Yahoo Finance Sensata Technologies Holding plc (NYSE:ST) Q1 2024 Earnings Call Transcript
Sensata Technologies Holding plc (NYSE:ST) Q1 2024 Earnings Call Transcript April 29, 2024
Sensata Technologies Holding plc beats earnings expectations. Reported EPS is $0.89, expectations were $0.86. ST isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Sensata Technologies First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ms. Alexia Taxiarchos, Vice President, Corporate Communications. Please go ahead.
Alexia Taxiarchos: Thank you, Betsy, and good afternoon, everyone. I'm Alexia Taxiarchos, Vice President of Corporate Communications, and I would like to welcome you to Sensata's first quarter 2024 earnings conference call. Joining me on today's call are Jeff Cote, Sensata's CEO and President; and Brian Roberts, Sensata's Chief Financial Officer. In addition to the financial results press release we issued earlier today, we will be referencing a slide presentation during today's conference 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 be making forward-looking statements regarding future events or the financial performance of the company that involve certain risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in our Forms 10-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. Most of the information that we will discuss during today's call will relate to non-GAAP financial measures. Our GAAP and non-GAAP financials, including reconciliations are included in our earnings release and in the appendices of our presentation materials.
Jeff will begin today with comments on our overall business. Brian will cover our detailed financials for the first quarter of 2024, including our financial guidance for the second quarter of 2024. Jeff will then return for some closing remarks. We will then take your questions. Now I'd like to turn the call over to Sensata's CEO and President, Jeff Cote.
Jeff Cote: Thank you, Alexia, and welcome, everyone. Upon being named CEO of Sensata in the first quarter of 2020, I set as a main priority to ensure that Sensata was prepared to partner with our customers to solve the complex engineering and operational challenges of the next 10 years and beyond. Our ability to help our customers solve these very demanding problems is core to our DNA and underscores why Sensata has achieved success for more than 100 years. With more change expected over the next decade that has been seen in the last 50 years, it was critical to equip Sensata with the required capabilities to remain a trusted, relevant player in the markets we serve. And we did just that. We are at the early stages of a transformation to an electrified world, and Sensata is well positioned to capitalize on the opportunities that these new capabilities and our core broad sensing capabilities provide.
We have invested in markets, including high voltage contactors, Performance Sensing, isolation monitoring, battery management systems and power conversion systems, that allows us to participate in the unprecedented opportunity across the end markets we serve from light vehicle and heavy vehicles to broad industrial markets including the infrastructure needed to enable all this electrified equipment. The results to date have been impressive as electrification revenue increased from less than 3% of total Sensata revenue in 2019 to more than 17% of revenue in 2023. Further, we are poised for continued future growth, recording over $2.3 billion in new business with $1.3 billion of that new business in the area of electrification during the last 3 years.
However, as we know, transformational change like we are seeing, for example, in the automotive industry is not linear in nature, consumer preferences, global economic trends and regulations are among the very many variables that can create short-term ebbs and flows in demand. The good news for Sensata is that while we do not control demand, we are well hedged against these fluctuations with our core safe and efficient business, which includes vital sensing products that have endured decades and will, without question, continue to be highly relevant to our customers, providing Sensata lasting durability. While our automotive customers may not be developing the next-generation internal combustion engine, they will continue to produce ICE vehicles for years to come, and the Sensata content is on a great majority of these vehicles.
This positions us very well to manage through the volatility associated with this transformation. For example, in the first quarter, we noted in certain markets such as North America and Europe, the lower-than-forecasted levels of EVs was offset by higher-than-forecasted ICE production. Given our broad share position across ICE vehicles, this EV slowdown did not negatively impact our revenue nor our ability to outgrow our end markets. In addition, we generated significant growth from new content both from new business wins on EV platforms while ramping production as well as on ICE vehicles, where we have taken share resulting in year-over-year net revenue growth of more than 6% as compared to the IHS stated market that was down 1%.as we know, market outgrowth can vary from quarter-to-quarter due to mix and launch schedules, but we were certainly pleased to deliver approximately 700 basis points of market outgrowth in our automotive business in the first quarter of this year.
