share repurchases.
Our capital allocation strategy and reduces risk in our capital structure lowers interest expense and improved adjusted net income and earnings per share as well as return on invested capital.
Paul will detail.
Information shortly.
On slide four I want to provide an update on two exciting applications that we've mentioned in the past earnings calls.
Recent government regulations implemented to reduce greenhouse gases and improve the environment require HVAC manufacturers to switch to new coolant with lower global warming impact.
Known as H O L or a three refrigerants.
So the Sada has leveraged its leadership position in HVAC pressure sensor to create a new category of gas detection sensors.
That detect refrigerant leaks.
Since we announced this application this past spring, we have already secured new business totaling $55 million in annual revenue from customers for sensors.
That will be launching later this quarter.
Since <unk> was the first supplier to be awarded you all certification for our solution.
Which provides a critical benefit to customers and catapult and sought out into a leadership position in this very fast growing sensor category with a 500 million addressable market expected in the next five years.
Another exciting areas of electromechanical braking.
During the third quarter, we were awarded a large win with a second major brake system provider to support a leading global EV manufacturer.
We are already a leader in brake pressure sensors and these new wins secure a total of $30 million in future annual revenue as well as our leadership position in force sensors for the next generation of braking solutions used on electric vehicles.
<unk> is focused on continually innovating to help customers solve their mission critical hard to do engineering challenges on their path towards electrification.
As shown on slide five I'd like to share some thoughts on how we intend to reach our revenue goals within automotive electrification.
We expect the combination of rapid E EV adoption and the increased content on electrified vehicles to drive more than $1 2 billion in automotive electrification of revenue person cider by 2026.
Up from approximately $380 million this year.
Approximately 90% of this total is already booked either through expected market growth as forecasted by IHS or incremental business wins already awarded.
Our progress in North America is being realized where we currently have approximately one and a half times the revenue per vehicle on an EV compared to what an ICD platform.
China and Europe remained as opportunities for us in China. We currently have approximately 1.25 the revenue per vehicle on a local OEM E V compared to ice platform.
However, the revenue per vehicle on the local OEM E V is about half that of a multinational ice sold into that market.
Therefore as share shifts to local Oems for multinationals since Sato will experience a headwind.
Yeah sure appears to have stabilized at around 55% of local for local Oems.
We will continue to monitor this closely.
We have been increasing our pace of new business wins with local Oems across many product categories, including the development of country specific contactor is through.
Through our joint venture with Chevron.
In Europe, we currently have approximately half the revenue per vehicle on evs compared to the same I C E platforms.
This will improve as one opportunities launch and we continue to win new E V specific opportunities in Europe.
Since <unk> has established strong customer relationships across the E mobility market, we supply almost every major automotive OEM and tier across the globe.
We have also developed strong relationships with emerging automakers.
As we have shared we think about the opportunity around electrification holistically the opportunity does not stop with components to enable electrified equipment.
It also covers the infrastructure needed to power all of this equipment.
And our renewable power generation energy developers and others are poised to benefit from global initiatives to Decarbonize sources of energy, including last year's inflation reduction Act in the United States, which.
Which provides significant long term funding to this industry.
By addressing key needs for this important illustration sadat revenues from its inverters converters and rectifiers are growing rapidly and in line with the investment case, we laid out when we acquired Donna power in mid 2022.
Revenue in this area is growing by more than 30% per year.
We are confident in its continued growth given accelerated business bookings related to new projects such as missile defense systems provided by general dynamics.
Hydrogen separation in storage at sites being developed by plug power and renewable energy materials development from Freeport Mcmoran for example.
Year to date, new business bookings in this area have been strong with a book to bill ratio of one point to an improving.
We remain bullish regarding our opportunities in this sector.
Now I would 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 1 million.
A decrease of one 7% from the third quarter of.
2022.
Adjusted operating income was 192 million a decrease of two 9% compared to the third quarter of 2022.
Primarily due to unfavorable movements in foreign currency.
Partially offset by pricing and productivity improvements.
Adjusted operating margins improved 90 basis points from the prior year period on a constant currency basis due to operational improvements within the business.
Adjusted earnings per share of 91 in the third quarter grew 7% from the prior year quarter, driven by our focus on cash flow debt reduction.
Return on capital to shareholders.
On a constant currency basis adjusted earnings per share would have been 99 cents.
Presenting 16, 5% growth from the prior year period.
Now I'd like to comment on the results of our two business segments in the third quarter of 2023, starting with performance sensing on slide nine.
Our performance sensing business reported revenues of 754 million and.
An increase of 2% compared to the same quarter last year.
Automotive revenue increased due to content launches.
Higher pricing.
Partially offset by unfavorable revenue mix and foreign currency.
The decline in heavy vehicle off road revenue reflects market contraction.
Unfavorable foreign currency, partially offset by content launches.
<unk> operating income was $186 million.
With operating margins of 20, 417%.
Segment operating margins increased year over year, largely due to higher pricing volume.
And productivity.
Partially offset by unfavorable foreign currency.
Excluding the foreign currency impact performance sensing operating margin would've been 25.
8%.
As shown on slide 10 sensing solutions reported revenues of 247.
$3 million in the third quarter of.
A decrease of 11, 3% as compared to the same quarter last year.
That's real revenue decrease due to weaker markets.
Especially in HVAC.
Appliance.
I T mobile.
Industry, Destocking and unfavorable foreign currency.
Aerospace revenue increased strongly in the quarter due to market pricing and content growth.
Sensing solutions operating income was $71 3 million with operating margins of 28, 8%.
Segment operating margin was flat primarily due to the decrease in industrial revenue.
Unfavorable foreign currency offset by the growth in aerospace.
Excluding the foreign currency impact sensing solutions operating margin.
It would've been 29%.
Okay.
On slide 11.
Corporate and other operating expenses not included in segment operating income were $75 1 million in the third quarter of 2023.
Adjusted for charges excluded from our non-GAAP results corporate and other costs were $64 2 million.
Slight increase from the prior year quarter, primarily reflecting higher employee costs.
During the quarter, we announced a restructuring plan to better align our cost base with a weaker market environment, we are seeing.
Unknown Executive: Good day, and welcome to the Sensata Technologies Q3 2023 earnings call. All participants will be in listen only mode. Should you need assistance? Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question, you will press star than one on your touchdown phone. To withdraw your question, please press star than two. Please note, this event is being recorded.
And there are areas of investment to focus on electrification and to accelerate our margin recovery.
We recorded a charge of 21 million in the third quarter in relation to this restructuring program.
We expect savings of $4 million to $6 million in Q4 as part of our guide.
And savings of $40 million to $50 million in 2024.
These actions are designed to help the company reach its stated goal of 20% to 21% adjusted operating margins in 2024.
Jacob Sayer: I would not like to turn the conference over to Mr. Jacob Sayer, BP Finance. Please go ahead. Thank you, Rocco.
Moving to slide 12.
Our capital deployment strategy, we shared at the beginning of 2023 is already providing steady returns to shareholders.
Jacob Sayer: Good morning, everyone. I'd like to welcome you to Sensata's third quarter 2023 earnings conference call. Joining me on today's call are Jeff Cote, Sensata CEO and President, Paul Vasington, Sensata Chief Financial Officer, and Brian Roberts, Sensata's incoming 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 Sensata's Investor Relations website.
Underscored by our improving return on invested capital of nine 8%.
50 basis points from the end of 2022.
We generated 87 million in free cash flow during the third quarter, it's up.
Up substantially from the prior year period.
And $401 million in free cash flow over the last 12 months.
Representing 70% conversion of adjusted net income.
We are targeting free cash flow conversion to be approximately 75%, 80% of adjusted net income by 2026.
Jacob Sayer: This conference call is being recorded, and we'll post a reply on our Investor Relations website shortly after the conclusion of today's call. As we begin, I'd like to reference Sensata's State Harbor Statement on slide two. During this conference call, we will make four looking statements regarding the future events or financial performance of the company. In these statements, involve risks and uncertain days. The company's actual results made different materially from the projections described in the statements.
Our Boston side as long term average reflecting improvements in working capital.
Capital expenditures are expected to remain in the range of $170 million to $180 million for 2023.
Our net leverage ratio was three one times at the end of September 2023, and we expect this metric to continue to decrease to a level below two times.
Jacob Sayer: Factors that my cause differences include, but are not limited to those discussed in our forum 10Q and 10K, as well as other subsequent filings with the SECC. We encourage you to review our gap financial statements in addition to today's presentation. Most of the information that we will discuss during today's call will relate to non-gap financial measures. Our gap to non-gap financials, including recontiliations, are included in our earnings release and the appendices of our presentation materials.
At the end of 2026, primarily from strong free cash flow generation.
We also intend to repay the notes maturing late next year from cash on hand.
During the quarter, we returned $35 million to shareholders in the form of share repurchases.
In addition, we recently announced that we've reset our share repurchase authorization to $500 million as.
As well as our Q4 quarterly dividend of <unk> 12 per share.
That was expected to be paid on November 22nd.
Jacob Sayer: The company provides details of its segment operating income on slides 9 and 10 of the presentation, which are the primary measures management users to evaluate the performance of business. Jeff will begin today with highlights of our business results during the third quarter. He will then provide a few updates on new launches and exciting applications that we discuss on fire calls and then provide an update on our progress and electrification. Paul will cover our detailed financials for the third quarter, updates on capital deployment, and he will discuss our financial guidance for the fourth quarter of 2023. We will then take your questions after I have repaired remarks.
Shareholders of record on November eight.
Yeah.
We are updating our financial guidance for the fourth quarter of 2023 as shown on slide 13 <unk>.
To reflect the latest IHS automotive production estimates given you a W strike activity.
This impact is expected to be temporary.
Our expectations are based upon the end market growth outlook shown on the right side of the page.
We are aligned with IHS estimates for automotive production on a some sort of revenue weighted basis.
Well currently UAW has reached agreements with the D. Three.
Jeffrey Cote: Now I would like to turn the call over to Sonsata CEO and President Jeff Kote. Thank you very much, Jacob, and welcome everyone.
Which now needs to be ratified by the membership.
Ultimate outcome and process to restart production remains somewhat uncertain.
Jeffrey Cote: I am very pleased to introduce Brian Roberts as announced this morning. Brian will be joining Sonsata and taking over the CFO responsibilities after the filing of our forum 10Q next week. Brian is a seasoned financial executive with extensive public and private company executive experience. Brian most recently served as CEO of Tervata Therapeutics, rising to the president and CEO's bond from the CFO role. Brian previously served as a public company CFO at both Inflit and Digitas.
