Good day, and welcome to Sensata Technologies Second Quarter 2021 Earnings Conference Call. . I would now like to turn the conference over to Mr. Jacob Sayer, Vice President of Finance. Please go ahead, sir..

Thank you, Keith. Good morning, everyone. I'd like to welcome you to Sensata's Second Quarter 2021 Earnings Conference Call. Joining me on today's call are Jeff Cote, Sensata's CEO and President; and Paul Vasington, Sensata's Chief Financial Officer. .

Thank you, Jacob, and welcome, everyone. I'd like to start with some summary comments on our strong performance during the second quarter of 2021, as outlined on Slide 4. The business recovery we have experienced beginning in midyear 2020 continued during the second quarter.

We responded effectively to increased customer demand, which drove 72% revenue growth from the prior year to a record $993 million, slightly above the guidance range we provided in April. .

Thank you, Jeff. Key highlights for the second quarter, as shown on Slide 8, include record revenue of $992.7 million, an increase of 72.2% for the second quarter of 2020. Organic revenue increased 62.9%. The acquisition of Xirgo increased revenue by 4.4%. And changes in foreign currency increased revenue by 4.9%. .

Thanks, Paul. Let me wrap up quickly with a few key messages as outlined on Slide 19. Sensata has responded very well to the rapid improvements in many of our end markets, demonstrating the strength, flexibility and reliability of our business and organizational model.

It's enabled us to capitalize on the recovery in the end market demand and deliver on customer orders. Our quick response to shifting demand positions us well as a trusted resource for our customers. We are delivering consistently robust end market outgrowth.

We remain confident in our ability to sustain this attractive end market outgrowth into the future based upon our strong levels of new business awards and our large and expanding pipeline of new opportunities.

We continue to invest in our megatrend-driven growth initiatives that are opening large and rapidly growing opportunities for Sensata across all of our end markets. We are making excellent progress in Sensata Insights and Electrification, as evidenced by the results so far this year as well as our new business wins in both areas.

We continue to believe that the overall business environment provides interesting opportunities to further strengthen our portfolio through strategically important, value-creating acquisitions or joint ventures.

In addition, we are pursuing new technology collaborations and partnerships with third parties to expand our capabilities and accelerate our megatrend growth. We expect to continue to deliver industry-leading margins for our shareholders while also increasing investments in our growth opportunities and our people.

And finally, I'm excited about Sensata's long-standing mission to help create a cleaner, safer and more connected world, not just for our customers' products, but also through our own operations. We believe we are meaningfully contributing to a better world.

We are incorporating ESG considerations into our strategy to bolster our long-term sustainability and success of the company for all of its stakeholders. We look forward to reporting more in the future on this topic. Now I'd like to turn the call back to Jacob..

Thank you, Jeff. . Operator, please assemble the Q&A roster..

. And the first question comes from Wamsi Mohan with Bank of America..

Congrats on the solid results. I was wondering if you could delve a bit deeper into your inventory assessment that you have broken out, which is very helpful.

Where do you think this incremental inventory is building? And do you think that, that gets absorbed in calendar 3Q? Or does the guide include some further buildup of inventory? And just a follow-up on that. You noted the sort of more conservative auto outlook versus IHS.

Is that just purely based on supply constraints? And does that set up for a better '22 given the fact that your auto production view has come down materially for the rest of '21?.

Sure, Wamsi, and Jeff and I'll both take that. In terms of the inventory estimate, how we do that is we have some centers that we ship that have very high market share.

And based on the number of units we ship versus the production, we triangulate on a certain amount of our parts that are going into customer inventory versus going in to produce those vehicles. So it is an estimate, we think it's a pretty good estimate. And that's automotive.

And in the heavy vehicle, we do know that some of our customers are having initial provisioning for their NS VI-compliant platforms and that inventory will stick and stay in their inventory level. So we have a pretty good feel for it. It's not a perfect answer, but it's a good estimate.

In terms of what we're seeing around the second half of this year, we do think some of this inventory will unwind. We bring it back to last year in the third quarter, fourth quarter of 2020, we did see -- we did believe inventory levels were depleting at our customers. Then they were building inventory, we think, in the first half.

And then the second half of this year, we'll see some unwind. So it is having somewhat of an impact sequentially on our revenue in the automotive business..

