Sensata Technologies Holding plc (ST) Earnings Call Transcript & Summary

Thank you very much. Welcome to the continuation for -- after our keynote talk from Prof. Goolsbee. We're now with Sensata Technologies. So it's a company we cover [ overweight ]. We're joined this year by Jeff Cote, CEO and President; Paul Vasington, EVP and CFO.

I want to kind of drill in first before we get to the broader strategic points around the macro chip shortage. Can you give us -- which is raging in automotive. So really 2 questions. Kind of what's your thoughts on the chip shortage impact on Sensata? In particular on the automotive side, there's been a deterioration in the external forecast since you gave your guidance, kind of as OEMs announced production cuts. So on the automotive side, was that fork contemplated within your guidance? And then secondly -- kind of secondly, are there chip shortages affecting other end market or applications that you're involved with? And then finally, kind of to the extent chip shortages are apparent in demand across either market, are they in the chips that you would put into your product, causing perhaps cost or customer issues? Or is it really your customer can't do something, and you can't ship something because they're not shipping?

Sure. So a lot there. Let me start out with, I guess, stating the obvious that this is a challenge that's facing many companies very broadly. So it's obviously not a Sensata-specific issue. And we've been working with our customers and suppliers in real-time to make sure that we can continue to deliver the demand that our customers see and they put their orders that they place with us. And I'm quite proud of the team's work on how we've navigated this challenge. Obviously, 2020 was full of a number of challenges in terms of safe work environment and so forth. And supplier shortages and the specifics around the chip shortage is something that we've been able to navigate through quite well. Right now, we're not changing our financial guidance. We did contemplate that there would be some bumps in the road associated with being able to deliver in the first quarter and beyond. We'll obviously update as we see more indications regarding the shortage and how that might impact customer orders to us. But right now, we're not seeing any impact on that, and orders continue to be quite strong. All of our -- almost all of our products have electronics in them. And so this is a broader-based issue across, not just the automotive industry, but other industries as well. However, the volume that we see in automotive are considerably higher than what we see in some of the other markets. So it's clearly most acute there relative to the impact. And I think the last point that I'll hit on is regarding the cost side. We did indicate that as this shortage results in inevitable pricing related to capacity, we have factored in a 25 to 50 basis point impact associated with, not only pricing, but increased logistics costs associated with expedited shipping and other items that would impact the overall cost structure. That's all baked into the guidance that we provided in the business.

Okay. Good. Let's move on to a big question. I know this is our industrials conference, not our automotive conference. And I think part of that is automotive companies used to trade at single-digit or low teens multiples and multi-industry is at 25x. So it made sense for you to be down here in Florida or virtually here in Florida. But now we're seeing one prominent EV company trading at about 12x, 23x revenue, a bunch SPACs at 6x revenue. And in my automotive coverage companies that are exposed to what we've been calling the EV force field have rerated. Aptiv from the mid-teens when we were down with them last year to the mid-20s. And I've been struck by Sensata for whatever reasons, which I want to go into. It hasn't seemed got in that kind of EV multiple expansions. So multiples are what multiples are. Investors are what they are. But looking at the fundamentals, can you just maybe round out your EV product portfolio for us, in particular, GIGAVAC, the contactors, but some of the other products? And also within automotive, kind of what is EV accretive versus really doesn't matter like cabin temperature? What the patent trade is or it may not be in an EV application, but EVs need more of that, need new temperature sensors.

