Sensata Technologies Holding plc Stock

Good afternoon. and welcome to the Sensata Technologies Second Quarter 2026 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. James Entwistle, of Investor Relations. Please go ahead.

Thank you, operator, 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 Second Quarter 2026 Earnings Conference Call.

Joining me on today's call are Stephan Von Schuckmann, Sensata's Chief Executive Officer; and Andrew Lynch, Sensata's Chief Financial Officer. In addition to the financial results press release we issued earlier today, we will reference the slide presentation during today's conference call. A 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 this call concludes.

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 those 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 call will relate to non-GAAP financial measures. Our GAAP and non-GAAP financials, including reconciliations are included in our earnings release and the appendices of our presentation materials and in our SEC filings.

Stephan will begin today's call with comments on the overall business. Andrew will then cover our detailed results for the second quarter of 2026 and financial outlook for the third quarter. Stephane will then return for closing remarks. After that, we will 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, and I'll share a few highlights from the quarter. We are pleased to report exceptionally strong Q2 results with each of our key metrics exceeding expectations and demonstrating accelerating financial performance, both sequentially and year-over-year.

Revenue grew 5% or 4.4% organically with organic growth in all 3 segments. Q2 is the fourth consecutive quarter of organic growth. Adjusted operating margin expanded 50 basis points year-over-year to 19.5% and adjusted earnings per share came in at $0.98, a year-over-year increase of over 12%.

Free cash flow continues to strengthen as our structural improvements in working capital take hold in our business. In the second quarter, we delivered free cash flow of $186 million our year-to-date conversion is 108%. The strong cash flow enabled us to continue deleveraging the company with net leverage now at 2.4x trailing 12 months adjusted EBITDA, and we retired $406 million of debt in the quarter. Our second quarter results demonstrate that we continue to make efficiency gains in our business. As we become more efficient, we are systematically strengthening our balance sheet and our disciplined growth framework is working and growth is inflecting upwards.

Let's turn to Slide 4 and take a closer look at these trends and what they mean as we look ahead. Since we laid out our key pillars and our associated performance metrics, we have demonstrated not only an ability to deliver on our commitments but to compound gains and accelerate progress. Adjusted operating margins have consistently expanded and the magnitude of these margin gains is increasing.

On a trailing 12-month basis, Free cash flow conversion has accelerated every quarter since we made this a priority. Similarly, in the second quarter last year, we committed that we would deleverage the company with urgency, with a target of getting below 2.5x net leverage in 2026 and we delivered the 2 quarters ahead of schedule.

Additionally, we indicated that we would strengthen our balance sheet by reducing gross debt, which improves our earnings resilience through market cycles. We have now executed 2 debt retirement transactions and reduced gross indebtedness by more than $760 million. We also laid out a disciplined framework for how we would return Sensata to growth over time. This framework meant being patient and deliberate in the opportunities we pursue to ensure that we are delivering high-quality, sustainable growth that will compound value for our shareholders over time.

We are pleased to report that a trend has emerged. In each of the last 4 quarters, year-over-year growth accelerated. And for the last 2 quarters, we have been in mid-single-digit territory. Importantly, earnings are growing faster than revenue, and we now have 3 consecutive quarters of double-digit year-over-year adjusted EPS growth. Simply put, there is a clear momentum in our business across every metric that we identified and our progress on growth as the organization increasingly energized.

Each site visit, I see examples of our team proactively identifying emerging or unmet needs for sensing and electrical protection, engaging with customers and rapidly bringing products to market. There are conscious examples of this across our business and in each of our segments. So with that, let's turn to Slide 5 and we can take a closer look at how our reorganized business is enabling growth, starting with automotive.

In our Automotive business, 3 key factors enable us to deliver market outgrowth. First, our diversified portfolio provides balanced exposure across ICE, EV and powertrain agnostic applications, enabling growth across regions regardless of varying EV adoption trends. Second, product innovation allows us to adapt to evolving EV architectures, which create demand for customized solutions where we have developed differentiated products and won significant business with global OEMs.

And third, localization. Our in region for region strategy aligns with customer demand for local content, supporting conquest wins. In the second quarter, these factors enabled us to deliver market outgrowth of 2% and further reinforce our ability to grow across regions with different powertrain adoption trends. In fact, we outgrew both ICE and EV production in both North America and Europe. In North America, our EV revenues were approximately flat in a market where EV production decreased by more than 30% year-over-year.

We expect electrification revenue to continue outperforming EV production in North America, supported by the new FoldBrake contactor, which launched in the second quarter and will ramp in future quarters. Our growth in North America was not limited to the EV category. We also outgrew ICE production with ICE revenue growth of approximately 14% against the market and increased 2% year-over-year. In aggregate, this represented double-digit net outgrowth in North America.

In Europe, recent electrification wins have narrowed the content gap between ICE vehicles and EVs and we outgrew EV production by 20%, delivering 30% growth in EV revenues against the market, which grew 10%. New business wins on ICE platforms enabled 5% ICE outgrowth in Europe and mid-single-digit net outgrowth for the region. In China, while the domestic market has softened, we continue to win local business that supports future growth. This quarter, more than 90% of our NBOs were again with local OEMs, helping offset mix headwinds from the share shift towards local Chinese OEMs.

We're also gaining traction with Tier 1 battery manufacturers by integrating into their system designs, giving us broader access to multiple OEMs. Over time, we expect this to create a flywheel effect as our business ramps and OEMs converge around fewer battery supplier defined architectures. Performance across the rest of Asia was exceptionally strong, with broad growth supporting by increasing content with Japanese OEMs and a rapidly expanding presence in India. In fact, we saw over 40% revenue growth in India in the second quarter and over 50% revenue growth year-to-date.

Earlier this quarter, I traveled to India, along with most of our senior leadership team. We visited our engineering center in Pune, where we announced that we would be opening a new manufacturing facility in Chennai as we begin to localize production for this fast-growing market. Now let's turn to Slide 6. Our Aerospace, Defense and Commercial Equipment segment delivered exceptional performance in the quarter with double-digit growth for the second consecutive quarter.

We're encouraged by the near-term momentum across this business and are continuing to invest in the medium- and long-term growth opportunities that can sustain that performance. In Aerospace and Defense, for example, we recently showcased a broad range of our high-power density motors at the Fine borough Air Show, and we're very encouraged by the customer response.

We expect our expanded portfolio of motors, actuators and cockpit controls, including our digital flight in septa to support continued growth and further strengthen our position against a favorable market backdrop for commercial and defense production over the next several years. Commercial Equipment, robust North American on-road truck orders and our strong second quarter results reinforce our expectation for a second half recovery.

We also saw sensors supporting on-site power generation for data centers contribute nearly 1 point of growth in the quarter, and we expect that contribution to continue in the second half and accelerate in 2027. As on-site power becomes more common in new data center builds, it is creating attractive demand for our diesel engine solutions, including cylinder pressure and high temperature sensing. Next, let's turn to Slide 7 to discuss industrials. In our Industrials business, we continue to navigate mixed end market conditions while building conviction around several attractive growth opportunities.

We secured another HL gas leak detection win in North America, supporting our line of sight to more than $100 million of annual HL revenue. Internationally, we see a similar structural opportunity developing, particularly in Europe, but rising temperatures and low historical air conditioned penetration by increasing demand for efficient heating and cooling solutions. At the same time, Europe's transition to next-generation refrigerants increases the need for reliable leak detection and safety-critical HVAC sensing.

Together, these trends create a meaningful long-term growth opportunity across our HVAC portfolio. Beyond HVAC, we are gaining traction in our data center business with a growing base of revenue in 2026, meaningfully contributing to organic growth in the year. Where that growth comes increased conviction in our right to win future business. In fact during the second quarter, we were specified into 3 additional new hyperscaler concepts for a total of 5 platform concept wins year-to-date. Additionally, we were named a preferred vetted vendor to a major hyperscaler. Each incremental specification win increases our credibility and improves our reach among hyperscalers, OEMs and EPCs and expanding our ability to win new business.

This quarter, one hyperscaler spec in led to a significant award with an ODM for pressure and temperature sensors in our cooler distribution units with shipments expected to begin the first quarter of 2027. With that, let's turn to Slide 8 as I would like to elaborate on these data center opportunities and where we are gaining traction. We frame our data center opportunity in 3 categories. First is electrical protection inside the data center, including circuit breakers and high-voltage contactors that protect and control power across PDUs, sidecars, power conversion systems and next-generation racks.

As architectures move towards 400 and 800-volt systems demand for reliable switching interruption and protection increases. Our solutions are well positioned where the higher voltage DC is converted back to AC and side cars or brought directly into severe. Second is thermal management, including air and liquid cooling applications that use pressure, temperature, leak and flow sensors, along with protection components to operate safely and reliably.

As rec power density rises, liquid cooling and cooler distribution units are becoming more common, increasing demand for precision sensing and protection higher-density data centers. The interdependency of liquid cooling systems and high voltage goes beyond each enabling the other. The presence of liquid and high-voltage architecture raises the stakes regarding electrical protection requirements and plays further into Sensata's credibility as a supplier into safety critical and mission-critical automotive applications.

Third is power and peak management. As AI workloads drive larger and faster swings in power demand, operators need resilient solutions to manage peak loads and use grid and on-site power more efficiently. Diner Power's converters, inverters and related technologies are well positioned for UPS systems, battery storage, peak shaving and on-site generation helping data centers support high-intensity compute loads and deployed faster where grid interconnections are constrained. As our data center opportunities convert into design wins, we recognize the focus on the potential scale of this opportunity for Sensata. Ultimately, that scale will depend on both the size of our addressable market and our participation rate.

While we are still early in the hyperscaler design in process and are not yet prepared to disclose expected market share or content per megawatt, we are increasingly confident in the opportunity. Let's turn to Slide 9, and I will elaborate on how we see this opportunity developing. As data center architecture shift towards higher voltage, liquid cooling and more on-site power generation, we expect our addressable market to expand by 1.5x to 2.5x. This expectation for SAM expansion is on a per megawatt basis, and is in addition to the expected market growth from capacity deployments. In addition to market growth and SAM expansion, we see the potential for higher participation as our differentiated sensing, protection and power conversion technologies become more relevant.

This is clearly an exciting high-growth opportunity; however, as we have seen with EVs, the pace of change and market adoption can vary. We are focused on what we can control: securing design wins with high-quality hyperscalers and making use of our existing product portfolio and capacity to minimize at risk investments. The ability to participate in this growth factor without significant investment is a distinct advantage for Sensata.

Our data center strategy does not require capital deployment for inorganic growth, capital-intense launches nor lengthy development cycles. We see ample opportunity to grow by leveraging existing products and developing derivative solutions from our core technology platforms. Data center architectures are evolving rapidly and the opportunity to secure specifications is unfolding in real time. Our recent wins demonstrate that our team is moving with urgency to accelerate development and sample delivery well ahead of the longer cycle time lines we see in other areas of the business.

Now let me turn the call over to Andrew to provide greater detail on the second quarter and our guidance for the third quarter.

Thank you, Stephane. Let's turn to Slide 11.For clarity, unless otherwise specified, amounts are referenced in millions of U.S. dollars and growth percentages are approximate. We delivered outstanding results in the second quarter with revenue adjusted operating income and adjusted earnings per share, all above our expectations. We reported second quarter revenue of $991 million, an increase of $47 million or 5% and from $943 million in the second quarter of 2025.

On an organic basis, revenue grew 4% year-over-year as we had a 1% inorganic tailwind from foreign exchange. Adjusted operating income was $193 million and adjusted operating margin was 19.5% compared with $179 million and a margin of 19.0%, in the prior year quarter. This year-over-year improvement of 50 basis points was attributable to stronger revenues and improved productivity. Adjusted earnings per share was $0.98, an increase of $0.11 or 12.6% year-over-year, which exceeded the high end of our second quarter guidance range by $0.03.

Free cash flow was $186 million, an increase of $71 million or 61% year-over-year. Our free cash flow conversion rate was 130% of adjusted net income, an increase of 39 percentage points compared with 91% in the prior year period. Let's turn to Slide 12 to review our free cash flow journey over the past few years and to discuss the structural enhancements we have made that are driving sustainable improvements. Prior to 2025, 80% free cash flow conversion would have constituted a historically strong result for Sensata.

In 2025, we redefined the cash generation power of our business and delivered 97% free cash flow conversion. Halfway through 2026, our year-to-date free cash flow conversion stands at 108%, putting us on track for a conversion rate, which meets or exceeds that which we delivered in 2025. Over the past 18 months, we have improved our cash conversion cycle by approximately 15 days, primarily through inventory reduction and supplier payment term optimization. We have also reduced capital intensity by better utilizing existing capacity, adding automation and deploying more flexible line concepts. As a result, capital expenditures decreased from a historical run rate above 4% of revenue to 3.5% last year. This year, Capital expenditures are just over 2% of revenue year-to-date, and we expect capital spending to normalize to prior year run rates in the second half.

Now, let's briefly turn to Slide 13 to review capital allocation. In the second quarter, we deployed $400 million of cash to retire $406 million of long-term debt. We recorded a gain of approximately $4 million net of transaction fees. We excluded this gain from our non-GAAP results. We closed the quarter with $403 million of cash on hand and $650 million of capacity on our undrawn revolving credit facility.

Our net leverage now stands at 2.4x trailing 12 months adjusted EBITDA compared with 3.0x in the prior year quarter. Gross leverage now stands at 2.9x trailing 12 months adjusted EBITDA and gross indebtedness is approximately $2.5 billion, a decrease of $762 million compared to June 30, 2025. In addition to retiring debt, we returned $18 million of capital to shareholders in the quarter through our quarterly dividend. Earlier this month, we announced our third quarter dividend of $0.12 per share, payable on August 26 to shareholders of record as of August 12.

Our capital allocation strategy continues to improve return on invested capital. For the 12 months ended June 30, 2026, ROIC increased by 120 basis points to 11.3% and compared with 10.1% for the 12 months ended June 30, 2025. Now let's turn to Slide 14 to discuss our segments. All 3 segments delivered organic revenue growth in the second quarter, which is a testament to our new operating structure and each segment's commitment to delivering profitable growth through its respective mandate.

Our Automotive segment delivered $545 million of revenue in the quarter, an increase of 3.3% year-over-year on a reported basis. Organic growth was 1.8% year-over-year resulting in approximately 2% outgrowth compared with flat global auto production. We achieved broad market outgrowth through content gains and production mix as our diversified portfolio of ICE, EV and powertrain agnostic products is well positioned regardless of regional powertrain adoption trends.

Automotive segment operating margin was 24.2%, a year-over-year increase of 120 basis points, driven by revenue growth and productivity. Our Industrial segment delivered $212 million of revenue in the quarter, a year-over-year increase of 2.9% on a reported basis and 4.2% on an organic basis. Organic growth was enabled by share gains and supported by stabilization in U.S. HVAC production. Industrial's operating margin was 27.1% and a year-over-year decrease of 100 basis points as we are reinvesting productivity from our automotive segment to fund Industrial's growth investment.

Our Aerospace, Defense and Commercial Equipment segment delivered $234 million of revenue in the quarter, an increase of 11.5% year-over-year or 10.9% on an organic basis. This was the segment's second consecutive quarter of double-digit growth, and we once again delivered revenue growth across every market vertical, including aerospace, defense, on-road trucks and off-highway equipment. Segment operating margin was 27.8%, a year-over-year increase of 340 basis points as we gained operating leverage from strong volume growth.

Adjusted corporate operating expenses were $61 million, an increase of approximately $10 million year-over-year, primarily due to higher variable compensation expense which was supported by stronger underlying performance. Now let's turn to Slide 15 to discuss what we are seeing in our end markets. Global auto production was approximately flat in the second quarter. For the full year, third-party forecasters expect production to decrease by approximately 2%. Despite these downward revisions, we remain optimistic on our ability to outgrow production and deliver modest organic growth for the year.

In aerospace, defense and commercial equipment, multiyear commercial backlogs and higher defense spending continued to support our positive outlook for aerospace and defense. In North American on-road trucks, robust orders and third-party build projections support our view that a recovery begins in the second half despite the lower build rates in Q2. Our on-road truck orders grew double digits in the quarter reinforcing that outlook given that our revenue typically leads truck builds.

Off-road markets appear stable overall with construction strength from data center build-outs roughly offsetting softer agriculture conditions. In our industrial end market, U.S. residential HVAC shipments recovered modestly on a year-over-year basis and we expect this to continue in the second half of 2026. U.S. PMI has been an expansion territory for several months, further pointing stabilization.

With that backdrop, let's move to Slide 16, and I will share our guidance for the third quarter of 2026. Currently, we expect third quarter revenue of $957 million to $987 million, adjusted operating income of $186 million to $193 million, adjusted operating margin of 19.4% to 19.6%, adjusted net income of $137 million to $142 million, and adjusted earnings per share of $0.93 to $0.97.

Our third quarter guidance includes approximately $10 million in tariff costs and associated pass-through revenues. This is approximately similar to the level of tariffs we experienced in the second quarter as recently announced changes to global tariff rates are not expected to have a significant impact on our business. Our tariff expectations are based on trade policies in effect as of July 28, 2026. Our third quarter guidance does not include any potential tariff refunds related to the recent AIBA tariff rulings nor does it reflect any possible pass-through of such refunds.

With that, I would like to turn the call back to Stephane for closing remarks.

Thank you, Andrew. Before we move to Q&A, I would like to leave you with a few closing thoughts. Our second quarter results demonstrate that the successful execution of our strategy is creating clear momentum across the business. Our expanding margins give us greater flexibility to invest in the highest return growth opportunities. Our operational initiatives, dramatically improved cash generation, which in turn allowed us to strengthen our balance sheet and improve resilience in our business.

And most importantly, growth is now taking hold across all 3 segments supported by disciplined execution, market outgrowth in automotive, continued strength in aerospace, defense and commercial equipment, and improving conviction around key industrials opportunities. Our data center strategy is maturing quickly with early specification wins and customer engagement, reinforcing our confidence that this end market can become one of several meaningful long-term growth platforms for Sensata.

Thank you for your time today. I will now turn the call back over to James for Q&A.

[Operator Instructions]

Operator, please introduce the first question. .

The first question comes from Wamsi Mohan with Bank of America.

It's nice to see the consistency in your results here and consistent improvement. Stephane, you spent a decent amount of time on this data center portfolio and the opportunity here. As we think about -- it's good to see the quantification in terms of conceptually where the SAM is going. But as you look at your product portfolio, can you help us think through when these products get qualified? And from a revenue standpoint, I think you mentioned that 1 of the hyperscaler opportunity could start to ramp, if I heard right, in Q1 of 27%.

