Good day and welcome to the Sensata Technologies Q4 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 would now like to turn the conference over to Mr. Joshua Young, Vice President, Investor Relations. Please go ahead.

Thank you Rocco, and good morning everybody. I’d like to welcome you to Sensata’s fourth quarter and full year 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 that we issued 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 at the conclusion of today’s call. Before we begin, I’d like to reference Sensata’s Safe Harbor statement 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 our Forms 10-Q and 10-K, as well as other subsequent SEC filings. On Slide 3, we show Sensata’s GAAP results for the full year 2017. We encourage you to review our GAAP financial statements in addition to today’s presentation. One part of the GAAP P&L that I would like to highlight this quarter is our GAAP tax rate. As a result of the recently enacted U.S. Tax Cuts and Jobs Act of 2017, Sensata recognize a stepping $3.7 million income tax benefit in the fourth quarter of 2017 principally related to the reduction and the U.S. corporate income tax rate to 21%. Most of the subsequent information that we discuss during today’s call will be related to our non-GAAP financial measures. Reconciliations of our GAAP to our non-GAAP financial measures are included in our earnings release and in our webcast presentation. Additionally the company provides details of its segment performance on Slide 9 and 10, which are the primary measures management uses to evaluate the business. Martha will begin today’s call with an overall business summary. Paul will then cover our financials for the fourth quarter and full year 2017 and provide guidance for the first quarter and full year 2018. 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. Sensata finished the year strong in the fourth quarter, capping off a year in which we accelerated our organic revenue growth, expanded our adjusted EBIT margins, delivered double-digit adjusted EPS growth and strengthened our balance sheet. We continued to perform to promise as the fourth quarter marks the eighth straight quarter we have met or exceeded our guidance for revenue and earnings growth. I will briefly touch on our fourth quarter performance before summarizing our full year financials shown on the slides. We reported revenues of $184.5 million in the fourth quarter of 2017, representing organic revenue growth of 5.2%, exceeding the high end of our guidance. Our heavy vehicle off-road and automotive businesses were the strongest drivers of revenue growth. During the fourth quarter, we expanded our adjusted EBIT margins by 110 basis points and delivered adjusted EPS growth of 14%. So overall, we delivered strong operational performance to close out the year. On Slide 4, I summarized Sensata’s performance for the full year 2017. Throughout each quarter of this year, our performance has been characterized by the consistent themes you see reflected on this slide. First, we are accelerating our organic growth rate. We generated organic revenue growth of 4% for the full year 2017, which was well above our initial guidance of 1% to 3% and more than double the organic growth rate we generated in 2016. This acceleration was driven by our HVOR and industrial businesses as well as strong growth in China. Next, we are generating robust adjusted EBIT margin expansion. We expanded our adjusted EBIT margins by 100 basis points in 2017, this level of margin expansion is well above the performance of our peer group and is the result of M&A…

Thank you, Martha. Key highlights for the fourth quarter, as shown on Slide 8 include, revenue of $840.5 million in the quarter, an increase of 6.6% from the fourth quarter of 2016. Of this growth, changes in foreign exchange rate increased revenue by 1.4%. The net result was 5.2% % organic revenue growth in the quarter. Adjusted EBIT grew by 11.7%, and adjusted EBIT margins increased by 110 basis points compared to the fourth quarter of 2016. On an organic basis, adjusted EBIT grew by 7.8% in the quarter. Adjusted net income was $149.4 million or 17.8% of revenue, a margin increase of 120 basis points compared to the fourth quarter of 2016, and adjusted net income grew 8.7% organic growth. Adjusted EPS was $0.87 in the fourth of 2017, and $0.11 increase from the prior year quarter. Of this increase, $0.04 reflects tailwind for foreign exchange rate. Excluding the impact of foreign exchange rates, adjusted EPS grew 9.2% organically primarily due to higher volume and acquisition cost synergies. Now I’d like to comment on our two business segments. I will start with Performance Sensing on Slide 9. Our Performance Sensing business reported revenues of $634.7 million for the fourth quarter of 2017 an increase of 7.9% compared to the fourth quarter of 2016. Performance Sensing reported organic revenue growth of 6.2% in the fourth quarter of 2017. As Martha mentioned earlier, this performance was driven by strong results in our HVOR business, which rose approximately 21% organically, and the strong performance of our automotive business in China. Performance Sensing profit was $180.7 million or 28.5% of revenue for the fourth quarter of 2017. Excluding the impact of foreign exchange rates, Performance Sensing profit as a percent of revenue was 28.6%, up 110 basis points from the year-ago quarter. This…