Based on IHS production estimates.
We estimate.
The impact on since all of this revenue is $35 million to $40 million this quarter with a 60 basis point impact to adjusted operating margin.
Foreign exchange represents an expected $11 million headwind to revenue 60 basis point headwind to adjusted operating margin nine cent headwind to adjusted EPS in the fourth quarter.
Excluding the impact of foreign currency adjusted operating income margin expectations for the fourth quarter, representing a 50 basis point decline from the prior year period, largely driven by the UAW strike.
Jeffrey Cote: He also brings significant public board experience, including eight years serving as Audit Committee Chair at Burei Inc. The depth of his experience is described in the press release we issued this morning. We welcome Brian to Sensata and look forward to working with him.
Our current fill rate is approximately 91% of the revenue guidance midpoint for the fourth quarter.
Slide 14 contain.
Contains a view of the implied full year 2023 outlook based on actuals to date and.
The fourth quarter guidance.
Jeffrey Cote: I'd like to thank Paul for his nearly 10 years of service to Sensata and wish him well in his upcoming retirement. Paul has been instrumental in guiding Sensata through a significant strategic shift and navigating through the pandemic. We appreciate that Paul will be continuing as an advisor to me and Brian for the next several months to ensure a smooth transition of this very important role.
A few notable observations organically adjusted operating margin is expected to increase.
100 basis points during the year and 60 basis points on a constant currency basis.
Adjusted net income and earnings per share are benefiting from our capital deployment strategy of reducing leverage.
Buying back stock Opportunistically.
We now expect foreign exchange to be a $58 million headwind to revenue for the full year.
Jeffrey Cote: Now I'd like to move to some summary thoughts on our performance during the third quarter as outlined on slide three. During the third quarter we produced 1 billion 1 million revenue down 1.7% from the prior year period and in line with our guidance range. Market outgrowth for the last 12 months remained within our target range at approximately 460 basis points and 660 basis points over the past three years. Strong recent business wins, new product development activities and the upcoming launch schedules gives us confidence that our revenue growth will accelerate in the coming years.
The 26 cent headwind to adjusted earnings per share given current exchange rates.
Yeah.
I want to recognize the senior leadership team at some thought it for their support.
Over the nearly 10 years I've served as CFO.
I also appreciate the insights and support I received from so many in the investment community.
Look forward to passing the baton to Brian to ensure a smooth transition.
I'd like to turn the call back over to Jeff for closing comments, thanks, very much Paul and let me wrap up with a few key messages as shown on slide 15.
A replay of our Investor event from late September is available on our Investor Relations website and I encourage you to watch it if you have not done so already during.
Jeffrey Cote: Adjusted operating income was 192 million or 19.1% down 30 basis points compared to prior year on a reported basis and up 90 basis points on a constant currency basis. Adjusted net income moved higher by 5.5% to 138 million and adjusted earnings per share grew 7% on a reported basis and 16.5% on a constant currency basis to 91 cents from the prior year period. During the quarter we took a 21 million dollar charge for a recently announced restructuring program.
During the event, we laid out the reasons why we believe since sort of represents a compelling investment opportunity.
We have a 100 year plus history of innovation and deep customer relationships.
The core of our business.
This success has been driven by trends in safety inefficiency is vital innovative and very profitable.
We are addressing an unprecedented opportunity in electrification.
Courted by record new business wins, and we remain on track to achieve our goal of 2 billion and electrification of revenue by 2026.
Jeffrey Cote: This program is expected to generate 40 to 50 million in savings in 2024. As we continue to focus our strategy on electrification harvest the investments of the past few years and actively manage our cost structure we expect to see the benefit drop to the bottom line.
Together this is expected to drive our long term financial performance.
For the benefit of our stakeholders.
We are.
As a management team to continue to focus our strategy in electrification and prioritize our investments to enable us to monetize the opportunities we have invested in to enable growth and drive higher margins.
Jeffrey Cote: At the beginning of 2023 we shared with investors a shift in our capital deployment strategy based upon our confidence in our capabilities to effectively intersect the electrification growth vector and deliver innovative solutions to our customers without the need for significant new acquisitions. We continue to execute that strategy during the third quarter returning capital to shareholders through our dividend and share repurchases. Our capital allocation strategy reduces risk in our capital structure lowers interest expense and improves adjusted net income and earnings per share as well as return on invested capital. Paul will detail this information shortly.
I'd now like to turn the call back to Jacob Thank you Jeff.
I will now move to Q&A Rocco.
Rocco would you please introduce the first.
Absolutely and as a reminder, everyone if you'd like to ask a question. Please press Star then one.
Today's first question comes from Mark Delaney with Goldman Sachs. Please go ahead.
Yes. Good morning, Thanks, very much for taking the question Paul Let me. Thank you for all of your help over the years and Brian wishing you a basketball in your new role.
Mark Thank you.
Oh, Yes, I was hoping to dig a little bit deeper into the electrification target for 2020, you said you reiterated the 2 billion targets you even since your Investor day in September some of the major auto Oems I talked about slowing down their E V wrap rates, so maybe help us better understand what you're seeing and what's good.
Jeffrey Cote: On slide 4, I want to provide an update on two exciting applications that we've mentioned in the past earnings calls. Recent government regulations implemented to reduce greenhouse gases and improve the environment require HVAC manufacturers to switch to new coolants with lower global warming impact, known as A2L or A3 refrigerants. Sensata has leveraged its leadership position at HVAC pressure sensing to create a new category of gas detection sensors that detect refrigerant leaks.
You get the confidence to reiterate the target that's placed into the volatility.
And in the ramp plans that we've laid out here are pretty recently.
Yeah, absolutely Mark so just to set the context, we set that goal back in April of 2021, when we did our electrification teaching them at the time it was a little bit of an ambitious goal, but we saw the line of sight in the accelerated trend of new business wins and engagement, we were experiencing with our customers.
And at that point in time over the last three years prior to that we had seen trends toward greater EV penetration right now so that moves around it ebbs and flows a little bit.
And at that point in time over the last three years prior to that we had seen trends toward greater EV penetration right now so that moves around it ebbs and flows a little bit.
Jeffrey Cote: Since we announced this application this past spring, we have already secured new business totaling 55 million annual revenue from customers for sensors that will be launching later this quarter. Sensata was the first supplier to be awarded UL certification for our solution, which provides a critical benefit to customers in catapult sensata into a leadership position in this very fast growing sensor category with a 500 million addressable market expected in the next five years.
But based upon the engagement with customers the mbo wins, we've seen third party estimates regarding EV penetration.
We feel very and we feel very comfortable with the $1 2 billion of revenue in automotive the balance of that will come from H B O R and the industrial business.
And again, 90% of that auto target is booked at this point now to address your very specific question regarding customers view, one EV penetration.
Jeffrey Cote: Another exciting area is electromechanical braking. During the third quarter, we were awarded a large win with a second major brake system provider to support a leading global EV manufacturer.
We're clearly seeing the accelerated trend associated with electrification right. So back in 2023% up North America was electric and.
Jeffrey Cote: We are already a leader in brake pressure sensors and these new wins secure a total of 30 million in future annual revenue, as well as our leadership position in forced sensors for the next generation of braking solutions used on electric vehicles. Sensata is focused on continually innovating to help customers solve their mission critical hard to do engineering challenges on their path toward electrification.
In 2023 is expected to be 11% and Europe back in 'twenty. It was 4% and 23 is expected to be 17% and in China. There was a 6%.
<unk>, new energy vehicle penetration in 'twenty and in 2023 is expected to be 36%.
So there maybe puts and takes in terms of estimates based upon customer take rate, but it's very clear that the technology exists. There is demand for these vehicles. The infrastructure is being built and so we're preparing for that the last comment I would make on this is that we clearly we've invested in this trend.
Jeffrey Cote: As shown on slide five, I'd like to share some thoughts on how we intend to reach our revenue goals within automotive electrification. We expect the combination of rapid EV adoption and the increased content on electrified vehicles to drive more than 1.2 billion in automotive electrification revenue for Sensata by 2026, up from approximately 380 million this year. Approximately 90% of this total is already booked. These are through expected market growth as forecasted by IHS or incremental business wins already awarded. Our progress in North America is being realized where we currently have approximately one and a half times the revenue per vehicle on an EV compared to an IC platform.
Toward electrification.
But to the extent it slows we have a very strong core business that will continue to prosper and in fact, if Oems slowdown their EV penetration they have to meet.
Our greenhouse gas emissions reductions in other ways, which would benefit so insider. So that's a slowing does not worry us. It's also in a category of our business, which today enjoys much higher margins. So to the extent that slows it will be good for us in sadr, either way might be a little bit slower topline growth going forward.
But more achievable and more bottom line Roe.
In terms of the overall company. So we're prepared for both.
Jeffrey Cote: China and York remain as opportunities for us. In China, we currently have approximately 1.25 the revenue per vehicle on a local OEM EV compared to IC platform. However, the revenue per vehicle on the local OEM EV is about half that of a multinational ice sold into that market. Therefore, in share shifts to local OEMs from multinationals, Sensata will experience a headwind. The share appears to have stabilized at around 55% for local OEMs, and we will continue to monitor this closely.
I think that there will be ebbs and flows on individual.
Individual customer forecast associated with it but we believe in this as being a long term trend in the industry.
Thanks for the question Mark.
Thank you and our next question today comes from Romsey Mohammed with Bank of America. Please go ahead.
Yes. Thank you so much and I'd Echo Mark's comments on on both Brian and Paul If I, if I could Jeff maybe on the UAW impact being transitory can you flesh that out a little bit in terms of how that's going to work into calendar Q1 did you see any inventory or do you expect.
Inventory buildup.
Jeffrey Cote: We have been increasing our pace of new business wins with local OEMs across many product categories, including the development of country-specific contactors through our joint venture with Sherard. In Europe, we currently have approximately half the revenue per vehicle on EVs compared to the same ICE platforms. This will improve as one opportunities launch, and we continue to win new EVs-specific opportunities in Europe. Sensata has established strong customer relationships across the E-mobility market. We supply almost every major automotive OEM and tier across the globe. We have also developed strong relationships with the emerging auto makers.
Into Q4, and and your guide is net of that or is there no real inventory buildup and you should see about seasonal trends heading into into Q1.
And if I could on on on the incremental restructuring it seems like that's going to drive about 100 basis points of operating margin upside.
If auto volumes were to go down can you still get to 20% to 21% operating margin in 2024, just trying to calibrate what kind of revenue estimate you would need to get to that 20%, 21% operating margin. Thank you so much.
