Q2 2019 Earnings Call
[laughter].
Good day and welcome to Sensata charges Q2, 2019 earnings call.
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Now, let's turn the conference over to Mr., Joshua Young Vice President Investor Relations. Please go ahead Sir.
Thank you Keith and good morning to everybody on the call I'd like to welcome you to subside in the second quarter 2019 earnings Conference call. Joining me on today's call are Martha Sullivan from insiders CEO , Jeff Co takes inside as President and Chief operating Officer, and Paul Barrington side as Chief Financial Officer. In addition to the earnings 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 side as Investor Relations Web site, and we will post a replay of today's webcast. Shortly after the conclusion of today's call.
Before we begin I'd like to reference since that is safe Harbor statement on slide number two.
During the course of this conference call, we will make forward looking statements regarding future events or the financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from the projections described in such statements factors that may cause such differences include but are not limited to those discussed in our forms 10-Q, and 10-K as well as other subsequent filings with the SEC.
On slide number three we show Sensatas GAAP results for the second quarter of 2019, we encourage you to review our GAAP financial statements. In addition to today's presentation. Most of the subsequent information we will be discussing during today's calls the call will be related to non-GAAP financial measures reconciliations of our GAAP to non-GAAP financial measures are included in our earnings release and in our webcast presentation. The company provides details of its segment operating income on slides 12, and 13, which are the primary measures management uses to evaluate the business Mark will begin today's call with an overall business summary, Jeff will then provide more details on our secular growth drivers and investments in electrification. Paul will then cover our financials for the second quarter of 2019 and provide guidance for the third quarter and an update to our full year 2019 guidance. We'll then take your questions. After our prepared remarks now I'd like to turn.
On the call over to Sensata CEO Martha Sullivan.
Thank you to Astra and thanks to everyone on the call for joining us this morning.
During the second quarter, we continued to significantly outperform our end markets, while advancing important electrification initiatives that will benefit our long term revenue growth.
While we generated lower volume in Q2 as a result of incrementally weaker end markets, we still delivered solid earnings and margin performance.
This performance reflects our ability to respond quickly to market changes as well as the impact from our capital deployment program.
On slide four lists some of the key highlights of the second quarter.
For the second quarter, we reported revenues of 883.7 million, which represented in our organic revenue decline of approximately 1.6%.
We delivered adjusted EPS of 93 cents, which was within the range of our guidance and flat with the EPS, we generated in the second quarter of 2018.
ATRIO, our continued to be our fastest growing business generating organic revenue growth of 1%, which partially offset a 1.1% organic revenue decline in our automotive business and a 4.1% organic revenue decline in sensing solution.
One of the key developments in the second quarter was that our end markets continued to weaken and were lower than our expectations.
The most notable declines were in the China auto end market, which was down 20% and the European auto end market, which was down 10%.
Additionally, the industrial end market was down 7% in the second quarter and the North American on road truck market was also weaker.
Despite the difficult end market environment, we continued to deliver strong secular growth for the overall company. This was led by our automotive business, which outgrew its end market by 650 basis points and continued its trend of accelerating content growth.
Our ATRIO our business outgrew its markets by 280 basis points below its recent trend due to the timing of customer product launches.
We believe our strong secular growth will be sustained into 2020 and Jeff will talk later in the call about why we have visibility into continuing this trend.
We were highly effective in managing our margin and EPS performance in the quarter, Despite generating lower revenues as a result of end market weakness and facing a higher tax rate.
Our Q2 adjusted operating margin of 23.2% was in line with the midpoint of our guidance and we reported flat year over year EPS, despite generating $30 million less revenue.
This is the result of actively managing our discretionary operating expenses and generating benefits from a capital deployment program.
As part of our efforts to continue to advance our electrification initiative, we partnered with lithium balance in Q2 to help us deliver battery management subsystems to industrial Hbr and material handling markets. We believe this partnership will also complement our wireless battery monitoring initiative in our auto business.
Finally, our board has authorized a $500 million repurchase of Sensata shares, which we expect to utilize over the next 12 to 24 months.
We are always continuously weighing the return profile of buying back our shares.
Against executing additional M&A opportunities, we believe that our shares are an attractive use of capital, particularly during periods, where M&A transactions are not actionable.
Slide five shows organic revenue growth by end market in the second quarter.
I will begin with Hbr, which posted 1% organic revenue growth in the quarter.
This was 280 basis points above an end market decline of 1.8% in the second quarter.
Strong content growth from our China on road truck business as a result of China's six legislation offset weaker end market demand.
After a period of solid growth over the past two years, our construction and agriculture businesses declined in the quarter as customers adjusted their inventories and production to lower global demand. We continue to see very strong sales activity for our wireless hub and the high voltage Contactors, we acquired from gig of that.
We have a number of large deals we expect to close over the next few quarters, which will help to establish the foundation for future growth.
Next our automotive business posted an organic revenue decline of 1.1%, which was 650 basis points above a 7.6% end market decline during the second quarter.
As a reminder, at our Investor day, 18 months ago, we committed to delivering higher content growth in auto and we have delivered on that promise hosting competitive outgrowth versus underlying production over the past six quarters.
The clear drivers of the secular performance in Q2 were our China auto and European Auto businesses, both of which are benefiting from new legislative mandates and the launch of applications to treat gasoline exhaust systems.
We also advanced our electrification initiative by winning new business on a number of subsystems for battery electric vehicles.
