Q4 2024 Sensata Technologies Holding PLC Earnings Call
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Good afternoon and welcome to the Synsata Technologies fourth quarter and full year 2024 earnings call.
All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero.
After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your touchtone phone.
Speaker Change: To withdraw your question, please press star, then 2. Please note, this event is being recorded and I would like now to turn the conference over to Mr. James Entwistle, Senior Director of Investor Relations. Please go ahead.
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Speaker Change: Thank you, Wyatt, and good afternoon, everyone. I'm James Entwistle, Senior Director of Investor Relations for Synsata, and I would like to welcome you to Synsata's fourth quarter and full year 2024 earnings conference call.
Speaker Change: Joining me on today's call are Stefan von Schuckman, Synsata's Chief Executive Officer, and Brian Roberts, Synsata's Chief Financial Officer.
Speaker Change: In addition to the financial results press release we issued earlier today, we will be referencing a slide presentation during today's conference call. The PDF of this presentation can be downloaded from Sonsata's Investor Relations website.
Speaker Change: Thank you for joining us for the conclusion of today's call.
Speaker Change: As we begin, I would like to reference Sensata's Safe Harbor Statement on slide 2.
Speaker Change: The company's actual results may differ materially from the projections described in such statements.
Speaker Change: Factors that might cause such differences include, but are not limited to, those discussed in our Forms 10-Q and 10-K, as well as other filings with the SEC.
Speaker Change: We encourage you to review our GAAP financial statements in addition to today's presentation.
Speaker Change: Most of the information that we will discuss during today's call will relate to non-GAAP financial measures. Our GAAP and non-GAAP financials, including reconciliations, are included in our earnings release and in the appendices of our presentation materials.
Speaker Change: Brian will begin today by covering our detailed results for the fourth quarter and full year 2024.
Stefan: Next, Stefan will comment on his perspectives from his first 30 days and key priorities moving forward.
Stefan: Stefan will then turn the call back over to Brian to discuss our financial guidance for the first quarter of 2025 and our high-level 2025 outlook. We will then take your questions.
Speaker Change: Now I would like to turn the call over to Sensata's Chief Financial Officer, Brian Roberts.
Speaker Change: Thank you, James. Good afternoon, everyone. First, let me welcome Stéphane to the team and thank Martha Sullivan for her leadership over the last several months as she stepped back into the CEO role on an interim basis.
Speaker Change: For clarity, let's note that all amounts are denominated in U.S. dollars.
Let me start on slide six.
Speaker Change: We finished 2024 with a strong fourth quarter as revenue of $908 million exceeded the top end of our $870 to $900 million guidance range.
Speaker Change: Adjusted operating margins increased sequentially for a fourth consecutive quarter, and we improved full-year free cash flow conversion by 27 percentage points to 76% of adjusted net income as compared to 49% in 2023.
Speaker Change: With our improved free cash flow generation, totaling $393 million for the year, we reduced net leverage to under three times as of December 31, 2024, for the first time in three years.
Speaker Change: A renewed focus on our core portfolio of highly differentiated sensing and electrical protection products is driving value and improving operational efficiency.
Speaker Change: Over the last two quarters, we exited through a combination of divestitures and last-time buys, approximately $370 million of annual revenue, including both the Insights business and the low-margin, low-growth product pruning efforts we described last year.
Speaker Change: In connection with these portfolio optimization measures, we implemented restructuring activities to streamline process, reduce overhead expense, and consolidate facilities.
Speaker Change: These actions to strengthen our operational foundation will prove critical as we enter 2025.
Speaker Change: As I noted, revenue was $908 million for the fourth quarter of 2024, as compared to $992 million in the fourth quarter of 2023, a decrease of about 8%.
Speaker Change: We exceeded our guide as our top line benefited from higher than expected auto production in both North America and China.
Speaker Change: For the full year, revenue was $3.93 billion, representing approximately a 3% decrease from revenue of $4.05 billion in 2023.
Speaker Change: Adjusting for the sale of Insights on September 30th and other products exited in the second half of the year, revenue would have decreased approximately 1% from 2023.
Speaker Change: Adjusted operating income for the quarter was $175 million, representing a margin of 19.3%, an increase of 80 basis points from 18.5% in the fourth quarter of 2023.
