Good morning and welcome to the Sensata Technologies Q4 and Full Year 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joshua Young. Mr. Young, please go ahead.

Thank you, Keith, and good morning, everyone. I’d like to welcome you to Sensata’s fourth quarter and full year 2016 earnings conference call. Joining me on today’s call are Martha Sullivan, Sensata’s President and CEO; and Paul Vasington, Sensata’s Chief Financial Officer. In addition to the earnings 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. And we will also post a replay of today’s webcast shortly after the conclusion of today’s call. Before we begin, I’d like to reference Sensata’s Safe Harbor statement, which I show on Slide #2. During the course of this conference call, we will make forward-looking statements regarding future events or the financial performance of the company that involve 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 Forms 10-Q and 10-K, as well as other subsequent SEC filings. On Slide #3, we show Sensata’s GAAP P&L for the full year 2016. We encourage you to review our GAAP financial statements in addition to today’s presentation. Most of the subsequent information that we will discuss during today’s call will be related to non-GAAP financial measures. Reconciliations of our GAAP to our non-GAAP financial measures are included in both our earnings release and in our webcast presentation. Martha will begin today’s call with an overall business summary. Paul will then cover our financials for the fourth quarter and the full year 2016 in more detail and also provide guidance for 2017 and the first quarter of 2017. We’ll then take your questions after our prepared remarks. Now, I’d like to turn the call over to Sensata’s President and CEO, Martha Sullivan.

Thank you, Joshua, and thank you all for joining us this morning. I am pleased to report that Sensata had a strong finish to the year in the fourth quarter and reported solid operational performance for the full year 2016, which can be seen on Slide 4. Despite facing challenges from soft HVOR and industrial markets as well as foreign exchange headwinds, we executed well and delivered our full year 2016 guidance. This demonstrates Sensata’s ability to respond efficiently to changing market conditions as well as the multiple levers we have to drive earnings and cash flow growth. In fourth quarter of 2016, we reported revenues of $788.4 million and organic revenue growth of 5.8%, which was above the midpoint of our guidance. For the full year 2016, we delivered 1.6% organic revenue growth and adjusted EPS of $2.89, which was also above the midpoint of our guidance and represented 14.2% organic growth. This strong operating-leverage was the result of productivity gains as well as M&A cost synergies. We generated free cash flow of $391 million in 2016, which represented 12% of our revenue in line with the guidance we provided earlier this year. This strong free cash flow enabled us to rapidly pay down our debt, and strengthen our balance sheet. We reduced our net leverage ratio from 4.6 times to 3.8 times by the end of 2016. Finally, we continue to see long-term opportunities for growth and we are investing for the future. We made important investments in technologies that led to new design wins and further expanded our position in electrification. We also made a strategic investment into Quanergy to capitalize on the future growth of the autonomous driving market. On Slide 5, you can see Sensata’s performance versus the full-year guidance we provided in February 2016.…

Thank you, Martha. Key highlights for the fourth quarter, as shown on Slide 10 include revenue of $788.4 million in the quarter, an increase of 8.5% in the fourth quarter of 2015. Of this growth, acquisitions, net of exited businesses added 5.6% to revenues. Changes in foreign exchange rates represented a net revenue headwind of 2.9%, and organic revenue growth of 5.8% in the fourth quarter of 2016. Both of our segments reported strong top line growth in the fourth quarter of 2016. Performance Sensing reported organic revenue growth of 4.7% and Sensing Solutions reported organic revenue growth of 9.8% do impart to easier comparisons to the prior quarter. From a geographic perspective, Asia continued to be our strongest region due to strength in China followed by Europe, which also posted solid organic growth. Adjusted EBIT grew by 15.9% and EBIT margins increased by 150 basis points compared to the fourth quarter of 2015. Adjusted net income was $131 million or 16.6% of revenue, an increase of 100 basis points compared to the fourth quarter of 2015. Adjusted earnings per share was $0.76 in the fourth quarter of 2016, a $0.10 increase from the prior quarter. In addition, adjusted earnings per share grow organically by 30% in the fourth quarter of 2016. As a reminder, we acquired CST on December 1, 2015. Our organic growth and adjusted net income, and adjusted earnings per share benefited from the fact that CST incurred in $11 million loss in December of 2015, and a considerable year-over-year improvement help drive our strong organic results. The details our adjusted earnings per share growth for the fourth quarter are illustrated in the bottom half of the slide. Higher volume and net productivity improvement added approximately $0.20 of EPS offset by an $0.08 EPS headwind from foreign…

Thank you. Keith, please assemble the Q&A roster.

