Sensata Technologies - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue was $911.3M and adjusted EPS $0.78, both above S&P Global consensus (revenue +$30M, EPS +$0.06); adjusted operating margin was 18.3% with modest net tariff costs in-quarter as pass-throughs lagged timing.*
• Management guided Q2 2025 revenue to $910–$940M (including ~$20M tariff pass-through) and adjusted EPS to $0.80–$0.86, with adjusted operating margin of 18.6%–18.8% (19.0%–19.2% excluding tariff dilutive effects).
• Sensing Solutions returned to year-over-year growth and margin expansion, while Performance Sensing was down on mix and weaker HVOR; free cash flow conversion improved to 74% with $86.6M FCF in Q1 and $100.5M buybacks.
• Strategic progress on operational excellence and tariff mitigation (80% of Mexico-sourced revenue USMCA-qualified; ~95% gross tariff exposure mitigated) and new electrification wins in Japan and China were highlighted as near-term catalysts.

What Went Well and What Went Wrong

What Went Well

• Exceeded high end of Q1 guidance ranges for revenue, adjusted operating income and adjusted EPS; “We delivered a strong first quarter 2025… exceeding the high end of our guidance” — CEO Stephan von Schuckmann.
• Sensing Solutions grew revenue 1% YoY and expanded margin to 29.2% (vs. 28.0% LY) driven by industrial stability and A2L leak-detection products; operating income rose to $76.1M.
• Free cash flow conversion improved 26 pts YoY to 74%; $86.6M FCF and $100.5M share repurchases; “we are confident in our ability to improve free cash flow” — CFO Brian Roberts.

What Went Wrong

• Total revenue declined 9.5% YoY to $911.3M; adjusted EPS fell to $0.78 from $0.89 and adjusted operating margin compressed 40 bps YoY to 18.3%.
• Performance Sensing revenue down 8.8% YoY to $650.4M and margin fell to 22.0% (from 23.7%) amid mix headwinds and HVOR weakness; HVOR orders slowed more than anticipated.
• Minor net tariff costs in Q1 and increased macro uncertainty (e.g., second-half auto production cuts in North America and Europe); ransomware incident disrupted operations ~2 weeks (no material financial impact).

Transcript

Operator (participant)

Good afternoon, and welcome to the Sensata Technologies first quarter 2025 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. 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.

James Entwistle (Senior Director of Investor Relations)

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 two. 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. Much of the information that we will discuss during today's call will relate to GAAP and 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.

Stephan von Schuckmann (CEO)

Thank you, James, and good afternoon, everyone. Let's begin on slide three. 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're pleased with these results, especially given the volatile and constantly evolving tariff environment, 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 are 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 as 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 are already taking action to drive progress on these pillars. Let me 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 has top quartile margins, the work we have done over my first 100 days has made clear that we have exciting opportunities to improve in 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 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 focus on inventory management.

Our team made good progress in 2024, reducing absolute inventory dollar levels by nearly $100 million, or 14%. In fact, we see opportunity to improve working capital by 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 our 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 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're committed to meaningful improvement, and the first step is to increase free cash flow conversion. The group made great strides in free cash flow conversion in the first quarter, as our conversion rate improved by 26 percent 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 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 end markets. Product innovation is critical, and we are seeing exciting opportunities across our portfolio to innovate and drive value for our customers. We spent considerable time over the last several quarters discussing our leak detection sensing capabilities in the HVAC space.

Our industrials business is a clear leader in this new market segment and remains 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 HVOR 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 are excited about further growth opportunities from our portfolio of high-voltage products. Now, I'll take a moment to discuss how we manage tariffs. Let's turn to slide four. 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, we have been in ongoing dialogue with our customers to secure their agreement to reimburse tariff costs. As of today, we have mitigated more than 95% of our gross tariff exposure in our auto and HVOR 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 a 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. I'd like to turn the call over to Brian to provide greater detail on Q1 and our thoughts around the second quarter and full year.

Brian Roberts (CFO)

Thank you, Stephan. Good afternoon, everyone. For clarity unless noted, all amounts are denominated in US dollars. Let me start on slide six. 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 $1,007,000,000 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%. Pass-through 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 seven 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 were 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 returned to normal seasonality and timing of price downs 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 eight, 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 percent points year-over-year to 74% in the first quarter, as compared to 48% in Q1 2024. Free cash flow was $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 three 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 shares for approximately $100 million of cash. In addition, we returned $18 million to shareholders in the first quarter through our quarterly dividend and have approved our second quarter dividend at the same $0.12 per share rate, payable on May 28th to shareholders of record as of May 14th.

