Good afternoon, everyone, and welcome to the Sensata Technologies Q1 2026 earnings call. All participants will be in a listen-only mode. Should you need assistance, please send to 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 and then one on your touchstone telephones. To withdraw your questions, you may press star and two. 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.

James Entwistle Thank you, Operator, and good afternoon, 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 Chief Executive Officer and Andrew Lynch, Sonsata'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 Sonsata'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 and thought of safe harbor statement on slide During this conference call, we will make forward-looking statements regarding future events or the financial performance of the company that involves 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 gap financial statements in addition to today's presentation much of the information that we will discuss during the today's earnings call gap financial measures our gap and non-gap financials including reconciliations are included in our earnings release in the appendices of our presentation materials and in our sec file cover our detailed results for the first quarter of 2026 and our financial outlook for the second chief executive officer stefan von schuchman

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 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 are 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 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 excellent 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 defined what accident 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 i updated you in 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 priming 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 with where we have made progress these last few months. Our new leadership team is gaining meaningful momentum in their respective areas nicholas 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, Alice, 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 four, 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 not only 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 underlining earnings power. Margin resilience not only positions us to manage through headwinds, it also ensures we maximize the benefits 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 18.6%. This stands 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 is 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 five 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 outgrowth accelerated to 4% in the first quarter as we were gaining traction on multiple fronts. For example, in Europe, we're outgrowing production as our content per EV continues to improve. In the U.S., we're outgrowing production as our ICE 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 fault-break 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 HEC to enable switching between 400 and 800 volt charging architectures. In China, our local contact 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 also see green shoots of our next wave of growth in automotive with our performance in India. we are significantly outgrowing production in this vast growing market and our revenue with a key oem more than doubled year over year andrew will cover our detailed q2 guidance and affiliate 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 keenly aware of some of the end market demand risks that are posed by geopolitical events and the effects 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 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 a 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 backlogs and increased military spending in addition to ramping up to supply the market driven growth we're focused on securing our share of wallet on 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 impacts, but we will update you should opportunities materialize. Our industrial business continues to experience end-market softness, particularly in HVAC, where unit shipments in the North American market increased in the first quarter. Nonetheless, we delivered modest organic growth, primarily through share gain. We booked two additional A2L 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 elevated 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 six, 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 in power distribution units and sensing sockets in coolant 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 the cooling 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 roadmap 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 thermal requirements. Industry roadmaps from leading GPU manufacturers point towards higher-voltage DC power systems, including 800-volt DC, which drive substantially higher rack densities and accelerate the need for liquid cooling solutions. these transitions increase demand for high voltage contactors and for pressure temperature and flow sensors these application areas are closely aligned with our portfolio where our performance reliability and application expertise support 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 specification. This approach strengthens downstream pull-through by enabling EPCs and channel partners to deliver against predefined customer requirements. Since our last update, the strategy has resulted in our products being spec'd by two hyperscalers, and our new flow sensor product has advanced from development to customer validation. From a timing perspective, industry roadmaps indicate that adoption of liquid cooling is expected to accelerate beginning around mid-2027, particularly in high-density AI and high-performance computing deployments. As these systems 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 specced in is now and that's exactly where our focus is this is what's inside of us well and it is the call to our automotive legacy in parallel our dynapower business is actively bidding on several large programs with an extensive opportunity pipeline for ups projects the highlights i just shared are just peek 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 our growth mandate With that, I would like to extend my gratitude to Teams and SADA 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, Stefan. Let's turn to slide eight. For clarity, unless otherwise specified, amounts 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 expectation 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. 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 from tariffs on a year-over-year basis adjusted earnings per share was 86 cents an increase of 8 cents year over year exceeding the high end of our first quarter guidance range by one cent we delivered 105 million of free cash flow in the quarter which was an increase of 18 million or 21 percent year over year our free cash flow conversion rate was 83 percent of adjusted net income an increase of nine percentage points compared to 74 percent 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 nine 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 strong start to the year, particularly after the record full year result that we delivered last year returned 43 million of capital to shareholders in the quarter in addition to our quarterly dividend we repurchased 25 million dollars of the impact of share-based compensation ratio at the end of the first quarter was 2.65 times trailing 12 months adjusted ebitda compared to 3.06 times for the prior year quarter de-leveraging 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 percent for the 12 months ended march 31 2026 compared to 10.1 percent for the 12 months ended march 31 2025 we announced our second quarter dividend of 12 cents per share payable on may 27 to shareholders of record as of may 13 11 to discuss our first quarter we see this as an encouraging proof point for the traction we are gaining from our reorganization 125 million of revenue in the quarter a decrease of one percent year over year on a reported basis on an organic basis we delivered one percent growth year over year and four percent outgrowth against a market that decreased by 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 and was 23.5 in the quarter a year-over-year increase of 70 basis points from 22.8 percent driven by both productivity and portfolio optimum delivered 184 million of revenue in the quarter which was a year-over-year decrease of approximately one percent on a reported basis and a year-over-year increase of one percent on an organic basis organic growth was enabled by share gains despite ongoing softness in u.s residential and construction markets the margin was 27.1 percent in the first quarter a year-over-year increase of 100 basis points from 26.1%, primarily due to productivity gains. The 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 was 28.1%, a year-over-year increase of 260 basis points from 25.5 percent as we gained operating leverage from strong volume 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 let's turn to slide 12 to discuss what we are seeing in our end markets and decreased by approximately three percent in the first quarter for the full year third-party forecasters are expecting a production decrease of approximately two percent 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 industrials and markets u.s residential and construction markets remained soft in the first quarter which was evident in year-over-year decrease in u.s residential hvac shipments expect hvac shipments to stabilize in the second quarter and return to growth in the second half of 2026. in aerospace defense and commercial equipment commercial aircraft backlogs are strong defense spending is accelerated signs of recovery in the first quarter although north american truck build rates did not improve an indicator for a replenishment cycle in the second half of 2026 as lead times generally result in our revenue growth preceding truck build rates let's move to slide 13 and i will share our guidance for the second quarter of 2026 look for the year the second quarter we expect revenue of 950 million to 980 million adjusted operating income of 182 million to 190 million of 19.2 percent to 19.4 percent adjusted net income of 131 million to 139 million and adjusted earnings per share of 89 cents to second quarter guidance includes approximately 8 million in tariff costs and associated pass, approximately $4 million lower than our prior run rate due to recent changes in U.S. tariff rates, are based on trade policies in effect as of April 27, 2026. In-quarter guidance does not include any potential tariff refunds related to the recent IEPA 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 Stefan 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 inside us prepared the operational principles we brought into the organization have proven effective over the last five quarters just as we did last year we will operate our business in a manner to overcome challenges and perform in line with the expectations we set and to deliver margin expansion for the year as we do so the underlining 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, Stefan and Andrew. We will now begin Q&A. Operator, please introduce the first question.

