Q4 2023 Sensata Technologies Holding NV Earnings Call
Operator: Good day, and welcome to the Sensata Technologies fourth quarter 2023 earnings call. All participants will be in listen only mode.
Good day and welcome to the since sort of technologies fourth quarter 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.
Operator: 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 may press star then 1 on your touchtone phone.
<unk> 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.
Operator: To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Mr. Jacob Sayer, VP of Finance. Please go ahead.
Jacob A. Sayer: Thank you, Drew. Good morning. I'd like to welcome you to Sensata's fourth quarter and full year 2023 earnings conference. Joining me on today's call are Jeff Cote, Sensata's CEO and President, and Brian Roberts, Sensata's 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. The PDF of this presentation can be downloaded from Sensata's investor relations website. This conference call is being recorded, and we 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 Sensata's Safe Harbor Statement on slide 2.
Jacob A. Sayer: Thank you drew good morning, everyone.
Jacob A. Sayer: I'd like to welcome you to some thought as fourth quarter and full year 2023 of earnings Conference call. Joining me on today's call are Jeff quotations at as CEO, and President and Brian Roberts since August.
Jacob A. Sayer: Chief Financial Officer.
Jacob A. Sayer: In addition to the financial results press release, we issued earlier today, we'll be referencing the slide presentation during today's conference call.
Jacob A. Sayer: The PDF of this presentation can be downloaded from <unk> Investor Relations website.
Jacob A. Sayer: This conference call is being recorded and we 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.
Jacob A. Sayer: During this conference call, we will make forward-looking statements regarding future events and the financial performance of the company that involve certain risks and uncertainties. The company's actual results may differ materially from the projections described in such data. Factors that might cause such differences include, but are not limited to, those discussed in our Forms 10-K and 10-Q, as well as other filings. We encourage you to review our GAAP financial statements in addition to today's presentation, because most of the information that we'll discuss during today's call will relate to non-GAAP financial statements. Our GAAP and non-GAAP financials, including reconciliations, are included in our earnings release and the appendices of the presentation material.
Jacob A. Sayer: During this conference call, we will make forward looking statements regarding future events of the financial performance of the company that involve certain 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.
Jacob A. Sayer: K and 10-Q as well as other filings with the SEC.
Jacob A. Sayer: 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.
Jacob A. Sayer: Our GAAP and non-GAAP financials, including reconciliations are included in our earnings release and the appendices of the presentation materials.
Jeff Grossman: Jeff will begin today with highlights of our business results for 2023. He'll then provide a few thoughts on our end markets and overall expectations for our financial performance for 2024. Brian will cover our detailed financials for the fourth quarter and full year 2023, updates on capital deployment, and he will discuss our financial guidance for the first quarter of 2024. We'll then take your questions after our prepared remarks. Now I'd like to turn the call over to Sensata's CEO and President, Jeff Grossman. Thank you, Jacob, and welcome, everyone.
Jacob A. Sayer: Jeff will begin today with highlights of our business results. During 2023, he'll then provide a few thoughts on our end markets and overall expectations about our financial performance for 2024.
Jacob A. Sayer: Brian will cover our detailed financials for the fourth quarter and full year 2023 updates on capital deployment and he will discuss our financial guidance for the first quarter of 2024, well then take your questions. After our prepared remarks.
Jacob A. Sayer: Now I'd like to turn the call over to some sort of CEO and president Jeff. Okay. Thank you Jacob and welcome everyone.
Jeff Grossman: On our fourth quarter 2022 earnings call, 12 months ago..., we discussed three key themes that would shape our future performance. Those key themes were an unprecedented opportunity in electrification, an updated capital allocation strategy focused on reducing gross and net leverage while de-emphasizing M&A, and a focus on our financial performance to drive top and bottom line improvement against a challenging market backdrop. Let me take a minute to provide some thoughts on our progress against these three drivers of our success. As you can see on slide three, our conviction that electrification is a key component of our future continues to grow. Electrification revenue grew approximately 50% year-over-year to $700 million, or about 17% of total revenue in 2023. For comparison, electrification revenue was less than 3% of our total business in 2019. Between 2021 and 2023, we secured more than $1.3 billion in electrification new business wins. The development cycle of programs typically includes launch timelines of three to four years after the award.
Jeff: On our fourth quarter 2022 earnings call 12 months ago, we discussed three key themes that will shape our future performance.
Jeff: Those key themes were an unprecedented opportunity in electrification.
Jeff: The updated capital allocation strategy focused on reducing gross and net leverage while deemphasizing M&A.
Jeff: And a focus on our financial performance to drive top and bottom line improvement against a challenging market backdrop.
Jeff: Let me take a minute to provide some thoughts on our progress against these three drivers of our success.
Jeff: As you can see on slide three our conviction that electrification is a key component of our future continues to rise.
Electrification revenue grew approximately 50% year over year to 700 million or about 17% of total revenue in 2023.
Jeff: For comparison electrification revenue was less than 3% of our total business in 2019.
Jeff: Between 2021, and 2023, we secured more than one 3 billion and electrification new business wins.
The development cycle of programs typically include launch time lines of three to four years after the award.
Jeff: These wins gives me great confidence that electrification is an increasingly important driver of our growth.
Jeff Grossman: These wins give me great confidence that electrification is an increasingly important driver of our growth. While adoption of electrification technology, especially in the automotive sector, may fluctuate from period to period, this overall trend will only increase. Sensata is well-positioned to capture a meaningful share of the electrification market not only in light vehicles but also in heavy vehicles and in the industrial infrastructure needed to enable increased electrification.
Jeff: While adoption of electrification technology, especially in automotive may fluctuate from period to period.
Jeff: This overall trend will only increase.
Jeff: Since <unk> is well positioned to capture a meaningful share of the electrification market.
Jeff: Not only in light vehicles, but also in heavy vehicles and then the industrial infrastructure need.
Jeff: Needed to enable increased electrification.
Jeff Grossman: That said, our safe and efficient business continues to deliver significant value to our customers and our company. It provides Sensata with meaningful scale and efficiency, and it is an attractive revenue generator that offsets the fluctuations we may experience. The second key theme was around capital allocation. We made key strategic investments over the past couple of years based on careful evaluation of where we are seeing the most success. We determined that our best use of capital is to invest in electrification.
Jeff: That said, our safe and efficient business continues to deliver significant value to our customers and our company.
It provides insider with meaningful scale and efficiency and it is attractive revenue generator that offsets the fluctuations we may experience.
Jeff: The second key theme was around capital allocation.
Jeff: We made key strategic investments over the past couple of years is based on careful evaluation of where we are seeing the most success, we determined that our best use of capital is to invest in electrification.
Jeff: With a full set of leading edge capabilities now in house, we shifted away from M&A towards organic growth and reducing our net leverage.
Jeff Grossman: With a full set of leading-edge capabilities now in-house, we shifted away from M&A towards organic growth and reducing our net leverage. I'm pleased that we made good progress this year already, as gross and net leverage dropped to 3.8 and 3.2 times, down from 4.7 and 3.4 times, respectively. In 2023, we paid down approximately $850 million of higher interest rate debt by eliminating our term loan in the first half of 2023 and retiring our 2024 bonds last December. We also bought back $88 million of stock in the open market and paid shareholders $72 million in dividends.
Jeff: I am pleased that we made good progress this year already as.
Jeff: As gross and net leverage dropped to three eight and three two times down from 4.7, and 3.4 times respectively.
Jeff: Okay.
Jeff: In 2023, we paid down approximately 850 million.
Jeff: A higher interest rate debt by eliminating our term loan in the first half of 2023.
And retiring our 2024 bonds last December.
Jeff: We also bought back $88 million of stock in the open market and paid shareholders 72 million in dividends.
Jeff Grossman: We remain committed to deleveraging the balance sheet going forward while also opportunistically undertaking share repurchases. Prioritizing our investments is a core component of our overall capital allocation strategy. With electrification as the clear future for our company and the best area of focus for our team, we have narrowed our investments in Insights, focusing our efforts there on profitability. We are exploring strategic alternatives for the Insights business as we continue to hone our strategic focus and investment priorities. Finally, while Brian will take you through the numbers, let me discuss the third theme, around financial performance more broadly. The last several years have brought unprecedented change to the end markets that we serve, including the impact of the pandemic. Materials Supply Chain Disruptions, Extraordinary Inflation, and End Market Transformation
Jeff: We remain committed to the deleveraging the balance sheet going forward, while also opportunistically undertaking share repurchases.
Jeff: Prioritizing our investments is a core component of our overall capital allocation strategy.
Jeff: With electrification as declare future for our company and the best area of focus for our team.
Jeff: We have narrowed our investments and insights focusing our efforts there on profitability.
Jeff: We are exploring strategic alternatives for the insights business as we continue to hone our strategic focus and investment priorities.
Jeff: Finally, while Brian will take you through the numbers, let me discuss the third theme around financial performance more broadly.
Jeff: The last several years has brought unprecedented change to the end markets that we serve including the impact of the pandemic.
Jeff: Material supply chain disruptions extraordinary inflation and end market transformation.
Jeff Grossman: Throughout this period, we partnered effectively with our customers, helping them to solve their increasingly complex engineering and operational challenges. However, our business was not immune to these market pressures, and while we have worked to navigate these challenges, there has been a short-term impact on our business in the form of lower-than-expected revenue and adjusted operating margins. This has been disappointing.
Jeff: Throughout this period, we partnered effectively with our customers, helping them to solve their increasingly complex engineering and operational challenges.
Jeff: However, our business was not immune to these market pressures.
Jeff: And while we have worked to navigate these challenges there has been a short term impact to our business in the form of lower than expected revenue and adjusted operating margins.
Jeff: This has been disappointing.
Jeff: Specifically revenue in our automotive business was negatively impacted by region mix, especially in China, where local Oems have taken share from multinationals.
Jeff Grossman: Specifically, revenue in our automotive business was negatively impacted by region mix, especially in China, where local OEMs have taken share from multinationals, in Europe, where we have less content for a vehicle on EVs given our lower market share as compared to diesel or gas vehicles, and in North America from softening EV ramp-ups during the UAW strike. We have also experienced market declines and inventory de-stocking in our heavy vehicle off-road and industrial end markets, adding to the pressure on growth. Our team did an excellent job of recovering inflationary costs through increased pricing, but these efforts did not fully offset increased expenses. In addition, our business mix has changed, resulting in a decline in our higher-margin industrial business. These factors, along with the effect of exchange rates, have led to a decline in adjusted operating margins.