As well as further growing our electrification sales pipeline.
As a result of our Q2 performance, we are lowering our projections for global automotive production for the remainder of the year, but we expect to offset much of this decline with sustained content growth.
Finally, I want to turn to industrial aerospace and other end markets, which are served by our sensing solutions segment.
For the second quarter of 2019, we posted a 4.1% organic revenue decline due to weak demand for our electrical protection products sold to industrial customers, serving the appliance HPC and automotive market.
As a reminder, we generated just over $250 million in annual revenue from our legacy electrical protection products, which have high margins grow in line with end production.
About half of our electrical protection revenue is generated in China.
These products to pretty far back in the supply chain.
As a result, we see significant inventory fluctuations in this business when end markets are volatile.
In Q2, our electrical protection products generated a double digit organic revenue decline much of this was driven by the end market, which we estimate was down 7% in Q2.
This decline in the industrial end market was significantly greater than what we experienced last quarter.
This was partially offset by growth in our aerospace business, which posted strong double digit organic revenue growth in the quarter.
We continue to see sequential PMI declines in North America, Europe , and China, which is resulting in many of our industrial customers slowing down their production schedules. As a result, we are much more cautious on the demand outlook for our industrial customers for the remainder of the year and this is reflected on our next slide.
On slide six as shown in more detail, how our end market expectations have changed for 2019 compared to our previous guidance.
We are lowering our expectations for global auto production and now expect a decline of 5% for the full year 2019 compared to our previous expectations for the market to decline 3% to 4%.
This assumes the European auto end market will decline, 4% to 5% versus our previous expectation of a 4% decline.
We expect that China auto end market will decline, 11% to 12% compared to our previous expectation of 5% to 6% decline in China auto.
Additionally, as a result of weaker markets in both our on road and off road businesses, we are lowering our assumptions for the ATRIO our end markets and now expect that HCR will declined 4% for the full year compared to our previous expectations of a 2% end market decline.
Finally, we expect our industrial end market to declined 6% compared to our previous expectations for a 1% decline.
Despite this end market volatility we remain confident in our secular growth performance for 2019 and longer term.
We have also made tremendous progress over the past two years and strengthening our position in electrification.
I'd like to now turn the call over to Jeff to talk about this in more detail Jeff.
Thank you Martha.
It's a pleasure to be on today's call.
On slide seven we show some of the drivers of our secular growth.
We are generating solid content growth across our business as a result of these multiyear trends.
And we are making investments that further position the company for long term secular growth.
While our content growth in automotive is significant our efforts to diversify our business into the heavy vehicle off road industrial and aerospace end markets.
Has created compelling long term growth opportunities that we are investing in and realizing.
For example in ATRIO War, we have outgrown the end markets by 550 basis points through the first six months of 2019.
We are seeing content growth in the on road truck market as new regulation drives additional safety and emissions requirements.
Additionally, our off road business is seeing content growth opportunities from the fan out of electronic controls.
Last quarter, we spoke about our wireless gateway or vehicle area network.
Which represents a content driver for Sensata as our customers look to use that data our sensors capture to enhance the safety and efficiency of their equipment.
In industrial we are seeing sensors being added for a range of requirements as customers generate better digital insights through industry 4.0 efforts.
In aerospace we are seeing sensors being added to monitor the environment of the cabin as well as to improve the efficiency and effectiveness of flight controls.
In automotive, we see similar trends and we have accelerated our growth relative to end market production.
Over the past two years, we have increased our outgrowth by 380 basis points.
And have grown the automotive business 570 basis points faster than end market for the first six months of this year.
I want to emphasize that we have high confidence in sustaining secular outgrowth in all of our businesses over the long term.
Our confidence is underpinned by the strong growth in new business wins, we have generated over the past four years.
Since 2015, we have expanded our new business wins from 370 million to over 500 million last year.
As a reminder, these wins represent incremental revenue for us that will be recognized over a three to eight year time horizon.
This long cycle nature of our business model provides us with high level of visibility into our future content growth.
While visibility into end markets remains challenging we can confidently commit to sustaining significant end market growth as a result of the business we have already secured.
On slide eight we show the progress we have made on our electrification efforts over the past two years.
Through internal development partnerships and acquisitions.
We have entered markets and develop solutions that position Sensata as a key player in solving mission critical electrification challenges for our customers.
And we are seeing great early returns on our investments.
We have established electrification as a clear strategic imperative for our business and the initiatives. We are pursuing represent large untapped markets for future growth.
Over the past two years, we have expanded our capabilities that will allow us to access a 32 billion market opportunity over the next 10 years.
These served markets are expected to grow at close to 18% per year over the next decade.
And we are already closing business today related to these opportunities.
I want to dig in some on the details of the opportunities we have listed on the slide.
We spoke in detail about wireless battery monitoring last quarter.
Which we first introduced to investors at our Investor day 18 months ago.
Since that introduction, we have already validated the technology and are actively engaged with asphalt our first customer.
The solution that has the potential to bring value to many of our customers by reducing their material and labor cost associated with electrified drive trains.
While helping improve reliability and modularity.
We have also spoken about gigabit back as another proof point related to our progress in electrification.
Good good back more than doubled our content on battery electric vehicles.
We are also seeing new opportunities in markets, such as charging stations and energy storage.
For our product roadmap standpoint, we are developing a product that combines the functionality of a high voltage contractor infuse, which will further differentiate us from competitors in the market.
