Q2 2025 Sensata Technologies Holding PLC Earnings Call
Good afternoon, everyone, and welcome to the Sada Technologies Q2 2025 earnings call.
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At this time, I'd like to turn the floor over to Mr. James Entwistle, Senior Director of Investor Relations. Sir, please go ahead.
Thank you. Jamie and good afternoon, everyone.
I'm James Aunt, whistle senior director of investor relations for SATA, and I would like to welcome you to some thought of second quarter 2025 earnings conference call.
Joining me on today's caller Stefan Von shookman. Since I was chief executive officer and Andrew Lynch, sat as Chief Financial Officer.
In addition to the financial results press release we issued earlier today, we will be referencing a slide presentation during today's conference call.
The PDF of this presentation can be downloaded from Sensata's Investor Relations website.
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 would like to reference Sensata's Safe Harbor statement on slide 2. During this conference call, we will make forward-looking statements regarding future events or the future financial performance of the company.
Involves 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-Q and 10-K, as well as other filings with the SEC.
We encourage you to review our GAAP financial statements. In addition to today's presentation,
Much 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, in the appendices of our presentation materials, and in our SEC filings.
Stefan will begin the call today with comments on the overall business.
Andrew will cover our detailed results for the second quarter of 2025 and our financial outlook for the third quarter of 2025,
Stefan will then return for closing remarks.
We will then take your questions.
Now, I would like to turn the call over to sata's Chief Executive Officer, Stefan Von shookman.
Thank you, James and good afternoon everyone.
Before I begin discussing our results for the second quarter.
I'd like to take a moment to congratulate Andrew Lynch, who was named our Chief Financial Officer last week.
Andrew has been a valuable partner to me since I joined Sada.
And the board and I have full confidence in him.
Andrews, extensive financial and operational experience at Sada.
Prepared him well for this role.
I'm excited to have him as a partner transformation Journey.
Now, let's begin on slide 3.
We delivered a strong quarter of 2025, with revenue adjusted, operating income, and adjusted earnings per share all exceeding the high end of our guidance for the second consecutive quarter.
This is an important proof point for the resilience of our business and our teams determination to execute in the face of challenges such as volatile and markets.
Geopolitical uncertainty. And the cyber security incident that we disclosed in April,
When I first spoke to you in February,
Points for shareholder value creation.
Improving operational performance.
Optimizing capital allocation and returning to growth.
And I may call a provided an update and some of the specific work we are doing on each of these pillars.
And much of the focus of the at update was operational excellence.
Today, I will go a bit deeper on Capital, allocation and growth drivers.
Before we get to capital allocation and growth.
I'll share a brief update on operational excellence.
Rolled out a number of initiatives over the last 6 months, and I'm pleased with our recent accomplishment on this journey.
Our cash conversion rate. In the second quarter was 91%, a significant step up from our first quarter 2025 conversion rate of 74%.
This improvement reflects our focus on unlocking cash to execute our capital allocation strategy.
With operational excellence initiatives. We're optimizing our working capital and creating margin resilience in our business.
Enabling us to deliver on our earnings commitments.
Now, I'd like to go deeper on our next pillar, optimizing our Capital allocation.
Simply put.
We will deploy capital in a manner designed to maximize shareholder returns.
In the first quarter.
Seize, the opportunity to repurchase 100 million of shares.
In the second quarter, we purchased another 20 million of shares and funded our dividend while also accumulating in additional 74 million of incremental cash.
In turn we reduced our net leverage ratio from 3.1 times traveling. 12 months adjusted, Evita at the end of the first quarter to 3.0 times at the end of the second quarter,
This further, strengthened our already, strong balance sheet.
In the past, we have heard me talk a lot about benchmarking as we look to drive. Operational excellence.
We are using extension external benchmarks for each of our key pillars.
As we look at comparable companies across the market.
Our differentiated margins. Stand out.
And our cash conversion is improving. However,
Our capital structure. And net Leverage is a bit of an outlier.
for the balance of this year and into 2026, you can expect us to continue to prioritize deleveraging
now I'm excited to share our progress on our growth pillar,
Just like Capital. Allocation growth is an enabled by operational excellence.
Over my Decades of experience in Industry. I have learned that the right to win is earned by consistently serving customers on time at the lowest possible cost.
With high quality products.
Operational initiatives will ensure that we do exactly that.
It is equally important that we are disciplined about the new business we pursue.
We need to win with the right technologies on the right platforms, at the right customers.
Of the last several months. I've worked with this in s team to study our past business when it's a bit deeper.
And to identify the characteristics of our most successful programs.
We're using those learnings to be more selective about how and where we invest and what business opportunities we pursue.
for us, it means the following
First.
Stick to our core product technologies: pressure, temperature, and electrical protection.
And certain specialty, sensing such as Force position, flow and leak.
Next.
Prioritize platform driven applications where High switching costs, favor incumbency and with an emphasis on regulated or Mission critical sockets.
Finally.
Focus on the Right End Markets.
Exposure to Kia secular tailwinds and appropriate diversification.
As we apply these criteria, our priorities become clear.
In our Sensing Solutions segment, HL Gear Gas Leak Detection is a recent example of a business opportunity that checked all the boxes for us.
We were able to leverage our core sensing capabilities to win a regulated sense of socket on air conditioning system platforms.
In 2025 this business is on track to deliver, approximately 17 M, 70 million dollars of Revenue and we continue to increase our market share with the goal of well over 100 million dollars of Revenue next year.
Look forward to leveraging. Our incumbency with key oems to win globally with similar regulatory requirements on the horizon in both Europe and Asia.
And our performance sensing segment, we've spoken a lot about the content opportunities on both ice and Evie platforms.
As well as the rapidly evolving new energy vehicle or Nev Market in China.
It is clear that we need to win in China to maintain and grow our global market share.
The China market is opportunity-rich, with a rapid adoption of any V's and growth of local OEMs.
