Jacob A. Sayer - Vice President of Investor Relations and Global Communications Martha N. Sullivan - Chief Executive Officer, President and Executive Director Paul S. Vasington - Chief Financial Officer, Chief Accounting Officer and Executive Vice President.

Wamsi Mohan - BofA Merrill Lynch, Research Division Craig Hettenbach - Morgan Stanley, Research Division Ambrish Srivastava - BMO Capital Markets Canada Ambrish Srivastava - BMO Capital Markets U.S. Jim Suva - Citigroup Inc, Research Division Mark Trevor Delaney - Goldman Sachs Group Inc., Research Division Shawn M.

Harrison - Longbow Research LLC Christopher Glynn - Oppenheimer & Co. Inc., Research Division Amit Daryanani - RBC Capital Markets, LLC, Research Division Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division William Stein - SunTrust Robinson Humphrey, Inc., Research Division.

Good morning, and welcome to the Sensata Technologies Holding N.V. Third Quarter 2014 Earnings Conference Call. At this time, I would like to inform you that this conference call is being recorded.

[Operator Instructions] For opening remarks and introductions, I will turn the call over to Jacob Sayer, Vice President of Investor Relations and Corporate Communications. Mr. Sayer, you may begin..

Thank you, Melissa, and good morning, everyone. Earlier today, Sensata issued a press release describing our financial performance for the third quarter of 2014. If you did not receive a copy, you may obtain it from the Investor Relations section of our website at sensata.com.

This call is being webcast live, and a replay will be available in the Investor Relations section of our website. Today's discussion will contain forward-looking statements based on the business environment as we currently see it and, as such, does include certain risks and uncertainties.

Please refer to our press release and our 10-Q and 10-K filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. In addition to U.S.

GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance.

Reconciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release as well as in the Investor Relations section of our website under Financial Reports. Comments made during today's call will primarily refer to our non-GAAP financial results.

On the call with me today are Martha Sullivan, our President and Chief Executive Officer; and Paul Vasington, our Chief Financial Officer. Martha will review highlights from the quarter and then will discuss trends in the end markets that we serve.

Paul will provide a more detailed review of the financial results, including segment data for our Sensors and Controls business units for the third quarter. He will also outline our fourth quarter 2014 financial guidance. We'll hold questions until after our prepared remarks [Operator Instructions].

I'll now turn the call over to Martha Sullivan, our President and Chief Executive Officer.

Martha?.

the upcoming Euro 6 regulations that will significantly reduce tailpipe emissions, CAFE requirements in the U.S. that are driving improved fuel economy, China IV requirements to reduce emissions and with the acquisition of Schrader, TPMS regulations in Europe that make vehicles safer and more efficient.

Our new business wins through the course of this year continue to be robust and in line with our organic growth objectives.

During August, we closed the acquisition of DeltaTech Controls, a global leader in customized electronic operator interfaces based on magnetic position sensing technology for the construction, agricultural and material handling industries.

The acquisition expands our technology offerings and our customer base with a common goal of driving higher productivity and safety. After the end of the quarter, we closed the acquisition of Schrader International, the leading provider of tire pressure monitoring sensors and related aftermarket equipment.

TPMS is the largest and fastest-growing application of low-pressure sensing today. In addition to being a requirement in the U.S., TPMS is in the process of being required in Europe beginning next month. Given this near-term regulatory requirement, Schrader is in the middle of a very substantial ramp in shipments in Europe.

Schrader expands our low-pressure sensing capabilities as well as our MEMS pressure sensor and ASIC design capabilities. It also brings wireless communication skills and a developed aftermarket channel. We are very excited to have this successful and well-respected low-pressure sensor team join Sensata.

So far this year, we have been very successful in doing what we promised shareholders with regard to superior deployment of capital to high-returning acquisitions. Looking ahead, the M&A pipeline remains robust and we continue to pursue proprietary discussions with potential partners.

However, for the near term, we intend to prioritize our substantial free cash flow towards paying down debt. I'd now like to turn the call over to Paul to review our third quarter results in more detail.