Yes. Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] And today’s first question comes from Shawn Harrison with Longbow Research.

Hi, good morning. Martha, I was hoping you could help me bridge the organic growth that you saw in the fourth quarter, which was quite robust, 2% organic growth in the first quarter here. I know that you had some easy comps in the fourth quarter. But was there any pull-forward of demand? Are you seeing something change in the demand environment to see from what was a robust second half of organic growth into slower growth starting 2017?

Yes, in the fourth quarter [ph] demand in China auto were strong. And in fact, China in general was strong in the fourth quarter. We are not expecting that same level of demand, and as we move into the first quarter of 2017. We’ve been tracking the phenomena of incentives on vehicle sales in China. And while those incentives are still there, they are at reduced rate, and we expected that to impact demand. In fact, we are seeing that in our overall fill rate. So still strong demand in China, as we move into the New Year. But not at what was a very strong rate in the fourth quarter. And just to bring that home, we think production in China auto grew something like 15% in the fourth quarter of 2016.

As a follow-on to that, what is your expectation for China auto production growth either in the first quarter or for all of 2017?

Yes, look in general, we think the global auto production, our view of the world is that will be flat. We think China will be probably certainly less growth than we saw in 2016. And so, if you look in general what third-party forecasters are calling out, we are not substantially different, maybe slightly more conservative on China.

Thank you. And the next question comes from Amit Daryanani from RBC Capital Markets.

Yes, thanks a lot. Good morning, guys. So, I guess, maybe to start off with, could you just talk about - when I think about your adjusted net income, I think you are looking at about 17% exit for 2017 right now, just in net income margins, you target something north of 21%. Just talk about the timeline to close that gap and what are the initiatives that you need to get there, i.e., is the current integration charges enough to get there, do you need more as you go forward?

You said 21%. Want to make sure I heard the numbers right.

Yes, I think you guys have talked about adjusted net income margin targets of 21% plus in the long-term, right?

In the long-term, and so that that comes back to - that’s a margin framework, where we have that we work towards. What’s going to drive us in that direction is going to be the continued integration of CST and Schrader, it’s continuing to improve the core business that we do every year in terms of operational efficiency and productivity. And it’s continuing to execute on the frontend in capturing all the opportunities that are out there for us in terms of revenue opportunity. So again it’s a framework, and it’s a long-term framework, and it’s one we’re working towards, and believe that we can achieve it at some point in the longer-term horizon.

And then, I think you asked specifically about is there enough interest expense movement to drive that. One of the things we are really going out for investors is on Slide 7 of our deck, where you can look at what we are doing operationally to improve the overall margins of our acquired business and get the overall business moving towards those long-term targets. So it’s definitely an important part of how we get there is the operational improvement. That comes to very specific integration activities. But also comes to just applying the continuous improvement practices of Sensata, that’s also key to helping us to get there.

Fair enough. And if I just follow-up, to Shawn’s question just on the 2017 guide, you’re looking at 2% organic growth. And I understand the China component you talked about. But could you perhaps just talk about what are you seeing in autos on a geo-basis on HVOR basis, because it seems like there should be positive offsets to the China headwind that you’re talking about. So maybe just framework, what’s the expectation on auto production, HVOR and so on for 2017 in that 1% to 3% organic guide?

Yes, I would talk about some of the markets that we think will be headwinds. We continue to think, we will see some deterioration in the HVOR market, when you look at Class 5 through Class 8, so not nearly the deterioration that we saw 2015 to 2016, but a continued drop in that end-market. We think that North American auto production is one that will most likely be a headwind. As we look forward that’s about 20% of our overall Sensata revenue exposures. Europe growing, not growing strong, when you net all that out it’s about - and it’s really no impact for Sensata in our view of overall production.

Perfect. Thank you, guys.

Keith, please take the next question.

Oh, yes, yes, the next question comes from Wamsi Mohan from Bank of America Merrill Lynch.

Yes, thank you, good morning. Martha, the organic growth rate has been on the sort of low-single-digit range when you look on an annual basis for the last five years outside of 2014. We have obviously gone through significant industrial weakness period. We’ve gone through sort of HVOR weakness, now potentially some auto weakness ahead of us. So given your pipeline of design wins, do you think we would see higher organic growth over the next five years versus the previous five? And given what you know about regulatory environment, how do you feel, what the major drivers could be over here? And I have a follow-up?

I do, Wamsi. If you look back, we’ve seen incremental improvements in our organic growth starting from 2015, so better in 2016 we expected to be better in 2017. And I expect it to be better as we move forward in the subsequent years. And, yes, that is based on our book of design-wins, which was strong in 2016. So we secured about $420 million of new design-wins. This is - think of it as incremental backlog bookings for Sensata. But these play out over the launch in the two to four year time horizon. And then play out beyond that before they ramp to the stabilized volume. So we are confident, given what we continue to secure in terms of new wins. And we do expect to continue to see a step up in that organic rate as we go forward.