The high-voltage applications on any of these offer incremental content opportunities for us compared to the traditional ice business.
Our China team is actively driving Business Development with local oems in China, to support their growth Ambitions, both in China and Beyond.
We have significantly increased our pace of new business wins in China, primarily on Neves.
Our customers are placing value on our product: performance-proven field quality in the local market and cost competitiveness.
And while established production scale.
More than 90% of these wins are with top local oems and leading Nev players.
Due to shorter design cycles in the China market, we expect many of these business wins to materialize into revenue later this year.
And serve as the foundation for a return to more consistent market outgrowth in 2026.
The content will.
Be securing include.
As well as powered.
Content such as tire pressure monitoring systems or TPMS.
1 of these recent TPMS wins featured, new tire burst detection technology and we are excited to share that. We were the first to bring this technology to market for an active safety application.
Tire boost detection enables the vehicle to activate its stability control features at the first sign of a tire rupture event, dramatically improving occupant safety.
This is exactly the type of technological differentiation that gives us an edge in the market.
now that we've spoken about our key pillars,
I'd like to talk a little bit more about what we are seeing in our end markets today.
Let's turn to slide 4.
I will start with turret tariffs and trade policy.
Through a combination of reimbursement, agreements with our customers and modifications to our supply chain.
We have now successfully mitigated all of our tariff costs in the second quarter compared to approximately 95%, and we spoke to you in May.
Since our last update, we've also seen a reduction in our exposures in connection with the de-escalation between the United States and China.
Additionally.
We are pleased to report that we have not seen significant impacts from recent tariff, escalations on Commodities, or from export controls, on rear earth, materials.
More broadly in our end markets, we're seeing a mix of volatility, resilience, and growth.
I'll say a few highlights now and then Andrew will provide more specifics as he walks you through our results and guidance
On the performance sensing side. We are pleased with Automotive production holding up stronger than initially expected. When trade tensions escalated.
Global production has grown in the first half as the market in China has been very strong.
HBO markets have been soft, particularly with on-road trucks, and we're starting to see off-road production slowed down as well.
As a result, we're managing our costs accordingly.
In our sensing solution segment, we're seeing more growth with highlight which highlights the advantages of our end Market diversification.
Blood growth.
In Aerospace. We saw over 5% Revenue growth. In the second quarter against the market That Grew roughly 3%.
Our Market Outlook for both Industrials and Aerospace in the second half is largely consistent with what we saw in the second quarter.
In summary, I am happy with what we have achieved so far this year and our Q2 results demonstrate the progress, we are making on our transformation plan built upon the 3 pillars.
As we progress to the balance of 2025, and into the New Year, we will maintain our focus and rigor on these initiatives to drive shareholder value.
With that, I will turn the call over to Andrew to provide greater detail on Q2 Financial results. And our guidance for the third quarter,
Thank you, Stefan and good afternoon everyone.
I want to begin today by extending my gratitude to Stefan and our Board of Directors for placing their confidence in me as sensitive as Chief Financial Officer.
I would also like to thank this team in our Finance Organization for their support over the last several months.
Let me start on slide 6.
we delivered another strong quarter in Q2 with results above our expectations across all of our key metrics,
We reported revenue of approximately 943 million for the second quarter of 2025 as compared to revenue of 1 billion 36 million in the second quarter of 2024.
While revenues were lower year-over-year, primarily due to the previously discussed divestitures, we saw $32 million of top-line growth sequentially from the first quarter of 2025.
...and exceeded the top end of our guidance range, reflecting our rapid recovery from the cybersecurity incident in April and general resilience in our end markets.
Adjusted operating income was approximately $179 million, or a margin of 19.0%, and included approximately $12 million of zero-margin pass-through revenues related to tariff recovery, which were 20 basis points dilutive to our adjusted operating margins.
Adjusted operating margins.
Improved 70 basis points.
from 18.3% in the first quarter of 2025,
Adjusted. Operating margins were consistent with prior year quarter at 19.0% and increased 20 basis points year-over-year. Excluding the dilutive impact of tariff pass through
adjusted earnings per share of 87 cents in the second quarter of 2025 represent represents an increase of 9 cents sequentially from the first quarter of 2025 as we delivered on our margin expansion plans, and a decrease of 5 cents as compared to the second quarter of 2024 due to Devastators
We achieved robust free, cash flow of $116 million in the second quarter and increase of 17% year-over-year.
Rate of 91% of adjusted net income and increase of 17 percentage points compared to the first quarter of 2025 and 20 percentage points. Compared to the second quarter of 2024.
As Stefan mentioned, free cash flow is a key focus for us and our improvements. We aim to accelerate our ability to execute our capital allocation strategy.
Now, let's turn to slide 7 and I will discuss Capital deployment.
In the second quarter, we executed share repurchases totaling $20 million and returned 18 million to shareholders through our regular quarterly dividend.
We reduced our net leverage to 3.0 times trailing twelve months adjusted EBITDA, compared to 3.1 times at the end of March.
With our Capital, allocation strategy, we delivered roic of 10.1% up, 30 basis points compared to the second quarter of 2024.
Looking ahead, you can expect us to continue to deploy capital in a manner designed to maximize shareholder. Returns with an emphasis on deleveraging, in the near term.
Turning to slide 8 I'll talk through the results for our segments as well as provide more color on what we are seeing in our end markets.
Let's start with the segment results.
Performance, sensing Revenue in the second quarter of 2025 was approximately 652 million.
A decrease of approximately 10% year-over-year.
Due to product diversions and lower on-road truck production in North America and Europe.
Approximately 147 million or 22.5% of performance sensing Revenue.
Representing year-over-year, margin expansion of 20 basis points, inclusive of any dilutive impact from tariffs.
Sensing Solutions revenue in the second quarter of 2025 was approximately $291 million, an increase of approximately 9% year-over-year.
Growth driven by new content in our Industrials business and market outgrowth in our Aerospace business.