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

[Operator Instructions] Today’s first question comes from Wamsi Mohan of Bank of America Merrill Lynch. Please go ahead.

Hi, yes. Thank you. Martha, you saw a fairly strong quarter-on-quarter growth in Asia auto, much stronger than last year and also on a year-on-year basis on somewhat of a tougher compare. Is this largely a function of incentives that will stop to be a tailwind in 2018? Or would you attribute this to more sustainable content growth? And did I hear Paul right that you won’t be giving regional disclosure around autos? Given the concerns around auto cycle, don’t you think it’s important to sort of continue giving this? And I have a follow-up.

Yes. So recognizing our overall business in China grew over 18% in 2017 is clearly outpacing the market. And so some of the strength that we saw in China, a little bit of demand acceleration in the fourth quarter, but way – far and away, what is driving our overall growth in China is strong content growth, and we do expect that to persist. Yes, the commentary you heard from Paul is that as we go forward, we will make sure you understand what’s happening in the global automotive production rates as it impacts Sensata. On an annual basis, we’ll give you a sense for what is happening in the regional breakout, but we’re finding it just not very meaningful on a quarterly basis.

Okay, thanks Martha. And Paul, when we look at the EBITDA margins, if you exclude other OpEx and other gains and losses, that was down slightly on a year-on- year basis. How do we reconcile that with the strong synergies that you’re realizing? And your expectation that you’re actually going to see an acceleration up to 110 bps of margin improvement next year? Thank you.

Sure Wamsi. I would first start with – we shared with you a couple of things on Investor Day I think are critical. One is that the integrations are coming to – largely coming to an end this year. So there’s very little integration spend in 2018 compared to 2017. That will help drive margins going forward. Also – we also provided the significant synergy growth that we’re seeing in the business, which is about $12 million in 2018. So those two are important drivers of margin expansion next year. We continue to optimize our manufacturing. We continue to drive cost out of the business, just from pure productivity gains that we continue to get. When you exclude the other income and expense, there’s two things I would comment. The first is that we are – we do have commodity expense. Those commodity costs rates are reflected in our cost of revenue. In the other income expense that you – or we call other net you commented on, that’s where we have the commodity hedges, which we – which offset those changes that occur up in the cost revenue. So you have to look at those together. I’d also say that we give guidance on a foreign exchange, we look at – we have a comprehensive foreign exchange hedging program. We hedge cash flows. We hedge the balance sheet. And we provide the impact to foreign exchange, we’re giving you that comprehensive look. So it includes all parts of the P&L. We talked about the increase or decrease that the currency could have You really need to look at the whole P&L to get a full picture of Sensata’s performance.

Thanks Paul.

Our next question comes from Shawn Harrison of Longbow Research. Please go ahead.

Paul, just wanted to be clear on the comment that you expect global auto production to be flat to down for 2018. Did that change from the Analyst Day? And the reason I ask is with TE Connectivity on its call, what is it, two weeks ago, they took up their global deal of auto production on China and Europe strength. So maybe just trying to figure out the difference between your view and their view, if anything.

Well, our view at the Analyst Day was that the global automotive market would be flat with a three-year period. Our guide here in 2018 is consistent with that view.

Okay. So I guess the follow-up to that is you’re not seeing that incremental strength they saw. Or are you just holding a more conservative view of the world?

Yes. I’m not sure we’re going to comment on anybody else’s view of the overall production market. These are markets that are pretty well documented by third-party forecasters. So you guys can also form your own perspective. I’ll remind you, we call the overall automotive production market flat in 2017. Many did not. Many were more optimistic. I think our call is the right one if you look at where it landed at the end of the day.