Paul?.

net revenue of $680 million to $705 million, which at the midpoint is an increase of approximately 37% for the fourth quarter of 2013; our current fill rate stands at approximately 87% of the midpoint of this guidance; adjusted EBITDA of $148 million to $158 million; adjusted net income of $84 million to $92 million; and adjusted net income per diluted share of $0.49 to $0.54, reflecting a fully diluted share count of 170.9 million shares.

In summary, we are pleased to report record revenue and earnings for Sensata in the third quarter. Sensata continues to deliver on its promises of stronger organic revenue growth combined with superior capital deployments of high-returning acquisitions. We would now like to open up the line for questions. Operator, please introduce the first question..

[Operator Instructions] Your first question is from the line of Wamsi Mohan for Merrill Lynch..

Paul, can you reconcile that comment around the prior expectation of dilution from Schrader versus your current guidance? Should we think that the impact is lower because you're realizing higher revenues and more leverage from Schrader than you had expected? And I have a follow-up..

No, Wamsi. To be clear, what -- as we -- as we've owned the company the last few weeks, we've been able to really understand their cost structure as an organization. And so as a result, it's allowed us to refine our integration plans and the cost associated with that..

Okay. On an organic basis, it looks like the guidance is below seasonal, but clearly you had a better third quarter, and we all know some of the Fx headwinds that you are facing as well as some weaker sort of numbers that have been circulating around the auto industry.

So can you help, perhaps, bridge the guidance on a sequential basis? How much of it is driven by M&A versus Fx headwinds in the core business?.

Yes, I think -- this is Martha, Wamsi. You hit it with your comment about the strength in the third quarter. So if we look at what's unusual in terms of us moving from third to fourth quarter, let's first recognize that normal seasonality in Controls would have us down sequentially, so that's not unusual.

The Sensors business really benefited from a strong third quarter, where we saw fewer shutdowns during the model year changeover, particularly in North America, which is seeing a strong year. I said, some of the other puts and takes, we're seeing a weakening of the off-road portion of HVOR as we go from third to fourth quarter.

So that's driving a bit of that trend as well. And then finally, we talked about the fact that there is still some remaining obsolescence associated with the Occupant Weight Sensor, that's stronger in the second half, and we see the run rate on that product drop off substantially in the fourth quarter..

Just to add on, Wamsi, around foreign exchange. I think you know, we hedge on a rolling basis, and we hedge out about 12 to 18 months. So as it relates to foreign exchange, we're pretty well locked in for 2014 particularly on the euro, which is our largest exposure..

Your next question comes from the line of Craig Hettenbach of Morgan Stanley..

On the Schrader acquisition, can you just talk about -- you mentioned a substantial ramp that they are in the process of, if you just look out kind of an intermediate to longer term, the growth profile you see for them versus the core sensor business?.

In the near term, this is similar to the overall Sensor business, I'd say a little bit stronger as we go from '14 to '15, and that really is impacted by this European ramp..

Okay. As a follow-up, you mentioned the PMI, some recent weakness or deceleration in China and Europe.

Can you talk about just from a macro perspective, particularly in those 2 regions, how you feel about just inventory levels? And how you've seen kind of customer orders or bookings kind of in the month of September into October?.

If you -- in terms of China, we've seen some slowing of the overall growth rate associated with automotive demand. As you can hear in our commentary, that's having little impact on our overall revenue growth, so we're growing at more than twice the end market rate in China in auto.

In some of the other areas, we've seen all year long, quite frankly, a fairly weak domestic market, as it relates to appliance and HVAC. We believe we are not seeing inventory build in China in those end markets, seeing some of that in the North American market as that industry prepares for an efficiency rating change going into 2015.

So that is one area where we think we may be seeing some inventory build..

Your next question is from the line of Ambrish Srivastava from BMO..

My question was on the accretion for next year. Well you said that this year, the integration cost -- or this quarter, the integration cost you've refined lower. So why would it not impact the accretion for 2015 to be better than what you are modeling? And then I have a quick follow-up please..

The amount of the cost associated with the projected integration plans is lower. The savings that we expect to generate from those is the same..

