Hello and welcome to the Sensata Technologies Q1 2017 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this conference is being recorded. And I’d like to turn the conference over to Joshua Young, Vice President of Investor Relations. Please go ahead.

Thank you very much, Keith, and good morning, everybody. I’d like to welcome you to Sensata’s first quarter 2017 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 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 on Slide number 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 certain risks and uncertainties. The company’s actual results may differ materially from the projections described in such statements. Factors that might cause such differences include but are not limited to, those discussed in our Forms 10-Q and 10-K, as well as other subsequent SEC filings. On Slide number 3, we show Sensata’s GAAP P&L for the first quarter of 2017. We encourage you to review our GAAP financial statements in addition to today’s presentation. Most of the subsequent information that we will be discussing during today’s call will be related to non-GAAP financial measures. Reconciliations of our GAAP to non-GAAP financial measures are included in 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 first quarter of 2017 in more detail and provide guidance for the full year and second quarter of 2017. We will 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 get off to a strong start to the year, reporting another quarter of solid operational performance in all segments of our business. I will begin our presentation on Slide 4. We delivered solid organic revenue growth, margin expansion and double-digit organic earnings growth in the first quarter of 2017 despite facing foreign exchange headwinds and higher integration spending. On the top-line, we reported revenues of $807.3 million in organic revenue growth of 3.5% both of which were above the high end of our previous guidance for the quarter. Our Performance Sensing business posted 3.1% organic growth, while our Sensing Solutions business reported 4.9% organic revenue growth, due to improving demand from HVAC, appliance and industrial customers. We saw a strong organic margin expansion in the first quarter of 2017 with adjusted EBIT margins expanding by 90 basis points and adjusted net income margins expanding by 130 basis points compared to the first quarter of 2016. On the bottom line, we continue to sustain double-digit organic growth in adjusted earnings per share posting adjusted EPS organic growth of 12% in the first quarter of 2017. This performance was driven by cost synergies in our acquired business as well as higher productivity in our core business. For the fifth consecutive quarter, we met or exceeded our guidance, which demonstrates our continued ability to execute and respond efficiently to changing market conditions. Finally, we laid the foundation for continued long-term opportunities for growth by securing important new NBO wins in auto, HVOR and aerospace. As a result, we believe we are well positioned to exceed our 2016 NBO performance, which is the direct result of growth investments we have made in previous quarters and…

Thank you, Martha. Key highlights for the first quarter as shown on Slide 10 include revenue of $807.3 million the quarter, an increase of 1.3% for the first quarter of 2016. Of this growth, changes in foreign exchange rates primarily the euro and Chinese yuan represented a net revenue headwind of 2.2%. Excluding foreign exchange, organic revenue growth was 3.5% in the first quarter of 2017. I would note that this is the first quarter in two years, we have not had any revenue impact that resulted acquisitions completed in the previous 12 months. Both of our segments reported strong top line growth in the first quarter of 2017. Performance Sensing reported organic revenue growth of 3.1% and Sensing Solutions reported organic revenue growth of 4.9%. Top line growth from design wins strong execution; recovery end markets fueled our revenue growth compared to the prior year quarter. From a geographic perspective, Asia continue to drive most of our organic revenue growth primarily due to strength in China. Adjusted EBIT grew by 4% and adjusted EBIT margins increased by 50 basis points compared to the first quarter of 2016. Adjusted net income was $121.5 million or 15% of revenue, margin increase of 80 basis points compared to the first quarter of 2016. Organic adjusted net income margin, which excludes the impact of foreign exchange rates 15.5% in the first quarter of 2017 which was 130 basis points higher year-over-year. Adjusted earnings per share was $0.71 in the first quarter of 2017, a $0.05 increase from the prior year quarter. Organic adjusted earnings per share grew by 12% in the first quarter of 2017. And the details of this improvement are illustrated in the bottom half of the slide. Higher volume and net productivity improvements added approximately $0.08 to organic earnings growth…

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

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Samik Chatterjee with JPMorgan.

Hi, good morning. Hi, Martha. Hi, Paul.

Hey.

Hey, on Slide 8, thanks for discussing the content growth opportunities that you have in HVAC. So I was wondering like when you look at this Variable Refrigerant Flow Technology can you help us with what is the penetration of this technology today and what are your expectations – penetration of this five years down the line and so that we can sort of size, what the content growth could be in terms of quantify that a bit better.