Additionally, our products are unique in their ability to function at very high voltages, which is required to extend range and reduce charging times.
We are also developing customized sensors that help customers detect thermal runaway for electric vehicles.
Which in many markets is being mandated over the next few years.
Today, we announced a partnership with lithium balance.
On slide nine we show in more detail the strategic rationale related to this partnership.
Look imbalance will enable sensata to offer a more comprehensive battery management solution to customers across all of our end markets and Sensata will leverage its extensive global sales channels and application understanding.
To drive broader adoption of lithium balances technology.
One of the more exciting markets, we intend to address as we develop solutions with lithium balance is the energy storage market.
As the world increasingly moves toward generating and storing power in a more distributed way to solve the growing grid balance issues, we believe energy storage will become more and more prevalent.
An example of this is the proliferation of renewable energy sources.
Lithium balance and Sensata are poised to help solve this challenge.
Lithium balance has developed their own energy storage system that utilizes their battery management technology and early installations already have been deployed in Europe .
Additionally, we.
As we further develop wireless battery monitoring solutions for our automotive market lithium balances hardware and software expertise will be invaluable in customizing solutions for our automotive customers.
Before I turn things over to Paul I'd like to address slide 10, with an overview of the key messages from the quarter.
We are accelerating our content growth and significantly outgrowing the end markets we serve.
We have confidence in the secular growth that it will be sustained and we are actively investing in exciting initiatives for the long term.
We delivered operating margins in line with our guidance. Despite the revenue shortfall, we faced in the quarter.
We are responding quickly and further aligning our cost base given the weakening end markets.
And we are executing on value, creating capital deployment.
Our M&A pipeline is active and strong we are investing in partnerships such as lithium balance that will help our growth.
And our board has authorized a share repurchase program.
Of up to 500 million, which reflects our belief in our long term strategy growth prospects and focus on shareholder value creation.
I'll now turn the call back over to Paul to review the second quarter results in more detail and to provide guidance for the third quarter and full year 2019 call.
Thank you Jeff.
Key highlights for the second quarter.
As shown on slide 11 include revenue of $883.7 million in the quarter.
The decrease of 3.3% from the second quarter of 2000 and team.
Changes in foreign currency decreased revenues by about 1%.
The net effect of our valves divestiture and the acquisition of gigabyte decreased revenues by 2.7% year over year.
The net result was 1.6% organic revenue decline in the quarter.
Adjusted operating income was $205.1 million in the quarter a decrease of 6.5%.
Compared to the second quarter of 2013.
Due primarily to the net effect of acquisitions and divestitures.
Net productivity headwinds, partly related to scaling new product launches.
And higher tariffs.
This was partially offset by lower operating expenses.
And lower variable compensation.
Adjusted net income was 150.4 million in the quarter a decrease of 6.5%.
Compared to the second quarter of 2018.
Adjusted EPS was 93 cents in the second quarter flat compared to the prior year quarter.
Which reflects a 7% decline in operational performance.
Six cents decline from the net effect of acquisitions and divestitures.
And the seven cents increase from foreign currency.
As well as a 6% increase from share repurchases.
Now I'd like to comment on the performance of our two business segments in the second quarter 2019.
I will start with performance sensing on slide 12.
Our performance sensing business reported revenues of 644.5 million.
For the second quarter.
The decrease of 4.7%.
Compared to the same quarter last year.
Reflecting both the negative impact from foreign currency of about 1%.
And the net effect of acquisitions, and divestitures, which reduced revenue by 3%.
Excluding these factors performance sensing reported and organic revenue decline of 2.7% compared to the prior year.
Our hbr business reported organic revenue growth of 1% in the second quarter.
NKTR once again had the strongest revenue growth in this segment.
And outpaced its accurate end market by 280 basis points.
Due to the solid underlying content growth in the business.
Our automotive business reported an organic revenue decline of 1.1% in the second quarter.
But outpaced end market by 650 basis points.
Our content growth benefited from new legislation in China and Europe .
Particularly for sensors used on gas particulate filters, the clean gas power train exhaust.
Performance sensing operating income was $168.1 million.
A decrease of 10.3% as compared to the prior year.
Performance sensing profit as a percent of revenue was 26.1% in the second quarter.
A decline of 106 basis points for the same quarter last year.
The decline in segment operating income and margin was primarily driven by the net effect of acquisitions and divestitures.
Productivity headwinds related probably related to scaling new products.
And higher tariffs.
As shown on slide 13, sensing solutions reported revenues of $239.2 million in the second quarter, an increase of 2.7% as compared to the same quarter last year.
On inorganic basis.
Factoring in a negative impact from foreign currency of 1%.
And a positive contribution from the acquisition of bigger back of 5.8%.
We reported and organic revenue decline of 4.1%.
This decline was primarily due to the slowdown in global industrial demand, particularly in China.
We also saw significant year over year over year decline in our semiconductor business.
This was partially offset by double digit organic revenue growth in our aerospace business.
Sensing solutions operating income was $77.1 million in the second quarter.
A decrease of 2.5% for the same quarter last year.
The decline in operating income was primarily the result of lower volumes and operating leverage in our core business somewhat offset by the acquisition of gigabyte.
Segment margins declined primarily due to the get go back acquisition as we continue to invest for significant long term growth and electrification.
Corporate and other costs not included in segment operating income.
Were $45.4 million in the second quarter.
Down approximately $8.1 million year over year, largely due to lower variable compensation expense.