Sensing Solutions' adjusted operating income was approximately $88 million, or 30.2% of Sensing Solutions revenue.
Representing year-over-year, margin expansion of 50 basis points again, inclusive of any dilutive impact from tariffs.
As a reminder corporate and other costs have been recast to exclude certain costs previously referred to as Mega Trends spend which are now presented within the 2 reporting segments.
Corporate and other adjusted operating expenses were up $4 million versus the second quarter of 2024, primarily driven by higher variable compensation due to better underlying performance.
Now, I'll provide caller on what we are seeing in our end markets.
In our Automotive business. Production estimates have been volatile and trade policy has evolved. Throughout the year, we have seen double-digit market growth in China, and the first half.
Partially offset by market weakness in North America and Europe.
Looking ahead to Q3, we see auto production moderating to roughly flat year-over-year.
And down about 1 million vehicle units sequentially from the second quarter on typical seasonality.
In our heavy vehicle and off-road business, we have seen softness throughout the year, with on-road truck production down more than 20% in the first half across North America and Europe.
And we expect the softness to persist in the second half of the year.
Global off-road markets. Have seen modest growth growth in the first half, but we are now experiencing a significant slowdown in Q3
In our sensing solution segment, we are seeing Market strength.
Both Industrials and Aerospace are seeing low single-digit market growth and we are seeing high, single-digits outgrowth in industrial as our gas leak detection, business has ramped nicely.
The market outlook I just discussed is reflected in our guidance, which I will take you through in a moment.
Looking a bit. Further ahead to Q4, we are monitoring third-party forecasts and customer demand signals and we expect more clarity as trade policy develops in the days and weeks ahead.
Lastly, before we get to our guidance, I'd like to give just a brief update on tariffs.
Let's turn to slide 9.
When we guided for the second quarter, we estimated that we would incur $20 million of tariff costs.
Which we expected to fully recover on a dollar basis, based on reimbursement agreements we were able to secure in partnership with our customers.
At this level of cost and pass-through revenue, we expected 40 basis points of adjusted operating margin dilution.
Subsequent to our second-quarter guide, we saw a de-escalation of tariff rates between the United States and China.
Additionally, we continue to work on our supply chain to manage our exposures.
The net result of this was that we incurred approximately $12 million of tariff costs in the quarter and recorded $12 million of pass-through revenues.
Accordingly, tariffs passed through were approximately 20 basis points dilutive to our adjusted operating margins.
With that, let's turn to slide 10, and I will walk through our expectations for the third quarter of 2025.
We expect third quarter revenue of $900 million to $930 million.
Adjusted operating income is expected to be between $171 million and $179 million.
Adjusted operating margins of 19.0% to 19.2%.
And adjusted earnings per share of $0.81 to $0.87.
At the midpoint of our guidance range, we see approximately 10 basis points of sequential margin expansion. However, we have assumed $15 million of tariff costs and associated pass-through revenues in our third quarter guide, slightly higher than the $12 million we reported in the second quarter due to business mix.
IAL adjusted operating margin expansion, compared to the second quarter, is in line with the margin expansion targets we talked about last quarter.
As noted in our press release and earnings materials, our guidance and tariff assumptions are based on trade policies and tariff rates in effect as of July 28.
Earlier this month, we announced our third-quarter dividend of $0.12 per share.
Payable on August 27th to shareholders of record as of August 13th.
Finally, before I turn the call back to Stefan, just a brief update on the cybersecurity incident that we disclosed in April. In connection with this incident, we experienced an approximately two-week disruption in our business.
Thanks to our team's preparation and resiliency, our business has fully recovered.
We are grateful to have this incident behind us without any significant disruption to our customers and without material financial impact.
With that, I will now turn the call back to Stan.
Thank you, Andrew.
I said this last quarter, but it warrants repeating.
There is a significant transformation underway at Sada.
The foundation of this transformation is the key pillars that I've discussed on each of our earnings calls since I joined Sensata at the beginning of the year.
I would like to conclude today's remarks by sharing a bit more about why these are key to our vision and what you can continue to expect from us.
Operational excellence is about stabilizing our core business to serve as an enabler to both our capital allocation and growth pillars.
Our capital allocation strategy is to utilize our cash flow improvements to deploy capital in a manner designed to create shareholder value in the short term and long term, with an emphasis on deleveraging.
and finally,
Our return to growth will be supported by a focused product strategy and a clear evaluation criteria for growth opportunities.
Success on our key pillars will be apparent in phases.
Today.
Consistent execution with adjusted operating margins at or above 19% and free cash flow conversion at or above 80%.
The next several quarters.
Net, leverage continues to improve.
And in the years ahead.
Return to more consistent growth.
I'm excited about what the future holds, and I look forward to continuing to update you on our progress moving forward. I will now turn the call back to James for Q&A.
Thank you, Stefan, and Andrew. We will now move to Q&A. Jamie, please introduce the first question.
Question and answer session.
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Our first question today comes from Mark Delaney from Goldman Sachs. Please go ahead with your question.
Uh, yes, uh, good afternoon. Thanks for taking my questions. Uh, nice to see the free cash flow conversion pickup, and Andrew, congratulations on the expanded role.
Thank you.
I wanted to start with EBIT margins, which expanded by 25 basis points year-over-year, excluding tariffs, even as organic revenue was down about 2%. You expect sequential margin improvement again in Q3. Can you go into more detail on what's driving that margin improvement, both in Q2 and Q3? And I guess, as you look longer term, do you see a path to 20% plus EBIT margins?
And we're trying to improve the plants that are weaker than the best benchmark within Sada. As one example, another example is, we're working on Commercial Excellence. So we have a much stronger rig around that.
And then, like I said, there are other examples. So we're working, for example, on improving our procurement and gaining effects from that. And that's basically the fact that you see with other initiatives that you can see the margin improvement. But for more details, let me pass on to Andrew.