And on the second part of your question, Wamsi, on the automotive outlook. I think you're right, that's the primary driver of our more conservative outlook, supply chain constraints. It's been well publicized. There are some significant challenges associated with it.

You see it as consumers, in terms of lead times for vehicles, number of inventory days in North America at an all-time low. So having lived through that over the last year, experienced the challenges associated with it, we're taking a more conservative view for the balance of the year.

And your added comment regarding the outlook for next year, I think, is absolutely right. Even with a recovery of 5% of -- in auto globally year-over-year, we see this substantially below where the peak markets for auto have been historically. So there's still a lot of tailwind for automotive growth of the markets that we're seeing in 2021..

And the next question comes from Samik Chatterjee with JPMorgan..

Jeff, I just wanted to ask you kind of more on the acquisition comment that you had. And I think it sounds like given where the leverage is and given the kind of the success you're having, you sounded a lot more aggressive about full-swing acquisitions. Can you give us some color about like the pipeline of opportunities you're looking at.

What areas are you more focused on? And besides kind of Insights and Electrification, are you looking at any other kind of pillars of growth that you want to kind of also invest in?.

Yes. Great. So I'm not sure it's a more aggressive stance on M&A. We have a strong pipeline. We've had some good execution on M&A and joint venture-related activity already this year with Lithium Balance, Xirgo, the Churod joint venture. So we feel that we've got some really good momentum. We will stay very disciplined.

The focus areas are around megatrends. So that's the exclusive focus of our M&A-related and joint venture-related activity. There'll be more bolt-on cereal. So the goal is to create more M&A growth every year rather than lumpy M&A growth. And the criteria for M&A will be accretive revenue growth, differentiated margins.

And again, we'll maintain our discipline in terms of evaluating opportunities and making sure we're highly confident we'll be able to generate returns for shareholders as well as expanding our presence in these markets that we're pursuing. Hopefully, that's helpful..

And the next question comes from Luke Junk with Baird..

Jeff, just wondering if it would be possible to break out the $200 million in forecast 2021 Electrification revenue that you had in the deck by these 3 major end markets, so auto, industrial and heavy vehicle. And maybe also if you could speak to the relative growth rates you're seeing this year between those as well at least qualitatively..

Yes. So it's going to be more disproportionately weighted toward auto given that's where the business is focused in terms of the ratio of our overall company revenue. So I would say broadly, apply the same end market exposure. We're seeing very substantial growth there.

We've -- we quoted that last year, we had about $120 million of Electrification business, so you can see it's substantial growth. Now some of that is coming as a result of the shift from internal combustion engines to electrified, but we see a lot of content growth there.

We've talked in many other occasions regarding the fact that the transition to electrified platforms is a tailwind for us in terms of content per vehicle and also content per piece of equipment.

And the opportunities, we see them as being even more significant outside of light vehicle auto, right? So when you talk about power distribution units for commercial vehicles, the amount of opportunity we have to serve broad infrastructure plays in terms of charging stations, we've talked about that.

So we see this as being a pretty broad-based play in terms of growth opportunity for us as a company..

The next question comes from Joe Spak with RBC Capital Markets..

Maybe just to get back to auto and the restock. I think last year you talked about maybe like $30 million to $35 million of restock and now it seems like another $35 million.

So is the right way to think about that as the cumulative impact that -- of the inventory build? Or did some of that stuff from last year already -- already get unwound? And then I guess related, like when we talk to the automakers, it doesn't really sounds to us like they're going to stop taking product because they want to make sure they can complete the vehicles when they receive missing modules.

So I'm wondering if this is, again, your unwind is just conservatism, if you think this can actually play out differently and maybe that inventory build unwinds slowly or bleeds out over time?.

And Joe, last year, if I'm correct, I think we talked about inventories being depleted in the third and fourth quarter and then a rebuild of those inventories in the first half of this year.

And like I said, we use -- we triangulate on that impact based on sensors with a very high market share that we're shipping into the marketplace that are at higher shipment levels in production.

So it seems as if our parts are ending up in warehouses to possibly be there when they're actually able to get that last module to make sure they can release it to cars. We've been seeing a much stronger growth trajectory because of this inventory growth and we do think if some of it unwinds, unwinds in the second half.

But again, this is our best forecast and we'll have to see how it plays in the third quarter..