Okay, thanks, Martha. And then, maybe Paul, you targeted a $0.20 of improvement in 2016, and incremental $0.20 benefit from integration of your prior acquisitions in 2017. How did you execute versus that target, do you still expect $0.20 in 2017? And if so that alone sort of gets you to the low-end of your EPS guide, and you’ve got positive revenue growth expectations, and potentially delevering as well. So it just seems the low end of your range is sort of already in the bag. What do you say would be some puts and takes in addition to that? Thanks.

Sure. So as it relates to how the acquisitions performed in 2016, they performed less than what we intended. So we have said about somewhere around $0.40 or so $0.40, $0.45. We did not achieve that. Much of that was driven by weaker volumes that we saw in CST, and a little bit in the DeltaTech business, which serves the agricultural market. As we look forward, the integrations continue to be on track in terms of integrating the businesses and the cost synergies. I would characterize that for 2017, I would say about half of the EPS improvement that we were going to see next year will be attributed to those three acquisitions. And the other half will be coming from the core business, excluding those three businesses.

Thank you. And the next question comes from Samik Chatterjee with JPMorgan.

Hi, good morning. I just wanted to firstly touch upon Quanergy and that’s an exciting opportunity in terms of the development of LiDAR. From your presence at CES, just curious what you’re hearing from your customers in terms of what is the price point or the cost target that Quanergy needs to hit for the LiDAR to get the sensor pack - to get the LiDAR as a key part of the sensor package on a vehicle. And when do you think Quanergy could hit those targets?

When you look at how fundamental that parameter is to autonomous driving and you look at the current price points, the current economics and the obstacles of packaging mechanical LiDAR, our discussions with our customers are not very focused on pricing. They’re really focused on overall functionality. And the point being that everyone understands the economics are orders of magnitude different from mechanical price points today. So there is not a pinpointed price. I am sure ten years into the adoption of autonomous vehicles that will be very much of the overall conversation. Much more important is getting the performance of the sensors and the packaging required to make it more of a mass adapted parameter. That’s really where our focus is.

Okay, okay all right. And just one question on the - I know you had commented on the impact of border-adjusted taxes. But when we look at the other discussions going around as a proposed corporate tax reform plan, which mentions something about disallowance of business deduction for net interest expense, and there is also some noise around relaxation of CAFE standard. So have you been able to sort of do any work in terms of what the impact of those two would be on the business?

Yeah, those are pretty distinct and wide ranging things that you are asking about. I can comment a bit on CAFE. This is an area that’s always been a bit dysfunctional for the automotive OEM, and given that it is an average across the fleet requirement generally what happens is they’re forced to bring a mix to the marketplace that allows them to hit that standard. Meanwhile, for years and our continued forward feature is to make all engines and all power trains more efficient. The point being that whether it’s an SUV or a pickup truck, consumers are valuing fuel economy, and we don’t expect that to change. We do expect that with the - if there is a relaxation of CAFE requirements that will allow our customers to sell into the market, what the consumer wants and we think that’s really healthy for the industry.

Thank you. And the next question comes from Rich Kwas with Wells Fargo Securities.

Hi, good morning. Martha, just want to follow-up on Sensing as you think about growth into 2017. In the past you talked about inventory headwinds are coming out of prior calendar years. A pretty strong growth coming here in the fourth quarter, how would you characterize inventory levels for your key verticals within the Sensing Solutions?

Yes. We feel that the inventories are being well managed, Rich, so that’s not one that I would put as a headwind to us in the first quarter here. So feeling pretty good about the discipline in really all of our markets at this point.

Okay. And then Paul on your comment previously around half of the EPS growth coming from prior deals. Does that include debt pay down as a component of that leverage reduction?

Yes. I’m just thinking about the operating improvements I’d be looking on an adjusted EBIT basis. How much of the contribution - how much the growth would come from those three acquired business versus the core units? Roughly half, half and half.

Okay. So then the other half would…

Maybe a little strong on the acquisitions but not enough to get to move the needle.

Okay. So is there any meaningful interest savings within the EPS growth for 2017?

Well, [we’re assuming just to pass this around] [ph] flat. We have a rising interest rate environment. We paid down a whole bunch of debt, so net, we’re going to assume net-net interest about flat, focused on net leverage, driving down to three times and keeping our options open in terms of how we’re going to get to the three times.