Thanks Stefan uh Mark I think I think to summarize so you know it's it's primarily operational productivity, that's driving, the sequential margin expansion uh and we feel pretty good about our margin levels in the in the 19% range and the near-term here in terms of longer term margin expansion opportunity. Um, we're we're we've not established any Targets at this time, we're really focused on short term and margin, resilience will provide more clarity on sort of what the longer term Outlook. Uh, looks like as we as we get into sort of the 26 guide period, but for now we're focused on just margin resilience at at the current level and sequential margin expansion quarter on quarter.
Uh, that's helpful. My follow-up is also around EBIT margins and how mix may or may not affect that. You talked about diverging trends you're seeing in some of these end markets: industrial picking up, and you said HVR is seeing signs of weakness. If you see those sorts of divergent trends by end markets, what might that mean, if anything, for EBIT margin?
Potential headwind or Tailwind uh, from from mix uh that investor should potentially uh expect thanks.
Yeah good good question mark. So um mixed up only matters in our business I think as we've as we've highlighted before our lowest margin business is our Automotive business. Our higher highest margin is our Aerospace business hbr, and Industrial are kind of in between, um, in in, as we look at the what we're seeing in the, the current quarter and, and Q3, we've seen softness in the hvr business, and strength and Industrial. And so we basically been able to offset any uh, any mix headwind from the, uh, from the hvr softness with the outgrowth that we're driving in industrial and we feel good that the the business mix kind of moving forward. Throughout the balance of the year, will support the margin expansion that we've committed to
Thank you.
Our next question comes from Joe Giordano from TD Cowen. Please go ahead with your question.
Hey guys, thanks for taking my questions. Um, as you, Stefan, have kind of gone through the portfolio now for a little bit longer. Um,
Where do you think you stand on?
More product rationalization, skew reduction that you need to do, scrubbing of backlog that you'd want, kind of a long time ago that's been pushed out. Like where do you think you stand on those things?
All right. Can you just repeat the question and for the last part?
So I'm just curious on where you stand as you like, evaluate the portfolio. Now that you've been here a little while, like, how much more skew reduction is is necessary or, or small Investments and and things like scrubbing of the backlog to see like how realistic delivery is on things that were 1, you know, maybe a long time ago and when markets were different
Well, look, I think, um, you know, a lot of the...
Skew reduction, or let's call it a portfolio. Cleansing has been done in the last, um, uh, in the last year. So there's been a, you know, significant work done by the team and, uh, around the interim, co-co-co Martha. But look, it's a continuous process.
So um, I'm looking at all types of skus, be it in automotive, be it in hvr, but also industrial. And um, anything that we don't feel that doesn't fit to our portfolio at this point in time. Um, we will cleanse of of our overall, um, of our overall skus. So it's a continuous process. It's not something that um, is is finished after we've um, gone through all of them. It's something that we we, you know, follow through um month-to-month actually. Yeah. So nothing significant at this point in time but um something I'll keep a focus on it.
And on the backlog, like the recovery, recoverability of stuff that you wanted a while ago.
Uh, and we're just focused on supporting the market as it is today.
Thank you and then and the follow-up. I know it's still early and but just any uh, anything incremental to find, you can give us on
The China positioning. I know this is a big priority of yours to evolve how we are positioned in China with the local OEMs. So maybe any updates there. Thank you.
Yes, yes. Also, of course I can. So look I think January we need to say there's been quite an extreme shift from multinational to Lo local oems. Um we see that the market is roughly at 70% local now and um we see that government incentives, you know, benefited, um, 2024 and they basically continue to drive 2025
Um, on the other hand, it's still encouraging obviously to see that multinational. Oems are continuing to make meaningful investments in China. So what does that mean for Sada? Um, I would say it's a return to outgrowth. So 90% of all the business of the year to date new business wins are now with top the basically with the top 5, local oems and uh with leading so-called new energy vehicle players and around that. Um, if I break that down to more product to more product focused, the high concentration on high voltage um, and powertrain agnostic content. So, um, hope we basically,
Respect modest outgrowth in the back half, um, based on third-party forecasted production mix. And um, uh, we are also pretty confident that um, it's going to be more consistent outgrowth in the beginning of 2026.
Our next question comes from Awsim Moen from Bank of America. Please go ahead with your question.
Hi. This is Ashley on the call for Wamsi. Uh, just one question for me. We were wondering if you saw any pull forward of demand that impacted the queue time period, specifically in OS. Just any color you could give us here. Thanks.
Sure, happy to happy to answer that. So, um, the short answer is no, I think, for a few, a few Dynamics at play here. So, in, in the second quarter, uh, the early part of the quarter, the supply chain was coming up the curve on usmca compliance, particularly, in April. And so, I think what we saw there was the oem's consuming inventory earlier in the quarter. And then replenishing it in the back half of the quarter, but effectively Q2 was basically normal. Um, and then looking ahead to the third quarter, our order book's pretty pretty solid and filled to where we would expect it to be relative to where we guided the quarter uh and certainly as we talked to our Channel Partners on the on the industrial business and and other end markets, we're not seeing any uh any pull ahead in in our business. I mean that that may be more of a dynamic further down the supply chain.
But where we said it's pretty much business as unusual in terms of order book correlation to production.
All right, thank you. I'll pass it back.
Our next question comes from Costa to Foolis from Wells Fargo. Please go ahead with your question.
Hey guys, thanks for taking my question. Uh Andrew congratulations. My first question is for you so you know you've been at some thought I think for a majority of all your professional career you've been there a while you've probably seen you know, a lot of the maybe archaic processes that have been in places. You've moved up the ranks uh but now you're literally a chief decision maker. So I just want to see like what are your what are the some of the things you're looking to improve within Sada?