Joe, to add some color to what we're experiencing on this front, I think your observations are absolutely accurate, that our customers are going really deep on this. We're having multi-party conversations to make sure that we're being as coordinated as we possibly can regarding what we build to make sure that we can serve the customer.

Because at the end of the day, it doesn't help if there are parts that are not in inventory and the vehicle can't be produced because of another supplier. So there's a lot of coordinating activity that's occurring on that front to make sure that we can deliver what was a record revenue quarter. So a lot of work is being done to manage that process..

And the next question comes from Matt Sheerin with Stifel..

I wanted to ask about your commentary about the input costs, particularly semiconductor cost for you and your ability or inability to pass them along.

Have conditions maintained the same or worsened? And do you have any visibility into when your own supply picks up? And then in terms of passing through those costs, how are those discussions with customers going?.

The conversation with customers are going along as expected. It's a difficult conversation, but we're a strong partner and supplier to them. And so to the extent we can share those costs, they're willing to do that and we've had some success. So in the second half, the actual underlying gross costs are going up, but the recoveries are offsetting that.

So good progress there, so that the net impact hasn't changed much from what we communicated back in April.

On the supplier side, Jeff, I would say, you want to add in here, we continue to -- and particularly, we're being very aggressive here in second quarter to secure inventory to make sure that we have our strong position in terms of ensuring supply.

We've gone into the spot markets to buy material and feel like we're pretty well positioned from an inventory perspective to be able to serve the demand that we're seeing in the second half. Our inventory level is a little bit higher, but we're comfortable about it just given the disruption that is in the supply chain today..

And the next question comes from Amit Daryanani from Evercore ISI..

I guess my questions will be around the calendar '21 guide. And if I think about the auto production estimate that you have, I think you're taking it down by 700 basis points versus what you had 90 days ago.

So I guess the 2 parts will be, a, what is driving such a big reduction in your estimate for auto production numbers, and I think the lowest number from any auto ecosystem company? But secondly, you really haven't changed your overall top line assumption.

So what is the offset to auto production coming down 700 basis points versus what you had 90 days ago? But the overall top line seems to hold up pretty well..

So we were trying to lay out for you that the auto production numbers that we see for Q3 is flat with Q2, because we don't see any real meaningful change in terms of the supply chain issues that the industry is dealing with. So it's flat Q2 to Q3. And then it improves in Q4, moves up, but not as much as what the third-party forecasts are projecting.

And I think the evidence would suggest that the third-party forecast, while coming down, are not coming down fast enough to reflect what actually happens in the quarter. So we think at some point, we'll get aligned there. But we think our estimate and our projection of the automotive production is a good one.

It's an appropriate level given what we're seeing in the supply chain and what we're hearing from customers about their struggles in terms of ramping up capacity. As it relates to what's offsetting, the heavy vehicle business continues to perform better as well as our industrial business.

And so they are offsetting the decline that we're seeing -- actually more than offsetting the decline we're seeing, in the automotive..

The next question comes from Brian Johnson with Barclays..

Yes, just want to get a sense, and thank you for the update on Sensata Insights, both on this deck and the teach-in on how you're going after the $800 million pipeline, kind of the timetable for translating that into bookings.

And then given, as you pointed out at the teach-in, this is a fragmented market around telematics, kind of what are you finding is the winning formula to secure bids versus ones that go to competitors?.

Yes. So great question. So let me start with -- the pipeline is what would be referred to as contract value rather than typical sales or value. So that is a little bit of a departure from how we would, as a company, normally refer to the opportunity pipeline that we see.

So -- and that's the way that sort of those types of more subscription-based or recurring revenue-based aftermarket models tend to refer to things. It's more than telematics, right? So at the core of the offering is an ability to take information off a vehicle and get it to the cloud in the form of a telematics device.

But what we're experiencing in terms of engagement with customers, as we combine these, what was the Xirgo and our internal Smart & Connected value proposition, is a much broader offering than just the telematics piece, right? So Sensata, if you remember from the teach-in, Sensata brings the ability to get information off a piece of equipment through our very broad-based sensing capability.

And then Xirgo brought the ability to accumulate that, get it to the cloud and analyze and provide data insights or information that would be more valuable. And so that's really the value proposition. Clearly, they are leaders in terms of telematics, OBD port translation and so forth.

