Release Date: July 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sensata Technologies Holding PLC (ST, Financial) reported a solid quarter with results in line with expectations across key metrics.
- The company achieved a 30 basis point improvement in adjusted operating margin from the first quarter of 2024.
- Sensata's automotive business outgrew the market by more than 700 basis points, growing 6% year over year.
- The company is actively exiting underperforming products, which is expected to improve margins and overall performance.
- Sensata remains well-positioned in the electrification market, with significant progress in high-voltage contactors and other key products.
Negative Points
- Revenue for the second quarter of 2024 was approximately $1,036 million, down from $1,062 million in the second quarter of 2023.
- The company is preparing for an automotive slowdown in the back half of 2024, with significant reductions in production forecasts.
- Sensing solutions revenue decreased by approximately 19% year over year due to continued destocking and a slow housing construction market.
- The company is experiencing market volatility, particularly in electric vehicles, with production forecasts dropping by 10% compared to earlier in the year.
- Sensata is facing macro headwinds and is taking steps to improve margins despite these challenges.
Q & A Highlights
Q: Can you expand on the new business wins in Japan and Korea?
A: Yes, we are excited about the traction we are getting, particularly with Toyota, which is starting to show up in our content growth, especially in active safety systems.
Q: When you talk about exiting $200 million of low growth, low margin business, what benefit does it have on your operating margin or cost structure? Are there other assets that could be divested to help you delever quicker?
A: This is part of normal product line management hygiene. The products being exited are low or no growth with substandard margins. This is one of many tools to ensure we can demonstrate our commitment to 20 to 30 basis points of margin improvement each quarter. We are also looking at other areas for potential divestiture to improve margins and delever.
Q: How does Sensata plan to achieve the 21% to 23% EBIT margin target? Are there other pricing actions or restructuring activities needed?
A: We see a path to margins in the 20s. We are focusing on operational performance and excellence, taking steps in the right direction each quarter. We have taken pricing actions and are aggressively attacking input costs to restore margins.
Q: Regarding the discontinued products, is that within performance sensing, and does it affect both auto and HVOR segments? What about the seasonal uptick in Q4?
A: The discontinued products cut across both auto and commercial truck sides of our performance sensing business. The seasonal uptick in Q4 is primarily expected in the performance sensing part of our business.
Q: What are the specific shock absorbers you will lean into to drive margin progress in performance sensing amidst a choppier auto backdrop?
A: We are actively pruning low-growth, low-margin products to free up investment dollars for higher growth opportunities. This helps balance volume drops and sets a foundation for future margin improvements.
Q: Can you help dimension the margins of the assets being divested? Are there other areas for margin improvement, such as corporate costs or R&D spending?
A: The divested products have low or no profitability. We are also looking at optimizing R&D investments and other areas to improve margins. We are still tracking our strategy within electrification and optimizing across the customer base.
Q: Are you seeing new ICE program awards, or are existing programs being extended? Can you reprice contracts that were expected to roll off?
A: Yes, we are winning new ICE program awards and repricing contracts that are rolling off. We are also making sure our capital is put to work effectively.
Q: Is the product pruning necessary to achieve the 20 to 30 basis points of margin improvement per quarter, or is it an additional endeavor?
A: Product pruning is one of many levers to achieve the margin improvement. It helps balance market environment challenges and sets a foundation for future margin improvements.
Q: How does Sensata ensure compensation from customers if new products for specific applications do not materialize or get delayed?
A: We develop products that cut across customers, ensuring reuse over time. We have regular discussions with customers to ensure capital is put to work effectively and seek compensation if volume commitments are not met.
Q: What are the expectations for auto production in the second half of the year, and are there further cost reduction initiatives to defend margins?
A: We expect auto production to be down 5% and HVOR down 4% to 4.5% in the second half. We are accelerating cost reduction efforts to defend margins and continue to commit to improving overall margin performance.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