These capital deployment actions yielded an improvement in our return on invested capital of a half point as ROIC increased to 10.2% for the 12 months ended March 31st, 2025, as compared to 9.7% for the 12-month period ended March 31st, 2024. Building upon Stephan's earlier comments, I'd now like to provide a brief overview of our current tariff exposure. Our tariff considerations primarily fall into three main categories: exposures related to products produced in Mexico, exposures related to the escalated tariff rates between the U.S. and China, and exposure related to the potential for increased costs for reciprocal tariffs. Currently, we are not exposed to tariffs specific to auto parts as our products are not in scope. Now, let me take a moment to talk about each of these exposure categories. First, Mexico.

As we've discussed, approximately 70% of our North American production is imported from Mexico to the U.S. Currently, approximately 80% of that Mexico-sourced revenue qualifies under USMCA and is not subject to tariffs. For other parts, we are working with our customers to help mitigate the cost by identifying alternative means of delivery, leveraging our global footprint, or pursuing alternative sourcing of materials. If no other options are available, we have been clear that our customers must absorb this cost. The escalation in rates between China and the U.S. has two main impacts on Sensata, as between 5% and 10% of our core industrial revenue, or 1% to 2% of total Sensata revenue, is subject to these tariffs. In many cases, starting in the second quarter, distributors are putting some orders on hold, awaiting potential reduction in the current rates, which range up to 145%.

We are hopeful that in the coming months, China and the U.S. will reach an updated trade agreement, reducing these rates and allowing us to ship these products. In advance, we have produced the required inventory, such that if an agreement is reached, we will quickly be able to fulfill customer demand. The second exposure is related to certain raw materials that we source from the U.S. into China for products produced in China. For these raw materials, we are working on alternative sourcing and delivery options to mitigate this risk. Finally, regarding the reciprocal tariffs, we will continue to monitor this closely over the next few months, as elevated future tariffs in markets where we operate may restrict our ability to leverage our global footprint as efficiently as possible. Currently, reciprocal tariffs do not have a material impact on our business.

Given the various executive orders in effect as of today, we anticipate incurring approximately $20 million of tariff costs in the second quarter. We expect to be able to offset this cost through incremental billings to customers and pricing actions to distributors. The end result should effectively be a net-zero dollar impact to adjusted operating income. Turning to slide nine, we note that third-party auto production estimates were revised downward significantly in April by 1.6 million units over the remainder of 2025, with most of the decline attributable to North America. For the second quarter, the global expectation is down 2%, with higher degrees of volatility by region, including Europe and North America, down 6% and 10%, respectively, while China remains strong. As we build our guidance expectation for Q2 and our thoughts for the second half of the year, we are aligning with these updated third-party estimates.

We've also considered the incremental risk in industrial related to the China and U.S. tariffs. In summary, the team is doing an outstanding job to mitigate tariff risk wherever possible and ensure that any tariffs incurred will be offset by increased pricing or pass-through billings. Let me now turn to slide 10 to discuss our guidance for the second quarter of 2025 and provide some additional thinking for the second half of the year. We currently expect revenue of $910 million to $940 million for the second quarter. This includes an expectation of approximately $20 million in tariff pass-through revenue. Adjusted operating income for the second quarter is expected in the range of $169 million to $177 million and is not expected to be impacted by tariffs, as any expense incurred would be offset by the pass-through tariff revenue.

However, the zero-margin pass-through revenue will have a dilutive effect on adjusted operating margin index of about 40 basis points. Including approximately $20 million in tariff revenue, we expect an adjusted operating margin index range of 18.6% to 18.8%. Again, for clarity, if we exclude approximately $20 million of anticipated pass-through tariff revenue in the second quarter, we would expect revenue of $890 million to $920 million, adjusted operating income unchanged at $169 million to $177 million, and an adjusted operating margin index range of 19% to 19.2%. For the second half of 2025, we are preparing for the more significant cuts in automotive production, currently forecasted by third-party sources, which are highly concentrated in North America. This will likely impact revenue by about $20 million to $30 million per quarter in each of Q3 and Q4.