Excluding charges added back to our non-GAAP results corporate and other costs were $37.8 million in the second quarter of 2019.
Slide 14 shows inside as second quarter 2019 non-GAAP results.
Adjusted gross profit decline seven 1% year over year to $313 million.
Primarily due to the negative effect from acquisitions and divestitures.
Net productivity headwinds, partly due to the scaling of new products and higher tariffs.
R&D costs were lower year over year by $1.3 million, but consistent as a percentage of revenue due primarily to changes in foreign currency.
Estimated costs were 8.5 million favorable year over year due to lower variable compensation costs foreign currency and cost controls.
As a result, adjusted operating income was down 6.5% compared to the prior year quarter.
Our tax rate so on this slide as a percent of adjusted profit before tax.
Was up 110 basis points year over year.
We expect our full year tax rate to be approximately 9%.
Slightly below our previous guidance of 9.3%.
Finally, adjusted EPS was flat as compared to the second quarter of 2018.
As the decline in adjusted net income was offset by the benefit of share repurchases.
Now, let me turn to our guidance for the full year 2019 as shown on slide 15.
Our updated guidance for the full year 2019, now anticipates the lower end market outlook that we shared with you earlier in the call.
As a result, we expect revenue between $3.46 billion to $3.52 billion for the full year 2019.
Representing a decline between two and zero percent.
We expect foreign currency to decrease revenues by approximately $15 million.
And the net effect of acquisition and the net effect of our acquisition of Ziggo back in our Divesture of valves.
We reduced revenues by approximately $5 million.
Our organic revenue guide represents a decline of 1% to 1% growth for the full year.
We expect adjusted operating income between 807.
And the $823 million.
Which would represent a decline of 1% to 3%.
On the bottom line, we expect adjusted net income between $596 million and $612 million and adjusted earnings per share between $3.67.
And $3.77.
For the full year 2019.
Which represents growth between one and 3%.
We mentioned earlier that we are implementing additional action actions to streamline and align our cost structure to the lower market demand.
As well to improve productivity.
These actions will include a voluntary retirement program further site consolidation and other restructuring actions.
To further reduce our costs.
This will result in approximately 25 million of incremental restructuring costs, which will be added back to our non-GAAP financials.
Some of these costs already incurred in Q2, while others will be reflected over the next two quarters.
On average we would expect about a two year payback for the actions we are taking.
We will see some savings in 2019 and substantially more savings in 2020.
A large portion of the severance costs will be funded this year and were lower our free cash flow in 2019.
We expect to generate free cash flow of approximately $460 million to $480 million.
This breed coat free cash flow guidance assumes annual capital expenditures of approximately 150.
For $170 million for the full year 2019.
The two primary drivers of our lower free cash flow guidance are lower net income reflected in our guidance as well as the incremental cash outflows associated with the restructuring actions I just mentioned.
On slide 16, I show, our financial guidance for the third quarter of 2019.
Overall, we expect report revenues between 847 and $871 million.
Representing a reported revenue decline between zero and 3%.
At the midpoint of our guidance.
We expect a foreign currency will increase revenues year over year by approximately $1 million in the third quarter.
Of 2019.
And the net effect of acquisitions and divestitures will further increase net revenues by approximately $5 million.
Excluding the impact of foreign currency and the net effect of acquisitions and divestitures, we expect to report in organic revenue decline of 1% to 4% in the third quarter.
Our current fill rate is approximately 80% of the revenue guidance midpoint for the third quarter.
We expect to report adjusted operating income between 196 and $202 million.
On the bottom line, we expect Q4 adjusted net income between 143.
The $149 million.
Which would represent a decline of 5% at the midpoint of our guidance.
We expect to report adjusted EPS between 88 cents and 92 cents.
Which would represent a decline of 3% to growth of 1%.
I'd like to conclude my comments with the following key points.
Sensata is delivering strong secular growth despite a meaningful decline in most of our end markets.
We expect underlying production in our end markets remain weak for the balance of 2019.
And we are taking various actions to quickly streamline and align our cost structure to the weak market demand we are expecting.
Finally in terms of capital deployment, we will continue to take a balanced returns driven approach to create the most long term value for our shareholders.
As an example of this approach is reflected in our decision to repurchase up to $500 million since on stock.
Now I'd like to turn the call back over to Joshua.
Thank you Keith please assemble the queue in AEROSURF, yes. Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your desktop phone if you're using a speakerphone. Please pick up your handset before pressing the keys to try a question. Please press Star then sue.
At this time, we will pause momentarily to assemble the roster.
And this one is first question comes from Jed Dorsheimer with Canaccord Genuity.
Hi, Thanks for taking my question.
I guess first one mark.
Given the decline, particularly in China.
While overall unit volumes are down I would assume that the dollar content per unit has actually increased as a function of decline I was wondering if you could provide a bit of an update in terms of.
Content.
Today, and then how the market changes in dynamics have kind of changed your.
What we should expect is we.
Look out for content growth.
Yes, Jed it's a it's a good point and it's a really important observation.
So despite at pretty precipitous drop in overall production in China, which we've now seen for a few quarters.
Our launches continue to be on track.
If we go back to our Investor day at the end of 2017, we talked about increasing our content per vehicle in China by 50%. We're actually running ahead of that on a linear basis. So the content is is doing quite well.
If you look at our overall growth in China, we were actually just asked flat despite in China broadly. Despite these really tough end markets that were facing.