Great. Once he want why don't I address the UAW piece of it and then maybe Paul can address the margin question given the restructuring in <unk> and so forth.
So uh huh.
As we had anticipated the UAW strike did not have any meaningful impact on the third quarter.
Jeffrey Cote: As we have shared, we think about the opportunity around electrification holistically. The opportunity does not stop with components to enable electrified equipment. It also covers the infrastructure needed to power all this equipment.
Handed essentially where we thought we were going to land.
We do where it's going to be a fourth quarter issue at the time of our Investor day, we used IHS estimates in terms of the impact associated with the strike to develop our our guide for $1 billion. We also look to what we had indicated is more normalized season seasonal patterns in the business, which from Q3 to two.
Jeffrey Cote: In renewable power generation, energy developers and others are poised to benefit from global initiatives to decarbonize sources of energy, including last year's Inflation Reduction Act in the United States, which provides significant long-term funding to this industry. By addressing key needs for this important industry, Sensata revenues from its inverters, converters, and rectifiers are growing rapidly, and in line with the investment case, we laid out when we acquired Dyna Power in mid-2022. Revenue in this area is growing by more than 30% per year.
For typically would be flat or maybe up a percentage point or so so we use those data points to help us figure out where we needed to be obviously things have changed and they've been very dynamic over the last several years based upon IHS forecasts.
Production, we believed that there was about a $40 million fourth quarter impact very specific to the D. Three based upon production schedules that aligns pretty tightly to what our order patterns have been from those customers.
Jeffrey Cote: We are confident in this continued growth given accelerated business bookings related to new projects, such as missile defense systems provided by General Dynamics, hydrogen separation and storage at sites being developed by Plug Power, and renewable energy materials development from FreeFort, MacMaran, for example. Year-to-date new business bookings in this area have been strong, with a book to bill ratio of 1.2 and improving. We remain bullish regarding our opportunities in this sector.
Recall that the <unk> III entered the fourth quarter or exited the third September 30, a vehicle what a number is we're back to the $60 range on average somewhere a little bit higher than others, but I think they were preparing vehicle lot inventory to deal with the potential.
Issues associated with the strike.
Going into that so I would expect that that might be down a little bit and will present an opportunity for us.
So if the startup of the restart up I think will be different by individual customer, but there were there were there to work with them. We've had calls with all of those customers regarding what that startup will look like and making sure that we can be there to deliver the parts when when they need them.
Paul Vasington: Now I'd like to turn the call over to Paul. Thank you, Jeff. Key highlights for the third quarter as shown on slide 8 include revenue of 1 billion, 1 million, a decrease of 1.7% from the third quarter of 2022. Adjusted operating income was 192 million, a decrease of 2.9% compared to the third quarter of 2022, primarily due to unfavorable movements in foreign currency, partially offset by pricing and productivity improvements. Adjusted operating margins improved 90 basis points from the prior period, and a constant currency basis due to operational improvements within the business.
And at this point my my sense would be it'll be a little choppy in the fourth quarter, but it looks as though with go as we go into the first quarter things will normalize.
One more comment that I would make an impact of UAW as I commented on our $40 million revenue impact in the fourth quarter are associated with the UAW strike that obviously falls through where it's pretty significant.
Jack Decremental margins, so, it's a 60 basis point impact.
Given that we know what we we felt strongly that it was temporary so we did not adjust the cost structure for that decline of revenue because we wanted to make sure that our teams and our sites, we're prepared to be able to respond when it ended and and that's turning out to be a good thing in terms of the.
Paul Vasington: Adjusted earnings per share of 91 cents in the third quarter grew 7% from the prior year quarter driven by our focus on cash flow, debt reduction, and return on capital to share. Scholars. On a constant currency basis, and just at Einstein's for share, would have been 99 cents, representing 16.5% growth from the prior period.
Preparedness on our side, but it does have a negative impact on fourth quarter margins to the tune of about 60 basis points. So ultimately wanted to just so quickly was the I'm just going back to Investor day, and the three year growth model in the top line.
Paul Vasington: Now I'd like to comment on the results of our two business segments in the third quarter of 2023, starting with performance sensing on slide 9. Our performance sensing business report revenues of 754 million, an increase of 2% compared to the same quarter last year. Automotive revenue increased due to content launches, entire pricing, partially offset by unfavorable revenue mix in foreign currency.
The revenue profile that we had in the model there was more backend loaded just given the watches on electrification and most of the growth and the model is around electrification and given the long cycle nature of the business the backend.
Period of that three year periods, where is where the growth is higher so we were expecting a lower growth in 2024, where obviously give you more specifics when we guide in.
At the beginning of 2024.
Paul Vasington: A decline in heavy vehicle offer revenue reflects market contraction, and unfavorable foreign currency partially offset by content launches. Performance sensing operating income was 186 million, with operating margins of 24.7%. Segment operating margins increased year of year largely due to higher pricing, volumes, and productivity, partially offset by unfavorable foreign currency, excluding the foreign currency impact performance sensing operating margin would have been 25.8%.
The the restructuring.
Was done to strengthen our cost position and our margin recovery plan and so that drives a lot of the improvement year over year.
And margin. So we're not we're not relying on volume to solve the problem of improving margins, we're going to focus on cost control focusing our investment dollars in the area of electrification, where having the grand success.
And so the revenue will keep will contribute but it's not what we're relying on to deliver the margin improvement.
Thank you thanks for the question.
Thank you and our next question today comes from Sami Chatterji with J P. Morgan. Please go ahead.
Paul Vasington: As shown in slide 10, sensing solutions report revenues of 247.3 million in the third quarter, a decrease of 11.3% as compared to the same quarter last year. Industrial revenue decreased due to weaker markets, especially in HVAC, appliance, and IT mobile, industry destocking, and unfavorable foreign currency.
Oh, hi, Thank you for taking my question.
Some of them.
Thanks Ryan.
Hum.
Outgrew the market if I looked at the last 12 months no bullet at 460 basis points and.
Last quarter I think the last one my number was around 535. So it's that's been reading Europe I'm just curious when you sort of beat out. The drivers then likely I'll go to the market is and how much of that is the share shift in relation to China automotive market looses, maybe lapping some of the price increases that you've taken which was probably helping Oklahoma.
Paul Vasington: Aerospace revenue increased strongly in the quarter due to market, pricing, and content growth. Fencing solutions operating income was 71.3 million, with operating margins of 28.8%. Segment operating margin was flat primarily due to the decrease in industrial revenue, and unfavorable foreign currency offset by the growth in aerospace.
And if you can be sold sort of what the right word southern white export reading that'd be helpful and a quick one football Bowl FX is always tough to model for you guys. I mean, you can you just give us some guidance for next year.
Paul Vasington: To screen the foreign currency impact, sensing solutions operating margin would have been 29%.
How should we think about ethics.
Paul Vasington: On slide 11, corporate and other operating expenses not included in segment operating income were 75.1 million in the third quarter of 2023. Adjusted for charges excluded from our non-GAP results, corporate and other costs were 64.2 million, a slight increase from the prior quarter, primarily reflecting higher employee costs.
Yeah.
Yeah. So let me let me hit on the outgrowth in.
More broadly the secular growth story that you're you're commenting on any impact to that and then Paul can touch on the other topics. So.
So if you look at the full year of 2023.
On a reported basis.
Company will be about flat on revenue.
On a constant currency basis will be up one and a half or so.
Paul Vasington: During the quarter, we announced the restructuring plan to better align our cost base with the weaker market environment we are seeing, to narrow our areas and investment to focus on electrification and to accelerate our margin recovery. We recorded charge of 21 million in the third quarter in relation to this restructuring program. We expect savings of 4 to 6 million in Q4 as part of our guide. In savings of 40 to 50 million in 2024, these actions are designed to help the company reach its stated goal of 20 to 21% adjusted operating margins in 2024.
While the global markets that we serve are down about one.
So there is that there is a secular growth story, we are growing faster than the markets when you break that down.
Automotive is up about two heavy vehicle off road is up about one aerospace is up 28% in the industrial market is down 9%. So the big impact in terms of 2023 is really they.
The industrial business in terms of that being down nine when you look at the auto market, specifically because that tends to be the market that we talk about when we talk about secular growth, but the reality is there's secular growth on all of the markets that we serve.
Paul Vasington: Moving to slide 12, the capital deployment strategy we shared at the beginning of 2023 is already providing steady returns to shareholders. As underscored by our Improving Return, an invested capital of 9.8%, up 50 basis points from the end of 2022. We generated 87 million in free cash flow during the third quarter, up substantially from the prior period, in 401 million in free cash flow over the last 12 months, representing 70% conversion of a just a net income.
If you look at the IHS forecast for the full year right now it's about 3%.
Auto growth.
Where at one and a half when you consider constant currency worth for so where we are growing faster than the production growth rate as forecasted by IHS.
There there are a lot of moving parts in here, Okay, but I think part of the challenge as we get into all of the details on it which are many but there are really.
There are two structural things that are impacting outgrowth to market and auto and there were two temporary things the structural items are the shift in China from multinational to law.
Paul Vasington: We are targeting free cash flow conversion to be approximately 75 to 80% of a just an end income by 2026, above Sensata's long-term average reflecting improvements in working capital. Capital expenditures are expected to remain in the range of 170 to 180 million for 2023. Our net leverage ratio was 3.1 times at the end of September 2023, and we expect this metric to continue to decrease to a level below two times by the end of 2026, primarily from strong free cash flow generation.
That's a significant impact just in Saada right now that's five percentage points share shift occurred during 2023, but as I had mentioned in my prepared comments, we believe that stabilized now, but we will watch that very closely in the way that we will address it is by accelerating our new business opportunities with the local Oems.
Not only on internal combustion engines, but on the E platforms, and we're making progress on that with 35% of their production during twenty-three being evs and us being higher revenue per vehicle I E. D's that demonstrates the progress that we're making there but in order to become more equivalent multinational and local we've got a lot of work to do but that is our.
Paul Vasington: We also intend to repay the notes maturing late next year from cash on hand. During the quarter, we return 35 million to shareholders in the form of share repurchases.
Paul Vasington: In addition, we recently announced that we reset our share repurchase authorization to 500 million, as well as our Q4 quarterly given of 12 cents per share, as expected to be paid on November 22nd, as shareholders of record on November 8th.
Strategic focus.
The second is the EV shift in Europe.
