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

Let's gets started. Thank you, everyone. I hope you had a great lunch. You got some sunshine. We're pleased to have with us once again this year Jeff Cote, CEO and President of Sensata. Those of you who were here 2 years ago before the world changed, I remember a presentation there where we just really touched upon Sensata Insights, did a little tiny bit on electrification, but I'm hoping to drill a lot more into that today because there's been a lot of progress over the last 2 years.

I want to start with just some of the basic macro and some of the organic growth targets. You did guide a couple of weeks ago. Can you give us a sense of how things are trending in terms of your end markets since your conference call?

Yes. So given that it was not too long ago, not a lot has changed, but we're guiding to 2022 that still has pretty robust growth overall as a company, 10% on average at the midpoint of our guide. And most interestingly, that's coming on the backdrop of very little market growth. So across all of our end markets, we're expecting, call it, 300 basis points of market growth that's being offset a little bit by what was inventory growth last year that won't repeat this year. So marketing inventory is maybe up 1%. But even with that, the 2 other growth levers that we have at our company in terms of our market outgrowth or content growth at around 600 basis points and then some M&A-related growth not factoring in any new M&A, but just M&A we did last year that will lap this year, yet just comfortably into that range. Now I suspect it will come up more later, but we're forecasting the automotive market globally to be up about 7% in 2022. IHS has a more rosy view of that. And I guess the most important thing that's changed is they've improved their view of the market in their latest update to, call it, another percentage point or 2 growth on automotive markets. We're not seeing that yet, and we're going to sort of stay with our more conservative view. But clearly, to the extent our automotive customers are able to deliver that higher demand. And by the way, I would very confidently say that there is consumer demand for vehicles. It's just the supply chain challenges. And so if we start to see a little bit thawing of what's been a very difficult supply chain, there could be potential upside on the automotive side. We had always said fourth quarter was going to be the toughest in terms of supply chain, that's proving out to be pretty accurate. And so we'll continue to monitor the situation and see whether or not there's some upside on the automotive side.

Now in automotive, is your outbound supply chain just in time to the manufacturer or is there a buffer stock that could distort kind of when if there is a pickup, when you see it in terms of your production rates?

Yes. The supply chains have been very disrupted. Historically, we're just in time with our customers. But given the disruption that all of our customers experienced over the last 2 years, they have placed more orders in our view than what they need to make sure that they do have a little bit of buffer stock. We -- it's hard to sort of really quantify the magnitude of that. But we -- our view is that about $100 million of revenue last year went into buffer stock. Now it's also difficult to tell whether or not that's sitting in a warehouse or it's sitting in a partially finished piece of equipment. But there's about that much buffer stock. Now to me, that's really good news in terms of Sensata's ability to execute. It suggests we're not the ones being a bottleneck on how things are going and certainly our results with our customers in terms of new win opportunities have demonstrated that.

And over on the H4 side, where does -- where do the end market stand there? We've heard some from truck suppliers that had a little bit of chip shortages are easing this quarter. Is that consistent with what you're seeing? And then a kind of trucking around the world, any comments?

Yes, sure. So it's very different depending on the market segment and the geography that you're dealing with. Across all of our HVOR business globally, we would expect that business to be pretty flat in 2022. It's made up of about 20% of our business, which is China on-road, which is down considerably year-over-year, down 50% in the first quarter and about 20% down year-on-year. And then in other markets in North America and Europe, we would expect a little bit of growth. So combination of those results in about a flat market. Again, it's panning out to be about that. And clearly, the opportunities around supply chain could change that dynamic, but we're not seeing anything meaningful in terms of change at this point.

So let's move on and talk. You mentioned your 600 -- 400 to 600 basis points of organic growth. And then we know there's another 400 just extended in organic, which I want to return to after we go -- get more granular around your initiatives. But on the organic growth side, if you kind of try to bucket it between the EV growth, the Insights growth and then just other product line growth, how would you bucket that?

Yes. So clearly, we're seeing our -- as a percent of base revenue, we're seeing the Insight business double from 2021 to '22. So we're seeing very significant growth there. The next largest growth area is around Electrification, where we're forecasting 50% growth in our Electrification business from 2021 to '22, but they are off a small base, right? We're talking about a $75 million Insights business, a $260 million Electrification business across all our end markets, but growing very fast. And so that's what we've been investing in, both organically and through M&A because we see those 2 growth vectors as being significantly higher growth rate than the rest of the market and our other markets that we serve in terms of the categories that we serve. So that's been the reason for the incremental investment. It's panning out nicely. The balance of the growth is coming from the rest of the market in terms of our outgrowth across those markets, but also in different market categories, some general market growth as well.

Right. So just within that 4% to 6%, there's actually -- given the small size, relatively little of that 4% to 6% is coming at this point from Electrification and Insights. Doing the math in my head, but I'm guessing less than 100 basis points.

In total dollar value, right. The growth rates...

So that impies you still have a portfolio of businesses that are growing 300 bps? 300 basis points.

There are.

And what are some of the key drivers there, in particular, maybe -- we talked about comments before. But several years ago, your predecessor, [ Marko ] beset by questions here around the diesel pressure injector business. So are there headwinds you're more than overcoming within that organic growth ex Insights, ex EV?

Yes. So I think that is a little bit of a misunderstood point is that folks think that combustion engines are dropping off the case of the earth. There's clearly a transition that's happening and it's happening at a rapid pace. But the content per combustion engine is continuing to increase over the next several years. And as pure combustion engines convert to hybrids, there'll be more opportunity for content. So we're seeing greater growth in Electrification and Insights, but that doesn't mean that we're not seeing growth in terms of content growth or outgrowth in those other markets. We're preparing for the future, though, because we know that these trends are going to continue. And we feel really good about the fact that we're confident in our ability to have more outgrowth and more content in those new platforms than we have in our current market.

Okay. So let's move on to Electrification. You did host a webinar yesterday and outline some of it. So maybe let me kind of just dive in -- maybe while I'm getting to more detailed questions, could you maybe talk about the 2 or 3 key takeaways we have taken from that?

Yes. So the takeaways are we're investing heavily in this transition. That the market is on its way in terms of a rapid change to a cleaner environment, both from government incentive and consumer preference. And Sensata is very well positioned from a capability standpoint, but we also have some very good runway and success stories in terms of how that migration is occurring. And I do apologize, we had some technical difficulties when we broadcasted yesterday, but it is available online for you to watch. We had 2 of our business leaders speaking to much more granularity in terms of what it is that we bring to market, what our competitive advantages are. And I think that you'd agree that we are very well positioned in this transition.

And just want to remind people, you can scan this QR code to participate in a live poll. Also, if you don't want to raise your hand for questions, if you use this QR code, I can see them up on the teleprompter here. Okay. So let's drill down into the 3 big chunks of the end markets that you described yesterday. So being $5 billion for light vehicle, commercial vehicle, $2 billion for BMS and $8 billion for high voltage distribution, including stationary stores. Let's maybe start with kind of closer to the traditional core, the light vehicle, commercial vehicle components. How does the CPD -- again, this kind of builds off the diesel pressure discussion we just had. How is the components -- what's the addressable CPV per electric LV or electric CV for those kind of components?

Yes. So from a size of the addressable market, it's quite large, right? So hundreds of dollars of content are available on a light vehicle in terms of marketplace where we can serve the needs of our customers. What we've said is that we see a line of sight that doubling our content. So if you think of our business today having about $40 of content on each internal combustion engine platform. So that's total Sensata revenue divided by total produced units, about $40 of content, we see a line of sight that double. So the content or the opportunity is increasing, we're continuing to maintain our fair share of that opportunity, representing some significant growth for us as a business.

And how do you think about your market share in the various niches like bigger than niche, but contactors, legacy Sensata, which would be pressure sensing, thermal and then the kind of new motor components?

Yes. So we have -- I guess I'd start with, given the applications that we serve, there tends to be only a handful of competition because they're very hard to do mission-critical applications. So 3 to 5 competitors in a particular space. It's not dozens of competitors. It's just not easy to do applications, and engineers and our customers aren't going to have just anybody who doesn't have the street credibility to do this. Those competitors vary by end market and by application that we're serving. But our goal as a company to have a #1 or #2 position or a path to get there. Now we're not there with every one of our opportunities. But what that translates to is market share that could be as high as 50%, 60%, 70% to market share that's 20% or 30% or growing development opportunities where we have a little bit lower than that. But in order to get to what we quoted as a $2 billion Electrification opportunity by 2026 or $60 million business growing to $2 billion, we don't need significant market share change in order to be able to do that. If we hold a similar level of market share that we enjoy today, we'll be able to get to that outcome.

And -- so let's move on. So that's probably the closest to the legacy core business. Next step out is BMS, where you described a $2 billion market, including high-voltage distribution units plus BMS. But maybe a few questions. One, remind us of kind of when and how you got into BMS. And then secondly, how -- how big is BMS in your backlog? And then how important -- I guess more like the first question, was lithium balance to this? And what did you bring to grow it that lithium balance didn't have independently?

Yes. So our foray, if you will, into battery management really started with wireless battery management because we have very strong wireless capability...

I'm sure.

Exactly. So we started developing an organic path to wireless battery management. Now the premise of that is that we believe that a wireless system, you remove cost associated with a harness, you make more room for more packs to extend the range and so forth. That hasn't completely caught on yet, but we built on our internal development by acquiring imbalance. So it's very important to make sure that we brought capability because there's more than the sensor level, understanding what's going on at the pack level, there's the whole battery management software process to make sure that you're charging and discharging the battery in a very safe way. And Lithium Balance brought that capability to us. Now I'll tell you that the opportunity at the battery management level is not a light vehicle one. Our customers in that space need to own that or they want to own that where they have tiers that are serving that. But outside of the light vehicle space, we are seeing significant opportunity associated with the components and the add-on controller and battery management system on top of it. So think of customers that have lower volumes, higher mix where they don't have the engineering resources to build that, they would rely on partners like Sensata to do it. And so in HVOR and in industrial applications, we're seeing a lot of pull from our customers to really develop a strong capability and revenue stream associated with it.

And how much of that within the BMS is really software? Because I think of the wireless BMS system, you'll have a bunch of sensors out there, sort of a box that aggregates the signals from it, but then someone's got to process that information to make decisions about charge, discharge, which modules to drop on in the battery. How involved -- in the light vehicle side, that's, to your point, what the OEMs want to control. How involved are you in that, in the commercial vehicle and other application side?

So we are -- we do have a team that's developing that. And so I just -- there's a lot of discussion regarding software. All of our sensors that have electronics have embedded software in them. But it's very different when you're talking about a system level software overlay. And I imagine we'll get to it. We acquired a business that we announced yesterday, Elastic M2M that provides software and an interface in the Insight side of the business. So we're expanding our capability around software. In terms of how much of the solution set is software, it's a very important part, but we're not selling it as a software solution. We're selling a completed package when we're talking about battery management or wireless battery management. So there's no software revenue stream, but there's clearly value add associated with that activity that helps improve the overall margin profile of those solutions that we're selling to our customers.

Okay. So I think a picture is beginning to emerge of sensors at the bottom, connectors, fuses, and you build on that, the BMS level, which kind of gets me to the third and I thought one of the more surprising things about your presentation. The $8 billion you talked about when you take those components plus BMS, but then put in for high-voltage distribution units, lithium ion batteries and services for energy storage. And obviously, energy storage is something that's been talked about for a while, particularly with Tesla and others in the utility grade. So maybe talk a little bit about how you got into that. How much of the battery you're actually doing, I don't think you're making themselves. And a bit about the competitive landscape.

Yes, definitely. So the further -- you're absolutely right. As you paint this picture, the further we get from sensors, which is our bread and butter. We produce a billion sensors and put them into the market every year, right? And they're high value, they work for the life, the equipment they go into. We're experts at the sensing layer. And through organic efforts and through inorganic, we're adding more capability. And that's exactly what we did with energy storage. So last year, December of last year, we announced the acquisition of Spear Power Systems. They provide full battery energy storage systems for specialty vehicle markets. So this isn't a broad-based market. Think of really difficult environments where you need energy storage. Things like marine applications for electric ferry systems that are, by the way, regulated that they're going to need to be propelled by electrified systems when they enter ports or when they operate more naturally in ports for ferries. So there's a very fast-growing market associated with that, and there's some unique safety weight balancing and energy density issues associated with those types of applications. And Spear Power has an expertise in a marketplace there. They also happen to serve Blue Origin in terms of the energy storage for their rockets. So you can imagine those are really sophisticated systems. That's an acquired capability. Sensata would not have been able to get there naturally. But there's a lot of sensors. There is a lot of electrical protection. There's a lot of battery management included in those. So to your specific point, no, we're not going to get into the battery cell business. We acquired that capability and then we package it in a safe way to enable an energy storage system for these applications.

And what's come as landscape? Because everyone from Tesla to ABB and whatnot are making noises about stationary storage or nonautomotive storage?

Yes. So again, depending on the market segment you're talking about, so in marine, Corvus is an example of a competitor that we would see. They're the leader in the market marine applications. So depending on the market segment, there may be different -- in energy storage, that's stationary. You see big companies like ABB and Siemens and others but they're all taking different roles in terms of where they play. And the way that we see our opportunity to participate in this market is that we can participate at the core component level or we can go as far up the stack as we need to, to be able to serve those customers. So we're not going to force an answer in terms of a solution, but we want to have the capabilities to be able to serve our customers in the best way we possibly can.

So just -- I know we can follow up with Jacob for some of the math. But within the $8 billion, does that include the components business there? So that's separate and above the $5 billion components we started...

That's exactly right. So when we think of components, it's largely in components in the light vehicle space. When we think of the subsystems, it starts to extend into other markets, but that's exactly right. It's Sensata's addressable market in terms of where we believe we would be able to compete.

And so of those 3 businesses, how do we think about margins? Because you've always made the point that the margins on sensors, which are low dollar per sensor, high risk, if I'm an engineer to spec a newcomer, relatively few competitors supports 20-ish percent high gross margins. But when we think about BMS, is that different? And then we go all the way to kind of battery packs where a lot of the cells, of course, are just pass through. How should we think about the margin evolution there?

So to me, margin is a proxy for the quality and the differentiation of the business. No customers would allow you to produce the margins that we produce if our product and our solution wasn't differentiated. And as we look for these new places to go, it's very strategically focused on where there's high growth and where we, as a company, can differentiate. Now depending on where we grow and the faster we grow or what we acquire to grow will impact margins, but I can guarantee you there will always be differentiated margins because we're identifying areas that have the characteristics that allow for that and where we can add value to allow for those differentiated margins. So an example would be as we grow our business in the newly acquired Elastic M2M, the software side of the visual presentation of Insight, we're going to naturally see higher margin profile there. We think about full battery energy storage, differentiated margins, but perhaps not as high as a software margin profile. So it will depend on what the mix looks like. Today, we're in those -- in the Electrification and Insights business, we're not running at company margins, but there are newer businesses that we're investing in heavily for the growth rates that we're talking about, 100% growth in Insights and 50% growth in Electrification, we believe it's the right investment to get the kind of growth that we're looking for.

Okay. Let's move on to Sensata Insights, which we've been discussing for several years here and the opportunity to move up the stack. Can you update us on the full stack solution that Sensata has and how kind of weaved together what Xirgo brought, what SmartWitness brought to the equation?

Yes, I'd be glad to. So if you don't mind a little bit of a wind up on it, when we started engaging in the area of Insights, and so I think we -- it's called Sensata Insights, but think IoT. So it's delivering insight to anybody that wants to extract more value and safety associated with the equipment that they're running. When we started talking with people who use that -- and it's different than our OEM customers, right? So it's end users, fleet managers and so forth that want to make sure that they're running their fleet safest and the most efficient that they can. The feedback that we got was they all wanted more data. And so we found ourselves getting into a discussion regarding what additional sensor components could we bring to their telematics insight ecosystem to provide more data to allow them to run more safely and more efficiently. So that was the pull for us, right? That was the -- that people want more data, everybody wants that.

Because as we discussed last year, I think, or 2 years ago, there's only a limited amount of data that comes out of the OPD dongle that a traditional Fleetmatics fleet solution would have or even in the black box.

Yes. And that's exactly right. There is a -- it's information-rich if you know how to interpret all that information, and we may get to that. It gets more complicated in an electric vehicle environment because the OBD port is proprietary. And so we're developing the capability to be able to do the decoding of what all those signals mean. But there is an element of what can the OBD port give you, but they want more. They want to understand all the tire pressure. They want to understand whether or not the load has shifted. They want to understand whether or not the driver is distracted. They want to understand whether or not there's been an event -- a fast-breaking event. And so the need for more information to make them more efficient led us to start to build an offering that would allow us to be able to serve those customers. Now I want to be really clear, just like on the Electrification side, we'll provide just sensors to customers, TSDs or fleet management software companies that want to buy just more sensor content to connect to their offering. But there are other customers that we're engaging with that want sensors. They want a telematics device to get the information off the equipment to the cloud. They want us to have a cloud presence to gather that information. They want us to be able to analyze it, apply artificial intelligence to the data and then serve it up. So what we're building is the modular capability to be able to bring that solution set in a very customized way to any of the customers that want it. Now the broader the solution we can offer, but we can also offer each individual component.