Speaker Change: For the full year, adjusted operating income was $749 million, or 19%.
Speaker Change: Adjusted earnings per share in the fourth quarter of 2024 was at the high end of our guidance range at 76 cents as compared to adjusted earnings per share of 81 cents in the prior year prior year period.
Speaker Change: For the full year, we reported adjusted earnings per share of $3.44, as compared to $3.61 in 2023.
Now let's turn to slide 7 to discuss our segments.
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Speaker Change: Performance Sensing, which includes our auto and heavy vehicle off-road units, reported revenue of $2.74 billion in 2024, roughly flat year-over-year.
Speaker Change: Our strong incumbency and recent share gains on ICE platforms enabled us to drive outgrowth despite the slowdown seen in EV adoption in both North America and Europe.
Speaker Change: Performance Sensing Adjusted Operating Margin for Full Year 2024 was 24.6% representing an 80 basis point decrease year-over-year due primarily to regional revenue mix and the impact of foreign currency.
Speaker Change: For 2024 Sensing Solutions, which is comprised primarily of our industrial and aerospace businesses.
Speaker Change: Reported revenue of $1.06 billion, which was a decrease of 8% year-over-year.
Speaker Change: While we have not yet seen a turn in industrial and market demand, we are encouraged that the business appears to have stabilized, as fourth quarter revenues were down just a couple percentage points as compared to the fourth quarter of 2023.
Speaker Change: Sensing Solutions operating margins for 2024 were 29.5%, representing a 30-basis point increase from 2023.
Speaker Change: Adjusted operating expenses of $264 million, included within our corporate and other segments, were roughly flat year over year.
Speaker Change: This includes approximately $62 million of expense related to programs previously referred to as Megatrend spend.
Speaker Change: Beginning in the first quarter of 2025, we will reallocate these expenses to the business units.
Speaker Change: with a great majority to be included within our performance sensing segment.
Stefan: With that, let me turn the call over to Stefan for his initial thoughts on the business.
Stefan: Thank you Brian, and good afternoon everyone. I'm excited to be here as the CEO of Sensata.
Stefan: Let me take a moment to thank the Global Sonsata team.
Stefan: Our entire board as well as Martha Sullivan who continues to be a valuable advisor to me
Stefan: Most recently with Cedric Friedrichshafen as a member of the management board and as a leader of the electric mobility division with more than 12 billion euro in revenue.
The Global Electric Mobility Division included all powertrains,
Stefan: to ensure that the growing electrification needs of its OEMs customers were met, but also to remain a strong market leader on ICE and hybrid platforms.
Stefan: During my tenure, the division increased revenue by more than €2 billion at an average growth rate of 7% per year, improved plant-level operational efficiencies, and increased the
and Crew Operating Margins.
Stefan: Our responsibilities also included oversight of the Asia-Pacific region and global procurement operations.
Stefan: Our prior employer and Sensata have a long history of collaborating in both automotive and heavy vehicle markets.
Stefan: With a reputation of being the partner of choice to meet complex sensing needs, Sensata has developed an attractive position of market leadership underpinned by its long-lasting and deep customer relationships.
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Stefan: At a time when end markets are undergoing unprecedented transition and uncertainty,
Speaker Change: Sunseta is well positioned across our business segments with a diverse set of high value products and differentiated margins.
Speaker Change: This includes a robust ICE portfolio, an opportunity-rich electrification offering for our auto and HVR customers, and a high-value sensing and electrical protection business serving customers in industrials and aerospace.
Speaker Change: With our strong product suite across end markets, our global footprint allowing us to serve customers in all regions and our deep embedded relationships
Speaker Change: I am confident that there is a significant opportunity to create shareholder value at Synsata.
Speaker Change: To unlock this value opportunity, I'm focusing my efforts on three key pillars which will be critical to our long-term success.
First.
Returning Sonsala to growth.
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Second
Improving our operational performance, and third, optimizing capital allocation.
Speaker Change: While I am only a month into my tenure, let me take a minute to discuss my initial thoughts around each of these three key priorities.
Unknown Speaker.