Yes. So I guess, starting at a pretty broad level on what you've described. I think that our EV story is a little misunderstood. Clearly, we have a concentration in the automotive light -- the light vehicle automotive market. 58%, 60% of our business is in that market. And historically, we've served customer needs associated with safety and efficiency regulation. And so there's been a concentration in the past as many OEMs have developed new product platforms to meet emission standards and so forth. So we've served those customer needs, and there's been a lot of product that we brought to the market associated with improving combustion engine efficiency. The -- I think the misunderstood part is that about half of our products that apply in a combustion engine environment also apply in an EV environment. So there's a fair amount of carryover. It's all -- not all new work. It's not all new NBO wins that we need to achieve in order to see a significant amount of that revenue carryover. The other thing is that we have been investing for a number of years organically and through acquisition to make sure that we could very positively make the statement that the EV transition is a tailwind or a positive for Sensata. And I'm excited to say that it is, right? We highlighted that in our last earnings call where we talked about the fact that we have confidence in content per vehicle in an EV platform being a 20% uplift from an internal combustion engine. Many of the -- as I mentioned, many of the applications are carryover, pressure sensing and braking, pressure sensing and other environmental sensing in an EV platform, but there is new content, e-motor precision, sensing for battery control to make sure that there isn't thermal runaway or other risks associated with that activity. High-voltage contactors to protect the most valuable component in the equip -- in the EV, the battery, as well as protecting the person that's applying the charge and the equipment that's applying the charge. So we've made a lot of progress over the last 3, 5 years in terms of building out our portfolio that allows us to have confidence in that uplift. In addition, we have engagement, either current products or new business wins, that we'll launch with almost every automotive OEM out there globally. And again, in our last quarter call, we showed a slide that outlined some of that interaction. So we feel very good about where we are. And most importantly, Brian, we're not done. There is still new opportunities to win. We have quoted $180 million of new business wins last year alone, almost half of our overall new business wins, and we'll continue to identify opportunities to engage with our customers on products they need today, products they'll need tomorrow with capabilities we have today or capabilities that we'll develop organically or acquire over the next several years as the trend continues.

And as we kind of look out to 2030, how would you see within the automotive your mix between pure EV products, things like GIGAVAC and Lithium Balance, and I want to drill down on both of those? Automotive components where it didn't matter what the power trade was, cabin temperature sensing, brake pressure and so forth. And then kind of the -- what's left or what will be left of the internal combustion engine-specific applications?

Yes. So different third-party forecasters have a different view in terms of what the mix will look like in 2030, for instance, but there is consensus building around 30% of the fleet being battery electric vehicle. And then there's still a very large portion that will be combustion. I think the trends around electrification associated with the technology development and the cost of that technology may cause that to accelerate to be more of vehicles in 2030 being battery electric. But the fact is a lot will still be combustion. This is something that's going to take a fair amount of time to migrate. Where -- what we've quoted is today, 5% of our automotive revenue relates to electrified vehicle platforms, when only about 3% of the automotive production in 2020 related to battery electric vehicles. So it demonstrates that there's more of that content in those platforms. And again, we'll continue to move in that direction. So when you fast forward to 2030, depending on the mix of battery electric vehicles, hybrids, which, by the way, have even more content than either of the combustion engine or battery electric because they have the dual drivetrain on board. As that mix shifts, it's a positive trend, and there'll be more of our content per vehicle and more revenue associated with those platforms. So hopefully, that helps.

And last year, we talked about GIGAVAC, and you did mention contactors and how those protect the batteries. But more recently, you've got Lithium Balance. Could you help us understand how that fits within the strategy and how it accelerates your EV positioning?

Absolutely. So it's less of a light vehicle play. The Lithium Balance does wired battery management, and wired battery management in a light vehicle environment is quite well served right now. There may be longer-term opportunities for us around wireless as that discontinuity occurs because you know we have a capability there, but that's a ways to go before light vehicles go to wireless. There have been some recently announced engagement with GM and other companies around the development of that, and we continue to evaluate whether or not there's an opportunity for Sensata to play there in a margin range that would make sense for us because there'll clearly be some margin stacking in the automotive world as we look at battery management. Outside of light vehicle, Lithium Balance is a wired battery management solution that has strong applicability in fixed equipment. So think energy storage systems as well as heavy-duty, material handling platforms where the wired solution still applies, and there is more content opportunity on that side. So it's a fairly small business, but it's an important one in terms of being able to broaden the portfolio of offering that we have to bring to the broad electrification theme, not just in light vehicle, but elsewhere, and into infrastructure build as well, which is obviously an area that there'll be significant investment, to enable all of that equipment to be charged in the new world.