But the real longer-term value creation is around that sticky information that's provided once the information gets to the cloud and they can do something with it. And that's what we're experiencing, more pull from customers as we have a broader solution set. And it's building really nicely.

The sort of thesis of the investment, combining it with the Sensata portfolio is working out quite nicely. More to come, early days still, but we're excited about the opportunity there..

And the next question comes from David Kelley with Jefferies..

Just hoping you could give us a sense of how you're thinking about outgrowth going forward.

And maybe specifically in autos, should we see a continued -- or do you expect to see a continued step-up in the second half outgrowth and specifically versus your longer-term targets of 400 to 600 basis points? And as we think about those outgrowth drivers, is there an opportunity that this kind of continued step-up in autos proves more structural?.

Yes. So it's a great question. Let me start with we're really excited about the fact that we're exceeding the targets. But you might note that in our prepared comments, we spoke to the outgrowth over the last 3.5 years, which in auto was just slightly above the 600 basis points. In HVOR, it was considerably higher.

So let me speak specifically to what's driving that in HVOR. The auto one, we feel great about being at the high end of the range. We'll continue to evaluate opportunities to update guidance.

But there's a lot of -- there are a lot of opportunities in the pipeline, those that we've won that give us confidence that we'll be -- we'll continue to be quite strong in auto.

The HVOR requires a little bit more digging into because the outgrowth is being driven by a pretty broad range of opportunities, but there are 2 that are quite large in terms of driving it above the average of 600 to 800, and that relates to the NS VI rollout in China, which has about another 6 months to a year where until it's fully rolled out.

So we would expect that to normalize a little bit. There are always other regulatory areas that will continue to drive, but NS VI was a big one driving that. So we're a little reluctant to change the 600 to 800 in HVOR. And the second is the conversion from mechanical hydraulic to electro hydraulic controls.

We had seen a pretty significant spike and pull associated with North America and Europe. And now we're seeing that in China as well. And so that's driving higher content than outgrowth values in the HVOR business. So listen, at the end of the day, we're happy about being at or above the ranges. We'll continue to monitor it.

And as we go forward and win new business, we'll give updates as to what we're thinking..

And the next question comes from Joe Giordano with Cowen..

Can you just talk about your relative positioning within EVs like on the different types of platforms, like higher-end models versus lower-end models with different power requirements and how your -- how Sensata's products are positioned in each of those?.

Sure. So you'll recall that when we acquired GIGAVAC back in 2018, we did that because they had premier positions in the highest and most premier vehicles. And by the way, just to make sure everybody understands, when we talk about those higher-end vehicles, they are vehicles that have longer ranges and shorter charge times.

It's not necessarily luxury vehicles. In the EV space, when we're talking about the technology that we need to bring to bear to help the customer solve the challenge, it's around charge time and range, which is what consumers are pulling.

At the time of that acquisition, we had a belief that, that was going to be the direction where the market was going. We think that's still going to be the case. But there will be a lot of the middle market, sort of EV market that was underserved without having more broad capabilities.

So we added the Churod joint venture to the mix to allow us to be able to have a broader portfolio. So now I feel as though we're much better represented across all of those categories of electric vehicles.

And we're not done yet, right? So we continue to make organic investments and look for partnerships, JVs, acquisitions that will bring more capability to be able to serve these vehicle platforms as all of these customers adopt new models and they build out their next 5-, 10-, 15-year strategy in terms of product portfolio. So really good success.

We feel as though we're well covered now, not only across models, but geographically as well. And we'll keep working on it..

And our next question comes from William Stein with Truist Securities..

One of the things we've recently learned from some of the semi suppliers and our industry contacts is that we're hearing about auto OE customers decontenting in sort of opportunistic fashion in order to complete kits and get cars shipped to customers, essentially rolling back some innovation in order to complete the builds.

I'm wondering if you're observing this trend, whether it's affecting your business and if you're contemplating this in the guidance..

Yes. So it's an interesting one. Obviously, OEMs are doing everything they possibly can to get more vehicles out. That is one of the tactics they're using. So let me give you an example.

If we had migrated to a next-generation sensor with that OEM due to cost reasons or whatever, tighter tolerances or faster response time, OEMs are willing to take a step back to go to the prior-generation sensor if the availability of the ASIC is there.