Okay.

So no change to 2015? Just to be clear on the accretion?.

No change in 2015..

Okay. And then Schrader is in the midst of a pretty significant ramp.

How does that impact CapEx for the company for 2015?.

A significant amount of capacity has already been put in place. So as we go forward, to this year, it was a higher level of capital for them. Next year, there will be some carryover of that, but going forward, we expect capital to come down. And in fact, it will be up pretty consistent with Sensata's capital levels as a percentage of revenue..

So no plans yet to move anything to your China facility where you have a lot of shelf space?.

We are actually implementing capacity in China right now, and so diverted some of the capital expansion into China and as Paul has mentioned, much of that had already been released by the company. We're just taking advantage of the manufacturing position that we have in China..

Your next question is from the line of Jim Suva from Citi..

About the EPS guidance that includes $0.09 to $0.11 of integration cost, I assume those all go away in the December quarter, or are there other things like in the March quarter? Or how should we think about the linearity of when we think about -- are there any additional costs that flow into the Q1 time period that are abnormal to associate with the integration of Schrader? Then I have a follow-up..

I would take that in 2 pieces, Jim. The first piece is that the $0.09 to $0.11 is the total financial impact of Schrader in Q4. So it's their operations and the integration cost, so it's a combination, and also the interest associated with the acquisition of that asset.

The integration, as we get into '15 and beyond, there will be ongoing integration cost of around $4 million to $8 million per year. And it's going to depend on line moves and things of that nature, but so there will be some ongoing integration costs, but the big chunk of it, we're taking in Q4 of 2014..

Okay.

And then as a follow-up, regarding the obsolescence issue around the weight sensor, am I correct, if my memory is right, that kind of the December quarter is kind of the last time that we see difficult comps coming off that? Or how much longer is that going to be impacting your financials?.

So Jim, that will limit us in terms of comps all the way through the first half of 2015. So we've been selling that product last year, this year, and now it's in the gains -- in decline, and by the end of this year, it will be pretty much down to almost nothing.

But from a year-over-year comp basis, you're going to have to consider that in the first of '15 versus the first half of '14..

Right, that's exactly what I figured.

Okay, last question, kind of annualized interest expense, post-Schrader close, now that you've kind of have funded it and got your terms all squared away, how should we think about either annualized or quarterly run rate of interest costs for total company?.

So Schrader, if you think about -- I mean, you can see we're generating today and we have a quite bit of fixed rate debt today, so you can get a pretty good sense of what the ongoing -- what the core interest is. The Schrader acquisition, we funded in 2 pieces.

The $600 million term loan, that is based on LIBOR and 275 basis points, and then we did $400 million of notes at 5.625%. So the combination of those, you can calculate about what the interest rate -- the interest cost will be.

Bear in mind, we're going to pay down that term loan as time goes, so there'll be a deceleration of that, but that will be on the term loan piece, not fixed rate piece..

Your next question is from the line of Mark Delaney from Goldman Sachs..

I understood the comment that Sensata hasn't seen a slowdown in orders despite what some of the OEMs like Ford have talked about, but given that the auto supply chain can be long, can you talk about how concurrently in past cycles it took for Sensata to see slower end demand materialize in its order book?.

Yes. The auto industry is one where we're dealing with pretty lean supply chains. About 70% of what we ship into auto goes direct to OEMs, so we're not sitting way, way back in the overall supply chain and have recent -- have decent visibility. So in the past, when we've seeing a downturn, we see it pretty quickly. We usually see it if it begins.

If it's in our backlog at the beginning of the quarter, we'll start to see that impact as we move into the follow-on quarter. So as mentioned previously, backlog is very normal, developing as expected and stable..

And then Paul, can you update us, now that you've had Schrader and DeltaTech actually close, what your expectations are in terms of how long it will take to complete the integration, if there is any change there? And then post integration, we should still be thinking about 20% to 23% adjusted net income as the right target margin?.

I agree with your comments. 20% to 23% adjusted net income is the right target for us, and that's one we're moving to and working towards. As it relates to DeltaTech Controls, that is going to follow our normal integration process. It has moved along really well. We would expect to be fully integrated in about our normal 2-year time line.