So -- any parameters you can share with us that can give us some sense of materiality, whether it's 27 or 28 and overall, from your progression standpoint, like how much more work needs to be done regarding qualification at a broader set of customers?

Thanks, Wamsi. That's a good question. And -- just give me a moment to elaborate that, and I'll explain our position. So we're continuing to see very good progress with our hyperscaler customers. But at the same time, customer designs are still maturing and the deployment time lines continue to evolve. Because of that, -- we don't think it's the right time to put a revenue or CAGR framework around the business. As those designs mature and time lines become clearer, we expect to provide more detail over the coming months.

What I can say today, one is that our confidence in the long-term opportunity has only increased. That's really driven by 3 things. And allow me to explain that once more in a bit more detail. The market is growing. We have a 14% CAGR and of deployed capacity through 2029. SAM is growing from 1.5x to 2.5x, that predominantly through high-voltage architectures and that resulting in liquid cooling requirements. And then there's our participation at right to play, which is increasing. This is, again, a result of a shift to high voltage data centers in liquid cooling.

And then one of the additional to that, and I think these are also really important points. During quarter 2, we've been specked into 3 additional hyperscaler concepts with a platform of -- with 5 platform concept wins year-to-date. And these 5 concepts, and this is also important, there's been a big progress and a fantastic result of the team. They span over 4 major brand name hyperscalers. And then to give you a bit of an orientation around revenue, our industrial components have approximately doubled in revenue in the first half of 2026 compared to first half of 2025.

So ultimately, that means we're moving from a component supplier assistant participant. That's how I'd sum it up. So just ask for a little bit more patient. And over the next couple of months, we'll be giving you more information. But it's just a little bit too early for that.

The next question comes from Mark Delaney with Goldman Sachs.

Which is on the margin outlook for the second half of the year. margin guidance is flattish sequentially, but that's coming off of a better-than-expected 2Q results. So maybe you can talk about what led to the strength in margins in the second quarter and key puts and takes as you look into 3Q and do you still think the 4Q margin can expand by the 30 bps you've previously been expecting?

Yes. Thanks for the question, Mark. We were definitely pleased with the margin result in the second quarter. And I'd categorize it as primarily driven by 2 factors, a little bit stronger volume than what we were expecting as the market came in a little stronger and then a head start on productivity. And so because part of it's a head start on productivity, I don't expect it to just represent a higher jump-off point off of which we would sequentially expand -- if you look at the midpoint of our Q3 guide, it's basically the same level of year-on-year margin expansion is what we communicated last quarter as a framework for the back half. .

And then I'd say on Q4, we didn't guide the fourth quarter. We still expect margin expansion year-on-year, and we still expect margin expansion in the fourth quarter from a revenue standpoint, probably sequentially flattish from the third quarter and then margins expanding.

The next question comes from William Stein with Truist Securities.

Perhaps even more nascent than your data center AI exposure, I wonder if you've begun to develop products or repurpose products and develop customer relationships and perhaps even design wins in physical AI, things like humanoid robotics and such?

Also great questions. Let me answer that question like that. So what we're kind of doing is obviously monitoring the potentially evolving humanoid market and where this could take us. And yes, it's clear humanoid are pack full of sensors, and that could evolve into a nice opportunity for Sensata. So we're very well aware of that. And yes, we're focused, and we'll see where it takes us. And I'll maybe elaborate more on that in the upcoming earnings calls. But definitely, if the market develops and the and I'm focusing on is, then it could be a nice opportunity for Sensata. .

The next question comes from Joseph Spak with UBS.

Thanks. Good afternoon. So Henry, the leverage targets ahead of schedule. I remember when you sort of communicated to the market on sort of getting the leverage down your view was that, that would sort of help the multiple and the valuation. And the multiple has expanded, but I'm curious sort of now how you sort of view future uses of cash. and whether share repos are back on the table because as you just highlighted, I mean, the cash conversion is quite strong. So it looks like 2.4x now by our math, could be around 2 by the end of the year, so below your target. So how are you sort of thinking about that going forward?

I'd sum it up like this, So first of all, for the company for Sensata itself, it's important that we continuously focus on improving our operations. And yes, cash generation and cash conversion is good. But there is still an opportunity to improve. We've got programs and initiatives running around reducing or further reducing our inventory levels, I feel we've made fantastic progress with the team has made fantastic progress around supplier payment terms and other opportunities within working capital to improve our overall cash performance.

So there is a next level that we're working on. And to your question, further -- I think the direction of the company related to how we use that cash is to continuously to deleverage the company and strengthen the balance sheet going forward. There is no change in strategy related to that from last.

The next question comes from Joe Giordano with TD Cohen.

I mean I guess it's probably a sign of where you're going -- no one's asked a question on automotive yet. So I think that's interesting. I'll jump there. You mentioned India. Just curious as to like sizing of that business and how large do you think it can get? And I'm curious, when you say India, is this like India local? Or is this India demand satisfied out of China exports? How should we think about that market? And then just a just follow-up. Just curious what your outperformance was in China. I didn't catch that on the prepared remarks. .

I'll Andrew will answer the question, Joe, to the outperformance in China. But let me start with India. So first of all, -- we're building a new facility there and deploying roughly $30 million of capital or capital expenditure. And the good thing about that is, and I'll get to the customers or the good thing about that is that it's mainly covered by -- offset by incentives. So nearly 100% of that is offset by incentives. And why are we building it there? Well, it's pretty simple. We've won a lot of business in the past with local Indian manufacturers and OEMs. And -- there's an expectation from the local guys to produce locally, and that's one of the reasons why we've decided to localize within India. So it's all local business.

But there's a further opportunity, obviously at a later stage. As I'm speaking about automotive OEMs a as a first step. And there's obviously a further opportunity then to use that site for export, but that's the plan for now. It's predominantly local. And then the other thing is that we want to leverage the opportunity of the broad market of suppliers in India, which could strengthen our competitiveness overall. There's excellent -- an excellent supply base there, and that will also be using going forward. So I think it's a good next step in the region there for Sensata.

And Andrew?

Yes. And Joe, in terms of sizing, so a little bit over $20 million of revenue in the quarter from India auto. Certainly, at the pace of growth that we're seeing and the growth rate in the quarter, it's getting to be sizable quickly here. It's still about 5% of our overall auto business. but growing rapidly. And it's a market that we think there's significant growth opportunity looking well out into the future. So not going to provide sort of long-term outlook on the size of the business there, but definitely growthful and one that we're excited about. And I think embedded in your question, if I heard you correctly, was a question on China. Could you maybe just repeat that part? .

Just curious what the outgrowth was there in the quarter. I'm just -- I'm trying to understand like with all these new customers and new wins with locals, like I'd expect you're probably doing pretty good there versus an overall market that's been sluggish. .

Yes. The China market has been pretty nascent and sort of production mix varying from quarter-to-quarter based on changing OEM market share, et cetera. So we didn't outgrow in China this quarter. We've been outgrowing, we outgrew in total on our global auto business, and we expect to continue to gain share in China with local EVs and certainly, the supplier defined battery architectures is a big part of that strategy moving forward.

So we're still pretty optimistic on the market and our position in it, but production is varying from quarter-to-quarter.

Joe, one more point I'd forgotten to add to the automotive content in India, that's the first step. So we obviously want to use that plant or that facility as well for commercial equipment business and also potentially for industrial business that we might want to localize there as the next step.

The next question comes from Christopher Glynn with Oppenheimer.

Yes. So just want to go a layer deeper on the margin expansion consistency that you're putting up. you gave sort of a state of play in the improvement pace for free cash flow. I wonder if we could do that on operations in terms of where are you with square footage plans various processes and best practices sharing from some of your better facilities to some of the -- those with room for improvement.

Thanks for that question. I think we -- overall, in these last quarters, we've made great progress. We've got a -- so first of all, -- with Nicolas, I announced that we've got a very strong COO with us, who's driving the change throughout Sensata's got a great team below him in operations. We've got clear initiatives, so when it gets to optimizing our footprint, which is as an example, is one initiative that we're currently working on, where we go through our entire Sensata production footprint and question, the size of our plant, questions the location of our plant and rechallenge ourselves in the end if we can improve that footprint. That's one area that we're working on.

So I would say great progress done in that respect, but maybe not quite finished yet. There's still a level of improvement. Then let me give you another example. So each plant has the overall challenge to reduce costs per product. And we benchmark them against each other, especially plants that have similar products produced in different areas of the world. And also there, I think we've done great progress. And part of the result of that is what you see in our financials. But I wouldn't say that every plant is on benchmark have that. We still have a level of improvement to go. So just based on those 2 examples, there's obviously a lot a lot more happening in the operations function. Good solid progress, but still a way to go.

And the other one was just curious about overall book-to-bill trends. It may be more or less meaningful by segment, maybe not too meaningful in auto, for instance. But with the overall global cycle starting to improve, and we're seeing that so far across the earnings reports in many cases. Just wondering even if you're not going to give a book-to-bill in the quarter, maybe how that book to bell trends have been developing?

Yes, Chris, thanks for the question. Book-to-bill is not a metric that we track across most of our business, just given the way our order book dynamics are, potentially relevant in the Dinapower business, which is a little more project-based, and we do look at it there. But -- that's just not a metric that we track broadly across our business. .

The next question comes from Guy Hardwick with Barclays.

Just wonder if you guys could give us a bit of an update on the overall content per vehicle trends, particularly as we go into the second half, it looks like global water production could be down sort of 4% to 5% year-on-year in the second half. And in particular, China is expected to be down worse than that. So just a number of things happening in terms of mix, but also the benefit of some of the contract wins that you've run. So -- just wondering how the content per vehicle is going to look in the second half potentially after have had a nice outperformance by a couple of points in the first half?

Yes. Thanks for the question. So certainly, we're seeing content per vehicle growth and particularly in North America and Europe, where we shared we outgrew grow both production categories in both markets, ICE and EV. That's a function of content per vehicle growth. So to give you kind of the state of play of where we are on CPV right now, at least across the major regions. So we're mid-30s in terms of content per vehicle in North America, high 30s in Europe and then just under 20% in China. .

The next question comes from Amit Daryanani with Evercore ISI.

This is Kevin all on for Amit.

Yes. The Industrial segment delivered 4.2% organic growth, but segment operating margin declined 100 basis points. I guess -- could you maybe just explain what specifically was causing that contraction? Was it more mix or pricing centric? And then when should the market margins for that segment start to improve a little bit? .

Yes. Thanks for the question. So we invested about $1.5 million or so of operating expenses incrementally year-on-year in that business, primarily tied to the data center opportunity and the growth that we see longer term there. We've been very deliberate about how we do that and investing for growth, and we're only doing it as we generate productivity in other areas of our business to pay for it. And so while it shows up as margin contraction in industrials, it's not driving margin headwinds at a company level.

And we've been systematic and deliberate about funding that. In terms of margin expansion, so look, I think as revenue growth comes from our Industrials business, it should have a variable contribution margin in the in the high 20s and approaching 30%. And so as we get revenue growth, we'll have affordability to invest and still see margin growth. But for the near term here, we're making sure that we're making the right investments to secure that growth opportunity.

The next question comes from Shreyas Patil with Wolfe Research.

Maybe turning to the revenue guidance for Q3. it looked like sequentially, you've got revenues down about 2.5% versus Q2. And I'm curious if you can expand on that. I know auto production is down seasonally, I think maybe that's down 2% to 3% weighted by your geographic mix. But given the acceleration in HVOR and maybe even HVAC, I wondering if you can help us with some of the puts and takes there?

Yes, happy to. I mean that's fairly typical seasonality in our business, and it's primarily driven by auto, as you know. In the auto segment, we basically have all of our major regions producing at normal rates in the second quarter. As we enter the third quarter, we've got summer shutdowns in Europe. And then in the fourth quarter, typically holiday shutdowns in the U.S. And so that drives the seasonality in our auto business.

To your point around aerospace, defense and commercial equipment, yes, that market is quite strong, and we're expecting production to be up in the back half. But we've actually seen orders ahead of production, just given where we sit in the cycle for that segment. So Typically, what we're seeing is if there's demand for truck builds in the third and fourth quarter, that's driving demand for sensors and components in the first half.

And so we've been outgrowing production early in the year, and then we expect to basically grow in line with production through the cycle here.

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

Thanks, operator, and thank you to everyone who joined today's call. Before we conclude, I'd like to announce that we'll be attending the Goldman Sachs Technology Conference on Wednesday, September 9 in San Francisco. We look forward to connecting with many of you there. Operator, you may now conclude the call. .

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

Good afternoon, everyone, and welcome to the Sensata Technologies Q1 2026 Earnings Call. [Operator Instructions]. Please also note, today's event is being recorded.

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

Thank you, operator, 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 2026 Earnings Conference Call.

Joining me on today's call are Stephan Von Schuckmann, Sensata's Chief Executive Officer; and Andrew Lynch, 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. A 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 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 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 earnings call will relate to non-GAAP financial measures. Our GAAP and non-GAAP financials, including reconciliations are included in our earnings release, in the appendices of our presentation materials and in our SEC filings. Stephan will begin the call today with comments on the overall business. Andrew will then cover our detailed results for the first quarter of 2026 and our financial outlook for the second quarter of 2026 Stephan will then return for closing remarks. After that, we will 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. As I typically do at the start of our earnings calls, I'd like to begin today with an update on Sensata's transformation journey. When we talk about transformation at Sensata, what we mean is that we have embarked on a journey to unlock untapped potential across our organization.

We are encouraged that the market has taken notice of the progress we're making. However, what I find even more exciting is the vast opportunity ahead of us. Tapping into that opportunity means maximizing value for our shareholders, sustainably over the short and long term.

We'd like to think of this as a pursuit of excellence over multiple phases, and that we are still early in this journey. The initial phase which we completed last year was to define what exit looks like and systematically built into the foundation of our business.

Our next phase is one of acceleration, expanding on the foundation by delivering incrementally better performance and increasing focus on strategic initiatives in pursuit of our aspiration to be best-in-class. And finally, transformation maturity means achieving and sustaining best-in-class performance and market leadership. Last year, as we embarked on the first phase of our journey, we define what extent looks like for us. And we deployed a key pillars framework designed to maximize value creation.

As we built up a systematic around those pillars, we focused on consistency of execution, sequentially improving each quarter and creating value for our shareholders. When updated during February on our year-end call, I shared that this framework is now foundational to everything that we do and is deeply ingrained in our business. As we advance to the next phase of our journey, our priorities framework is, first, to retain the consistency of execution and margin resilience that we installed in the business over the past year.

Second, to continuously compound value by delivering year-over-year growth and margin expansion, not only in aggregate but now also at segment level. And third, to fulfill our growth mandate by delivering on our near-term growth targets while also importantly, prior our future growth engine as we work on the strategic growth initiatives we laid out for each of our segments. In this phase of our transformation, these priorities are all equally important. Balancing strategy, growth and executing effectively is the standard to which we hold ourselves.

Just as we did last year, each quarter, we will update you with proof points of our progress. Before we get to the first quarter proof points, allow me to set the stage but where we have made progress these last few months. Our new leadership team is gaining meaningful momentum in their respective areas. Nicolas, and our operations team are making progress on inventory reduction and supplier payment terms optimization, which is evident in our first quarter cash conversion.

Similarly, with improved focus on factory performance, productivity is accelerating, which is demonstrated in our first quarter margin expansion. Marcus, Elis and Brian have hit the ground running in their respective roles, and I will share more color on this as I provide segment updates in just a few moments.

Before we get to the segments, let's turn to Slide 4, and I will briefly cover our strong first quarter results, which clearly demonstrate the continued and consistent progress that we are making. We delivered revenue and adjusted operating income at the high end of our guidance range, and we exceeded our expectations on adjusted EPS and free cash flow. Free cash flow of $105 million was again a bright spot and this represented 83% conversion, outpacing the first quarter of 2025, which is particularly noteworthy as 2025 was a record year for Sensata. With our improved free cash flow, we progressed further on our deleveraging journey.

The results of the quarter are indicative of the progress we are making on our transformation journey and demonstrate that our strategy is creating value for shareholders. This is evident by any in the quarterly results, but also in the sustained improvement in return on invested capital, which has continuously increased and now stands at 10.8%.

Last year, I spoke a lot about margin resilience, which requires operating our business with an inherent understanding that headwinds will arise. To prepare for this, we continuously make structural improvements, which increase our underlying earnings power. Biogen resilience not only positions us to manage through headwinds, it also ensures we maximize the benefit from tailwinds. Our Q1 results are an example of margin resilience in action. Despite multiple headwinds, including precious metal and inflation of over 100%, our first quarter adjusted operating margins improved by 30 basis points year-over-year to [ 18.6p ]. The stand in sharp contrast to the first quarter of 2025 when our results decreased 40 basis points from the prior year. While I'm pleased with our consolidated results for the first quarter, I'm even more excited by the performance we are seeing in our segments with our reorganized business. Growth in our clear strategic focus and our Q1 results are indicative of the progress that we are making as we delivered organic growth in each of our segments.

Let's turn to Slide 5, and I will take you through a few highlights for each of our segments. In our Automotive business, we again delivered market outgrowth, demonstrating our ability to grow regardless of powertrain mix. As you may recall, we returned to market outgrowth in the back half of 2025 after several challenging quarters. Our growth accelerated to 4% in the first quarter as we are gaining traction on multiple fronts. For example, in Europe, we are outgrowing production as our content per EV continues to improve.

In the U.S., we're outgrowing production as our portfolio benefits from the resurgence of truck and SUV production. We're also securing future growth stacking electrification wins with innovative new products, such as our high-efficiency contactor, or HEC and our [ Folta ] contactor where we have secured meaningful new business wins in both Europe and the U.S.

For example, in Europe, we secured a design win on an EV platform at a large German automotive OEM leveraging our heck to enable switching between 400 and 800-volt charging architectures. In China, our local contactor volume continues to ramp as we expand our business with key local OEMs, and we are now gaining traction with battery and battery systems manufacturers.

Japan and Korea continue to be growth accelerators for us as we enjoy our highest content per vehicle in Korea, and we continue to grow our market share with leading OEMs in Japan. We're also seeing green shoots of our next wave of growth in automotive with our performance in India. We are significantly outgrowing production in this fast-growing market, and our revenue with a key OEM more than doubled year-over-year. Andrew will cover our detailed Q2 guidance and the full year outlook in these remarks. But as I speak about automotive, I want to take the opportunity to assure you that while we are thrilled with our first quarter results and excited about our second quarter outlook, we are also clearly aware of some of the end market demand risks that are posed by geopolitical events and the effect on oil prices.

