Good day and welcome to the Sensata Technologies Q2 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 event is being recorded. I’d now like to turn the conference over to Mr. Joshua Young, Vice President of Investor Relations. Please go ahead.

Thank you, Allison and good morning, everybody. I’d like to welcome you to Sensata’s second 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. We will also post a replay of today’s webcast shortly after the conclusion of the 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 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 filings with the SEC. On Slide 3, we show Sensata’s GAAP results for the second 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 discuss during today’s calls 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 second quarter of 2017 and provide guidance for the full year and third 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.

Thanks, Joshua, and thank you all for joining us this morning. I am delighted to report that Sensata continued to deliver strong results in Q2 reporting improved year-over-year operational performance in all segments of our business. This performance reflects continued execution of our strategy to win in sensing, which is helping us to deliver revenue growth, margin expansion and attractive earnings growth. I will begin on Slide 4. We generated solid organic revenue growth and robust margin expansion both year-over-year and sequentially. On the top-line, we reported revenues of $840 million and organic revenue growth of 3.6% both of which were at the high end of our guidance. This growth was balanced nicely between our Performance Sensing business, which posted 3.5% organic revenue growth, and our Sensing Solutions business, which reported 3.9% organic revenue growth in the second quarter of 2017. Double-digit organic revenue growth in Asia and the HVOR market drove our performance in the quarter. Our auto business outgrew a softer auto production market in the second quarter due to good content growth. We continued our recent pattern of robust margin expansion in the second quarter of 2017 with adjusted EBIT margins expanding by 140 basis points and adjusted net income margins expanding by 160 basis points compared to the second quarter of 2016. On the bottom line, we delivered another quarter of double-digit organic earnings growth posting organic adjusted EPS growth of 12.3% in the second quarter of 2017. This performance was driven by core productivity initiatives as well as improvements in the profitability of our acquired businesses. I had mentioned in previous quarters that Sensata has built-in earnings power in our business model due to M&A cost synergies. Our earnings performance in Q2 and the first half of 2017 is evidence of this operational lever. I…

Thank you, Martha. Key highlights for the second quarter as shown on Slide 9 include revenue of $840 million in the quarter, an increase of 1.5% from the second quarter of 2016. Of this growth, changes in foreign exchange rates primarily the euro and the Chinese renminbi, represented a net revenue headwind of 2.1%. Excluding foreign exchange, organic revenue growth was 3.6% in the second quarter of 2017. Adjusted EBIT grew by 8.2%, and adjusted EBIT margins increased by 140 basis points compared to the second quarter of 2016. On an organic basis, adjusted EBIT grew by 8.8% in the quarter. Adjusted net income was $139 million or 16.6% of revenue, a margin increase of 160 basis points compared to the second quarter of 2016. Adjusted EPS was $0.81 in the second quarter of 2017, a $0.08 increase from the prior year quarter. Excluding a $0.01 headwind from foreign exchange rates, adjusted EPS grew 12.3% organically due to core productivity gains, higher profitability from acquired businesses and higher volume. Now, I’d like to comment on our two business segments. I will start with Performance Sensing on Slide 10. Our Performance Sensing business reported revenues of $621.8 million for the second quarter of 2017, an increase of 1% compared to the second quarter of 2016. Excluding a 2.5% headwind from changes in foreign exchange rates, Performance Sensing generated 3.5% organic revenue growth driven largely, as Martha mentioned earlier, by HVOR and the strong performance of our automotive business in China. Performance Sensing profit was $169.1 million, or 27.2% of revenue. Excluding the effects of foreign exchange rates, Performance Sensing profit as a percentage of revenue was 27.4%, up 250 basis points from the year ago quarter. This improvement from the prior year reflects net productivity gains driven by cost reduction programs…

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

[Operator Instructions] Our first question will come from Wamsi Mohan from Bank of America - Merrill Lynch. Please go ahead with your question.