Jeff: In Europe, where we have less content per vehicle on evs, given our lower market share as compared to diesel or gas vehicles and in North America from softening EV ramp ups and the UAW strike.
We have also experienced market declines and inventory destocking in our heavy vehicle off road and industrial end markets, adding to the pressure on growth.
Jeff: Our team did an excellent job in recovering inflationary costs through increased pricing, but these efforts did not fully offset increased expenses. In addition business mix has changed resulting in a decline in our higher margin industrial business.
Jeff: These factors along with the effect of exchange rates has led to a decline in adjusted operating margins.
Jeff Grossman: Despite these headwinds, we have taken actions within our control to help offset these end-market and macro challenges. As we turn to 2024, on slide four. We believe our cumulative end markets will basically be flat to slightly down this year, but we expect to outperform those markets. In the automotive industry, the most recent IHS forecast indicates that 2024 vehicle production is expected to be down 50 basis points year on year. Additionally, additional evidence suggests that the automotive end market is returning to pre-pandemic market dynamics, including contractual price reduction. In heavy vehicle and off-road, third-party forecasts indicate that strength in heavy vehicle on-road in China will be offset by weaknesses in North America and Europe, as well as in off-road markets, resulting in low single-digit market declines in that market segment for us. Our industrial business, which includes HVAC, appliance, and general industrial, continues to see inventory destocking and a slow global construction market, impacting overall sales expectations.
Jeff: Despite these headwinds we have taken actions within our control to help offset these end market and macro challenges.
Jeff: As we turn to 2024 on slide four.
We believe our accumulative end markets will basically be flat to slightly down this year.
Jeff: But we expect our two.
Jeff: To outperform those markets.
Jeff: In automotive the most recent recent IHS forecast indicate that 2020 for vehicle production is expected to be down 50 basis points year on year.
Jeff: Additional evidence suggests that the automotive end market is returning to pre pandemic market dynamics, including contractual price reductions.
Jeff: And heavy vehicle and off road third party forecasts indicate that strength in heavy vehicle on road in China will be offset by weaknesses in North America and Europe as.
Jeff: As well as off road markets, resulting in low single digit market declines in that market segment for us.
Our industrial business, which includes HVAC appliance and general industrial continues to see inventory Destocking and a slow global construction market impacting overall sales expectations.
Jeff Grossman: We expect these trends to continue in the first half of the year and begin to subside in the second half of 2024. Finally, our aerospace business, albeit a smaller percentage of our overall business, continues to see strong growth and is expected to be up year over year. Thank you.
Jeff: We expect these trends to continue in the first half of the year and begin to subside in the second half of 2024.
Jeff: Finally, our aerospace business, albeit at a smaller percentage of our overall business continues to see strong growth and is expected to be year over year.
Jeff Grossman: Taking into consideration this anticipated flat to slightly down year-over-year market backdrop, we expect revenue growth of approximately 2 to 3 percent in 2024. This outlook is based upon continued launches and ramps of certain light vehicle platforms, the launch of new tire pressure sensors on heavy vehicles, the launch of new A2L leak detection sensors in HVAC, and continued growth of our aerospace and dynapower inverter and converter business units. Regarding our adjusted operating margins, structural changes in our business around pricing, revenue mix, and exchange rates have caused short-term margin erosion.
Jeff: Taking into consideration this anticipated flat to slightly down year over year market backdrop, we expect revenue growth of approximately 2% to 3% in 2024.
Jeff: This outlook is based upon continued launches and ramps of certain light vehicle platforms. The launch of new tire pressure sensors on heavy vehicles.
Jeff: The launch of new Hol leak detection sensors in HVAC.
Jeff: And continued growth of our aerospace and diner power inverter and convert our business units.
Jeff: Regarding our adjusted operating margin structural changes in our business around pricing revenue mix and exchange rates have caused short term margin erosion.
Jeff: We expect margins to increase slightly in the first quarter of 2024 sequentially from the fourth quarter of 'twenty three.
Jeff Grossman: We expect margins to increase slightly in the first quarter of 2024 sequentially from the fourth quarter of 2023 and then continue to grow sequentially each quarter of 2024 by about 20 to 30 basis points per quarter. We remain firmly committed and confident in reaching 21% or greater adjusted operating margins in 2026, despite these near-term headwinds. As shown on slide five, let me address the impact of MIX on our overall business. MIX matters to margins across our business units and product lines. It's noteworthy that even with our recent adjusted operating margin challenges and automotive exposure, Sensata continues to deliver top quartile margins as compared to our peers.
Jeff: And then continue to grow sequentially each quarter of 2024 by about 20 to 30 basis points per quarter.
Jeff: We remain firmly committed and confident in reaching 21% or greater adjusted operating margins in 2026 <unk>.
Jeff: Despite these near term headwinds.
Jeff: As shown on slide five let me address the impact of mix on our overall business.
Jeff: Mixed matters to margins across our business units and product lines.
Jeff: It's noteworthy that even with our recent adjusted operating margin challenges in automotive exposure Sensata continues to deliver top quartile margins as compared to our peers.
Jeff: As the charts demonstrate our automotive business concentration increased by two percentage points in 2023.
Jeff Grossman: As the charts demonstrate, our automotive business concentration increased by two percentage points in 2023, while our higher-margin industrial business decreased by a similar amount. This end market and product mix shift reduced operating margins by 40 basis points in 2023 compared to 2022. With the expectation that de-stocking will end, our industrial end markets will begin to grow again, reversing some of this trend later in 2024. In addition, given our long exposures to the euro and the yuan and short exposures to the pound and the peso, currency rates also impacted our margins meaningfully, by 60 basis points in 2023. On slide six, I want to provide color to our automotive business.
Jeff: While our higher margin industrial business decreased by a similar amount.
Jeff: This end market and product mix shift reduced operating margins by 40 basis points in 2023 compared to 2022.
Jeff: With an exception that Destocking will with the expectation that Destocking will end, our industrial end markets will begin to grow again reversing some of those trends later in 'twenty four.
In addition, given our long exposure to euro and one and short exposures to the pound and peso.
Jeff: Currency rates also impacted our margins meaningfully.
Jeff: By 60 basis points in 2023.
Jeff: On slide six I want to provide color into our automotive business.
Jeff Grossman: In the auto industry, we are currently balancing two key trends, the move to EV from ICE platforms and mixed shifts across regions. Further, within China, we saw the added impact of share shift to more local OEMs from multinational players. In North America, EVs are 50% ahead of ICE vehicles in terms of average content, given our higher market share among EVs. However, in Europe, we are behind, at only half the average content on EVs due to lower market penetration on the current generation of EV platforms.
Jeff: In auto we are currently balancing two key trends the move to E V from IC E platforms and.
Jeff: And mix shifts across regions.
Jeff: Further within China, we saw the added impact of share shift to more local Oems from multinational players.
Jeff: In North America, Evs are 50% ahead of ice vehicles in terms of average content, given our higher market share among evs.
Jeff: While in Europe, we are behind at only half the average content on evs due to lower market penetration on the current generation of EV platforms.
Brian Roberts: We believe new product launches anticipated in 2025 and 2026 should close this gap in Europe. In China today, our average content on EVs is slightly higher than on ICE engines or ICE vehicles, but we are behind with local brands compared to multinationals. In 2023, locally produced automobiles comprised approximately 55% of the total market, an increase from the prior year. We work with many local Chinese OEMs today, and our pace of new business wins has accelerated across many product categories, including the development of country-specific contactors, which should help offset this trend. Now, let me turn the call over to Brian. Thank you, Jeff. Good morning, everyone.
Jeff: We believe new product launches anticipated in 2025, and 26 should close this gap in Europe.
Jeff: In China today, our average content on Evs is slightly higher than an ice engines or ice vehicles.
Jeff: But we are behind with local brands compared to multinationals.
Jeff: In 2023 locally produced automobiles comprised approximately 55%.
Jeff: Of the total market an increase from the prior year.
Jeff: We work with many local Chinese Oems today, and our pace of new business wins has accelerated across many product categories, including the development of country specific contact or us which.
Jeff: Which should help offset this trend.
Now, let me turn the call over to Brian.
Brian Roberts: Thank you Jeff good morning, everyone.
Brian Roberts: Key highlights for the fourth quarter of 2023, as shown on slide eight, include revenue of $992.5 million, a decrease of 2.2% from the fourth quarter of 2022. However, revenue was higher than the midpoint of our October guidance, reflecting favorable timing of the UAW strike settled in November. Adjusted operating income was $184 million, or 18.5%. In the fourth quarter, adjusted operating margin was negatively impacted by both the revenue mix and by 5 million of one-time adjustments related to year-end inventory procedures. Adjusted earnings per share of $0.81 in the fourth quarter decreased by $0.15 from the prior year quarter.
Brian Roberts: Key highlights for the fourth quarter of 2023 as shown on slide eight include revenue of $992 5 million a decrease of two 2% from the fourth quarter of 2022.
Brian Roberts: Revenue was higher than the midpoint of our October guidance, reflecting favorable timing of the UAW strike settling in November.
Brian Roberts: Adjusted operating income was $184 million or 18, 5%.
Brian Roberts: In the fourth quarter adjusted operating margin was negatively impacted by both revenue mix and by $5 million of one time adjustments related to year end inventory procedures.
Brian Roberts: Adjusted earnings per share of 81 in the fourth quarter decreased 15 cents from the prior year quarter.
Brian Roberts: On a constant currency basis, adjusted earnings per share decreased 4% from the prior year period. During the fourth quarter, the company took a non-cash impairment charge on goodwill of approximately $322 million related to revised financial expectations for our Insight business unit. Key highlights for the full year 2023, as shown on slide nine, include record annual revenue of $4,054,000,000, an increase of approximately 1% from 2022 or 2% on a constant currency basis. Adjusted operating income was $774 million, or 19.1%, a slight decrease from $778,019.3% in 2022. This was primarily due to the rate of exchange, inflationary costs, and business unit mix, partially offset by operational improvements. Adjusted earnings per share of $3.61 in 2023 grew 6% from the prior year, driven by our focus on debt reduction and return of capital to shareholders. On a constant currency basis, adjusted earnings per share grew 14% from the prior year.