We have launched national six add content and that was an important thing that had to happen in in 2019.
And so that is very much on track.
Having said that the market now is dealing with legacy national five content vehicles and net.
It making the inventory situation challenging from an end market perspective, but we are doing very well and the content per vehicle friend.
Continues to be driven by national six changes, which are in place and more of those launches ahead of us.
Take rates on T. Pms are also helping to drive growth.
Electrification really important in China.
Some of the wins that were alluding to are happening in China, which is now the fastest growing NPV market in auto so all of that bodes well for our content growth.
Great Thats.
Helpful I guess in the energy storage.
Ariad that you're looking at increasing your exposure to with.
Lithium balance and in.
Other growth in in that area I was wondering if you might be able to.
Maybe give us a little bit more.
Hi deeper perspective on it.
What we should expect in terms of.
As your moves in that particular market.
Sure a minute, let Jeff Jeff has been working this one closely is going to talk to you about that yes. So I think it's a great question. The the opportunity around energy storage. We believe we will continue to grow quite rapidly. We mentioned in the script that lithia imbalanced already has the solution that they are bringing to market in that area. There are fairly small company. However, as so as we engage with them and continue to develop our partnership.
We will certainly take their technology and go to our customers to evaluate continued opportunities to be able to pursue as that market continues to evolve and so thats building one of the many areas that we see as being an opportunity associated with lithium balance. We also mentioned that it will help us in terms of battery management on a wired basis within our industrial and Hbr markets and it will also complement the wireless battery monitoring activity that we have that's been an ongoing organic effort for us in the automotive market.
Great Thats helpful. One more question, then I'll jump back in the queue Martha.
It looks as if youve done a really good job in terms of shifting over to a more variable cost model, which should help you through this downturn.
Becomes a prolonged one.
It also looks as if the shift to.
Electrification is happening.
Sooner. So I was wondering if you might be able to provide you know as you Steward. This company provide a perspective on.
How you might be able to.
Sort of shift the business away from.
The more unit economics that it's.
Still heavily reliant upon on.
Ice based.
Vehicles.
And how you're thinking about it.
The electric as well as.
Automated trends in the marketplace.
Yes, I think there are really three dimensions.
First if we look at our overall automotive business.
It's making sure that we are.
Positioned very well and winning in applications that are growing with some of the disruptions happening in that market electrification being number one for sensata.
We also see opportunities when we look at what's happening from a connected perspective in the automotive business.
I'd say just as important though is the work that we're doing beyond auto and it has two impacts one it brings secular growth into other end markets and to its helping to diversify our business. So you can see at the current run rate now we have dropped below the 60% Mark in terms of our automotive exposure.
And so we're enjoying secular content in areas like material handling in HPC in aerospace and Thats really helping to strengthen our overall business model. So really appreciate that question. It's a very important dynamic at sensata.
Great I'll jump back in the queue and look forward to seeing you guys next week.
Thank you and the next question comes from Wamsi Mohan with Bank of America Merrill Lynch.
Yes. Thank you good morning, Hey, Paul Tanksley color on restructuring I was wondering if you could just maybe give us a little more insight into sort of what segments regions end markets. These actions are being taken and then how much of these savings will actually flow through the bottom line versus reinvested in the business, particularly in in 2019 and I will follow up.
So the.
Areas, where the restructuring is going to impact the business is actually across the globe. So many of the markets, which are weaker we are taking action to improve the cost structure and so you would see the savings coming across all parts of the business for Sensata.
The savings were going to see a little bit of that savings in 2019, most of that most of the savings will come through as were looking to restructure the organization to be more productive and so looking to realize most of that savings as we enter into 2020.
Okay, Thanks, Paul and and larger Jeff.
You had very strong business wins over the last few years, our business wins tracking here in this much weaker so auto.
OEM end market.
And.
Particularly as it pertains to any of the trends in China, which which you alluded to on the call. How are you thinking about the risk of too many players and being able to underwrite the strength from from design wins longer term. Thank you.
Good question Wamsi. So we talk about the fact that the secular trends that are impacting the business continue to track at a very strong way regulation electrification smart connected autonomy. All of these are very good for Sensata and its really resulted in an increase in our overall in deal wins over the last several years, we mentioned that in 2015, we won $370 million of Envios last year was 500, we're tracking very nicely toward a good.
Amount of wins during 2019, as well and the pipeline continues to be quite full so there's there's lots of opportunity and we are engaging with customers to make sure that we engage with them to get those winds behind us because they are ultimately what drives that secular growth for us going forward.
And then wants in terms of the number of players just the segmentation of of.
Our end markets is really important as we see the dynamics play out and that's particularly true in China.
That's been a disciplined now that we've been observing for.
As long as we've been in the automotive market in China, just given the number of players that are there.
Thank you and the next question comes from David Kelley with Jefferies.
Hi, Good morning, Thanks for taking my questions a quick follow up on the.
The auto outgrow accelerating here and just given some of these changing regulations in China and Europe . I guess is the recent pace sustainable or is there another leg on the horizon of outgrowth you see you would just love to get your thoughts on kind of the content pipeline over the next 12 to 18 months.
Yes, so just to sort of level set in auto in the first quarter, we had outgrowth of about 490 basis points 650 in the second so year to date 570, we're feeling good about that trend continuing.
