Good day and welcome to the Sensata Technologies Third Quarter 2024 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. James Entwistle, Senior Director of Investor Relations. Please go ahead.

Thank you, Betsy, and good afternoon, everyone. I'm James Entwistle, Senior Director of Investor Relations for Sensata and I would like to welcome you to Sensata's third quarter 2024 earnings conference call. Joining me on today's call are Martha Sullivan, Sensata's Interim President and CEO; and Brian Roberts, Sensata's Chief Financial Officer. In addition to the financial results press release we issued earlier today, we will be referencing a slide presentation during today's conference call. The PDF of this presentation can be downloaded from Sensata's Investor Relations website. This conference call is being recorded and we will post a replay on our Investor Relations website shortly after the conclusion of the call. As we begin, I would like to reference Sensata's Safe Harbor Statement on Slide 2. During this conference call, we will make forward-looking statements regarding future events or the financial performance of the company that involve certain risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that cause such differences include but are not limited to those discussed in our Forms 10-Q and 10-K as well as other filings with the SEC. We encourage you to review our GAAP financial statements in addition to today's presentation. Most of the information that we will discuss during today's call will relate to non-GAAP financial measures. Our GAAP and non-GAAP financials, including reconciliations are included in our earnings release and in the appendices of our presentation materials. Martha will begin today with comments on our overall business. Brian will cover our detailed results for the third quarter of 2024 and our financial guidance for the fourth quarter of 2024. Martha will then return for some closing remarks. We will then take your questions. Now I would like to turn the call over to Sensata's Interim President and CEO, Martha Sullivan.

Thank you, James, and good afternoon, everyone. Let me welcome James Entwistle as our new Senior Director of Investor Relations. James joined us in September after spending the last 11 years at Stellantis, including the last three years as their Investor Relations Manager. Now turning to Slide 3. Our third quarter core operating results were in line with expectations and demonstrate positive early returns from our efforts to improve operational efficiency, drive execution and expand margins. For example, during the quarter, there were three key developments. First, we completed the sale of the Insights business to a subsidiary of Balmoral Funds. Second, we eliminated low-growth, low-margin products of approximately $30 million of quarterly revenue. As expected, we were about 60% completed on our product lifecycle management initiatives as of September 30th and expect to be nearly finished by year-end. As a reminder, in total, we had identified approximately $200 million of annualized revenue in connection with these efforts. Third, we commenced several operational improvement initiatives focused on streamlining process, increasing automation, reducing overhead expense and aligning capital expenditures to a lower market reality. These steps will prove critical as we return in 2025 to a more normalized environment of operating productivity, offsetting price-downs with our OEM customers. I am encouraged by our team's progress over the last 90 days and I'm confident that these ongoing initiatives will provide additional benefit as we continue to navigate a difficult end-market environment, especially in our Performance Sensing segment. As we turn to Slide 4, for the third quarter, both automotive and heavy vehicle off-road markets decreased by approximately 5% year-over-year with further erosion likely in the fourth quarter. During my long tenure with Sensata, we have weathered many challenging auto cycles and we have a track record of performing through periods of end-market…

Thank you, Martha. Good afternoon, everyone. Just a reminder for clarity that unless noted, all amounts are denominated in US dollars. Let me start on Slide 6. As Martha stated, we delivered another solid quarter with results in-line with expectations across our key core operating metrics. We reported revenue of approximately $983 million for the third quarter of 2024 as compared to revenue of $1 billion in the third quarter of 2023, a decrease of about 2%. Adjusting for approximately $30 million of revenue exited in Q3 2024 related to our product life cycle management efforts, revenue year-over-year would have been up 1%. Adjusted operating income was $188 million, representing a margin of 19.2%, which was an improvement of 20 basis points sequentially from the second quarter of 2024. This is our third consecutive quarter of delivering adjusted operating margin expansion and is in-line with our expectations to deliver margin expansion each quarter this year. Adjusted earnings per share of $0.86 in the third quarter was in-line with expectations. Adjusted earnings per share were $0.91 in the third quarter of 2023. The year-over-year change was primarily driven by lower revenue and foreign currency fluctuation. Our Q3 2024 GAAP results include impacts from several discrete events, which have been excluded from our adjusted results. Let me take a moment to walk you through these items. First, as Martha noted, we recorded a non-cash charge of approximately $150 million to write down goodwill related to the Dynapower acquisition from 2022. While we remain excited for the future of Dynapower, the business experienced project delays as timelines related to clean energy and electrification shifted. The resulting delayed growth and cash flow expectations for the business necessitated the impairment of goodwill. Second, we completed the sale of our Insights business to a subsidiary of…