Speaker Change: Over the last few years, Sunsada has struggled to deliver organic growth against the backdrop of weak-end markets.
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Like many peers, the company responded appropriately by cutting costs.
Speaker Change: The opportunity for growth, however, is not completely dependent on the market.
Speaker Change: It is also achieved through innovation and by winning with the right customers on the right platforms.
Speaker Change: This was paramount to the growth I helped deliver at my previous employer, and I will bring similar perspectives to Sensata.
Speaker Change: As such, our revenue expectation for 2025 is to be organically flat for 2024.
Speaker Change: Longer term, it will be my priority to deliver top-line growth, and I am confident that Sunsata is well positioned with the right product portfolio to do so.
Speaker Change: For example, our industrials business recently launched its A2L leak protection sensor for HVAC units and we have established a market leadership position.
As production of new generation HVAC systems increases,
Speaker Change: We expect this product to be a meaningful growth driver for our industrial business.
Speaker Change: Additionally, we have a strong value proposition across powertrains within auto and HVRR as we demonstrated in 2024 with approximately 350 basis points of outgrowth across these end markets.
Our ice business is strong.
Speaker Change: As demonstrated by recent significant wins, including exhaust pressure sensing with Toyota,
New Emission Sensing Applications in North America
Speaker Change: We also continue to win in electrification where we are focused on growing with leading EV players in North America and Europe.
and Expanding SHARE with local players in China.
Speaker Change: Finally, our aerospace business continues to see modest growth at operating margins well above our portfolio average.
Speaker Change: In the near term, we're focused on operational excellence and continuous improvement as a growth enabler.
I want to be clear on this point.
Speaker Change: Operational excellence is not just about cost productivity and margin percentage.
Speaker Change: It means delivering a high-quality product to our customers on time at the lowest possible cost.
While we efficiently manage production capacity and optimize inventory levels.
Being operationally excellent means doing all that well.
Speaker Change: And that ensures we remain the supplier of choice for our customers, affording us the opportunity to win business and gain share.
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Recently I visited our plant in Aguascalientes in Mexico.
Speaker Change: I was impressed by our many product lines across our business units and the highly capable team at that site.
Speaker Change: That said, it was also clear that we have opportunities to advance towards operational excellence.
Continuing our lean manufacturing efforts.
Accelerating our work to identify incremental design-driven cost reductions.
Speaker Change: and demanding more of our supply chain are all areas where we expect to deliver meaningful improvements.
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Speaker Change: Overall, I'm encouraged by the progress the Sensata team has made in this past year as they improved quality and customer scorecards, achieved quarterly or operating margin targets and refined the product portfolio.
Speaker Change: In the coming months, I will travel to many of our locations, including Bulgaria, Malaysia and China, to meet our customer facing teams and review our operational performance.
Speaker Change: Ahead of these visits, I've challenged our teams to accelerate their operational excellence initiatives.
Speaker Change: And I look forward to seeing that progress with an emphasis on value creation.
Speaker Change: Finally, let me speak to cash flow generation and capital allocation.
Speaker Change: I'm pleased with the team's accomplishments in growing free cash flow in 2024.
Speaker Change: Incremental free cash flow is key to unlocking significant shareholder value as we find efficient ways to generate and deploy cash.
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Speaker Change: Insala's board and I will continue to prioritize reducing net leverage, repurchasing shares opportunistically and maintaining our dividend.
Speaker Change: Are there currently no plans for greater portfolio management beyond what was achieved in 2024?
Speaker Change: Product Life Cycle Management is good business practice, and I expect to continually ensure that each of our products and businesses earns their place within our portfolio.
Brian Roberts: With that, let me turn the call back over to Brian. Thank you.
Brian Roberts: Thank you, Stephan. On slide 8, I want to highlight our cash deployment efforts for the fourth quarter and full year 2024.
Brian Roberts: As mentioned earlier, we are pleased with our improvement in free cash flow conversion as a percent of adjusted net income. We exceeded our target of 67% conversion, ending the year at 76%.
Brian Roberts: We generated $393 million of free cash flow, which was a year-over-year increase of 44%. As you can see from the chart, we've returned to pre-COVID levels of conversion as we improved working capital by reducing inventory levels and controlling capital expenditures.