Not only through 2019, but beyond as well and we've talked about the number of opportunities that are really driving that euro six EPS in Essex in China, a number of different regulations associated with fuel evaporation requirements electrified platforms. So there there are dozens of opportunities I think thats. The most important aspect of really zero in on its not just one or two different things that are creating opportunity for the company and as we continue to expand our capability basis than multiplies into other areas. So the Tms opportunity as it fanned out through Europe , and now into China and that eventually the Hbr and so something set aside it does really well is take those capabilities that weve developed for one end market to solve a challenge and then fan it over time.
So we feel.
Quite confident and.
Ultimately the trends that we see in the opportunity to continue to see that outgrowth.
Alright, great. Thank you and then maybe to switch gears a bit and as a follow up if we look at the performance sensing margin, which we think held up fairly well given some of the end market deterioration can you just talk about some of the cost levers you are pulling and have to poll given a year scaling new product launches, but also be you've got some restructuring initiatives, taking place and on the horizon here.
Performance sensing business I think you've you've characterized it well I mean, the scaling of the new products is an intense process that we've been talking about for a while and so we see good growth in that.
And those areas and then to offset those some of the weakness we've seen in some of the more mature products is impacting our operating levers that we would expect to achieve and realize the cost reduction is it all across the piano, it's driving better productivity in our manufacturing process, it's leaning out in streamlining our overhead costs all with the intention of continuing to sustain and drive margin improvement in that business over time.
Thank you and the next question comes from me John on Jani with Evercore.
Hey, Bob Thanks, a lot. Good morning, guys up two questions from me as well first one gigawatt hour could you maybe give us a sense on the revenue opportunity you have today as you think about this over the next two to three years.
And just what investment perspective could you quantify how much how much of the headwind in the sentence solutions margins from investment in making four gigawatt for the revenue opportunity yet.
Yes. Thank you know the business that when we announced at the time of the acquisition running around.
Something like $90 million in revenue and growing.
Very strong double digits at 20% to 30%.
But that's small base is it was great what really compelled us to follow on that transaction was the opportunity horizon.
We talked about $300 million sales pipeline already developed.
In auto alone for the high voltage Contactors and we've since extended that now to end markets like Hbr and material handling. This play that we're talking about with lithium balance and the opportunity. It brings us into an energy storage systems also allows us to bring high voltage contactor.
Content into very large end markets. So it's really important we talk about as being a strategic imperative at sensata that means it's a must do and it's all opportunity base.
I think relative to Sensata sensing solutions and margins.
The investment that we're making in gig evac is largely to tool that portfolio for the automotive market. Some most of that investment you are seeing inside of the performance sensing segment.
Got it Okay got it and then I guess just on the free cash flow a run rate for the back half in general as you guys update to the full year guide for free cash flow, but.
As expected use of like 300 million in the back half of the year versus 170 million unit in the first half and each due 2019 guide implied guide I should say is up year over year as well just can you just touching the levers that can get you to the street castle wrapping up in the back half of the year.
Well similar to what we've seen in the past second half cash flow this stronger than the first half.
We're going to continue to.
Investing capital, but with the rate. This year is more level set that it has in the past so more balanced quarter by quarter in terms of Capex spend continued improvement in working capital continued improvement in driving down our receivables theres linearity improvement in the fourth quarter. We typically see so the revenues are flat month month to month. So we typically see a much better cash flow in the second half than the first half so feel pretty confident.
If you look at our operating cash flow to Eni improved throughout the second half more aligned with 100% conversion. So I feel pretty good about our ability to do that either this restructuring the restructuring that we're taking the funding of that will happen mostly in the second half so that will be a drag.
And also the change that we talked about in terms of profit will be derived from where we thought we were going to be.
But all in all I think it's very achievable.
Thank you and once again. Please press Star then one if you would like to ask your question.
And our next question comes on Samik Chatterjee with Jpmorgan.
Hi, Good morning, Thanks for taking my question a month I just wanted to get your thoughts.
On the business outlook in a different on the outgrowth working on different.
Aspect on the market share opportunities that you're seeing both organically and inorganically that often when the industry volumes due to challenging some of the smaller players will struggle. So when you're looking at this stuff environment are you looking at some of the organic how are you thinking what the organic opportunities as well as the M&A pipeline.
Yeah, you know, we always have a mindset when markets get tariffs that were going to get stronger and it really is around the observation that you made to meet there are a number of things that happen.
Yes, more marginal competitors struggle to compete.
We're very focused on maintaining the value that we bring to customers.
But also making sure that we follow through on commitments for launch.
New product close and that scares us really really well. So we've continued to see nice share gains most of that coming through new content in new applications and that will continue.
We're very disciplined in our capital allocation process.
So keeping an eye on M&A valuations is important to make sure that we have the optionality to buyback shares.
And so given tougher markets and we would expect to see valuations get more attractive and interesting over time, and so thats part of making sure. We have the optionality to do what is best for our shareholders in terms of creating returns.
Okay, and if I can just follow up on the China automotive market, we understand the excellent great to look in your discussions with the Oems or what are you hearing in terms of what can get that market to stabilize or potentially to get great. Entre growth. Maybe next year are there any policy actions or anything that you are hitting could potentially help on that front.
Yes, we have been spending a tenant timeline on China, but at both myself and Jeff have actually been on the ground in China over the past few months trying to get a sense for exactly that when you look at it from a policy perspective, the incentives in the stimulus put in place so far have been fairly municipality based.