Okay. And then lastly Martha on auto as it relates to Europe with diesel penetration you have other suppliers out there auto companies related companies talking about lower diesel penetration in Europe and kind of long-term outlooks where there is grind lower and maybe it picks up steam. How would you characterize what you’re seeing from the customer base as you look at your growth rate for the auto business in the next three to five years, what are you contemplating for diesel penetration?

Yes. We expect that we’re going to see contraction of that penetration Rich overtime, so probably about 5 points of market share. If you think out in the five year horizon, one of the things that we’re making visible to investors is that we’re actually seeing content, our content grow more quickly on gasoline engines and then on diesel engines, and part of that is by design, recognizing some of the market headwinds for diesel, and therefore where we have focused on new applications. So when we get into that time horizon, we get to the point where we’re somewhat agnostic about whether or not it’s a gas or a diesel engine. But to your specific question, we do expect there to be about five points of deterioration in about five year time horizon. We saw - if you take that linearly, we think that’s above what happened between 2015 and 2016, and an additional step down in 2017. So pretty much on track to where we called it.

Thank you. [Operator Instructions] and our next question comes from William Stein with SunTrust.

Great, thanks. First on the restructuring side. Our CST and Schrader are the only two that aren’t fully integrated now, and how much improvement to go following 2017 in those deals?

Well, yes, DeltaTech is fully integrated at this point. We certainly lapped the last two years and business is playing well for CST still early one year into the integration, Schrader were midway through the integration than a lot of frontend now continue to integrate the backend.

Yes, just keep in mind, keep making the point that there is pretty strong methodology inside Sensata to constantly be looking at optimizing our network, our supply chain network, and constantly we’re putting in place overall productivity measures. And so that piece of it is forward looking for our entire business including DeltaTech, but the specific integration plans to Paul’s point are targeted at CST and Schrader.

Right. And then the follow-up if I can, Martha you mentioned this new content growth in gas engine particular emissions. Is that a new category when should we see that ramp and is that a meaningful part of your content growth going forward?

It’s a new application and it’s one that’s important in Europe and in China. One of the things that allowed us to be successful there is the fact that we have a much more competitive low pressure sensor offering, so it’s a low pressure device. We also see opportunity now for high temperature sensing. We talked about the fact that we secured something like $420 million in new business wins in 2016, and about $50 million of those were associated with this new application. Timing typical to the long-term cycle here, so again we are focused on the three to four years before launch, and then time to ramp from there.

Got it. Thank you.

Thank you. And the next question comes from Christopher Glynn with Oppenheimer.

Thanks. Good morning. Nice picture of the second bridge on Slide 9. Just wondering if you could give me the integration spend for the fourth quarter and for the full-year 2016.

So the fourth quarter was about 3, and for the year it was about 17.

Okay. So that’s flat next year, okay. And then on the FX you absorbed $0.08 in the fourth quarter, I think the guide was $0.05. So usually have pretty good visibility on that. So wondering what change there and still EPS came in at the high-end of the guide. So wondering what the offset was to the unfavorable FX disruption?

One of the things is that we don’t hedged the renminbi, so the really strong China revenue came with an offsetting FX unfavorable impact. And then there was a very quick very rapid down decline in the euro versus the dollar in Q4 that we are not 100% hedge or 85% to 90% hedge of currency. So it had a little bit of an impact, but the renminbi was probably the biggest impactful, then we also got all the revenue and the profit associated with those sales.

Okay. It makes sense. Thanks.

Thank you. And the next question comes from Jeremie Capron with CLSA.

Thanks. Good morning all. First, I wanted to confirm, I heard your market assumptions right for 2017, you said overall pretty much neutral, right?

Yes.

Yes.

Okay. And when I look at the organic growth that you delivered in Q4 just short up 6% clearly accelerating here, and I understand the benefits of the strength in the Chinese auto market. But your guidance for Q1 implies significant slowdown. I’m wondering what headwinds beyond China are you seeing here.

Yes, I - we’re not seeing significant headwinds aside from the ones that we talked about. We expect that our heavy vehicle off-road market continues to have a headwind there that maybe a piece of it. If you look at the comp for a portion of our sensing solution business were fairly weak in the fourth quarter to fourth quarter comparison. And that’s not the situation we’ll be seeing on a first to first.

Okay. And I didn’t hear any guidance around the cash flow. You had a good cash flow in 2016, good conversion. Can you give us any sense of what you expect for 2017, any puts and takes around usual conversion of net income, and well on CapEx, please?