Brian Roberts: On a constant currency basis adjusted earnings per share decreased 4% from the prior year period.
Brian Roberts: During the fourth quarter. The company took a noncash impairment charge to goodwill of approximately $322 million related to revised financial expectations for our insights business unit.
Brian Roberts: Key highlights for the full year 2023 as shown on slide nine include.
Brian Roberts: Record annual revenue of $4.054 billion, an increase of approximately 1% from 2022 or 2% on a constant currency basis.
Brian Roberts: Adjusted operating income was $774 million or 19, 1%.
Brian Roberts: <unk> decreased from seven 778 million 19, 3% in 2022.
Brian Roberts: This was primarily due to rate of exchange inflationary costs and business unit mix, partially offset by operational improvements.
Brian Roberts: Adjusted earnings per share of $3 61 in 2023 grew 6% from the prior year driven by our focus on debt reduction and return of capital to shareholders.
Brian Roberts: On a constant currency basis adjusted earnings per share grew 14% from the prior year.
Brian Roberts: Now I'd like to comment on the results of our two business segments in the fourth quarter of 2023, starting with performance sensing on slide 10. Our performance sensing business reported revenues of $753 million, an increase of approximately 1% compared to the same quarter last year. Both automotive and heavy vehicle off-road increased slightly, primarily due to market growth and content launches partially offset by revenue mix, pricing, and foreign currency. Performance Sensing Operating Income was $184.4 million, with operating margins of 24.5%. Segment operating margins decreased year over year, largely due to negative pricing not fully offset by productivity.
Speaker Change: Now I'd like to comment on the results of our two business segments in the fourth quarter of 2023, starting with performance sensing on slide 10.
Speaker Change: Our performance sensing business reported revenues of 753 million, an increase of approximately 1% compared to the same quarter last year.
Speaker Change: Both automotive and heavy vehicle off road increased slightly primarily due to market growth and content launches, partially offset by revenue mix pricing and foreign currency.
Speaker Change: Performance sensing operating income was $184 4 million with operating margins of 24, 5%.
Segment operating margins decreased year over year, largely due to negative pricing not fully offset by productivity product line mix and rate of exchange.
Brian Roberts: Product Line Mix, and Rate of Exchange. On a constant currency basis, performance sensing operating margin was 25.1%. As shown on slide 11, Sensing Solutions reported revenues of $239.5 million in the fourth quarter, a decrease of 11% as compared to the same quarter last year.
Speaker Change: On a constant currency basis performance sensing operating margin was 25, 1%.
Speaker Change: As shown on slide 11, sensing solutions reported revenues of $239 5 million in the fourth quarter, a decrease of 11% as compared to the same quarter last year.
Brian Roberts: Continued de-stocking in industrials was the driver of the revenue decline, partially offset by continued growth in our aerospace business. Sensing Solutions operating income was $68.2 million, with operating margins of 28.5%. The decline in margins year over year is primarily due to lower industrial revenue.
Speaker Change: Continued destocking in industrials was the driver of the revenue decline, partially offset by continued growth in our aerospace business.
Speaker Change: Sensing solutions operating income was $68 2 million with operating margins of 28, 5%.
Speaker Change: The decline in margins year over year is primarily due to the lower industrial revenue.
Brian Roberts: As shown on slide 12, corporate and other operating expenses not included in segment operating income were $414.2 million in the fourth quarter of 2023, including a non-cash impairment accounting charge to Goodwill of approximately $322 million related to the revised financial expectations for our Insights. The impairment was the result of moderated growth and cash flow projections compared to earlier business outlooks. While we are confident in Insight's future and believe in its market opportunity, we have narrowed our investment's focus on electrification initiatives, resulting in the review of strategic alternatives for this business. Excluding the impairment charge and other charges excluded from non-GAAP results. Corporate and other expenses increased by 3% compared to the prior year quarter due to higher employee costs.
Speaker Change: As shown on slide 12, corporate and other operating expenses not included in segment operating income were $414 2 million in the fourth quarter of 2023.
Speaker Change: Including the noncash impairment accounting charge to goodwill of approximately $322 million related to the revised financial expectations for our insights business.
Speaker Change: The impairment was the result of moderated growth and cash flow projections compared to earlier business outlooks.
Speaker Change: While we are confident in <unk> future and believe in its market opportunity, we have narrowed our investments focus on electrification initiatives, resulting in the review of strategic alternatives for this business.
Speaker Change: Excluding the impairment charge and other charges excluded from non-GAAP results corporate and other expense increased by 3% compared to the prior year quarter due to higher employee costs.
Brian Roberts: Moving to slide 13, our capital allocation strategy is demonstrating excellent results as our return on invested capital increased by 40 basis points to 9.7% in 2023. We generated $57 million in free cash flow during the fourth quarter and $272 million in free cash flow over the full year. That represents approximately 50% of adjusted net income. To increase our conversion rate in 2024, we have renewed our focus to improve working capital with work streams focused on reducing inventory and receivables, as well as maintaining control over our CapEx spend. Capital expenditures this year are expected to be flat with 2023 at approximately $175 million.
Speaker Change: Moving to slide 13, our capital allocation strategy is demonstrating excellent results as our return on invested capital increased by 40 basis points to nine 7% in 2023.
Speaker Change: We generated $57 million in free cash flow during the fourth quarter and $272 million in free cash flow over the full year.
Speaker Change: It represents approximately 50% conversion of adjusted net income.
Speaker Change: To increase our conversion rate in 2024, we have renewed our focus to improve working capital with work streams focused on reducing inventory and receivables as well as maintaining control over our capex spending.
Speaker Change: Capital expenditures this year are expected to be flat with 2023.
Speaker Change: Approximately $175 million.
Speaker Change: Our net leverage ratio was three two times at the end of December and we expect this metric to further improve to below three times by the end of 2024 and below two times by the end of 2026.
Brian Roberts: Our net leverage ratio was 3.2 times at the end of December, and we expect this metric to further improve to below three times by the end of 2024 and below two times by the end of 2026. We bought back $28 million of stock in the fourth quarter and $88 million for the full year. In addition, we recently announced our Q1 quarterly dividend of $0.12 per share that will be paid on February 28th to shareholders of record as of February 14th.
Speaker Change: You bought back 28 million of stock in the fourth quarter and $88 million for the full year.
Speaker Change: In addition, we recently announced our Q1 quarterly dividend of 12 cents per share that will be paid on February 28 to shareholders of record as of February of 2014.
Brian Roberts: We are providing financial guidance for the first quarter of 2024, as shown on slide 14. For the first quarter of 2024, we expect revenue of $970 million to $1,010,000,000. At the midpoint of the revenue guidance range, we would expect an adjusted operating margin of approximately 18.6% and adjusted earnings per share of $0.85. While the impact on margins from the rate of exchange is slowing, we expect it to negatively impact our first quarter results with an expected headwind of $7 million to revenue. $0.60 basis points to the adjusted operating margin and $0.05 to the adjusted earnings per share.
Speaker Change: You're providing financial guidance for the first quarter of 2024 as shown on slide 14.
Speaker Change: For the first quarter of 2024, we expect revenue of $970 million to $1 billion 10 billion.
Speaker Change: At the midpoint of the revenue guidance range, we would expect adjusted operating margin of approximately 18, 6% and adjusted earnings per share of <unk> 85 cents.
Speaker Change: While the impact on margins from the rate of exchange is slowing we expect it to negatively impact our first quarter results with an expected headwind of $7 million to revenue.
Speaker Change: 60 basis points to adjusted operating margin and five cents to adjusted earnings per share.
Speaker Change: We anticipate full year revenue growth in the range of 2% to 3%.
Brian Roberts: We anticipate full-year revenue growth in the range of 2 to 3 percent. However, revenue will likely be flat to slightly down year over year in the first and second quarters as our industrial markets continue to see de-stocking pressure. The second half of the year should rebound, with revenues increasing in the range of 3-5% year over year, with new launches and ramping products driving growth. Within our peer group, Sensata continues to deliver top quartile adjusted operating margins, and we expect to sustain that performance.
Speaker Change: Revenue will likely be flat to slightly down year over year in the first and second quarters as our industrial markets continue to see Destocking pressure.
Speaker Change: The second half of the year should rebound with revenues increasing in the range of 3% to 5% year over year with new launches and ramping products driving growth.
Speaker Change: Within our peer group since that it continues to deliver top quartile adjusted operating margins and we expect to sustain that performance.
Jeff Grossman: We remain confident in our 2026 margin targets of 21 percent based upon expected volume increases and productivity gains. However, with the structural differences in the business since 2021, gaining significant adjusted operating margin leverage in 2024 will be difficult. Specifically, compared to 2021, as Jeff noted, we have experienced material impacts to margins from foreign currency exchange rates, high inflation, and a negative mix between our product families and business units as we return to a priced-down environment with our OEM customers. We will seek to improve productivity in our manufacturing facilities and supply chains to offset this trend. However, productivity benefits will ramp slowly this year as we navigate through higher-cost inventory on hand, negotiate material cost reductions with suppliers, and improve our yields through automation and efficiency. Further, certain statutory cost increases effective January 1st add pressure to first quarter adjusted operating margins. From the first quarter levels, we would expect to see 20 to 30 basis points of sequential margin each quarter throughout 2024. Now, I'd like to turn the phone back to Jeff for closing comments.
Speaker Change: We remain confident in our 2026 margin targets of 21% based upon expected volume increases and productivity gains.
However, with the structural differences in the business since 2021, gaining significant adjusted operating margin leverage in 2024 will be difficult.
Speaker Change: Specifically compared to 2021 as Jeff noted, we have experienced material impacts to margins from foreign currency exchange rates high inflation and negative mix between our product families and business units.
Speaker Change: As we've returned to our price down environment with our OEM customers, we will seek to improve productivity in our manufacturing facilities and supply chains. So I've said this trend.
Speaker Change: However, productivity benefits will ramp slowly this year as we navigate through higher cost inventory on hand to.
Speaker Change: Negotiating material cost reductions with suppliers and improve our yields through automation and efficiency.
Speaker Change: Further certain statutory cost increases effective January 1st add pressure to first quarter adjusted operating margins.
Speaker Change: From the first quarter levels, we would expect to see 20 to 30 basis points of sequential margin each quarter throughout 2024.