And so that's got to get to a critical mass where it really has an impact on the overall end market and we're not expecting that in 2019.
What's been very important to us is to make sure that mandate stay on track and our enforced and we're feeling very good about that we're seeing it in new content that we're shipping we're seeing that in the production builds for things like NSX. Those are stabilizing I think relative to overall end market.
Volatility.
It the perspective, we come away with is that there is a negative sentiment at the business level and in China.
And so.
Just getting to the point, where there are fewer surprises on the horizon is going to be important to our customers trade is a piece of it it's probably more pronounced in the past few months and has been that's our sense is attached to overall OEM customers, but it has not impacted what they're bringing into the market. The new applications that they are putting on board and we think that that is the most important thing to understand as they move forward in the end market.
Thank you.
And the next question comes from Joe Giordano with Cowen.
Thank you this is Robert on for Joe.
I guess to kind of follow on on China as it relates to your view into 2020.
Theres a lot of debate out there on where you are in Europe , and China will be in terms of production next year.
With some more bearish NHS data.
In China. They have this over capacity in high inventory dynamic going on and I. Just wanted your opinions on how you think that dynamic balances with the government doesn't want to see another year declines.
For such an important industry for them, so any kind of thoughts on 2020 would be very helpful.
Yes look we don't have all the answers we are watching it closely one of the things that we're really keeping our eye on and I would encourage you to do the same is looking at were overall vehicle inventory set there's there's generally information around.
Rolling averages on months on hand.
We would expect that that needs to come down as we get towards the end of the year and that will be an important leading indicator on 2020. It has not come down and that's part of our revised call on the balance of the year.
Relative to the importance of maintaining and automotive market you definitely see that in some of the incentives again that we're seeing rolling out into municipalities. A really important piece of that is the new energy vehicle component in that in China.
And that is very much on track and then beyond automotive.
There are very important end markets for China in China for Sensata as well and so we're encouraged by what we see relative to technology uptake in end markets like material handling and much more efficient infrastructure going into building.
In other areas and the government is definitely encouraging those as well.
Thank you and the next question comes from Shawn Harrison with Longbow Research.
Good morning, Martha I was hoping you could maybe talk about the inventory situation in the H. feel our sector as well as kind of the broader industrial markets and.
Maybe how long you think it may take to clean out whatever excess is in those markets.
Yes, I think and on the industrial stay I guess I'll start there and we mentioned in our prepared remarks that we've got about 250 million annualized revenue.
And a portion of our business that is attractive, but lose with end market and said.
Pretty high back in the EM in the supply chain, we're expecting continued inventory corrections through the end of the year and Thats the phenomena that we see in that overall business.
When we look at industry online data, which is a good source for trying to understand whether or not were seen major changes.
We haven't seen a rise in inventory at that level, but it's sitting at fairly high levels, and we expect that that that needs to come down as well I think relative to feel our I'm going to let to speak to that again has been spending a lot of time on that part of our business.
Yes on the on the HR side.
The the first half of the year with about flat growth up 1%. It turned out somewhat like we would have expected. We were always forecasting second half of the year to come down more dramatically, though and several of our larger customers have announced the fact that they intend to take inventory out. So I think on the Hbr side. The inventory correction has started towards the end of the second quarter, but more of that will happen during the second half of the year.
And we get some visibility into that as we examine our customer orders and we talk through that with them, but it will take a quarter or two for that to work through the pipeline I would estimate.
And then Jeff if I may follow up.
The comment on timing related in terms of just the lower hbr market outgrowth in the second quarter, what would you expect to your market outgrowth to accelerate too in the in the back half of the year.
It will be higher than second quarter for sure, but the four if you recall the first quarter was significantly higher it was 850 basis points in the first quarter. We I would expect that it's going to be more similar toward this year to date number around that four to 500 basis points.
Thank you.
Thank you and the next question comes from Brian Johnson with Barclays.
Yes, good morning, a couple of questions.
You flagged, China or so called National six in particular around the.
The trucking business, there, but could you maybe tell us how you think despite the unit volumes your concept might benefit from that in the light vehicle marketplace in China.
Yeah, our content is actually benefiting from that right now Brian . So we are on the OEM production launches associated with National sex, we've been watching very closely to make sure that those launches are on track and their production is actually changing over we're very encouraged that it has and that it will continue to see launches against that mandate as you move into the second half of the year. The complicating factor is that the as a result of this change over in a down market is quite a bit of national five vehicle inventory light vehicle inventory sitting in place and that needs to be worked off that is our assumption in our one of the things that drives a reduced outlook from sensata for the China auto market.
Okay second question, just a quick follow up there Giovanni.
Can you give a sense of how your business is split between premium in China.
Larger foreign Jvs larger.
Local Oems and then the smaller Oems, where this sales decline seem to be the largest.
Yes.
We've we've gotten you can really tracking based on them.
What is the overall sensor content.
That's in let's say a local brand first as a multinational brand. So the fastest growing part of our content is actually with those local brands that are coming from a fairly low point, but having to meet the overall mandate.
So thats been an attractive part of the business.
Our revenues in China again set mix are very much a reflection of the shares that those players have in China. So it is not as though.
You know we've got just a couple of auto OEM customers were pretty well represented across the fleet. If you look at the top 20 producers relative to premium vehicles, it's important to understand that our products show up in mission critical application.
