Sensata Technologies : Q1 2025 Sensata Technologies Earnings Conference Call (Transcript)

Published: 2025-05-09 15:51:11 ET ST

Published on 05/09/2025 at 15:51

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EDITED TRANSCRIPT

ST.N - Q1 2025 Sensata Technologies Holding PLC Earnings Call

EVENT DATE/TIME: MAY 08, 2025 / 8:30PM GMT

OVERVIEW:

Company Summary

Good afternoon, and welcome to the Sensata Technologies first-quarter 2025 earnings call. (Operator Instructions) Please note that this event is being recorded.

‌I would like now to turn the conference over to Mr. James Entwistle, Senior Director of Investor Relations. Please go ahead.

Thank you, Jason, and good afternoon, everyone. I'm James Entwistle, Senior Director of Investor Relations for Sensata, and I'd like to welcome you to Sensata's first-quarter 2025 earnings conference call. Joining me on today's call are Stephan Von Schuckmann, Sensata's Chief Executive Officer; 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 today's call.

As we begin, I'd 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 might 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, the appendices of our presentation materials, and in our SEC filings.

Stephan will begin the call today with comments on the overall business. Brian will cover our detailed results for the first quarter of 2025 and our financial outlook for the second quarter of 2025. Stephan will then return for closing remarks. We will then take your questions.

Now I would like to turn the call over to Sensata's Chief Executive Officer, Stephan von Schuckmann.

Thank you, James, and good afternoon, everyone. Let's begin on slide 3. We delivered a strong first-quarter 2025 with revenue, adjusted operating income, and adjusted earnings per share, all exceeding the high end of our guidance. We are pleased with these results especially given the volatile and constantly evolving tariff environmentk, which continues to have daily impacts on key end markets.

I want to thank our customers, suppliers, and our Sensata team for their efforts to work through unprecedented levels of change and uncertainty to deliver what I expect is the first of many strong quarters during my tenure. While I know tariffs are top of mind for many, I'd like to start the call today by going a little deeper on the three strategic imperatives that I shared earlier this year. These key pillars of improving our operational performance, optimizing our capital allocation, and returning Sensata to growth from our priorities and our core areas of focus.

Much of my initial 100 days with Sensata have been spent observing, listening, and learning, and I've traveled to our factories, spent time with our teams, and met many of you, our shareholders. I've watched how we manufacture and deliver our products, how we innovate and plan for future growth by winning new business opportunities, and have begun the process of taking a fresh look at our strategy. These efforts resulted in some key observations on which we're already taking action to drive progress on these pillars.

And we start with improving our operational performance. Last quarter, I clearly defined what it means to be operationally excellent, but it's important and warrants repeating. Operational excellence is not just about cost productivity and margin percentage, it means delivering a high-quality product to our customers on time at the lowest possible cost while we efficiently manage production capacity and optimize inventory levels. It also requires us to be excellent across all areas of our organization.

While manufacturing and production are at the forefront, we also strive to be best in class in our commercial, procurement, SG&A, engineering, and innovation teams. To ensure we are setting the right levels of ambition across the company, we are now continuously benchmarking Sensata internally and externally to remain the supplier of choice for our customers, affording us the opportunity to win new business and gain share.

While Sensata is top quartile margins, the work we have done over my first 100 days has made clear that we have exciting opportunities to improve the pursuit of operational excellence. Over the last two decades, I've experienced what best-in-class lean manufacturing looks like, and I know that we have untapped potential to leverage our strong teams at Sensata. Let me dive a little deeper and give you some examples.

First, consistency in operations. As I traveled to our factories, it was apparent that each location does certain things differently at Sensata rather than following a standardized production system. This results in sites implementing different standards from line concepts to floor management, leading to the same components being produced at various varying cost levels. We want all our factories producing the same component at the lowest possible cost. To achieve this, we're implementing a standardized production system, much like the various derivatives of the Toyota production system adopted across the auto industry.

Second, continued focused on inventory management. Our team made good progress in 2024, reducing absolute inventory dollar levels by nearly

$100 million or 14%, but we see opportunity to improve working capital, optimizing our inventory further. To enable this, we have kicked off a new initiative focused on integrated supply chain planning to gain a more accurate planning of part level demand integrated through production and materials.