Thank you, Brian. In summary, let me leave you with a few key messages as we reflect on the third quarter and look ahead to the fourth quarter and 2025. First, it's clear today we are faced with challenging market conditions across the sectors we serve. Volatility has been amplified, especially in auto over the past several months, and it is likely to persist through Q4 and into early 2025 as OEMs modify production levels to adjust for inventory held by them or on dealer lots. We have been through many of these cycles over the years and are actively taking the necessary steps to respond to the current demand environment with a focus on improved execution and better operational efficiency. Second, we are building a solid foundation for 2025 and the future. I am more confident than ever that Sensata has a winning long-term strategy built on high value sensing and electrical protection solutions, allowing us to continue to win in a safer, cleaner, and more electrified world. As regulations increase and our customers look for help to solve complex new challenges, we are well positioned as the partner of choice in this period of transformational change. Third, we have an exceptional team in place globally that is committed to driving shareholder value, executing for our customers and delivering on our mission. It has been a tremendous opportunity and privilege to connect with colleagues, new and old who share our goal of developing best-in-class content, enabling our customers to lead in their respective markets. I will now turn the call back to James.

Thank you, Martha. We will now move to Q&A. To allow all of those who wish to ask a question the opportunity to do so, we will limit each participant to one question. Betsy, please introduce the first question.

[Operator Instructions] The first question today comes from Wamsi Mohan with Bank of America. Please go ahead.

Yes, thank you so much. Martha, you mentioned that you're baking in more downside to third-party estimates and expecting those to come down. Can you just talk about some magnitude? What are you thinking is ultimately going to transpire from a production assumption standpoint or what's baked into your guidance? And given this weak exit rate in 2024, how should we think about 1Q seasonality as well? That'd be helpful. Thank you.

Sure. Hi, Wamsi. Yeah, the way we're thinking about this is particularly North America and Europe. And so we are somewhere between 200,000 to 300,000 vehicle units below third-party forecast at this point as we look ahead to the fourth quarter. And we're not expecting a lot of help beyond that as we move into the first quarter. So in terms of normal seasonality, we would expect normal sort of cost seasonality inside of Sensata. We expect the market is going to not give us a whole lot of help in the first quarter.

Okay. Thank you so much.

The next question comes from Joe Giordano with TD Cowen. Please go ahead.

Hey, guys. I have one question on China and then one like more high-level for Martha, if I could. On China, just to your point of the share change and the significant shifts in where your content sits with the locals, like how do you balance what you want to keep investing in that region or like what's the -- how does the strategy evolve given like the structural changing dynamics for you?

Yes. It's an important question. So the way we're looking at the market is recognizing that there will be consolidation, certainly at the local OEM level. We're focused particularly on locals that have aspirations outside of China and where our global position and our innovations are valued. And as we look at that opportunity, it's quite significant and we continue to add content even on ICE engines. So the market opportunity and the market position is still strong and the investments make sense given that we are really leveraging technologies across Sensata and we're not making unique technology investments inside of China. So we feel good about that investment and the returns that it brings.

And Martha, if I could just follow, since you were away from the CEO role and I know you're still very involved with the company, but having like that time away and now coming back, like how has it changed like your ability to kind of see things differently now that you were out of that seat for a bit here? And like does it give you that like that distance, that time, did it give you kind of different perspective into some of the things that you were seeing years ago?

It did give me a different perspective and let's recognize that the world is not what it was almost five years ago when I retired. Having said that, I would say that there is clarity that comes with knowing the strength of Sensata and a sense of urgency to make sure that we're performing as well as we can for shareholders. I would also say it's been great. We've got a lot of really strong new talent on the team, including Brian, who has brought, I think a really good cadence of improvement for our shareholders.

Thanks, guys.

The next question comes from Mark Delaney with Goldman Sachs. Please go ahead.