And so if you if and again in my prepared comments I talked about the fact that because we were behind on the original sourcing associated with launches in Europe around Evs, we're about half the content or the half the revenue per vehicle and in Europe on Evs versus internal combustion. We've got a number of wins that we've had.
Paul Vasington: We are updating our financial guidance for the fourth quarter of 2023, as shown on slide 13, to reflect the latest IHS automotive production estimates given UAW strike activity. This impact is expected to be temporary. Our expectations are based upon the end-market growth outlook shown on the right side of the page. We are aligned with IHS estimates for automotive production on a Sinsada revenue weighted basis. While currently, UAW has reached ten of agreements with the D3, which now need to be ratified by membership, the ultimate outcome in process to restart production remains somewhat uncertain.
That won't materialize over the next several years that will it will address that issue and we're not done we are continuing to work with those customers to get more revenue per vehicle on the E platforms as that take rate accelerate so those are there are two structural very strategic issue is there's a lot of other noise in the system.
Associated with things that are going on but those are the two things that are having the biggest impact in terms of structural but two more transitory or temporary items are the launch delays that we've talked about so there's a significant amount of launch delays that have happened. During 2023 that we were counting on a revenue that would've changed that outgrowth ray.
Paul Vasington: Based on IHS production estimates, we estimate the impact on Sinsada's revenue as 35 to 40 million is quarter, with a 60 basis point impact to adjusted operating margin. Born exchange represents an expected 11 million headwind to revenue, 60 basis point headwind to adjusted operating margin, and a 900 headwind to adjusted EPS in the fourth quarter. Excluding the impact of foreign currency, adjusted operating income margin expectations for the fourth quarter, represent a 50 basis point to clients in the prior year period largely driven by the UAW strike. Our current still rate is approximately 91% of the revenue guides midpoint to the fourth quarter.
And again, we're working with customers around creating more certainty around those to make sure that they and we are ready to launch when there when we've intended and the second is around the D. Three impact in the fourth quarter. So we have more revenue per vehicle with the D. Three when that revenue goes down it creates a mix problem for us but.
These last two items will fix themselves with more engagement with our customers and the resolution on the U W.
UAW strike so the other two we will keep you posted on them. We've got to make sure that we continue to drive our strategy to address those issues hopefully that gives you more color on that.
Paul Vasington: Slide 14 contains a view of the implied folio 2023 outlook based on actual estate in the fourth quarter guys. A few notable observations organically adjusted operating margin is expected to increase a hundred basis points during the year in 60 basis points on a constant currency basis. Adjusted net income in earnings for sure are benefiting from our capital deployment strategy of reducing leverage and buying back stock opportunistically.
And on the FX I mean, FX will continue to be a headwind next year.
We'd estimate somewhere around a 50 basis point impact to operating income and operating income margin.
We didn't align with what we I think she will be shared on Investor day.
And that's based on current rates, so where are we exit year. It stayed the same that's what I would expect.
Thanks for the question to me.
Thank you and our next question comes from Amit.
Paul Vasington: We now expect foreign exchange to be a $58 million headwind to revenue for the full year in a 26 cent headwind to adjusted earnings for sure given current exchange rates. I want to recognize the senior leadership team at Sensata for their support over the nearly 10 years I've served at CFO. I also appreciate the insights and support I've received from so many in the investment community.
Dairy and army with Evercore. Please go ahead.
Yeah. Good morning, Thanks for taking my question I have two as well both on the auto under December quarter expectations for automotive revenues to be down 10% can you just talk about how do you think that stacks up across the various geographies for you and then any initial sense of what kind of the 24 production could look like across the key geos.
Yeah. So on.
Yeah, you know I spoke to the auto production versus what our market rate was for the full year, if I remember correctly in the first quarter, we were growing faster than the market that the IHS market in second quarter, we were a bit behind third quarter Whereabout are equivalent and then the fourth quarter, we're behind so.
Paul Vasington: I look forward to passing a baton to Brian to ensure a smooth transition.
Jeffrey Cote: I'd like to turn this all back over to Jess for closing comments. Thanks very much Paul and let me wrap up with a few key messages as shown on slide 15.
Jeffrey Cote: A replay of our investor event from late September is available on our investor relations website and I encourage you to watch it if you have not done so already. During the event we laid out the reasons why we believe Sensata represents a compelling investment opportunity. We have a 100 year plus history of innovation and deep customer relationships. The core of our business whose success has been driven by trends and safety and efficiency is vital, innovative and very profitable.
And that's due to the primarily the mix associated with the three so I expect a drop in production on <unk> three has a revenue impact to us that's causing our adjusted market in auto but across the year, Amit we're pretty much on top of a the IHS forecast so mix will move around based on.
On Oems that produce cars and the platforms that are produced but across the market or cross the year, it's pretty it seems to be pretty stable.
And to clear up in case, there's any confusion on it but the numbers that are on that slide are meant to be market gross numbers not our revenue growth. Obviously, they are air wages for our revenue across Oems and geographies. They lined up the auto number at least lot lines up with.
Jeffrey Cote: We are addressing an unprecedented opportunity in electrification supported by record new business wins and we remain on track to achieve our goal of 2 billion in electrification revenue by 2026. Together this is expected to drive our long term financial performance for the benefit of our stakeholders.
Just forecast for production.
Got it and then.
Yeah. So just to go back to the discussion you had around the impact from the UAW strike and I totally understand why you have a outsized impact on your operating profit line in the December quarter.
Jeffrey Cote: We are committed as a management team to continue to focus our strategy in electrification and prioritize our investments to enable us to monetize the opportunities we have invested in to enable growth and drive higher margins.
Is it fair to think that that should reverse back I E. The incremental margins should be much stronger as those revenues potentially come back in the first half the year.
Yes definitely so.
As that revenue comes back they'll it'll absorb.
Jacob Sayer: I'd now like to turn the call back to Jacob. Thank you Jeff.
Unknown Executive: Well now move to Q&A. Raka would you please introduce the first one? Absolutely. And as a reminder everyone if you'd like to ask a question please press star one one.
The overhead we have associated with that and we would expect the incrementals to come back just like they would go down in the fourth quarter.
So without you know.
We're guiding to around 19% midpoint of guidance operating income we'd be.
Mark Delaney: Today's first question comes from Mark Delaney with Goldman Sachs. Please go ahead. Thanks for that.
At or slightly above what we had originally guided here for if not for the UAW strike. So yes, we're very focused on making sure. We show continued progress toward our operating income index target.
Jeffrey Cote: Good morning. Thanks very much for kicking the question. Follow me. Thank you for all of your help over the years and Brian wishing you a best of luck in your new goal. Thanks Mark. Thank you. Jeff, I was hoping to dig a little bit deeper into the electrification target for 2026. You reiterated the 2 billion target. You know, even since your investor day in September some of the major auto OEMs have talked about slowing down their EV rap rate.
Thanks, Amit for the question.
Thank you and our next question comes from Steven Fox with Fox Advisors. Please go ahead.
Hi, Good morning, I had two questions as well first of all.
With regard to sort of the EV supply chain. There also seems to be concerned, especially on the semiconductor front with the level of inventories at some of the Oems were sitting on his EV demand has kind of slowed a little bit here can you talk about you know how you inventory Oems and how you. How you think maybe your inventory sit there and then.
Jeffrey Cote: So maybe help us better understand what you're seeing and what's giving you the confidence to reiterate the 2 billion target just by some of the volatility in the ramp plan is that we've announced here previously. Yeah, absolutely Mark. So just to set the contact we set that goal back in April of 2021 when we did a electrification teaching. At the time it was a little bit of an ambitious goal but we saw the line of sight in the accelerated trend of new business wins and engagement we were experiencing where there are customers.
I had a follow up.
Yeah. So let me address it on the supply side and then on how we deal with the demand from our customer side. So I'm I'm I'm hesitant to claim the end of supply chain challenges.
Jeffrey Cote: And at that point in time over the last three years prior to that we had seen trends toward greater EV penetration right now. So that moves around. Edson flows a little bit. But based upon the engagement with customers the NBO wins we've seen third party estimates regarding EV penetration. We feel very and we feel very comfortable with the 1.2 billion of revenue and automotive. The balance of that will come from HVOR and the industrial business, and, again, 90% of that auto target is booked at this point.
It's been a very challenging couple of years, but clearly things have abated considerably.
In terms of the overall availability of parts, that's not a universal message because I think when you talk about electronics. There are certain types of electronics that are still scarce and short on supply versus others, but generally we're in a much better place and we feel as though the inflationary pressures that were driven by that.
Supply demand dynamics are starting to balance out a little bit. So that's on the supply side on the customer side.
As we've talked about we were up and make sure we make to the order right. We're a just in time inventory model. There was a point in time when customers would quite literally take anything that we could produce to make sure that they had parts available to them, we feel as though that's reversed pretty dramatically due to.
Jeffrey Cote: Now, to address your very specific question regarding customers view on EV penetration, we're clearly seeing an accelerated trend associated with electrification, right? So, back in 2023% of North America was electric. In 2023, it's expected to be 11%. In Europe, back in 2020, it was 4%, in 2023, it's expected to be 17%. And in China, there was a 6% new energy vehicle penetration in 2020, and in 2023, it's expected to be 36%.
Changes in the in the market, but also because we feel as though we've been there for our customers. So we have a proven track record of being able to deliver when they say they need. It. So we you know I think we'd estimated its very difficult to estimate, but I think we had estimated there's still maybe $15 million to $20 million of inventory our parts in the warehouses.
Jeffrey Cote: So, there may be puts and takes in terms of estimates based upon customer take rate, but it's very clear that the technology exists. There is demand for these vehicles. The infrastructure is being built. And so we're preparing for that. The last comment I would make on this is that clearly we've invested in this trend toward electrification. But to the extent it slows, we have a very strong core business that will continue to prosper.
Or is it partially completed vehicles, but it's not a meaningful number anymore in terms of.
The long cycle OEM market, where we have more visibility given the just in time inventory modeling that our customers have them on the industrial side us more short cycle businesses. It much harder to get a really good beat on that and clearly some of the decline that we've experienced during 2023 in that market.
Jeffrey Cote: And in fact, if OEM slow down their EV penetration, they have to be greenhouse gas emissions reductions in other ways, which would benefit Sensata. So, the slowing does not worry us. It's also in a category of our business, which today enjoys much higher margins. So, to the extent that slows, it will be good for Sensata either way. Might be a little bit slower top line growth going forward, but more achievable and more certain bottom line growth in terms of the overall company.
Not only market, but destocking that is happening, but that will have a <unk>.
Positive impact when when restocking does occur it's been a tough year for that market, but.