That’s fair, Martha. And then just on the kind of – or I guess the mid-single-digit growth you see in the HVOR market for 2018. It looks like industry forecasters have been also taking up their views, particularly of North America. That 4% to 5%, did that come up over the – relative to the Analyst Day? Or is that where you were 45 days ago?

Again, when we gave our guide for Analyst Day, it was really on the three-year perspective. We’re calling the end market in 2018 stronger than the overall guide we gave for the three year. So we do think that there’s some rebounding that’s happening. That is consistent with what we put together in the 2018 guide. That was our thinking when we provided that guide at Analyst Day.

Okay. Thank you.

And our next question comes from Amit Daryanani of RBC Capital Markets. Please go ahead.

Thanks for taking my question guys. I guess two for me as well. Paul, may be let’s start with the 100 basis points of 2018 EBIT margin expansion you guys are talking about. Can you just help me understand how much of that do you think will be from the gross margin side versus OpEx side? And beyond that, I guess, how much of this is just going to be from the fact that you have less integration charge in 2018 versus 2017? I think it was a bit more integration-heavy year for you guys.

That’s correct. So a significant part of our margin expansion in 2018 will come at the gross margin line. We expect R&D to increase as we continue to invest in our – supporting our new business design wins. We would expect to get leverage on our SG&A costs. If you think about integration, we said $20 million of integration is where we ended the year this year. We’re expecting about $5 million next year, which we communicated on Investor Day. So that’s going to be the $15 million tailwind. We also talked about $12 million tailwind related to growing synergies. So those will contribute to the expanding gross margins as well as some of the leverage we’ll get around SG&A.

Got it. And I just – if I could just follow up, the core automotive segment saw some nice revenue acceleration, I think, in the December quarter after being somewhat flattish organically for a few quarters. I’m curious, what are some of the reasons that enabled this uptick in growth for you guys over there organically? Was it content? Was it production trends? Just some clarity, that would be great.

I want to make sure I heard the question. You’re asking about what’s driving the strength in the fourth quarter in auto. Was that question?

Yes, that there was more content versus production trends that’s helping you.

Yes. Clearly, content for us. So we’re seeing the momentum of our past year’s NBO wins, what we’ve already secured and that’s now coming through and leading to stronger content growth for us in auto in 2018.

Perfect. Thank you.

And our next question today comes from William Stein at SunTrust. Please go ahead.

Great. Thank you for taking my questions. First, I just want to clarify the discussion around global auto production being flat for the next three years. Periodically, you add the sort of qualifier that this relates to your exposure to global auto production. Can you confirm that, that understanding is correct? And then remind us please where you’re under or overexposed. Maybe it’s one OEM or one region. I seem to forget. Thank you.

Yes. The only significant correction for us is that we’re not well represented in Toyota. So we take the Toyota production out of our overall rates. That is the correction that we make. Beyond that, not a lot of change there. We’re looking at major automotive markets, so Japan, Korea, North America, China, Europe. And I think that’s consistent with others. We do some work to understand at the beginning of period where inventories lie and look to how that normalizes over time. I think that’s pretty consistent with how folks think about the market.

One other, if I can. Your HVOR growth is very robust now. And I’m hoping you can comment on the areas where you expect that to moderate and maybe the timing. It’s likely not to remain at this very robust level for an extended period of time. Any comment on what the fate might look like?

Well, I’ll just start by pointing out, we’ve talked about what the overall growth rate is. You understand what the end production rate. So we are significantly outperforming the end market in heavy vehicle and off-road, and we expect to continue to do that over the long term. We’ve provided that commentary at our Investor Day, for example. So while we’re probably in a period, I would say, in 2017 and into 2018 where there is faster end market rebound, that’s not what’s driving most of our growth. And we expect heavy vehicle and off-road to be a good double-digit performer for Sensata over the long run.

Thank you.