Yes, the penetration rate across the industry is still quite low, heavier in Asia, some opportunity as you get to North America as well. And our expectation is that this application for us grows at about 12%. So we think nice content growth associated with that application.

Okay. And just a clarification, do you think you can go through this content growth opportunity entirely organically? Or do you need to acquire any particular technologies to help with that?

No, we’ve got a really nice portfolio today aligned to this particular opportunity. So we’ll get there organically.

Got it, got it. And a quick second one from me. Just in terms of your diesel revenues, which are still growing even if that market is decline. Could you – I know you mentioned content gains as well as market share gains that’s driving it. Could you share some more details on that as to what’s driving? What the content gain as well as market share? Who are you really gain share from?

Let me make sure I understand the question. Are we talking about the automotive markets?

Yes.

Okay. And so your question was related to vehicle inventories that are growing and we see that in China and in North America. Most of our growth that’s independent of end market is really coming from our position in applications that grow more quickly than the production of the overall market. And so this is for the most part not about us taking away sockets that belong to somebody else. But disproportionately growing in high growth applications, we’ve talked about things like gas direct injection, we’ve talked about gas particulate filter sensing. We’ve talked about other new exhaust sensors that are coming into play and engine outside of diesel. So those are examples, tire pressure sensing is a really important growth driver for us in the future and that’s where some of the design wins are coming into play.

Thank you. And the next question comes from Wamsi Mohan with Merrill Lynch.

Yes. Thank you, good morning. So Martha, when you look at organic revenue in the quarter 2.5% your guide reflects sort of 2% to 4% next quarter, your full year guide implies couple of points of deceleration from here, which I don’t think is very different from prior expectations. I was wondering if you could frame that in the context of how much of that delta is just, so as the expected auto market weakness first half versus second half versus any other changes to expectation in other areas. And I have a follow-up.

That really is – you nailed it right there, that’s a primary view that we have looking at what’s happening in both China and in North America, so, not a lot of change beyond just the first half to second half timing there.

Okay, great. Thanks. And as follow-up, when I look at the European auto revenues that decline $10 million year-on-year. Can you talk about some puts and takes there in terms of FX, production, diesel? What was the main puts and takes? And should we expect that magnitude of revenue decline to persist through the rest of the year? Thanks.

Yes. So the FX is certainly a piece of it and we’ll see that headwind and we sell those out – most of the FX movement, you see is from the euro and from the Chinese yuan. In terms of organic growth, we had a strong organic quarter in Europe auto in the fourth quarter of 2016. And saw some component level inventory dislocations that impacted the first quarter, that’s not our expectation as we go forward.

Thanks, Martha.

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

Thanks a lot. Good morning guys. Two questions from me in roll up. Martha, you talked about the shift from diesel to gasoline. I’m wondering – do you see that accelerating in the near-term in 2017 specifically. And how do you think of your content per vehicle and profit pool in diesel versus gasoline?

Yes. We don’t see that deteriorating in 2017 and we see those penetration rates very close to where we’d call them. Maybe slightly more positive than we had expected. So, just keep in mind, we expect about a 5% share loss of diesels, their loss in the European market over the next five years. When we think about the content opportunity difference for Sensata between diesel and gasoline engines, today that sets about $5 to $10 depending on the OEM. And we see that diminishing as we’ve been winning new business much more strongly on the gas and hybrid side and then on the diesel side. So the content opportunity is really catching up quickly on the gas and hybrid side of the business.

That’s really helpful. I guess maybe just a follow-up on Slide 6; where you talked about 60% of deal centric savings that still lie ahead for you over the next two years I think. Can you talk about what is that 60% – what does that equate you into the dollar amount of dollars pretends to your P&L. And what sort of deal integration charges should we expect to the next few years to achieve those savings.

So I’ll take that one, Amit. The first comment is that when you go back to what we’ve said, when we first acquired the businesses we said about $20 million of synergies for Schrader, $15 million for CST. As we stand here today, we see the opportunity of being significantly higher. And so there’s quite a bit of synergies in front of us in the higher than what we would expect and we originally did the deals. Most of that synergies going to come from the actions that we’re taking now, which is moving manufacturing from high cost to low cost, locations such as Springfield to our – to a lower cost location as well as the closure of the Minden, Germany plant. There is more work to be done, there are more synergies to began and they start to come into the P&L here in the second half of 2017 and then even greater in 2018. So a lot of opportunity in front of us, we’re executing most of that today, we can see those actions in front of us and really excited about the opportunity.

Perfect. Thank you.