Specific to <unk>, we don't see customers cutting orders because they have.
Component specific to our their EV production with some sort of I think that we've stabilized in terms of shifting the parts they need to make the product for their customers.
That's that's really helpful and that leads me into my second question, which was on industrial markets.
Jeffrey Cote: So, we're prepared for both. I think that there will be ebbs and flows on individual customer forecast associated with it, but we believe in this as being a long term friend in the industry. Thanks for the question, Mark. Thank you.
It seems like these markets are getting worse, but everyone defines industrial differently across the supply chain. So can you sort of talk about offer these declines year over year declines that you're seeing like what is sort of a path to recovery or whether we're not even in a recovery phase yet.
Unknown Executive: And our next question today comes from Mom's email hand. Look back at America. Please go ahead. Yes. Thank you so much. And I echo Mark's comments on on both Brian and Paul.
Yeah. So you know we do a lot of modeling we have a long.
Long history in these markets that we serve.
To understand based upon PMI metrics and other third party metrics that are have a pretty good correlation to the demand for our for our product globally across the individual reason regions clearly we've gone through a destocking period, Steve and so.
Jeffrey Cote: If I could, Jeff, maybe on the UAW impact being transitory, can you, can you flesh that out a little bit in terms of how that's going to work into counter Q1? And did you see any inventory areas affecting inventory build up into Q4 and your guide is net off that or is there no really inventory build up and you should see about seasonal trends heading into into Q1. And if I could on on the incremental restructuring, it seems like that's going to drive about 100 basis points of operating margin upside.
So we've had order rates lower than where the market is and when you look at the 20 year history of that.
It snaps back when there was a recovery.
Fourth quarter is down.
19%.
Market wise industrial quarter over quarter.
Its accelerated from where it was in the third quarter, So I'm not I'm not claiming that the bottom has been achieved on that but.
Jeffrey Cote: If auto volumes were to go down, can you still get to 20 to 21% operating margin in 2024, just trying to calibrate what kind of revenue estimate you would need to get to that 20 to 21% operating margin? Thank you so much. Great.
It will it will hit at some point my my hope would be that the fourth quarter would be the bottom of that and then going into 2024, we'd start to see that recover from a revenue basis standpoint, our industrial business is pretty flat Q3 to Q4, so from a.
Jeffrey Cote: Once you want, why don't I address the UAW piece of it? And then maybe Paul can address the margin question given restructuring and in volumes and so forth. So as we anticipated, the UAW strike did not have any meaningful impact on the third quarter. We landed essentially where we thought we were going to land. We knew it was going to be a fourth quarter issue. At the time of our investor day, we used IHS estimates in terms of the impact associated with the strike to develop our guide for a billion dollars.
Sequential standpoint, it looks like its stabilized and then we will start to see a recovery on that last point I'd make there might.
It might be the obvious, but that's a very hard margin business for us relative to our auto when you interview our business. So when that comes back that will create some leverage in terms of incremental margin for the company as well.
Great Super helpful. Thank you.
Thanks, Steve.
And our next question comes from Luke junk with Baird. Please go ahead.
Jeffrey Cote: We also looked to what we had indicated as more normalized seasonal patterns in the business, which from Q3 to Q4 typically would be flat or maybe upper percentage point or so. So we use those data points to help us figure out where we needed to be. Obviously things have changed and they've been very dynamic over the last several years. Based upon IHS forecasts of production, we believe that there's about a $40 million fourth quarter impact very specific to the D3 based upon production schedules that aligns pretty tightly to what our order patterns have been from those customers.
Good morning, Thanks for taking the questions and Paul Best wishes in your retirement as well.
Yes bigger picture you said at an increased pace of new business wins with local Oems in China, including country specific contactor is I was just hoping you can expand on the increased traction that you're seeing there specifically I guess within contractors, especially and what you know as we look out a few years from now would a reasonable target.
It might be for local EV content versus what your historical kind of 10 has been with the multinationals on ice platforms in China I'm thinking.
Yeah. So.
Jeffrey Cote: We call that the D3 entered the fourth quarter or exited the third September 30 vehicle lot numbers were back to the 60 range on average. Some were a little bit higher than others, but I think they were preparing vehicle lot inventory to deal with the potential issues associated with the strike going into that. So I would expect that that might be down a little bit and will present an opportunity for us.
Some of you may remember that.
In 2022 now has 21 late 'twenty, one we entered into the JV wish Iraq right because what we had observed was that the vast majority of the vehicles in China. The electric vehicles in China that were being produced with lower voltage and so let me quantify under 400 volt systems.
Whereas a lot of the newer systems in Europe, and North America are above 400 volt.
Jeffrey Cote: So in the startup, the restart up, I think will be different by individual customer, but we're there to work with them. We've had calls with all of those customers regarding what that startup will look like and making sure that we can be there to deliver the parts when they need them. And at this point, my sense would be it'll be a little choppy in the fourth quarter, but it looks as though as we go into the first quarter things will normalize.
We had not invested in and we didn't have the right solution at the low foreign or false who we partnered with the with our with Jake with this JV. We're sure art, we've seen accelerated progress there around specifically contact or now.
Now we've made some progress on that as evidenced by the fact that when you look at our local make her a local oh, yeah, we have.
0.25 times the revenue per vehicle on an electric vehicle versus on a combustion it but a lot more work to do to get that to the equivalent in the United States, but progress being made its not only going to be contact rates. So there are other applications that we're serving that R. E. D specific as you know around breaking around tire pressure.
Jeffrey Cote: One more comment that I would make on impact of UAW is I commented on a $40 million revenue impact in the fourth quarter associated with the UAW strike. That obviously falls through a pretty significant decremental margins. So it's a 60 basis point impact given that we know what we felt strongly that it was temporary. So we did not adjust cost structure for that decline in revenue because we wanted to make sure that our teams in our sites were prepared to be able to respond when it ended. And that's turning out to be a good thing in terms of the preparedness on our sites, but it doesn't have a negative impact on fourth quarter margins to the two of those 60 basis points.
Paul Vasington: So Paul, thank you.
<unk> around environmental control that represent opportunities for us a good progress there our goal as we've talked about we have doubled the EV content by 2026 on a global basis.
When you look across the globe by 2026 based upon where we are today North America will be above that two times, China will be approaching the two times and then Europe I think will be the one that will be not.
Paul Vasington: Yeah, just so quickly one of the going back to investor day in the three or gross model on the top line. The revenue profile that we had in the model there was more backend loading just given the launches on electrification most of the growth in the model is around electrification and given the long cycle nature of the business back end period of that three or periods where is where the growth is higher.
Not far behind but will be accelerated and pick out the Arab take crazy average of two times across the company.
We continued our progress you know more to come in terms of specific mbo wins in that area.
Thinking through that and just a follow up in the near term if I look back to the strike impacts on the business in 2019, I think you said about 10 million in lost revenue in North America, just hoping you could bridge that to the 40 million or so you're expecting this year just trying to see if there's something in terms of what's going on in the channel or just generally how this strike it's <expletive>.
Paul Vasington: So we were expecting lower growth in 2024. We're obviously giving more specifics on the guide in the beginning of 2024. The restructuring was done to strengthen our cost position in our margin recovery plan. And so that drives a lot of the improvement year by year in margin. So we're not we're not relying on volume to solve the problem of improving margins. We're going to focus on cost control focusing our investment dollars in the area of electrification. We're having the greatest success. And so the revenue will contribute, but it's not what we're relying on to deliver the margin improvement.
Paul Vasington: Thank you. Thanks for the question.
From this insider standpoint, given you didnt impact that aren't is meaningfully different thinking.
So we're trying to reference back to the priorities that we system you're happy with.
AWS struck.
In 2021 does that sound right.
Yeah. The 2019 strike you'd cited about $10 million in lost revenue, while trying to square that with $35 40 right now.
Nobody of units are pretty similar yeah yeah.
Yeah, So listen I mean, we're we're at a 40 million impact where we're looking at what IHS as ultimately the impact will be as I had mentioned that ties pretty closely what do you where rates are and where we are in our fill rate I think were 1990, 1% filled against the forecast that we have that's pretty typical in it that too is normalizing so I.
Wamsi Mohan: Thank you. And our next question today comes from Senator G with JP Morgan. Hi, thank you for taking my question and Paul congrats on the right. On the outgrew to the market, if I looked at the last 12 months number at 460 basis points and last quarter, I think the last 12 months number was around 535. So that's been moderating here. I'm just curious for you to piece out the drivers there.
I feel as though it's a pretty good estimate you know I think that.
Sure.
Yeah, I mean, I think how the union has dealt with this one under <unk> leadership has been anything but consistent with the past and so.
Wamsi Mohan: Why the outgrew to the market is moderating? How much of that is the share shift in relation to China automotive market versus maybe lapping some of the price increases that you've taken, which was probably helping out performance. If you can piece out sort of what the drivers are and why that's moderating, that will be helpful. And a quick word for Paul, Paul FX is always tough to model for you guys. I mean, can you just give us some guidance for next year?
You know where we're following based upon the production rates. The fact that they have.
Tentative agreements, obviously very positive.
But we'll watch closely the startup at to see whether or not we have that full $40 million impact or how that transitions.
Transitions as we go throughout the year.
But yes, it's that's the math on.
On the production rates, which is about we remember we had talked about seven to 8 million per week.
Wamsi Mohan: Yeah, so let me hit on the outgrowth and we're broadly the secular growth story that you're commenting on and the impact to that and then Paul can touch on the other topic. So if you look at the full year 2023 on a reported basis, the company will be about flat on revenue. On a constant currency basis will be up one and a half percent. While the global markets that we serve are down about one.
If it if everything is shut down so we're at the point, where it's a little less than half the full quarter impact if everything had been shut down for the fourth quarter.
Thanks, Luke that question yet.
Thank you and our next question today comes from William Stein with Truest. Please go ahead.
Great. Thanks for taking my questions. Thanks, specifically to Paul it's been great working with you over the last few years and I have a question for Brian.
Yeah, I do have a question for Brian and I'm wondering if you can share with us.
Wamsi Mohan: So there is a secular growth story. We are growing faster than the markets. When you break that down, automotive is up about two heavy vehicle offer. One aerospace is up 28 percent and an industrial market is down 9 percent. So the big impact in terms of 2023 is really the industrial business in terms of that being down 9. When you look at the auto market specifically because that tends to be the market that we talk about when we talk about secular growth but the reality is there's secular growth in all of the markets that we serve.