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

I think we are all kind of circling around the same question around Performance Sensing HVOR versus automotive. But if you were to separate out the growth in your customers’ production schedule from the net growth in your content with new forms of sensing and so forth, how would you do that? What would be roughly direction in each of those growth – each of the growth numbers in each of those three subsegments?

I think that way we’ve tried to do that, again, I’ll go back to the Investor Day, all the materials available, is to point to you what our assumptions have been on end market and what our expectation is for overall organic growth. So I think that was fairly transparent. As we go into 2018, aside from the heavy vehicle and off-road business, we’re not seeing a lot of end market help. And so you can see the difference there reflected in our organic growth rate.

Okay. So in the fourth quarter, was there anything different than long-term trends in terms of the organic content growth above and below production?

Every quarter, there’s something different, and so every quarter has its perturbations. I would look at trends. I think that’s more helpful than looking at the very specifics on any particular quarter. So what you saw in the fourth quarter that is important to recognize is accelerating organic growth in our auto business, and that really is a reflection of our content gain.

Okay. Second question, can you give us an update on Quanergy and your LiDAR, either new business discussions, the feedback Quanergy got out at CES where they were very active in some point?

Generally, we don’t comment about what’s happening inside of Quanergy. We’re very pleased with the partnership. We continue to hear from customers on the importance and the specifics of what they’re looking for on a LiDAR sensor for autonomous applications, really, level four and level five in the light vehicle market, and we’re pleased with the overall progress we’re making. As we’ve talked about it before. This is a very long-term play for us, and so a lot of development that still remains to be done. We’re seeing good performance in the generation of product that we’re developing now, but it will be some time before that actually converts to revenue. We’re seeing well beyond the 2020 timeframe.

Okay. Thank you, Martha.

[Operator Instructions] Today’s next question comes from Mark Delaney of Goldman Sachs. Please go ahead.

This is Timothy Sweetnam on for Mark Delaney. Thank you for the opportunity to ask a question. So my first question is relative to the 3% to 5% organic revenue growth outlook for 2018. How does China compare to that? As I think it was an important driver for the company’s comments at its Analyst Day due to rising content. And how do the higher purchase tax rates in China for cars this year play into that?

So strong performance in China across-the-board. Now light vehicle represents about 70% of our China revenues, just to give you a sense for it. And China represents about 14.5% of overall Sensata’s revenue, and we’re seeing very consistent, very strong double-digit growth rates. As we look ahead to 2018, we do think there’ll be some impact on the overall production rates in China because of the dropping off of tax incentives. But we’re still projecting very strong double-digit growth for Sensata in China.

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

Hi, good morning everyone. This is – as we think about the outlook, the revenue outlook for the year, comps are pretty similar across both segments. Is there a business that we should weight a little more heavily in terms of growth rate, organic revenue growth rate for 2018?

Well, Rich, I guess if you’re asking between Performance Sensing and Sensing Solutions, we’re going to expect Performance Sensing to have higher growth year-over-year than the Sensing Solutions business, principally driven by the content growth in automotive and the strong growth in HVOR, both in market and content.

Okay, all right. So – and then within the Performance Sensing on – as it goes back to auto. So China was up 18%. That’s roughly – China auto is about 10% of your revenue. So that really constituted, really, all your organic growth in 2017. Should we think about – when we think about the business for 2018, what’s the content growth or organic revenue outperformance that you’re assuming versus underlying production for 2018? So production is going to be flat to down. Should we think of content being 200, 300 basis points better overall? Or can you get to close to that mid-single-digit organic growth rate for auto for 2018.

Yes. We think we’ll get closer to that, Rich, and you could start to see that in the fourth quarter. So we’ve said now, we’re not going to get help. We actually may have a little bit of a headwind on overall production rate. So we’re expecting stronger growth in auto in Performance Sensing and the kind of growth that we’ve seen in the heavy vehicle and off-road business. So yes, we think we’re getting now in line with the model that we shared at the Analyst Day.

Remember we said the 5% automotive growth at Investor Day over the three-year period on flat global market, so that should help you start to close in on what the content would be.