Yes, thank you. Good morning. Martha, you have called out that China is a key area of strength both in autos and non-autos for you, second half trajectory for China autos is weakening somewhat as you had called out before. Are you expecting this strength in industrial and HVAC to persist for a few quarters or was there something cyclical, including any restocking in the channel that you see as more of a near-term step up, and I will follow up?

Yes. I would just start by saying there really is not a lot new from the outlook that we provided when we guided. So, we see the year playing out roughly in line with the way we had anticipated. So, expected as you pointed out, expected softening in production in China. The content growth that we're seeing in China is really important and we expect that that will continue as well as the great performance we're seeing in markets outside of auto.

And within that, specifically, Martha, are you expecting, was there any inventory restock that you saw within industrial and HVAC and do you think that it's transitory or do you think the content growth there sort of continues to persist?

We've been looking at inventories across those end markets. We saw some healthy reduction in China vehicle inventory. Outside of autos, the inventory levels that we're looking at are not out of line at all where they have been seasonally around this time.

Okay, thanks Martha. And as a follow-up, this quarter you saw auto revenues grow organically despite production decline given the content increases. But given the expected headwind sort of more broadly going at the back half. Any early thoughts into 2018 on both auto production and revenue growth? Thank you.

Yes. I guess, the comment I would make is we continue to believe that the overall content development in our business is more important as we look ahead than end markets, which are not going to be big drivers of the overall growth, probably with the exception of HVOR where we've seen some recovery. So, we remain really confident in the momentum that we're building on content growth. And as you point out you can see that now in our numbers.

And our next question will come from Amit Daryanani of RBC Capital Markets. Please go ahead with your question.

Thanks. I have a question and follow-up as well. I guess, Martha just thought up on the China discussion, you talked a fair amount of the opportunities there specifically in China. Can you just help us understand what your markets are in China with local OEM specially versus what the global share broadly? And is the margin profile for Sensata any different in China versus the corporate averages right now?

Yes. I'll take the second first. The margin is not different than the corporate average and many of those business that's actually above the corporate average. When we look at local producers, our share is similar, the content opportunity today with those local producers is less but growing more quickly. So, more of an acceleration in growth going forward. We've got strong overall market positions.

Got it. And then I guess some of capital allocation perspective, I think you're well on track to get to the sub three time leverages you guys have talked about by the end of this year. Can you just talk about where is the desire higher, is that more to have a more round enough capital allocation as you get into '18 with buybacks and dividends or you prefer one versus the other or you like to build up your balance sheet for a deal down the roads. Just help us understand what happen once you get to this target leverage ratio?

Yes. I would just start with the overall asset which is putting cash to work for our shareholders we believe is really important and it is an ongoing part of our strategy and an ongoing part of our discipline. We think it's important to have optionality on how we use that cash. So, we've created I think terrific value in M&A. we expect to do that as we go forward. We also recognize that there is time, so when valuations are suggests it's not the right time to buy or that projects within our pipeline there needs to be parties on both side. So, that so just having the optionality we think it's really important. I think we would put dividends as a very distant third option, just given us overall tax efficiency for our shareholders.

And our next question will come from Samik Chatterjee of JPMorgan. Please go ahead.

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

Good morning.

When you check with the firstly on your thoughts on North America production as I understand, concerns on your inventories and second half production quite high. What are you seeing from auto makers in terms of some more shut downs from the in Q3 here. And are you expecting more production cuts as we go into the second half?

So, our assumption coming into the year with overall production down in North America about 2%. And that outlook has not changed. And you begin to start to see that year-over-year in the second quarter. Right now, when we look at our backlog right in line with our expectation. So, we call this as a down year for production. And do keep in mind it is production that drives our revenues. So, that's where we focus. So, not a lot of surprises there. The overall decline we see in Sensata's revenue going from second to third quarter are very much in line with our normal seasonality, which includes the impact of summer shutdowns and the model your change overs. So, at this point that we believe that they are well comprehended and dragging the die in the second half of the year.