Thanks, Ken. Thanks for the the question. Uh, you know my my primary focus here is on enabling the transformation. That's defined. As has outlined here in his key pillars. I think we've we've got the right priorities to drive performance. There's a lot of work behind the scenes that that goes into enabling these key pillars. You know as Stefan mentioned there's there's a bunch of initiatives that underpin, the operational excellence pillar and a lot of that comes down to making sure that we've got the right analytics and the right data to drive the right decision making and so that's that's part of the the the role of the finance org from a from a tactical standpoint and so certainly focused on enabling that and then the other piece around around Capital allocation and growth.
Uh, ensuring that we're applying the right rigor to our growth investments.
And ensuring that we're we're allocating capital in a way that that that creates shareholder returns. So I think just reiterate that the pillars, that's defined as outlined and and I'm fully on board with enabling those
Optimization efforts, impacting your inventories, right? So, it sounds like part of the strategy is, like, standard is standardization, right? So are you bringing in like a single component across? Um, your products that reduce cost and variability and, um, you know, there, we got to keep High stock of that component, and that kind of reduces the working capital Tailwind.
I I I think as we think about inventory it, it's 2 levers. So certainly focusing on productivity and working. Uh unit cost reduction to drive inventory, cost down and drive product costs down, ultimately frees up more working capital. Uh, the other piece is just the the, the amount of inventory that we carry and 1 of the things we talked about on on past calls about a potential driver for that is, uh,
Better integration of our supply chain planning and demand planning and making sure that we're we're using our our systems. And the data that's available in the End Market to optimize, our lead times optimize our demand signal and optimize our production planning. All of that culminates in an inventory reduction opportunity. Uh and and that's a that I would categorize as sort of a go forward lever to continue to drive uh higher levels of free cash flow conversion. And and may I, if I may add Andrew what we still, what we, what we do is something I mentioned initially, is that we're benchmarking. Our inter inventory levels plant for plant. Um, uh, on the 1 hand benchmarking, plants amongst each other.
With similar products, we are trying to figure out who has the best inventory level, and, you know, what other plants can strive for. But then, on the other hand, we are also looking outside of Sada.
And uh, looking at, you know, who's the best in class in in, in inventory levels and measuring ourselves against them and, and redefining our measures and trying to try, try and drive inventory levels down.
My question is, guys.
Thank you.
Our next question comes from Joe Spock from UBS. Please go ahead with your question.
Uh, thanks so much everyone. Um, I actually want to pick up on the free cash flow theme and, um, you know, how you're thinking about it for the second half. I think I heard, uh, 80% sort of conversion, and I'm not sure if that's a long-term target or a midterm target. Um, and then also just on capex.
And maybe this is obviously part of free cash flow. It looks like...
You know, you're at 3% of sales in the first half. I think that's, you know, below historical, but maybe this is sort of the new normal for some companies. So, maybe just some help there on how you're thinking about that.
So thanks for the question. Um, look, generally, we’ve set ourselves an ambition to strive for a cash conversion rate at 80% or more.
Yeah, and and I would just add to that. So um, good point on the uh, on the lower level of capex in the in the second quarter, some of the dynamic there was candidly just as we were looking at uncertainty the uncertainty in the end markets and we saw production forecasts drop dramatically early in early in, Q2 following the trade policy or or uh tariff rate escalations. We throttled back some of our capex.
Uh, to respond to potentially lower uh, lower Revenue levels, obviously, that that didn't materialize. We saw that, that demand get restored. And so we'd expect an uptick in capex in the in the back half of the year that said I expect to be able to maintain pretty high levels of of free cash flow conversion. Going forward in 80% really is the floor. We have plenty of levers available to us to maintain uh reasonably solid cash flow conversion here. Moving forward, inventory hasn't come down dramatically yet there's still opportunity there capex. While it may not be as low as it was in. In the second quarter, we still have the opportunity to, uh, to understand or spend at a level consistent with depreciation and so, uh,
Headwind.
Okay, so even with depreciation, is that a good guide? Um, and I guess like versus, I think in the past, it's sort of been like a 4% level. Do you think going forward it can be a little bit below that?
I think 4% is probably a good proxy for what sort of normalized run rate capex. It looks like it can vary in any given quarter, and certainly, we adjust it up or down based on our view on market certainty and the investment opportunities ahead of us. You know, whether those are sort of near-term automation opportunities to drive productivity or longer-term opportunities around growth investment. We try to keep that all in balance.
Okay, and then, just on the deleveraging comment. Um,
Planning to sort of gross debt down. Um, are there any sort of leverage targets, or how should we think about minimum cash? Just so we understand how investors can think about what's available for a dividend share, repurchase, or debt repayment.
Yeah.
In the short term, we'll look to reduce net leverage by accumulating cash on the balance sheet.
That just the function of where our debt maturities sit and what the current interest rate environment. Looks like we don't have any debt maturities until 2029. That doesn't mean that we're going to wait until 2029 to address gross debt. There will be opportunities here in the in the coming quarters to to potentially take some action there. But in the, in the immediate term, our focus is going to be on accumulating accumulating cash on the balance sheet. And then, of course we we still have a, a share repurchase program. We didn't execute, uh, you know, Q2 at the same level we did in q1, but we'll still maintain the flexibility to opportunistically repurchase shares as we see fit and keep that in balance. With our, with our net leverage targets. Certainly we'd like to be below 3, 3 times levered in the near term and and moving towards 2 and a half relatively soon.
Thanks so much.
Our next question comes from.
Shearious Patil from Wolfe Research, please go ahead with your question.
Hey, thanks so much for taking my question. Maybe just coming back to the China auto piece, can you just help level-set? How big is this for you today? And just to clarify, how much of an uplift could we see from the new launches that, uh, that you mentioned, Stephan, that are starting, uh, later this year?
And then, just to wrap, just to put a finer point on it. How do you see the competitive landscape in China?
Specifically on the auto, on the auto business, in the past, the sense was that the mid to low end of the China market was very difficult to penetrate, either given vertical integration or price competition among some of the local suppliers. I'm just curious if that is still how you see it, or have there been changes in the market.