Any initial thoughts you have on the company and specifically what you think your priorities are likely to be in the near and longer term.
So I'm I'm about an hour and a half in so a little bit more time to be able to truly digest, but I guess I would say you know what brought me its insider.
I'm certainly very excited about the core business in the electrification trends that exist.
Watching the Investor day back in September you know certainly thinking that those targets that were laid out are achievable.
Wamsi Mohan: If you look at the IHS forecast for the full year right now, it's about 3% auto growth. We're at one and a half when you consider constant currency worth for. So we are growing faster than the production growth rate as forecasted by IHS. There are a lot of moving parts in here. Okay, but I think part of the challenge is we get into all of the details on it, which are many, but there are really, there are two structures that are impacting outgrowth to market in auto and there are two temporary things.
And really you know Paul has developed a great team and has a great management team here that are then I get to work with so more to come over the coming months, but I'm excited to be here.
Great. Thank you for that.
You know I think this question was just asked perhaps in a slightly different way, but I'm.
I'm, hoping Jeff.
Jeff perhaps you can discuss the variability of your print position across the local China EV companies.
You know, it's one thing to talk about you know 1.25 times the content of a local I C E, but where we as investors can often get into trouble as you close these statistics and they may be very correct relative to where you have design wins, but.
Wamsi Mohan: The structural items are the shift in China from multinational to local. That's a significant impact to Sensata, right? Now that 5 percentage points share shift occurred during 2023. But as I had mentioned in my prepared comments, we believe that stabilized now, but we will watch that very closely. And the way that we will address it is by accelerating our new business opportunities with the low local OEMs, not only on internal combustion engines, but on the EV platforms.
There is an issue relative to the breath, sometimes where you know maybe you're not.
Making explicit bet, but where you wind up getting bigger content wins.
Wamsi Mohan: And we're making progress on that with 35% of their production during 23V EVs and us being higher revenue per vehicle on EVs, that demonstrates the progress that we're making there. But in order to become more equivalent, multinational and local, we've got a lot of work to do. But that is our strategic focus. The second is the EV shift in Europe. And so if you, if, again, in my prepared comments, I talked about the fact that because we were behind on the original sourcing of associated with launches in Europe around EVs, we're about half of content, or the half of revenue per vehicle in Europe on EVs versus internal combustion.
You know those Oems might not achieve the same growth of the growth they aspire to and others, where you don't have as much preposition might wind up.
Ramping and so I'm, hoping you can address the variability from OEM to OEM in China, and maybe what percentage of them, you're working with and how old was at 1.25 times content varies familiar I'm doing them. Thank you.
Yes, so you're absolutely right that the.
The mix of the business matters and engaging with the winters matters and that's.
Candidly never bit more challenging given the disruption that is occurring in the automotive market.
And so from an EV specific standpoint.
Wamsi Mohan: We've got a number of wins that we've had that will materialize over the next several years, that will address that issue. And we're not done. We are continuing to work with those customers to get more revenue per vehicle on the EV platforms as that take rate, etc. So those are the two structural, very strategic issues. There's a lot of other noise in the system associated with things that are going on, but those are the two things that are having the biggest impact in terms of structural in the two.
It's very clear right now.
That's the two global leaders are Tesla that'd be wider.
We're very well positioned with Tesla, we're very broadly.
And.
They're they're above our average.
Net revenue per vehicle. So that's a very good thing.
Why do I feel as though we're very well positioned also but the challenge with BYD is they are vertically integrated from electrification specific component standpoint, we're working with them very closely to your broader question regarding China Oems.
Wamsi Mohan: More transitory or temporary items are the launch delays that we've talked about. So there's a significant amount of launch delays that have happened during 2023 that we were counting on our revenue that would have changed that Elfroth rate. And again, we're working with customers around creating more certainty around those to make sure that they and we are ready to launch when they're when we've intended. And the second is around the D3 impact in the fourth quarter.
I think where we've cast the net very wide in terms of who we're working with.
I think.
Clearly, we could say the top five local Chinese Oems, we have good relationships with.
Wamsi Mohan: So we have more revenue per vehicle with the D3 when that revenue goes down creates a mixed problem for us, but those last two items will fix themselves with more engagement with our customers and the resolution on the AW. UAW strike. So the other two, we will keep you posted on them. We've got to make sure that we continue to drive the strategy to address those issues.
But there are a lot of Chinese Oems.
I I can't definitively say that we're working with all of them, but I feel as though we're well positioned with the ones that are gaining market share in that and the big question that we're grappling with as it relates specifically to China.
When will that consolidation happening and where will the consolidation happening. So I personally don't think that's going to happen anytime soon.
Paul Vasington: Hopefully, that gives you more color on that. And on the effects, I mean, the effects will continue to be ahead wind next year. I would estimate some around 50 basis points impact operating income and operating income margin. Which is in the line with what we, I think we should, what we shared on the last day. And that's based on current race, so how we exit, year, speed state the same, that's what I would expect. Thanks, Wamsi, for the question.
But the evidence of who the winners will be not only in the Chinese market.
But potentially in the global market are starting to develop in terms of share that's being accumulated.
Accumulated and that's where we're focused as we continue to focus the strategy and making sure that we're working with the folks that we know will be the winners that's where we're making sure that we continue to win with the work that the players that have experience behind them that demonstrates that.
Amit Daryanani: Thank you, and our next question comes from Amit Daryanani with Evercola, please go ahead. Good morning, thanks for giving my question. Thanks, I have to as well. You know, close on the auto on your December quarter expectations for automotive revenues to be down 10%. Can you just talk about how do you think that stacks up across the various geographies? And then any initial sense of what Canada 24 production could look like across the PGOs?
Specific point of the one two times.
That's a year to date in 2023, when you look at collectively all of our revenue with local Chinese makers, and we split that between combustion engine platforms and EV platforms.
That's the mix when you look at their content.
The revenue per vehicle on I see its about 20 and you look at the E.
Amit Daryanani: Yeah, so on the idea and I spoke to the auto production versus what our market rate was for the full year. If I remember correctly in the first quarter, we were growing faster than the market that the IHS market and second quarter, we were behind third quarter, we were about to put on and then the fourth quarter, we are behind. So, and that's due to the primarily the mix associated with D3, so the expected drop in production on D3 has a revenue impact to us that's causing our adjusted market in auto, but across the year on it, we're pretty much on top of the IHS forecast.
E V makers, it's it's 1.25 times that but we will continue to monitor it and our goal would be to make sure we accelerate that given 35% of the vehicles produced in China. This year are going to be new energy vehicles.
Thanks for the questions.
Thank you and our next question comes from Tristan <unk> with.
Wolfe Research. Please go ahead.
Hey, Thanks, so much for taking my questions and.
Thanks, Paul for all the all the help over the years.
Maybe coming back to the to the easy targets he talked about strong content and more.
On North American Oems.
Amit Daryanani: So, mix will move around based upon OEMs that produce cars and the platforms that are produced, but across the market across the year, it seems to be pretty stable. And to clear up in case there's any confusion on it that the numbers that are on that slide are meant to be market growth numbers, not our revenue growth. Obviously, they are they are weighted for our revenue across OEMs and geographies. They line up the auto number at least lines up with the IHS forecast for production. Got it.
But the ones we are.
But they are the ones, where we're seeing.
And push outs and when.
Our prior expectations appear to be evolving or really.
Biggest with these north American automakers.
You know for example, G M previously talked about adding 600000.
The VEB.
Large truck capacity by next year.
The entire industry seems to have been targeting something like $1 billion of happy units.
In that in that area by 2026 unitary market for large trucks. It is about $2 7 million.
Jeffrey Cote: And then, yes, let's go back to the discussion you had around the impact from the UAW strike. And I feel you understand why you have an outside impact on your operating profit line in the December quarter. Is it fair to think that that should reverse back IE the incremental margins should be much stronger as those revenues potentially come back in the first half of the year? Yes, definitely. So, as that revenue comes back, they'll absorb the overhead we have associated with that, and we would expect the incrementals to come back just like they would go down on the fourth floor.
It does appear that there could be.
Changes to those expectations and I guess, what I'm, what I'm asking is if that were to happen would that create an outsize headwind.
Two cents on it.
Yeah. So.
The point is taken out.
Really watching closely to understand what their forecast look like as.
As we continue to progress forward right. There are some outside dynamics that are causing some of the changes in their estimates right now in terms of negotiation with the UAW and other things certainly consumer demand for electric vehicles.
Jeffrey Cote: So, without, you know, we're guiding to around 19% midpoint of guidance on operating income, we'd be at or slightly above what we had originally guided if not for the UAW strike. So, yes, we're very focused on making sure we show continued progress toward our operating income index target. Thanks.
Specifically as it relates to the truck market.
Amit Daryanani: I'm in for the questions.
You know are causing our customers to think about that but I'll go back to the comments I have made earlier, which is.
Clearly if EV penetration in the North American market, which is where we have the greatest.
Stephen FOX: Thank you. And our next question comes from Stephen Fox at Fox advisors. Please go ahead.
Revenue per vehicle slows that will be that will create a challenge in terms of achieving the $1 2 billion of revenue, but the Oems will need to do other things on those combustion engines to get to the emissions requirements over the next three five years and we're well suited.
Stephen FOX: Hi. Good morning. I had two questions as well. First of all, with regard to sort of the EV supply chain, there also seems to be concern, especially on the semiconductor front with the level of inventories that some of the OEMs were sitting on as EV demand is kind of slowed a little bit here. Can you talk about, you know, how you inventory OEMs and how you think maybe your inventory sit there and then I... Yeah, so let me address it on our supply side and then on how we deal with the demand from our customer side.
To go after that right. So they had stalled and paused all of their compression engine development.
If they changed direction, they will need to restart some of those and that will represent opportunity for a center or an accelerated basis to make sure that we're addressing those issues and as I've also mentioned that as an area, where we have demonstrated margin profile. That's superior to the electric vehicle component area now we have a road map.
Stephen FOX: So I'm hesitant to claim the end of supply chain challenges. It's been a very challenging couple years, but clearly things have abated considerably in terms of the overall availability of parts. That's not a universal message because I think when you talk about electronics, there are certain types of electronics that are still scarce and short on supply versus others, but generally we're in a much better place and we feel as though the inflationary pressures that were driven by that supply demand dynamics are starting to to balance out a little bit.
On the electric vehicle specific components to get to company margins, but there's a lot of work that we need to do to get there. So there's a put and take the delay or slowing of it we'll maybe have a little bit of impact on revenue, but it will have a positive bottom line impact hopefully that addresses your concerns.