Turning to slide 9.
Brian Roberts: We also delivered on our commitment to reduce net leverage to below three times trailing 12-month EBITDA as of December 31st, 2024.
Brian Roberts: We retired 700 million of bonds a year early through a combination of 200 million in corporate cash and proceeds from a 500 million bond offering maturing in 2032.
Brian Roberts: With these actions, we have improved the maturity profile of our debt stack, with the next tranche not due until 2029.
Brian Roberts: Additionally, we returned $72 million of capital to shareholders through our dividend, and we repurchased nearly 2 million shares in 2024, using approximately $69 million of cash.
Brian Roberts: These capital deployment actions yielded an improvement in our return on invested capital, which increased to 10.2% for 2024 as compared to 9.7% in the prior year.
Brian Roberts: Let me now turn to slide 10 where I'll discuss our guidance for the first quarter of 2025 and provide some thoughts for the full year.
Unknown Speaker.
Speaker Change: Revenue is expected to be in the range of $870 to $890 million, with a decrease from the fourth quarter primarily due to a return of normal seasonality, as well as foreign currency headwinds.
Speaker Change: So the full year, we are expecting the business to be organically flat year over year at approximately $3.6 billion of revenue.
Speaker Change: As a reminder, approximately $300 million of 2024 revenue will not repeat in 2025.
Speaker Change: This amount is comprised of the sale of insights, divested products, and more meaningful currency headwinds.
Speaker Change: As we've discussed over the last couple of quarters, adjusted operating margins will decrease sequentially in Q1 to a more historical pattern of margins related to the timing of pricing and productivity.
Speaker Change: Currently, we expect adjusted operating margins of 18.2 to 18.4% for the first quarter, representing a sequential decrease of about a percentage point from Q4 2024.
Speaker Change: In comparison, the average Q4 to Q1 sequential drop in the pre-COVID period of 2015 to 2019 was 200 basis points.
Speaker Change: Our better performance compared to historical norms is a testament to the operational initiatives undertaken over the last six months to optimize our portfolio.
Speaker Change: Importantly, and consistent with historical patterns, we expect adjusted operating margins to return to 19% or better in the second quarter, driven by ramping productivity and a seasonally stronger top line.
Speaker Change: We then expect to deliver incremental adjusted operating margin improvement in the second half of 2025.
Speaker Change: For the full year 2025, adjusted operating margins are expected to be equivalent or slightly better than 2024.
Speaker Change: Our Q1 2025 guidance and full year 2025 outlook excludes any potential impacts from recently announced tariffs on imports into the United States.
James Entwistle: With that, I'd like to turn the call back over to James.
James Entwistle: Thank you, Stefan and Brian. We will now move on to Q&A. To allow all of those who wish to ask a question the opportunity to do so, we will limit each participant to one question at a time. Wyatt, please introduce the first question.
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Speaker Change: Thank you. The first question will come from Joe Giordano with TD Cowen. Please go ahead.
Unknown Speaker.
Hey guys, thanks for taking my questions.
Hey, Joe,
Speaker Change: Hey, I wanted to touch on the outperformance in auto right that was that was interesting to see 300 basis points
Speaker Change: Can you talk about what drove that and how we should think about that in the future? Because like, I know you've made a lot of strides on US EV and, you know, that stuff's largely been pushed out. So like, what should we how should we think about the driver of outperformance versus production?
for the portfolio for like the near term.
Sure, absolutely. As we think about 24,
Speaker Change: China is obviously still the more challenging market for us in that the, you know, from a, you know, local versus multinational perspective, and we've talked about last quarter, that once we get into the second half of the year in 2025, we would expect to see more normal outgrowth patterns return in China, as we would lap those comps.
Speaker Change: But for the full year 25, I think our expectations are that you would see us somewhere, you know, kind of in our normal range, maybe a little bit on the lower end, given where IHS is. But, you know, we should see some modest outgrowth in the full year.
Speaker Change: And then just to follow on, if I think about Europe specifically, right, that was a market where you have great customer relationships historically, but we're not on like,
Speaker Change: This generation of EVs because you didn't have the portfolio to do so back when they were being bid. Now that you've had the contractor portfolio for several years, when should we expect you guys to kind of get your fair share of that EV business in Europe?