In the spirit of margin resilience, we have developed plans for a number of scenarios and we are prepared to act swiftly to preserve our margins in event that automotive end markets deteriorate. Our Aerospace, Defense and Commercial Equipment segment was a star performer in the quarter with double-digit organic growth.

Our truck production remains soft, particularly in North America, we're seeing an increased demand for build slots in the back half of the year. Given the longer lead times for these vehicles, we're now entering replenishment cycle. We also observed an increase in demand from our diesel engine and power generation customers as they are benefiting from the demand for generator sets tied to data center construction.

Aerospace and defense continues to experience steady mid-single-digit growth driven by both strong commercial backlog and increased military spending. In addition to ramping up to supply the market-driven growth, we are focused on securing our share of well-time near-term content growth opportunities in defense applications. We recently secured a circuit breaker win from a German manufacturer of armored ground transport vehicles for a defense application in Europe, and we have similar opportunities in Europe in our pipeline.

We're also closely monitoring recently publicized developments around the U.S. government asking traditional automotive OEMs to support defense production. It's still too early to quantify any impact, but we will update you should opportunities materialize. Our industrials business continues to experience end market softness particularly in HVAC, for unit shipments in the North America market decreased in the first quarter.

Nonetheless, we delivered modest organic growth primarily through share gain. We booked 2 additional HL leak detection wins in the first quarter, further expanding our market leadership position as this product line continues to be a growth accelerator in North America. We remain focused on expanding this product offering into Europe and Asia.

In the near term, European heat pump demand has returned to growth, supported by innovated fossil fuel prices alongside policy incentives, energy security concerns and improving cost economics. We expect this combination to be a positive demand driver for us over time.

Let's turn to Slide 6. As I'd like to elaborate on the data center opportunities in our industrial business. We have increased conviction around our right to win in data centers, building on our existing data center business. I'd like to provide more color on the opportunity and general time frame for growth acceleration. Inside the data center, electrical protection sockets and power distribution units and sensing sockets in quant distribution units create demand for our products.

Outside the data center, there are meaningful opportunities for our Dynapower product in uninterrupted power supply or UPS systems and HVAC demand grows with recruiting needs for each data center. We are incumbent in data centers today with both low voltage AC electrical protection as well as with sensing and HVAC applications.

With this incumbency, we are already benefiting from secular growth. As we look at the technological road map for data centers, we see a major inflection point in the data center ecosystem. The opportunity for Sensata is significant and our right to win is compelling. This inflection point is driven by the rapid evolution of GPU platforms and the associated changes in power and thermal management requirements. Allow me to elaborate.

Today, most deployed data centers rely on low voltage AC electrical architectures where air cooling meets current thermo requirements. Industry road maps from leading GPU manufacturers point towards higher Baltic DC power systems, including 800-volt DC which drives substantially higher reg densities and accelerate the need for liquid cooling solutions. These transitions increased demand for high-voltage contactors and for pressure, temperature and flow sensors. These application areas are closely in line with our portfolio where our performance, reliability and application expertise supports a strong competitive position.

In parallel with our EPC and distribution partnerships, we're engaging earlier in the design cycle with hyperscalers and ODMs to support upfront specifications. This approach strengthens downstream pull-through by enabling EPC's internal partners to deliver against predefined customer requirements. Since our last update, the strategy has resulted in our products being specked by 2 hyperscale and our new flow center product has advanced from development to customer validation.

From a timing perspective, industry road maps indicate that adoption of liquid cooling is expected to accelerate beginning around mid-2027, particularly in high density, AI and high-performance computing deployments.

And this system scale, leading GPU and infrastructure suppliers anticipate a subsequent shift towards higher voltage power architectures. While the revenue opportunity is medium term, the time to get spec-ed in is not, and that's exactly where our focus is. This is what -- as well, and it is the call to our automotive legacy. In parallel, our diner power business is actively bidding on several lot programs with an extensive opportunity pipeline for UPS projects.

The highlights I just shared are just a peak into the growth engine that we are priming at Sensata. I have even more conviction in our growth prospects than I did just a quarter ago. With our new segmentation, Marcus, Alice and Brian each have clear growth mandates for their respective businesses. They, along with their strong teams, are bringing the end market focus that is required to deliver on a growth mandate.

With that, I would like to extend my gratitude to teams -- for their collective commitment to our transformation and consistency of execution. Now let me turn the call over to Andrew to provide greater detail on the first quarter and our thoughts around the second quarter and full year.

Thank you, Stephan. Let's turn to Slide 8. For clarity, unless otherwise specified, amongst are referenced in millions of U.S. dollars and growth percentages are approximate. We delivered first quarter revenue, adjusted operating income and adjusted earnings per share at or above the high end of our expectations despite volatility in our end markets. As Stephan noted, this demonstrates a continuation of the momentum and consistency of execution that we achieved last year. We reported first quarter revenue of $935 million, an increase of $24 million or 3% from $911 million in the first quarter prior year.

On an organic basis, Revenue grew 4% year-over-year as we had a $34 million inorganic revenue headwind from divestitures, which was partially offset by a $20 million revenue tailwind from FX. This was the final quarter of meaningful revenue impacts from the initiatives we began in 2024 to exit $200 million of annual revenues related to underperforming products. Adjusted operating income was $174 million and adjusted operating margin was 18.6%, compared with $167 million and a margin of 18.3% in the prior year quarter. This year-over-year improvement of 30 basis points was attributable to stronger revenues and improved productivity.

Margin benefits from the divestiture of underperforming products approximately offset headwinds for tariffs on a year-over-year basis. Adjusted earnings per share was $0.86, an increase of $0.08 year-over-year, exceeding the high end of our first quarter guidance range by $0.01. We delivered $105 million of free cash flow in the quarter, which was an increase of $18 million or 21% year-over-year. Our free cash flow conversion rate was 83% of adjusted net income an increase of 9 percentage points compared to 74% in the prior year period.

This was an encouraging start to the year in what is typically our most challenging quarter for free cash flow as we have timing-related headwinds attributable to interest and variable compensation payments the latter of which was a $20 million headwind year-over-year.

Let's move to Slide 9 to unpack this further. Free cash flow of $105 million not only exceeded our expectations, it was a record first quarter result for Sensata. This outperformance was driven by the momentum we are gaining on working capital efficiency with our initiatives to reduce inventory and optimize supplier payment terms. We are thrilled to have such a strong start to the year particularly after the record full year results that we delivered last year.

As we move to Slide 10, I will discuss capital deployment. We returned $43 million of capital to shareholders in the quarter. In addition to our quarterly dividend, we repurchased $25 million of shares to offset the impact of share-based compensation. Our net leverage ratio at the end of the first quarter was 2.65x trailing 12 months adjusted EBITDA compared to 3.06x for the prior year quarter.

Deleveraging will continue to be our capital allocation priority. We have conviction in this approach, and we are pleased with the improvements we are delivering in return on invested capital, which improved by 70 basis points to 10.8% for the 12 months ended March 31, 2026, compared to 10.1% for the 12 months ended March 31, 2025. Earlier this month, we announced our second quarter dividend of $0.12 per share payable on May 27 to shareholders of record as of May 13.

Now let's turn to Slide 11 to discuss our segments. All 3 of our segments delivered organic revenue growth and operating margin expansion in the first quarter. We see this as an encouraging proof point for the traction we are gaining from our reorganization. Our Automotive segment delivered $525 million of revenue in the quarter, a decrease of 1% year-over-year on a reported basis. On an organic basis, we delivered 1% growth year-over-year and 4% outgrowth against the market that decreased by 3%. our market outgrowth was driven by both content gains and production mix as our versatile portfolio of ICE, EV and powertrain agnostic products continues to perform in a market with uneven powertrain adoption rates.

Automotive segment operating margin was 23.5% in the quarter, a year-over-year increase of 70 basis points from 22.8% driven by both productivity and portfolio optimization measures. Our Industrial segment delivered $184 million of revenue in the quarter, which was a year-over-year decrease of approximately 1% on a reported basis and a year-over-year increase of 1% on an organic basis.

Organic growth was enabled by share gains despite ongoing softness in U.S. residential and construction markets. Industrial's operating margin was 27.1% in the first quarter, a year-over-year increase of 100 basis points from 26.1%, primarily due to productivity gains. Aerospace, Defense and Commercial Equipment segment delivered $226 million of revenue in the quarter, an increase of 15% year-over-year or approximately 17% on an organic basis. we had revenue growth across every market vertical, including aerospace, defense, on-road trucks and off-highway equipment.

Segment operating margin was 28.1%, a year-over-year increase of 260 basis points from 25.5% as we gained operating leverage from strong volume growth. Adjusted corporate operating expenses were $63 million, an increase of $10 million year-over-year primarily due to higher variable compensation expense, which was supported by stronger underlying performance.

Now let's turn to Slide 12 to discuss what we are seeing in our end markets. Global auto production decreased by approximately 3% in the first quarter. For the full year, third-party forecasters are expecting a production decrease of approximately 2%.

Recent downward revisions to third-party forecasts are primarily attributable to China and the Middle East and we do not expect these revisions to have a meaningful impact on our business. In our industrial end markets, U.S. residential and construction markets remained soft in the first quarter, which was evident in the year-over-year decrease in U.S. residential HVAC shipments.

We expect HVAC shipments to stabilize in the second quarter and returned to growth in the second half of 2026. In aerospace, defense and commercial equipment, commercial aircraft backlogs are strong, Defense spending is accelerating and on-highway trucks are starting to show signs of recovery. In the first quarter, although North American truck build rates did not improve, our order book increased. We are optimistic that this is a leading indicator for a replenishment cycle in the second half of 2026 as lead times generally result in our revenue growth preceding truck build rates.

With that backdrop, let's move to Slide 13, and I will share our guidance for the second quarter of 2026 and some color on our outlook for the year. For the second quarter, we expect revenue of $950 million to $980 million, adjusted operating income of $182 million to $190 million. adjusted operating margin of 19.2% to 19.4%; adjusted net income of $131 million to $139 million and adjusted earnings per share of $0.89 to $0.95.

Our second quarter guidance includes approximately $8 million in tariff costs and associated pass-through revenues. This is approximately $4 million lower than our prior run rate due to recent changes in U.S. tariff rates. Our tariff expectations are based on trade policies in effect as of April 27, 2026.

Our second quarter guidance does not include any potential tariff refunds related to the recent EPA tariff ruling nor does it reflect any possible pass-through of such refunds. Due to geopolitical uncertainty and end market volatility, we are continuing our practice of providing guidance one quarter at a time. That said, we do want to share our view that current consensus estimates for adjusted operating margin expansion of approximately 30 basis points per quarter in the back half are consistent with our view, provided that end market demand holds up. Should end market demand deteriorate materially, we are prepared to take reasonable measures to defend the 19% annual margin floor that we committed to last year.

Now I'd like to turn the call back to Stephan for closing remarks.

Thank you, Andrew. Before we move to Q&A, I would like to leave you with some closing thoughts. As we progress through 2026, we do not expect our path ahead to be free of challenges, it really is. Sensata's prepared. The operational principles we brought into the organization have proven effective over the last 5 quarters.

Just as we did last year, we will operate our business in a manner to overcome challenges and perform line with the expectations we set and to deliver margin expansion for the year. And do so, the underlying earnings power in our business will continue to strengthen, and we are primed for accelerated earnings expansion as market cycles turn more favorable. We are proud of what we have accomplished so far, and I have conviction that our business is primed for excellence. We have an outstanding leadership team and a committed organization that is running behind them.

We have achieved organization-wide operational discipline, our productivity engine is delivering. Our strategic initiatives are accelerating and our growth opportunities are robust. I will now turn the call back over to James.

Thank you, Stephan and Andrew. We will now begin Q&A. Operator, please introduce the first question.

[Operator Instructions]. And our first question today comes from Wamsi Mohan from Bank of America.

This is Ryan Show on for Wamsi. Two questions for me. One, on auto content outgrowth of 4% in the quarter. Stephan, I know you gave some details earlier in the call, but can you share any further color about the region? And as our production declines 2% year-over-year, is that the right outgrowth to think about?

So thanks for the question. Let me start a bit broader. By starting with the IHS prediction or forecast which is roughly 91 million vehicles for the year of 2026. That's around 2% down from what we saw in 2025. I think it's important to mention there are 2 factors that need to be considered that can substantially influence these -- the IHS forecast. The first one geopolitical tensions and obviously, they're being related to the oil price. And the second factor that's important are test car subsidies in China. And as we know, these were in place in quarter 3, quarter 4 of 2025, which led to a strong demand.

But since quarter 1 of 2026 subsidy policies have changed, and this has obviously resulted in a weak demand. Nevertheless, the automotive segment and the segment leads around Marcus and the team and also our China President, Jackie, they have a very clear and accountable growth mandate. And to get to your question around regions, they are winning meaningful business in each and every region.

So in China with contactors, in Southeast Asia, for example, in Japan, we made good progress on winning new business, as we've mentioned in the call. And so we're in South Korea. We've been winning in all types of powertrain platforms from ICE to battery electric vehicles. And I think it's also important to mention that -- we've been winning in the regions, and we've been making good progress. But we've also been winning in automotive with new products.

The 2 products that I mentioned in the call, the high efficiency contactor which was the fifth win for this new product with a German OEM and also the business mentioned around the full break contactor. And then there's additional opportunities in China with battery system manufacturers that I feel we're gaining good momentum and making good progress. So overall, I'd say we've got strong conviction that the team will outgrow the market in 2026. So I hope that fully answers your question around automotive.

Got it. Yes, very helpful. And last question for me. the 60 to 80 bps of operating margin expansion sequentially seems pretty high than prior quarters. Can you give us a bridge of the drivers that's leading this?

Yes. So operating margins did not expand sequentially. They contract sequentially on typical Q4 to Q1 timing-related items, but we've seen less contraction than what we've typically seen in past years as we've gotten a head start on productivity compared to compared to what we've seen in past years. So a stronger start to the year and really encouraged by that and certainly a head start on our targets for the year.

If your questions relating to Q2, step-up in margins from Q1 to Q2, it's again the same themes. It's that the head start on the year, stronger productivity earlier in the year gives us a stronger lift as we move into the second quarter and volume certainly helping.

Our next question comes from Mark Delaney from Goldman Sachs.

I had 1 to start also on the margin topic. The company mentioned that it expects margin improvement of about 30 bps year-over-year in the back half provided that market conditions don't meaningfully deteriorate. Given all the supply chain and geopolitical volatility that's occurred over the last 90 days and pressure on input costs. Can you speak more on the actions that Sensata is already taking to navigate this environment and the company and our extension to expand margins in the back half?

So let me start with that, Mark. And I think it's important to say that despite all challenges that we have, we have a clear playbook to respond, and we've been working through that pay book throughout 2025 and we use that same playbook for 2026. So what I'm saying is Sensata is prepared. What we do is we think in scenarios and that prepares us for current or existing but also future headwinds like material inflation, tariffs and everything else.

Equally important to mention is that we are designed into mission-critical application, which obviously gives us a position of leverage. And that -- saying that society can -- defend its margins. And I think that pretty much differentiates us from us. I don't know, Andrew, if you want to add something to that, but.

Yes. I think thematically, those are exactly the factors that give us leverage and confidence in our ability to execute. And then I would say it's the same margin cadence that we observed last year where we see sequential improvement each quarter. Q2 tends to normalize to where we exited the back half of the prior year, and then we see sequential improvement each quarter thereafter as our productivity engine kicks in. And certainly, there's headwinds and challenges associated with input costs, but that's no different than the headwinds or challenges we saw last year on tariffs and the playbook around offsetting those is exactly the same.

That's helpful context. And then, Stephan, you spoke about a number of areas where you're seeing some progress in the data center market. And based on all these engagements that are underway, are you able to give more context of how much incremental revenue this market could add in 2027 and the types of margins investors can anticipate as that center revenue grows?

Allow me to answer that question a little bit broader. So look, I think you're probably all aware of that, but I still want to mention this. I lead -- to more data processing and demand for high-performance computing. And this will lead to a change in Rec architecture to high-voltage 800-volt with liquid cooling. And that obviously means that Sensata has sensing and electrical sensing and electrical protection portfolio to serve these do mining application. And this shift purposes the industry right into the center of Sensata's expertise, which is serving these mission-critical applications with automotive-grade reliability. We're meeting robust performance specification harsh environment really matters. So I really feel we have the right to win here, and we'll share more progress once we go through the individual earnings calls going forward.

And Mark, I would maybe just add to that. Although we're not at a point where we're providing a dollar revenue forecast or specific timing. The other side of that is that we're not seeing a significant need to invest to intersect this trend. So if you look at a typical automotive product portfolio and design cycle, we're often designing to a customer specification. And so that requires investing in the program ahead of revenue. With the data center pole, what we're expecting is to get spec-ed in with products that we have today and technologies that we have today. And so the growth is real, and we're excited about it. But the other side of that is that we're not finding ourselves having to invest significantly to pursue and win these applications. And so with that frame what's important to us is the demand is there and that the revenue will come, but less concern over the precise timing of when.

Our next question comes from Christopher Glynn from Oppenheimer.

Just wanted to follow up on that in terms of the timing of you being able to speak with a lot more specificity about some of the data center opportunities in cooling and UPS. There is an element of the next-gen architecture is playing more tubes also an element of -- the timing of your posture to be more purposeful about what your going after. So I'm wondering how much of this is kind of catch-up versus maybe in the current gen data center architectures, it's just not as much opportunity.

Well, as we just -- as I explained, in Ecodata set concepts, the opportunities not as strong or somewhat limited in comparison to liquid cold data center concepts. And break that down into a product level and we can also maybe add a bit to timing. On the air core data center concept, it's about temperature sensors and circuit breakers, where we're gaining momentum. But as soon as we go to the high-voltage liquid called data center concepts around 800 volts that expands our product portfolio to pressure sensors, flow sensors, temperature sensors, circuit breakers and contactors. And that is basically the add-on opportunity if you compare the 2 concepts to each other. And what we're seeing out there in the market is, first of all, the concept being placed into the market and our task the last couple of months has been to get specked into these concepts.

And our expectation is that these data centers or these new data centers that are based on high-voltage 800-volt architectures will be we'll start showing revenue growth for Sensata around mid-2027. So just over a year from now from a timing point of view.

Appreciate the deeper dev. And to what extent did the products get represented as an integrated solution or a co-package solution for you guys for independent design wins into the liquid cooling and other targeted applications?

Yes. It's more technology oriented. So the wins on the electrical protection products will tend to be grouped in the wins on the thermal management products. We'll tend to be driven by different decision makers and in different applications. But I would expect that those will scale at relatively the same rate because they're interconnected.

Our next question comes from Joe Giordano from TD Cowen.