Speaker Change: Now I'd like to turn the call via phone call back to Jeff for closing comments, Thanks, Brian let.
Jeff Grossman: Thanks, Brian. Let me wrap up with a few key messages as outlined on slide 15. First, I want to thank you, our investors, for your support as we work through this extraordinary transformation, with our strategic focus now keenly directed at electrification. As I mentioned earlier, electrification revenue, which was less than 3% in 2019, is now 17% of our total business. We have won more than $1.3 billion in electrification opportunities over the past three years, and that will fuel our longer-term growth.
Jeff: Let me wrap up with a few key messages as outlined on slide 15.
Jeff: First I want to thank you our investors for your support as we work through this extraordinary transformation.
Jeff: With our strategic focus now keenly directed on electrification.
Jeff: As I mentioned earlier electrification on revenue, which was less than 3% in 2019 is now 17% of our total business.
Jeff: We have won more than $1 3 billion and electrification opportunities over the past three years and that will fuel our longer term growth.
Jeff Grossman: Second, I'm confident of brighter days ahead. We know that our markets will improve, and our safe and efficient business provides a natural hedge for volatility that may occur with EV adoption rates. Our adjusted operating margins will take longer to recover than we initially expected, but we are prepared and continue to perform well compared to our peers and expect to see sequential quarterly margin improvement this year. Third, our capital allocation strategy is already showing good results, as the increase in adjusted earnings per share outpaced revenue growth in 2023. And fourth, last year, we made dramatic progress on addressing scope one and two market-based greenhouse gas emissions, meeting our 2026 reduction targets early. Consequently, we have raised our target reduction goal for 2030 to 45% from our 2021 baseline emissions level.
Jeff: Second I'm confident a brighter days ahead, we know that our markets will improve and our safe and efficient business provides a natural hedge for volatility that may occur with EV adoption rates.
Jeff: Our adjusted operating margins will take longer to recover than we initially expected, but we are prepared and continue to perform well compared to our peers and expect to see sequential quarterly margin improvement this year.
Jeff: Third our capital allocation strategy is already showing good results.
Jeff: The increase in adjusted earnings per share outpaced revenue growth in 2023.
Jeff: We will continue to prioritize delevering, while being opportunistic with share repurchases to further improve earnings per share and returns on invested capital.
Jeff: And fourth last year, we made dramatic progress addressing scope, one and two market base greenhouse gas emissions.
Jeff Grossman: In closing, I'll note that when I was named CEO in March of 2020, little did I know what the immediate future held: a worldwide pandemic, massive supply chain disruption, and the highest inflation we've seen in 40 years. However, we now see a return to a more normal environment. I am more excited than ever about the opportunities ahead. We are poised to deliver to our customers what we do best, helping them solve their most challenging engineering and operational challenges. We have a focused strategy, a committed management team, and more than 20,000 Sensata teammates across the globe driving execution. I look forward to updating you on our progress. Now, let's turn the call back to Jacob.
Jeff: Meeting, our 2026 reduction targets early.
Jeff: Consequently, we have raised our target reduction goal for 2030% to 45% from our 2021 baseline emissions level.
Speaker Change: In closing I'll note that when I was named CEO in March of 2020.
Speaker Change: Little did I know what the immediate future held.
Speaker Change: A worldwide pandemic.
Speaker Change: As a supply chain disruption and the highest inflation we've seen in 40 years.
Speaker Change: However, we now see a return to a more normal environment.
I am more excited than ever about the opportunities ahead.
Speaker Change: We are poised to deliver to our customers, what we do best helping them solve their most challenging engineering and operational challenges.
Jacob A. Sayer: Thank you, Jeff. Now we'll move on to Q&A. Drew, would you please introduce the first question? Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone.
Speaker Change: We have a focused strategy a committed management team and more than 20000 inside of teammates across the globe driving execution.
Operator: If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Wamsi Mohan with Bank of America. Please go ahead. Hi, thanks for taking my question. It's Ruplu filling in for Wamsi today.
Speaker Change: I look forward to updating you on our progress.
Speaker Change: Now I'll like to turn the call back to Jacob.
Jacob A. Sayer: Thank you Jeff.
Jacob A. Sayer: We'll move on to Q&A.
Jacob A. Sayer: Drew would you please introduce the first question.
Drew: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to.
Ruplu: Jeff, looks like your implied op margin guidance for fiscal 24 is 19.2 to 19.5 based on 20 to 30 bps of improvement every quarter. That compares to the prior guidance of 20 to 21%. So I think you said FX is a 30 bps year-on-year headwind.
Drew: Assemble our roster.
Drew: The first question comes from <unk> Mohan with Bank of America. Please go ahead hi.
Drew: Hey, Thanks for taking my question, it's Rupal filling in for one D. Today, yes, it looks like your implied op margin guidance for fiscal 'twenty four.
Jeff Grossman: Can you help us parse the remaining 80 bps year on year into impact from pricing, mix, and restructuring, just so that we can size those impacts? And then what is giving you confidence that an operating margin can really grow 20 to 30 bps quarter on quarter every quarter? Yeah, so we spoke about really the three items that are impacting the margin profile. We did not speak to the benefit associated with the restructuring that we did in the third quarter of last year, but obviously, that is helping mitigate and offset some of the impact of the headwinds that we're experiencing.
Is a 19 point to the 19.5 based on a 20 to 30 bps improvement every quarter that compares to the prior guidance of 20% to 21%. So I think you said FX is a 30 bps year on year headwind.
Drew: Can you help us parse the remaining 80 bps year on year into impact from pricing mix restructuring.
Drew: So that we can size those impacts and then what is giving you confidence in op margin can really grow 2030 bps quarter on quarter every quarter.
Jeff Grossman: But it's really coming from the three areas that we've outlined. It's the mix of the business, which is really a mix around the end markets we're serving. So industrial, as an example, versus automotive, which is a higher-margin business relative to our automotive business. So as industrial goes down, that impacts the business negatively. And also across regions and product families. And as we outlined in the fourth quarter, that was a 40 basis point impact on us. The other is around foreign exchange.
Yeah. So we we spoke about really the three items that are impacting the margin profile, we did not speak to the benefit associated with the restructuring that we did in the third quarter of last year, but obviously that is helping mitigate and offset some of the impact of the headwinds that we're experiencing but its really coming from the three areas that we've outlined.
Drew: It's the mix of the business, which is really our.
Drew: The mix around the end markets, we're serving so industrial as an example versus automotive which is a higher.
Jeff Grossman: That's going to impact more in the first quarter than the full year. I think for the full year, we think it's a modest amount of impact. In terms of the rate of exchange, obviously, we don't control that, depending on where the rate of exchange goes.
Drew: Higher margin business relative to our automotive business, so as industrial goes down that impacts the business negatively.
Drew: It also across regions and product families and as we outlined in fourth quarter that was a 40 basis point area. In 2023 that was a 40 basis point impact to us. The other is around foreign exchange, that's going to impact more of the first quarter than the full year I think for the full year, we're thinking it's a modest amount of impact in terms of <unk>.
Jeff Grossman: But as we enter the year, we believe for the full year, that's going to be maybe 10 basis points or flat to last year. So that's starting to mitigate, which is very good news. And then, obviously, there's the aspect of the volume in the business as well that's impacting our ability to gain some leverage in terms of margin profile. Yeah, I just want to add real quick.
Drew: If exchange, obviously, we don't control that depending on where the rate of exchange goes by as we entered the year. We believe for the full year, that's going to be maybe 10 basis points were flat to last year or so that's starting to mitigate which is which is very good news.
Brian Roberts: I mean, obviously, one of the things that I spent a lot of time on in my first quarter here was doing this deep dive into our planning as we go through the budget cycle. And one of the things that became clear as part of that is, especially in the first half of the year, we have a lot of room for productivity improvement as conditions normalize. But we do need to work through kind of higher levels of inventory, and so that's one of the things that will impact margins a little bit, especially in the first half of the year. And then as productivity gains kick in, we should be able to see that improving throughout the year, which gives us a lot of confidence in the 20 to 30 basis points improvement per quarter, sequentially going forward. Thank you. The next question comes from Mark Delaney with Goldman Sachs. Please go ahead. Good morning.
Drew: And then obviously, there's the aspect of the volume in the business as well that are impacting our ability to gain some leverage in terms of margin profile. Yeah. I just I just want to add real quick I mean, obviously one of the things that I've spent a lot of time on in my first quarter here has been doing this deep dive around our planning as we go through the budget cycle.
Speaker Change: And you know one of the things that became clear as part of that as you know, especially in the first half of the year. You know we have a lot of room for productivity improvement as the as conditions normalize.
Speaker Change: We do need to work through kind of higher levels of inventory and so that's one of the things that will impact margins, a little bit, especially in the first half of the year and then as productivity gains kick in we should be able to see that improving throughout the year, which gives us a lot of confidence to the 20 to 30 basis points improvement per quarter sequentially going forward.
Mark Trevor Delaney: Given slower auto OEM plans around the pace of their EV ramps, and also considering the strong bookings the company's had in recent years, including what you reported today for 2023, is the target for $1.2 billion of automotive electrification revenue in 2026? Yeah, it is based upon the expectation of EV penetration over time, and we know that can move around a little bit. We've talked about the fact that we have about 90% of that booked as of the end of 2023, so we see a really strong line of sight to that 1.2 billion. We also have a fairly good line of sight to the other 800 million of electrification revenue and the other businesses based upon market growth expectations in those areas. So with the 2 billion, it might be 100 million or so off in either direction; it will depend on market penetration rates and the development of those markets, but the movement toward electrification is real.
Speaker Change: Thank you Ruben.
Speaker Change: The next question comes from Mark Delaney with Goldman Sachs. Please go ahead.
Mark Trevor Delaney: Yeah. Good morning, I think so much for taking my question given slower auto OEM plans around the pace of their E V ramps and also considering the strong bookings. The company has had in recent years, including now what you reported today for 2023 is the target for $1 2 billion of automotive electrification revenue in 2022nd thought to you before.
Speaker Change: Yeah. It is based upon the expectation of EV penetration over time, and we know that can move around a little bit.
Speaker Change: We've talked about the fact that we have about 90% of that booked as of the end of 2023. So we see a real strong line of sight to that one point too. We also have a fairly good line of sight to the other 800 million of electrification of revenue in the other businesses based upon market growth expect.