Ladies and gentlemen, at this time, we'll begin that question and answer session. If you'd like to ask a question, please press star and then one using a touch to the telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. And our first question today comes from Wamsi Mohan from Bank of America. Please go ahead with your question.

Hey, guys. Thanks for taking my questions. This is Ryan Chulion for Wamsi. Two questions for me. One on auto content outgrowth of 4% of the quarter. Safar, I know you gave some details earlier in the call, but can you share any further color by the region? And as auto 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 two factors that need to be considered that can substantially influence these the ihs forecast the first one are geopolitical tensions and obviously they're being related to the oil price and the second factor that's important are test cost subsidies in china and as we know you know these were in place in quarter three quarter four of 2025 which led to a strong demand but since quarter one of uh 2026 subsidy policies have changed and this has obviously resulted in a weak demand nevertheless the the automotive segment the segment leads around you know marcus and 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're winning meaning many meaningful business in each and every region so in China with contact us in Southeast Asia for example in Japan we made good progress on winning new business as we've mentioned in the call and so have we in in South Korea and 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 two products that i mentioned they're called the high efficiency contactor which was the first win for this new product with a German OEM, and also the business mentioned around the front brake 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 a strong conviction that the team will outgrow the market in 2026. So I hope that fully answers your question around automotive.

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

Yeah. 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 compared to what we've seen in past years. So stronger start to the year and real Q2, you know, step up in margins from Q1 to Q2. It's, again, the same themes. It's that, you know, 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.

Thanks so much.

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

Yes, good afternoon. Thanks for taking the questions. I had one to start also on the margin topic. The company mentions 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 Sanzada is already taking to navigate this environment and put the company in position to expand margins in the back half?