Thank you. And the next question comes from Shawn Harrison with Longbow Research.

Hi, good morning and congrats on the good start to the year. Just following up a bit on Amit’s question. As I think about previous acquisitions, I know there was a drag because of HVOR weakness. Is there any way you can quantify maybe what that weaknesses had on the contribution of – be at DeltaTech or Wabash or CST. And then maybe what a turnaround in that HVOR market could represent over the next year or two for you. And I have a follow up.

Yes. I think the way you think about those past acquisitions. First recognize that those are now completely integrated into the core. And so when we talk about our overall core margins those are included in Sensata’s core business. Given that their exposure was primarily HVOR, the trends on the top line have been aligned with production in HVOR with significant outperformance by DeltaTech where we’re seeing very strong content growth. So when you look at the fact that our HVOR business in 2015 and 2016 were down much, much less in the overall end market. DeltaTech was a good contributor to that on an organic basis. We’re now seeing for the first time organic growth in that business, even though end markets are declining. So I think great contributors. Let me make sure that answers the question, but just to put that on perspective.

I think that’s helpful. I guess just following on that. Are you expecting positive organic growth then from the market in the second half of the year, because that’s what it seems like the industry is now forecasting?

No, we’re still relying on our content growth. So – our assumption is on overall HVOR and I think global HVOR is roughly flat. And so we expect to grow against that flat production and we still expect parts of that market to be down year-over-year as the year concludes.

Okay. As a pre-follow up, just on the auto production globally, I know you haven’t changed your expectations for the year, but if you seen any signs in terms of coming from customers that production will be starting to come offline in the second quarter or anything substantially different the 90 days ago.

You know nothing that that there have been some announcements around production cuts and model your changeovers. Again those are lining up with our expectations for what end markets would do.

Thank you. [Operator Instructions] And the next question comes from Rich Kwas with Wells Fargo Securities.

Hi, good morning all. Just a couple questions here on the accretion, Slide 8, I guess where you have or sorry. Slide 6 with regards to the synergies, when you look at Schrader and CST. Do we take 40% of the original savings, which I think was when you combine them $0.73 to $0.81 when they have first initially announced? Do we see that’s the right number in terms of what’s been achieved and rest is left to be achieved? Or is there a new benchmark we should think about in terms of the contribution? Just so that we have something that to gear off of here going forward.

Hello, Rich. We’re outperforming our original assumptions on cost synergy doing better than where we had call those going forward. At the same time, if you go back I think it’s our last earnings call we actually showed you where the EBIT performance of these businesses were and our intention to get them out to the segment margins of Sensata’s. So I think as you triangulate across those input you’ll get a sense for what’s in front of us.

Okay. All right. And then just on the first quarter performance in auto, Martha. I think you talked about some inventory de-stocking in Europe in the first quarter after and I guess some payback after the strong fourth quarter. But it does look like relative to overall light vehicle production that the organic revenue growth for auto was more or less in line. Apart from the inventory de-stock in Europe anything that you would know as it relates to North America, because it seems like China maybe came in better and expected.

No, I think commentary in line with what we said before keeping in mind that the inventory shift from fourth quarter 2016 in Europe with component level inventory. So that had an impact on that overall business and on our overall organic rate, which by the way it was quite positive for the quarter.

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

Yes, thanks. Just another question on the HVOR market your commentary certainly sounds encouraging. But could you just talk about the content opportunity today versus two years ago. And as we see – so we begin to see an up cycle in terms of reinvestment there from customers, are you seeing a radical change in terms of technologies that will benefit you?

HVOR continues to be a good content growth performer inside of Sensata. We don’t see radical changes, I would say there are some added opportunities, tire pressure sensing in that market, being one that we wouldn’t have been talking about two years ago, so – an attractive market for Sensata.

Okay. And could you just update us on your thoughts regarding M&A, as Paul pointed out that first quarter in a long time where you haven’t seen any year-over-year impact from acquisition. So it’s been 15 or 17 months or so since your last acquisition. Just any thoughts there in terms of your strategy, any change in plans.

M&A continues to be an important opportunity for us to create value for our shareholders. In the intermediate term getting our balance sheet in line with the expectations of a capital market is important and you’ve seen the improvements that we’ve made in our net leverage ratio. I would also share with you that the acquisitions that we’ve done in the past particularly CST have really expanded our footprint into adjacent market. And that was one of the strategic objectives we had going back a few years ago. Having accomplished that, now we see the opportunity to add bite-sized businesses into that new footprint. And so we’re seeing much more of a pipeline of opportunities and lots of different options. But in the near-term getting our leverage ratio to – the objective of 2.7% to 3.0% is what we’re focused on.