At this level of revenue decrease, we remain confident in our ability to expand our pre-tariff adjusted operating income margins by approximately 20 basis points per quarter over the course of the second half of the year. Like all of you, we are watching the macro environment closely for further regulatory and economic changes and will continue to update our expectations accordingly. With that, I'd like to turn the call back to Stephan for closing remarks.

Stephan von Schuckmann (CEO)

Thank you, Brian. Before we move to Q&A, I'd like to leave you with some closing thoughts. What I outlined today is a glimpse into the significant transformation underway at Sensata. While we are still in the early days, I can state with confidence that after my first 100 days in the role, I'm even more optimistic than I was on day one.

The foundation of the business is solid, with much to build upon. We're developing a high-performance organization and creating a culture of continuous improvement. We are taking a benchmark-driven approach towards setting ambitious goals across all regions, functions, and product families. I am confident that the work we are doing here is creating a level of resiliency in our business that will continue to deliver meaningful results in the short term and in the future. Finally, with regard to tariffs, thanks to the extraordinary work of our Sensata team and the collaborative approach from our customers and suppliers, we have now mitigated substantially all of our current tariff exposure. With that, I'll turn the call back to James. Thank you.

James Entwistle (Senior Director of Investor Relations)

Thank you, Stephan and Brian. We will now move to Q&A. Jason, please introduce the first question.

Operator (participant)

To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from Wamsi Mohan from Bank of America. Please go ahead.

Wamsi Mohan (Senior Equity Research Analyst)

Yes, thank you so much. Thanks for all the color around tariffs. It's super helpful. I was wondering if you could help us think through your comment, Brian, on the second-half impact of $20 million to $30 million per quarter in Q3 and Q4. How much of that is related to straight production cuts versus potentially outgrowth trends? Maybe you can just help us think through those moving pieces as you think about the total revenue impact in the second half.

Brian Roberts (CFO)

Sure, Wamsi, thank you for the question. Good afternoon.

We're basically baking at 100% really on straight production cuts. If you look at North America, which is forecasted to be down somewhere between 500,000 and 600,000 units per quarter in Q3 and Q4, that's the real driver of the change as we look through the production expectations into the second half. We thought it prudent to be able to make sure that we were adjusting for it now.

Wamsi Mohan (Senior Equity Research Analyst)

Okay, thanks for that. If I could quickly follow up, the Sensing Solutions growth that you saw, would you say any of that is attributed to any pull-forward impact on demand that certain end markets have seen because of tariff reasons? Thank you.

Brian Roberts (CFO)

Yeah, I'll start, and then Stephan, if you want to jump in. From my perspective, no. We hadn't really seen much in tariff impact in industrials, especially in the first quarter.

As we had talked about last quarter when the tariff rates in China were roughly about 20%, it just wasn't material to the business. Obviously, there's been escalations of that since, which happened late in the quarter into early Q2. Really didn't see anything that happened from a pull-in perspective there. If anything, as those rates have escalated, we have seen some things be put on hold here in Q2. Hopefully, again, if we can find a more reasonable compromise between the two countries, then we're certainly prepared to ship as soon as customers give the okay to release those orders.

Stephan von Schuckmann (CEO)

I think what I could add, Wamsi, we're making good progress on our gas sensing leak detection. We've launched our A2L product range.

What you're seeing is the first level of growth impact, and that's basically one of the impacts of this growth within the industrial sector.

Wamsi Mohan (Senior Equity Research Analyst)

Okay, thank you so much.

Stephan von Schuckmann (CEO)

Thank you.

Operator (participant)

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

Mark Delaney (Analyst)

Yes, good afternoon. Thank you very much for taking my questions, and thank you for all the details on your key priorities, Stephan, and also the tariff exposure. Stephan, you mentioned in your prepared remarks progress in Asia with some Chinese local EV OEMs and also with some Japanese auto OEMs. Those are two customer sets that have historically been smaller for Sensata. Can you help us better understand the size and scope of the wins thus far? Would you consider the bookings so far as still small but a good start to build on?

Or do you think the awards you already have will ramp to a meaningful level of revenue for the total company?

