Operator
Good day, and welcome to Sensata's fourth quarter and full year 2025 Financial Assaults Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. to withdraw your question please press star then two please note this event is being recorded i would now like to turn the conference over to james and whistle senior director of investor relations please go ahead thank you operator and good afternoon everyone i'm james and whistle 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 Stefan von Schuchman, 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 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 10Q and 10K, 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, in the appendices of our presentation materials, and in our SEC filings. Stefan will begin the call today with comments on the 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. Stefan will then return for closing remarks. We will then take your questions. Now I would like to turn the call over to Sinsata's Chief Executive Officer, Stefan von Schiffmann.
Thank you, James, and good afternoon everyone. Let's begin on slide three. 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 through a framework of three key pillars 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 on which we build 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 the next phase of our transformation before we get to the next phase of our transformation i would like to take a moment to acknowledge the magnitude of what we accomplished this year and to thank this insider 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 three pillars approach is compelling. With our focus on operational excellence we 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 out growth 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. To 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 determined resilient leadership let's turn to slide four 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 insider performance the team has demonstrated that they 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 five, 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 four 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 without year-over-year margin contraction this is a testament to the resilience we have instilled in this business and the seriousness business, with which we take our commitment to a 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 impacts 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 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 dollars of long-term debt in the fourth quarter our net leverage now stands at 2.7 times trailing 12 months adjusted EBITDA and with 573 million dollars of cash on hand as of december 31st 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 four percent 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 has at times created 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. Neither view is entirely accurate. As we look towards the next phase of our transformation, we reconsidered how we are organized. We looked at factors such as business cycles market cycles customer mix and go to market strategy after careful evaluation we reorganized and started into three operating segments each with a distinct mandate for value creation and growth these three segments are automotive which was approximately 57 percent of 2025 revenue industrials which was approximately 21 percent of 2025 revenue and aerospace defense and commercial equipment which was approximately 22 percent 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 limited underlying production growth making this a market outgrowth driven segment we enjoy high volumes and revenue certainty tied 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 grow 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 EV. This also positions us to grow in all geographies despite differing 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. The platform lives in these markets are 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 a premium price point for higher durability. Each of the markets we serve in this segment experience cyclical growth. The 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 as having high automotive concentration and therefore being a market outgrowth business in a low growth market. Sensata's growth history has 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 three-part growth framework. Let's turn to slide seven. 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. And 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 clear 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 eight, and I will discuss our automotive segment, where our mandate is to foster our core business while delivering growth across all propulsion types. Recently, we have seen content-accretive business opportunities on plug-in hybrid vehicles, or PHAFs, and extended range electric vehicles, or ERAFs. This vehicle type is particularly attractive for SunSATA. Allow me to illustrate as we turn to slide 9. Approximately half 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 the air conditioning and brake systems, as well as tire pressure sensors. On a typical EV, we see these same sensor sockets as well as additional content opportunity from electrical protection sockets in the electric powertrain and charging architecture. In aggregate, our content per vehicle opportunity on an EV is approximately double that of an ICE. In between ICE and EV are various hybrid platforms. a mild hybrid will look more like a nice 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 2026 in an automotive market that is expected to be approximately flat pf and erf production is expected to grow 17 and over the balance of the decade we expect a 12 percent cager for these vehicle types The content potential on a plug-in hybrid or range extender is attractive due to the availability of all three socket categories. Ice powertrain, high voltage electrical protection, and sensor content outside of the powertrain. As these vehicles win in the market, we expect they will emerge as a meaningful outgrowth driver for us, and yet another proof point for our competitive advantage in not being indexed to any single 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 three 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 microgrids. One of the most compelling growth vectors is data centers, and I'd like to briefly click down to share more about where we see opportunities. 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 under-penetrated 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 allocated some of our top performers to this 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 darlings of our portfolio with high margins and outstanding growth potential earlier i talked about automotive pedigree in aerospace pedigree matters too being in flight on commercial airliners is the gold standard and we're in flight today both with position sensors 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 clear secular trend, let's turn to slide 16 and take a look at that sector. UAVs offer 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. For that, I will now turn the call over to Andrew to offer more insights into Q4 and full-year results, as well as to share our outlook for 2026 and guidance for the first quarter.