It's, uh, it's pretty much the same as.
The, uh, a very competitive, um, region, a very competitive country, as you know, there's um, amongst the RMS, you know, there's price wars going on, um, which obviously trickles as an effect down to the, uh, Tier 1 level. Um, and that leads us to obviously be extremely focused on cost. That's something that we, um, have re-initiated. Um, since that has a strong history of being very.
Cost focus. And that's something that we've been focusing even more on in, uh, in, um, in in China. Um, and, uh, following through on that on a very stringent way to stay competitive within the market. So, so what we do is, um, we take our products. Uh, we go back into the design and, uh, and we take out as much cost as we can, um, in order to be competitive. And on the other hand,
um, you know
Some of the products is, you know, mentioned in my, uh, earnings in, in my, in my scripts just earlier on, um, come with the certain level of, um, technical differentiation. Take the, um, you know, the, uh, Tire boost.
Uh, systematic. Um, and that allows us to enter the market first and gain market share in comparison to others that do not have these functionalities yet. So that's that's how we tackle the competitiveness, um, in the market. Um, look, and it's, again, it's a very important market for us, as you can imagine that some of the, you know, the Chinese oems that are um hungry for market, growth are stepping outside of uh, of the country and you know, trying to gain market share and
In Europe and Southeast Asia. I appeared in Thailand in Malaysia and so on. So high dynamic dynamic there and that makes it interesting for us, you know, as a as a growth opportunity. Because if we win with the, uh, with the right players like we have, um,
I mentioned that we've won. 90% of our year-to-date um new business with the uh with with the top 5, local oems. So with really, with leading so-called new energy vehicle players. Um, and, and why do why do I say that? Because those are the players that for most probably also show growth outside of China and that will give so side of the opportunity to, you know, to to benefit from that additional growth um in, for example, southeast Asia, or in Europe or wherever else, they're growing up
Opportunities that we've highlighted would be sufficient to return us to kind of the low to mid single digits outgrowth that we've targeted in our auto business.
Uh, so that'll give you a little
About specific platforms or programs yet, but that's sort of the magnitude.
Okay, okay. That's helpful.
Uh, and then, uh, maybe pivoting to HBO.
Uh, you talked about meaningful weakness in the end market there, Curious. How are you thinking about outgrowth in that business, both near-term and long-term? In the past, you've talked about 3 to 6 points of outgrowth as a target for auto. I'm wondering if there's a similar target.
For HBO.
Well, let's
So is that make that makes sense in? Let me first start with the End Market, um, with the end markets and let me give you our perspective and then I'll I'll um give you an up. Look on how businesses developing for Sada. So on the end markets, um, for Android trucks. Um, we see that obviously for the entire year of 2025 production is is down and you need to look at that from a regional perspective. So taking North America for on-road trucks. We we um we projected really quite a strong downturn of roughly 24% year-over-year for this, um, Financial year of 25 and in Europe on-road, trucks were soft in the first half which
Is roughly 6% down but projected to be up uh, in uh, in the second half of of this year, um, and um, looking at Agriculture and construction, so it's expected to be be down in a high single digit percentage. And, um, then the second half, um, more positive than the, than the first half and then, if you look at, you know what, what are the actual slowdown, you know, drivers that are pushing that. So, for on-road, um, we're saying in North America in North America, there's been no buy ahead on EPA in 27 and general, um, a macro uncertainty and, um, operators are not renewing their fleets and that's what we're seeing in, in our, in our numbers.
Um, in Europe.
We, um, saw a soft quarter too on macro uncertainty, um, but we see that Q3 is pretty much normalizing on a year-over-year basis now on. Now, what does that mean for? Um, sarda's business? So from a business perspective, um, we under grew the market in the first half, uh, and, uh, and that the reason for that is as Western production was down about trying a production, uh, was up. Um, our content is generally higher on Western oems, but we expect and we actually expect this to continue, um, in, in our age, for our segment, through the balance of the Year, given the softness that we've seen in, uh,
In these Western production forecasts.
Okay, great. Thank you.
Our next question comes from Christopher Glenn from Oppenheimer. Please go ahead with your question.
Uh, yeah, thanks. Just give a little, uh, orienting question to start on. Um, the guy in the third quarter is down about $30 million sequentially. At the midpoint, is that, you know, the vast majority impact that performance sensing?
That's right. We see auto production down about a million units sequentially. Uh, and then we see, uh, we see some softness in the uh the off-road space accelerating in the third quarter. So all performance sensing
Okay, great. And then, um, just a couple content and outgrowth dynamics that might be in play. Um, curious. How you see Europe phasing with some of the relaxation of the, um, mandates for EVS. If, if that's, you know, a cpv mixed shift that progresses well in European Auto through the back half of the year. And then, uh, you know, you've talked a lot about the games with, uh, local oems in China and starting to lap somewhat, the share loss from multinationals. Have you indicated a time frame when uh out growth crossover might be expected for China.
That would be a potential outgrowth, driver.
Uh, just a reminder there. We're we're about half the, uh, the content for a vehicle on an Eevee in Europe, compared to an IC. As we move to Next Gen, we get we get above parity there but but on the current gen that that's where the the content mix sets.
Uh, and then on the China question, um let me, let me ask something about if you. So basically what, um,
To add that Christopher, um, on the content side. Even if even...
Um, growth is not as strong as predicted due to, you know, soft softening regulations as we know, for example, in Europe. Um, the combustion engine ban, might be softened, then we'd have probably a shift towards um, hybrid and mainly plug-in hybrids in the market. And uh, you know, since Ida has a has a broad portfolio mix which we could serve as well. Um, uh, as as as
We can also obviously serve the EV market, so it's not a downturn for us. It's actually beneficial for us.