Stephan von Schuckmann (CEO)

I look, we've, so I'd expand like this, Mark. First of all, thanks for your question. We've made good progress in China. The team has been very active in Southeast Asia, specifically in Japan. Those are the wins that I've mentioned around Mazda and with Toyota that we've won last year. I think it's important to say that we've also made good progress, especially in the EV sector in China, and it's pretty broad. The team has not only won business with international OEMs being successful in China, but specifically also with Chinese OEMs. We've had wins with local OEMs and that in all different product areas.

Mark Delaney (Analyst)

Okay.

Just, I mean, as you think about what you've actually booked so far, I mean, are these still relatively small in terms of the revenue they'll represent over the next few years as they ramp up, or are these already pretty large?

Stephan von Schuckmann (CEO)

No, these are, I would say, small to medium-sized wins. Still pretty small overall, but growing step by step. We've made some good improvements, but medium to small wins.

Mark Delaney (Analyst)

Very helpful. Thank you. My other question was around EBIT margins. The company had been anticipating EBIT margins for the year in the low 19% range. You're off to a good start based on what you spoke to for your expectations in the first half. Brian, I believe you talked about some margin expansion in 2H, even on lower revenue.

Could you speak a little bit more on your updated margin expectations for the year, in particular, as you think through any effects from tariffs and some of those revenue trends that you spoke to? Thank you.

Brian Roberts (CFO)

Yeah, absolutely. Again, I mean, we're obviously going off the information we have currently, right? I want to make sure that we're all clear that we're using April IHS, effectively, or S&P Global Mobility for effectively some of the production data. As we know, that may be volatile. We'll obviously have to continue to update for that. As we sit today, we felt very good about our Q1 result. Again, excluding, we wound up with a couple million dollars of net impact on tariffs in the first quarter.

A lot of that, quite candidly, was things that were in transit when tariffs were first announced, and we could not turn things around or so in time. That is really kind of a one-time effect. If you exclude that out, we would have been 18.6% in Q1, which would have been a very strong result. As we are looking, again, excluding tariffs here as we talk about going forward, Q2, we certainly still expect to be back into the 19%+ range. We are stair-stepping very similar to how we did last year in Q3 and Q4. I think if you blend that all together, what we said last quarter still holds true that we think we are at or above where we were for 2024. We are encouraged by that.

Certainly, a lot of the initiatives that Stephan's talking around about to be able to become more operationally excellent, those initiatives are going to help us. Certainly, they can help us a little bit here in the back half of 2025, but then they'll also start to set the table for us in 2026. So we're certainly excited about that progress and what it's going to be able to do for us to hopefully continue this margin expansion kind of run, if you will, going forward.

Mark Delaney (Analyst)

Thank you.

Operator (participant)

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

Joe Giordano (Managing Director of Diversified Industrials and Automation & Robotics Research Analyst)

Hey, guys. How you doing?

Stephan von Schuckmann (CEO)

Good.

Brian Roberts (CFO)

Good.

Joe Giordano (Managing Director of Diversified Industrials and Automation & Robotics Research Analyst)

Hey, good. Brian, not to pin you down too much, but is the $20 million to $30 million of the incremental production cuts, is that being offset elsewhere? Industrial is starting to grow again. Obviously, you get the tariff revenue.

Just trying to square that simply, we're not saying that revenue is down $20 million to $30 million. It's just there is an impact that needs to be filled. Is that how we should think about it?

Brian Roberts (CFO)

Yeah. I mean, again, from where we were three months ago when we started to talk about color for the full year, we've seen 1.6 million auto units effectively come out, with the great majority of those being in North America and then another slug in Europe, right? When you look at that, that's just that many less light vehicles that are going to get produced that has an impact on the business. We've quantified that looking at roughly, again, North America being down 500,000 to 600,000 units per quarter for Q3 and Q4. That roughly, that's $25 million plus or minus of revenue impact to us.

I think the rest of the business, obviously, there can be risk that comes with the tariff exposures of just around production levels. Overall, I think, especially on the Sensing Solution side, we feel very good about the progress and momentum we've made. Again, we may see some distributor orders put on hold here in Q2 due to the tariff uncertainty, but we're working our way through that, and the underlying foundation seems very solid.