Third, a more strategic approach to procurement. Over the past few years, our procurement organization became more tactical in adjusting to a highly inflationary environment, including working diligently over the last year to recover much of the cost increases that have absorbed during the worst of those inflationary times. While this certainly positioned us better than we otherwise would have been, we have not invested sufficiently to develop our suppliers to drive the same or better levels of productivity improvement through the supply chain. Accordingly, we have reorganized our operations group to to allocate resources to supply development and improvement programs. These changes will increase our operating resiliency in 2025 and beyond. The savings we derive will enable us to embark on additional initiatives setting the foundation to continue to expand margins.

Let me now turn to my second pillar, capital allocation. Our focus here is simple. To ensure that we are effectively allocating capital to maximize return for our shareholders. The Board and I take this responsibility to invest our shareholders' cash seriously. We are committed to meaningful improvement. And the first step is to increase free cash flow conversion.

We've made great strides in free cash flow conversion in the first quarter, and our conversion rate improved by 26% points year over year to 74%. Given the strong Q1 result, we used approximately $100 million of cash to repurchase 3.5 million shares. We are confident in our ability to improve free cash flow and expect to follow the disciplined approach we took last year by returning cash to our shareholders through share repurchases, reducing our net leverage, and maintaining our current level of dividend.

Finally, let me speak to returning Sensata to revenue growth. Over the medium and long term, to be able to better understand our opportunity for growth, I've spent considerable time these last few months diving deep into our product innovation, our ability to attract and win new business, and our overall positioning within our markets. Product innovation is critical, and we are seeing exciting opportunities across our portfolio to innovate and drive value for our customers. We've spent considerable time over the last several quarters discussing our leak detection sensing capabilities in the HVAC space.

Our industrial business is a clear leader in this new market segment and remain enthusiastic that this will be a growth driver for Sensata over the next several years. The breadth and depth of our ICE and electrification technologies are core strengths for Sensata across our auto and HVR businesses. We are well positioned to be the supplier of choice across areas such as braking, emissions, and electrical protection, and we are winning business in all regions.

As an example, in the first quarter, we booked a significant win in Japan with Mazda for exhaust and fuel sensors. This follows important wins in 2024 with Toyota and other Japanese OEMs as we continue to make significant strides in this market. In China, we successfully secured several contractor and TPMS business awards with market leading local EV OEMs as well as significant wins through leading local tiers serving the global market. These wins demonstrate our capability to compete and win around the world. As we look out to 2026 and 2027, we're excited about further growth opportunities from our portfolio of high-quality products.

Now I'll take a moment to discuss how we manage tariffs. Let's turn to slide 4. The direct and indirect effects from tariffs are the primary issue impacting us, our customers, and our end markets today. Over the last decade, we have positioned ourselves well by proactively focusing on a region-for-region strategy to align our supply chains and production with our customers. North America represents approximately 40% of our global revenue, of which we serve roughly 70% from production in Mexico.

Since early March, when the 25% tariff on non-USMCA qualified components from Mexico took effect. We have been working diligently with our customers to minimize the impact of tariffs to their business and ours. For example, in early March, less than 50% of our products manufactured in Mexico were USMCA qualified. Our team has worked tirelessly to improve this, and today, 80% of our revenue sourced from Mexico is now USMCA qualified.

We're working with customers to leverage our global footprint to deliver tariff mitigation solutions such as changes to logistics, production, and sourcing. When we must incur tariff costs to supply our customers, our position is clear. Our customers must absorb these incremental costs. To effectuate this outcome, there have been an ongoing dialogue with our customers to secure their agreement to reimburse tariff costs. As today, we have mitigated more than 95% of our gross tariff exposure in our auto and HVR business through a combination of tariff exemptions, customer agreements to reimburse tariff costs, and various other actions.

Finally, let me take a moment to discuss the ransomware incident at Sensata in early April. The incident temporarily impacted our operations to varying degrees over roughly two-week period. Thanks to the exceptional work of our operations, customer service, and IT teams as well as a team of third-party cybersecurity professionals, we're happy to report that we are back to normal business operations.

And let me turn the call over to Brian to provide greater detail on Q1 and our thoughts around the second quarter and full year.

Thank you, Stephan. Good afternoon, everyone. For clarity, unless noted, all amounts are denominated in US dollars. Let me start on slide 6.