Speaker Change: Patients in those in those areas. So listening you know with a 2 billion it might be a 100 million or so off in either direction. It will depend on market penetration rates and the development of those markets, but the movement toward electrification is real that business grew 50% last year, it's now 17% of our overall company.
Jeff Grossman: That business grew 50% last year, and it's now 17% of our overall company. That trend is going to continue. To the extent there are puts and takes in terms of the migration toward electrification, we have that natural edge in the business. And we've talked about the fact that if EV penetration slows down, it may impact the overall growth rate of the business, but it would be positive for the margin profile of the business. So we feel well positioned in terms of what we've won and what our capabilities are, and we'll watch closely how the market evolves. Thank you, Mark. The next question comes from Matt Sheerin with CIFL. Please go ahead. Yes. Thank you and good morning. I wanted to...
Speaker Change: That trend is going to continue to the extent there is puts and takes in terms of the migration toward electrification, we have that natural hedge in the business and we've talked about the fact that if EV penetration slows down it may impact the overall growth rate of that business, but it would be positive to the margin profile in the business. So we feel well.
Speaker Change: Position in terms of what we've won and what our capabilities are and we will watch closely Howard Oh, how the market evolves.
Speaker Change: Thank you Mark for the question.
Speaker Change: The next question comes from Matt Sheerin with Stifel. Please go ahead.
Matthew John Sheerin: Oh, yes, thank you and good morning, I wanted to.
Jeff Grossman: I wanted to... just ask around your guidance for the year, that 2% to 3% growth. I guess question one is, what kind of confidence and visibility you have, given that a lot of your peers and suppliers are actually not giving any guidance for the year due to a lack of visibility, and also just concerns that this inventory correction could take longer. So could you just walk us through your thought process by sector and growth rates by sector for the year? Yeah, I'd be glad to.
Just ask around your guidance for the year.
Matthew John Sheerin: 2% to 3% growth I guess question, one is what kind of confidence and visibility that you have given that a lot of your peers and suppliers are actually not not giving any guidance for the year due to the lack of visibility and also just concerns that this inventory correction could take longer so could you just.
Matthew John Sheerin: Walk us through your thought process by by sector and in growth rates by sector for the year.
Jeff Grossman: So we're, in 2024, we are being much more conscious to follow IHS forecasts, right? In the past, we have done adjustments based upon our weighted impact on the business and so forth in terms of where we have content on various platforms and different OEMs. We believe it's better for us to focus on the IHS forecast and then share with you how we believe that is going to impact our company growth in the automotive business. So we're following the IHS forecast right now. The latest forecast from IHS for the full year is down, call it 50 basis points. We believe in our auto market, based on launches, because we have engaged with customers to understand what is going to happen this year in terms of their product launches. And some of those were carryovers from 23 that were delayed into 24.
Speaker Change: Yeah, I'd be glad to so.
Speaker Change: Where were at in 2024, we are being much more conscious to follow IHS forecast right in the past we have done our adjustments based upon our weighted impact in the business and so forth in terms of where we have content on various platforms and different Oems, we believe it's better.
Speaker Change: For us to focus on the IHS forecast and then share with you. How we believe that is going to impact our company growth in the automotive business. So we're following IHS forecast right now are the fourth the latest forecast from IHS for the full year is down call. It 50 basis points, we believe that our auto market based upon law.
Speaker Change: Choose that we have engaged with customers to understand what is going to happen. This year in terms of their product launches and some of those more carryover from 'twenty three that were delayed into 'twenty four we feel good about where that automotive business is we're giving you a view into the full year.
Jeff Grossman: We feel good about where that automotive business is headed. We're giving you a view into the full year, but we're guiding specifically to the first quarter. So we would call the automotive market up a couple hundred basis points, excuse me, our business up a couple hundred basis points in a market that's down, call it 1%. In the HVOR market, we believe that the third parties are forecasting somewhere around 4% down. As I mentioned in my prepared comments, that's a result of strength in China for on-road trucks but weakness in North America and Europe for on-road and also in construction.
Speaker Change: But we're guiding specifically to the first quarter. So we would call the automotive market a couple of 100 basis points in it or excuse me our business up from a couple of hundred basis points in a market that's down call it 1% and the H B O. Our market. We believe that the third parties are forecasting somewhere around 4% down.
Speaker Change: But as I've mentioned in my prepared comments that as a result of strength in China on road truck, but weakness in North America and Europe on road also in construction.
Jeff Grossman: So that would be the market expectation that we have baked into our view for the heavy vehicle market. And then in the industrial sector, the first half is going to be a little bit more tough sledding with some continued de-stocking, but we do expect that to recover to get back to single-digit growth for the full year. But the first half of the year will be down a little bit. Aerospace, the shining star, really, in terms of market dynamics, we would continue to expect that market to be up high single digits in 2024. Thank you, Matt. The next question comes from Christopher Glynn with Oppenheimer. Please go ahead. Yeah, thanks, Brian. Welcome.
Speaker Change: So that would be the market expectation that we'd have baked into our view for the heavy vehicle market and then in industrial the first half is going to be a little bit more tough sledding with some continued destocking, but we do expect that to recover to get back to single digit growth for the full year, but the first.
Speaker Change: Half of the year will be down a little bit aerospace are the shining star really in terms of market dynamics. We would continue that continue to expect that market to be up high single digits in 2024.
Speaker Change: Thank you Matt for the question.
Speaker Change: Question comes from Christopher Glynn with Oppenheimer. Please go ahead.
Right Yeah. Thanks, Brian Welcome I wanted to ask you a question about free cash flow I know, you're kind of new to the role here, but you know conversion Miss them was light in the year are you know after a soft 'twenty two and then your 24 guidance at 65 to 70.
Brian Roberts: I wanted to ask you a question about free cash flow. I know you're kind of new to the role here, but, you know, conversion missed and was light this year. You know, after a soft 22, and then your 24 guidance at 65 to 70%, transcripts provided by Transcription Outsourcing, LLC, some, maybe some of the operations, that should be better for cash flow. Yeah, no, great, great question. I mean, as we've looked at the last couple of years to try to account for timing, you're right, you know, we've been basically kind of converting, you know, a half or slightly over half, adjusting that income into free cash flow. I can sum it up in one word. It's inventory, right?
Speaker Change: Per cent compares to I think 75% to 80% long term outlooks. So curious where your thoughts are on you know where the gates or an ability to lean working capital flows and some maybe some of the operating disciplines that should be driving better free cash flow conversion yeah.
Speaker Change: No great Great question, I mean, as we looked at the last couple of years to try to account for timing you're right. You know we've been basically kind of converting you'll have for slightly over half of our adjusted net income into free cash flow I can sum it up in one word it's inventory right and ultimately that's the main you a big piece of it for us and a lot of.
Brian Roberts: And ultimately, that's the main, you know, a big piece for us and a lot of focus. You know, obviously, over the last couple of years, there was a different prioritization where we needed to make sure the supply chain had enough redundancy in it or enough, you know, quantity in it, if you will, to be able to make sure we could meet customers' demands. That was really important to the company.
Speaker Change: Yes, you know obviously over the last couple of years, there was a different prioritization, where we needed to make sure the supply chain had enough redundancy in it or enough quantity ended if you will to be able to make sure. We could meet customers' demands that was really important to the company.
Brian Roberts: You know, now, in a more normalized environment, we're working hard to start taking down those inventory balances. That said, it's going to take a little bit of time, and that's why we've talked about the higher cost of inventory that will impact adjusted operating margins in the first half of the year, as well as we just work through kind of that overall normalization. Certainly, receivable management, the company does a good job there, but we can do better. And, you know, one of the reasons for that, as we look at the end of this year, the end of 23 and the beginning of 24, you'll look at the balance sheet and know, you know, we really didn't, we didn't try to manage payables, right?
Speaker Change: Now in a more normalized environment, we're working hard to start taking down those inventory balances that said, it's going to take a little bit of time and it's why we've talked about higher cost of inventory that'll impact adjusted operating margins in the first half of the year as well as as we just work through kind of that overall normalization.
Speaker Change: Certainly receivable management company does a good job there, but we can do better.
Speaker Change: And you know one of the reasons for it.
Speaker Change: As we look at the end of this year and end of 'twenty three and the beginning of 'twenty four you'll look at the balance sheet no. We really didnt, we didnt try to manage payables right. So we let that kind of naturally flow as it should which is why we got the result for 'twenty, three and where we think we get the improvement for 24, and then to your point on the longer.
Brian Roberts: So we let that kind of naturally flow as it should, which is why we got the result for 23 and where we think we can get the improvement for 24. And then, to your point on the longer term, again, I'll come back to inventory. I mean, that's going to be a key piece. Thank you, Christopher. The next question comes from Samik Chatterjee with J.P. Morgan. Please go ahead.
Speaker Change: [noise] term again I'll come back to inventory I mean, that's gonna be a key piece for us.
Speaker Change: Thank you Chris for the question.
Speaker Change: The next question comes from stomach Chatterji with J P. Morgan. Please go ahead.
Samik Chatterjee: Hi, thanks for taking my question. Jeff, I guess I had one for you; it's a bit more on the strategic front. I mean, I think, out of today's earnings report, one of the investor sentiments that I think we'll hear is that the strategy that you've laid out in terms of the transformation continues to be sort of fluid and sort of change over time, not in relation to electrification, but the adjacencies of it, including sort of, you did invest today in September, and now you're sort of restructuring insights, and some of those sort of adj Any sort of thoughts around when we can sort of get to a more stable state in terms of strategy in relation to sort of tracking execution relative to it? Because I think the bigger challenge here seems to be in terms of just the macro developments that are happening, but you're changing your strategy in response to that as well. Yeah, it's a great question.
Samik Chatterjee: Hi, Thanks political my question, Jeff I guess I had one for you with a bit more on the strategic front I mean, I think out of today's learning support one of the investor sentiment is that I think will you is that the strategy that you've laid out in terms of the transformation.
Samik Chatterjee: That continues to be sort of fluid and sort of change or die not in relation to electrification, but the distance itself, including so you did an investor day in September and now you're still restructuring insights and some of those little bit do synthes continue to sort of be fluid.
Samik Chatterjee: Any sort of talks around win when we can sort of more well get to a more stable state in terms of strategy.