Got it. And just want to get your help on how to best think about margins in the out your, because looks like most of the integration spend is done in the first half sort of second half, sort of gets us being based to work off and from a guidance that looks like you'll exit sort of around a 23%, 24% range. 23% or 24% for EBIT margin. So, how should we think about the levers for EBIT margin improvement from the second half levels into the out years?

I guess, a long comment I would make is that we are extending some of that spend I should say delaying some of that integration spend. It was delayed from the second quarter into the third quarter. So, while most of that is in first half of the year as you point out. There is some other's been coming into the third quarter as well. I think relative to our ongoing margin levers, the actual realization to the synergies and the full-year impact of that is not something that you will have seen. We are still going to be working off high cost inventory well into the fourth quarter of this year. So, we expect the margin expansion to continue well into 2018.

Got it, thank you. Thanks for taking our questions.

Our next question will come from Christopher Glynn of Oppenheimer. Please go ahead.

Thanks, good morning.

Good morning, Chris.

Hey, Paul. So, the performance sensing margin was really strong next step up in the second quarter sequentially in year-over-year. Just wondering above the normal cadence where that improves each quarter through the year in a typical year. Is that cadence intact or is the 2Q performance has some influence on the linearity?

So Chris, I would say that the strong performance there, about a 1/3rd of that margin expansion came from a combination of synergy that are growing within the performing sensing segment and a reduction integration cost. The other 2/3rds is just really good, walking and tackling around cost reduction activities, managing the P&L very effectively and getting some decent growth. And you can also see within performance sensing, the strength in the heavy vehicle and off-road business is also reflecting there and the volume leverage that's been created from their growth. So, a really good strong Q2, the 27% plus margin is where we expect that business to be and we expect that business to continue to grow its margins based on the cost reduction initiative and the continued completion of the integration of the acquisitions.

Okay, sounds good. On the Schrader business, just wondering how you're seeing the development of the aftermarket potential sort of emerging payout there?

Yes. That, it continues to develop, it's lumpy. So, different than the overall production business. What's really interesting there is the growing base in the automotive car park in Europe now since that only became a mandate in 2014. So, that is the biggest driver of aftermarket which is what's that happening in the park. We're encouraged by the growth of TPMS in the overall park in Europe and beginning to see that play out in our numbers.

[Operator Instructions] Our next question will come from Shawn Harrison of Longbow Research. Please go ahead.

Hi, good morning everybody. First a clarification and then a follow-up if I may. I think last quarter you said something around 60% of your synergies were still to be realized from CST and Schrader. Wondering if that's still the key number to use and what were the exact integration expenses this quarter. Sorry if I missed that.

Integration this quarter was I think about 7 million or then more than 7 million that was the absolute spend. And yes, we are still on track, the 40% was at the end of last year. We're still on track in terms of the synergy opportunity in front of us and the pace in which we're going.

Okay. Martha, if I may as a follow-up. I hear a lot of questions on just your diesel exposure and just the headwinds there. If I look at the LCM data for the first half of the year, it states that diesel market share in Europe was down about 500 basis points year-over-year which I think is greater than maybe what you would highlight it historically. So, if you can maybe bridge the gap between the data we're seeing out of industry forecasters versus what you're seeing. And just an updated diesel content per vehicle, I don’t know if it's just a basic arithmetic mean that you're using or there is higher content certain vehicles versus other that gives the disparity in terms of the headwind you're facing.

Sure, Shawn. So, the first thing I point out is that we look at diesel production in Europe. So, that's the baseline that we use. I would also point out that diesel penetration has been dropping for the past five years. It essentially dropped 10 points of market share if you go back five years. And during that period we've grown our European revenues really well and continue to do so. So, what we're looking at is an overall expectation for to more continued decline in diesel as the share of production in Europe. And we talked about that extensively on our last call as you pointed out. We are increasingly though agnostic about what happens in the power train. So, our content wins and the manifestation of those and our revenue are coming very strongly from gasoline based engines and from electrification, so think hybrids. So, getting to the point now, well we're soon to be agnostic on that. And you're seeing that in the numbers as you don’t see that overall decline you pointed out haven’t at the strong impact on Europe. So, slight headwind to the business but overwhelmingly offset by strong content growth in other parts of the business.