So you'll find us embracing systems, you'll find it's embedded in the tires were sitting and exhaust systems. We're increasingly now designed into traction motors and working on applications that pretax thermal runaway in an electric vehicle the point being that were not part of the convenience or assertive gadgetry that you might see in an overall premium vehicle.
Versus more of a.
Mass market vehicle and so therefore, we don't we don't see a lot of swings in our business.
If there are changes in the take rates across those segments.
Thank you and the next question comes from Gene for Radovan with Wells Fargo.
Good morning, all.
So good to see the step up in outgrowth and also the margin discipline seems pretty good so.
So that's good but the issue obviously is the end market and the lack of visibility so.
My though you touched a little bit on China markets, but what are some of the conversations you're having with the European automotive clients.
Given the lack of visibility that I mean for now regulations are helping but.
Beyond that what is their sin.
For how the market's going to play out or what is it time line for recovery.
Anything you could provide color on what you how your conversations with the European clients that going that that will be helpful and I have a follow up.
Okay sure, yes, a year.
Really important end market for us.
In terms of the overall visibility I would say the visibility we've had coming into the quarter relative to the European players has been okay. So not a lot of surprises inside the quarter.
As we look at you know more in the intermediate term.
Really trying to keep our eye on what is what is impacting them what has impacted them in let's say in the past 12 months things like Debbie LTP.
And how is that playing out in 2019, they spent quite a bit of time on that topic. We don't expect to see another major dislocation in demand given some of the W. LTP changes that will be happening again in September so watching that closely.
But one of the impacts that we are seeing in Europe is something of a knock on effect to the China end market.
So we have important customers there are major tier one systems integrators coming out of Europe that actually ship into China, There's still engines that go into China, as well and so that is having an impact on the overall year at market and to the extent that that is a volatile that does affect the visibility that our European customers have enhance our visibility.
Got it but any is it is okay. So there's not really much visibility youre, saying its the conversations are not necessarily at this point in time for the market recovers, but seems like a small block and tackle at this point in time.
All right my follow up would be.
Can you talk about your truck markets across the globe and just what your assumptions are North America, obviously peakish.
Europe truck somewhat underperforming I mean this is market.
And in China.
We are benefiting from Pbms, obviously, but can you update us what your views are what it what are the kind of momentum you saw.
And if you can provide as expectations by region.
And how that fluid flows into your lower end market guidance that would be helpful. Thank you very much.
Yes, we've been at try to give you a bit of that I would just at a high level by saying, we actually think that the market was slow more in the second half of the year and that it has in the first half of the year as it relates to the heavy vehicle and off road business.
We had been anticipating as somewhat of a correction on road in North America.
And we're seeing that I think it came a little bit sooner into the second quarter, we thought that would be more second half based and we think thats going to be a double digit down that end market in the second half of the year.
In Europe , we expect to get marginally worse, as well, but probably more in single digit down.
And we're beginning to see other portions of our off road market now being impact and so AG and construction are both important end markets enter Hbr section, we expect that those will be down from an end market perspective in the second half of the year.
Thank you and the next question comes from Mark Delaney with Goldman Sachs.
Yes. Good morning, just one question for me.
I think implied for Q1 9, Dps guidance of about a dollar for dollar five implies high single digit EPS growth off of.
About 3.5% to 4% revenue growth year over year, I know, that's not an unusual amount of EPS leverage but last year in the fourth quarter Opex was managed pretty tightly and I think maybe tax rate is a little bit of a headwind year over year. So maybe just help us better understand what's driving some of that year over year leverage and.
Where we may see that show up in the panel this year. Thank you.
So mark I mean, just the benchmark you last year Q4, our operating income index was 24.
And so this Q4's slightly better than that but we would expect would be continued improvement in the cost structure is the restructuring actions that we've taken will certainly help the bottom line is to continue improving our productivity initiatives, which gets stronger as the year goes on it's managing our costs very smartly, given where the markets are so.
I feel very consistent what we've seen before in terms of the ramp up in profit sequentially.
When you're right that does deliver nice a nice EPS results in Q4 to help us get those two are.
The midpoint of our guidance that we provided.
Thank you and the next question comes from Jim Suva with Citi.
Hi, This is Tim we are calling on behalf of Jim Suva. Thanks for taking the question of Tpms Pbms rollout in China do you still expect to roll all to be in second half of this year.
I believe you mentioned items earlier.
Revenue opportunities for Sensata is that still the case.
So we have already seen.
That and momentum take place again, we saw that began last year, we've seen it move move into this year as well, we're seeing content growth in the first half of 2019.
So.
Really I'd say well underway, we would expect to see that continue as we move into the second half as well Jeff alluded to the fact that there is another leg coming on T., Pms, which is really in our heavy vehicle and off road business. So some of the new business opportunity wins that we've had in 2018 and in 2019 relate to new content that will be coming on the hbr side of the business as well in tire pressure monitoring.
Thank you and the next question comes from Ethan choice with Morgan Stanley .
Oh. Please go ahead Lisa.
Your line is live.
Okay as far as time nothing.
Slide that is all the time, we have currently for questions I would like to turn the floor to Joshua young for any closing comments.
Thank you very much I would like to thank everybody for joining us. This morning Sato will be attending the following investor conferences during the third quarter. The Canaccord growth in Transportation conference in Boston and the Citi Technology Conference in New York, We hope to see you at these conferences and invite you to visit us at our headquarters in Attleboro, Massachusetts.
We appreciate your continued interest in Saada, Thank you and good day.
Thank you see conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.