It doesn't necessarily change the ability for them to meet the regulation, but there -- in some instances, there are cost implications associated with that. So as part of our product road mapping, we purposefully designed our new product to be able to give them a lower cost product going forward.

And so sometimes we're taking a step back, we're having the commercial discussion regarding that. But at the end of the day, the goal is to help our customers get more vehicles produced so that they can sell more vehicles.

And so that's one technique that they're using, and they're looking at a lot of different ways to try to figure out how to get a complete set -- chipset to be able to make the cars..

And the next question comes from Nik Todorov with Longbow Research..

I understand that could be a hard-to-answer question, but what is your sense how much of your product could be sitting at partially built light vehicles or heavy vehicles right now? And how should that relate to the inventory destocking that you talked about?.

I don't think we have visibility to where it is in their supply chain, but we estimated about $25 million of build this quarter. Things that we shipped that were in some -- it didn't go into a produced vehicle..

Yes. So that's all inclusive, right? It's hard for us to sort of really gauge where it sits. But when we do the math on our revenue growth and we back into the factors we know, including production numbers, we get about $25 million of inventory build in the quarter. Hopefully, that's helpful..

And the next question comes from Rod Lache with Wolfe Research..

This is Shreyas Patil on for Rod. Just a question, how should we think about bridging from the first half to the second half of this year? End market production should be higher in automotive and you are raising industrial and HVOR production and market expectations, but the guidance is implying about an 8% decline in revenue.

And then just quickly, if you could help frame the content benefit from the conversion to electronic hydraulics that you mentioned for HVOR..

Yes, on the revenue piece, it's -- like I said earlier, it's -- the reduction in automotive is being more than offset by improvements in both industrial and HVOR. I mean the improvement in HVOR and industrial are about the same in terms of the sequential step-up or at least relative to what we guided last time..

On the second part of your question, just to make sure I understand it, are you looking for a little bit more visibility into what this conversion from mechanical hydraulic to electronic hydraulic is? Is that the nature of your question?.

It was one of the reasons you're achieving the above your prior target in terms of outgrowth. I just want to understand what -- the benefit that is to Sensata either on like a per vehicle basis or just some way to frame that..

Yes, got you. Okay. So let me -- so the application is an electronic joystick or integrated armrest in an agriculture piece of agricultural equipment or construction equipment or material handling equipment. So it's not a $5 content item.

Joysticks or integrated armrest can have ASPs anywhere from $50 up to $600, depending on the complexity of the design. So it's significant content. The volumes, obviously, are considerably lower than what we would see in a light vehicle market, but the ASPs are quite high and they drive significant content as that pans out. Hopefully, that's helpful..

Thank you, Shreyas. And just to be crystal clear, I mean, in the second half versus the first half, we did talk about our industrial business coming back to its normal seasonal pattern, which is a weaker second half than the first half.

And in the heavy vehicle business, while it's experiencing great outgrowth in the fourth quarter typically is a little bit lighter seasonally. So that kind of accounts for the first half and second half and then also the automotive business declining a bit due to the low production levels..

And the next question comes from Michael Filatov with Berenberg Capital Markets..

Just a quick question around aerospace. It looks like you're maintaining the market growth expectation for aerospace. But I think there are some indicators that suggest that the market backdrop is improving slightly.

So just any commentary around aerospace market growth in the second half and if there's potential for upside, particularly because it's your highest-margin business..

Yes. It's a long-cycle business. It is largely -- demand is largely aligned to, as we said, OEM production and the air traffic. It is getting better. But this is a business that's pretty small relative to the rest of Sensata. So a few million of improved revenue, we'd expect to see in the second half versus the first half and it is very profitable.

But it's not going to be a major needle mover this year, but it is showing signs of improvement, which is great news..

Thank you. And at this time, as there are no more questions, I would like to return the floor to Mr. Jacob Sayer for any closing comments..

Thank you, Keith. I'd like to thank everyone for joining us this morning. Sensata will be participating in upcoming virtual investor conferences this quarter, including Jefferies Technology Conference and the RBC Global Industrial Conference during the upcoming quarter.

As Jeff mentioned, we're also planning a teach-in about our Electrification initiatives later in the year, and we'll share details of that event ahead of time. We look forward to seeing you at one of those events or on our third quarter earnings call, which will happen in late October.

Thank you for joining us this morning and for your interest in Sensata. Keith, you may now end the call..

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines..