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

Okay. Great. Thank you, everybody, for joining us. We'll go ahead and get started. My name is Mark Delaney, and I cover Sensata for Goldman Sachs. I'm very pleased to have with us today Jeff Cote, the President and CEO of Sensata; and Paul Vasington, CFO. Thank you both for joining us.

Thanks, Mark.

Thanks to you.

I thought to get started, if you kick things off with a more open-ended question, and I'll direct this one to you, Jeff, but is there any that you believe could surprise industry observers or investors over the next year?

That's a very broad question. I think that -- I think we all know that we've been operating in a -- I think we all -- we've been operating in -- is it better now? You turned it down. Okay. Great. So we've been operating in a bit of a challenging time in terms of a lot going on, a lot of moving pieces. And so I think the very high level of response to the question is, certainly, there are things that could go in the wrong direction, but I would say every one of those things that could go in the wrong direction, could be upside opportunities as well. So when we provided guidance for the balance of the year, we pointed out some key factors that we felt as though could have an impact on the balance of the year. Obviously, we're in a pretty cautious environment in terms of what we're looking at. Some of those factors are consumer confidence and the demand for our customers' products in North America, largely driven by monetary policy and other things in Europe. It could be energy related. And in China, lockdowns and other factors that could have a negative impact on our customers' demand and therefore, a negative impact on our revenue, but I would say any of those could go in a positive direction. And generally, I would say from where we gave guidance, we're feeling a little bit more positive about where things are versus where we were a month or 6 weeks ago, but there's a lot that can still transpire for the balance of the year.

And yes, when you say you feel a little bit more positive relative to the last earnings call, anything in particular that you're alluding to on that front?

Yes. I mean I think the North American consumer in terms of the demand for automotive, for instance, has continued to be quite strong. Clearly, our customers cannot deliver what ultimate demand is still, and we're seeing some softening on the supply chain in Europe. I think that, again, we're not out of the woods, but I'm feeling better about the energy supply that's been built up and the reduction in dependency on Russian gas overall. Prices clearly are continuing to go up, but the risk associated with rolling shutdowns in the industry seem to be a little bit better. On the negative side, I would say, in China, in terms of lockdowns, there have been some more recent announcements regarding some COVID-related lockdowns, and we know that in that region, vaccine effectiveness hasn't been as strong, whereas in the balance of the world, in Europe and certainly, North America, we seem like we're getting beyond the COVID-related concerns.

Okay. That's helpful. And in terms of some of the steps that have made you a little bit more confident on the European energy situation and realizing there's a lot of permutations that could still occur there, but is it just the amount of gas they've been able to store? Or is there other things that you're seeing the industry do to maybe better prepare itself? And anything Sensata is doing specifically that's within your control?

Yes. So just to be very specific, it's not really a Sensata issue. We're not energy hungry in terms of the amount of energy that we would use globally from a manufacturing standpoint. It's more the knock-on effect that impact to our customers would ultimately have on our demand. And so -- it is the buildup of supply, it is the migration away from dependence and the feedback that we're getting is that although we're not out of the woods and we'll continue to see price escalation on that front, it's not an availability issue, it's a pricing question.

Okay. And of course, there's been a global supply chain issue with semiconductors. You said in your prepared -- in your opening points that you're seeing some moderation. I think you're alluding to the semiconductor situation, but I hope you could elaborate a little bit more on that.

Yes. Certainly, semiconductors has been the area over the last 18 months to 2 years, that's been the most acute, but it's by no stretch limited to semiconductors. I mean we've seen supply chain issues on resins, we've seen logistics challenges, a variety of different issues on the supply chain side. I sort of look back to sort of mid-2020 or -- mid-2021, excuse me, when I think people felt as though was a '21 issue and we knew that supply chain challenges would persist. My view is they're not going to go away at the end of 2022 either, but the impact that they're having in terms of challenges, with our customers, with us as a supplier to them and their broader supply base seems to be mitigating a little bit.

And you said the North America industry still can't fit all the demand that's out there. I mean is the gating factor in your opinion, is still mostly semiconductors? Or is there something else at this point that's the biggest constraint?

Yes. I think -- specifically in the automotive industry, I think it's largely a semiconductor challenge. But again, it's -- putting together, light vehicles are complex. There are a lot of parts involved. And so a variety of other things could come into play on that front.

Paul, let me bring you in here. All of these issues that we've just been talking about, I know puts a lot of stress and unfortunately had some costs associated with it. So there's been some margin impact for so many companies, including Sensata. Maybe you can help us frame up how much margin impact there has been from all of these various supply chain issues, also some input cost pressure? And what's your outlook for the ability for Sensata to be able to recapture that margin going forward?

So we've definitely seen quite a bit of a rise in input costs related to material inflation. It's been around electronic components, mechanical parts, metal-related parts. And so it's over $100 million probably of input cost increases year-over-year. But we've been able to -- and we expect to be able to fully offset that in terms of increased pricing with customers. The techniques that we use vary by industry, but largely been pretty successful. In the first half, we were about neutral in terms of rising pricing with rising costs. In the second half, we expect to be a little bit above, in terms of pricing above cost. We stated that this year, the margin profile has -- is down versus what it was in '21. So we're down. We were 21% in 2021. We're going to come in somewhere in the below 19% this year. But the margins are going to improve and have been improving sequentially. And that's coming from just better execution, better pricing relative to costs, managing our cost structure as effectively as we can, given the environment we're operating in. And like to exit the year somewhere close to 20%, and that would set us up for a 21% op income margin in '23. That's what we're targeting right now. But it's just managing all these disruptive events around inflation, supply chain shortages, serving our customers as best we can and not being the problem. And then looking for better and continued outgrowth by continuing to deliver on the new product launches. All that will create better volumes and should deliver a better margin profile for next year.

That makes sense. In terms of getting those price increases instituted and getting them sort of contractually agreed to with your customers. I mean how far along are you in that process? Is it largely done? I mean we're in September now, right? There's not a whole lot of time left in the year.

It depends on the industry, and what kind of agreements you have with your customers that will dictate the approach that you take. But I think largely speaking, we've been able to lock in a lot of the pricing that we have targeted for the year. There's still more work to be done, but we've made a lot of progress, good momentum. The engagements are very positive. Customers understand the pressures that their suppliers are dealing with. And so I think we're making really good progress on that front.

And I would add, a large portion of that is in the form of pricing as opposed to cost pass-through, right? So it carries over into 2023, but as we start to think about our planning process for 2023, I'd mentioned that the supply chain challenges, and I would put cost inflation in the category of supply chain challenges. The expectation is that, that will persist into 2023. So this is a new practice, a new muscle, a new capability as a company that we'll make sure that we're rolling right into the '23 planning process as well.

Maybe just talk across all your different end markets, auto, industrial trucking, a couple of other areas as well. But if you could just speak a little bit more on some of the end market trends that you're seeing more broadly across the various industries, the company serves and other key regional variations that are important to point out?

Sure. So I think it's important to sort of step back and look at the growth model that Sensata has because net-net in 2022 across all of our markets, we're expecting the market to go down by 1% this year. And I'll speak to some of the variation that we're seeing, but -- even in that environment, with inventory growth that occurred in 2021 that did not repeat in '22, we're seeing growth as a company. And so that's as a result of our outgrowth to market, meaning more of Sensata product in our customers' product and also the M&A-related growth. So we -- our most recent guide was up 5% in an environment that's been pretty challenging. So we tend to talk a lot about the next quarter -- the next couple of quarters. We're very excited about the opportunity that we have from a market growth standpoint over the longer term and the capabilities we're bringing to those markets. But it's challenging times right now from a market standpoint. The overall automotive market is going to be up maybe a couple of percent, maybe a little bit better this year. Our heavy vehicle market will be down, call it, 9% year-over-year. So that's been quite challenged. Aerospace has been up 1% off a very low level. And our industrial business is, call it, flat year-over-year. So geographically, first half of the year, China was more challenged given all of the lockdowns that occurred. The second half should be better for China and Asia related markets and a little bit more challenging in North America and Europe.

Okay. Pretty big legislation was passed recently in the United States with the Inflation Reduction Act and perhaps it's a little bit more downstream from Sensata, but anything you can share on thoughts of potential impact to your company?

Yes, absolutely. So investment in environmentally-friendly technologies will, without question, help Sensata long term. So it is the core focus of our business to help our customers solve their most difficult challenges in an environment where they're trying to become -- or produce equipment that's safer and more efficient -- more energy efficient. And so long term, this will have a very positive impact. In terms of the trends, investment by governments, not only in the U.S. but around the world, is not a new phenomenon. This is something that's been happening. So there's consumer preference for this type of equipment, these types of products. There's government investment that's occurring. There's commercial investment that's happening. And I think all of you know that our focus from a company standpoint has always been on regulatory-driven capabilities to help our customers achieve these objectives. But over the last several years, we've really doubled down in the areas of electrification and in IoT, what we call our Insights-related business, which is all about making fleets of high-value equipment safer and more efficient and more of an aftermarket environment. That trend is very positive. The government support from the U.S. toward this is certainly going to help. But we see a lot of other trends that would support our confidence in continuing to invest in these areas.

Specifically with electrification, maybe we can go into more depth on that part of your business. The company has a target to double its content in an electric vehicle compared to an internal combustion engine vehicle within 5 years. Maybe level set us kind of where you are today? And then what gets you to that doubling? And how much is already booked that's maybe giving you some confidence in being able to achieve that number?

Yes. So doubling content in light vehicle electrification, right? But we did a teach-in that, I think, it's still available on our website that address the electrification strategy more broadly as a company. Today, it's a $280 million, $260 million business for us, at least, that's what we would expect in 2022.

[indiscernible] the total company. So we're growing at over 50% this year. Yes.

But we'd expect the electrification business for Sensata to be $2 billion by 2026. And so a key to that is doubling content on electric vehicles for sure. But it's a broader phenomenon than this, right? So we've gotten a lot of questions appropriately so in terms of our investment philosophy from an M&A standpoint beyond just sensor components or components in light vehicle and heavy-duty into the industrial side of the business as well. Because with the electrification of all this equipment, there needs to be an infrastructure that's built to support that. And so the investments in Lithium Balance, Spear Energy (sic) [ Spear Power ], Dynapower, these are all reasons why we're investing there because the growth opportunity associated with the proliferation of electrified equipment is going to be large as these investments occur. But we track the MDOs, we provide an enormous amount of transparency associated with our new business wins on an annual basis. In 2021, we won $640 million of annualized business that will -- those are wins that will eventually result in the $640 million in annualized business. It's a long cycle business. So it could be anywhere from 2 to 4 years for that to take place. 2/3 of that was in the area of Electrification and Insights. So we're building up the business portfolio, the wins that we've had with our customers that gives us increasing confidence in that prediction of $2 billion of revenue and 2x content in electric vehicles.

Any sense of where your market share is tracking when you look at some of these wins that you're getting? You spoke to the figure, the $640 million. But like what's the market share looking like in electrification? How does that compare to internal combustion engine market share?

So I think those of you that know Sensata know that we aim to serve applications with our customers that are hard to do, mission-critical. And historically, in those areas, there are 3 to 5 competitors. There aren't 30 competitors, right? Because it engineered our customers, never going to pick a newcomer to the market to serve that application when the device is serving a mission-critical application, and it needs to work for the life of the piece of equipment. So the competitive set naturally is pretty confined to folks that have street credibility to be able to design, scale, manufacture with high quality. Our goal as a company is to get a #1 or #2 position or a path to get there. We're not #1 or #2 position with every one of our applications, but the goal is to get there because that is what drags along the differentiation in the margin profile that we enjoy in the business. So based upon the new business wins in the areas that we've targeted for electrification, whether it be high-voltage contactors, current sensing, isolation monitoring, e-motor position, battery disconnect, high-voltage disconnects, we are very confident that we're going to be in the top range of market position.

Speaking of the wins you've had in electrification. I think it was last earnings call, you mentioned the big battery disconnect unit when -- I think it was one of the largest or the largest win that the company has had in history. Maybe talk a little bit more on what led to that? I mean I think it grows $150 million of revenue over time, but you're serving as the Tier 1 as well. So I think a lot of there to maybe better understand for investors.

Yes. So we're really excited about this. It was the single largest business opportunity that we won as a company, a contract value of over $1 billion, with a platform that's a leading platform in North America. And where it started, you sort of have to rewind the clock to October of 2018 when we acquired GIGAVAC, which is a high-voltage contactor business. And since then, we've done a number of other acquisitions, and we've invested very aggressively, although we're investing somewhere around $65 million incremental in product development associated with pursuing Electrification and Insight-related business. And so as we were engaging with our customers in this particular case, in this customer in North America, talking about -- talking with them about their electrification architecture for their new platforms that they're rolling out, it led to a natural discussion regarding the vehicle architecture that brought us a little bit more upstream in terms of beyond just a component into a battery disconnect, which has a lot of contactor, sensors, thermal properties associated with managing the heat that runs through this disconnect. That led to the opportunity that's candidly a new category for us, not only in light vehicle, but in heavy vehicle as well. We've announced a number of large wins on the heavy vehicle side as well. But it doesn't necessarily mean that we're always going to be competing at the tier level. We still do work with tiers extensively. We're going to serve our customers where they have a need and where they're pulling us. And if they want us to do more of a subsystem then we'll do a subsystem. If they want us to provide just components to another tier that's going to be providing that subsystem, then we'd be glad doing that as well. But we're really excited about it. This one win in North America means $8 of content across all of the North American fleet for light vehicles. So it's a meaningful one, and there are several other opportunities like it out there.

I think somebody has also have been doing more work in EV charging. I believe it's been a bit smaller. I don't know, this one for you, Paul, but maybe you can size how much revenue you have tied to EV charging? And when you think about maybe that $2 billion to total electrification, how material is the charging piece to that?

Charging -- EV charging related to infrastructure. Yes. So we have a fast-growing business on the industrial side as part of our Clean Energy Solutions segment. That comes from the GIGAVAC acquisition. GIGAVAC was -- when we bought that business, it was largely an industrial business. So they serve contactors and fuses into the charging infrastructure, fast DC charging units and other types of equipment that serve that particular market. So it's fast-growing. It is starting to expand rapidly as that end market starts to expand more rapidly. So it's another lever. It's not nearly as large, obviously, as our automotive opportunity, but it's, again, a very differentiated product that's got great growth profile and good margin profile.

Jeff, as you're speaking to the Electrification business, you mentioned a number of acquisitions you've done, Dynapower pretty recently, Spear and Lithium Balance as well. Maybe just talk about how they all fit together with an example or help us better understand sort of how does 1 plus 1 equal 2.5 or 3 in this area?

Yes, absolutely. So I had mentioned with the proliferation of electrified equipment, there needs to be investment in infrastructure. I sort of think back to the 5, 6 years ago when we were thinking about the potential for electric vehicle proliferation, and there were a number of obstacles associated with consumers choosing to go electric vehicle, price, battery cost, total cost of ownership, range, charge time, infrastructure, general comfort with it. I think we would all agree that we're beyond that at this point. And so clearly, the range is at a point where most people don't have range anxiety when you can drive 350 miles with an electric vehicle. The fact is that very few people do that in 1 driving session, if you will. But the point is simply that there's more to it than content. So when you look at something like Dynapower, which is an industrial-grade power inversion business, a leader in industrial-grade power inversion, you would say that's a little bit different than a sensor component, right? They're producing room-sized power inverters for electrical installations for a PV installation that needs to then store that power in a battery backup until the grid needs it. That's the type of application. There's a lot of Sensata content in terms of the components in those, but it's a broader play on us being able to bring the Dynapower, largely North American offering to a broader solution set. So you mentioned to Paul, the notion of DC fast charging. Whenever there's a DC fast charging base that has battery backup that has to pull power off the grid, store the battery, there's a power inverter involved in that process. So Sensata has an opportunity to help access to market as well as supply chain purchase. But let's be clear, the go-to-market strategy for high volt -- for a power inverter at the industrial grade is very different than components in the automotive space.

That's helpful. Paul, on EV margins, the company has talked about the profile on an aggregate basis in Electrification being somewhat below the corporate average at least currently as you're investing. Maybe you talk about where margins are in your EV business? And then longer term, do you think the EV and Electrification business more holistically can hit the low 20% corporate target?

We definitely have conviction around getting to the corporate target at some point. I think what's important to understand is that if you think about our EV portfolio, focus on automotive, which is where the greatest amount of revenue exists. A large portion of that revenue, not all of it, but a large portion is carryover technology. So things that we do on thermal management, which would be a pressure and temperature sensor, starts with a pressure sensor that we have a leading position in the industry today on ICE vehicle. And so we have high-volume manufacturing and designs that we can leverage in that new application that is very profitable. The part that we're seeing lower profitability is around some of the newer applications around contactors and fuses and electronic drive position because they are very new designs. They are new applications on new electric vehicles that continue to -- in terms of the architectures, continue to change based on our OEMs. And so there's a lot of fragmentation and there's not much scale yet. Now as that starts to change over time, as designs become more standardized and we can modularize things, we can build scale, which is a lot with how our existing business today started, the profitability will move up. It's just that we are in a period of time when all the sourcing is happening now. You want to make sure that you are on those platforms because building incumbency in the automotive industry as a supplier is incredibly important. And so we are spending money to win that business, to build that incumbency for the future. And it's just coming with a heavier investment load today and not with the volume level -- volume scale leverage that you would normally expect to get from Sensata. Over time, that will improve. It may not be next year, it may be a few years, but over time. And we are playing the long game, right, to build a very strong market leader position in these key electric components for the long future of Sensata. So I would -- I think what we're giving guidance that we're going to target 21% next year. And we'd expect things to improve from there, as these lower-margin components start to increase in terms of scale and standardization.

All right. That's very helpful. One of the other big megatrend areas was Smart & Connected, and we spoke a little bit about it, but maybe we can go into some more depth now on that part of your business. And you've done some acquisitions here, Xirgo, SmartWitness. Maybe talk about what the offering is that you have today? And there's other areas you still need to add into kind of get the full solution that you would like to have there?

Yes. So at the core, what we're aiming to do is to provide more data to the telematics -- the broad telematics ecosystem, right? So if you'll bear with me as I sort of do a little bit of a wind up on this, we -- this was -- this opportunity was identified by Sensata when we were engaging with our OEM customers in the heavy vehicle space when they were implementing tire pressure. There was a regulatory requirement. As you probably know, all of our OEM customers have -- a lot of them have telematics offerings as well. So as we were getting smarter regarding this ecosystem, we went and interviewed and talked with all of the players in the telematics -- the broad telematics ecosystem. So that's telematic service providers, it's fleet management software companies, it's fleets themselves. The common theme that all of them wanted more of is data. And it just so happens that Sensata produces over 1 billion sensors every year. So we know a lot about getting data off equipment. And so our initial offering in this space was to just feed more sensor data through our sensors to that ecosystem. We've expanded that with the acquisition of Xirgo so that now we have the capability to get the data off the equipment to the cloud. Xirgo also had analytics, artificial intelligence, machine learning in the cloud to aggregate that data and serve it up. We also added another high-value sensor parameter with video telematics on SmartWitness. We added the Elastic M2M platform for some of our customers that want a visual interface or a user interface. So the reality is today, we have the full stack offering. We have sensors, we have the telematics device, OBD, port, coding, interpretation, bringing that information to the cloud. And so our customers, whether they be telematics service providers or fleet management software companies or fleets themselves, they can pick from the menu of offering that we have. It's a small business today, but it's fast-growing. It's going to grow 100% this year from, call it, 100 -- or 80 to 160. So it's growing very fast. It has the potential to be higher profit because today, about 20% of it is, if you will, data as a service rather than selling hardware, so it's at a higher margin. And we'll continue to invest in that area as we go. But it's really focused on sort of the fleet logistics channels and other high-value equipment.

And when you think about who you're competing with in that business, I mean is it Geotab, Samsara, it internal capabilities, OEMs would do maybe all of the above?

Yes, all of the above. It's a very fragmented ecosystem. But it's all of the above. I mean, we can sell some of this to our OEM customers. In fact, we are, because they're buying our tire pressure sensors, and we're selling a collection device, a receiver, if you will, for those telematics devices, if you will, at the truck and trailer level. Those can be turned on in a different way in the aftermarket. So we're selling to the whole ecosystem. It's not unusual for us to be in a position where we're competing and serving customers. That's something that we've always done, but we're going to continue to build out the offering to serve this market.

Got it. I'm going to ask a couple more and then give people in the audience an opportunity as well. So we start taking questions, if you have any, please. Yes. And maybe just kind of follow up a little bit more there. I mean anything that you think some of these competitors do maybe differently or better than Sensata? What differentiates you? And on that threat, there's -- the OEMs are trying to build a lot more capabilities inherently right into the vehicle itself. I mean is that going to be a threat to this business longer term?

Yes. So on the first part, the thing that we're always very careful of is not to compete with our customer. And so this notion of us having a menu of what we would potentially sell depending on what the customer wants is something we're very mindful of. And a lot of our competitors become competitors with their customers over time as their offering expands. So that would be one area. The second area is our very deep understanding of sensor capability. We are the only player in this market that produces in billion sensors every year. I can guarantee you that. And our sensors are across the board in all vehicles and equipment that you would use, you know where our products are. So that's an enormous advantage that we have. In terms of the OEM play, we'd be very happy continuing to service our OEM customers in terms of more sensor data to serve the telematics ecosystem. The challenge that I see them facing is that fleets don't buy a single OEM vehicle. And so they want to have a telematics system that will collect information across all their different vehicle platforms. And they buy a lot of different vehicles as they're putting that together. And so the OEM version of the telematics device has limitations based upon where ultimately that would go.

Got it. Well, let me stop here and see if anyone in the audience has questions that they would like to ask Sensata?

Sorry, it's a bit granular, but [indiscernible] your views on current size of growth in battery power management? And your views on what your suppliers providing more product for that?

Yes. So I think the question was around where voltage or current levels will go with vehicles going forward? Is that...

Just the battery power management.

Okay. Yes. So it's no surprise that is -- so let me be very clear, we're not providing battery management capability in light vehicle. We do battery management in stationary and marine applications, but the battery management aspect -- so the software layer, if you will, on top of light vehicles is largely being done by our customers, right? So the Teslas of the world and others, they want to own that software battery management process. So we're, in most cases, just providing the hardware. If you want to get to longer ranges and shorter charge times, the voltage levels are going up very dramatically. And this is very serious power in terms of energy density. So there's a lot of things that come into play there in terms of the electrical architecture that we're advancing in as well as the battery -- size of battery packs and the types of battery packs that are being used. But my sense is that's a trend that's going to continue. I think that those of you that know us know that historically, we have not invested heavily in what were viewed as more commuter vehicles, things with a 100-mile range or less. But we see all OEMs investing very heavily in longer range and shorter charge time. So more to come on there in terms of the overall investment. In terms of our engagement with our electronic suppliers, clearly, this is an area around power electronics and other aspects of the power management process that they're investing in, and we're working very closely with them on that. That's not an area that we would be targeting as opportunity for Sensata.

And also, I can ask the last couple of questions.

What do you feel about the investment-grade rating?

So I guess the first comment there is that today, we're fortunate when we issue debt, we issue at a pretty tight level and I would say probably some of the best execution in the high-yield market and closer to an investment-grade company, but we don't have an investment-grade rating. So investors like our paper. They believe in the business and the confidence around our cash flows. And so -- and then not being investment grade does give us some flexibility around how we deploy capital. And so the combination of those 2 give me comfort that we're at the right rating today. Investment grade may be in our future, but it's not something that we're focused on today.

The one thing that's been very topical, especially all of us coming out here to California, right? There's great challenges. We spoke a little bit about it throughout the session today, but we've just seen the grid in California strained to the limit just a week ago. Anything more you can share around the ability of the grid to actually meet rising EV demand and any thoughts you have on it? And with sort of the level of investment that's going in and things like Inflation Reduction Act, I mean do you think the grid will be ready? Or is there going to be -- need to be substantial acceleration into grid robustness and some of the things maybe you're providing in order to support this longer-term transition?

Yes. So I think -- thanks for the softball question. I think we all know there needs to be significant grid investment, and that's why we're investing in this area. The other thing I would mention though is that it does no good for the environment if we just go to electric vehicles and all of that power is generated with fossil fuels. So the need to invest in renewable energy sources as well is going to be a very important area. Dynapower has a small but fast-growing opportunity around powering electrolyzers for hydrogen -- green hydrogen production. So we believe there are several other areas around grid infrastructure build and green energy that will present opportunities based upon the acquisitions that we've done and the organic investments that we've made that will provide opportunity for growth. And remember, I mean, we're focused on these growth areas that we'll see very significant, 20%, 30%, 40% growth in the future. So the target areas for organic and inorganic investment are about margin index preservation, but revenue growth accretion. And so the areas that we're focused, I think, are pretty obvious in terms of candidates for significant growth.

One other topic I wanted to ask on is inventory. You guys have made some estimates around inventory that was sitting with your customers, I think, predominantly in the automotive industry where it's been grappling with the supply chain inefficiencies and so they have incomplete kitting problems. Any updates you can share in terms of how much inventory is maybe sitting at the customers and how you see that playing out over the next maybe near term, but also over the next 12 to 24 months as well?

We saw a significant build of our products and our customers in 2021. A we don't have direct line of sight to that. So it's usually trying to analyze the production versus our high market share sensors that we ship to find if there was a dislocation. There was a significant build based on our analytics. So far, we have not seen a further build or a reduction based on our analytics. And so it's been pretty neutral so far through the first half of this year. We'll know more at the end of the third quarter when we see the actual production data and what the actual production was relative to our deliveries, and we'll be able to triangulate was there is a change. But so far our assumption is that the inventory that was built last year stayed in place, and there's no reduction in that inventory this year.

And any sort of qualitative feedback from customers you guys are thinking 1, 2 years down the line? I mean are they just thinking, hey, we've had so many supply chain issues globally for multiple years now, maybe they just want to run with more inventory as just a normal course of business, and so maybe this is never going to be sort of a headwind. Or do you think at some point they may try and work this down.

I -- my true sense here would be that particularly in North America, given the fact that dealership inventories are still very, very low and given that the production is at a historically low level, there is long-term runway in terms of production. And so based on that, I would think that the inventory would not get reduced. But some of these things happen because of unexpected disruptions and causes the supply chain response that you didn't expect to see. But I think largely, there's more upside here than anything over time.

Great. Well, we are out of time here. So Paul, Jeff, thank you very much for joining us.

Thank you very much. Appreciate it.

Thank you, everyone.