Thank you, Stefan, and good afternoon, everyone. Let's begin on slide 18. As Stefan mentioned earlier, year, 2025 was a transformative year for us as we rolled out new initiatives framed around three 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 dollars or approximately one percent 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 four percent year-over-year in the fourth quarter we delivered adjusted operating income of 180 million dollars and adjusted operating margin of 19.6 percent 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 dollars 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 88 cents in the fourth quarter of 2025 increased by 14 cents year over year as we delivered on our margin expansion plans adjusted net income was 130 million dollars in the fourth quarter of 2025 an increase of approximately 16 percent year over year we recorded approximately 50 million dollars 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 of primarily non-cash charges 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 lifecycle management actions. On an organic basis, revenues were approximately flat year over year against a challenging market backdrop. We delivered $705 million of adjusted operating income in 2025 which was a decrease of six percent from 749 million in 2024 primarily due to lower revenue adjusted operating margin was 19.0 percent flat to 2024 despite the six percent 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. The primary driver of these decreases was lower net revenue 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 3.0 times trailing 12-month adjusted EBITDA as of December 31, 2024, to 2.7 times as of December 31, 2025. In the fourth quarter, we took advantage of favorable bond market conditions to retire $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 12 cents per share payable on february 25 to shareholders of record as of february 11th 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 percent 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 stefan 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 one percent year over year which was approximately in line with the market segment adjusted operating income was approximately 129 million dollars in the fourth quarter of 2025 or 24.4 percent of segment revenue representing year-over-year margin expansion of 100 basis points industrial segment net revenue was 191 million dollars in fourth quarter of 2025 an increase of six percent year-over-year on a reported basis and eight percent 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 dollars in the fourth quarter of 2025 or 30.9 percent 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 $56 million in the fourth quarter of 2025, 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 the 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 of 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 81 cents to 85 cents. At the midpoint of our guidance range, we expect year-over-year revenue growth of approximately 2 percent, year-over-year adjusted operating income growth of approximately 3 percent, year-over-year adjusted operating margin expansion of 20 basis points, and year-over-year EPS growth of 5 cents per share. At the midpoint of our guidance range, we have assumed approximately $12 million of tariff costs and pass-through revenues. 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 february 18th 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 points 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 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 digits year over year revenue growth we expect to participate in market growth in both our industrials 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 higher than they were in 2025 due to the stronger underlying performance. We have additional seasonality related to interest payments, which are largest in the first and third quarter. Consequently, we expect Q1 free cash flow conversion to be our seasonally lowest quarter and likely below our 2025 result, 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 Stefan.
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 multi-year 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 are in a fundamentally different place than we were a year ago. We have built an organization that is intently 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 into three distinct operating segments, each with unique growth and end market characteristics 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 will 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.
Operator
Should you wish to ask a follow-up question, please re-enter the queue. operator please introduce the first question we will now begin the question and answer session you ask a question you may press star then one on your touchtone phone if you are using a speaker phone please pick up your handset before pressing the keys if at any time your question has been addressed and you would like to withdraw your question please press star then two we ask that you please limit yourself to one question. If you have additional questions, please re-enter the question queue. At this time, we will pause momentarily to assemble our roster. The first question today comes from Wamsi Mohan with Bank of America. Please go ahead.
Yes, thank you so much. Stefan, given the transformation underway where you've 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 revenue growth potential here over a longer period of time, especially since you've emphasized how key it 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 these slides 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 mandate per segment and also equally important to mention we have the right team in place to execute this growth so we've had our proof points as we've mentioned in the call and since has returned back to growth in in the second half of 2025 and additionally to that we have a broad opportunity for growth 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 somewhere 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 opposite next question comes from joe giordano with tv cowan please go ahead hi guys thanks for taking my
question um look i think you guys explained the segmentation well in terms of like the thought process behind it my first initial thought when i saw it was okay two of these segments are fairly small and this is a company like focused on efficiency so stefan can you talk to me how you balance like okay now we have three reporting structures three presidents you know you kind of add a little like i don't know bureaucracy is the world wrong word there clearly but like you add more kind of fixed structure there. How do you weigh that against what you're getting by separating it this way?
Let Andrew start on the fixed cost structure part on the overhead, and then I'll jump in now. Thanks, Joe.