Samik Chatterjee: In relation to sort of tracking execution related to it because I think the bigger challenge here. It seems to be in terms of just the macro developments that are happening what are you changing your strategy in response to that as well.
Speaker Change: Yes, it's a great question and we talked a little bit about this at Investor day are about the fact that several years ago as we as when I took over in March of 2020, we realized there was going to be cigna.
Jeff Grossman: And we talked a little bit about this at Investor Day, about the fact that several years ago, as when I took over in March of 2020, we realized there was going to be significant amounts of change in the end markets that we serve. And I've been known to say there's gonna be more change in the next 10 years than there has been in the last 50. And I think we all agree with that.
Speaker Change: Significant amounts of change in the end markets that we serve and I've been known to say theres going to be more change in the next 10 years and there has been in the last 50 and I think we all agree with that.
Jeff Grossman: That resulted in us needing to really look at what those changes were going to be and where we needed to invest to make sure that we stayed highly relevant in the end markets that we serve. And what we had identified early on were three areas around autonomy, around insights or IOT, connectivity, if you will, and electrification. And we cast the net very wide to make sure that we had enough lines in the water, if you will, to incubate the growth that we wanted to experience long-term.
Speaker Change: That resulted in us needing to really look at what those changes were going to be and where we needed to invest to make sure that we stayed highly relevant in the end markets that we serve and what we had identified early on was three areas around autonomy around insights where Iot connectivity.
Speaker Change: If you will and electrification and we cast the net very wide.
Speaker Change: Make sure that we had enough lines in the water. If you will to to incubate the growth that we wanted to experience long term.
Jeff Grossman: I will state very, very confidently, I'm certain now electrification is the future, and we are narrowing our investments to that. Now, we're very fortunate that two of those three opportunities we pursued were meaningful opportunities in terms of the development of the market. But when you look at the fact that, in 2023, 700 million of our business, or 17%, will be electrification, the success we're achieving has really dictated the direction of the strategy. We have the capabilities to serve our customers there, but they need our help.
Speaker Change: I will stay very very Continentally I'm certain now electrification is that future.
Speaker Change: And we are narrowing our investments to that now we're very fortunate that two of those three opportunities. We pursued were meaningful opportunities in terms of the development of the market.
Speaker Change: When you look at the fact that in 2023 $700 million of our business or 17% was electrification. The success. We're achieving has really dictated that the direction of the strategy. We have the capabilities to serve our customers there they need our help and that is the future for their comes.
Jeff Grossman: And that is the future for the company. Now, the core business will continue to be very relevant, but we need to focus the strategy in that area around electrification.
Speaker Change: Now the core business will continue to be very relevant.
Speaker Change: But we need to focus the strategy in that area around electrification and you can see it in the revenue growth in the new business wins that we're experiencing it's painful to manage through a restructuring of businesses that are seeing.
Jeff Grossman: And you can see it in the revenue growth and the new business wins that we're experiencing. It's painful to manage through a restructuring of businesses that are seeing very significant opportunities, but that is what strategy is all about. It's picking and choosing where we need to invest. We'll continue to be very committed until we find out where we want to go with the Insights business. But our investments need to go toward a strategy toward the electrification area. Thanks for the question. Yeah. The next question comes from Steven Fox with Fox Advisors. Please go ahead. Hi, good morning.
Speaker Change: Significant opportunity, but that is what strategy is all about it's picking and choosing where we need to invest will continue to be very committed until we find out where we want to go with the insights business, but our investments need to go towards strategy towards the electrification area.
Speaker Change: Thanks for the question Yeah. Thank you Simon.
Speaker Change: The next question comes from Steven Fox with Fox Advisors. Please go ahead.
Hi, good morning.
Steven Fox: Jeff, I was wondering if you could just dial in on your expectations for electrification for 2024. You're thinking on growth versus what kind of market expansion you're expecting and also how those margins within that pool of products is advancing this year and its influence on the overall margin. Yeah, so let me start with the last part of that question, which is around the product development. We have a very strong portfolio of opportunities to go to our customers, and high-voltage contactors are the core of that, but it's much broader. It's current sensing.
Steven Fox: Jeff I was wondering if you could just dial in on your expectations for electrification for 2020 for Youre thinking on growth versus what kind of market.
Steven Fox: Expansion, you're expecting and also how how those margins within that pool of products is advancing this year and its influence on the overall margin. Thanks.
Jeff: Yeah. So let me let me start with the last part of that question, which is around the product development.
Jeff: We have a very strong portfolio of opportunities to go to our customers and contact high voltage contactor is are the core of that but it's much broader it's current sensing its isolation monitoring it's other aspects of sensing if you will or electrical protection that is necessary in order for our.
Jeff Grossman: It's isolation monitoring. It's other aspects of sensing, if you will, or electrical protection that is necessary in order for our customers to go through this transformation. And by the way, there's an accumulation of all those components in the form of battery distribution units and other subsystems that we're getting pulled into that are very meaningful from an average selling price standpoint that is propelling growth as well. But it's at that core component level where we have the expertise, and we continue to build on that organically with the joint venture with our partner in China around Sherard Technologies. So there are different types of technology and product capabilities that are necessary in different markets around the world. So we've built out a really nice portfolio to be able to serve that market, and again, that's demonstrated in the form of the magnitude of the new business wins that we've experienced over the last several years, and that's been growing during that period of time.
Jeff: Customers to go through this transformation and by the way, there's an accumulation of all those components in the form of battery distribution units and other sub systems that were getting pulled into that are very meaningful from an average selling price standpoint that is propelling the growth as well, but is that that core component level, where we have the <unk>.
Jeff: Expertise and we continue to build on that organically with.
Jeff: With the joint venture with our partner in China are around sure. Our technology. So there's different types of technology and product capabilities that are necessary in the different markets around the world. So we built out a really nice portfolio to be able to serve that market and again, it's demonstrated in the form of the magnitude of the new business wins that we've had.
Jeff: Experienced over the last several years and thats been been growing during that period of time in terms of the overall development of the market.
Jeff Grossman: In terms of the overall development of the market, if we go back five years, I think with the penetration rates that we experienced in 2023 of around 10% in North America, somewhere around 16% in Europe, and around 35% in China, those are meaningful penetration rates of electric vehicles. Today, there are over 230 models of electric vehicles in China, and that's the reason why there's higher penetration there because they've invested ahead of the curve and they have so many different options.
Jeff: If we go back five years, I think with penetration rates that we've experienced in 2023.
Jeff: Of around 10% penetration in North America somewhere around 16% in Europe and in China of around 30%, 35% those are meaningful penetration rates of electric vehicles. Today. There are 200 over 230 models in China of electric vehicles and that's the reason why there's higher penetration there.
Jeff: Cause they've invested ahead of the curve and they have so many different options. So the penetration may ebb and flow a little bit with regulation and different things that happen.
Jeff Grossman: So the penetration may ebb and flow a little bit with regulation and different things that happen, consumer acceptance of it, but the ship has sailed on this. This is happening, and so that's why we've really doubled down not only in the area of electrification for light vehicles, but it's happening in heavy vehicles and the infrastructure that's necessary to support it. So we feel good about it, but we're going to watch closely as our customers make choices in terms of where they allocate investment dollars, and if some of our customers decide that they want to slow things down and spend money on a new combustion engine that's more efficient, then we'll follow suit and continue to serve them in that market that we do extraordinarily well. Thank you, Steve, for the question. The next question comes from Luke Junk with Baird. Please go ahead. Good morning.
Jeff: Consumer acceptance of it but the ship has sailed on this this is happening and so that's why we've really doubled down not only in the area of electrification for light vehicle, but it's happening in heavy vehicle and the infrastructure that's necessary to support it. So we feel good about it but we're going to watch closely as our customers make choices in terms of where.
Jeff: Are they allocating investment dollars.
Jeff: And if some of our customers decide that they want to slow things down and spend money on a new combustion engine, that's more efficient than will follow suit and continue to serve them in that market that we do extraordinarily well.
Speaker Change: Thank you Steve for the question.
Speaker Change: The next question comes from Luke Young with Baird. Please go ahead.
Luke Young: Oh good morning, Thanks for taking my question a question on the outlook for the back half of the year, specifically your expectation for revenue growth to rebound in the second half based on new and ramping private lunches and I'm just wondering to what extent, you've injected any conservatism or haircut your assumptions relative to moderating EV growth.
Luke L. Junk: Thanks for taking the question. The question is on the outlook for the back half of the year, specifically your expectation for revenue growth to rebound in the second half based on new and ramping product launches. And I'm just wondering to what extent you've injected any conservatism or haircut your assumptions relative to moderating EV growth and changing geographic mix relative to the auto piece of that ramp. And I'd also be curious if you could just parse out what is auto and non-auto related in that ramp.
Luke Young: The changing geographic mix relative to the auto piece of that ramp and be also curious if you could just parse out what is auto and non auto related in that ramp I know you have some things in the track and whatnot that are contributing as well. Thank you.
Jeff Grossman: I know you have some things in HVAC and whatnot that are contributing as well. Thank you. Yeah, sure. So, let me touch on the auto piece, given that it's a big portion of the business. We're looking at IHS numbers, right? So, the first quarter of 24 is expected to be about 21, 21.5 million units. The second quarter is expected to be up a little bit, about 22. And then in the third quarter, there's a natural dip.
Speaker Change: Yeah sure. So let me let me touch on the auto piece, given that's a big portion of the business.
Speaker Change: We're looking at IHS numbers right. So first quarter of 'twenty four is expected to be about 21, 21, and a half million units.
Speaker Change: Second quarter is expected to be up a little bit by 'twenty, two and then in the third quarter. There is a natural dip in the fourth quarter for the automotive market, that's up to almost 24 million units in the in the fourth quarter. So that's the data we're looking at that would drive net.
Jeff Grossman: It's the fourth quarter for the automotive market, and that's up to almost 24 million units in the fourth quarter. So, that's the data we're looking at that would drive net, you know, down a half a percentage point or down, you know, one percentage point in terms of overall production. And then we layer on top of that all of the details associated with the new launches that are happening. And, you know, we're building capacity. We're bringing in raw material.
Speaker Change: Down a half a percentage point or a down one percentage point in terms of overall production and then we layer on top of that all of the details associated with the new launches that are happening that where we're building capacity, we're bringing raw material on so there's been extensive dialogue with customers and we.