And our next question will come from Rich Kwas of Wells Fargo Securities. Please go ahead.

Hi, good morning everyone.

Good morning, Rich.

How are you doing? On the, just a quick update on you're giving some auto production outlook for the balance of the year for the full year. What's the updated view on HVOR, I think the assumption for the market was be flat for the year. Seems like that's trending ahead of expectation. What's the update there and what's embedded in the outlook?

Yes. About market growth for about 2% for the broad HVOR business which has many verticals within it.

And then, that is an improvement in our outlook as you point out.

In any split between off and on road within there?

No.

I think at this point just given now we've got geographic balance more in the business. So, you start to deal with a level of granularity that it's probably not helpful to speak to.

Okay. And then just as a follow-up on Q3 as we the revenue guided at least a bit better than where expectations were in the EPS guide, little bit lighter. So, it seems like from a margin standpoint a little more modest view on margin. I know the integration cost are most of them largely pass. I guess, trying to figure out what's within that is, it seems like there is some conservatism there in there around margin. But if you could if you talked to some of the risks out there as it relates to specifically in the margin side as we think about near term in the next quarter or so?

Rich, I don’t know if I would call it conservative when you think about what we just printed for Q2. Where 840 million of revenue going into 799 at the midpoint. So, we're giving a $40 million of volume and we got favourable exchange rate, some of that even more than that. So, we're covering through less integration, increased synergies, really strong cost management. Pretty base sequential volume decline which would be normal. And we just see which exiting the high seasons for many of our businesses. So, I wouldn’t call conservative, I would call again another quarter strong execution, strong margin performance and continued control over the cost in the bottom line.

I think relative to your, you may be asking about revenue up or even not as that. Keep in mind that we do not hedge the topline on revenue, so the currency impact that are positive there, since we hedge on the bottom line, don’t drop through incrementally.

And our next question will come from William Stein of SunTrust. Please go ahead.

Great. Thank you for taking my question. Paul, can you remind us, after this year by the end of the year what will be left from a cost savings perspective on the acquisitions where you're still sort of ramping –savings.

So well, as we completed the Springfield move as well as the Germany move, I mean, we have inventory that we are going to work off so we haven't really started seeing the significance that comes from those actions and those are the two we talk about. There are other things obviously that we are dealing to drive synergy. So there is going to be a lot more synergies savings for companies to those two announced events in 18 versus 17, so a lot of runway there. We are gaining synergies this year just into different actions that we have taken in previous periods. So the pipeline is there and the continued growth and synergies that’s have been happening in 17 and we will continue to 18.

Then as a follow up, Martha can you talk about your expectations for China too, I think they already adapting but perhaps in mandate for TPMS?

Yes. We mandate development as very much on track to the point where we are enjoying designing wins right now in TMPS against their time frame. So the thesis holds and we are excited about the opportunity in China and that is one of several mandates that are playing out for us by the way. So when we look at what's happening across the commercial truck fleet in China when we look at mandates around efficiency, when we look at mandates in the HBAC market around efficiency, we are seeing a lot of that play into the revenue growth that we are enjoying now.

And our next question will come from Brian Johnson of Barclays. Please go ahead.

Yes. I want to ask two questions. First, just the organic growth guide for Q3, it seems like H4 is developing well auto production is a bit more favourable yet you are in the 0% to 3% range. Is that some of the inventory affects you talked about earlier or just some dose of conservatism?

I think, it's more of a mix looking at overall seasonality. It's looking at our expectation that the production assumptions we use in our guide don't change. So some of that reduction is going to be coming into the second half of the year if you look where production landed in the first half of the year.

Okay and if you roll forward the 2018 you are given where you came out on organic growth here given H4 accelerating, do you have any preliminary indications on where you could think of organic growth in 2018?

No, not at this point. We have talked about the fact that we expect to sustain cadence of our improvement which you have seen if you look at from 15 to 16 to 17. So at this point that's sort of the level of guide that we talk about. More to come as we get closer to the year and understand what's happening in the overall market.