Yeah. 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 that 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, we'll drive growth and margin expansion in each of our segments that more than offset that incremental cost. And I'll let Stefan talk to the thinking around strategy here.
Exactly. So, Joyce, here is this, you know, the resegmentation, and we mentioned it in the script, is all about value creation. And, you know, we've been executing, which is the first building block around value creation. But if you look at this second building block, which is everything around growth, we felt that with this segmentation, this gives us this level of opportunity. allow me to order that a bit strategically so the resegmentation is anchored in our end markets and i think that's that's very important around value creation it also reflects how we structurally manage and operate the business that's insider you know despite now having three instead of two segments what it also does it strengthens alignment with our strategic pillars so driving focus growth and again operational excellence which was a focus in 2025 that does us by recognizing the distinct characteristics and value drivers of each segment that alone is for me value creating and additionally to that each segment now operates with a clear growth mandate and defined accountability supported by designated leadership which is responsible for executing these very segment specific strategies so that's our path to value creation by you know splitting up into three segments coming from tube in the past okay next question comes from mark delaney
Operator
with Goldman Sachs. Please go ahead.
Hi, team. You have a bond on firm, Mark. Thank you for taking the question. The company mentioned that they're targeting low single-digit outgrowth in the auto segment in 2026, and you previously talked about targeting bookings with domestic OEMs in Asia and in China. Can you maybe talk a little more about how those bookings with the domestics have been tracking it, and to what extent that and other factors are underpinning the low single-digit outgrowth expectation in 2026?
Yeah. Absolutely. Thanks for the question. Want to start?
So, let me jump in first, and then Andrew, please ahead. So, to the point in, you know, winning additional business in Asia, let me explain it the following So, since the last call, so let me start referring to what we've done, and this has been very supportive in the business development in these last couple of months, is 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's been highly successful within China in winning new business. And since the last call that we had together, Jackie's won additional business specifically with Chinese OEM. So it's been very successful, and I feel very bullish about that. 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 winds. Now, in 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, solid business in Japan. And let me give you one specific example. So we have doubled our revenue with a leading Japanese OEM, and we've also won further business in Japan in these recent months. I've actually just been in Japan, and it was very, very good to see what business 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 then we've also won good business with customers in south korea so um and and think about it from from this point of view um the content per vehicle of the business that we've now won in south korea with local customers has exceeded the north american oem content and uh content per vehicle and 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 further business, but I'm very, very happy with the progress that we've made in China and Japan and South Korea and overall in Southeast Asia. But Andrew, any point you wanted to add?
Yeah, 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 mixed 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 it made it impossible to outgrow the market. And we expect similar in 26. We expect market growth across regions to be more or less similar. and so our content difference in China will be less relevant because of the similar market growth in each region.
I appreciate the color. Thank you.
Operator
The next question comes from Robert Jameson with Vertical Research. Please go ahead.
Hi. Thank you for taking my questions. I 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 As we think about this as we go forward, does this potentially 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, particularly given the focus on winning with the right products and customers across the portfolio. Is that the right way to think about, you know, 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, we feel very confident that we can generate values by doing that. I think this is you've summarized it very well okay perfect and then sorry just just one quick follow-up there too Stefan 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 you know one one big learning is especially now that I've also been to southeast days and you know i met my teams in japan and korea and i'll you know still travel on beyond that is you know i'm to be open i'm even more confident with what i see in the strong team that we have and you know the capabilities that we have this is really a i think something that stands out with since with sinceada in comparison to others you know when it when i travel to japan we have a long long standing team with a great amount of experience and been with the company for many years so they know exactly um you know 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 a 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've visited for example in you know in china which where i see a similar picture or even you know in mexico and and other regions i want to count you know i want to list all up now but that's that's been very encouraging and i think you know that foundation gives us the
opportunity around value creation and growth and everything that we have you know ahead of us excellent thank you so much the next question comes from joseph sacks with ubs please go ahead thanks uh good afternoon um i wanted to touch stefan on um some of the opportunities you you mentioned in the data center, and I know you have some content in and outside as you highlight on the slides. And some of that actually looks new for 26, but I guess the question is, as you sort of form 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 and D or will there be some, you know, inorganic opportunities potentially that present themselves?