So we mentioned on the call for $425 to $450 million of free cash flow, and CapEx of $130 million to $150 million. So the midpoint CapEx is $140 million, which will be higher than what we spent this year. I think working capital will be relatively flat year-over-year. So earnings, the conversion of free cash earnings will improve a little bit.

Thank you. And the next question comes from Matt Sheerin with Stifel.

Yes, thanks. A couple of questions, just one, just clarifying your revenue growth expectations for that that 1% to 3% organic growth, is that for both segments, both the Sensing Solutions and the core sensor business?

We expect both segments will achieve organic growth.

Okay. And your commentary around bringing the net leverage down to 3x, that would imply no additional debt and obviously no acquisitions. And you haven’t done a deal in over a year. What’s your thinking on M&A? Is that still one of your top priorities in terms of growth? And if so, what areas or technological voids that would you be looking to fill?

Yes, M&A is still a very much part of our playbook as our other ways of deploying capital to create returns for our shareholder. In the event that we actually over-perform and we’re approaching the 3-times, we have been actively looking at alternative ways to deploy that capital. When we think about M&A, one of the benefits of the CST acquisition was that it allowed us to develop exposures and now business positions in new end-markets, where we see sensing opportunity. And we also see opportunity for further sensor consolidation in those verticals. So we’re thinking about that carefully. Relative to technologies, we tend to be a little bit careful and close to the vest about any targeted technologies that we may be thinking about.

Okay, fair enough. Thank you.

Thank you. And the next question comes from Craig Hettenbach with Morgan Stanley.

Yes, thanks. On CST, you mentioned just a weaker environment that’s impacted a number of companies in 2016. But just can you talk about maybe the investment in that business and kind of the intermediate to longer-term opportunities you see there?

Yes, if we rewind to the state of that business at the time of acquisitions, it was a business with pretty decent margin performance, but very little past investment for growth. And we’re changing that. And I think very delighted that a portion of our overall design-wins in 2016 includes their portfolio, so particularly in aerospace for example, and in parts of our off-road market as well. So it takes time to actually turn a business towards growth. But we’re making very good progress on that front, at the same time really performing extremely well in terms of margin improvement in the business.

Great. And then just a follow-up question on M&A, when you think about the deleveraging angle versus you have been very active in your integrating deals. How do you kind of put that altogether in terms of appropriate timing and opportunity set and what’s most important to you in 2017?

I think that, when we think about that is that we make sure that we have the appropriate threshold expectations for our overall M&A. And so, during the time where we’ve been more and more leveraged that threshold expectation is going to increase significantly. At the same time, deals are a function of lot of things that that happen. And making sure that the valuations are where they should be, most of what we do are private deals or proprietary deals where we have some impact on the overall timing of the transaction. So we think about it that way as well. So, yes, still an important part of our growth story at Sensata.

Got it. Thank you.

Thank you. And the next question comes from Jim Suva with Citi.

Thank you very much. For you organic growth for next year, can you help us understand has anything changed with pricing or content growth as the low-single-digit growth looks a little bit small. So we’re just trying to look it, is it more macro-driven or, content, has that decelerated or how should we think about that?

Yes, a couple of comments on that front. When you look at our backlog on design-wins, our new business awards, they don’t tend to come in, in a linear way year-over-year. So long cycle business, the launch and timing of those depends very much on the platform or what’s happening in the region. And I would say our pace of content wins is impacted by that more than anything else. We’re seeing strong content performance in markets that are still down markets. So our commercial truck market for example, we contended it to do very well from a content perspective there, similarly in Europe, where foreign currency has been a headwind for us. So, no, we don’t see it as sort of a slowdown in the overall growth. We do think that there are parts of the business where content is not as robust in 2016 and 2017 as we’ve seen in 2014, for example. Given the backlog, we expect to see organic rates or organic growth rate continue to pace up as we move forward. See, the only other comment I would make relative to pricing, we have not seen changes in the pricing dynamic. But we do have a practice of launching new generation products that generally come in at a lower price point, although a higher margin point. And that just allows us to increase our competitiveness and our penetration, and provide what is a great economic value for our customers. And we’re seeing a little more of that in 2017 than we’ve seen in the past.

Thank you. And that is all the time we’ve allotted questions. I would like to return the call over to Joshua Young for any closing comments.

Thank you, Keith. I’d like to thank everyone for joining us this morning. We appreciate your continued interest in Sensata. Sensata will be attending the following events or conferences in the first quarter of 2017: The Goldman Tech Conference in San Francisco; the Barclays Industrial Conference in Miami; and the J.P. Morgan’s Industrial Conference in New York. We encourage you to meet with us at these conferences or visit our headquarters in Attleboro, Massachusetts. Thank you and goodbye.

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.