Jeff Grossman: So, there's been extensive dialogue with customers. And we learned a lot last year in terms of some of the delays that occurred to make sure that we're really engaging much more closely with customers to understand what's happening. And so, you know, two to three percent growth isn't spectacular growth, to be honest, right? And that does not drive the outgrowth that we're normally accustomed to in the business.
Speaker Change: Earned a lot last year in terms of some of the delays that occurred to make sure that we're really engaging much more closely with customers to understand what's happening and so you know 2% to 3% growth isn't isn't spectacular growth to be honest right and that does not drive outgrowth that were normally accustomed to in the business, but it's the market.
Jeff Grossman: But it's the market realities based upon the end markets, the market itself, and also the content growth that we'll experience based upon launch schedules. I'll just add that, you know, in the second half of the year, Luke, to your question, we do have product launches coming up for TPMS with an HVOR that's driven by regulation in Europe. So, that one makes us feel a little bit better about that one.
Speaker Change: Reality is based upon the end markets.
Speaker Change: The market itself and also the content growth that we'll experience based upon launch schedules I'll just add that in the second half of the year look to your question. We do have the product launches coming up for T. P. M. S with an H B O R. That's driven by regulation in Europe, so that that would make us feel a little bit better about that one the leak detection.
Brian Roberts: And then, you know, the leak detection in HVAC, we expect to see continuity ramp up, you know, given where we are and what demand looks like there. So, you know, as we've gone through this process, I mean, we certainly have, you know, Jeff mentioned it. His remarks, you know, it's important that we make sure that we're executing well against what we're saying, and so I think it's fair to say that we've tried to build in a level of conservatism. Obviously, into the forecasting, we'll continue to watch third-party data as it goes, and, you know, just if required, but we feel pretty good about it today. Thanks, Luke, for the question. The next question comes from Shreyas Patel with Wolf Research. Please go ahead.
Speaker Change: In H B a C. We expect to see continuing to see ramp up you know given the given where we are and what demand looks like there are and so you know as you've gone through this process I mean, we certainly know Jeff mentioned it in his in his remarks, we know it's important that we make sure that we're executing well against what we're saying and so I think it's fair to say.
Speaker Change: We've we've tried to build in a level of conservatism you know into the forecasting obviously, we'll continue to watch third party data as it goes and you know just if required but we feel pretty good about it today.
Speaker Change: Thanks, Luke for the question.
Speaker Change: The next question comes from <unk> Patel with Wolfe Research. Please go ahead.
Shreyas Patel: Thanks a lot for taking my question. I wondered if you could talk a little bit more about the productivity actions that you're looking to take this year and how to think about that relative to the impact of contractual price reductions. You mentioned that those are starting to come back. I believe they're typically around 1% to 2% annually.
Patel: Hey, Thanks, a lot for taking my question I'm wondering I'm wondering if you could talk a little bit more about the productivity actions that youre looking to take this year.
Patel: How to think about that relative to the impact of contractual price reductions you mentioned those are starting to come back I believe they're typically around 1% to 2%.
Brian Roberts: So just trying to think about how the two together will you be looking to offset those price reductions through productivity this year? Thanks. Sure. No, great question.
Patel: Annually, so just trying to think about how to.
Patel: Will you be looking to offset those price reductions through productivity this year. Thanks.
Brian Roberts: Thank you. So, you know, I mean, the first thing I would say is that, you know, we have been investing continuously over the last couple of years in capital expenditures driven around, you know, customer needs for our lines and facilities, but also to be able to gain efficiencies and improve automation levels. And so that's certainly an area that we think is going to help us, you know, kick in here in the second half of the year to be able to find those gains and find productivity. You know, again, certainly in an environment that's more normalizing to kind of an OEM price down environment, we're working with our suppliers already on what that means around material costs. Again, it's going to take us a little bit of time to work through higher-cost capitalized inventory, so that's a little bit more of a headwind at the beginning of the year.
Speaker Change: Sure No great question. Thank you so the.
Speaker Change: First I would say as you know we have been investing continuously over the last couple of years and capital expenditures driven around.
Speaker Change: You know customer needs for airlines and facilities, but also to be able to gain efficiencies and improve automation levels and so that's certainly an area that we think is going to help us kicking in here in the second half of the year to be able to find those gains and find productivity.
Speaker Change: Again, certainly in an environment, that's more normalizing to a kind of an OEM price down environment, we're working with our suppliers already on what that mid teens around what that means around material costs again, it's going to take us a little bit of time to work through higher cost capitalized inventory. So that's a little bit more of a headwind in the beginning of the year.
Brian Roberts: But again, as we talk about the sequential margin improvement in the back half of the year, we think that's certainly a helper for us. And as Jeff noted also, we think, you know, exchange rates normalizing gives us a little bit more benefit there as we continue. Yeah, the only other thing I would mention is on the pricing side. We talked about a return to a more normal environment. We're not expecting a one and a half percent price decline in 2024.
Speaker Change: But again as we talk about the sequential margin improvement in the back half of the year. We think that's certainly a helper for us and as Jeff noted also we think exchange rates normalizing it gives us a little bit more of a benefit there as we're continuing to purchase.
Speaker Change: Only other thing I would mention is on the pricing side. So we talked about a return to a more normal environment, we're not expecting 1.5% price down in 2024, but the trend is going in a direction from where we were seeing significant price up to more neutral on pricing. So we don't have to bend their cost.
Jeff Grossman: But the trend is going in a direction from where we were seeing significant price increases to more neutral on pricing. So we don't have to bend the cost curve completely, but we are trying to get ahead of the curve in terms of bending the overall COGS cost line to be prepared for that transition back to the normal environment where we would see that one, one and a half percent price decrease in productivity to offset it. Thank you, Sirius, for the question. The next question comes from Amit. Daryanani with Evercore.
Speaker Change: Herb completely but we are trying to get ahead of the curve in terms of bending the overall cogs cost line to be prepared for that transition back to the normal environment, where we would see that one 1.5% price down and productivity to offset it.
Speaker Change: Thank you Charles for the question.
Speaker Change: The next question comes from Amit.
Amit: Our unit Ani with Evercore. Please go ahead.
Amit Daryanani: Please go ahead. Good morning, everyone, to you as well. I guess the first one, Jeff, I'm hoping you can just talk about what the path to 21% operating margin looks like today, and is there a revenue run rate or a combination of that and cost reduction that you need to get there, and just what the contribution of those two buckets would look like. So volume helps us tremendously. There's no question about that.
Amit: Oh good morning.
Amit: Good morning, I want to ask you as well.
Amit: I guess the first one Jeff moving just talk about what do you think the part 221% operating margin look like today and is there a revenue run rate or a combination of a bad cost reduction that you need to get there and just what the contribution of those two buckets would look like.
Speaker Change: So it is not.
Speaker Change: <unk> helps us tremendously there is no question about that but but with two 3% expected revenue growth, we can't count on that right. Now so we're going to do all of the other productivity measures that Brian talked about to try to get more productivity to offset the pricing impact at some point and things are starting to turn a little bit in terms of the strength of the U S.
Jeff Grossman: But with 2-3% expected revenue growth, we can't count on that right now. So we're going to do all of the other productivity measures that Brian talked about to try to get more productivity to offset the pricing impact at some point. And things are starting to turn a little bit in terms of the strength of the US dollar versus those long currencies.
Speaker Change: All are versus those long currencies. So the fact that were for the full year not going to have a big impact or headwind associated with what's going on there was going to be extraordinarily helpful. In terms of the overall benefit that we experienced but it's the combination of those things that are going to allow us to do that longer term.
Jeff Grossman: So the fact that we're, for the full year, not going to have a big impact or a headwind associated with what's going on there is going to be extraordinarily helpful in terms of the overall benefit that we experience. But it's the combination of those things that is going to allow us to do that. Longer-term aspects of the profitability of the business mix. But we do that really well.
Speaker Change: Aspects of the met the profitability of the business mix, but we do that really well we have you know what.
Jeff Grossman: We have a dozen or so very large product families where we have product roadmaps that we've built that are multi-year roadmaps that will get us to better profitability. In terms of the mix of business, we've talked pretty extensively on prior calls regarding the fact that our electrification business is lower margin at the net margin level, but at the gross margin level, it's more comparable to the company margin. And so as that investment profile reaches equilibrium, we'll start to see a better drop through in terms of overall margin profile. Thank you very much for the questions. The next question comes from Joe Giordano with Cowen. Please go ahead. Hi guys, good morning. This morning,
Speaker Change: Dozen or so very large product families, where we have product roadmaps that we built that are multi year roadmaps that will get us to better profitability.
Speaker Change: In the mix of business, we've talked pretty extensively on prior calls regarding the fact that our electrification business is lower margin at the net margin level, but at the gross margin level, it's more comparable to the company margin and so as that investment profile reaches equilibrium will start to see a better drop through in terms of overall margin profile.
Speaker Change: While.
Speaker Change: Thank you very much for the question.
Speaker Change: The next question comes from Joe Giordano with Cowen. Please go ahead.
Joe Giordano: Hi, guys good morning.
Joe Giordano: Hey, I just want to, you know, keep following up on the margin here. So I mean, I think having all the mix issues and pricing, competitors struggled with this as well. For, you know, over this kind of cycle here, but when I look at some, Performance Sensing was almost a 30% margin business at one point, and we're still pretty far below that. And I think everyone is...
Joe Giordano: Right.
Joe Giordano: Hey, I just wanted to you know keep following up on the margin here, So I think having.
Joe Giordano: All the mix issues and pricing I think competitors struggled with this as well or you know that this kind of cycle here, but you know when I look at some.
Joe Giordano: You can performance sensing was like almost a 30% margin business at one point right and we're still pretty far below that and I think everyone has I think others, maybe are getting closer to where they were pre COVID-19 and pre supply chain disruption and just curious if maybe like.
Jeff Grossman: I think others maybe are getting closer to where they were pre-COVID and pre-supply chain disruption. I'm just curious if maybe... Is there a more aggressive kind of restructuring effort needed from a footprint standpoint or from a facility? Is there more you could do in the absence of favorable volumes?
Joe Giordano: Is there a more aggressive kind of restructuring effort needed it at from a footprint standpoint or from a facility is there more you can do in the absence of favorable volumes to kind of push margins back up to kind of historical levels.