Speaker Change: Yeah, no, good news there is, you know, many of those wins, we've been designed into that next generation set of wins. And so, you know, really, we're awaiting those launches. And, you know, I think, you know, we all understand that.
Speaker Change: to a more equivalent range between ICE and EVs in Europe. We'd expect that it's probably more of a 26-27 thing than a 25 thing, but we're looking forward to those launches.
Thanks guys
Speaker Change: And the next question will come from Amit Daryanani with Evercore. Please go ahead.
Amit Daryanani: Good afternoon, everyone. I have two as well. I guess maybe just to start with, as I think about the operating margin expansion, ramping from like 18.3 in Q1 to 19 plus in the back half of the year, can you just talk about how much of that is operational improvements driven versus expected revenue leverage? I'm just trying to understand how much of this expansion you think is controllable versus perhaps a bit more revenue driven over here.
Sure, thanks for the question. I think...
Amit Daryanani: You obviously we're going to be organically flat is kind of the thinking for 2025 and we're obviously on a little bit of a lower revenue base than where we were in 2024.
Amit Daryanani: so that's what's driving the margin expectation for the full year to be, you know, I call it 19 to slightly better than that. So think, you know, 19 to 19 three kind of a range.
You know, obviously the volume is important for us.
Speaker Change: such that, you know, with ebbs and flows of revenue, we're able to continue to generate operational productivity. And as, you know, Stefan pointed out, you know, certainly we believe there's different opportunities for improvement as we continue throughout 25, which hopefully benefit the second half of this year as well as start to, you know, tee up 2026.
Speaker Change: Got it. And then, you know, Brian, you folks had very impressive free cash flow conversion in the December quarter specifically, certainly the fully December quarter really stood out. Can you touch on what enables outside conversion in the December quarter? And then how do we think about free cash flow conversion in Canada 25 at a high level? Thank you.
You bet
Speaker Change: We still think there's more to do and continue to kind of push in our days on hand, but we made a significant amount of progress in 24 compared to where we were probably in 22 and 23 to right size those balances.
Speaker Change: You know, again, a lot of this is really just, I'd say, kind of, as we've talked about all year, a refocus on the balance sheet, a refocus on conversion, making sure we're collecting our receivables on time, you know, doing all of that blocking and tackling that's needed to be able to generate conversion. You know, I think for 25, we're looking for conversion levels to be
Speaker Change: Again, at least where we are here and hopefully getting into the high 70s towards 80 percent.
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Speaker Change: And the next question will come from Mark Delaney with Goldman Sachs. Please go ahead.
Mark Delaney: Yes, good afternoon. Thanks for taking my question. Stefan, congratulations on the new role. You mentioned, Stefan, that growth and capital allocation are two of your key priorities. As you think about those two areas, do you have any early thoughts about whether the growth that you're expecting and looking to drive will be more organic, driven by R&D and better focusing on customers, as you mentioned, or do you think M&A is going to be an important component of that growth?
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Mark Delaney: So, thanks for your question. First of all, I, you know,
Jeffrey Cote: It's been 30 plus days, so it's still early, but if I look at the opportunities that I see at this point of time, especially around, you know, the experience that I've gained at my prior employer, ZF.
Jeffrey Cote: I would see opportunities in Asia-Pacific, and especially around China. If I go a little bit deeper into that, what I've done in the past is...
I've always looked at individual OEMs.
Jeffrey Cote: and I've tried to understand which of these OEMs will be the winners of the future. And there one always needs to be somewhat cautious.
Jeffrey Cote: What I've developed with my team at that time at ZSS is an intelligence to define which customers will be growing.
Jeffrey Cote: I'd like to transfer this knowledge and try to implement it here at Sensata and find opportunities to grow within that region.
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
It was one of the ones for me, I just.
Mark Delaney: Sure, Mark. Happy to try to help here. So, to date, you know, the China tariffs that President Trump has announced, you know, we don't view those to date to have any form of material impact.