Yes, good afternoon. Thanks for taking my question. With all the product exits and also the Insights divestiture, I'm hoping to better understand what the full magnitude of EBIT margin improvement those various efforts may bring and how much more there may be off of the 19.2% to 19.5% EBIT margin guidance in the fourth quarter. Maybe it's the full run rate already, but if there's more to come, I'm hoping to understand the magnitude. And on the self-help margin topic, Brian, I think you said you expect to size OpEx appropriately to revenue in 2025. I don't know if you could be more specific around what level of OpEx to sales do you think is appropriate and if you think you'll be at that ratio next year even if end markets are cyclically soft. Thanks.

Sure, Mark. Thanks for the question. So just to run through the pieces. We've talked about that if the margin completely fell to the bottom line immediately upon the exit of the $200 million of annualized products, you would see roughly about a 30 basis point improvement. Now the challenge with that is it doesn't just fall in the back into the bottom and you can see through our efforts that we do have expenses in the operating expenses, SG&A expenses that then have to be rationalized to be able to drive towards that lower revenue base and that's what we're in the process of doing now. In the fourth quarter, we previously said that this could contribute a couple of basis points to the overall fourth quarter benefit. And so that's factored into the range that we provided, which is roughly about 20 basis points of improvement, which is consistent with the 20 basis points to 30 basis points of quarterly improvement we've been talking about all year. So we're working through that now. We do expect some of those cost initiatives to continue as we're moving forward and trying to adjust to what we think Q1 market environment may be. I'm not sure that there's incremental to be seen, as Martha mentioned, typically seasonality in Q1 is a challenging quarter for Sensata as we do move back towards a historical price down environment and we do offset that with productivity, but productivity comes in over time. So the work to do still in our planning efforts to be able to give more clarity for both Q1 and 2025 and I'm sure we'll update you on that on next quarter's call.

And just on the Insights piece with the exit, can you just help us understand the effect of that on EBIT margin, please?

Yeah. I mean, Insights is actually a little, believe it or not, a little bit accretive this year, just given some of the cleanup that happened with that business and preparing it for sale. So there's really no incremental benefit this year for it. But again, overall, if you look at the level of operating and G&A expenses that came with that business, the level of investment that would continue to be required for us was just too high and ultimately, it was one of the main drivers for us to decide to move on from them.

Thank you.

The next question comes from Christopher Glynn with Oppenheimer. Please go ahead.

Thanks. Good afternoon. And was curious about operating efficiencies and driving execution, expanding margins. I was wondering if you could discuss some specifics. Obviously, you have the product line exits, but I mean around how you manage internal accounts, internal reporting channels, any production line changes, examples of that. What's going on to behind the headlines that you're highlighting?

Yeah. Honestly, it's getting back on track to a lot of blocking and tackling that have been part of Sensata for quite a while. And then just given recognizing the disruptions that we went through as many companies did around inflation, around COVID, around supply-chain, it's really important that we get back on track with those processes. So lots of examples. Things like smart automation, given that we've seen labor rates increase from where they've been even two or three years ago. And we get a really nice return on that investment and those things can happen quickly inside of a year. We've done things like lean reimplementation in some of our production sites to ensure that we're looking at process mapping and eliminating process steps that we don't need to do, that makes everybody more efficient. It makes them more cost-effective and it makes their jobs easier. So there's a lot of goodness that comes with this renewed focus. Another area I would talk about is design-driven cost reduction. So if you look at our core Sensing business, some of that those technologies have been around now for decades and they're still very high margin products and they stay that way because we invest in delivering design changes that reduce cost, make them competitive and also ensure that we enhance our margins. So those are just some of the examples.

Okay. Thanks. And then on the exits, I was curious, are there any interesting cases where you've tested price on the way out quote, unquote and you found that those products are -- will stay?

Well, we were with you until you made the last comment. So some of the exits do include just pricing our way out of the market, that's a smaller piece of the overall. But the reality is these are -- when products get to this point in their life cycle, they're really beyond sort of investment or go-to-market strategies that are going to change because many of those things would have been exercised over the years.

Okay. Thank you.

The next question comes from Shreyas Patil with Wolfe Research. Please go ahead.