Scharder, the integration time line, as we said before, is going to be longer. And that is because of the ramp-up in Europe.

We want to make sure that the organization is working towards meeting its customer needs, and we do not want to be too disruptive while that is going on, so that integration will probably take a little bit longer, more like 3 years or so..

Your next question is from the line of Shawn Harrison from Longbow Research..

A couple of questions. Just us as we look at the gross profit in OpEx profile for the fourth quarter and kind of maybe to an earlier question, how that ramps for the year.

What is kind of the range of gross profit margin and OpEx on an adjusted basis that you would forecast for the fourth quarter?.

I think the answer to that question is think about ANI percent or index percent will be -- excluding acquisitions, will be in the 20% range. So similar to what you saw this quarter. It is slightly a little bit better.

Gross margins will get a little bit better in Q4 versus Q3 sequentially when our RD&E and our SG&A will stay in consistent levels and within our model..

That's on an -- maybe the other way -- the last question is the integration charges for Schrader, where will those fall?.

Where will they fall? They're going to fall based on where the costs are going to be incurred, and I don't think we're in a position to give that kind of details right now..

Okay. And then I guess 2 follow-up questions tied into each other. I know there were initial revenue projections for '15, or at least talked about for both DeltaTech and Schrader.

Maybe if you could update on those? And then also just how Euro 6 implementation is progressing?.

Yes, we haven't actually provided long-term revenue guidance on the acquisitions. We talked about Schrader being in a stronger growth mode going from '14 to '15 and expect that to perform at very low- double-digit growth moving in from '14 to '15. That is, I think, about as much commentary as we've provided at this point..

Okay.

And then just Euro 6 implementation?.

Euro 6 implementation consistent with all of our past comments. So we've talked about that having from $75 million to $100 million run rate impact as we get into the second half of 2015. So the annualized impact would be between $75 million to $100 million. We are on track to fall within that range..

Your next question is from the line of Christopher Glynn from Oppenheimer..

Just wondering we got a growth number for Schrader for next year.

Is $550 million base for 2014 still good to think about?.

Yes..

Okay.

And then on DeltaTech, Wabash, maybe combining them can -- what's the progression there, the combined dilution expected this year and the combined accretion for next?.

I'll comment on this year. The businesses have been slightly dilutive on the year, and DeltaTech will be slightly diluted in Q4 because we're going to have integration cost to record within the management plans that we put in place. And so for the year, they're not -- obviously, they've been slightly negative from a profit perspective..

And look, again, just to think about the model, we've talked about consistently with Schrader being the exception, we tend to be integration-heavy during the period of integration, and we don't expect a lot of accretion until we are done with that integration. Wabash and DeltaTech fall into that same model that we've demonstrated in the past..

Okay.

And then just a little bookkeeping, as we think about Schrader rolling in, I don't recall -- do you back out the purchase accounting adjustments on inventory to adjust net income?.

So what we'll add back, just to be clear, any M&A advisory fees related to the successful acquisition, any inventory step-up, any amortization intangibles that are recorded related to the Schrader acquisition, we'll also capitalize all the debt issuance cost related to the debt to fund the acquisition.

And then we'll add back the deferred issuance cost that we amortize, consistent with what we've done in the past..

The next question is from the line of Amit Daryanani from RBC Capital Markets..

A couple of questions for me.

One, can you just maybe talk about, it looks like $32 million ahead of the midpoint of your guidance in September, and you're guiding up about $115 million sequentially in December, but I guess, I'm struggling to understand how much of these numbers are driven by the DeltaTech deal and the Schrader deal? Is there a way to kind of [indiscernible].

I would say most of it is driven by -- the increase in the guidance is primarily driven by DeltaTech and Schrader..

And how about the September beat of the $32 million versus midpoint, how much of that was DeltaTech versus organic upside?.

It was both. There was some organic upside, but the significant portion of that was attributed to DeltaTech, having them for 2 months and recognizing that they're a $125 [ph] million a year business, you get a sense of where they might have been..