Mark Delaney: It's probably important to note that roughly 70%, give or take a point or two either way, of our manufacturing for North America is done in Mexico. So that would be kind of the overall scope of the exposure there. Keep in mind that the
Mark Delaney: The tariff itself would be more on the cost side of what we produce as compared to the sale side of what we produce. And obviously we're watching that pretty closely.
Mark Delaney: We're, as you know, a global company. We have redundant manufacturing throughout the world.
Mark Delaney: It's one of our strengths of how we can be region for region for our customers and certainly
Mark Delaney: If tariffs came into play, then we would certainly do our best to be able to...
Mark Delaney: Leverage our global footprint to minimize the exposure as much as possible and you know candidly I'm sure we as long as as well as every other supplier out there will be working with Our customers and you know unfortunately most of that cost likely winds up being passed on to a consumer
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Thank you.
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Speaker Change: Next question will come from Christopher Glenn with Oppenheimer. Please go ahead.
Speaker Change: is targeted. I'm just wondering what you see there in a little bit more depth. Is there sort of low-hanging fruit or how you see that those efficiencies progressing?
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Speaker Change: So, you know, coming from the automotive Tier 1 world, you know, everything revolves around operation. At least a portion of performance revolves around operating excellence.
I think...
Speaker Change: Part of my comment was based on my visit in Mexico, in Argos Calientes, where I was roughly two weeks ago.
Speaker Change: and when I met an excellent team, a very strong team down there, I met a team that has a lot of ideas around operational excellence.
By where I see opportunities, if you scale that up,
Speaker Change: And if you concentrate more on costs, especially around costs, especially around quality, improving quality numbers, delivery performance, lowering inventories.
Speaker Change: and developing that in a more systematic way over every single plant around Sint-Sluiter. So I used Aguas Calientes as an example, but doing that in a very strong, systematic, stringent way, so that you have a continuous year-over-year productivity improvement.
Speaker Change: That's what I see at this point of time. Of course it's still early days. But this is one of the areas I'll be focusing on.
Unknown Speaker.
Speaker Change: I would explain it like this, you know, take for example, the region in Europe, what we see at this point of time, especially with, you know, more conservative governments being elected.
that most probably we would see.
Speaker Change: The idea around that is to, you know, focus or refocus more on these technologies and try to gain opportunities around them.
Unknown Speaker
Speaker Change: Chris, obviously we saw some of that here at 24, with the Stronger ICE business and just the amount of new opportunities coming through have been substantial and the team has done a great job of taking advantage of that.
That was great. Thanks, Brian.
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Speaker Change: And the next question will come from Luke Yonk with Baird. Please go ahead.
Good afternoon. Thanks for taking the question. To start with...
Luke Yonk: Stephen, great to have this call to you. Just given your history at the China market and your time at your previous employer, I'd be just interested in your first impressions of Sensata's automotive business in China, maybe just some high level strengths and weaknesses and areas that you can lean into in the near term beyond what you've already mentioned in terms of focus on the top growing customers and platforms there. Thank you.
Luke Yonk: So I think from what I've seen so far and again I would just like to say it's early early days 30 plus days but I think you know since I've been very active in China's you know
Luke Yonk: have undergone extensive activities to win new business within China. If I look at it from the experience that I bring with in the past,
Luke Yonk: China, especially China plus Asia-Pacific, one needs to look at the complete...
Luke Yonk: is somewhat a different animal. So I think it's important that
You're very selective.
Within the market
Luke Yonk: and the OEMs that you want to win with in that market. I think that is one.
Speaker Change: That's the one part of it. So cannot not include that. The information that you see and heard on that affidavit, it doesn't count as ours and
Luke Yonk: So you would have Chinese OEMs that are, for example, very successful in technologies around hybrids or around range extenders, but they've launched EV models and you would expect them to be successful as well, but they haven't been.
Luke Yonk: And that's just one example that you need to be very, very selective and that's something that I would try and bring into Sensata to understand or to let the team understand which OEMs to win with.
that's that's basically
for the region itself.
Luke Yonk: And there's another aspect I'd like to add to that. So it's not just Chinese OEMs winning within China.
Luke Yonk: There's also obviously a lot of Chinese OEMs that are hungry for growth outside of China. So they want to expand into, especially into Southeast Asia. So we're speaking about Malaysia, Thailand.
