Sensata Technologies Holding plc Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Completed sale of Insights business to Balmoral Funds subsidiary for $165 million, recording a $110 million loss on sale.
• Eliminated low-growth, low-margin products (~$30 million quarterly revenue). ~60% completed on product lifecycle management initiatives, expecting nearly finished by year-end (identified ~$200 million annualized revenue).
• Commenced operational improvement initiatives: streamlining processes, increasing automation, reducing overhead, aligning capital expenditures.
• Automotive and heavy vehicle off-road markets down ~5% y/y in Q3, with further erosion expected in Q4. China market: local OEMs gaining share, headwind as content per vehicle on local OEMs is half of multinationals. Excluding China, automotive fared better in Q3 with ~400 basis points of outgrowth. Heavy vehicle off-road: Q4 outlook revised downward, EU tire pressure sensing regulations help offset some softness.
• Sensing Solutions: Industrial business stabilized, A2L sensor ramping, Dynapower's fifth-generation power systems approved but goodwill impaired due to project delays. Aerospace business monitoring customer issues.
• CEO search in final stages, expected to conclude in timeframe guided earlier.

Segment Performance

• Performance Sensing: Third quarter 2024 revenue was approximately $660 million, a decrease of approximately 5% year-over-year. Adjusted operating margin was 24.5%, unchanged sequentially and down 1 percentage point year-over-year, attributable to product lifecycle management actions and slowing automotive market.
• Sensing Solutions: Revenue in the third quarter of 2024 was approximately $274 million, flat year-over-year. The industrial business stabilized with ~2% sequential growth, A2L leak detection sensor ramping in Q4 and 2025. Dynapower had a non-cash goodwill impairment charge of $150 million due to project delays in clean energy and electrification. Aerospace business performing well but monitoring customer labor and quality issues.

Guidance

• Q4 2024 Revenue: Expected in range of $870 million to $900 million, midpoint ~$100 million below Q3. Factors: $50 million from Insights sale, $20 million from product exits, $30 million from lower Performance Sensing segment.
• Operating Margin: Expected to expand ~20 basis points to 19.4% in Q4, consistent with quarterly margin improvement goal.
• Dividend: Declared Q4 dividend of $0.12 per share payable to shareholders of record on November 13.

Risks

• Market volatility in automotive and heavy vehicle off-road segments.
• Delays in clean energy and electrification projects impacting Dynapower's growth and cash flow expectations, leading to goodwill impairment.
• China market headwind due to local OEM share shift, impeding outgrowth in China for 12-18 months.
• Inventory destocking and slow housing market affecting industrial business.
• Foreign currency fluctuations impacting earnings.

Question and Answer

• Q: Wamsi Mohan asked about magnitude of downside to third-party estimates and 1Q seasonality.

A: Martha Sullivan said Sensata is ~200k-300k vehicle units below third-party forecast in Q4, and not expecting much help in 1Q.

• Q: Joseph Giordano asked about China strategy.

A: Martha Sullivan said focusing on local OEMs with global aspirations, leveraging Sensata's technologies as content on local OEMs can still be expanded despite lower per vehicle content.

• Q: Mark Delaney asked about EBIT margin improvement from product exits and Insights divestiture.

A: Brian Roberts said product exits could contribute ~30 bps improvement, but SG&A expenses need rationalization; Insights divestiture had no incremental benefit this year as cleanup was already done.

• Q: Christopher Glynn asked about operating efficiencies.

A: Martha Sullivan mentioned smart automation, lean reimplementation in production sites, and design-driven cost reduction as examples.

• Q: Manmohanpreet Singh asked about electrification delays.

A: Martha Sullivan said delays in North America and Europe, but Sensata is hedged with ICE and plug-in hybrid positions, still bullish on electrification as growth driver.

• Q: Luke Junk asked about CEO search impact on strategy.

A: Martha Sullivan said new CEO will drive strategy, emphasizing automotive experience, technology roadmaps, and innovation.

• Q: William Stein asked about 2025 production growth and outgrowth.

A: Brian Roberts said early to predict, but Sensata is focusing on execution and efficiency; Martha Sullivan added product launches planned in 2025 but market volatility remains.

• Q: Steven Fox asked about HVOR market cycle.

A: Martha Sullivan and Brian Roberts said Q4 outlook revised downward, near bottom of cycle but unsure when turn.

• Q: Zach Walljasper asked about Europe CO2 regulations.

A: Martha Sullivan said Sensata is positioned well with ICE and BEV content, but consumer demand and projections for 2025 not fully developed.