Okay. Thanks.

Our next question will comes from Craig Hettenbach of Morgan Stanley. Please go ahead.

Yes thanks. I want to follow-up on the topic of automotive content and if I look at kind of that 1.4% given lackluster production environment just Martha if you were to look at just kind of a flat environment kind of remind us just in the intermediate to longer term what do you think your content growth would be overtime?

Yes, again I think that's perspective that we should provide when we begin to give guidance into next year. We have been pleased with our overall content performance. You can certainly see where we are performing in our end markets and what those production rates are doing and that will give you good sense for where we are actually performing. But when we talk about improvement, a cadence of improvement year over year there really is with the notion that our content growth continues to build.

Okay and this is my follow-up just on the target net leverage of three times by the end of this year. Can you talk about kind of the puts and takes to capital allocation as you move forward in terms of what some of your priorities are whether it's further deleveraging versus M&A growth opportunities?

Yes. As we mentioned, you look at what's driving the net leverage ratio at this point it's much more about cash accumulation and keeping our options open as we get to the overall net three times. It's really important for us to have optionality on capital allocations and that's the way we think about it. We have been good acquires. You have seen that play out on the synergies that we are delivering. M&A will continue to be a very important part of our overall playbook. Given the acquisition that we made particularly in CST that opened up a number of industrial vertical markets for us what we see in those vertical markets are very interesting, I would say by sides type opportunities that are filling the pipeline. At the same time thinking about this in the longer term there are times where evaluations are indicators not the time to buy and we want the option of being able to put cash to work for our shareholders when we think about buybacks. So we think about that in a very balanced way of having the options to continue to put cash to work for our shareholders.

Our next question will come from Mark Delaney of Goldman Sachs. Please go ahead.

Yes. Good morning and thanks for taking the question. The first question was a follow-up on China. There was a comment in the prepared remarks in the slide about seeing better enforcement of some of the regulations. Was it was sort of alluding to future opportunities for TPMS or are you guys seeing better enforcement in China more broadly and if so can you elaborate on what you are seeing there and the benefit Sensata?

Yes I would say that commentary comes out of the adherence to regulations that have been previously passed, so particularly in the commercial truck market particularly in efficiency standards inside of the automotive market. So we see customers across the board bringing more discipline to the adherence of that regulation whether those are local producers or the multinational.

Okay that's helpful and then follow-up on the margin improvement opportunity you are talking about to the opportunity from the Mendon shutdown later this year. Is there any way you can kind of help quantify how much savings that can potentially bring once it's fully complete and how should we think about the cadence for integration cost associated with that shutdown?

On the integration there is still more integration cost to be incurred in the third quarter and we expect to complete of closure that plant in the third quarter. So there is a little bit more spend there. As it relates to the synergies what I can say is, as we’ve told you the kind of pace we are on what's been completed, what's still to go for CST alone is about $15 million of synergies that we identified in the investment case. We see more opportunity there than the $15 million and there will be more to come on that when we talk about 2018 later in the year. But certainly we are progressing ahead of what we had expected when we originally put the case together.

And our next question will come from Joe Giordano of Cowen, please so ahead.

Hey guys thanks for taking my questions. And a question on EV and kind of related with hybrid what do you guys doing now on EV specifically that like you are not doing on a regular car and if there is things that are available there that you are not doing what's your kind of view on those products related to your current portfolio?

Yes, it's important to consider baseline and what's on EV so when you think about electrification generally we see growing content across that fleet. So in those platforms energy regeneration is the really important element and we move from centres and advance braking systems of one per system to anywhere from 2 to 4 per system, so a natural content growth for us on that front. We see lots of opportunities in thermal management that we are engaged in as well. Our tire pressure sensing portfolio becomes even more important to those producers because tire pressure and maintaining that inflation is a big driver of fuel economy. So when you think about how important it is to extend the range that's why we are finding more demand for the higher end of that particular portfolio. When we look at climate control systems the need for increased efficiency has platform players and electrification really growling down on the content that you would find inside of our climate control system, so lots of great opportunities both currently that we are shipping into and as we look ahead.