Want to start on China automotive. I'm just curious, just given like the improvements you've made on the ground in terms of getting your content with local large players and -- if I think about the comps over the last couple of years, right, like you had mix -- dramatic mix shift away from like incumbents multinational incumbents. So what's the like the opportunity set for you as you add first time ever content on these new customers, like what magnitude should you be outgrowing that market? It seems like it should be like very large just given where you're coming from and adding for the first time.

First of all, let me frame what the business opportunity looks like and then we can speak about growth numbers. So as you know, Joe, we were focused a lot on international OEMs in the past and basically pretty much strongly shifted away from international OEMs more to local OEMs. And we've won a lot of business with them, be it on the contactor side, but also about our classic applications and products that we've been offering in the market. But predominantly, it's been on electrification and on the contactor side. that's the one side of it. And actually, it was just in our factory in a couple of weeks ago, and we're busy wrapping up this contacted business, and it's quite a significant volume that will place us to be in a good third position within the market in China.

The second thing is, and this is something that's starting to grow is that we're seeing opportunities with battery with factory systems. So we're seeing further opportunities. It's also related to contactors. And this is business slowly, but certainly emerging, and we're gaining traction with them. That's the next level of opportunity that we see. So yes, we have a strong base business with legacy products and incumbent, and that's pretty much stable, I would say, but we're very much growing on or strongly growing on the electrification side of the business where we've gained a lot of traction.

And maybe one last word to that. there are not that many suppliers on contactors that can deliver at scale but can also deliver it on a high-quality level. And that's where Sensata comes in. We know how to deliver at scale, and we know how to deliver it on a high-quality level, and that has sort of allowed us to position ourselves within that market in China with growth...

Yes. And then, Joe, on the outgrowth question. So if you think about our bodies on a global basis first, you're typically looking at a price down framework of low single digits, kind of 1% to 2% a year depending on the year, which means that to deliver low single digits outgrowth requires underlying content growth more in the mid-single digits range. And so that's what we expect on a global basis. If you do that same math in China, the pricing pressure is higher price tends to be mid-single digits in price downs year-on-year. And so to outgrow that market requires underlying content growth in the high single-digit range. That's exactly what we saw last year, and we expect to continue to outgrow that market. But with where the pricing dynamic is right now, I wouldn't expect the net out growth to be materially different to what it is for our global business. The underlying content growth, I would expect to be stronger to your point.

Last quarter, you started talking about drones a little bit. Just curious, you saw the aerospace business grew significantly over market here. I'm just curious how much of that was attributable to some of those faster growing, newer areas for you?

Yes. I'd say the growth that we're seeing right now is primarily attributable to our core business. and just acceleration of defense demand and consistent with what we were seeing in our order book as we put out our guide earlier this year. the opportunity beyond that is probably more medium term, but we're seeing traction on that in terms of opportunity to bid on and that type of business.

I mean we've been active, Joe, as I mentioned in the call, we just had a recent doing with circuit breakers for German manufacturer of armed ground transportation vehicles, which is, I think, an important one with the product in that case in Germany or in Europe, which is not as strong as our defense business that we have in North America. And we see similar opportunities in the pipeline. So we're gaining traction there and starting to build our order book, which is -- looks promising.

Our next question comes from Guy Hardwick from Barclays.

Question on the HVAC side. I think you said in your prepared remarks that your HVAC revenues are down, but obviously, the market expect was down double digits in Q1. And I think it's expected to be down double digits again in Q2. And then I think you said it should return to growth in the second half. And I think that's kind of consistent with the sell-side AHRI forecast. So just the question is, how much do you think you outperformed in Q1? And is that kind of -- I imagine it was a considerable margin. And is that something we could extrapolate through the sector Q2 or was implicit in Q2 guidance? And what about outperformance continue when the market kind of stabilizes in the second half?

Yes. So the HVAC business is about 25% or so of our overall industrial business. And so with 1/4 of our business down, the end market demand down double digits and the net organic growth of 1%. There was certainly some outgrowth there. That was primarily driven by the new content that we launched last year with our AI product. But moving forward, we expect to continue to outgrow the market with our new content and then participate in market growth as the market recovers. And so certainly, if we get recovery in the back half, that would be a growth accelerator for us. At the same time, as we communicated at the start of the year, we recognize and understand the risk in this market. And so we built an operating plan that was -- that does not rely on market growth for us to deliver on our margin expansion aspirations. So we'd be encouraged to see it. The channel has been soft for some time, and it looks like there will be a replenishment cycle in the back half, but we're not super dependent on it either.

And just my follow-up question is hopefully, incremental margins sort of were excellent in DC&E and margins moved up in industrial quite nicely even though revenues were flattish. So was there any positive mix effects in those 2 segments, which could have led to that those margins?

Yes. Well, so on aerospace, defense and commercial equipment, with the growth that we're seeing in Aero, which is our highest margin end market, there's meaningful variable contribution margin from that. And then just more broadly, when we see that level of growth, 15% year-on-year, the operating leverage that we get from that is sharper than what you get from low or mid-single digits growth. And so that was certainly a contributor as well. And then -- sorry, I may have missed the second part of your question there.

I think your answer is stretch ready is that were there any businesses, I mean you partly answered that, which had positive mix other than arrow.

Got it. No, the mix was generally consistent across most of the commercial equipment space. And so again, just the growth in this business and particularly at these high growth rates tends to come with a higher variable contribution margin, and we benefit from that.

Our next question comes from Amit Daryani from Evercore ISI.

This is Irvin Liu on for Amit. I had a financial question for Andrew. It's good to see free cash flow conversion higher than what we have seen historically for Q1 is at 83%. Though CapEx was lower than what we've seen historically. Can you just give us a sense on how CapEx should trend through the year, especially given the lower-than-expected CapEx in Q1?

Yes. We're still targeting CapEx in the 3% to 3.5% range. That's the general framework for where we think we need to operate our business. the demands have been lower, largely because of acceleration of factory automation that we worked on last year. and more flexible line concepts. And so as a result of that, we're seeing just a little bit softer need for capital in the short term, but we still expect it will normalize to that 3% to 3.5% range. And to the extent that we run lower, that will continue to benefit free cash flow. But we don't expect it to be structurally below 3%.

And let me add to that. We've been systematically working on optimizing our CapEx. And let me give you 2 examples where we've been doing that. So on optimization is around CapEx that used for machine and equipment, where we've started to expand our focus around purchasing machines and equipment out of Southeast Asia or even China, which is substantially cheaper than equipment brought from Europe or North America, and that has allowed us to optimize our CapEx on the one hand. And then everything that's required around CapEx to maintain our factories around the world. What we call called CapEx to keep the life side, we've been optimizing that as well. So those have been 2 opportunities where we've reduced CapEx, and that has helped us in the end to reduce it overall. And to be able to deploy it for other topics like small automation.

Got it. If I can tack on another data center related question. It's great to see products specked by 2 hyperscalers. But can you give us a sense on what the total TAM or perhaps what per megawatt TAM could look like for you all across electrical and sensing products that you're selling into for data centers and center adjacent opportunities?

Look, I think that's a question we'll take with us for the next call.

Our next question comes from Joseph Spak from UBS.

Andrew, just a couple questions on tariffs. I guess 2 flavors. One is, I know in the past, you said you source 70% from Mexico, I think 80% of that was USMCA compliant. There was a change on Section 232 metal tariffs, wondering if there's any impact you there. And then EPA, I know you said the guidance doesn't include any repayments, but have you filed for any reimbursements? Or do you plan for any? And like, can you give us a sense as to how big that can be, if it is true.

Yes. So on the first part of the question, so we're not seeing any meaningful direct impact from the changes in metal tariffs. Obviously, we're monitoring the impact on end market demand, but it's not directly impacting us in any material way in terms of the metals or commodities that we source. And we expect that with the current tariff rates in place and with the cancellation of the EPA tariffs, that our run rate moving forward would be approximately $8 million per quarter, which is about 1/3 lower than the $12-ish million run rate that we had previously.

On the question of refunds. So we're certainly following the government prescribed process and when we have more to share we'll share that. But at this time, we're not going to speculate on the size or magnitude of potential recovery.

Okay. Can you -- can you remind us how much do you think you paid last year?

Yes. We paid a little over $40 million in tariffs last year and the vast majority of that was EPA more than 2/3.

Perfect. I just wanted to back on the business head turn our attention back to CE because the market, you said it was down 1, you were up 16. And I know you sort of talked about some potential improvement and more order books being filled there. But I guess I just want to understand whether you're lining up with that future builds and like maybe there's some inventory being built or like there's something else going on that's really causing that strong outperformance that we saw this quarter. And I guess, as we see builds improve over the course of the year, would you then expect that outgrowth to come in a little bit? Or is there something sustainable what we saw this quarter?

Yes. So let me just start with -- so when we talk about that segment in aggregate, aerospace, defense and commercial equipment, about 1/4 of it is in the aerospace end market. and about 3/4 of it is in the commercial equipment end markets. So the growth rate that we shared, the 15% or 17% organic is for the total segment. And certainly, there was market growth in aerospace. On the commercial equipment side, yes, we believe the market in total down about 1%, and we saw outgrowth to that market, primarily driven by what we believe was an inventory replenishment ahead of an expected production acceleration in the back half. We do not expect that, that is indicative of what the go-forward growth or outgrowth would be if this end market actually recover as production normalizes in the back half. There's always an inventory build that happens as you get into a replenishment cycle, especially with the production having been significantly suppressed for the last 8 quarters. So I'd expect to continue to grow and to outgrow, but likely not at that same clip.

Okay. Sorry. Just 1 quick clarification. Just I was just looking at the 16% commercial equipment in the back of your slide, I think, on '19, but you're saying that's not just truck, that's not just truck. Is that what you're looking at?

Yes, that's right. If you're looking at that end market at the back end of the slide then, yes, that is the growth that we experienced in the end market as well.

Okay. So it was strong, but some of that was also construction and...

For example, we're seeing pull-through in diesel demand related to generator sets for data center. So there's more than just the truck replenishment cycle.

Our next question comes from Konstandinos Tasoulis from Wells Fargo.

I want to ask about the 100% precious metal inflation you saw in the quarter. You're still able to get 30 basis points of margin expansion. Can you maybe frame the puts and takes of that impact, like what the headwind was and what the offsets were?

So lots of challenges we worked through in the first quarter. Let me just start with not only did we have a significant precious metal challenge. We also had about a 40 basis point headwind from from FX. We had about $20 million of lift on FX on the top line and effectively drop through on the bottom line. So we were really pleased with the margin expansion we were able to deliver year-on-year with those 2 challenges. And I think that points to just the continued improvement in underlying earnings power in the business, independent of these challenges.

With respect to metals, so we have roughly $40 million of annual precious metals buy. And on those precious metals in the first quarter from a year-on-year perspective, rates are up approximately 100%. We have, through the first half of the year, about 80% hedge coverage on these metals which gives us some mitigation, but more importantly, it gives us time to execute the more permanent and structural mitigation that we're working through in our business.

So with that, maybe I'll turn it over to Stephan and let him share a little color on how we're thinking about structurally mitigating this.

Thanks, Andrew, let me add to that. So basically, how we manage the impact, especially on metals inflation is very different when you look at the different types of businesses we have. So I think overall, in the commonality of businesses is that we're in strong negotiations with our supply base when it gets to pushing on metal inflation impacts towards Sensata Equally important, but that differs depending on the product that we have and which metals are designed into the individual products, what we're doing our VAV activities, the so-called design activities, too, I think it designed the metal content of the product.

In our industrial business, that's quite a big task to design, for example, silver out of our products, which is deep content the product of silver, so that once the hedging period runs out, that we have limited impact or literally no impact with our products going forward related to metals. And then, of course, I think the last lever is to discuss any impact directly with our customers and speak about compensation, which we're in continuous discussions with them, and we see our openness for that as well.

Okay. And then let me just talk about winning business. I mean, I think with the drones. I think a lot of that is just customer access, right? It's like an emerging technology, you get customer access. You're in the designing phase with them, you can grow that business. How can you apply maybe some of those learnings to getting more business in the data center opportunity?

Okay, first of all, if I think you got a bit more depth on the drone business of the support APs. We see overall, we see a double-digit CAGR, which is I think there's a lot of opportunity there, especially around military drones. On the other hand, we're designing with different applications and products, is -- position sensing, all different types of products. We presented that in the last earnings call.

Can you just repeat your question related to data centers?

Yes. So you guys were able to get in on those design-ins with the drones. That's quite spectacular. What, I guess, strategy can you use from getting on those business to getting on more data center business? Any learnings from that, that you can apply to any data center business?

Well, look, it's pretty similar in and like I say, if you take products that the existing products that we got designed in the drone business like temperature centers, precious sensors, worth coal actuators, high-efficiency motors. Those products were ultimately not designed for drone applications. But because of the fast design cycles of drones, we've managed to get designed into these applications. And eventually, we'll be delivering for these drones. On the data center, it's pretty similar. So we're in -- the products that we've carried over from our automotive business, be it from electrical protection be it sensing products, those are products that we've carried over and designed into data centers now, as mentioned, into hyperscaler concepts. So very similar in the style of business and how we manage our business -- existing products that we provide into those applications.

Our next question comes from Luke Junk from Baird.

So maybe I'll just ask one, and it's a little bigger picture. Stephan, just would be great to get your perspective on market structure within the data center business, specifically. How do you think about the need to take share in data center with these reference designs and if you're doing so, do you think you're taking share from? And just market share is factor in this data center story? How important is it? Or are these more jump-ball dynamics, especially thinking about the 800-volt opportunity that you?

Well, thanks for the question. Maybe I'll start and let Stephan chime in here. I think the beauty with some of the new content opportunity that we've laid out in data center, particularly with the architecture change, is that it's not shared that we need to take or win. It's fundamentally new sockets. So today, you're dealing with AC power architecture, moving towards high-voltage DC and that creates a fundamentally different electrical protection design, moving from fuses and circuit breakers towards high-voltage contactors. And so it's not that we need to take share. It's that we need to have a product that meets the spec and then go and get specked in, and that's exactly what we're focused on.

And that's part of the reason why we have so much conviction in our right to win in this space is that as Stephan mentioned on the call, as the architectures change, it's moving right into our wheelhouse in terms of our technology set, the products we offer, our ability to meet the spec and perform in robust high-performance applications.

I think they may add some technical aspects to that. So if you look at the data center concepts today, I think I mentioned it earlier, they're based on their airport. And the products that we deliver into those concepts today are basically temperature sensors and circuit breakers. And then these new concepts coming on, so it's not basically -- it's not taking market share from in the new -- they have a whole different product range because of the liquid cooling that they required because of the increased computing power. And that obviously gives us the opportunities, again, to take existing products like pressure sensors, flow sensors, temperature centers, existing circuit breakers and contactors and designing those into the data center concept together with hyperscalers and then giving us potential revenue, as I stated, from mid-2027 onwards. So not taking share from any 1 away, it's getting into those hyperscaler concept designs and placing our products in there, that is the task.

Our next question comes from Shreyas Patil from Wolfe Research.

Just 1 question for me as well. Just wondering if you could provide some color on the segment outgrowth expectations. I guess if you're doing on the core point -- state double-digit organic in aero and commercial I guess, shouldn't organic growth in Q2 be above that 1% to 4% that you're guiding?

So look, I think, let me frame that generally. And I think it's important to mention with all the examples that we've given that Sensata has multiple growth factors. And I've mentioned many examples where we've won business and where we're in. And I think it's equally important that our segment leaders around Ellis, Marcus and Brian, they're very clear and accountable growth mandates as well. And as you can recall, we've returned some fiber back to growth, and that's not so long ago, and that's in the second half of and we've actually accelerated that growth in the quarter -- in quarter 1 of 2026. So of course, 1 question is is that growth momentum is enough, but we always need to see where we come from. And I think we've -- the team has done a fantastic job in accelerating that growth. And we're not even showing growth over all segments in all areas with all different types of products, be new products and so on. So I feel -- we've made good progress.

Yes. And just to maybe hone in on the outgrowth topics. So Third-party forecasters are projecting auto production down a couple percent again in the second quarter. And so if we were to deliver similar outgrowth, that would put out on an absolute basis, organic growth in the kind of 1% to 2% range for the quarter. And then if you look at the other 2 segments, we certainly don't expect that we're going to grow at 15% in aerospace, defense and commercial equipment, that likely moderates to sort of mid- to high single digits.

And then industrial is not going to get back into a growth cycle until the back half of the year. So with that trend, I think that puts us squarely in the 1% to 4% revenue growth guide for the second quarter.

And with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to James Entwistle for closing remarks.

Thanks, Jamie, and thanks to everyone who joined us on today's call. Before we conclude, I'd just like to announce some upcoming conferences that we'll be attending during the second quarter. We will be at the Oppenheimer Industrial Growth Conference on Tuesday, May 5, which is virtual. The TD Cowen Technology, Media and Telecom Conference on Wednesday, May 27 in New York City. And the Wells Fargo Industrials Conference on Wednesday, June 10 in Chicago. We look forward to connecting with many of you at those conferences in the coming months. Jamie, you may now conclude the call.

And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.

Good day, and welcome to Sensata's Fourth Quarter and Full Year 2025 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded.

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

Thank you, operator, 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 Fourth Quarter and Full Year 2025 Financial Results Conference Call.

Joining me on today's call are Stephan Von Schuckmann, Sensata's Chief Executive Officer; and Andrew Lynch, 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.

As we begin, I will 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 the company that can involve certain risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause these 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 non-GAAP financial measures. Our GAAP and non-GAAP financial measures, including reconciliations are included in our earnings release and the appendices of our presentation materials and in our SEC filings.

[Audio Gap] on the business. Andrew will cover our results for the fourth quarter and full year of 2025, as well as our financial outlook for the first quarter of 2026. 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. As I typically do at the start of our earnings calls, I would like to begin today with an update on Sensata's transformation journey.

Throughout the year, I've spoken about our transformation [Audio Gap] operational excellence, capital allocation and growth, along with the various initiatives which underpin them. These key pillars for value creation are fundamental to everything we do. Initiatives that we discussed this year are simply building blocks, laying a foundation and withheld our future.

As we enter 2026, I'm proud of the work we did to put those building blocks firmly in place, and I'm excited to share more about [Audio Gap]

moment to acknowledge the magnitude of what we accomplished this year and to thank the Sensata team for their tremendous work. Our team demonstrated resilience and determination to perform continuously overcoming the many challenges that came our way, and always delivered on our commitments.