And then, Chris, I think your question on China is when the winds start to show up in our growth. So, there are really two dynamics here around our growth in China. The first is the rapid share shift that we saw last year, where multinationals lost share to locals. This largely played out in the back half of last year, so we'll start to lap those comps into the third quarter. As a result, that outgrowth headwind starts to go away here in the back half of 2025, and we’d expect to perform more strongly.
Less in line with market in China in the back half, and then as these new businesses launch, which have design cycles and lead times that are less than a year, that will start to show up in revenue late in 2025 and early into 2026, and set the foundation for outgrowth in China in 2026.
Okay, great. Thank you for that.
Our next question comes from Seek Chattery from JP Morgan. Please go ahead with your question.
Hey, um, thanks for taking my questions and Andrew, congrats on the, um, New role as well. Um, maybe if I can sort of go back to the China, um, renewed piece of wins that you're discussing here and, um, great thanks for all the color till now. But uh, maybe if you can sort of, uh, discuss how, how are you thinking about content per vehicle? Where in the, as you mentioned, the content per vehicle, there can sometimes be lower than the Western oems, but in the new sort of win activity that you're seeing on that front, what do you finding out in relation to content per vehicle opportunity? And do you see a road map here as you continue to drive those wins is, is is there a sort of more compression in the difference between the content on Western oems versus Chinese local oems on that front? And I have a quick follow-up after that. Thank you.
So, Andrew, you are sending the content. Basically, as not mentioned in the...
In one of the previous calls, we've shifted our focus in China, so it's very important. Of course, you know, we want to win with the winners in China, and we want to,
We have been focusing on new energy vehicle producers in China, and that has enabled us to win significant new business in the Chinese market. From a content point of view, that's what we have been doing these last couple of months.
Yeah, for for content in China. Um, the what really matters for for us is you can look at it whether it's Evie versus icy or you can look at it from a perspective of of locals versus multinationals. Either way, it's about the same, which is that our our content historically, on, on EVS, or on multinationals was, was much lower, or sorry. EVS are locals, was much lower than with multinationals, and that's what we're starting to change. So, these new wins will bring that that content imbalance up to parity. Such that we don't have a, a, a headwind from the, uh, from the shift to, uh, to local players as they continue to grow in the market.
Okay, go helpful and just in terms of um, Stefan your earlier, comments about the portfolio, more curious about, uh, how you're thinking about where the incremental R&D dollars go, particularly, if we do she uh do see a shift in the automotive industry towards more hybrids relative to EVS that is beneficial for your content. Overall, how are you thinking about where the incremental R&D dollars are being dedicated in terms of platform strategy from your end? Thank you.
Medications for trying to promote Chinese New Energy Vehicles. So that's one side of it. That's what we're focusing on.
Um, on the other hand is, you know, we're putting more and more of our indeed dollars in the industrial area. Um, we've got, uh, you know, our um, gas leak detection, products, a2l and A3. We're just ramping up. Some of them are still in the development phase, and we're already thinking about, um, certain follow-up versions, so improvements on these products. So we put our, um, put a certain level of, um, dollars of R&D and these, uh, products. And then on the, um, uh, on the Aerospace side. This, um, you know, so also significant growth opportunities there and, uh, selectively we've been putting more and more R&D dollars in that area as well. So that we can tap that growth in the market that we see, at least for the future.
Thank you, and thanks for taking my questions.
Our next question comes from William Stein from Truist Securities. Please go ahead with your question.
All right. Great, thanks for taking my question. First, Andrew, congrats on the promotion. Stefan, thank you, I think.
Yeah. Um, and Stefan, I think analysts and investors have, um,
Sort of been waiting for a new, uh, Mantra to understand the long-term growth potential, either for free cash flow per share or earnings per share. And, and I think what you're, what you're communicating. I, I just it's sort of a clarifying question, is that, your priorities are to maintain the 19% operating margin sort of bogey, stabilize it, but not necessarily have such a hard focus on expanding it. Second is to improve free. Cash flow conversion and third to decrease leverage. Do we have that right? And is there and and maybe the the the connection to this is I've heard a couple of analysts refer to outgrowth but I think those are um targets that were set by prior managers of this business. Do you have an outgrowth Target or Mantra that you want to guide us towards for the long term?
but so, um,
Thanks for the question. And, um, you know, let me...
Uh, let me reiterate and bring some clarity and some more clarity into that.
So so first of all um again we're going through an entire transformation and and and by the way, this transformation is working for us.
Um, and we've also implemented a lot more focus and rigor, in our organization. And like I've said, now, we're emphasizing benchmarking. We, um, we're we're working on consistency and we're working on topics like standardization. Um, and and we we consistently and proactively improving our operations, so working on enhancing free cash flow. Um, and then we're setting ourselves up like you this discussion around China for growth in the future and let me know and be more specific. What does that mean in numbers so to be precise what we said is
And Andrew actually mentioned it's the floor of an 80% cash conversion rate or more. So, of course, that is basically the bottom end of it.
Flow of 19% margin or more. So as you can see in uh Q3 and in Q4 of this um Year we're looking at expanding margins by 20 basis points. And then we also said um uh so there is a magic margin expansion. Um uh uh uh included in that to get to be um precise on your question. And then we also said it's important that Sara gets back to a uh, organ organic growth.
Right by, you know, by winning business in the market, by winning business in, in automotive with the right players that we're back on track in hvr that we're making progress, in industrial. And in the Aerospace area and an overall, we said, we said, okay, let's target a growth rate. An organic growth rate of somewhere between 2 to 4%, and that's sort of the kind of the frame that I've given the company that we're focusing on now. And, um, you know, let's, uh, that is the passenger for the next 12 to 18 months and that's what we're focusing on, and we'll see where that takes us.
Thank you.
Our next question comes from Robert Jameson from Vertical Research. Please go ahead with your question.
You know, Target the right types of customers in the right regions, um, that you've spoken about, I'm just curious if, um, anything's been implemented. Uh, there that's driven the year to date. When you mentioned in, you know, China with the locals and then also in Japan year to date.