And then I guess just a quick aside to that as well, like I know you've taken like almost $400 million of write-downs on Dynapower, but 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 let me elaborate a bit you know how how we see data centers and uh and you know what organic growth opportunities we have with them so i think first of all very important to mention that we have that our products are in data centers today so in existing data centers that are up and running and and i'll say that for products that are both inside data centers and outside the data centers and that's that's really broad so inside data centers we're talking about electrical protection so we're talking about circuit production circuit breakers fuses contests those are all existing products think of sensing so pressure and temperature sensing think of refrigerant leak detection and so on those are all existing products within data centers today they're designed in hyperscalers have designed those those sensor products into data centers they exist the same applies to products outside of data centers so sensor products outside of data centers so we're talking about you know power and peak management which is converters inverters we're talking about electrical protection so that contact is motor protection and so on so these are all existing product inside of the data center that's very important so this is all organic 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 um we're also designed into future data center concepts so you have the hype of hyperscalers that specify the teeth tier three components and basically once they specified and and once they're approved they designed into these future console we're designed into future data concepts with certain hyperscaler so not all but with certain and on the other hand we're in deep discussions with others so we're you know we're obviously have the ambition within 2026 to try and get designed into most hyperscaler concept of the googles and and amazon's and medicine and so on um and i'll 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 on some of the slides that's for example one example is flow sensors so that's within our own development and we're going to design a specific flow sensor for data centers and going to design that in to the future data centers that we um that we um we're currently discussing so so that's just that's it and then we have you know within data centers we have specific focus areas like liquid cooling for data center racks where we feel we have a very competitive position so overall strong position with existing products a lot of ideas for future products that we're currently working on and that'll 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 lift associated with lower amortization or depreciation for that example. But I think it does raise an important point, which is how 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, but our focus is on real margin expansion and not…
Operator
The next question comes from Luke Young with Baird. Please go ahead.
Good afternoon. Thanks for taking the question. I'm 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 profile 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, 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 across the three key regions that we serve there another roughly 25 tied to the construction and 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 aftermarket distribution those all break down pretty pretty equally in sort of the the seven to ten ten 10% size range each. So pretty diversified. And within those, we see the highest growth opportunity 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 Stefan to talk a little bit more about the growth that we see. exactly so let me let me explain um the growth opportunity around defense in a bit more detail so here i think it's important to mention we also uh said in the script um we're obviously in a period of a of you know super cycle growth of eu and uh and u.s defense spending and you know since ada is a fantastic opportunity to participate in this growth and today there are multiple defense application being served with our products, you know, the cross fighter jets, helicopters, ground transportation vehicles. These are obviously all strongly growing applications. 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 that within those UAVs, we already have existing business with all different types of products in powertrain systems and purchase precision sensing and feedback flight control and actuation systems and mission systems and targeting where we have a broad range of products we're in the actual drones or uavs 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 the growth.
Andrew, would it be possible just to break down the industrial segment as well, similar from a market standpoint, quick?
Sure thing. Industrials, as you know, So 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 I'll just give you the breakdown here. Resi and commercial sort of combined would be about 80% of the segment, and then the remaining 20% would be the clean energy opportunities that we see around, for example, Dynapower microgrid applications outside of the data center, as well as electrical protection components that we sell into grid hardening applications.
Operator
comes from Sameek with JPMorgan. Please go ahead.
Hi, thank you for taking my question. This is MP on behalf of Sameek Chatterjee. I just wanted to ask how much of the industrial growth during 4Q was linked, sorry, during the full year was linked to A2, A12 gas leak detection sensors, and how did the rest of the industrial business track during the year? And also, we'll squeeze in another one there, you will be launching this flow sensors in 2026. Will that be of similar contribution like the A2L this year? Thank you.
Yeah, I'll take the first part of the question on the size. So we launched A2L last year in 2024. We saw somewhere in the order of magnitude of $10 to $15 million of revenue primarily in the fourth quarter of 2024, and then that ramps significantly to about $70 million in 2025, so you could think of the year-on-year growth as somewhere in the order of magnitude of $50 to $60 million, and then we think that matures at north of a $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 two major new businesses with OEMs, with long-term agreements with A2L. So that's, I think, was a really, really good success in 2025. The team's 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's 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 SAM in North America of roughly $150 million, you see the same amount of sizable business in Southeast Asia. so in this case more in japan and in south korea um so that's a great opportunity and by the way with a3 similar size of business that we're working on so greater great growth in 25 and we're going to see continued growth in 26 onwards and especially now if uh south korea and um and japan comes in that'll be good for us himself jim comes from costa tesalu with wells bargo
Operator
So, please go ahead.