I'll share more proof points in a moment, but at a high level, as we reflect on the year, the outcome of our 3-pillar approach is compelling. With our focus on operational excellence, reported results, at or above the midpoint of our guidance ranges every quarter this year. With our focus on capital allocation, we created urgency to improve cash generation reducing both gross and net leverage, and returning capital to shareholders. And with our focus on returning to growth, we overcame structural challenges in our business and end market mix ultimately returning to outgrowth in the second half of 2025, and returning to revenue growth in the fourth quarter.

We have a structured way of working, starting with a measure-based approach to prioritize hitting our targets. The compound value over time, we continuously raise the bar setting new targets incrementally higher than the previous ones. This way of working is now ingrained in our organization and is embedded in everything that we do. Maintaining this rigor requires determinant resilient leadership.

Let's turn to Slide 4, as I would like to highlight the industry-leading executive team we have assembled over the past year. Our leadership team is a balanced mix of new talent with best-in-class industry experience and proven Sensata of performance. The team has demonstrated that, that will rise to meet the challenge of the moment, and I'm confident that we have the right team in place to lead us through the next phase of our transformation journey.

With that, let's turn to Slide 5, and I'll share a bit more about this past year's transformation. This year's performance demonstrates not only the progress we made. It also sets a benchmark for the organization we expect to be. We finished 2025 with a strong fourth quarter, capping off a year in which we met or exceeded our expectations across each of our key metrics for 4 consecutive quarters. The results are proof points for the progress we made across each of our key pillars. Let's start with operational excellence.

We exited the year with Q4 adjusted operating margin of 19.6%, representing 30 basis points of year-over-year margin expansion despite headwinds from tariffs. With that strong finish in 2025, we delivered on our commitment of 19% adjusted operating margin for the year. This was a major inflection point for us, and it was the first year since 2021, with our year-over-year margin contraction. This is a testament to the resilience we have installed in this business and the seriousness with which we take our commitment to our margin floor of 19%.

Free cash flow has been an area of significant focus, and we believe our progress is a leading indicator of the impact to come from the operational improvements we are making. We made significant strides in improving free cash flow this year, generating a record $490 million at a 97% conversion rate. This conversion rate was an improvement of 21 percentage points from prior year and is significantly higher than any year in our history, aside from the abnormal 2020 pandemic year.

With our strong free cash flow, we accelerated value creation through our capital allocation pillar, returning $191 million to shareholders through buybacks and dividends, while also retiring $354 million of long-term debt in the fourth quarter. Our net leverage now stands at 2.7x trailing 12 months adjusted EBITDA, and with $573 million of cash on hand as of December 31, we have ample liquidity.

Our third key pillar is growth. In our long-cycle business, the initiatives we took this year to drive growth will show up in the quarters and years ahead. And we're already seeing compelling signs of progress. We delivered on our commitment to return to our growth in the second half of 2025, outgrowing production in Q3 and delivering 4% organic growth in Q4. With this progress, we are doubling down on our growth mandate moving forward.

I'm tremendously pleased with the transformation that we've executed this year and the value we created in our first year on this journey. I also want to be clear that we are not done. What we have accomplished sets the foundation for an even brighter future. I'm excited to share more about the next phase of our transformation.

Turn to Slide 6, and I will start by more clearly defining Sensata. Sensata is a uniquely diversified business. We sell sensing and electrical protection products into multiple end markets with automotive being our largest market. This, as at times, creates confusion. Some see Sensata as an automotive business with exposure to other end markets. Others see Sensata as a diversified industrial business with outsized automotive exposure. None of you is entirely accurate.

As we look towards the next phase of our transformation, we reconsidered how we are organized. We look at factors such as business cycles, market cycles, customer mix and go-to-market strategy. After careful evaluation, we reorganized Sensata to 3 operating segments, each with a distinct mandate for value creation and growth. These 3 segments are Automotive, which was approximately 57% of 2025 revenue, Industrials, which was approximately 21% of 2025 revenue, and Aerospace, Defense and Commercial Equipment, which is approximately 22% of 2025 revenue.

Each operating segment is aligned to market verticals that are clearly delineated by customers, sales channels, growth drivers and business cycles. Automotive is a relatively mature end market with a limited underlying production growth, making this a market outgrowth driven segment. We enjoy high volumes and revenue certainty [indiscernible] to underlying vehicle production because our products are designed in on long-lived vehicle platforms. We outgrow production by increasing our content on vehicle platforms and by positioning the business to succeed on all propulsion technologies.

Our ability to [indiscernible] regardless of propulsion type is an enviable position in the automotive market compared to many of our peers and competitors who are levered primarily to either ICE, or E. This also positions us to grow in all geographies despite delivering powertrain trends.

Industrials is a highly diversified and primarily short cycle business with a mix of direct to OEM distribution channel and project-based sales. Our Industrial segment includes derivatives of sensor products from our other end markets, as well as products developed specifically for industrial applications, such as gas leak detection and certain electrical protection devices. Because the industrial segment is so diversified, it offers the most growth opportunity in terms of new applications, or markets for our products. This includes several areas with secular growth such as thermal management, grid hardening and data centers.

Aerospace, defense and commercial equipment is also highly diversified, but is more long cycle and platform-driven. The end markets we serve include commercial aviation, defense, commercial trucking, construction equipment and agricultural equipment. [indiscernible] significantly longer than in automotive, often spanning multiple decades. The applications for our products typically support long service lives often in harsh environments, leading to much higher specifications and their premium price point for higher durability.

Each of the markets we serve in this segment experienced cyclical growth. Cyclicality is influenced by macroeconomic factors, as well as by government policies such as defense spending, environmental standards, tax incentives and farm subsidies. As a result, we see a confluence of different cycles, often affording us the flexibility to manage the segment by balancing contracyclicality. Historically, the market thought of Sensata is having high automotive concentration and therefore, being a market outgrowth business in a low growth market. Sensata's growth history, as to a certain extent, reinforced that view. As we think about value creation moving forward, we see a much wider field of opportunity which is best summarized in our 3-part growth framework.

Let's turn to Slide 7. First, we design, produce and sell sensing and electrical protection products in multiple end markets, each with the different growth dynamics I just described. Second, we leverage our automotive scale and pedigree to our advantage. The high volumes and production certainty afford us the flexibility to manage through market volatility in our other end markets while underwriting growth investments. At the high quality and delivery standards in automotive enable us to win in other markets.

Third, we use the common characteristics of our most successful programs to set [indiscernible] guardrails for new business opportunities. That means we stick to our core products and technologies, while focusing on high-volume platform-driven business opportunities, serving mission-critical or regulated applications. As we develop growth strategies for each of our segments, we have been disciplined about filtering the market for growth opportunities that fit this framework, and we're excited about the opportunities we see. With that, I would now like to offer a glimpse into the next phase of our transformation, accelerating value creation by delivering growth in each of our segments.

Let's turn to Slide 8. and I will discuss our automotive segment, where our mandate is to foster our core business while delivering growth across all [indiscernible]. Recently, we have seen content accretive business opportunities on plug-in hybrid vehicles, or [ PFS ], and extended [indiscernible] electric vehicles or [ ERAS ]. As vehicle type is particularly attractive for Sensata.

Allow me to illustrate as we turn to Slide 9. Approximately off of the dollar value of content that we have on a traditional ICE vehicle is outside of the powertrain and thus is still relevant on an EV. This includes sensor sockets in air conditioning and brake systems, as well as tire pressure sensors. On a typical EV, we see these same sensor socket, as well as additional content opportunity from electrical protection sockets in the electric power drain and charging architecture. In aggregate, our content per vehicle opportunity on an EV is approximately [indiscernible] ICE. In between ICE and EV are various hybrid platforms. [indiscernible] hybrid will look more like an ICE vehicle while a plug-in hybrid, or range extender, will be more like an electric vehicle.

Let's turn to Slide 10 to unpack this further. In an automotive market that is expected to be approximately flat. [ PF ] and [ RF ] production is expected to grow 17% and over the balance of the decade, we expect a 12% CAGR for these vehicle types. The content potential on a plug-in hybrid or range extender is attractive due to the availability of all 3 socket categories. ICE powertrain, high-voltage electrical petition, and sensor content outside of the powertrain. As these vehicles win in the market, we expect that will emerge as a meaningful outgrowth driver for us and yet another proof point for our competitive advantage in not being indexed to any propulsion technology.

Now let's turn to Slide 11 and take a look at Industrials. Our Industrial segment has a strategic mandate to deliver growth across 3 key technology areas. Power and peak management, thermal management and electrical protection. We see demand over these products in multiple areas, including HVAC, appliances, buildings and microgrid. One of the most compelling growth vectors is data centers, and I'd like to briefly kick down to share more about where we see opportunity.

Let's turn to Slide 12. In the past, we have shared that we have some content in data centers today, but that we are underpenetrated in this market. These opportunities span our key industrial product areas. As you can see illustrated on this page, the content opportunity inside the data center is significant.

Turning to Slide 13. There are meaningful opportunities outside the data center as well. One of our growth initiatives in 2026 is to expand our share in data centers. What I can share today is that in the fourth quarter of 2025, we stood up an initiative to deliver growth in data centers. We reallocated some of our top performers to the critical growth initiative. And as we demonstrated in 2025, we take execution of our initiatives seriously. I look forward to sharing positive updates here as the year progresses.

Lastly, I will discuss our Aerospace, Defense and Commercial Equipment segment, starting on Slide 14. We serve multiple market verticals in the segment, which can be grouped as aviation, ground transportation and off-highway equipment. We have a dual mandate for this segment to position the business, to weather market cycles and to grow our aerospace and defense business into a more meaningful part of the portfolio. We see ample opportunities for revenue growth in the super cycle that is developing across both commercial aviation and defense. With that, again, I will briefly click down to share a bit more about where we play and where we see opportunity.

Let's turn to Slide 15. Aerospace is one of our smaller and often overlooked market verticals today, yet it is one of the [indiscernible] of our portfolio with high margins and outstanding growth potential. Earlier, I talked about our automotive pedigree. In aerospace, pedigree matters too. Being in-flight on commercial airlines is the gold standard, and we're [ in fly ] today. Both [indiscernible] and aircraft circuit breakers. Given the backlog for commercial aircraft, we expect meaningful growth from this part of our portfolio.

With increased defense spending as a key secular trend, let's turn to Slide 16 and take a look at their sector. UAVs of a high-volume platform-driven opportunities for both sensing and electrical protection products, perfectly aligned to the growth framework I described. We look forward on future calls to sharing more about our progress on accelerating growth in this key end market.

With that, I will now turn the call over to Andrew to offer more insights on Q4 and full year results, as well as to share our outlook for 2026 and guidance for the first quarter.

Thank you, Stephan, and good afternoon, everyone. Let's begin on Slide 18. As Stephan mentioned earlier, 2025 was a transformative year for us as we rolled out new initiatives framed around 3 key pillars. Our Q4 and full year results are proof points for the progress we made. We reported revenue of $918 million for the fourth quarter of 2025, which exceeded the midpoint of our guidance range by $13 million. Fourth quarter revenue represented an increase of $10 million, or approximately 1%, compared to $908 million in the fourth quarter of 2024. This was the first year-over-year quarterly revenue increase since the first quarter of 2024. On an organic basis, revenue increased approximately 4% year-over-year in the fourth quarter.

We delivered adjusted operating income of $180 million and adjusted operating margin of 19.6% in the fourth quarter of 2025, an increase of 30 basis points, both sequentially and year-over-year. Adjusted operating margin was diluted by approximately 30 basis points due to approximately $15 million of zero margin, pass-through revenues related to tariff recovery. Excluding the dilutive impact of tariff pass-through, fourth quarter adjusted operating margin increased by 60 basis points year-over-year, and 40 basis points sequentially. Tariff pass-through revenues did not meaningfully impact sequential performance as we recorded similar levels of tariff cost and pass-through revenues in both the third and fourth quarter of 2025.

Adjusted earnings per share of $0.88 in the fourth quarter of 2025 increased by $0.14 year-over-year as we delivered on our margin expansion plans. Adjusted net income was $130 million in the fourth quarter of 2025 [indiscernible] approximately 16% year-over-year. We recorded approximately $50 million of restructuring related and other charges in the fourth quarter. While these charges primarily related to our ongoing transformation efforts, they also included approximately $16 million [Audio Gap] related to an electric vehicle program cancellation by an OEM customer. These costs were excluded from our non-GAAP financial metrics.

Now let's turn to Slide 19 to review our financial performance for the full year 2025. 2025 revenue was $3.70 billion, compared to $3.93 billion in 2024, a decrease of 6%, primarily due to our previously disclosed divestitures and product life cycle management actions. On an organic basis, revenues were approximately flat year-over-year against the challenging market backdrop. We delivered $705 million of adjusted operating income in 2025, which was a decrease of 6% from $749 million in 2024, primarily due to lower revenue. [Audio Gap] flat to 2024 despite the 6% lower revenue as our productivity gains offset any deleveraging impacts.

2025 adjusted operating margin was diluted by approximately 20 basis points due to approximately $40 million of zero margin pass-through revenues related to tariff recovery. Excluding the dilutive impact from tariff recovery, 2025 adjusted operating margin increased by 20 basis points year-over-year. 2025 adjusted earnings per share of $3.42 decreased by $0.02 year-over-year, and 2025 adjusted net income of $503 million decreased by approximately $16 million year-over-year. [Audio Gap] due to product divestitures. Adjusted net income as a percentage of net revenue increased by 40 basis points year-over-year, from 13.2% in 2024 to 13.6% in 2025.

Now let's turn to Slide 20 to discuss our free cash flow performance. We delivered record free cash flow of $490 million in 2025, an increase of 25% compared to 2024 free cash flow of $393 million. Free cash flow conversion was 97% of adjusted net income, an increase of 21 percentage points year-over-year. In 2025, we reduced net leverage from 3.0x trailing 12-month adjusted EBITDA as of December 31, 2024, to 2.7x as of December 31, 2025. In the fourth quarter, we took advantage of favorable bond market conditions [ higher ] $354 million of our long-term debt. In connection with this transaction, we recorded a net gain of approximately $3 million, which we excluded from our adjusted operating results.

Turning to Slide 21. We returned $191 million to shareholders in 2025, which consisted of $121 million in share buybacks, and $70 million in dividend payments. Last month, we announced our first quarter 2026 dividend of $0.12 per share payable on February 25 to shareholders of record as of February 11. Our capital allocation strategy continues to prioritize deleveraging as a means to compound value for our shareholders. ROIC in the fourth quarter increased to 10.6%, which is an improvement of 40 basis points year-over-year compared to the fourth quarter of 2024.

Now let's turn to Slide 22, and I will walk through the results for our segments for the fourth quarter of 2025. In connection with the reorganization that Stephan described, our reporting segments are now automotive, industrials and aerospace, defense and commercial equipment. This new segmentation reflects a reorganization of our business and leadership to align with our strategic imperatives, and to most effectively execute our strategy. With this new reporting structure, we look forward to giving investors enhanced visibility into our business results and the ongoing progress of our transformation journey.

Growth is an increasingly important metric for us as we move to this next phase of our transformation journey. We were pleased that each of our segments delivered year-over-year organic revenue growth in the fourth quarter. Automotive segment net revenue was $527 million in the fourth quarter of 2025, a decrease of approximately 1% year-over-year on a reported basis, primarily due to product divestitures. Organically, revenue increased approximately 1% year-over-year, which was approximately in line with the market.

Segment adjusted operating income was approximately $129 million in the fourth quarter of 2025, or 24.4% of segment revenue, representing year-over-year margin expansion of 100 basis points. Industrial segment net revenue was $191 million in the fourth quarter of 2025, an increase of 6% year-over-year on a reported basis, and 8% organically. This strong year-over-year growth was driven by continued growth in our gas leak detection business. Segment adjusted operating income was $59 million in the fourth quarter of 2025, or 30.9% of segment revenue, representing year-over-year margin expansion of 620 basis points.

Finally, aerospace, defense and commercial equipment, segment net revenue in the fourth quarter of 2025 was $199 million, which grew approximately 4% year-over-year on a reported basis, and 7% organically. Segment adjusted operating income was approximately [Audio Gap] or 28.1% of segment revenue, representing year-over-year margin expansion of 310 basis points. Adjusted corporate and other costs include higher variable compensation costs associated with the improved segment performance.

Before we get to our guidance for the first quarter of 2026 and outlook for the year, I will share what we are seeing in our end markets. Let's turn to Slide 23.

In automotive, we saw Q4 light vehicle production growth of a modest 2%. For the year, we saw light vehicle production growth of nearly 4%, with market in China growing 10%, while production in the West, where we have higher content per vehicle, decreased by 1%. Looking ahead to 2026, we expect global light vehicle production to be flat to down 1%, with similar trends across each region. In Q1, we expect global light vehicle production to decrease by 3% to 4%, and then we expect modest year-on-year production growth each quarter thereafter.

In our Industrial segment, 2025 GDP growth was just under 2% in the West, and just over 4% in Asia. We expect similar regional growth differences in 2026 including in the first quarter. Our industrials business is primarily indexed to housing, construction and HVAC, and we continue to see soft end market demand and limited year-on-year market growth, as the market works through the drawdown of inventory that was built up in response to tariffs and regulatory changes. We expect this drawdown to continue through the first half 2026, and we are optimistic that market expectations for lower interest rates set up a second half recovery.

In our Aerospace, Defense and Commercial Equipment segment, North America on-road truck production decreased 26% year-over-year in 2025, and decreased 22% in the fourth quarter. We are expecting similar decreases through the first half of 2026, followed by modest recovery in the second half, with an overall production decrease in the mid-single digits for the year. However, as this end market recovers in the second half of 2026 and ramps sequentially from the first half, it will be margin accretive for us. In aerospace and defense, we saw low single-digit blended growth for both Q4 and full year 2025, and we are expecting similar growth throughout 2026.

With that, let's turn to Slide 24, and I will walk through our expectations for the first quarter of 2026. We expect first quarter revenue of $917 million to $937 million. Adjusted operating income of $168 million to $175 million. Adjusted operating margins of 18.4% to 18.6%, adjusted net income of $118 million to $125 million, and adjusted earnings per share of $0.81 to $0.85. At the midpoint of our guidance range, we expect year-over-year revenue growth of approximately 2%, year-over-year operating income growth of approximately 3%, year-over-year adjusted operating margin expansion of 20 basis points, and year-over-year EPS growth of $0.05 per share.

At the midpoint of our guidance range, we have assumed approximately $12 million of tariff cost and pass-through revenues [Audio Gap] our guidance and tariff assumptions are based on trade policies and tariff rates in effect as of February 18, 2026, and do not incorporate any impacts from potential changes to trade policies.