Thanks. Maybe following-up on some of the earlier questions, looks like you're doing a really good job of reducing cost and that's helping reduce the decremental margin impact even as revenue is under pressure. I'm curious if you can unpack some of the measures that you're taking. And how much runway do you have to further reduce cost from here? And I believe you mentioned price downs potentially normalizing more going forward. So how should we think about that maybe slowing the pace at which you can continue to improve margin assuming the end markets remain weak? Thanks.

Thanks, absolutely. So again this business and we've openly talked about is notoriously hard to grow margins in the first quarter. So sequentially Q4 to Q1 is always a challenge in this business. And quite candidly, I expect it will be a challenge for this business in 2025 as we get back to that more normalized environment. Productivity efforts, many of which Martha just pointed to as examples have been underway and a lot of that will help offset some of those cost action or costs that will come into our market, if you will in our business. But they take time. And so some of those layer in over a little bit of time and we have to adjust to those. And so we're always looking for different ways to be able to get more efficient. I think additionally to what Martha mentioned before, we look very hard before we're adding cost. I think that's a level of discipline that we brought to the company this year that has served us well, especially in a market environment that has certainly softened over here over the back half of the year. I think, again, for '25 planning perspective, we've got a lot of work to do on our plan. So it will probably become a little bit clearer how we're thinking about margins as we get into next year. I will say and what we have said is our goal for 2025 is to be able to expand margins from where we are in 2024.

The next question comes from Samik Chatterjee with JPMorgan. Please go ahead.

Hi. This is MP on for Samik Chatterjee. Thanks for taking my question. So I have a question around the electrification programs. So you mentioned that some of the delays related to electrification programs. Can you please expand on that? And also how does this impact your ability to hit the electrification target of $2 billion by 2026? And I have a follow-up.

Yes. So the areas in the marketplace where we've seen the greatest delays are in North America and also in Europe. One of the great things about our business model is that, that we are well hedged against those delays when you look at the position that we have on ICE vehicles and also on plug-in hybrids. So we do expect that the platforms will come back and electrification will continue to happen in automotive, and actually in the HVOR market as well. We have some commercial truck applications that we're focused on. So we expect this to be an important growth driver in automotive and commercial truck. Also quite frankly, in parts of our industrial end markets as well, where we are engaged with the similar technologies and meeting similar needs for efficiencies, whether they be heat pumps or infrastructure around charging stations or power conditioning units that we provide via our Dynapower business. So we're still quite bullish on the opportunity, but we're making sure that our burn rate is aligned to the market timing.

Okay. Got it. And the follow-up here I have is like any early thoughts until 2025, how you're thinking about the business and like what are your assumptions about the end markets like which are expected to be positive, which are expected to be negative and something around that?

Yeah, I would say at this point, certainly through the first half of 2025, we're not expecting any help from the market. So, as we have in the fourth quarter here, we've taken some judgment against third-party forecasters. And we're looking at those forecasts very critically as we roll into 2025. So we're not expecting help from any particular end market, at least through the first half of the year.

Okay. Thank you.

The next question comes from Luke Junk with Baird. Please go ahead.

Thank you. I wanted to ask a big picture question and kind of bridging on the electrification question we just had. And I'm just wondering as the CEO search process now nears its conclusion, just what it's revealed to you about the strategic direction of the company from here? Does it inform re-emphasizing auto and electrification? Does it maybe push towards diversifying the company and pushing more on some of end market, opportunities within Sensing Solutions? Just any insights from the search process would be helpful. Thank you.

Yeah. I think what I would reiterate are some of the characteristics that we've talked about that we believe are important in the next CEO of Sensata. And those are certainly the ability to drive technology roadmaps, the ability to enhance innovation. Also, automotive experience, we think is important given the profile of our business. I think any changes to this strategy will come from the new CEO and it's important that, that person has the time to lay that out.

The next question comes from William Stein with Truist Securities. Please go ahead.

Great. Thank you for taking my questions. First, Martha, I think you said that you're expecting to fill that role in the same timeframe that you outlined earlier. Can you remind us on what you've said in the past about that? Was that by the end of this year or a different time frame?

Yes. When I came into the role on May 1st of this year, we spent some time looking at how long does it actually take on average to fill CEO roles when you're searching on the outside and that ranges from 6 months to 12 months. So that's the timeline. We're very confident of landing squarely in that timeframe.