Okay great.
Just one last quick one I mean anything that youre seeing on the tier two supply chain.
Stephen FOX: So that's on the supply side. On the customer side, as we've talked about, we were a make to we make to the order, right, we're a just in time inventory model. There was a point in time when customers would quite literally take any kind of anything that we could produce to make sure that they had parts available to them. We feel as though that's reversed pretty dramatically due to changes in the market, but also because we feel as though we've been there for customers, so we have a proven track record of being able to deliver when they say they need it.
Especially as the industry starting to ramp back up on the UAW strike.
You know how confident are you that you can.
The tier two supply base can ramp up as well.
Yeah, So our all of our OEM customers have been very.
They've communicated a lot with often with all of their suppliers regarding readiness I can't speak to what others have done in terms of making sure they're idling ready to go when when the when that demand comes back.
Stephen FOX: So we, you know, I think we estimated it's very difficult estimate, but I think we had estimated it's still maybe 15 to 20 million dollars of inventory. Our parts in warehouses or in the partially completed vehicles, but it's not a meaningful number anymore in terms of the long cycle OEM market where we have more visibility given the just in time inventory modeling that our customers have on the industrial side, more short cycle businesses, much harder to get a really good beat on that and clearly some of the decline that we've experienced during 2023 in that market is not only market but destocking that's happening, but that will have a positive impact when when restocking does occur, it's been a tough year for that market, but you know, specific to EVs, we don't see customers cutting orders because they have components specific to our their EV production with Sinzada. I think that we've stabilized in terms of, you know, shipping them parts they need to make the product for their customers.
But I can tell you that where we're ready to go and if some tiers message not from a lack of communication on the part of their customers regarding being ready for their.
Their response, so and and I would also mentioned, where we are directed by or where we serve those tiers.
We're having an open dialogue with them as well so we feel as though this although will the restart will have some some bumps associated with it I feel as though what that well plan, where we'll be able to restart pretty pretty effectively thanks, Chris for the questions.
Thank you and our next question comes from Joe Giordano with Cowen. Please go ahead.
Hey, guys good morning.
Morning, Joe.
Juggling a bunch of calls so apologies. If this was asking I just just curious on the guide right. So like an Investor day, you just talk about the thought process didn't kind of going out of your way in giving a for Q guide when there was already kind of like an uncertain market right now and then you know it almost compounds having to cut it here. So like what was the thought process.
Jeffrey Cote: That's that's really helpful and that leads me into my second question, which was on industrial markets. It seems like these markets are getting worse, but everyone defines industrial differently across the supply chain. So can you sort of talk about off of these decline year over year declines that you're seeing like what is sort of a path to recovery or whether we're not even in their recovery phase yet. Thanks. Yeah, so, you know, we do a lot of modeling.
Kind of going into that event as to like why you felt compelled to put it out there and when there was still like the strike going on.
Well.
We obviously felt good about Q3, which we deliver.
And so and we felt we should give expectations on Q4, which we have pretty good confidence at the time based on our Phil.
And we're obviously putting out a three year guide that would be underpinned based off our 2023 estimates so at all.
Jeffrey Cote: We have a long history in these markets that we serve to understand based on PMI metrics and other third party metrics that have a pretty good correlation to the demand for our product globally across the individual regions. Clearly, we've gone through a destocking period Steve and so we've had order rates lower than where the market is and when you look at the 20 year history of that, you know, it snaps back when there's a recovery.
It tends to put that out you were clear that our guide for Q4 was based on IHS estimates at the time.
Which had about $15 million of.
Neither lower production because of the strike or that they had built inventory that they would consume and we felt that was a.
A prudent.
Our assumption to use which underpinned the guy and now we're seeing that the strike going on longer.
And we're using IHS as current estimate which gives us about a $40 million $35 million to $40 million revenue impact.
Jeffrey Cote: The fourth quarter is down 19%. Market Wise, industrial quarter of a quarter. That's accelerated from where it wasn't the third quarter. So, I'm not claiming that the bottom has been achieved on that, but it will hit at some point. My hope would be that the fourth quarter would be the bottom of that and then going into 2024, we did our to see that recover from a revenue basis standpoint. Our industrial business is pretty flat, 2, 3 to 2, 4.
So we were using a third party as a way of developing the guy and we're updating it based on new information I think that's appropriate and it felt like it helped integrate.
Performance in Q3 with the full year 'twenty, three and that our three year expectation that we provided so.
So I think it was the right thing to do and I and I think whats driving our lower guide is in fact, the UAW activity and how it is progressing no one's going to be able to know the number right.
Jeffrey Cote: So, from a sequential standpoint, it looks like it's stabilized, and then we'll start to see your recovery on that. Last point, I'd make there is the might be the obvious, but that's a very hard margin business for us, relative to our auto and HVR business. So, when that comes back, that will create some leverage in terms of incremental margin for the company as well.
Whenever we put out there you know it's our best estimate based on the best estimates out there to provide that but when we get to the end of the quarter, we'll know for sure but we feel confident that this is the best estimate we can put out there for Q4 at this time.
Stephen FOX: Great, super helpful. Thank you. Thanks, Dave.
Thanks, Scott Thanks, guys.
And our next question today comes from Matt Sheerin with Stifel. Please go ahead.
Yes, Thanks, and good morning, Jeff I'm, hoping you can give us more color on what you're seeing in the <unk> market.
Luke Young: And our question comes from Luke Young, who is there? Please go ahead. Good morning. Thanks for taking the questions and Paul Bess wishes in your retirement as well. Jeff, take a picture you cited in increased pace of new business wins with local OEMs and China, including country specific contactors. I just hope you can expand on the increased traction that you're seeing there, specifically, I guess within contractors, especially in what, you know, we look at a few years from now.
That was down sequentially and year over year for you and I know that market has been weak, but you've also been talking about in recent quarters about continued market outgrowth. So could you share what you're seeing in terms of outlook from customers and by region and are you expecting it to recover anytime next year.
Yeah. So in in the third quarter, the market was up a little bit.
Luke Young: What a reasonable target might be for local EV content. And versus what your historical content has been with the multinationals on ice platforms in China, thank you. Yeah, so some of you may remember that in 2022, no, it was 21, late 21, we entered into the J.B, with Iraq, because what we had observed was that the vast majority of the vehicles in China, the electric vehicles in China that would be improved were lower voltage.
Call it 2% third quarter versus third quarter of last year.
When you look at what we're guiding to it's down one or 2% versus the fourth quarter of last year.
And then on a sequential basis, it's a decline but it is a typical seasonal decline third to fourth quarter and the H B O market into our market to your broader question regarding.
That overall market, it's disproportionately impacted by China on road.
Luke Young: So let me quantify, under 400 volt systems, where it's a lot of the newer systems in Europe and North America are above 400 volt. We didn't, we had not invested in it. We didn't have a great solution at the low 400 volt. So we partnered with the, with our, with Jake, with this J.B, with charard, we've seen accelerated progress there around, specifically, contactors. Now, we, we've made some progress on that as evidence by the fact that when you look at a local maker, a local OEM, we have, you know, 1.25 times the revenue per vehicle on electric vehicle versus on a combustion, but a lot more work to do to get that to the equivalent in the United States.
There was some strength in some of the other markets that we serve.
And again much like the comments that I provided on the industrial market. It's been declining for you know 12 to 18 months at this point and the expectation would be that it will come back the seasonality of that business tends to be in that sort of 12 to 24 months timeframe.
Thanks, Matt.
Thank you and our next question comes from Chris Snyder at UBS. Please go ahead.
I think I wanted to ask on auto.
Up 6% organic you know closer to flattish production year on year, but let me know if you're going to see that difference that's a pretty pretty solid outgrowth, probably one of the better quarters, we found in the wild.
Luke Young: But progress being made, it's not only going to be contactors, right? So there are other applications that we're serving that are EV specific. As you know, around breaking, around tire pressure, around environmental control that represent opportunities for us. Good progress there. Our goal, as we've talked about, is to have double the EV content by 2026 on a global basis. When you look across the globe by 2026, based upon where we are today, North America will be above that two times.
As a function of comps, maybe just sort of talk about why you know the outgrowth came in better from where it's been.
Yeah, I mean, we've talked about the fact that outgrowth is a measure that we really shouldn't be looking at over a longer period of time, rather than in any quarter because mix of what our customers actually make matters in terms of what that looks like.
Daily we would have the exact same amount of revenue per vehicle across the globe, but we know that's not possible based upon you know the relationships. The individual relationships. We have so I would say you know there are a number of things that we know drive outgrowth in the automotive business in terms of not only EV penetration, but the.
Luke Young: China will be approaching the two times, and then Europe, I think, will be the one that will be not far behind, but will be, you know, accelerating to get there, to create the average of two times across. Delta Company. So continue our progress, you know, more to come in terms of specific envial wins in that area. Thank you for that.
Man out of other applications that we serve there were many.
Jeffrey Cote: And just to fall up in the near term, if I look back to strike impacts in the business in 2019, I think you said about 10 million in loss revenue in North America. Just hoping you could bridge that to the 40 million or so you're expecting this year just trying to see if there's something in terms of what's going on in the channel, or just generally how this strike is different from the Sensata standpoint, given you didn't impact that aren't as meaningfully different.
But I really would encourage folks to look at outgrowth across a longer period of time than a quarter.
Because a lot can change the dynamics in an individual quarter.
Thanks for the question.
I've talked with you.
Ladies and gentlemen, this does conclude our question and answer session I'd like to turn the conference back over to the management team for any coupon or remarks.
Thank you Rocco I'd like to thank everyone for joining us. This morning, we will be participating in a few investor conferences later during the quarter in Q4.
Jeffrey Cote: Thank you. You're trying to reference back to the priority, which is the UAW strike in 2021. Is that the question? Yeah, the 2019 strike, you decided about 10 million in loss revenue in North China. Where that was 35 to 40 right now. Nobody of units are pretty similar. Yeah. Yeah, so listen, I mean, we're in our 40 million impact, we're looking at what IHS says ultimately the impact will be. As I had mentioned, that ties pretty closely with the where rates are and where we are in a fill rate.
New York Stock Exchange is answering in industrial virtual conference on November 14th we will participate in <unk>.
So join an alliance Bernstein Industrial Investor Conference down in New York on the point of view.
Remember.
Melius Industrial Investor Conference in New York again on December 7th and Oppenheimer is sponsoring a technology Investor Virtual conference on December 14th.
Presenting.
We look forward to seeing you at one of these events or on our fourth quarter earnings call in late January 2024.