As we discussed last quarter, our Q1 guidance range reflects Q4 to Q1 margin seasonality related to the timing of customer pricing, supply chain productivity and inventory turns. We have taken measures to improve this dynamic, which is reflected in the 110 basis point step down at the midpoint of our guide, compared to the approximately 200 basis points experienced during the reference period of 2015 to 2019. Similar to 2025, a we expect margins to normalize to 19% or better in the second quarter, and then expand each quarter thereafter.

While we are not providing full year guidance, I would like to share some early thoughts on our outlook for 2026. We currently expect low single-digit year-over-year revenue growth. We expect to participate in market growth in both our industrial and aerospace, defense and commercial equipment segments, and we expect to deliver market outgrowth in our Automotive segment. Precious metals pricing has emerged as a headwind for us to mitigate in 2026. Our most significant exposures are silver, gold and platinum, all of which we hedge, affording us time to work through pricing with our customers.

With the work we did to mitigate tariffs last year, we developed a toolkit of measures, which we are now deploying to manage precious metals inflation. We do not see risk to our Q1 guide associated with metals. On a full year basis, we expect to offset any precious metals headwinds through a combination of supply chain optimization, product redesign, and pass-through of these costs to our customers. Our cost recovery muscle is well developed, and we take margin resilience seriously. We reiterate our annual margin floor of 19%. However, we are targeting margin expansion of at least 20 basis points on a full year basis.

Finally, with respect to free cash flow. We were thrilled with our 2025 free cash flow performance, converting at 97% of adjusted net income, which allowed us to accelerate the execution of our deleveraging plans. As we look ahead to 2026, we may see slightly lower free cash flow conversion than what we delivered in 2025, particularly in the first half of the year. First quarter seasonality is impacted by variable compensation payments related to prior year performance, which in 2026, are approximately $20 million [indiscernible] than they were in 2025 due to the stronger underlying performance.

We have a [Audio Gap] in first and third quarter. Consequently, we expect Q1 free cash flow conversion to be our seasonally lowest quarter, and likely below our 2025 results, primarily due to the higher variable compensation payments. On a full year basis, we are targeting performance in the high 80s, well above the 80% floor that we established last year.

With that, I will now turn the call back to Stephan.

Thank you, Andrew. Let's turn to Slide 25, and I will make a few closing remarks. I'm tremendously pleased with the 2025 results that Andrew just shared. We are in the early stages of what we expect will be a multiyear transformation journey. However, these results are evidence of just how significantly our business has changed for the better in such a short period of time.

As we look ahead to 2026, we're in a fundamentally different place than we were a year ago. We have built an organization that is intensely focused on execution, and we have adopted a highly structured way of working. We start with KPIs that are designed to create value. We underpin those KPIs with targets that are benchmark driven, always against best-in-class performance. For each target, we define metrics, against which we regularly evaluate progress. And behind those metrics are a pipeline of measures each with accountable owners. The structured style of working is deeply ingrained in our organization.

While 2025 was indeed a compelling proof point that our approach is working, maximizing value creation must always be our goal. Unlocking value means continuously raising the bar. As we turn the corner into 2026, we must build upon the foundation we laid in 2025. We have taken bold steps to do exactly that. We have reorganized our business [Audio Gap] growth and end market careeristics and specific growth mandates. We developed a clear framework to which to pursue growth and we installed the right leadership team, including new segment leaders to execute the next phase of our transformation journey.

As with everything we do, the goal of this transformation is value creation. And that is how we will measure our success. I could not be more excited for what is ahead. The future is bright, and I look forward to updating you on our progress along the way.

I'll turn the call back to James for Q&A.

Thank you, Stephan and Andrew. We will now move to Q&A. In order to ensure adequate time for all participants to ask a question we will limit each participant to one question. Should you wish to ask a follow-up question, please [indiscernible] to the queue. Operator, please introduce the first question.

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

Stephan, given the transformation underway where you made a lot of progress here, can you just talk about how you see the longer-term revenue potential of the portfolio? I appreciate your 2026 guidance that you have given. But how should investors think about the ultimate, like, revenue growth potential here over a longer period of time, especially since you have emphasized how key that is to your strategy?

Thanks for the question. So I think it's very important to mention that the overall growth opportunity that we've shown you on this slide today and especially in the call and in the different segments. That is real. So it's definitely real growth. We have different products, different solutions for each segment. We feel that's real, and that's definitely also the next building block of value creation.

Secondly, we have a very clear growth matter per segment. And also equally important to mention we have the right team in place to execute this growth. So we've had our [indiscernible] points, as we've mentioned in the call, and Sensata has returned back to growth in the second half of 2025. And additional to that, we have a broad opportunity for growth across all products and all segments. So if you ask me I feel really good about the growth opportunities that we have in 2025, and I feel equally optimistic around the growth opportunities that we've shown in each and every segment in 2027 and onwards.

Yes, there's still a lot of work to do. And we still need to penetrate some of these markets and some we're in like I've mentioned, but I feel very confident that we're on a good track and I feel very confident about growth going forward, 2027 and onwards.

The next question comes from Joe Giordano with TD Cowen.

Look, I think you guys explained the segmentation well in terms of like thought process behind it. My first initial thought when I saw it was, okay, 2 of these segments are fairly small. And this is a company like focused on efficiency. So Stephan, can you talk to me how you balance like, okay, now we have 3 reporting structures, 3 presidents. You kind of add a little like -- I don't want -- bureaucracy is the wrong word there, clearly. But like you had more kind of fixed structure there. How do you weigh that against what you're getting by separating it this way?

I'll let Andrew start on the fixed cost to actual part on the overhead and [indiscernible] jump in on.

Yes. So Joe, I mean, just from a cost perspective, you're right, we've added a little bit of cost to the overhead structure here in our corporate costs and we expect that to be sort of the normalized run rate moving forward, take variable compensation costs out. That was a little higher in Q4. But in general, we expect the second half run rate to sort of be our normalized run rate moving forward.

We expect that to pay for itself. I mean the expectation is that that's an investment. And with that investment will drive growth and margin expansion in each of our segments that more than offset that incremental cost. And I'll let Stephan talk to the thinking around strategy here.

Exactly. So Joe [indiscernible] -- the resegmentation, and we mentioned it in the script, is all about value creation. And we've been executing, which is the first [indiscernible] around value creation. But if you look at the second building block, which is everything around growth, we felt that with this segmentation, this gives us this level of opportunity and allow me to order benefit strategically.

So the resegmentation is anchored in our end markets, and I think that's very important around value creation. It also reflects how we structurally manage and operate the business at Sensata, despite now having 3 instead of 2 segments. What it also does, it strengthens alignment with our strategic pillars, so driving focused growth and again, operational excellence, which was a focus in 2025, and does is by recognizing the distinct characteristics and value drivers of each segment. That alone is for me, value-creating. [Audio Gap]

and define accountability supported by designated leadership, which is responsible for executing these very segment specific strategies. So that's our path to value creation by splitting up into 3 segments coming from 2 in the past.

The next question comes from Mark Delaney with Goldman Sachs.

[Audio Gap] low single-digit outgrowth in the auto segment in 2026. And you previously talked about targeting bookings with domestic OEMs in Asia and China. Can you maybe talk a little more about how those bookings with the domestics have been tracking and to what extent that and other factors are underpinning the low single-digit outgrowth expectation in 2026?

Yes. Absolutely. Thanks for the question. You want to start?

So let me jump in first and then Andrew [indiscernible] ahead. So to the point in winning a [ dental ] business in Asia. Let me expand the following way.

So since the last call -- so let me start [indiscernible] So what we've -- what we've done, and this has been very supportive in the business development in these last couple of months. First of all, we've strengthened our Asia team from an organizational point of view. So we've implemented a [ China ] President, and you saw that in the beginning, a gentleman called Jackie. Jackie has been highly successful within China and winning new business. And since the last call that we had together, Jackie has one additional business, specifically with Chinese OEMs. So it's been very successful, and I feel very bullish about that.

We've been -- we've been winning business with contactors, but also with other content around sensing. And it's been a great part for us, utilizing our plants and -- with broad business wins. Now addition to that. So if I look at the -- allow me to look at the region, maybe a little bit more from a broader perspective. We've also won good business in Japan. And let me give you one specific example.

So we have doubled [Audio Gap] in these recent months. We've actually just been in Japan, and it was very, very good to see what the team has won there and exciting to see that. And then I've actually -- while I was down there, I traveled over to South Korea, to meet our team in South Korea and when we also won good business with customers in South Korea. So -- and think about it from this point of view. The content per vehicle of the business that we've now won in South Korea, local customers has exceeded the North American OEM content, and content per vehicle. That is obviously traditionally the highest content per vehicle for Sensata, and we've now managed to exceed that in South America.

So overall, I think we've made good progress there. Look, again, a lot of work to do, and we have a great ambition for 2026 to win for the business, but I'm very, very happy with the progress that we've made in China, in Japan and South Korea overall Southeast Asia.

But Andrew, any point you want to add on?

Yes. I'll just add on the content per vehicle dynamic. As you noted, we had a challenge earlier in the year with our mix and our exposure to local OEMs. The enabler for us returning to outgrowth in Q3 was effectively that we've overcome that headwind. We've won enough business with local OEMs in China that if you take the top 10 to 20 OEMs in that market and compare them to the multinationals where we've historically had really strong content we're effectively at parity. And so we've overcome that mix headwind in China, which has enabled us to outgrow that market in the back half.

And then more broadly, the automotive market as a whole we saw production start to normalize in the sense that China was not outgrowing the broader market by such a rate that made it impossible to outgrow the market. And we expect similar in '26. We expect market growth across regions to be more [Audio Gap] in each region.

The next question comes from Robert Jamieson with Vertical Research.

Just wanted to focus back on the new segment structure. And I think the separation obviously makes a lot of sense. And as Joe alluded to, there's obviously some costs that come with that. But as we think about this as we go forward, does this essentially help you become more nimble from an organic reinvestment standpoint in the different segments where you see fit, given you have dedicated leadership and potentially have them have a higher ability to capture opportunities as they arise more quickly to drive growth through the cycle. Like particularly given the focus on winning with the right products and customers across the portfolio. Is that the right way to think about part of this change?

To keep it short, that's exactly the right way to see it. That's exactly the thinking behind it. Each segment that we've defined is unique for itself. And each segment has ample opportunity for growth. And with a very strong and new leadership team in place, and we feel very confident that we can generate value by doing that. I think this is -- you summarized it very well.

Okay. Perfect. And then sorry, just one quick follow-up there, too. Stephan is, as you've traveled quite a bit across the globe, any new learnings or areas of focus outside of what you've discussed today that you'd like to improve upon just across any of the new segments.

So one big learning is, especially now that I've also been to Southeast Asia I met my teams in Japan and Korea [Audio Gap] to be open, I'm even more confident with what I see and the strong team that we have and the capabilities that we have. This is really, I think, something that stands out with Sensata in comparison to others.

When I travel to Japan, we have a long, long-standing team with a great amount of experience. I've been with the company for many years. So they know exactly how to generate business and how to generate value there with the right guidance, and with the right leadership now in place and especially with the new team, I really feel good about that. So that's basically been a reconfirmation of what I have seen in other areas that I visited, for example, in China, which we see a similar picture. Or even in Mexico and other reasons, I want to can't list them all up now. But that's been very encouraging. And I think that foundation gives us the opportunity around value creation and growth and everything that we have ahead of us.

The next question comes from Joseph Spak with UBS.

[Audio Gap] some of the opportunities you mentioned in the data center, and I know you have some content in that side. As you highlighted on the slides, and some of it actually looks new for '26. But I guess the question is, as you sort of formed this team to focus more on the opportunity, is that expected to deliver mostly organic results? And if so, is that leveraging existing tech and finding new uses? Or does that mean new R&D? Or will there be some inorganic opportunities potentially that present themselves?

And then I guess just a quick side to that as well. like I know you've taken like almost $400 million of write-downs on Dynapower. But were those -- were any of those asset write-downs, meaning that if you start to leverage that tech for these opportunities, the margin accretion could be quite good?

Thanks for the question. Let me elaborate a bit how we see data centers and what organic growth opportunities we have with them. So I think, first of all, very important to mention that we -- that our products are in data centers today. So in existing data centers that are up and running. And I say that for products that are both inside data centers, and outside of the data centers. And that's really broad. So inside data centers, we're talking about electrical protection. So we're talking about circuit protection, circuit breakers, fuses, content. Those are all existing products, think of sensing. So pressure and temperature sensing, think of refrigerant league detection and so on. Those are all existing products within data centers today. They are designed in hyperscalers have designed those Sensata products into data centers that exist.

The same applies to products outside of data centers or Sensata products outside of data centers. So we're talking about power and peak management, which is converters, inverters. We're talking about electrical protection. So our contact is motor protection and so on. So these are all existing products inside of the data center. That's very important. So this is all organic growth if we grow with -- if data centers are growing, we grow with them if they're designed into the concept.

Now beyond that, it's still within the range of organic growth. We're also designed into future data center concepts. So you have the hyperscalers that specify the Tier 3 components. And basically, once they specified and once they're approved, they designed into these future [indiscernible] designed into future data concepts with certain hyperscalers. So not all, but with certain. And on the other hand, we're in deep discussions with others. So we obviously have the ambition within 2026 to try and get designed into most hyperscaler concept of the Googles and Amazons and Metas and so on.

And now beyond that, we want to leverage our sensing capabilities to develop further unique products to broaden the product portfolio that we have today, everything that I've just mentioned, which is organic growth. We're going to broaden that. And that is related to own R&D. And you could see on some of the slides, that's, for example -- one example is flow sensors. So that's within our own development we're going to design a specific flow center for data centers, and we're going to design that into the future data centers that we we're currently discussing.

So that's just -- that's it. And then we have -- within data centers, we have specific focus areas like liquid cooling for data center racks, but we feel we have a very competitive position. So overall, strong position with existing products [indiscernible] a lot of years for future products that we're currently working on, and that will give us ample opportunity to grow within the data center segment market.

And on the Dynapower question, just to add some clarity there. So the charge that we took was a goodwill impairment charge. And so we won't see any margin [Audio Gap] for that example. But I think it does raise an important point, which is when we think about margin expansion and productivity and we're focused on real margin expansion. And so when we say we're looking to expand margin at least 20 basis points next year. We're focused on doing that through a combination of improved volume and volume leverage and productivity.

One of the things that will help margins over time is the fact that we've gotten more disciplined about our capital expenditures and deploying flexible line concepts to keep CapEx lean, and we expect that will show up in lower depreciation expenses over time. What our focus is on real margin expansion and not write-offs.

The next question comes from Luke Junk with Baird.

Just curious about a couple of the newer areas that you on earth tonight specifically data center and defense. Just wondering if you'd be able to speak to materiality for both of those in terms of percentage of sales today?

And then just as we're trying to think about the growth file potential. I don't know if you could speak to any historical growth in terms of recent growth trends or maybe put a finer point on some of the opportunity from here?

Sure, Luke. I'll take the first part of that question on the size of the segment. So the Aerospace, Defense and Commercial Equipment segment in total is about $800 million of revenue on an annualized basis. If you break that down, there's obviously multiple market verticals that we serve within that segment. I'll give you sort of a high-level breakdown.

About 40% of that is on-road truck across the 3 key regions that we serve there. Another roughly 25% tied to the construction end market. Another roughly 10% tied to the agricultural market. The balance of that segment would be in other off-road vehicles as well as commercial aviation defense market distribution. Those all break down pretty equally in sort of the 7% to 10% size range each. So pretty diversified [Audio Gap]

from end markets in commercial aviation and defense given the higher level of spend. And then on top of the end market growth opportunity, there's obviously opportunity around new content that we called out, and I'll turn it over to Stephan to talk a little bit more about the growth that we see.

Exactly. So let me explain the growth opportunity around defense in a bit more detail. So I think it's important to mention we also said it in the script. We're obviously in a period of a super cycle growth and U.S. defense spending. And Sensata is a fantastic opportunity to participate in this growth. And today, there are multiple defense [Audio Gap], helicopters, ground transportation vehicles. These are obviously all strongly growing application. And then we have the emerging UAV, or unmanned aerial vehicle market, where we really see significant growth opportunities.

And you also saw in the slide -- and within those UAVs, we already have existing business with all different types of products in powertrain systems and precision sensing and feedback, flight control and actuation systems, and systems and targeting where we have a broad range of products. We're in the actual drones or [ UOBs ] today. And because this market where we expect a double-digit percent CAGR is growing significantly. We feel we're going to participate with our products in that growth.

Andrew, would be possible just to break down the Industrial segment as well some [indiscernible] market standpoint quick?

Sure thing. Industrials, as you know, is -- we've historically talked about that in terms of commercial versus residential. And I think that split still largely applies. We're focused on those verticals rather than applications like HVAC and appliance like we've previously disclosed. So just give you the breakdown here.

So that resi and [Audio Gap] about 80% of the segment and then the remaining 20% would be the clean energy opportunities that we see around for example, Dynapower power microgrid applications outside of the data center as well as electrical protection components that we sell into grid hardening applications.

The next question comes from Samik Chatterjee with JPMorgan.

This is MP on behalf of Samik Chatterjee. I just wanted to ask how much of the industrial growth during 4Q was linked -- sorry, during the full year was linked to [indiscernible] detection sensors and how did the rest of the industrial business track during the year? And also, we'll squeeze in another one. Clearly, you will be launching this flow sensors in 2026. Will that be a similar contribution like the [ 8 wells ] this year?

First part of the question on the size. So we launched [indiscernible] last year in 2024. We saw somewhere in the order of magnitude [Audio Gap] significantly to about $70 million in 2025. So you could think of the year-on-year growth is somewhere in the order of magnitude of $50 million to $60 million.

And then we think that matures at north than $100 million annualized run rate business as our incremental wins continue to stack and as we see that market mature.

And let me add to that. So that's actually been a success story in 2025. We've won 2 major new businesses with OEMs long term with long-term agreements with [indiscernible]. So that's, I think, was a really, really good success in 2025. The team has done a fantastic job to fill our order books, and we have a really high market share in North America. And what's quite interesting with this business is -- and that was something we also discussed now during the trip in Japan and in Korea.

Obviously, depending on regulation, we see great opportunities there as well. And if you're looking at a market size, a same in North America, roughly $150 million, you see the same amount of a sizable business in Southeast Asia. So in this case, more in Japan and in South Korea. So that's a great opportunity. And by the way, with A3, similar size of business that we're working on. So great growth in '25, and we're going to see continued growth in '26 onwards and especially in South Korea and Japan comes in, that will be good for us in Sensata.

The next question comes from Konstandinos Tasoulis with Wells Fargo.