Joe Giordano (Managing Director of Diversified Industrials and Automation & Robotics Research Analyst)

On the ability to feel that good about margins despite that headwind in the U.S. on profitable business, what are the main buckets that's helping you and giving you that visibility? Is it headcount and issues that have already happened, or where are you pulling those levers?

Brian Roberts (CFO)

Yeah. I mean, I would say this is all really coming right now from operational productivity, right?

I mean, as we built our plan for 2025 of where we were going to see growth, how we were going to continue to kind of work our way through the productivity, massive fuel to offset pricing and other things, the teams have done a really good job of minimizing pricing impacts where possible, being able to continue to drive procurement, continue to drive just overall efficiency. We're getting some of the benefits now from some of the restructuring charges that we took in the back half of 2024. All of those things are leading to, I think, giving us more confidence in our margin plan moving forward.

Joe Giordano (Managing Director of Diversified Industrials and Automation & Robotics Research Analyst)

Thanks, guys.

Operator (participant)

The next question comes from Joe Spak from UBS. Please go ahead.

Joe Spak (Managing Director of Autos, Auto Suppliers and Auto-tech Equity Research)

Thanks, everyone. Brian, I guess just going back to your comments on the back half, I mean, I understand what those third-party providers did.

I would argue increasingly that's looking pretty conservative based on some other commentary we've gotten from companies. I mean, if that doesn't happen, I'm just doing some quick math, but it would suggest that maybe that quarter-per-margin expense could be 5 basis points to 10 basis points better than you indicated. Is that about right? I just want to sort of calibrate for potential upside if sort of that case doesn't play out.

Brian Roberts (CFO)

I'm going to hold off on trying to kind of recalculate on the margin side because obviously, if global production numbers are improved in the back half of the year as the tariff environment eases, for example, then we're certainly prepared to take advantage of that when that happens, right? We can only go off of the data we have.

Man, I'm really bad at predicting the lottery numbers, but that's kind of how we're thinking about it.

Joe Spak (Managing Director of Autos, Auto Suppliers and Auto-tech Equity Research)

Fair enough. Just on the tariff, so to understand, you expect to sort of be fully compensated for that. Has that already, what percent of that's already been negotiated? How much is still in progress and needs to be done?

Brian Roberts (CFO)

Yeah. No, look. Sorry, go ahead.

Stephan von Schuckmann (CEO)

No, no, no. Basically, we've had a broad range of negotiations with, I would say, all of our customers in the HVOR sector and also in the auto sector. As I mentioned, we've basically covered 95% or managed to mitigate 95% of the risk with these negotiations.

Brian Roberts (CFO)

If you want to put that in dollar terms, Joe, right, if we're booking $20 million of tariff roughly in Q2, we're talking about $1 million worth of exposures still to cover.

Joe Spak (Managing Director of Autos, Auto Suppliers and Auto-tech Equity Research)

Okay. Stephan, now that you've had a little bit more time and appreciate your three pillars update, just wondering if you have any more thoughts on the Sensata portfolio, whether there's any holes that you see, any other areas you think the company may be able to win, or maybe some products that upon further review might not be core?

Stephan von Schuckmann (CEO)

Look, the focus in these first 100-plus days has been on these three pillars. It's been on operational performance. I've been focusing a lot around growth and everything else that I've mentioned so far. And yes, of course, I'm looking at the portfolio.

I'm looking at the industrials. I'm also looking at the portfolio in auto. Up to date, there's no change to that at this point in time.

Joe Spak (Managing Director of Autos, Auto Suppliers and Auto-tech Equity Research)

Thank you.

Stephan von Schuckmann (CEO)

Thanks, Joe.

Operator (participant)

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

Christopher Glynn (Managing Director and Senior Analyst)

Hey, good afternoon, guys.

Stephan von Schuckmann (CEO)

Hey, Chris.

Christopher Glynn (Managing Director and Senior Analyst)

I want to touch on the first pillar that Stephan articulated. Brian, you talked about setting the table for continued progress in 2026. Just curious if that comment reflects an expectation of kind of cumulative organizational build? I know it's early days, but in terms of the vision, would this be anticipating some acceleration in the margin pacing by the time we phase into 2026, or more about sustaining a steady moderate pace over time?

Brian Roberts (CFO)

Just trying to get through Q2 here, Chris. Yeah, I think too early to tell, right?