You -- at the June teach-in, you talked that Xirgo was on track for $100 million analyzed revenue. You seem to close the year with $75 million of Insights revenue. Now bear in mind, Xirgo was only consolidated for [ 2 ], so that implies 25. Was this largely on track where you thought Sensata Insights would end up the year?

It was on track to where we expected. It wasn't at its full potential because of supply chain challenges. We left the year with many bookings that we couldn't deliver given supply chain challenges on that side of the business. But we achieved the $75 million that was 3 quarters we own it. And that business, both through organic means, which is growing consistent with what we would have expected 20% plus along with the inorganic growth associated with SmartWitness, we'll see that business double. Now it's still small. It's a $75 million business going to $150 million, but it's growing very fast, and we see great potential in terms of where it could take us.

And final question on this. You guided to a 2x increase in revenues, so that's $100 million to $200 million or $75 million to $150 million. Your backlog -- your bookings were $37 million. So how should we think about book-to-bill in this business? Because to be honest, 0.37 doesn't sound like a huge book-to-bill ratio.

Yes. So just -- we had -- we left a 2021 with $85 million of orders, bookings. What the 37% was, was new business wins that we locked during 2021. So that was orders that we had accepted from customers for new business opportunities. So we left the year with, do the math, 60% of our 2022 revenue booked orders from customers. But we see a trajectory around new business wins that's quite healthy at $37 million new business win against a $100 million business is a pretty healthy pipeline of opportunities. Think of that as the equivalent to our new NBOs that we talk about as a company.

So final set of questions around inorganic growth. You've talked about an inorganic growth target of 400 to 600 basis points. How should we interpret that? Is that $200 million of acquisitions a year? Is it less than that, but a larger one every few years? And are you still working on tucking in the mega trends in terms of Electrification and Insights as the major focus of acquisition?

Yes. So we've always had a inorganic element of our strategy. But it's been a little more lumpy, right? So we've done a larger transaction. We've digested it for several years. Those M&A-related activities tend to be focused and underwritten more on cost synergies. They've been incredibly successful. We mentioned a couple of them in terms of the capabilities that it has brought to Sensata like the Schrader acquisition in terms of wireless and low power management. Our strategy is still going to be focused on M&A, but it will be focused on the true growth vectors on Electrification and Insights. It will be more serial M&A, right? So our goal would be to have 4 to 6 per year rather than more lumpy. We see that being important for a number of reasons. It diversifies the risk given that we're extending to more high-growth companies. We're paying a little more for these. So we want to make sure that we have diversification of our risk associated with the acquisitions. But it also allows investors to understand what our growth is going to look like many years into the future as opposed to the lumpy growth that we've experienced. And no question that over the coming years, what we see is opportunities where we can accelerate our capability build through inorganic means is going to continue to evolve, and we want to make sure that we're constantly focused on that to address that through M&A.

Great. So I want to thank you. That was a great overview of an increasingly megatrend-oriented business. It's amazing the evolution just in the time I've been hosting you at Barclay down here. So thank you.

Thank you very much. It's been lot of fun. Thanks.

Thinking about your innovation for our legacy sensor business and being able to identify [ synergies ], it seems to me like if you have those 2 focuses [indiscernible] current example. You're selling into a customer that has solutions you can see how fast they're growing. Is that how you're identifying a lot of these candidates? Are you actually doing business with them and that they need to help the balance sheet, the better access?

It's definitely one of the ways that we identify acquisitions. So an example of that would be Xirgo. As we were bringing our organics, what we called our Smart & Connected initiative to market we were introduced to Xirgo to partner with them to bring that solution set to a customer. And after we work with them a while, we identified them as a target. But we approach M&A very holistically. We have a strategic view as to where we want to go. We look at the markets that we want to participate in. We look at all the players in that market. We gauge with them to see whether or not they can be broken free in terms of an inorganic play. So our M&A focus is much more targeted toward where we want to be and how we can break assets free as opposed to an M&A focus, which is we get a bunch of sims through the door, and we evaluate things that are available, so to speak. And that results in us being largely in proprietary deals on the assets that we pursue as opposed to be in a more competitive process.

Great. Thanks for the question, John.

Thank you.