Hey, guys. Thanks for taking my questions. 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 two?
So we've been working on this quite some time. We've spent a lot of time in 2025 where we intensified our efforts. And look, it's pretty broad. So I wouldn't say it's based on a single group of products, be it electrical protection. It's pretty broad. And we want to, you know, when we speak about designing into future data center concepts, 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 course are inside and outside of data centers. Look, give us some time. This is developing. And we'll be more precise once we go further through the calls of, you know, 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.
Operator
The next question comes from Stephen Fox with Fox Advisors. Please go ahead.
Hi, good afternoon. 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 you know maybe where the incremental margins may differ? Thanks very much.
Yeah 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 and we see higher growth opportunity in industrials and aerospace defense and commercial equipment given the stronger underlying market growth that we expect in those in those sectors over time. So I would say automotive will continue to be, you know, sort of our, you know, 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 percent 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, you know, strengthening our margins, we don't differentiate between segments. So when we speak about um improving productivity or plant performance that's irrespective of the individual segment we do that across all segments when we speak about reducing product costs we tackle all our products in every single segment we don't only focus on specific products per segment so it's an exercise that we've been um you know pushing very hard in 2025 over all businesses that we have with Sinsata, and we're going to do exactly the same, if not even harder, in 2026 going forward. So it's not a specific segment-related exercise. This is a very, very broad initiative to push on marginal improvement.
Great. That's very helpful. Thank you.
Operator
The next question comes from Shreyas Patil with Wolf Research. Please go ahead.
Hey, thanks so much. Looking at Q4, you mentioned auto-organic growth was one percent, but it looks like industry production was up two, so it looks like you underperformed the market by about one point. You're pointing to low single-digit outgrowth in 26. I'm thinking maybe if you could help give us some of the drivers of outgrowth for this year, and are there opportunities ways to add content in areas outside of the powertrain, such as domain consolidation or autonomy? Thanks.
Yeah, 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 percents, but yes, you're right. The auto production rounds to 2% and our revenue rounded to 1. 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 a half a percent. 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 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.
And let me add to that. I think, you know, you asked the question around growth opportunities, and let me start a bit broader. and I think it's in this case it's important to mention that Sonsada is in a really desirable position. Let me explain that. Let me explain why I call it a desirable position. It's because we can literally grow in any region with any type of application and that's really irrespective if is nice or hybrid or or evi 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 take an example um where we have a high push in content andrew mentioned the content increase for example in china strong push towards electrification we benefit from that we have double the content of an ice if we win business that's obviously supports our growth path um uh in in china around plug-in hybrids and and e-refs we also said we have we have growth potential in that market i mean that's that's actually you know strong growing uh application where we see a 12 percent cager overall um and if we win business with with pfs or e-refs we will grow with the market depending where PS and EREFs are sold the most. So that is another area where we see, you know, a content bridge opportunity for Sensata to grow.
Operator
The next question comes from Joe Giordano with TV Cowan. Please go ahead.
Hey, guys. Thanks. Appreciate the follow-up here. One thing I just wanted, 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 and 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 we all kind of saw years ago so i think in this case um it's important that a lot of these products exist really today with sensata that's so so these are an existing product range within our portfolio um it could be within auto they could be within other areas of business so it's not a new development of a product might be a slight adaption 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 via data centers so i would say in that in that case the risk is manageable the second thing is so if you look at our our growth framework that we've set for ourselves so we say we want to maximize value from 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 um no 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 would step in. It needs to be high volume. It needs to be platform-driven business. It needs to be mission-critical. They need to be regulated sockets. That's important for us. And they also need to be hard-to-do applications. I think that's also important. So it's not something that you can copy that easily. So we have, I think, a high standard that we've set ourselves before we enter these markets or we enter new markets within the segments to manage that risk accordingly.
Yeah, perfect. That's exactly what the answer is opening here. So thank you, guys. Thank you. Thank you.
Operator
This concludes our question and answer session. I would like to turn the conference back over to James and Whistle 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.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