I mean, as we work through 2026 planning in the back half of the year, we'll obviously have a lot more visibility and understanding around the environment. We'll certainly have a lot better visibility and understanding around kind of as we think about pricing for next year and a lot of these initiatives that Stephan has kicked off with the teams and really trying to drive this concept of a standardized production system and operational excellence. I'd put that into the more to come category at this point, but certainly doing the things necessary now to give ourselves the best chance for further expansion going forward.

Stephan von Schuckmann (CEO)

Let me add to that. I think we've mentioned it one of our times. We've got a lot of change, a lot of things that are unpredictable.

Everything that we're doing at this point in time to try and improve operational performance with the examples that I've given is to be more resilient against these impacts that might come or might not come.

Christopher Glynn (Managing Director and Senior Analyst)

Yeah. I appreciate it. It's early days and was just meant the internals in isolation, but appreciate it's early days and stay tuned for more to come. Brian, I assume the 20 basis points sequentially through the back half on the margin, that assumes the $20 million zero margin pass-through is static?

Brian Roberts (CFO)

Yeah. I mean, think of the numbers as kind of pre-tariff, right? I think it'll be good practice for us so we can kind of stay apples to apples given that clearly the tariff environment is volatile and will probably continue to change each quarter.

We'll continue to look at this kind of inclusive of tariff and then excluding tariff as well and give you both sets. When we talk about 19 and 19.2 too here in Q2, which is what we talked about last quarter, that's obviously excluding the tariffs. Then 20 basis points plus or minus in Q3 and Q4, you can stair-step that really on both, I guess.

Christopher Glynn (Managing Director and Senior Analyst)

Got it. Okay. On aerospace, last couple of quarters, most vendors, at least that we cover and follow, have had negative OEM revenue. You talked about stable. That stable's a point in time and a long-term growth path for production. Do you see that pivoting back as the OEM and the supply chain alignment? I think a lot of companies have talked about it back to growth after the March quarter.

Wondering if you're anticipating a pivot in the year-over-year revenue performance for aero?

Stephan von Schuckmann (CEO)

I mean, I could say a few words of no, we don't see that. We see a strong development within our aerospace business. We also expect a certain level of growth within 2025. I'll pass on to Brian to say a few more details.

Brian Roberts (CFO)

Yeah. No, I think that's exactly right. I mean, in some, obviously, certain customers have had some challenges in the aerospace area, but as those continue to resolve themselves, that bodes well for us. I think we have a very strong backlog in aerospace. We'll continue to show, I call it kind of steady-eddy growth in aerospace, both on the revenue side as well as on the margin profile.

Stephan von Schuckmann (CEO)

Both our large customers have a good and solid backlog on which we can build and grow. Yep.

Christopher Glynn (Managing Director and Senior Analyst)

Makes sense. Thanks, guys.

Stephan von Schuckmann (CEO)

Thanks, Chris.

Brian Roberts (CFO)

Thank you.

Operator (participant)

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

Samik Chatterjee (Senior Equity Research Analyst and Managing Director)

Hi. Thanks for taking my questions and congrats on the robust results here. Maybe if I can start with the second-half color that you provided on the automotive volume sort of risk or the downside from a third-party forecast perspective, can you share any primary view here in terms of a similar either sort of changes in third-party forecast or your thinking at this stage relative to the heavy truck market and maybe to the extent that you can on the industrial side, how the second half looks? Interested in seeing if you have any thoughts in relation to sort of the risk from the macro in terms of those two areas? I have a follow-up. Thank you.

Brian Roberts (CFO)

Yeah, sure. Samik, I appreciate the question.

Let me give you a little color. Yes, you're right. Auto is obviously easier to track just using third-party data there. I mean, I hope that back to Joe's question, he was right that it ultimately proves a little conservative, and that would be a good thing for all of us. When we think about HVOR, that market outlook has clearly also worsened over the course of the last couple of months in this tariff environment. We've seen weakness in on-road truck. I think some of the pre-buy that people expected to have come through due to potential regulatory changes around emissions and other things in the U.S. likely being delayed. Coupled with the tariff environment, I think it certainly slowed any of those production expectations around pre-buy. We've worked that into the model.