Just going back to the data centers, how long have you guys been working on the opportunity there? And where do you feel the bigger value-add opportunity is? Or where are you more differentiated? Is it more like electrical protection side? Or is it the sensors? And is that something that could be another -- in terms of dollars look like A2L, the leak detectors in the next year or 2?

So we've been working on this quite some time. We've spent a lot of time in 2025. We've been intensified our efforts and -- and look, it's pretty broad. So I wouldn't say it's based on a single group of products. We had electrical protection [indiscernible] it's pretty broad. I mean we want to -- when we -- when we speak about designing into future data center concept, we don't only want to do that with a specific group of products. We're looking at all opportunities that we have. And all the opportunities that I've just mentioned in this call so inside and outside of data centers.

But give us some time, this is developing. And we'll be more precise once we go further through the calls of every quarter. But it's got a lot of opportunity, and we feel very confident that this could be a significant growth driver for the segment and for Sensata.

The next question comes from Steven Fox with Fox Advisors.

I was just curious if you could provide any more color around the segment margins from the aspects of where do you see the most opportunity for margin expansion? And maybe where the incremental margins may differ?

Yes. So I mean we're focused on operating margin expansion across all of our segments over time. Now certainly, growth is going to be an element of that operating margin expansion. Higher growth opportunity in industrials and aerospace, defense and commercial equipment, given the stronger underlying market growth that we expect in those sectors over time.

So I would say automotive will continue to be -- sort of our -- we'll look to outgrow the market by a couple of percentage points, and we'll look for variable contribution margin in the 20% to 30% range on that business, depending on the product mix and region. Industrials and aerospace would be similar but with higher growth rates.

When it gets to strengthening our margins, we don't differentiate between segments. So when we speak about improving productivity, or plant performance irrespective of the individual segment, we do that across all segments. When we speak about reducing product costs, we tackle all our products in everything segment. We don't only focus on specific product per segment. So it's an exercise that we've been pushing very hard in 2025 over all businesses that we have with Sensata [indiscernible] to do exactly the same, if not even harder in 2026 going forward. So it's not a specific segment-related exercise is a very, very broad initiative to push on margin movement.

The next question comes from Shreyas Patil with Wolfe Research.

So looking at Q4, you mentioned organic -- auto organic growth was 1%, but it looks like industry production, was 2%. So it looks like you underperformed the market by about 1 point. You're pointing to low single-digit outgrowth in '26. Just thinking maybe if you could help give us some of the drivers about growth for this year? And are there opportunities to add content in areas outside of the powertrain, such as domain consolidation or autonomy?

Yes, sure. I'll take the first part of that question. So a little bit of this is a function of using whole numbers here on the percent. But yes, you're right, the auto production rounds to 2% and our revenue [indiscernible] Biggest reason for that is, again, regional mix.

So if you unpack the growth rates in auto production in the fourth quarter, China grew about 4% year-over-year in Q4. The -- North America and Europe both decreased by about 0.5%. Korea, where we mentioned we now have even higher content per vehicle, dropped by about 6% year-on-year in the fourth quarter. And so while there was average market growth of of close to 2%. The market mix of where that growth occurred was not in our favor from a content per vehicle perspective.

Looking ahead to 2026, as we look at third-party production forecasts, as well as what we're hearing from our customers and seeing in our order book, we're seeing relatively similar growth rates in every region. And so we don't expect this regional mix dynamic to be meaningful in 2026, and that's important because as the regional mix and growth rates normalize, our underlying content growth will be the true driver of our market outgrowth.

Let me add to that. I think you asked a question around growth opportunities. And let me start a bit broad, and I think it's -- in this case, it's important to mention that Sensata is in a really desirable position. It's -- and let me explain that. Let me explain why I call it as a [indiscernible] position.

Its because we can naturally grow in any region with any type of application, and that's really irrespective of it is [indiscernible] hybrid or EV related. So what does that ultimately mean? We can follow any pace of electrification. If it speeds up or if it slows down, we will follow that pace. And so take an example [indiscernible] we have a high push in content. Andrew mentioned the content increase, for example, in China, strongest towards electrification. We benefit from that. We have doubled the content of an ICE, we win business, that's obviously supports our growth path in China.

Around plugin hybrids and [indiscernible] we also said we have growth potential in that market. I mean, that's actually a strong growing application where we see a 12% CAGR overall. And if we win business with [indiscernible] , we will grow with the market, depending where [indiscernible] are sold the most. So that is another area where we see a content rich opportunity for Sensata to grow.

The next question comes from Joe Giordano with TD Cowen.

I appreciate the follow-up here. One thing I just want to like a more existential question, I guess. But Sensata in the past got itself into trouble by chasing the shiny thing, right, and then ending up with a bunch of businesses that were subscale. So as you talk about small businesses today into attractive markets like data center and grid hardening and all these things, I think we all appreciate why Sensata would want to chase that.

But how do you make a decision to be confident that these are businesses that we should win, that we could participate in profitably and then we can ultimately have scale and kind of prevent the same issues that we all kind of saw years ago?

So I think in this case, it's important that a lot of these products exist really today with Sensata. So these are an existing product range within our portfolio. It could be within auto, there could be within other areas of this. So it's not a new development of a product. Might be a slight adoption of a product, but we have high standards, high-quality products that we can apply out of, for example, auto and apply into other applications, be it data centers. So I would say, in that case, the risk is manageable.

The second thing is, so if you look at our growth framework, that we've set for ourselves. So we say we want to maximize value from our core products, as I've just mentioned, that is maximizing because we're using an existing product portfolio. And then we'll leverage our scale and pedigree. So a lot of these products that are already produced at high scale, where we have existing production line and existing equipment that we can use in this case, no additional assets required. No additional plant structures required. We use our competitive footprint around the world, and we produce our products as we do every day just for a new type of segment.

And then look, we've also defined rigorous standards for this new business. So it's not just an area where we step in, it needs to be high volume. It needs to be platform-driven business. It needs to be -- need to be mission critical that they need to be regulated [indiscernible]. That's important for us. And they also need to be hard to do application. I think that's also important. So it's not anything that you can copy that easily. So we have I think a higher standard that we've set ourselves before we enter these markets, or we a new markets within the segments to manage that risk accordingly.

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

Thanks, everyone, for joining today's presentation. This concludes our fourth quarter and full year 2025 earnings conference call. Operator, you may now end the call.

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

Good day, and welcome to the Sensata Technologies Third Quarter 2025 Earnings Call. [Operator Instructions] Please note that 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, sir.

Thank you, operator, 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 2025 Financial Results Conference Call. Joining me on today's call are Stephan Von Shipman, Sensata's Chief Executive Officer; and Andrew Lynch, 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 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 can 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 non-GAAP financial measures. Our GAAP and non-GAAP financials, including reconciliations are included in our earnings release in the appendices of our presentation materials and in our SEC filings.

Stephan will begin the call today with comments on the overall business. Andrew will cover our detailed results for the third quarter of 2025 and our financial outlook for the fourth quarter of 2025. Stephane 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. Before we get into the third quarter results, I'd like to start today by briefly reflecting on what we have accomplished so far this year and where we are in our transformation journey. Now our first earnings call after I joined Sensata at the beginning of 2025, outlined the transformation ahead of us built around 3 key pillars: operational excellence, capital allocation, and a return to growth. In each of our subsequent earnings calls, we provided updates on our transformational journey framed around these 3 pillars. .

I've been pleased with the incremental progress in each of these quarterly updates. With the Q3 results we are reporting today, we have reached a significant milestone in our transformation journey. While we have more work to do and planter challenges ahead, our exceptionally strong Q3 results give me confidence that we have meaningfully improved our core business. Our emphasis on operational excellence and margin resilience has positioned us to overcome challenges such as tariffs and end market volatility.

Our laser focus on free cash flow and optimizing capital allocation to reduce net leverage has been successful, and we are now well ahead of our net leverage and cash conversion targets. As a result, earlier today, we commenced cash tender offers to purchase $350 million of our long-term debt. Finally, with respect to growth, -- we've conducted a thorough assessment of our product portfolio, production capacity and growth investments, and we are taking action to position our business to maximize the benefit from secular tailwinds.

I I'll now share some additional color in the third quarter through the lens of our key pillars. Our Q3 results represent a compelling proof point in the progress we have made on operational excellence. The third consecutive quarter we delivered on expectations, reporting results at or above guidance ranges. Third quarter adjusted operating margins and adjusted EPS both expanded sequentially from Q2 despite seasonally lower revenues. In [indiscernible] path, to expand the full year adjusted operating margins on a year-over-year basis excluding the dilutive impact of pass-through revenue, as is yet another compelling proof point in the progress our team has made with our 2025 full year outlook standing in sharp contrast to the preceding 3 years when our business experienced year-over-year contraction in adjusted operating margin.

Now let's turn to Slide 4. I and I will discuss cash flow and capital allocation. Our near-term capital allocation strategy is simple, are focused on rapidly deleveraging our business. While we are comfortable with our balance sheet, we believe that reducing leverage to a level more consistent with our peers, removes a potential barrier from -- for some investors, making Sensata a more compelling investment. Our operational excellence pillar has been a key enabler of this strategy as we optimize working capital and improve free cash flow conversion. After converting free cash flow at above 90% of adjusted net income last quarter, we made more progress in the third quarter with conversion now exceeding 100%.

As a result of our strong free cash flow generation and strong cash position of $791 million of cash on the balance sheet as of September 30 and -- we're taking decisive action to deploy capital and retire debt. Today, as I mentioned, we commenced cash tender offers to purchase $350 million of our long-term debt. More information about these cash tender offers can be found in the press release that we issued on this transaction earlier today. discipline around our capital expenditures and reducing the capital intensity of our business and has been a key driver of our progress toward improving cash flow conversion, and we're acting on these priorities without compromising on growth.

In fact, as we look ahead towards growth, we have studied past capital allocation to ensure we are making the right investments going forward. On our July earnings call, we defined a 3-part framework through which we would evaluate growth. Allow me to recap that again here today. First, we'll stick to our core product technologies with sensing and electrical protection. Second, we'll prioritize platform-driven applications with an emphasis on regulated or mission-critical sockets. And third, we'll focus on our key markets prioritizing those with secular tailwinds and ensuring appropriate diversification.

We will continuously evaluate our product portfolio using this framework and where we identify areas where the message to shift our strategy, we will be decisive. In our diner power business, which provides microgrid power inversion and rectification, it has become clear that the investment thesis and strategic plan around clean energy no longer offers the most compelling growth factor for this business as government policies have shifted and investment has slowed.

That said, we do see other areas were down a power line to our growth framework, specifically in applications where grid stabilization and redundant power supply are mission-critical such as defense and data center power delivery. Accordingly, we have recast our growth plans for this business, enabled by a more focused strategy. We believe this provides more compelling long-term growth with higher certainty of outcome. However, due to recent changes in clean energy policy and the anticipated slowdown in the clean energy sector was necessary to reevaluate the book value of this business to date.

As a result, we recorded a noncash goodwill impairment charge in the third quarter, which Andrew will discuss in more detail in a few minutes. Now let's turn to Slide 5, and I'd like to take a moment to highlight some of the recent additions to our executive leadership team as we embark on the next phase of our transformation journey. I'm pleased with the momentum we have built in our business through our operational excellence pillar. Not only have we delivered on our quarterly targets. We have done so with demonstratable margin resilience as we continue to perform in the face of multiple challenges in our end markets.

Given the relatively short period of time in which we have made this progress, it is clear that our most significant opportunities are ahead of us. At this juncture, it is imperative that we install the right leadership to ensure that we continuously unlock value by optimizing our cost structure, streamlining our production network and serving our customers well.

In the Form 8-K that we issued along with our earnings press release today, we announced that Nicolas Pardo will join Sensata Effective November 1 as Chief Operations Officer. Nicolas has more than 20 years of operations leadership experience, including supply chain optimization, manufacturing excellence and leading transformations, which will be a tremendous asset to Sensata as to strengthen our global operations footprint to meet the needs of changing and dynamic markets.

Most recently, Nicolas served as the vision Operations Officer at Tenet Commercial Vehicle Solutions. Previously, he held leadership roles at WABCO, including Chief Supply Chain Officer and Vice President of Sourcing and Purchasing. These accomplishments include leading several organizational transformations and applying innovative technologies to achieve measurable productivity and quality gains. With operations on solid footing and with accelerated progress on our capital allocation pillar, we are now ratcheting up the intensity of our focus on our third pillar, returning Sensata to growth.

This too requires experienced leadership. Earlier this quarter, we announced that Patrick Heska joined Sensata as our Chief Growth and Transformation Officer. Patrick has extensive automotive and industrial experience, both in industry as well as at McKinsey & Company, where I was a partner in the automotive practice. [indiscernible] 13 years at Mackenzie, led projects, including go-to-market strategy, enterprise transformations and AI technology strategy.

We also announced today a Jackie Chan has been promoted to Executive Vice President and President of Sensata China effective January 1, 2026. The Jack joined Sensata in January 2024 as Vice President and General Manager, China Automotive has been instrumental in positioning Sensata to rewin market share increase the localization of our business and supply chain. In his expanded role, [indiscernible].

Check will have P&L responsibility and primary management oversight of of Sensata's business in China. Jack's promotion underlines the importance of succeeding in China and he has demonstrated that he is the right leader. Under Jackie's leadership, our automotive business in China has returned to our growth with double-digit growth over market in the third quarter and 90% of our new business wins this year have been with local OEMs.

Now let's turn to Slide 6, and I will discuss some recent product innovations that will drive growth across multiple end markets. We previously mentioned that we were first to market with a tire burst detection solution for a vehicle stability control application. We continue to make progress here and we have now secured business with 2 leading Chinese OEMs. I'm proud to see our Tire Burst Alert feature gaining traction in the market and becoming a trusted component in vehicle safety strategies. These wins highlight a common theme. As vehicles become more intelligent, so must the systems that support them, giving us a clear road map for hard to expand content and win new business.

Looking ahead towards the medium term, it's clear that our path to expanding content will be driven by meeting the global shift towards sustainable mobility with smart impactful solutions. One such example is our high-efficiency contactor, which simplifies EV charging, enabling vehicles to work seamlessly with both 400 and 800-volt architectures. As [indiscernible] involved vehicles launched in markets where the charging infrastructure is predominantly 400-volt, our contact enables a switchable architecture.

This product was recently recognized as a finalist for EV charging innovation at the 2025 battery show North America. As we have discussed on past earnings calls, global regulations are acquiring more sustainable refrigerants in HVAC systems. And with that, demand for reliable gas leak detection is accelerating. Our IL sensor is helping customers across key markets, detect and manage refrigerant leaks with speed and precision. By supporting compliance and improving system performance -- this solution is becoming a trusted part of HVA platforms. We have recently secured 2 customer agreements solidifying our market leadership position for the next several years.

As additional customer programs are awarded in the coming months, we foresee this business accelerating to more than $100 million of revenue in the near future, and we see expanded opportunities outside of the United States in the years ahead, making this product a potential growth driver for many years to come. Finally, as we look more broadly at secular trends, we expect our aerospace business to emerge as a meaningful growth engine for Sensata going forward. Sara's proven capability in this space and a key right to win as we have been selling into the defense sector since the 1940s. Looking ahead over the next decade, U.S. and Allied Nations defense spending expected to increase significantly from $1.7 trillion in 2025 to $2.8 trillion in 2035. The vast majority of the spend is expected outside of the U.S. primarily driven by EU defense spending. Given our global footprint and deep business relationships in Europe, we are focused on winning our share of this growth. While I'm excited by the additions to our leadership team, I would also like to acknowledge the exceptional progress from the whole Sensata team.

Collectively, we embraced our 3-pillar approach and really to bring forward and build initiatives around these pillars. We have worked relentlessly in pursuit of value creation guided by the pillars and enabled by the initiatives that underpin them, and we're getting results. We have turned a corner on financial performance, consistently meeting or exceeding our plan and delivering on our commitments. We have unlocked free cash flow and meaningfully accelerated our capital allocation strategy, and net leverage is improving. And we returned to market outgrowth in the third quarter with our automotive business outgrowing global vehicle production by approximately 1% and outgrowing its end market by approximately 5% and our Sensing Solutions business delivering organic revenue growth of 2.5%, with approximately 1% outgrowth in industrials while aerospace were approximately 2%, roughly in line with the market.

With that, I'll turn the call over to Andrew to provide greater detail on Q3 financial results market outlook and our guidance for the fourth quarter.

Thank h's, Stephane, and good afternoon, everyone. Let's turn to Slide 8. I -- we delivered another strong quarter in Q3, once again, achieving results that exceeded our expectations across all of our key metrics. We reported revenue of $932 million for the third quarter of 2025 and which exceeded our expectations due to stronger global auto production, amplified by our return to outgrowth. Third quarter revenue of $932 million represented a decrease of $51 million or 5.2% as compared to $983 million for the third quarter of 2024, and primarily due to our previously discussed divestitures and product life cycle management actions.

On an organic basis, revenue increased approximately 3% year-over-year. We delivered adjusted operating income of $180 million and adjusted operating margins of 19.3%, which was up 30 basis points sequentially from the second quarter of 2025 and and up 10 basis points year-over-year. Our adjusted operating margins were diluted by approximately 20 basis points due to $12 million of 0 margin pass-through revenues related to tariff recovery. Excluding the dilutive impact of tariff pass-through, third quarter adjusted operating margins increased by 30 basis points year-over-year. Tariffs pass-through revenues did not meaningfully impact sequential performance as we recorded approximately equal levels of tariff costs and pass-through revenues in both the second and third quarter of 2025. -- adjusted earnings per share of $0.89 in the third quarter of 2025 increased by $0.02 sequentially from the second quarter of 2025

Despite seasonally lower revenues as we delivered on our margin expansion plans. Adjusted earnings per share was flat with the third quarter of 2024 on lower revenue. Free cash flow generation has been a primary focus for us this year and our improvements accelerate our capital allocation objectives. I am pleased to report that we delivered free cash flow of $136 million in the third quarter, which was an increase of approximately 49% year-over-year. This represents an exceptionally strong conversion rate of 105% of adjusted net income, an increase of 14 percentage points compared to the second quarter of 2025 and 37 percentage points compared to the third quarter of 2024.

Now let's turn to Slide 9, and I will discuss capital deployment. With our strong free cash flow, we reduced net leverage to 2.9x trailing 12 months adjusted EBITDA compared to 3.0x at the end of June. Last quarter, we indicated that our capital allocation strategy would prioritize deleveraging. Today, we took initiative to deploy capital in furtherance of this priority as we commence cash tender offers to purchase $350 million of our long-term debt.