So is it fair to say that a lot of the content growth that you guys can see from those kind of dynamics it's outside of the power train itself, is that fair?

No I wouldn't say that so we can debate whether or not helping to manage the thermal challenges in battery is outside the power train or not that's content that you would not see in a conventional ICE engine for example.

That's fair and then just maybe one quick one for Paul. With the integration span and the savings you saw this quarter was it more levered towards performance sensing more than may be has been in other quarters there seems to just be where at least what we were kind of modelling more of a discrepancy there?

Yes, I would say it's more of the performance sensing side. I mean, realize that sensing solutions more that is related to the CST business and as we talked about that's still early in the integration process. We have same synergies related to CST but not as much as you would have expect it from Sensata.

And our next question will come from Jim Suva of Citi. Please go ahead.

Hi, thanks very much. I have two questions. And I will ask them at the same time while it's great to see the company raised the lower end of EPS guide what was the reason for not raising the higher end of the EPS guide and then my second question is regarding the leverage ratio when you get down to three times which cash flow visibility is pretty solid with the company should we expect in the M&A to pick up or do you actually have to hit the three times or if you have the four side now could you actually start the M&A pipeline for accretive acquisition sooner than expected? Thank you.

So Jim, I guess on the guide, so as we have it now, we are looking now 2.5% organic growth and 10% plus earnings growth. So four times the earnings growth pays to revenue. So I think that's pretty tremendous work and results. Higher the guide, we achieved higher the guide with better top-line so the organic growth is in the higher end of the – which is the higher end of our range a little better performance around integration so little bit lower cost. Then there is a possibility for us getting to the higher end in that range. And that's how we constructed the guide itself.

I think the answer to the leverage ratio we have talked about really the desire for optionality on how we allocate capital, Jim. When you look at us moving towards the three times net leverage it really is net we are using the cash balance to do that. You certainly seen Sensata be willing to extend our leverage ratio in the past for the right opportunity in M&A. We have also seen Sensata put cash to work in the form of buybacks in the past. When we look at the cadence that we are on and the very near term time frame most likely will end up at that net leverage ratio three times just given what time it is.

And our next question will come from Steven Fox of Cross Research. Please go ahead.

Thanks. Good morning. Just one question on the HVOR market growth you talked about 2% I guess I was curious it sounds like your assuming heavy vehicle recovery that's pretty muted in historical patterns. Can you talk about why that would be the case and maybe the upside risk of that is different and then any specific content within heavy truck that maybe is going to differentiate you? Thanks.

We are seeing better markets across the entire HVOR business like I said there is many verticals. There is trucking, there is construction, there is -- it’s not America, it’s Europe, and so it's a combination of the performance we have seen, what we are seeing from third party data what we are seeing, hearing from our customers trying to understand what macro factors drive demand and based on all that work and based on all the verticals we come up with an average growth rate of about 2% for the year. We think that it's been reasonable. It's certainly embedded and we started the year with probably 3% -4% better when we started the year and we think it's appropriate given what time it is in that business and in that end market.

There are a number of content drivers for us in the HVOR market and some very familiar ones when you think about what's driven Sensata’s growth in the past so from a power train efficiency standpoint we have sensor content opportunities. Our operator sensor controls that came with the Delta tech acquisition we made a few years back, we are really enjoying some great content growth there. We see folks moving from [indiscernible] wire electrified, cabin if you will, driving great content on that front. And we are beginning to get our early design wins on tire pressure sensing in the truck market as well. So lots of good opportunity, revenue, content revenue now and great opportunities as we look ahead.

Great. Thank you very much.

Ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference back over to Mr. Joshua Young for any closing remarks.

Thank you, Alexia. And I would like to thank everyone for joining us this morning. We appreciate your continued interest in Sensata. Sensata will be attending the following investor conferences in the third quarter. The JPMorgan auto conference in New York on August 9, the City Tech conference in New York on September 7. 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.

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