Okay. Just repeat the first sentence of your question. I didn't hear it. It was a bit, uh, um.
Oh, it's just about the global sales team and just, um, having implemented, like, has anything been implemented, um, to make them more effective in terms of, um, targeting the key regions. Um, you know, that you mentioned, like winning with the right customers, etc.
It says that we have... we look, you know,
We've been entirely changed the focus, so take, um, take the electrification market and the opportunities that, you know, emerging within this market and they, they differ very much per region now. So, um, I think it's very important to be, uh, extremely selective when choosing who you want to grow with. This is really important because, um, as we know, unfortunately, not everybody's growing in the market, um, and then, and with some of them, actually, you know, you could face a a potential risk, especially in China. We know that there is a consolidation going on in the market or, or, or an accelerated consolidation among amongst oems. So, yes, um, you know, the, the team in China is very much focused and not not, you know, if I, if I may say the more blunt we're not running after every
Business. But, um, trying to choose very selectively, the right customers that we believe are going to be, you know, future strong out growers in the Chinese market. And that's, that's been, uh, challenging, you know, it's difficult, obviously choose these right customers. But we have a, a good level with built up, and that's also a change a good level of intelligence around that. And again, you know, being very selective and obviously, let let me, um, explain a bit more around China.
Is not just, you know, predicting um the or trying to predict the consolidation game in China. But it's also trying to understand who who, which of these um, future customers are going to grow outside of China. And the as you probably know there's a huge Dynamic out there, you know? So a lot of the big customers are entering, um, European countries. They're entering southeast Asia and and, and they're hungry for growth. And so, for us as a team, as a sales team, it's very important that, um, we try and determine who go who are going to be the winners out after the outside of China so that we can grow with them, um, when we, uh, when business with them. So, that's, it's a different type of, um, type of focus.
Um, and then again, in the, in the, in the mix of, um, you know, the applications. So um around um, hybrid applications around combustion, engine applications. I think we've basically broadened the scope a bit more. Um, so we said, look, there's also a very good opportunities around the combustion engine applications that we still go for
Have the assets. So, you know, we have the products. Um, and we'll also try and win in that sector. And why do we do that? Um, why does a sales team go off that? Because that's somewhat balances off the risk that you might have on the, um, EV side, you know. Um, uh, trying to predict who are going to be the winner. So yes,
The total. It's a different focus.
That's very helpful. I appreciate that. Um, and then just, uh, pivoting to the leak detection business, just curious if you could elaborate on the total addressable market there. What's that size? Um, and then what's the margin profile versus the legacy industrial sensors, you know, business? Um, you know, I'm also curious, uh, what's embedded in your guidance for this business for 2023? Um, is it still a high single-digit outgrowth versus the market? I'm just giving some of the things that we've heard, um, about the residential demand environment from some of the pure-play back names today. Thank you.
Interesting thing, you know, there's as soon as um stronger or tighter regulations come out, um in uh in South Korea, for example or in Japan. Um, we'll be ready with our products, you know, we've we're busy scaling up HL and and hopefully we'll be ready by then with with A3 and then we'll um, selectively tackle, those markets and that's an additional opportunity um where we can gain market share and you know, gain additional revenues around the um the margin of the product. I'm going to pass over to Andrew Hill. Explain that to you.
Yeah, we we've been coming up the curve on on margin, but, but at the level that we're at today, sort of 70 million, or so, of annualized Revenue. We're, we're basically at or very close to normalized Industrial margins. Uh, so scale is really helped there, but I think we're, we're over the hump on, on where we need to be on on margins, and scale,
Uh, and then in terms of outgrowth in the third quarter, so you're right, the resi dynamic has changed a bit. We're still expecting outgrowth in the third quarter. We were high single digits in Q2, probably low to mid single digits in the third quarter. And then a similar kind of outlook for the balance of the year.
All right, so that's very helpful. Thank you.
And our final question today comes from Luke Young from Baird. Please go ahead with your question. Uh, good afternoon. Here's the question. Uh, maybe just one for me, seven, and really tapping into what you were just talking about in leak detection. But maybe broadening that out and sensing solutions, you know it seems like tapping into non-auto markets could be a pretty interesting opportunity here. Just hoping to get your sense of urgency prioritizing that. I mean, including the message pretty loud and clear around China and the performance sensing side of the portfolio. But how should we think big picture about reinvigorating growth in sensing solutions? Maybe even beyond the leak detection product and potentially even offsetting some of the S and performance sensing. Thank you.
Luke, thanks for the.
Question, uh, yeah, it's certainly part of our strategy is uh, is looking at opportunities to diversify our end Market exposure. And and we're, we're weighing that in as we evaluate the new business opportunities for, for, for investment, um, Beyond a2l and Industrial. Certainly, we're looking thematically at things like broader demand for for electrification and, and the electrical electrical protection opportunities that come with that. Uh, we're looking at grid hard, hardening, and and grid opportunities in the electrical protection opportunities that come with that. But I think those are all sort of longer term secular.
The clear near-term winner is the A2L product and various derivatives of that for other end markets. So, you know, while we will continue to look at secular opportunities longer term, the focus in the short term is on taking the business that we've already won, expanding it, expanding margin, share, and bringing it to other end markets.
Understood. I'll leave it there. Thank you.
And ladies and gentlemen, with that, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to Andrew Lynch for any closing remarks.
Thank you all for joining today's presentation. We look forward to seeing you at various investor events later this quarter. We currently expect to participate in the following events: Evercore ISI Semiconductor IT Hardware and Networking Conference in Chicago on August 26th.
Jeffries Industrial Conference in New York on September 3 and Goldman Sachs Technology Investors Conference in San Francisco on September 9.
That concludes our second quarter earnings conference call, Operator. You may now end the call.
Ladies and gentlemen, we do thank you for joining today's conference. The call-in presentation has now concluded. You may now disconnect your lines.