Luke Yonk: and all the countries around there, but also wanting to grow in Europe. So there's a lot of effort to grow there as well. So when selecting these...
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Speaker Change: Got it. Thank you for that. And then for my follow up, Brian, maybe
Luke Yonk: Just any segment level margin comments at a high level would be helpful, especially relative to your
Luke Yonk: Yeah, I mean, a lot of the megatrend spending or what had been called megatrend spending was really engineering expense at this point that was working on new business initiatives within the performance sensing business unit. So I would expect the great majority of it, probably 90% plus or minus or so of that expense will wind up in performance sensing.
You know on an overall basis, I think we will
Luke Yonk: You know, our expectation is that we probably continue to see strength in the sensing solutions margin, potentially see that number continuing to increase a little bit, as hopefully we see that bottoming out of industrials.
Luke Yonk: such that, you know, stabilize revenue. They start to grow there at back of HVAC, that allows some growth in the sensing solution gross margins. Performance is probably going to be somewhere where it is, you know, right in that same range with the, and just have to adjust for the pricing.
Unknown Transcript
Understood. Thank you.
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Speaker Change: Again, if you have a question, please press star then one. Our next question will come from Guy Hardwick with Freedom Capital Markets. Please go ahead.
Hi Guy, thanks for your question, of course I can.
Speaker Change: So, two areas of focus around thermal management and electrical protection, especially in the industrial solutions.
Bruce Hepler, Professor of Marketing Journalism, University of Birmingham
Speaker Change: My home market where I come from Germany for example very bullish on heat pumps
Speaker Change: And I think that is one area of opportunity that we would have. And everything around leak detection, for example. So we're launching the HL product and, you know,
This product is.
I'm gonna show
Speaker Change: quite some growth in the upcoming months and years, So those are two opportunities that I would see. I'm sure there are a lot more that I haven't seen yet and I'll dive into the industrials area step-by-step.
Speaker Change: One area maybe that has been touched but where we don't have any significant business as of today is for example everything around data centers.
Speaker Change: There's something I'm getting my head around. I want to understand somewhat deeper and that could also be a future opportunity.
Speaker Change: Thank you for listening. We look forward to hearing from you.
Speaker Change: Thank you. And just to follow up for Brian, obviously, congrats on the excellent performance and free cash flow. And obviously, you gave encouraging guidance for this year. But is there any reason why, eventually, Sinsada couldn't be a 100% free cash flow conversion company, similar to Public Peers?
Speaker Change: I'd rather walk before I run, I guess, to say, you know, there are there are some limitations. I mean, one of the strengths, as I mentioned earlier, is that we have redundant manufacturing in multiple areas of the world. And so
Speaker Change: That's certainly a benefit when we think about how to best use our footprint to be able to effectively meet customer needs. The downside of that is it allows you to not necessarily use inventory as efficiently as you could if you were manufacturing it all in one location.
Speaker Change: So we'll have to continue to see and evaluate that. If you look historically in this business,
Speaker Change: It's really been around an 80% a little bit better kind of a cap on cash flow conversion.
Speaker Change: But, as many of you know, cash flow is near and dear to my heart, and we will continue to do everything we can to drive that number higher. But for now, in 2025, I'm certainly going to try to push to get us to that 80% mark.
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Thank you. Bye bye.
Samik Chatterjee: And our next question comes from Samik Chatterjee with the J.P. Morgan. Please go ahead.
Samik Chatterjee: Hi, thanks for taking my question and Stefan, congrats on the role. I just wanted to understand from you, I know it's early days, but relative to the outperformance, relative to automotive production,
Samik Chatterjee: Do you have any thoughts yet in terms of what is sort of the optimal level that Sunsata should target?
and particularly how would you think about balancing
Unknown Executive, Brian Roberts, Unknown Executive, Martha Sullivan, Jeffrey Cote
Samik Chatterjee: Outgrowth to automotive production and a quick follow-up just for Brian. Brian, I know you on the tariff question you mentioned 70%
Speaker Change: of the North America production being in Mexico. Does all of that get carried over the border to the customer or does some of that get sort of overall shipped to the customer in Mexico? So I just wanted to clarify that, but thank you for taking my question.