Yes. Let's get to that after just a couple of questions left on automotive.

Sure.

And since that was the topic of the keynote infrastructure. I do want to understand you there. So within automotive, are there any kit? Do you -- it appears, I think you've mentioned publicly that Tesla is a customer for GIGAVAC. Is there any way to size your exposure there? And just in general, as you kind of think about the legacy OEMs going electric like VW or GM versus Tesla and all the new entrants coming in by way of the SPAC marketplace, are you pursuing all of the above? Do you prefer to just focus on the larger OEMs?

Yes. We will -- well, we have always and we'll continue to serve as many OEMs as we possibly can. Tesla is an incredibly important customer to us, but they're not that large. They're not producing that many vehicles where there's an enormous amount of Sensata revenue concentration associated with that one customer. And it is always our goal to take product categories that we develop and fan them out across all customer base and really be able to leverage that capability across all of those customers. And so that will continue to be our goal. Obviously, if we work with a particular customer around a development that's specific for them, we have to be careful how we use that with other customers. But every customer has an EV road map that we're working with them to bring our core capabilities to bear to help them solve those challenges and build out those road maps over the next 5, 10, 15 years.

And just final question on automotive. Can you talk about your current business of components that are idiosyncratically just part of ICE and things like engine pressure sensors? What percent of your automotive or overall business are those components now given that there's probably a final wave more on commercial truck of emissions regulations, perhaps medium-duty trucks coming in? Are there still growth prospects there? And then I guess the final question, given those products or pressure sensors, what does that CapEx and factory footprint look like in the -- and how easy is it to repurpose it into other applications versus having what investors worry about in terms of stranded ICE assets?

Okay. Great. Yes. So I'm glad you mentioned that because every one of our customers has a product road map that will have growing content in internal combustion engines over the next 5, 10 years because those platforms need to continue to become more efficient to meet regulation. So again, the notion of the product category serving the internal combustion engine, it will become a smaller piece of our overall revenue, but the content per vehicle on combustion engines will continue to grow at that 4% to 6% that we've quoted in light vehicles specifically. And we've won a lot of those NBOs already in the past 3 or 4 years that we'll be launching over the near term. So that's an important point. I'm glad you brought that up. In terms of the trend going forward in terms of the electrified vehicles, we'll continue to see opportunities on that side as well, and we'll build more capabilities to be able to serve them. The products that we have -- you'd mentioned pressure sensors, there this -- there's core technology that applies to different product applications, very specific product applications. So take brake pressure sensing to enable electronic stability control. But the core ceramic capacitive technology or MEMS technology can be repurposed for lots of different reasons and for lots of different applications. An example would be battery pressure to monitor for thermal runaway. It's not a combustion engine platform, but it's clearly an application that we can bring that core pressure technology to bear to solve a problem in a very different way in that new environment. And so across the board, all of our pressures -- or excuse me, all of our sensing parameters will have different take rates, but will be able to break down the core capability to be able to solve different challenges depending on the customer need. So they don't evaporate, right, is essentially the point. Now we've -- but to your point around fixed asset utilization and so forth, we've been very mindful of that, and we've been very careful in terms of the amount of new business wins and the amount of capacity that we put in place to make sure that we don't end up with assets as that shift from combustion to electrified vehicle occurs, that we don't end up with stranded assets in our manufacturing. In some cases, we've shortened depreciation lives to make sure that we don't end up with asset lives that go beyond. And in other cases, we've made sure that we've essentially capped capacity so that we don't end up in that situation.

Okay. Good. Let's move on. You mentioned infrastructure as subject of our keynote lunch. So as you think about who knows what infrastructure comes out of Washington, but one thing Prof. Goolsbee stressed was obviously in line of Texas as well kind of fortifying the renewable -- the grid -- bringing renewables into the grid. So whether it's that or the more traditional infrastructure of public transit, highways, government buildings, kind of how would those various flavors of infrastructure stimulus help Sensata?