We may debate the rate of change as the market fluctuates over time, but the number of plug-in hybrid and battery electric vehicles will only continue to increase. In 2023, EV penetration rates were 10% in North America, 15% in Europe and 36% in China. In 2026, IHS forecast the penetration rate to almost double in all 3 of these regions with penetration rates of 24%, 31% and 60% for North America, Europe and China, respectively. Our first quarter automotive business results underscores that Sensata is well prepared for both the coming wave of plug-in hybrid and battery electric vehicles as well as the continued production of ICE vehicles to deliver for our customers and for our shareholders. Let me take a moment to discuss the rest of our business portfolio, which represents nearly half of our revenue and continues to drive solid results against challenging market conditions.
Our heavy vehicle and off-road business is starting to benefit from new European regulations around tire pressure monitoring. Demand continues to increase, providing confidence that we will outgrow a market that is expected to decline in the mid-single digits due to North American weakness, partially offset by improving production in China. Our Industrials business, which includes HVAC appliance and General Industrial continues to see inventory destocking and slow construction markets, impacting overall sales expectations. While this industrial down cycle will likely continue to pressure results throughout much of 2024, our A2L leak detection sensor, which we launched late last year, has been well received in the marketplace and is delivering above expectations.
Finally, our aerospace business continues to deliver solid results with single-digit year-over-year growth. In summary, against an overall market backdrop for 2024, which will likely be down 1% to 2% this year, we are confident in our ability to deliver outgrowth of approximately 300 to 400 basis points. While Brian will take you through the first quarter results in a moment, let me add that our first quarter performance is an important proof point as to the durability of the Sensata business as we delivered revenue and adjusted operating margins at the high end of our guidance range provided in the fourth quarter call in early February. With that, let me turn the call over to Brian, who will take you through the first quarter results in greater detail and provide guidance for the second quarter.
Brian Roberts: Thank you, Jeff. Good afternoon, everyone. Let me start on Slide 6. As Jeff noted, we had a solid first quarter with revenue and adjusted operating margins towards the high end of our guidance ranges. We reported revenue of approximately $1.007 billion as compared to revenue of about $998 million in the first quarter of 2023. This represents a 1% increase year-over-year. Organic revenue growth of 2.3% was partially offset by 140 basis points of unfavorable foreign exchange rates. Sequentially, revenue increased by 1.4% from the fourth quarter of 2023. Adjusted operating income was $188.5 million or a margin of 18.7%. This represents a 20 basis point improvement from 18.5% for the fourth quarter of 2023. Foreign exchange rates proved to be a significant headwind to our adjusted operating margins with a 70 basis point impact in the first quarter of 2024.
On a constant currency basis, adjusted operating income margin was 19.4% compared to 19.3% in the first quarter of last year. Adjusted earnings per share was $0.89 for the first quarter of 2024. This represents a $0.03 decrease from the first quarter of 2023. Adjusted earnings per share exceeded our guidance by $0.01. On a constant currency basis, earnings per share would have been $0.93 in the first quarter of 2024. Moving to Slide 7. A key driver of margin tailwind or headwind in a given period is the revenue mix of our business units. This slide helps to demonstrate this point. On the left is a graphical representation of our highest-margin business, Aerospace, down to our large -- lowest margin business, auto. While we continue to enjoy differentiated margins as compared to many in the automobile space, we do know that a point of share that shifts from industrial to auto results in about a 25-basis point headwind to Sensata.
Year-over-year, we experienced a 3-point shift to auto from our higher-margin businesses. On a constant currency basis, our year-over-year adjusted operating margins increased in Q1 2024 despite this mix shift, demonstrating productivity improvements across the organization. Turning to Slide 8 on segment performance. To better reflect how we are managing and operating the business as well as to acknowledge the ongoing strategic review of our Insights business, we have reclassified Insights from Performance Sensing, creating another operating segment, which is reported in Other. Prior periods have also been adjusted for purposes of comparability. On this adjusted basis, our Performance Sensing revenue increased in the first quarter of 2024 by approximately 7% year-over-year to approximately $713 million.
Growth was primarily driven by strength in Europe due to higher-than-forecast ICE production, coupled with strong results in both Japan and Korea. Performance Sensing operating income was approximately $185 million or 26% of performance sensing revenue. Operating margins increased by 70 basis points year-over-year, driven by revenue outgrowth and productivity. Sensing Solutions revenue decreased by 9% year-over-year to approximately $258 million, primarily due to the continued destocking challenges in the industrial business. While we expect these market pressures to continue throughout much of the year, the launch of our new A2L leak detection business will partially offset some of the drop in the second half of 2024. Sensing Solutions operating income was $72.5 million with operating margins of 28.1%.
This decrease of approximately 150 basis points is primarily due to that lower industrial revenue. Turning to capital allocation on Slide 9. Our priority remains to drive our net leverage down to under 3x by the end of this year. In addition, we announced last week our Q2 quarterly dividend of $0.12 per share, payable to shareholders of record as of May 8th, and we repurchased approximately $10 million of Sensata shares in the first quarter of 2024. We are focused on improving our free cash flow conversion in 2024 to approximately 65% to 70% of adjusted net income. Part of that effort, we expect to keep our 2024 capital expenditures flat with 2023 and about 4% of revenue and to reduce our inventory days on hand by approximately 10% this year.
As shown on Slide 10, we are providing financial guidance for the second quarter of 2024 as follows. We expect revenue of $1.025 billion to $1.055 billion. As expected, this represents a slight top line decrease from the second quarter of 2023. You'll recall that Q2 2023 benefited from approximately $25 million in low-margin onetime revenue. At the midpoint of the revenue guidance range, we expect adjusted operating margin of approximately 18.9% and adjusted earnings per share of $0.92. We expect foreign currency to negatively impact our second quarter results by 50 basis points compared to prior year. Looking ahead to the back half of the year, we note that continued industrial destocking and unfavorable foreign exchange rates will likely continue to pressure revenue.
That said, we continue to expect revenue growth of approximately 2% for the full year 2024. Finally, within our peer group, we know that Sensata continues to deliver top quartile adjusted operating margins. Despite pricing pressure as we return to a more normalized environment, our team continues to drive productivity through operational improvements. We remain committed to delivering adjusted operating margin improvement of 20 to 30 basis points per quarter for the remainder of the year. Now I'd like to turn the call back to Jeff.
Jeff Cote: Thank you, Brian. Alongside our earnings release today, we issued a separate release announcing my retirement from Sensata. Martha Sullivan, who will step into the role on an interim basis while the company undertakes a search process. I know many of you are familiar with Martha, given her 35-year history with Sensata, including her time as CEO from 2013 to 2020 and her tenure on the Board of Directors. It has been a great honor to be the CEO of Sensata over the last 4 years and a member of the management team since 2006. And I am proud of the progress we have made, enabling our customers to solve their most challenging engineering and operational issues by developing a broad set of capabilities that is not only helping to transform our end markets, but also has transformed Sensata.
As recently as 2017, IHS predicted that electric vehicles would comprise approximately 9% of the market in 2026. Now that forecast is 26%. And Companies such as BYD and Tesla have become the largest EV manufacturers globally. Since 2019, the Sensata has grown revenue by 17% to just over $4 billion in 2023. Basically, all of that growth has been in electrification. While this significant opportunity has emerged, we continue to navigate through an unprecedented micro environment, commencing with the pandemic, followed by massive supply chain disruptions and an inflationary cycle. We did our best to navigate through these choppy waters and are now poised to grow our top line and bottom line and improve our financial predictability. I know that Martha, Brian and the whole team will continue to work tirelessly to deliver on Sensata's promising future.
As our first quarter results and second quarter guidance indicates, we are on the right path. We achieved revenue and adjusted operating margin results for the first quarter at the high end of our guidance range, and we are on track to deliver margin expansion in the second quarter. We continue to reduce net leverage, and we expect to be under 3x by the end of 2024. I want to thank our investors for your support through the good and challenging times. I want to thank our Board for giving me a great privilege to serve as CEO for these past 4 years. And most importantly, I want to thank our customers, and the more than 21,000 Sensata teammates that I've had the honor of working alongside for the last 18 years to deliver innovative solutions for our customers each and every day.
I'll now turn the call back to Alexia.
Alexia Taxiarchos: Thank you, Jeff. We'll now move to Q&A. [Operator Instructions]
Operator: [Operator Instructions] Your first question today comes from Wamsi Mohan with Bank of America.
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