Yes. I just wanted to clarify whether 2018 really gets into that level or if it was going to be more of a back-end weighted, 2019, 2020 sort of framework, so. Okay. Thank you.

And our next question comes from Craig Hettenbach of Morgan Stanley. Please go ahead.

Just want to follow up on the comments on M&A, Martha, in terms of the core business starting to perform a little better. You evaluate the portfolio. Do you look at things like adjacencies, CST-type opportunities? Anything you can kind of share in terms of how you see the landscape?

Sure. One of the things that we’ve been conveying is that when we look at our pipeline, I will tell you it is active, but it is much more biased ex auto. And as a result, given the footprint we now have because of the CST acquisition, we see a lot of more fragmented bite-size opportunities in these vertical markets. And so that’s more the nature of what is in the pipeline today. I would say bias is more ex-auto than and more modest bite-size acquisitions than some of the more recent ones we’ve done.

Got it. That’s helpful. And just a follow-up question for Paul, just on margin. As we think through this year and maybe even heading into 2019, can you kind of frame just some of the gross margin improvements and, as some of the synergies still come into play, how you’re thinking about trajectory and gross margins?

So like I said earlier, the things that are going to drive gross margins are going to be the completion of the integration. The synergies that are being realized, which we laid out for 2018, 2019 on Investor Day. It’s the continued improvement in driving cost out of the business and the optimization of our manufacturing footprint, and it’s the operating leverage that we get on our fixed cost base. Those are the things that are going to drive margin expansion over the next few years, for sure.

Got it. Thanks.

And our next question comes from Joe Giordano of Cowen. Please go ahead.

Hey good morning guys. Paul, you touched on this earlier, I just want to make sure I understand. When we look at the year-on-year kind of EBITDA comparison when you’ve – with considering that $8 million swing in other and the synergies that we’re talking about and a little bit less depreciation, like – so are you – were you trying to say that the commodity pressure is kind of offsetting a lot of the synergies that you’re getting like right now? And is that fair?

No, no. When you think of commodities, it’s…

I want to make sure you hear that Joe. That is not what we’re looking at.

Just trying to explain that when you look at commodities, we don’t get hedge accounting for commodities. So we’re going to get a little technical. And so when – if commodities are a headwind in cost of revenue, which they have been, we hedge those exposures. And so to lock in the hedge price of the commodity, we had contracts. And those four contracts results in gains and losses, and they offset whatever happens in cost of revenues. So what you’re seeing in part year-over-year is that the benefit we’re getting in other net is gains on commodity contracts are offsetting losses on the underlying commodity and cost of revenue. So those materials work.

So then what accounts – so shouldn’t the synergies then be pushing like EBITDA, like it was basically kind of like – okay, okay. So you’re saying it’s just all staying there. It just seems like – okay, that’s fair. At Investor Day, you guys had on display some stuff, some wireless sensing for EVs. And when I was talking to your people, it sounded like there’s still a lot of discussions going on about, like who’s going to like ultimately make this stuff, is it going to be OEM, is it going to be wireless. How are those discussions kind of progressing? Like I know it’s very like engineer to engineer kind of level. But I’m just curious as to how people are thinking about those kind of designs going forward and how far out those discussion are taking place.

The conversation is good. I think what you may have heard is that if you look very broadly at battery management, there’s a lot of functionality there that we’re not pursuing with our solution, and we want to make sure we’re providing what we think is the most important thing. And that is really rich embedded information in the overall battery as opposed to logic on battery management, and that hypothesis is playing out with our customers.

That’s all the time we have allotted for question and answers on today’s call. I would now like to turn the conference back over to Joshua Young for any closing remarks.

Thank you. I’d like to thank everybody for joining us this morning. Sensata will be attending the following investor conferences in the first quarter, the Goldman Sachs Tech Conference and the Barclays, Citi and JP Morgan Industrial Conferences. We hope to see you at these conferences, and we invite you to visit us at our headquarters in Attleboro, Massachusetts. We appreciate your continued interest in Sensata. Thank you, and good day.

The conference has now concluded. We thank you all for attending today’s presentation. You may now disconnect your lines.