As Stephan noted, we delivered a strong first quarter, despite the macro uncertainty in our end markets, with revenue, adjusted operating income, and adjusted earnings per share all ahead of expectations. We reported revenue of $911 million for the first quarter of 2025 compared to revenue of $1.007 billion in Q1 of 2024. Adjusting for the actions we shared last year to divest $200 million in annualized revenue related to various low-margin, low-growth products, and the Q3 2024 sale of INSIGHTS, revenue was approximately flat year over year and up sequentially 1%. Past revenue related to tariffs recorded in Q1 was negligible at approximately $2 million.

Adjusted operating income was $167 million, representing a margin of 18.3%, consistent with our expectations. While this denotes a year-over-year decrease of about 40 basis points, it is, as expected, given a return to a more normalized seasonality pattern of margins related to the timing of pricing and productivity. Excluding approximately $2 million of net cost impacts from tariffs, our adjusted operating margin for Q1 would have been 18.6% above our guidance range. Stephan has made quite clear that our expectation is to pass through tariff costs to our customers. However, there may be some minimal quarterly impact due to the timing gap between tariff payment and cost recovery.

Adjusted earnings per share in the first quarter of 2025 was $0.78 compared to adjusted earnings per share of $0.89 in Q1 2024. The Q1 2025 result exceeded the midpoint of our guidance by $0.07 or about 10%. This result was due to a combination of our strong operational performance, lower-than-expected taxes incurred, and the repurchase of approximately 3.5 million shares during the first quarter, reducing our overall shares outstanding.

Now let's turn to slide 7 to discuss segments. Sensing solutions, which is comprised primarily of our industrial and aerospace businesses, delivered

$261 million of revenue in the first quarter of 2025, up 3% year over year after adjusting for the various divested products. Stability across industrials and aerospace, combined with our growing A2L gas leak detection sensing products contributed to the positive Q1 result. This is the first period where we have seen year-over-year growth in sensing solutions since the second quarter of 2023. While we remain cautious in our outlook given the uncertain macro environment, we are encouraged by this progress. Sensing solutions' operating margins was 29.2% in the quarter as compared to 28% in Q1 2024 as a result of operating efficiencies and improvements to the product portfolio.

Performance sensing, which includes our automotive and heavy vehicle off-road businesses, reported revenue of $650 million in the first quarter of 2025, a decrease of about 9% year over year or about 8% after adjustment for divested products. We slightly undergrew the market in Q1 in auto given our previously discussed mixed issues in China as well as volatility in European OEM production schedules driven by shifts in the regulatory outlook. This was partially offset by increased North American production ahead of tariffs for parts that were USMCA qualified. We continue to expect that outgrowth will normalize in the second half of 2025 as we lap the China year-over-year comparisons and see improved regulatory clarity in Europe.

HVOR orders slowed more than initially anticipated in Q1, corresponding to the weaker market outlook for this segment as tariffs and regulatory shifts impact customer demand. Performance sensing adjusted operating margin was 22% in Q1 as compared to 23.7% in Q1 2024, as we return to normal seasonality and timing of pricedowns offset by productivity gains. Corporate and other has been recast to exclude certain costs previously referred to as megatrend spend which are now presented within the two reporting segments. Adjusted corporate operating expenses were $52 million in the first quarter of 2025, a decrease of approximately 10% or $6 million versus the first quarter of 2024, reflecting efficiencies gained because of the restructuring efforts taken in the second half of last year.

Turning to slide 8. Stephan noted we remain laser focused on improving our free cash flow conversion, and I'm pleased that we continued our momentum in the first quarter. Free cash flow conversion improved 26 percentage points year over year to 74% in the first quarter as compared to 48% in Q1 2024. Free cash flow is $87 million, up 35% from $64 million in the same quarter last year. This strong Q1 result sets the foundation for Sensata to further improve free cash flow conversion in 2025 as compared to 2024.

Net leverage in the first quarter was just above 3 times. This was as planned due to a lower trailing 12-month EBITDA denominator caused by the sale of INSIGHTS and the divested products. We were proactive around share repurchases in the first quarter, buying approximately 3.5 million

Disclaimer

Sensata Technologies Holding plc published this content on May 08, 2025, and is solely responsible for the information contained herein. Distributed via Public Technologies (PUBT), unedited and unaltered, on May 09, 2025 at 19:50 UTC.