On the industrial side, again, we've got three quarters in a row now of what I'd call at least good solid stability there. We'll have to watch for if the demand environment changes a little bit due to the tariffs, especially if China and the U.S. can't reduce the rate that they're charging each other at the moment. I think everybody's still hopeful that that'll resolve itself here in the coming periods. The outlook, I think, in our industrial business is, I'd say, solid. I don't want to get too far over our skis on it, but I think it's certainly been improving.

Samik Chatterjee (Senior Equity Research Analyst and Managing Director)

Okay. Got it. And then just in relation to the wins that you mentioned in your prepared remarks, and obviously, it's a pretty uncertain macro.

When you sort of are now looking at the pipeline of activity and engagement with customers, are you seeing any—and I am referring to automotive customers—are you seeing any push-outs in terms of maybe the timelines of when you expect customers to decide on some of these engagements and wins, how they translate or how quickly they translate into wins? Are you seeing any changes on that front just given that they have multiple other things to sort of now take care of, I guess?

Stephan von Schuckmann (CEO)

I think I would say that I would answer that question two-fold. We have seen both. On the one hand, we have seen customers pushing out projects and postponing projects, especially around electrification. On the other hand, depending on the region that you are in, we see customers that are extremely bullish, especially around China and especially around EV platforms and applications.

We see actually an acceleration of projects and basically no cancellations. It is two-fold, depending on what region you look at.

Samik Chatterjee (Senior Equity Research Analyst and Managing Director)

Got it. Got it. Thank you. Thanks for taking the questions.

Operator (participant)

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

Shreyas Patil (VP of Equity Research)

Hey, thanks a lot for taking my questions. Maybe just starting on Sensing Solutions, you noted the business has returned to growth here. Just wondering how we should think about the incremental margins in that business, assuming we can maintain further revenue increases?

Brian Roberts (CFO)

I mean, clearly, if you go back to the segment numbers that we gave and which is in the slide deck and in the queue, good strong operational margin improvement year-over-year. We expect that trend to continue here over the next couple of quarters.

Certainly a contributor to how we're thinking about the incremental margin expansion we're talking about for Sensata in total, given the outlook within that group as compared to a tougher environment on the auto and HVOR sides.

Shreyas Patil (VP of Equity Research)

Okay. Maybe just following up on the last question, because I believe for 2026, the plan, or at least the expectation was for a pretty significant increase in EV launches in Europe. Should we be assuming that those programs are getting pushed out or delayed, or is that just a reference to what you're seeing over the next few quarters?

Stephan von Schuckmann (CEO)

No, I don't see those programs being pushed out. In the country, I mean, most of the OEMs need to reach their CO2 targets. Within the mix of the total production volumes that they have, they need to have a certain level of EVs.

What we're seeing here, in our view, is actually projects being launched or products being launched one after the other. I think 2026 and partially 2025 is a year where we are now seeing especially the second generation of electric vehicles being launched. Those are predominantly vehicles on 800-volt platforms with a higher range and higher charging speeds. I do not think that those vehicles will be pushed out because they're technologically on the highest level. I could expect that OEMs want to get these vehicles into the market because there will be a higher end customer acceptance in comparison to first-generation vehicles. To be precise on your question, Europe would not see much push-outs anymore. In the country, I think they will be launched step by step. The push-outs were related to projects previously launched.

Shreyas Patil (VP of Equity Research)

Okay. All right. Thank you.

Operator (participant)

The next question comes from Kosta Tasoulis from Wells Fargo. Please go ahead.

Kosta Tasoulis (Equity Research Associate)

Hey, everybody.

Stephan von Schuckmann (CEO)

Hey, Kosta. How are you?

Kosta Tasoulis (Equity Research Associate)

Doing good. Good. A beautiful quarter. I want to talk about free cash flow and another strong quarter of that. Brian, are all of the levers that kind of the low-hanging fruit that you can pull to improve free cash flow kind of already done, or is there any—can you talk about maybe any other levers that are remaining to pull?

Stephan von Schuckmann (CEO)

Let me take the first part of that question, and then I'll pass on to Brian. Look, I think improving your free cash flow and the example that I mentioned, especially around inventories, that's something you need to continuously work on. That is what we're doing.

I would not call it a low-hanging fruit, but I think it is something that you can improve step by step and make significant gains throughout 2025 and even beyond that. That will drive a certain level of free cash flow improvement. There are also other levers in that, but I will pass on to Brian.