Okay. Thank you.

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

Thanks, good morning. I think the 40% penetration to the cost synergy pie chart is tied to the first quarter run rate. Just wondering, what your target for the exit rate out of the year.

We don’t – I mean to be perfectly honest, we have a lot of different options on integration, we know that that’s part of our overall playbook to get to the double-digit earnings that we’re delivering to shareholders. So we are not that granular in our guide and specifically what the level we’ll be on every component of that margin contribution.

Okay. Sound smart and flexible. On the TPMS auto wins just wondering how that comment ties into China and how the visibility shaping into the kind of 2019 timeline that’s approaching.

Yes. Good wins in China and our overall investment thesis on track given the engagement that we have with customers as well as the way the regulation is developing.

Okay. And do you sort of expect similar share that you had in the other major markets.

Yes, we do. So our strongest share market for TPMS is North America, below that in Europe, we think China land somewhere in-between but really good market share overall.

Thank you. And the next question comes from William Stein with SunTrust.

Great, thanks for taking my question. Actually, I have two. First, Martha you’ve been very clear about your expectation for roughly 0% unit growth this year in automotive globally and that seems to be playing out with positive growth in the first half and sounds like that’s going to go negative in the back half of the year. Is the development of inventories in North America and China a sign that perhaps you’re Tier 1 or OEM customers warrant as accurate at forecasting this decline and demand at the customer level as your view was?

I would say, not. Mostly, where we see the inventories – vehicle inventory, so we’re not seeing a lot of component level inventory build, we saw some of that in Europe at the end of the year. But that was much more a one-off with a particular large customer. So I wouldn’t make the claim that you called out there.

Okay. So, but the OEMs there’s inventory there, okay, that helps. So the other question I had is about reconciling two things that were just a little confusing to me in the presentation. I think it was Slide 6 that shows that you’ve got – you’ve done quite a bit of cost savings with regard to the recent acquisitions. But there’s still quite a bit left and another slide, I think it’s Slide 24, later that suggests M&A is delivering zero to the earnings growth that you saw in the quarter. The reconciling factor either charges related to integrating the acquisitions? Or is there – where their business exits or is it a piece of both or there’s a something else I’m missing?

No, you got it. Its integration spend in the fourth – in the first quarter which is much stronger in the first half of 2017 for us. So when we talk about the synergies, we’re delivering and the EBIT improvement and those acquired businesses that acts the overall integration spend. We’re now calling out that integration spend to be $19 million to $20 million for the year.

Yes. And the other thing I – the line item that you’re talking about I think it’s 24 that would be when we would have a year-over-year impacted acquisitions. As I said, this year we’re going to have full year, the acquisitions in 2016 and 2017. So you’re not going to see any impact there as it relates to the acquired business.

So that that’s more the way we categorize organic growth. Once we lap a business in the year that’s now categorized into organic growth.

Got it. Thank you.

Thank you. And the next question comes from Mark Delaney with Goldman Sachs.

Yes, good morning and thanks very much for taking the question. First question is about the outlook for the EPS trajectory in the second half of 2017. I think using the midpoint of guidance for 2Q 2017 and also the full year 2017. In the first half I thought, it will done 51% of revenue, about 47% of EPS. I know, you talked about some savings coming through from consolidations. So if you could help us quantify how much of a benefit that you expect into 2017 and are there other factors that are helping get the EPS improvement into edge that you’re guiding for even on lower revenue.

So I will take that one, Mark. I mean the first one is integration expense, we’re talking about 19% and 20% and majority of that’s going to be the first half. So you’re going to have that sequential benefit in the second half just for lower integration. We started to see some of the synergies from that large move that we’ve had in terms of closure of Springfield and Minden start to [indiscernible] into the P&L in later part of the second half. We’re going to see productivity gains continue to ramp up in the core business as we normally do. And then just general good strong cost management that we typically do here. So I think it’s a pattern that you would expect given the underlying economic factors that we’re dealing.

And that’s very helpful. And then follow-up questions I mean to get a little bit more color on the commentary about China auto, I think somebody it was very strong in first quarter. I think still looking for good trends in the June quarter, but then down 2% in terms of production for the full year or so. Can you just give us a better bit more sense about how much you think China was growing in 1Q and 2Q for the market and potential out of Sensata? So we can help to better gauge how much of a year-over-year decline there may be in the second half.