So let me start with that, Mark. And, you know, I think it's important to say that, you know, despite all challenges that we have, we have a clear, you know, playbook to respond. And we've been working through that playbook 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 materials inflation, tariffs, and everything else. Equally important to mention is that we're designed into mission-critical application, which obviously gives us a position of leverage. And that, you know, saying that society can in the end defend its margins, and I think that pretty much differentiates us from others. I don't know, Andrew, if you want to add something to that.

Yeah, I think thematically those are exactly the factors that give us leverage in confidence in our ability to execute. And then I would say it's the same margin cadence that we observed last year. 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. And certainly there's headwinds and challenges associated with input. We saw last year around tariffs and the- A couple contacts, thanks.

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

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 ai leads you need to know it leads to more data processing and demand for high performance computing and this this will lead to a change in rec architecture to high voltage 800 volts with uh liquid cooling and that obviously it means that Sensata is sensing an electrical protection as a sensing and a protected electrical protection portfolio to serve these demanding application and this shift pivots the industry right into the center of Sensata's expertise which is serving these mission critical applications with automotive grade reliability meeting robust performance specification harsh environment really matters so I really feel we have you know 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 you know although the you know we're not at a point where we're providing avenue forecasters but the

other side of that is that we're we're not seeing a significant to intersect to this trend. So if you look at, you know, a typical automotive product, we're often designing to a specialization, and so that requires investing in the program ahead of revenue. With the data center poll, what works, 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.

With that frame, what's important to us is that we'll come, but less... our next question comes from christopher glenn from oppenheimer please go ahead with your question yeah uh thanks just wanted to um follow up on that in terms of the timing of you uh being able to speak with a lot more specificity about some of the data center opportunities and cooling and ups um there is an element of the the next gen architectures playing more to you there's also an element of the timing of your posture to be more purposeful about what you're 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 you know as we as you just um well as i explained you know in air cold data center concepts the opportunities you know not as strong or somewhat limited in comparison to liquid cool data center concepts and if i break that down into a product level and andrew can also maybe add a bit to timing um on the air cold data center concepts it's about temperature sensors and circuit breakers where we're gaining momentum. But as soon as we go to the high-voltage liquid-cooled data center concepts around 800 volt, 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 two concepts to each other. And what we're seeing out there in the market is, first of all, these concepts are being placed into the market and our you know task these last couple of months has been to get into these concepts and our expectation is that these data centers of these new data centers that are based on high voltage 800 volt architectures will be you know we'll start showing revenue growth for Sensata, you know, around mid-2027. So just over a year from now, from a timing point of view. Thanks.

Appreciate the deeper dive.

And to what extent did the products get, you know, represented as an integrated solution or a co-packaged solution for you guys for, you know, independent design wins into the liquid cooling and other targeted applications? yeah it's more technology oriented so that the winds on the on the electrical protection products will will tend to be grouped in the winds on the on the thermal management products will will tend to be driven by different decision makers and in different applications but i i would expect that those will will stick thanks again our next question comes from joe giordano from td callan

please go ahead with your question hey guys thanks for taking my questions I 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 of the last couple of years, right, like you had mixed, dramatic mixed 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, you know, we were focused a lot on international OEMs in the past, And we basically pretty much strongly shifted away from international OEMs more to local OEMs. And we've run a lot of business with them, be it on the contactor side, but also on our classic applications of 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, you know, I was just in our factory in Wuhu a couple of weeks ago, and we're busy wrapping up this contact-to-business, and it's quite a significant volume that will place us to be, you know, in a good third position within the market in China. um the second thing is and this is something that's starting to grow is that um we're seeing opportunities um with uh battery systems with battery systems now so we're seeing further opportunities it's also related to contactors um and um this is this is slowly but surely emerging and we're gaining traction with them that's the next level of opportunity that we see so yes we have a you know a strong base business with the legacy products and uh we're incumbent and um that that's 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 um word to that uh there are not that many suppliers on contact that can deliver at scale, but can also deliver it on a high quality level. And that's where SimSata 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.

Growth? And then, Joe, on the outgrowth question, so if you think about our auto business on a global basis first, You're typically looking at a 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 in the high. That's exactly what we saw last year, and we expect to continue to outgrow that market. The pricing dynamic is right.

Thank you for that. 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.

Yeah, 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...

I mean, we've been active, Joe. As I mentioned in the call, we just had a recent win with circuit breakers for a German manufacturer of armored ground transportation vehicles, um which is i think an important one with a you know with with uh with a product um in uh in that case in germany or in europe which is um you know 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 um which is really good thanks our next question comes from Guy Hardwick from Barclays, please go ahead with your question.