Jeffrey Cote: I think we're 91% filled against the forecast that we have that's pretty typical and that too is normalizing. So I feel as though it's a pretty good estimate. I think that how the union has dealt with this one under Chantane's leadership has been anything but consistent with the past. And so we're following based upon the production rates. The fact that they have tentative agreements, obviously very positive. But we'll watch closely to start up to see whether or not we have that full 40 million impact or how that transitions as we go through the year.
Thank you for joining us this morning and for your interest in some sort of Rocco you can now end the call.
Thank you we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Jeffrey Cote: But yes, that's the math on the production rates, which is about we remember we had talked about 7 to 8 million per week. If it if everything shut down, so we're at the point where it's a little less than half the full quarter impact if everything had been shut down for the full quarter.
Unknown Executive: Thanks. Thanks for taking my questions. Thanks, specifically to Paul. It's been great working with you over the last few years.
Brian Roberts: And I have a question for Brian. Yeah, I do have a question for Brian. I'm wondering if you can share with us.
Brian Roberts: Any initial thoughts you have on the company and specifically what you think your priorities are likely to be in the near and longer term. So I'm about an hour and a half in so a little bit more time to be able to truly digest, but I guess I would say what brought me to some SATA is, you know, I'm certainly very excited about the core business and the electrification trend that exists.
Brian Roberts: You know, watching the investor day back in September, you know, certainly thinking that those targets that were laid out are achievable. And really, you know, Paul developed a great team and there's a great management team here that I get to work with.
Brian Roberts: So, you know, more to come over the coming months, but I'm excited to be here. Great. Thank you for that.
Jeffrey Cote: And, you know, I think this question was just asked, perhaps in a slightly different way, but, you know, I'm hoping Jeff, perhaps you can discuss the variability of your print position across the local China EV company. You know, it's one thing to talk about, you know, 1.25 times. Williams, the content of a local ICE but where we as investors can often get into trouble is you quote these statistics and they may be very correct relative to where you have design wins but there is an issue relative to the breadth sometimes where you know maybe you're not making an explicit bet but where you wind up getting bigger content wins, you know those weems might not achieve the same growth or the growth they aspire to and others where you don't have as much preposition might wind up ramping and so I'm hoping you can address the variability from OEM to OEM in China maybe what percentage of them you're working with and how that 1.25 times content varies from OEM to OEM.
Jeffrey Cote: Thank you. Yes so you're absolutely right that the mix of the business matters and engaging with the winners matters and that's candidly never been more challenging given the disruption that is occurring in the automotive market and so from an EV specific standpoint it's very clear right now that the two global leaders are Tesla and BYD. We're very well positioned with Tesla we're very broadly and they're above our average net revenue per vehicle so that's a very good thing.
Jeffrey Cote: BYD I feel as though we're very well positioned also but the challenge with BYD is they are vertically integrated from a electrification specific components standpoint we're working with them very closely. To your broader question regarding China OEMs we've cast the net very wide in terms of who we're working with. I think clearly we could say the top five local Chinese OEMs we have good relationships with but there are a lot of Chinese OEMs so I can't definitively say that we're working with all of them but I feel as though we're working with them.
Jeffrey Cote: So we're well positioned with the ones that are gaining market share and the big question that we're grappling with as it relates specifically to China is when will that consolidation happen and where will the consolidation happen and so I personally don't think that's going to happen anytime soon but the evidence of who the winners will be not only in the Chinese market. But potentially in the global market is starting to develop in terms of share that's being accumulated and that's where we're focused.
Jeffrey Cote: As we continue to focus the strategy and make sure that we're working with the folks that we know will be the winners that's where we're making sure that we continue to win with the players that have experience behind them that demonstrates that. So the specific point of the 1.2 times that's a year to date in 2023 when you look at collectively all of our revenue with local Chinese makers and you split that between combustion engine platforms and EV platforms.
Jeffrey Cote: That's the mix. When you look at the content or the revenue per vehicle on IC, it's about 20 and you look at the EV makers, it's 1.25 times that. But we will continue to monitor it and our goal would be to make sure we accelerate that given 35% of the vehicles produced in China this year are going to be new energy vehicles. Thanks, Will, for the question.
Jeffrey Cote: Thank you. And our next question comes from Shreyas Patil with Wolf Research. Please go ahead. Hey, thanks so much for taking my questions and thanks Paul for all the all the help over the years. Maybe coming back to the to the easy target. So you've talked about strong content on North American OEMs. But the ones we are, but they're the ones where we're seeing plan pushouts and we're prior expectations appear to be evolving are really big.
Jeffrey Cote: Biggest with these North American automakers. You know, for example, GM previously talked about adding 600,000 units of EV large truck capacity by next year and the entire industry seems to have been targeting something like a million and a half units in that in that area by 2026. The entire market for large trucks is about 2.7 million. So it does it does appear that there could be changes to those expectations. I guess what I'm what I'm asking is if that were to happen.
Jeffrey Cote: Would that create an outsize headwind to Cincinnati. Yeah, so the point is taken out, you know, I am really watching closely to understand what their forecast look like. You know, as we continue to progress forward, right, there's some outside dynamics that, you know, are causing some of the changes in their estimates right now in terms of negotiation with the UAW and other things. Certainly consumer demand for electric vehicles, specifically as it relates to the truck market, you know, we're causing our customers to think about that, but I'll go back to the comments I had made earlier, which is clearly if EV penetration in the North American market, which is where we have the greatest revenue per vehicle flows.
Jeffrey Cote: That will be that will create a challenge in terms of achieving the 1.2 billion of revenue, but the OEMs will need to do other things on those combustion engines to get to the emissions requirements over the next three, five years. And we're well suited to go after that, right. So they had stalled and paused all of their combustion engine development. If they change direction, they'll need to restart some of those and that will represent opportunity for a center accelerated basis to make sure that we're addressing those issues.
Jeffrey Cote: And as I've also mentioned, that is an area where we have demonstrated margin profile that's superior to the electric vehicle component area. Now, we have a road map on the electric vehicle specific components to get to company margins, but there's a lot of work that we need to do to get there. So there's a put and take that delay or slowing of it will maybe have a little bit of impact on revenue, but it will have a positive bottom line impact.
Jeffrey Cote: Hopefully that addresses your concern. Okay, great. Just one last quick one. I mean, anything that you're seeing on the Tier 2 supply chain, especially as the industry is starting to ramp back up on the UAW strike, you know, how confident are you that you can, that the Tier 2 supply base can ramp up as well. Yeah, so all of our OEM customers have been very, they've communicated a lot with us and with all of their suppliers regarding writing this.
Jeffrey Cote: I can't speak to what others have done in terms of making sure they're idling ready to go when that demand comes back, but I can tell you that we're ready to go. And if some tiers miss, it's not from a lack of communication on the part of their customers regarding being ready for their response. So, and I would also mention where we are directed by or where we serve those tiers. We're having open dialogue with them as well.
Jeffrey Cote: So, we feel as though this, although we'll, the restart will have some, some bumps associated with that feel as though it's a well planned, we'll be able to restart pretty effectively. Thanks for your questions. Thank you.
Joseph Giordano: And our next question comes from Joe, Joe Donna with TV talent. Please go ahead.
Jeffrey Cote: Hey guys, good morning. Morning, Joe. And a problem, not the juggling a bunch of calls, so apologies if this is asked. I just, just curious on the guide, right? So like an investor day, you just talk about the soft process and kind of going out of your way and giving a 4Q guide when there was already kind of like an uncertain market right now. And then, you know, it almost compounds having to cut it here.
Jeffrey Cote: So like, what was the soft process kind of going into that event is still like why you felt compelled to put it up then when there was still like the strike going out? Well, we obviously felt good about Q3, which we delivered. And so, and we felt we should give expectations on Q4, which we had pretty good confidence at the time based on our fill. And we're obviously went out of three or died.
Jeffrey Cote: That would be underpin based on our 2023 estimate. So it all made sense to put that out. We were clear that our guide for Q4 was based on IHS estimates at the time, which had about $15 million of either lower production because of the strike or that they had built inventory that they would consume and we felt that was a prudent assumption to use, which underpin the guide. And now we're seeing the strike go on longer.
Jeffrey Cote: And we're using IHS estimate, which gives us about a $40 million, $35, $40 million around an impact. So we were using the third party as a way of developing the guide and we're updating it based on new information. I think that's appropriate. And I felt it helps integrate performance in Q3 with the full year 23 and then our three year expectation that we provide it. So I think it was the right thing to do.
Jeffrey Cote: And I think what's driving our lower guide is, in fact, the UAW activity and how it's progressing. No one's going to be able to know the number, right? I mean, whatever we put out there, you know, it's best estimate based on the best estimators is out there to provide that. But when we get to the end of the quarter, we'll know for sure. But we feel confident that this is the best estimate that we can put out there for Q4.
Unknown Executive: Thank you.
Unknown Executive: And on a question today, Christopher, I'm sharing this before. Yes, thanks, and good morning. Jeff, I'm hoping you can give us more color on what you're seeing in the HVOR market.
Jeffrey Cote: [inaudible] Thank you. Thank you. [inaudible] Yeah, I mean, we've talked about the fact that Elbroth is a measure that we really should be looking at over a longer period of time rather than in quarter because mix of what our customers actually make matters in terms of what that looks like. Ideally, we would have the exact same amount of revenue per vehicle across the globe. But we know that's not possible based upon, you know, the relationships, the individual relationships we have.
Jeffrey Cote: So I would say, you know, there are a number of things that we know drive. Elbroth and the automotive business in terms of not only EV penetration, but the fan out of other applications that we serve. There are many. But I really would encourage folks to look at Elbroth across a longer period of time than a quarter because a lot can change the dynamics in an individual quarter.
Unknown Executive: Thanks for their questions. Thank you.
Unknown Executive: Thank you for joining us this morning. We'll be participating in a few investor conferences later during the quarter into four. New York Stock Exchange is sponsoring an industrial virtual conference on November 14th. We'll participate in also joined an Alliance Bernstein industrial investor conference down in New York on the point of the month of November. Milia's industrial investor conference in New York began in December 7th. And Oppenheimer is sponsoring a technology. Investors virtual conference on December 14th will. Investors virtual conference on December 14th. We'll be presenting. We look forward to seeing you at one of these events, or on our fourth quarter earnings call in late January, 2024.
Unknown Executive: Thank you for joining us this morning, and to your interest in Sensata, Rocco, you can now end the call. Thank you.
Unknown Executive: We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day. Thank you.