And again, so let’s recognize, we don’t expect our revenue to decline year-over-year we’re expecting that there will be production declines year-over-year, don’t have that completely framed out here that’s probably something we can share with you offline. Our views there are now not different from third party forecasters. I think they were coming into the year but we’ve seen updates now that are more in line with our expectations for the year.

That’s helpful. Just one last one if I could. You talked about some inventory of cars now in China and North America building. Do you have any quantification about where those inventories are and what you consider normal inventory levels.

We’re just – really is vehicle inventories that’s published data. And I would say that there – they’re not outside the range where we’ve seen customers operate over time. But given that they’re both to the high side and given that for example the USR in March was significantly declined over the previous year and those things line up and have us believing that we should not be expecting more robust production than our original forecast.

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

Thank you very much. You just beat which was great; and I was pretty much across both segments. But I believe you’ve mentioned, you’re not increasing due to – what your view on the auto sector. Have you actually seen production order revisions downward yet? Or is that just your internal adjustments? And why wouldn’t the strength in the non-auto segment allow you to raise your full year guidance. Thank you.

So Jim recall that our visibility is pretty strong a quarter out, we’re about 86% filled for the second quarter right now. So order rates would not extend into the second half, and we wouldn’t see any evidence of that from customers at this time. And again it’s a combination of looking at our vehicle inventories are looking at other third-party forecasters and not expecting that that’s going to be different from our original view coming into the year. I think as it relates to the non-auto parts of the business, keep in mind that we have fairly easy comps in the Sensing Solutions business in the first half of the year and that changes as we get to the second half of the year. So again being careful to take a look at what’s happening in a large number of very granular vertical markets, which is what Sensing Solutions is at this point. So, not enough outperformance there for us to decide that there’s a real change in the overall end market.

Okay. Thanks so much for the details, greatly appreciated.

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

Yes, thanks. Just the question on the China auto market and I think it’s been widely telegraphed in terms of the expected slowdown. But just any color you’re seeing from customers in terms of how they manage that slowdown, is this something that’s kind of gradual as you go through the year or is there anything more abrupt in terms of how they’re changing build plans?

No, we haven’t seen anything dramatic. We have seen the order patterns in the second quarter come in line with our spaces and hence the guide for the second quarter. So nothing dramatic at this point, but definitely in line with a slowing growth rate year-over-year and probably a production decline in the second half of the year.

Got it. Thank you. And then as my follow-up for the broad business outside of autos, there’s been some enthusiasm in terms of some macro pickup. So any particular indicators that you guys are watching in terms of the pulls you’re seeing on that non-automotive business in kind of Q2.

So we’ll continue to watch the China PMI closely. And that’s trended nicely again in line with the expectation. We’re encouraged and what feels like now a slight bottoming and slightly improving pattern in the heavy vehicle and off-road market. So that’s one that we’re watching very carefully as well.

Okay. Thank you.

Thank you. And the next question comes from Joseph Giordano with Cowen and Company.

Hey, guys good morning. This is Tristan in for Joe this morning. Could you just debate us on the – partnership maybe some of the things you presenting at the Auto Shanghai.

Yes, so the partnership continues to evolve very productively, working very closely with our partner quite focused on getting production like samples into the hands of our customers later in the year, strong customer engagement. A great deal of conviction in the marketplace that LiDAR is a must have technology when we start to talk about level three and above autonomous. So we’re quite encouraged about the partnership and it’s developing well.

Okay. Thanks. And then I have just a quick one on Slide 16 your FX assumption for euro are I think $1.12, I’m just trying to reconcile this with FX rate where there are now about $1.09 I belief.

That’s because we’ve been hedging in the euro over a long period of time. So as the hedges, hedges we’re putting on the euro rates was higher. So what’s you’re looking at than average rate of hedges over a period of time and spot rate for the small portion, it’s not hedged.

Got it. That makes sense. Thank you so much.

Thank you. And that is all the time we’ve allotted for questions this morning. That does conclude our question-and-answer session. I would like to return the conference back 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 support in Sensata. Sensata will be attending the following investor conferences in the second quarter. The Oppenheimer Industrial Growth Conference and the Wells Fargo Industrial Conferences in New York, and the Bank of America Merrill Lynch Technology Conference in San Francisco. We encourage you to meet with us at these conferences or visit us at our headquarters in Attleboro, Massachusetts. Thank you and have a good day. Goodbye.

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