Hi, good evening, gentlemen. I have a question on the HVAC side. I think you said in your prepared remarks that your HVAC revenues are down, but obviously the market was down double digits in Q1. 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 like sell-side AHRI forecasts. So just question is, how much do you think you outperformed in Q1? And is that kind of a, I imagine it was considerable margin. And is that something we could extrapolate through the Q2 or what's implicit in Q2 guidance? And will that outperformance continue when the market kind of stabilizes in the second half?

Yeah, so the HVAC business is about 25% or so of our overall industrials business. And so with a quarter of our business down, you know, 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, you know, 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, you know, a growth accelerator for us. At the same time, you know, 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 does not rely on market. We'd be encouraged to see it.

Just my follow-up question is, obviously incremental margins were excellent in AD, C, and E, and the margins moved up in industrial quite nicely, even though revenues were flattish. So, was there any positive mix effects in those two segments which could have led to those margins?

Yeah. 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 uh variable contribution margin from that and then just more broadly when we see that level of growth uh 15 year on year the operating leverage that we get from that is is sharper than what you get from lower mid single digits growth and so that that was certainly a contributor as well and then i think your answer is stress ready is it was there any businesses i think you partly answered that which had positive mix other than arrow ah got it um no the mix was generally consistent across most of the commercial equipment space. And so, again, just in this growth rates.

Thank you.

Our next question comes from Amit Dariani from Evercore ISI. Please go ahead with your question.

Hi, thank you for the question. 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 Q1s 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?

Yeah. 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 the nation 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%. It will continue to benefit free cash flow, but we don't expect it.

And let me add to that. We've been systematically working on optimizing our CapEx, and let me give you two examples where we've been doing that. So one optimization is around CapEx 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, you know, bought 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 CapEx to keep the lights on. We've been optimizing that as well. So those have been two 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 smart automation.

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

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

Got it. Thanks a lot.

Thanks for the questions.

Our next question comes from Joseph Spock from UBS. Please go ahead with your question.

Thanks. Good afternoon. Andrew, just a couple of questions on tariffs. I guess two flavors. One is, I know in the past you said, you know, you source 70% from Mexico. I think 80% of that was USMCA compliant. there there was a change on uh section 232 metal tariffs wondering if there's any um impact you there and then i and iepa 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's true yeah so on the first part of the question um 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 in terms of the metals or commodities that we source. And we expect that with the cancellation of the IEPA tariffs, that our run rate moving forward would be approximately $8 million per third lower than that. On the question of...

Can you remind us how much you think you paid last year in IEPA?

Yeah, we paid a little over $40 million in tariffs last year, and the vast majority of that was AIPA, more than two-thirds.

Perfect. I just wanted to, back on the business head, turn our attention back to CE, because the market, you said, was down one. You were up 16. And I know you sort of talked about some potential, you know, improvement and, you know, more order books being filled there. But I guess I just want to understand whether, you know, 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 while we saw this quarter?

Yeah, so let me just start with, so when we talk about that segment in aggregate, aerospace defense and commercial equipment, about a quarter of it is in the aerospace end market, and about three quarters of it is in the center organic, is for the total segment. And certainly, on the commercial equipment side, yes, we believe the market in total down about a percent, and we saw outgrowth to that market primarily driven by what we believe was an inventory replenishment ahead of an hour. We do not expect that that is indicative of what the go-forward, always an inventory built that happens as you get into a replenishment cycle. continue to grow and to help.

One quick clarification. I was just looking at the 16% commercial equipment in the back of your slides, I think on 19, but you're saying that's not just truck. That's not just truck. Is that what you were?

That's right. If you're looking at that end market at the back end of the slides, then yes, that is growth that we experienced.

Okay.

So it was strong, but some of that was also construction and ag. and it's correct yes okay okay thank you and for example you know we're seeing pull through in in in uh diesel uh just the uh our next question comes from costa to sulis from wells fargo please go ahead with your question hey guys thanks for taking my questions um i want to ask about the uh the 100 uh precious metal inflation you saw in the quarter uh 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?

Yeah. 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 got $20 million of lever year on year with those two continued improvement in underlying earnings dependent of these. With respect to metals, and on those precious year-on-year perspective, rates are up approximately. 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 have the more permanent instruction that a little color around.