Okay. Thank you. And you clearly don't sound too optimistic about markets even if you're doing a great job on cost cutting at least through the first-half of the year. I wonder if you might give us sort of your early views as to production -- auto production growth for 2025 and maybe remind us of the outgrowth algorithm that you believe you could achieve on the top line? Thank you.

So I think it's really early for us to be talking probably from a market perspective of what we think is going to happen in auto. I mean, as we've all seen, it's continued to change not even month-to-month, but in some cases day-by-day. And so certainly a few more months' worth of data will help us all as I think we get a better picture on '25 for what our growth looks like. I think again, what we're doing on our side is trying to make sure that we take action. We're trying to make sure that we're controlling what we can control. And as Martha has pointed out, really focusing on execution and efficiency, we'll continue to react to it to whatever the market drives.

I think the only other thing I would add is that there are important product launches that are planned in 2025 and that will bring value for our customers and for us. What we have seen in down markets and even in the volatility of the market, given mix changes across ICE, plugs, hybrids, changes on the commercial truck side, we have in the past Stein, that while they are planned early in the year, these things can push out. So that's one of the reasons we're taking the time to really understand what our outgrowth can be and what that end market will be.

Thank you.

The next question comes from Steven Fox with Fox Advisors. Please go ahead.

Hi. Good afternoon. For my one question, I was just hoping we could dig a little bit more into the HVOR market. You mentioned that there was another cut in terms of market forecast. I know it's been under pressure for a while now. I was just wondering if you could sort of describe where we're at versus a potential bottom, how the cycle is differing from prior cycles, etcetera? Thanks very much.

Yeah, we began to see, on the commercial truck side of the business, we began to see a slowdown in that market in the second half of 2024 and have seen that accelerate a bit, really in line in this case with what we're hearing from third-party forecasts and we use KGB in particular. So it's not a mystery when you look at where those production forecasts are.

Yeah. I mean on-road China was a little bit stronger in the first half of the year and I think our expectation was that was going to normalize a little bit in the back half, which seems to be. I think the piece that we wrote, I don't say surprised by, but certainly have seen kind of come to fruition is that North America and Europe. They haven't had the rebound that people were expecting. And so that the negative year-over-year declines in both of those markets according to KGP as a third-party source is down 20%. So it's a significant drop in volume from what -- where they were a year ago. And so hopefully we're nearing the bottom of that cycle and hopefully that will start to turn, but we're not sure exactly when it does.

Great. That's helpful. Thank you.

[Operator Instructions] The next question comes from Joseph Spak with UBS. Please go ahead.

Hi. It's Zach Walljasper on for Joe Spak today. Thinking about Europe next year and the CO2 regulations going on there, like any early thoughts about like either maybe potentially going higher or less ICE vehicles being produced? Like how do you think Sensata is positioned for that development, kind of any puts or takes with that? Thank you.

I think we're positioned quite well, frankly, just given our content on ICE engines and given the growing content that we have on BEV. So today, we are still slightly less content on a BEV, so full electric vehicle in Europe. And so that slowdown has actually, in some cases been a positive for us. Difficult to know where that -- next year, a big piece of that is what does the consumer want and that's been part of the slowdown. So we're paying attention, but we haven't completely developed our projections for 2025.

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Roberts for any closing remarks.

Thank you, Betsy, and thank you, everyone, for joining the call today. We do look forward to seeing you at various investor events this quarter. We have a pretty full agenda. At the moment, we're planning on to participate in the following events, November 12, next Tuesday, at the RW Baird 2024 Global Industrial Conference in Chicago. Next Wednesday, the 13 at the JPMorgan Equity Opportunities Forum in Miami. On December 3rd, we'll be at the UBS Global Industrial and Transportation Conference in West Palm Beach. December 12th, in New York City at the Melius Research Industrial Forum. And finally, I'll be participating virtually with both Evercore for a fireside chat on December 10th and with Chris in the Oppenheimer team on December 11th. So pretty full agenda coming up. I appreciate everybody joining today and we look forward to speaking with you again over the conferences next quarter. That concludes the third quarter earnings conference call. Operator, you may now end it.

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