Brian Roberts (CFO)

Yeah. I mean, I think we have obviously made significant progress year-over-year. From 2024 to 2023 was 25, 26 percentage points. We continued that in Q1. Q1 is notoriously probably the most challenging quarter to grow cash. I absolutely agree with what Stephan just said. I think there is still a significant opportunity for us in the area of inventory. I do think we will see a few ebbs and flows on that.

I mentioned before, we're building a little bit of inventory in our industrial area right now, assuming at some point this distributor demand is going to get released, and we didn't want to get caught flat-footed on that. We want to be able to ship quickly. There can be slight ebbs and flows from a period-to-period. Overall, absolutely, I think the trend is still pointing in the right direction. We have more growth and more improvement to get in the area of cash flow.

Stephan von Schuckmann (CEO)

Let me add one more point to that. We're challenging ourselves. I think we've made good progress, just as Brian mentioned. We're looking outside of Sensata, and we're looking at peers and competitors out there. We're looking who's really good, for example, in days on hand in inventory and in overall inventory levels.

We're comparing ourselves to that. We're doing that in every region and through every plant. We see certain levels of opportunities within that.

Kosta Tasoulis (Equity Research Associate)

That's great, guys. Speaking of competitors, would you be able to provide any color on how your manufacturing footprint compares to your competitors? You mentioned you improved your USMCA compliance. Can you talk about how you're positioned relative to them and if that could possibly be an opportunity for you?

Stephan von Schuckmann (CEO)

Look, I think Sensata has a very competitive manufacturing footprint. The teams around production have done a fantastic job, first of all, in scaling up production and basically being very local for local. I think that is a strength of Sensata. I think the opportunity within production lies within the productivity of each facility. When we look out at our competitors, yes, of course, we look at manufacturing footprint.

What we do, we especially look at is the productivity levels that we're on. We look at what's best in class around productivity. That's why we benchmark ourselves and we strive to be better. That's one of the initiatives that we're working on this year and we'll also be working on through 2026 to get us onto that next level of productivity. That's our target.

Kosta Tasoulis (Equity Research Associate)

Great. Thanks for taking my questions.

Stephan von Schuckmann (CEO)

You bet. Thank you.

Operator (participant)

The next question comes from Guy Hardwick from Freedom Capital Markets. Please go ahead.

Guy Hardwick (Managing Director and Senior Analyst)

Hi. Good evening. Hi, guys. Stephan, just wondering, based on the pillars you target, whether you have a sense for what you think the long-term margin potential of the business is, bear in mind what you said about second-generation EVs from 2026.

Stephan von Schuckmann (CEO)

Look, Guy, I appreciate the question.

We're working on a lot of levers at this point in time. The three pillars is the one side of it. As you can recall from what I'd said, we're going beyond that. We're working on SG&A. We're looking at our structures. We're looking at commercial excellence. We're looking at how effective our procurement is. We're going into our engineering structures. We're looking at engineering efficiency. To a certain extent, obviously, that might not be too strongly related to margin. We're also looking at our innovation and how we're moving ahead there. Everything, to an extent, will have an effect on margin, and will have a positive effect on margin. I think it's now 100-plus days, so quite early. Give me some time while I work through all these levers and while I'm trying to improve in all these levers for Sensata.

I'm sure we'll have more details and insight on that at a later stage.

Guy Hardwick (Managing Director and Senior Analyst)

Okay. Thank you. Just a quick one for Brian. Maybe I missed it because I missed the start of the call, but are there any sort of financial issues from the ransomware attack you reported a month ago?

Brian Roberts (CFO)

No. You'll see in Stephan's prepared remarks, there was some obviously disruption to the business over the course of a couple-week period. That's all behind us now. The teams did a super job being able to work their way through it and get us back up and running. We don't expect it to have a material impact on the financial results for the quarter, so we're all systems go.

Guy Hardwick (Managing Director and Senior Analyst)

Thank you.

Operator (participant)

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

Brian Roberts (CFO)

Thanks.

Just want to thank everybody for joining today. Sorry that the call wound up a little later. In our normal cadence, part of that was just with the ransomware attack. Wanted to make sure we had appropriate time to get through our closing process. We'll get back to our normal schedule next quarter and look forward to updating you then again at that point. Take care, everybody. Thank you.

Operator (participant)

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