So, Dion, thanks, Angie. Let me add to that. So, basically, how we manage the impact, especially around metals inflation, is very different when you look at the different types of businesses we have. So, I think overall, the commonality of all businesses is that we're in strong negotiations with our supply base when it gets to, you know, pushing on metal inflation impacts towards Insider. 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 vave activities or so-called design activities to basically design the metal content of the product in our industrial business that's a you know quite a big task to design for example silver out of our products or to decontent the product uh so that once the you know the hedging period runs out um limited impact or literally no impact um without you know our products going forward related to um to metals and then of course i think the the last um lever is to you know discuss any impact directly with our customers um and you know speak about compensation uh which we're you know we're in continuous discussions with them and um you know we see openness for that as well okay um and then let me just uh talk about you know winning business i mean i think you know with the drones i i think a lot of that

is just customer access right it's like an emerging technology get customer access you're in you're in the design and uh phase with them you can grow that business how can you apply you know maybe some of those learnings to getting more business in the data center opportunity.

Around drones, because first of all, if I think you've got a bit more depth on the drone business or so-called UAVs, we see overall, we see a double-digit CAGR, which is, you know, I think there's a lot of opportunity there, especially around military drones. On the other hand, you know, we're designed in with drones with different applications and products, be it in sensing, 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?

Yeah, so you guys were able to get in on those design ends with the drones. You know, that's quite spectacular. spectacular. What, I guess, strategy can you use from getting in on those business to getting on more data center business? Any learnings from there that you can apply to winning data center business?

Well, look, it's pretty similar in the end. You know, like I said, if you take products that, existing products that we got designed in the drone business, like temperature sensors, pressure sensors, voice coil actuators, high efficiency motors, those products were ultimately not you know not designed for drone applications but because of the fast design cycles of you know of drones we've managed to get designed to get designed into these applications and eventually you know will be delivered delivering for you know for these drones on the data center it's pretty similar you know so we're in you know those are products that we've carried over from automotive business be it from electrical protection be it from you know be it sensing products um you know those are products that we've carried over and designed into data centers now um as mentioned into into hyperscaler concepts so so very similar in the style of business and how we you know manage our business okay thank you for taking my thoughts existing products that we've designed into those applications thank you our next question comes from luke young from Baird, please go ahead with your question.

I appreciate you taking the question. We're pretty deep in the call, so maybe I'll just ask one, and it's a little bigger picture. Stephen, 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, who do you think you're taking share from? and just market share is a factor in this data center story how important is it or are these more jump ball dynamics especially thinking about the 800 volt opportunities that you've got well thanks for the question maybe i'll start and let uh let's stephan chime in here the um i think the beauty with some of the new content opportunity that we've that we've laid out in uh in data center particularly with the architecture change is that 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 spec'd 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. The architecture is chained to our wheelhouse in terms of...

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

Appreciate that. I'll take my other questions offline.

Thank you.

Our next question comes from Shreyas Patil from Wolf Research. Please go ahead with your question.

Hey, thanks so much. Just one question from me as well. I'm just wondering if you could provide some color on the segment outgrowth expectations.

I guess if you're doing four points outgrowth and auto and double-digit organic and aero and commercial, I guess shouldn't organic growth in future be above that one to four percent that you're guiding so look i think um let me give you let me frame that generally and i think it's important to mention with all the examples that we've given um that sensata has has multiple growth factors and i've mentioned many examples you know where we've won business and and and where we're in and i think it's equally important that are segment leaders around Alice, Marcus, and Brian, they're very clear and accountable growth mandates as well. And as you can recall, we've returned some sort of back to growth, and that's not so long ago. That's in the second half of 2025, and we've actually accelerated that growth in quarter one of 2026. So, of course, one can question is, you know, is that growth momentum enough? But, you know, we always need to see where we come from, and I think the team has done a fantastic job in accelerating that growth, and we're now even showing growth over all segments in all areas, all different types of products, be it new products, and so on. So, you know, I feel we've made good progress.

Yeah, and just to maybe hone in on the outgrowth topic. 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 on a kind of 1% to 2% range for the quarter. And then if you look at the other two segments, we certainly don't expect that we're going to continue to grow.

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 5th, which is virtual, the TD Cowan Technology, Media, and Telecom Conference on Wednesday, May 27th in New York City, and the Wells Fargo Industrials Conference on Wednesday, June 10th 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.