Our capital allocation strategy, combined with the performance of our business is delivering returns with return on invested capital increasing to 10.2%, which is an improvement of 10 basis points sequentially from the second quarter of 2025 and 20 basis points year-over-year compared to the third quarter of 2024.

In the third quarter, we returned $17 million to shareholders through our regular quarterly dividend. Last week, we announced our fourth quarter dividend of $0.12 per share, payable on November 26 to shareholders of record as of November 12. Turning to Slide 10. In I'll talk through the results for our segments. Performance Sensing revenue in the third quarter of 2025 was $657 million, approximately flat year-over-year on a reported basis. Organically, revenue increased 3.6% year-over-year as we outgrew our end markets in both automotive and HVOR consistent with the expected return to outgrowth in the second half of 2025 that we had communicated earlier this year.

Performance Sensing adjusted operating income was $156 million or 23.7% of Performance Sensing revenue, representing year-over-year margin expansion of 160 basis points inclusive of any dilutive impact from tariffs. Sensing Solutions revenue in the third quarter of 2025 was $275 million, which was approximately flat year-over-year. Organically, revenue increased 2.5% year-over-year driven by new content in our Industrials business and growth in our aerospace business. This marks our third straight quarter of year-over-year organic growth. Sensing Solutions adjusted operating income was $85 million or 30.9% of Sensing Solutions revenue representing year-over-year margin expansion of 150 basis points, again, inclusive of any dilutive impact from tariffs.

The margin expansion in both our Performance Sensing and Sensing Solutions segments represents the significant strides our teams have made in the last year in unlocking productivity, and I want to echo Stephan's comments regarding the great work being done by Team Sensata. Corporate and other adjusted operating expenses increased by $12 million compared to the third quarter of 2024 and primarily driven by higher variable compensation due to better underlying performance. Finally, just a brief follow-up on the Dynapar topic that Stephan mentioned earlier. In the third quarter, we recorded $259 million in noncash charges as a result of changes in clean energy policy and emissions regulations. This included a goodwill impairment charge of approximately $226 million related to the DynaPower business as well as certain other noncash charges primarily due to excess capacity related to electrification.

These costs were excluded from adjusted operating income as they are noncash and nonrecurring in nature. More detail regarding the reconciliation of our GAAP to non-GAAP financial metrics is available in our SEC filings in the appendix to today's and our earnings presentation and on our Investor Relations website. Turning briefly to Slide 11. I will share some high-level thoughts on our markets. Within Performance Sensing, we have been pleased with the durability of automotive demand. We are encouraged by the growth in China, where we continue to increase our share. And in North America, despite concerns around end market demand, Production has lagged SAAR and inventory levels remain relatively normal, indicating further durability. The HVOR end market has been soft, particularly with on-road trucks in North America, though we have been pleased with our ability to expand margins overall despite weakening end market demand in this high-margin business. In Sensing Solutions, gas leak detection has provided meaningful growth against an end market that has not yet fully recovered. Given our exposure to HVAC and appliance, we look at housing recovery and interest rates as the likely catalyst for this end market. And lastly, in our aerospace business, we have seen reliable market growth in the low to mid-single-digit range all year, and we expect that to continue with strong order books across the sector. Before I discuss our fourth quarter expectations, let's turn to Slide 12 for a brief update on tariffs. In the third quarter of 2025, we recorded approximately $12 million of tariff costs and associated pass-through revenues. This was approximately flat with the second quarter of 2025 and -- and looking ahead, we expect the same exposures in the fourth quarter based on trade policies currently in effect.

The vast majority of our imports into the United States are from Mexico, and over 80% of those imports are USMCA qualified. We do not expect any meaningful changes in our USMCA qualification levels moving forward. Additionally, Sensata is not directly exposed to either the automotive parts nor heavy truck parts tariffs as the products we produce are not included within the scope of these tariffs.

And finally, just a brief reminder on our operating posture regarding tariffs. Sensata will produce to customer demand signals and will make product available to our customers at our production locations or delivered to any appropriate destination of our customers' choosing. Should our customers require that we import materials into any jurisdiction that applies the tariff to such imports -- we will only do so with a reimbursement agreement in place. We are grateful to our customers and suppliers for their continued support in this process. Their partnership and collaboration has been invaluable.

With that, let's turn to Slide 13, and I will walk through our expectations for the fourth quarter of 2025. We expect fourth quarter revenue of $890 million to $920 million. Adjusted operating income of $172 million to $179 million, adjusted operating margins of 19.3% to 19.5% and -- adjusted net income of $121 million to $127 million and adjusted earnings per share of $0.83 to $0.87 The -- our revenue guidance range reflects a cautious outlook in light of recent idiosyncratic events such as the Novelis factory fire and the potential supply disruptions related to Nexperia. To be clear, we have not projected any major disruptions to our business in connection with these events. However, we are taking a more cautious view on the market and our order book. At the midpoint of our guidance range, we expect approximately 10 basis points of sequential margin expansion, and we have assumed the same level of tariff costs and pass-through revenues to what we incurred in the third quarter. As noted in our press release and earnings materials, our guidance and tariff assumptions are based on trade policies and tariff rates in effect as of October 28, and and do not incorporate any impacts from proposed changes to trade policies.

Finally, while we are not yet providing 2026 guidance, I would like to share initial thoughts on 2026. We are reasonably comfortable with consensus estimates for the full year. However, as we look at the quarters within 2026, we see a wider range of estimates, particularly in the first quarter. As a reminder, Q4 to Q1 margin seasonality is driven by pricing dynamics in our automotive business. Specifically, contractual price downs to our customers typically take effect at the beginning of the year as do our supplier price reductions. However, with approximately 90 days of inventory on hand, the majority of our first quarter sales reflect higher cost inventory. As we progress into the second quarter, margins normalize, and each quarter thereafter, we typically see margin expansion driven by productivity in our factories. This trend was observed in the years preceding the pandemic and the inflation that followed and was observed again in 2025 as pricing returned to pre-pandemic norms. We expect similar seasonality moving forward.

With that, I will turn the call back to Stephane.

Thank you, Andrew. As we look ahead, I'd like to leave you with a few parting thoughts. Over the last 9 months, we have executed with consistency, laying a solid foundation on which to build. Beyond significantly improving our say-do ratio, we have also improved underlying performance in our business, and our free cash flow conversion is a compelling proof point. Additionally, we have demonstrated a return to market outgrowth, beginning with our industrial and aerospace business earlier in the year and with our third quarter results, also in our automotive and heavy vehicle businesses.

And lastly, -- we're acting decisively to set ourselves up for long-term shareholder value creation by installing the right leadership team, adjusting course on strategy as end markets change, and deploying capital to retire debt. We look forward to continuing to update you on our progress as we transition towards the next phase of our transformation.

I'll now turn the call back to James for Q&A.

Thank you, Stephane and Andrew. We will now move to Q&A. [Operator Instructions] Operator, please introduce the first question. Your first question today will come from Wamsi Mohan with Bank of America.

This is [indiscernible], on for Wamsi. Congrats on the. Just 1 question for me. On the tire birth detection, last quarter, I believe it was mentioned that wins might be able to help contribute to revenues relatively quickly. Just can you help us think through quantifying this revenue impact in China from these additional wins? .

Thank you, Ashley. Yes, so in China, the design cycle tends to be much shorter than in the West, it can be as quick as sort of 6 to 9 months from a design win to start a production. With respect to individual wins, given that these are only at a couple of OEMs so far, we're unable to disclose the actual value of these wins. What I can say is that we expect to -- we returned to outgrowth in China in the third quarter, and we expect to continue to outgrow the market moving forward. And these wins and other wins with local OEMs in China are a big reason why we'd expect our growth to be in the low single-digit market range, low single digits above market range initially. .

And your next question today will come from Mark Delaney with Goldman Sachs.

I also was hoping to better understand what the company in terms of its ability to outgrow the auto market. So it's to recognize you outgrew globally in the third quarter. I think you said double digits in China and your comments, Andrew, about outgrowth going forward. It's really where I was hoping to focus. So as you look into 2026, you think about the auto business more generally, but both in Asia and in a global perspective, based on the wins you have and your discussions with customers, do you think your overall auto business can outgrow auto production next year? .

Mark, to hear you. Let me answer that question for you. So yes, I mean, you're absolutely right, we had like double-digit outgrowth in China. We've won a fantastic business. I just -- as you heard in my crypt -- we have a new President in China with Jackie, and he has really done a great job to win new business on the contactor side, but as I also just mentioned on the pipes system -- and that has enabled us to outgrow in that market and given us an overall, I would say, modest outgrowth in quarter 3 of this year. And going forward, with those wins and potential further wins that we're currently working on. We're looking at further outgrowth going forward into 2026. .

Your next question today will come from Guy Hardwick with Barclays Capital.

Is it -- I'm just looking at the revenue by end market. Am I reading this correctly that HVAC stepped up very considerably sequentially and quarter-on-quarter, that revenues compared to just over 4% a year ago and 4.6% in Q2. So it kind of implies almost 40% growth in the HVAC business. Is something -- has there been some segmental change? Or is that real growth.

That's real growth, definitely real growth. So overall, what's obviously fueling this growth is our so-called HL gas leak detection product. We've won new business. We've won 2 new businesses, and we're continuing to gain market share. We've got a substantial market share from today's perspective. And that is basically fueling this growth and then also further growth going forward. That's the main reason for that.

And Guy, just for clarity, we presented the gas leak detection revenue in industrial last quarter, we've recast both on a Q3 and on a year-to-date basis into the HVAC segment. So I think that may be what you're seeing in those end market disclosures. .

And your next question today will come from Joe Spak with UBS.

Andrew, there's 3 debt securities listed in the tender offer. Obviously, the 5 and 7 days are the most expensive. Is there any reason to believe you wouldn't go after those first? And just somewhat related is the lower interest expense considered in your fourth quarter EPS guidance?

Yes. So given that the tender is still open or sort of limited in how much we can share about what notes we prefer to retire or anything like that. But what I can share on the interest is we're earning roughly at parity between cash on the balance sheet and the interest expense that we're incurring on those 29 notes. And then obviously, the other notes are a little bit more pricey. But on balance, I wouldn't expect it to have a material impact on net interest in the fourth quarter. And so nothing to consider from a guide perspective there. And then beyond that, we refer to the tender offer materials that we issued with the press release earlier today.

Your next question today will come from Joe Giordano with TD Cowen. .

Nice job. As you think through the capital structure here, I think everyone probably likes what you're doing with the charges and taking down dinapower and the debt reduction. But -- how do you think -- like how do you marry the innovation internally that you're doing with like the desire to ultimately deploy more in the future? So I know now we're talking about retiring debt and paying down and getting leverage down. But what's the target where you start to feel comfortable enough that you can start to take iterative steps outside of the current portfolio again.

Sure. Thanks for the question. So I think in the short term, we're very focused on our core business. We believe that we have all the building blocks that we need to grow, succeed in our end markets and return to outgrowth like Stephan mentioned. So I want to be very clear, that's our core focus right now. A big part of that involves in improving the cash generation in our core business and then prioritizing the deployment of that capital to reduce our leverage. And I think you can look for that to be our primary focus for the near to medium term. .

And let me add to that, Joe. So basically, I mean, yes, for now the story that we've been continuously telling was on the last call is, first 1 to deleverage the company. use some excess cash to strengthen our operations. So we've been very levers around smart automation in our factories to increase productivity. And that's proven to be the right investment, as you can see in the results as one effect. Yes. And going forward, obviously, we'll reevaluate if we'll deploy cash somewhere else. But at this point in time, -- we're sticking very much to what we've been telling you and deleveraging the company and improving performance. And that's the focus for the next quarters ahead.

And your next question today will come from Luke Junk with Baird..

Even hoping you could just double-click on the aerospace portfolio, especially your IP and innovation cycle in that business relative to your right to win comment and the prepared remarks, I guess if I look, it's been growing low single digit plus in recent years, it seems like the market has been growing a little bit faster in aggregate, just the levers that you see to growing that business more quickly into the future, too. .

So first of all, let me reflect back on the growth. We've had steady growth, like you say, mid-single digit. And this has basically been both in commercial and defense markets. in quarter 3 of this year, this was actually a record revenue result. And I think as Andrew mentioned in his script was basically the fifth straight quarter of positive outgrowth. Now I think 1 topic is well known, but I'd like to repeat it, we still have high customer backlogs. They still sister still there. And -- this is basically [indiscernible] basically this passes the recent information that we received FAA is now approved with our biggest customer, 1 of our biggest customers, an increase to 42 aircraft per month. And as you can remember, back since January 2024, that was roughly 38 aircraft per month. So basically, that's going to increase our part of that growth. And the other part of it is our exposure to defense business. And that will be the other area we'll be growing in this business unit. .

And your next question today will come from Shreyas Patil with Wolfe Research. .

I wanted to better understand the strategic positioning of Dyna Power at this point. You talked a little bit about the potential for applications related to data centers. I wanted to maybe see if you could expand on that a little bit more. And are you seeing engagements from customers in some of those end markets either grid storage, utility or grid applications or then even data center.

Basically, the main focus for now and around data power, or high energy requirements, which for us, create use cases around grid stabilization. That is the major use case around data centers from today's perspective.

And your next question today will come from Konstandinos Tasoulis with Wells Fargo.

I think you guided organic growth over the next 12 to 18 months to be in the 2% to 4% range. I think the commentary last quarter was a lot of that was being helped by the nonlight vehicle business. But I think H4 housing still looks kind of challenged. Can you just parse out how you're thinking about that now?

Sure. Happy to. So I think first, so obviously, we've seen a slowdown in some of our nonauto businesses this year, HVOR and specifically on-road truck in North America has slowed. And so while we're outgrowing that end market, the ability to grow with it is hampered by the lower levels of production that's impacted organic growth a little bit this year. I think we're still on track for about a percent-ish organic growth if you look at where third parties are for the fourth quarter and then where our -- where the midpoint of our revenue guide is.

And admittedly, that was a cautious guide given some of the risks that we see in the fourth quarter. So we'll see how that all settles in terms of production levels, et cetera. I think as you look forward beyond the fourth quarter, so certainly, again, we're not giving 2026 guidance. But we -- the biggest outgrowth headwind we've had this year, which has challenged our organic growth rate has been the China market. And we turned the corner here in the third quarter, where we're now outgrowing production in China. So if end markets hold up and we continue to deliver the level of outgrowth that we've had here in the third quarter, we have very high confidence in our ability to grow organically low single digits moving forward.

And your next question today will come from William Stein with Truist.

I'm hoping you can remind us of your longer-term margin outlook. I forget what you've targeted in the past. And I forget if it's single year or expansion view or multiyear. Can you just catch us up on that, please?

Thanks for the question, Will. So you may recall on the last call, we talked about a margin floor of 19% -- we're still committed to that floor. The reason that was an important data point for us is because there's obviously a lot of end market volatility and challenges we're dealing with mixed matters in our business certainly. We feel very comfortable in our ability to defend that floor on a full year basis. And then beyond that, I would point to we've demonstrated an ability to sequentially expand margins throughout the year as we've done this year.

And lastly, I would just point out that our -- 2 of our higher-margin businesses, HVOR and industrial are both in markets that are relatively soft right now. So if and when those markets recover, certainly, there's some margin help that we get with that. But without clarity on that and without having guided 2026, where we stand today is that we're very comfortable defending a margin floor of 19%.

And your next question today will come from Rob Jamieson with Vertical Research Partners.

Nice results tonight. Just had a couple on free cash flow. Just really strong conversion this quarter again. Just wondering if you could walk through some of the details on working capital improvement, cash discipline is driving this performance? And then just kind of your thoughts around the sustainability at this level. And then, Stephane, just on the the benchmarking initiatives that you talked about in terms of getting different manufacturing facilities to going to get to best-in-class internally. Just wanted to see what you're starting to see there in terms of early improvements.

Let me start with the second question. Thanks for the question. Look, we've continued with our benchmarking with benchmarking progress. First of all, the idea was to benchmark ourselves internally. So from a product family perspective, we would take the best-in-class product from a cost perspective and then benchmark that against all the other factories where that product is produced we made good progress. So we've reduced our costs significantly on each and every product, but we still have some way to go. And then the other view is obviously outside of Sensata. So if we can obtain benchmarks where we find products being produced better than our factories, we'll take that benchmark. -- and work off against -- work ourselves off against that target, which we also do for certain product families. So it's continuous progress. I think we've improved a lot, but still ongoing. .

Yes. And on the cash flow question. So the biggest lever there has been has been lower capital expenditures in our business. And I think that's really reflective of the level of discipline we're applying to CapEx. We're certainly looking at things like the certainty of the production outlook on the programs that we're investing in as well as the timing, and that's driven a lower level of CapEx in our business. .

I'm comfortable that we can continue to convert free cash flow at a relatively healthy level. And the number that we've committed to is greater than 80% I don't think that our relatively low level of CapEx this year is a benchmark for where we're going to be indefinitely -- but certainly, as we're looking at EV production outlook, that's a little bit uncertain volumes that are maybe softer than where they were expected to be a few years ago. We're applying a lot more rigor on the CapEx that we're improving and that's showing up in our free cash flow conversion. So I'm comfortable that we'll continue to convert at a high level. And I think the year-to-date result has been reflective of CapEx discipline.

Your next question today will come from Samik Chatterjee with JPMorgan.

This is [indiscernible] for Samik Chatterjee. I just wanted to double click on your return to growth pillar of the overall strategy. Just wanted to understand in terms of end markets, which end markets are strategically of higher importance in terms of returning to growth? Or like where do you expect the growth will be more skewed in terms of the overall end markets?

From an end market perspective, I think Andrew has given some highlights on that, in we see from Susana's perspective, strong market outgrowth on the HVOR sector that is mainly driven due to construction and agricultural business, and that's basically offsetting the softness in that market. And we also see, as I've mentioned earlier, with very, very strong order books in the aerospace area, we'll see a potential of growth going forward there as well. That is another area of high growth. Automotive, I would say, is rather soft with a slight outgrowth going forward. So the 2 strong ones being aerospace and industrial. Industrial was the third one. And I also wanted to mention, especially with our gas leak detection product that's enabling us to outgrow the market. And going forward, that will also be pushing growth.

Concludes our question-and-answer session. I would like to turn the conference back over to Andrew Lynch for any closing remarks.

Thank you, operator, and thank you all for joining today's presentation. We look forward to seeing you at various investor events later this quarter. We are currently expected to participate in the following events: the RW Baird Global Industrial Conference in Chicago on November 12, the UBS Global Industrials and Transportation Conference in West Palm Beach on December 3, and the Oppenheimer Winter Industrial Summit, which is a virtual conference on December 11. This concludes our third quarter earnings conference call. Operator, you may now end the call.

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