Q2 2024 Summary
Published Feb 13, 2025, 5:07 PM UTC- Sensata is winning new awards and contracts in the internal combustion engine (ICE) vehicle segment, demonstrating its strong positioning to benefit from continued demand in ICE vehicles despite slower EV adoption.
- The company is actively pruning underperforming, low-margin products, targeting the elimination of $200 million of annual revenue, to improve margins and reallocate resources to higher-growth opportunities, enhancing return on invested capital (ROIC) and shareholder value.
- Sensata is committed to improving operating margins by 20 to 30 basis points each quarter, despite market headwinds, showcasing strong management focus on operational performance and demonstrating a path to restore margins above 20%.
- Sensata Technologies expects auto production to decline by 5% in the second half of 2024, and heavy vehicle and off-road (HVOR) production to decrease by 4% to 4.5%, which could negatively impact the company's revenue and profitability.
- The company is exiting approximately $200 million of underperforming products, which, while intended to improve margins, may lead to reduced revenue, and the potential margin benefits may not fully offset the revenue loss, especially if the products have low margins.
- Delays in electrification and slower-than-expected growth in electric vehicle (EV) production may impact Sensata's future growth prospects, as the company acknowledges delays in electrification and is pivoting back to internal combustion engine (ICE) products, which may not offer the same growth potential.
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EBIT Margin Target Path
Q: How will Sensata achieve its 21–23% EBIT margin target?
A: Management is focusing on operational performance and excellence, setting shorter-term goals to progressively improve margins and regain them "back into the 20s". They see a path to these margins by continuing aggressive input cost management and pricing actions , with the $200 million product exits being a significant step. -
Product Exits and Margin Improvement
Q: How will exiting $200 million of low-margin products benefit margins, and are more divestitures planned?
A: Exiting low or no growth products with substandard margins is part of normal product line management to ensure commitment to 20–30 basis points of margin improvement each quarter. Product pruning is one of many tools focused on operational excellence to improve margins. -
Auto Production Outlook and Cost Reductions
Q: What's the auto production outlook for the second half, and are further cost reductions planned?
A: Sensata expects auto production to be down 5% and HVOR down 4–4.5% in the second half. This heightens the importance of accelerating cost reduction efforts to defend margins and continue delivering increased overall margin performance. -
Electrification Backlog and Pivot to ICE
Q: How has the electrification backlog changed, and how comfortable are you with it?
A: Sensata remains comfortable with its electrification backlog but recognizes delays in electrification. They've pivoted to winning new business in internal combustion engines (ICE) and are uniquely positioned to do so , ensuring agility by maintaining a relevant product portfolio across the production landscape. -
Winning New ICE Business and Repricing Contracts
Q: Are you winning new ICE programs, or just extending existing ones, and can you reprice contracts?
A: Sensata is winning new awards in the ICE sector, intentionally targeting customers well-positioned on the ICE side. They are also repricing contracts that have rolled off, leveraging opportunities to improve profitability. -
Margin Improvement and Cost Rationalization
Q: What's the margin impact of divested assets, and are there other cost rationalizations planned?
A: Management expects 20–30 basis points of margin improvement, with divestitures contributing. They've conducted a strategic review of R&D investments for returns and made changes, optimizing across customer base, regions, portfolio mix, and customization levels. -
Performance Sensing Margin Decline and Outlook
Q: Why did Performance Sensing margins decline, and what's expected ahead?
A: Margins declined due to mix; Europe, leading outgrowth but with lower margins, shifted towards combustion engine vehicles versus EVs, impacting margins. Performance Sensing margins are expected to align with company guidance in the second half. -
Measures to Drive Margin Amid Choppier Auto Market
Q: What steps are being taken to drive margins in a choppier auto market?
A: Sensata is investing wisely by pruning non-growth, substandard margin products, freeing up funds for higher growth areas, and balancing volume drops to improve the bottom line. -
Role of Product Exits in Margin Improvement
Q: Is product pruning essential for achieving margin improvements?
A: Product pruning is one of multiple levers used to deliver 20–30 basis points of margin improvement regularly. It's part of the strategy to meet commitments regardless of market conditions. -
Savings from Product Pruning
Q: How significant are the savings from product pruning?
A: Pruning $200 million in revenue doesn't yield immediate savings due to incremental expenses that need rationalization. It's a combination of short-term and long-term benefits, providing some gain in 2024 and setting a foundation for improved margins in 2025.