Speaker Change: Sure, there was a lot there, Sam, so let me start on a couple pieces and then let Stefan kind of jump in with his thoughts in his first 30 days or so here.
Speaker Change: So, you know, around the tariff question to start, we do use and leverage a Maquila structure, so the majority of what is imported in the U.S. is us effectively carrying it over the border and then effectively then dispersing it to customers.
Speaker Change: There is some that we do within Mexico and there's a potential that we could do more if we had to Depending on exactly what happens with the all these potential for tariffs And so it's one of the things that we will certainly look at with customers To see if there's a more efficient way for us to be able to deliver, you know goods to them
Speaker Change: I think, you know, and there's a lot there, you know, I would comment a couple of things around outgrowth.
Speaker Change: Margin Profile Portfolio, and again, it's early days for Stefan, let him jump in here.
Speaker Change: but I do think this business historically, and there's really no reason to think it's different, has driven outgrowth somewhere in that average of, call it, 3 to 6 percentage points.
Speaker Change: I would think that there's no reason to think that's different regardless of the powertrains and if anything with ice being, I think that's showing good strength in ice.
Speaker Change: kind of reaffirms that range. You know, on the operating margin front, you know, I would say that...
and then we will recover pretty quickly on that.
Brian Roberts: Those are the big drivers, and again, I think as Stéphane mentioned on portfolio, just early days to determine if any other changes will happen over time. I think I could add somewhat, but I think you've answered the question, Brian.
Speaker Change: You're asking me what is the right level of market outgrowth for Sunsiders, maybe a bit early for me to give any number there, but from my experience
Brian Roberts: And I look at the technological mix of Sensata, I would say some, you know, from low to mid single digits, I would say is the right outgrowth that we should focus on.
Thank you. Thanks for taking the questions.
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Brian Roberts: And the next question will come from Joseph Zach with UBS. Please go ahead.
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Brian Roberts: Hi, it's actually Zach Waldjastra. I'm for Joe's back today. So thanks for the question. Appreciate the color around like the margin seasonality. But you know, we think about the second half of the year, like, how should we think about drivers margin expansion, you know, coming from one, you know, the volume leverage and two, but just natural cost assets company resets for the lower like sales base.
Speaker Change: Can we expect Megatrend spend to also be rebased? And then my second quick question is, with free cash flow conversion improving, what are your thoughts around capital allocation for the year, whether it's buybacks or M&A potentially? Thank you.
Speaker Change: on so let me start with capital allocation you know I think
Speaker Change: You know, our view has obviously been to kind of look at both, you know, net leverage, continuing to reduce leverage, and opportunistic share repurchases, kind of 1A and 1B, and you can continue to kind of alternate the order of those. I think that's probably the approach of the, you know, at the present time for us to be able to deploy cash.
Speaker Change: Around margin, Zach, if I heard your question right. Sorry, came through a little bit kind of garbled, but
Speaker Change: You know, in the second half of the year, certainly, you know, based off of just incremental revenue that we would typically see.
Speaker Change: As we go through the year, getting kind of the full effect of all of the cost initiative work that we did.
Speaker Change: Certainly our expectations are in the productivity improvements which compound over time.
Speaker Change: that we continue to see the margin lift in both Q3 and Q4.
Speaker Change: If I had to hazard a guess, it's probably similar levels of increase as you saw here in 2024 in the back half, but obviously we're trying to make sure we
Speaker Change: We're as aggressive as we can there so that we can we can ensure that we will be You know at or up for the full year 25 as compared to 24
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Great, thank you so much.
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Speaker Change: Again, if you have a question, please press star then 1.
We'll wait momentarily in case anyone queues up.
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Unknown Executive, Martha Sullivan, Jeffrey Cote, Unknown Executive, Martha Sullivan,
Speaker Change: With no further questions, this concludes our question and answer session. I would like to turn the conference back over to Brian Roberts for any closing remarks.
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Brian Roberts: So everybody, thank you for joining today. Certainly appreciate all of your questions and your continued interest in SIDSADA. We look forward to speaking with you again next quarter. And operator, you can disconnect the line. That concludes the call.
Brian Roberts: Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
For more information visit www.FEMA.gov
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