Jeff Grossman: Margin back up to kind of Yeah, so, um, you know, I think we demonstrated in the third quarter that we're not bashful about making really tough decisions regarding restructuring, but we also, We clearly want to make sure that we have a team in place to deliver on the future. And in a long cycle business, as you can imagine, that's a very delicate balance because we have a very large portion of new business wins; the 1.3 billion of new business wins over the last three years were just electrification. It was more like 2.5 billion in new business wins that we need to deliver on, that will provide growth going forward. And so, you know, it is no doubt that the short and long-term are a delicate balance.
Speaker Change: Yeah. So.
Speaker Change: I think we demonstrated in the third quarter that we're not bashful about doing making really tough decisions regarding restructuring, but we also.
Speaker Change: We clearly want to make sure that we have the team in place to deliver on the future and in our long cycle business. As you can imagine that's a very delicate balance because we have.
Speaker Change: A very large portion of new business wins of $1 3 billion of new business wins over the last three years was just electrification. It was more like two and a half billion of new business wins that we need to deliver on.
Speaker Change: That will provide the growth going forward.
Speaker Change: And so you know it's it is a doubt that short and long term is a delicate balance we're trying to thread the needle on that.
Jeff Grossman: We're trying to thread the needle on that. You know, we're taking what we believe are appropriate measures associated with restructuring the business, focusing the strategy in areas that are around the future, and difficult decisions regarding insights. So, we believe we're making the right decisions. We'll continue to look into it. That's our commitment, to continue to look at what else we can be doing to accelerate that pace of change. And so, you know, we're sharing with you what we have acted on and what we believe the opportunities are right now. From a footprint standpoint, we're fairly consolidated. I mean, for a four-plus-billion-dollar business, we have 15 sites around the world. We don't have 50.
Speaker Change: You know, we're taking what we believe are appropriate measures associated with our restructuring the business focusing the strategy in areas that are around the future difficult decisions regarding insights so.
Speaker Change: So we believe we're making right decisions, we will continue to look at it that's our commitment to continue to look at what else, we can be doing to accelerate.
That pace of change.
Speaker Change:
Speaker Change: And so what we're sharing with you what we've acted on and what we believe the opportunities are right now from a from a footprint standpoint, where we're fairly consolidated I mean for four plus billion dollar business. We have 15 sites around the world. We don't have 50.
Jeff Grossman: Right, so we're already sort of, you know, and that's what drives the 18, 19% margins in our business, which is comparable to some of our peers with much larger organizations. But we recognize we need to keep working at it to get back to, you know, a higher level of margin. And we're not backing off the 21.
Speaker Change: Right. So we're already sort of you know and.
Speaker Change: And that's what drives that.
Speaker Change: 19% margins in our business, which is comparable to some of our peers with much larger organizations, but we recognize we need to keep working at it to get back to.
Speaker Change: A higher level of margin and we're not backing off the 21 is just going to take us a little bit more time to get there and it's a balance of short and long term investment for the growth of the business long term and to your point on the performance sensing margin you again keep in mind that as electrification does continue to grow for us and gain scale that helps yeah, we see similar levels of gross.
Jeff Grossman: It's just going to take us a little bit more time to get there, and it's a balance of short and long-term investment for the growth of the business in the long term. Yeah, to your point on the performance sensing, you know, margin, you know, again, keep in mind that, you know, as electrification does continue to grow for us and gain scale, that helps. We see similar levels of gross margin today on the safe and efficient side versus the electrification side. But we're not yet at the EBIT margins, if you will, in electrification, and that will improve with more scale.
Speaker Change: Today in the safe and efficient side versus the electrification side, but we're not yet at the you know the EBIT margins. If you will in electrification and that will improve with more scale. He was just noted several times a lot of these new business wins, especially over the last couple of years really start to kick in in the 25 and 26 cycles.
Brian Roberts: It was just noted several times that a lot of these new business wins, especially over the last couple of years, really start to kick in in the 25 and 26 cycles, which is part of the reason why we're investing today, and we're ultimately going to hopefully see that growth tomorrow. So those are two big drivers of where it is.
Speaker Change: As part of the reason why we're investing today and we're ultimately going to hopefully see that growth tomorrow. So those are two big drivers of where it is and so again I agree with Jeff.
Brian Roberts: And so again, I agree with Jeff, you know. I think we need to always be prudent and smart around the cost structure. But, you know, ultimately, growth is going to be an important aspect, and we have the fuel in new business wins to do it. So now we have to. Thank you, Joe, for the question. The next question comes from Chris Snyder with EBS. Please go ahead.
Speaker Change: I think we need to always be prudent and smart around the cost structure, but you'll ultimately growth is going to be an important aspect and we have the fuel in new business wins to do it. So now we have to execute against them.
Speaker Change: Thank you Joe for the question.
Speaker Change: The next question comes from Chris Snyder with UBS. Please go ahead.
Chris Snyder: Thank you. I wanted to follow up on the, and I understand. But it's only been two or three years since the company bought Zerbo, and the investment was already substantial at $600 million. And I thought at the time that, at least Zerga was neutral to, maybe even accretive margins.
Chris Snyder: Thank you I wanted to follow up on the on the insights business and I understand that electrification is a bigger opportunity and probably maybe more worthy of investment dollars, but it's only been two or three years since the company bought zero smart witness in the investment was very substantial at $600 million and I thought at the time at least zander.
Chris Snyder: It's neutral to maybe even accretive margins. So I guess my question is has something changed in those businesses over the last two or three years and even more competitive than you thought.
Jeff Grossman: So I guess my question is, has anything changed in these businesses over the last 23 years? Are they more competitive than you thought? Has anything happened?
Speaker Change: Thank you.
Jeff Grossman: Yeah, it's a great question. So if you look at the most notable public competitor to our Insights business, it's a company called Samsara. You may or may not know them. But their model is very different, and they're investing heavily in the growth rate that they're experiencing in that business. So it does require a very different business model in terms of investment in gaining market share and getting equipment out there to then have a revenue stream associated with the software. The opportunity is real, but it's tough to operate that model in Sensata's business when, number one, we can't run at a loss, and, number two, we have other areas that are more meaningful for us where we can be investing.
Speaker Change: Yeah, it's great. It's a great question. So if you look at the.
Speaker Change: Most notable public comp to our insights business. It's a company called Sam Sarah you may or may not know them.
Speaker Change: But their model is very different and they are investing heavily in the growth rate that they were experiencing in that business. So it does require a very different business model in terms of investment in gaining market share and getting equipment out there to then have a revenue stream associated with the software.
Speaker Change: The opportunity is real.
Speaker Change: But it's tough to operate that model in some <unk> business, where number one we can't run at a loss.
Speaker Change: And number two we have other areas that are more meaningful for us where we can be investing in and so.
Jeff Grossman: And so, listen. I think we don't like a write-off for this business, we don't like changing our perspective on it, but I think that we have to make the tough decisions based upon the investments that we've made, the lines we've put in the water, and where that future holds. And we're going to work to optimize that business to allow it to achieve its full potential. Thank you, Chris, for the question. And we have a follow-up from Christopher Glynn with Oppenheimer. Please go ahead.
Speaker Change: Listen I think we.
Speaker Change: We don't like or a write off on this business, we don't like changing our perspective on it but I think that we have to make the tough decisions based upon the investments that we've made the lines, we put in the water and where that future holds and we're going to work to optimize that business to allow us to achieve its full potential.
Speaker Change: Thank you Chris for the question.
Speaker Change: And we have a follow up from Christopher Glynn with Oppenheimer. Please go ahead.
Christopher D. Glynn: Thank you, I just wanted to clarify on the 50% electrification revenue. I don't think dynapower was a huge part of that. Wondering if you could comment on what the organic was and what your outlook is for the 2024 backdrop for new. Yeah, so trying to think back in time here, it was in the summer of 22. So we had half of 2023 that was the portion from DynaPower that was inorganic. But it's still, you know, sizable 30% plus growth that we're experiencing in the electrification business, Chris. Not 24, anything on 24.
Christopher D. Glynn: Thanks, Yeah, just wanted to clarify on the 50% electrification revenue.
I don't think China power was a huge part of that wondering if you could comment on what the organic was and what your outlook is for the 'twenty 'twenty four backdrop for new business wins.
Speaker Change: Yeah. So.
Speaker Change: Trying to think back in time here arisen this summer of 'twenty. Two so we had a half of in 2023 that was the.
Speaker Change: A portion from a diner power that was inorganic, but it's still sizable 30% plus growth that we're experiencing in the electrification business, Chris about 24 or anything on 24 MBS.
Jeff Grossman: The NBOs will continue to be meaningful. 2022 was the peak year in terms of sourcing opportunities. We ended up at 660 in 2023. And we think around that target is what we would expect for 2024 as well. So a heightened level compared with four or five years ago and disproportionate in the era of electrification.
Speaker Change: Yeah.
Speaker Change: <unk> the <unk> will continue to be meaningful in 2022 was the peak year in terms of sourcing opportunities. We ended up at 660 in 2023, and we think right around that target is what we would expect for 2024 as well so a heightened level off of four or five years ago was disproportionate in.
Speaker Change: The era of electrification.
Thanks again. Yeah, thanks. This concludes our question and answer session. I would like to turn the conference back over to Jacob Sayer for any closing remarks. Thank you, Drew. I'd like to thank everyone for joining us this morning. Sensata will be participating in the Alliance Bernstein Tech Investor Conference in New York on February 29th and the Morgan Stanley Tech Investor Conference in San Francisco on March 4th. We look forward to seeing you at one of those events or on our first quarter earnings call, which will be in late April 2024. Thank you for joining us this morning and for your interest in Sensata. Drew, you may now end the call. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: Thanks again, yes. Thank Smith.
Speaker Change: <unk> concludes our question and answer session I would like to turn the conference back over to Jacob Sayer for any closing remarks.
Jacob A. Sayer: Thank you drew I'd like to thank everyone for joining us. This morning since auto will be participating in the Alliance Bernstein Tech Investor Conference in New York on February 29th and the Morgan Stanley Tech Investor Conference in San Francisco on March 4th.
Speaker Change: Look forward to seeing you at one of those events or on our first quarter earnings call, which will be in late April 2024. Thank you for joining us This morning and for your interest in some sort of drew you may now end the call.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].