And then I guess, given some of the recent deals you guys have done, how do you think about content growth heading into 2015 when the deals are there and the obsolescence headwinds [indiscernible] I'm just curious, how do you do with organic growth and content growth in '15 versus that 7% to 10% goal you've talked about?.

So we've been fairly consistent in saying we expect to, over time, return to our normal 7% to 10% overall organic. We expect very little help from end markets next year. We know that the Euro 6 will put us safely back in the range in the second half of 2015..

Fair enough. And then just finally on the commercial vehicle of the HVOR market, how -- you've always had a lot of strength in that segment.

How do you see that progress as you go into Q4 and volume to 2015 from an organic profile?.

Yes. It's kind of a tale of 2 markets for us. I think the first thing to give you a sense of is when it comes to commercial truck, most of our exposure is still North America. We'd begin to pick up with some wins as we move into 2015, and the European commercial truck market is one that's been a lackluster market and seeing some downside.

So from an end-market perspective, we'll continue to see some help in North America. Largely what's driving this, and we've been consistent on this theme, is our content wins, and it's a strong area of content wins for us. The off-road piece of our HVOR is a little more challenging, particularly when we look at agriculture.

We think that, that's one of the few kind of downturns that we're seeing from an end- market perspective..

Your next question is from the line of Richard Kwas from Wells Fargo..

Just following up on that.

Martha, what's the HVOR revenue exposure at this point with DeltaTech in the mix now as a percentage?.

Yes. So 15% of our overall revenues were excess [ph], becoming a meaningful segment for us..

And that's just off-road? That doesn't include the on-road?.

It's both..

It's both..

It's both.

Do you have a split between off and on now at this point?.

Yes. It's roughly, I'd say, 40%, 45% on the off-road..

Okay, all right.

And then on the content growth for the 5.8%, what was the -- I assume that includes the OWS impact in that number, is that right?.

Yes, that is right..

Right..

So what was the impact this quarter, just to try to understand with the going-forward underlying growth rate?.

Yes. We talked about it being between 1% to 2% overall in 2014 and very much backend loaded..

Okay, so it would be maybe pushing toward the higher end of that 2%?.

That's right..

Okay. And then, Paul, on free cash flow, so $325 million now for this year, there were some moving parts in the quarter. I assume that is related to the tying up on the acquisition front.

If we just take a step back and think about next year, with DeltaTech and Schrader included, should we think of this as kind of a pickup next year, just from some of the work you're doing this year organically? And then you get the benefit from Schrader and DeltaTech, and so the number should be solidly north of $400 million?.

Yes. Up -- and it's probably about $400 million..

Okay.

So, I mean, but it should be -- I mean $400 million has been your typically run rate, I mean, it should be better now, right?.

Yes, I think -- when -- we're not going to -- we don't want to guide too much here on '15. We still need to go through a bit of planning and working with our customers, understanding what next year looks like. But in general, I think we are in that $400 million, $425 million kind of range for the free cash flow..

I think the one thing to watch out for there is to recognize that the acquired businesses don't perform at Sensata's margin, so there's not as much to convert from to begin with. Having said that, as the balance of the working capital in the acquired business is pretty similar to Sensata..

Your next question is from the line of William Stein from SunTrust..

I apologize if this has been presented already, but did the company disclose or talk about revenue contribution from DeltaTech in Q3? And what Schrader and Delta add incrementally in Q4, so we can get kind of organic growth x M&A?.

Yes, look, we've talked about the overall annualized run rates of those business. We owned DeltaTech for about 10 weeks in the third quarter. And Schrader, that run rate in the fourth quarter, we expect to be between $105 million to $125 million in revenue in the fourth quarter.

And just to be clear, we don't typically guide on the segments of our business. We recognize everybody's trying to get their hands around Schrader, so I'm willing to lay that out for you at this point..

And I'm wondering if you can also comment on the gross margin trend? I was very pleased with the profitability in September, but it seems to have gotten there from some revenue upside, and at least relative to my model, the gross profit came in a bit lower than expected, and that kind of flowed through the model straight down.

I'm wondering, was there some unusual pressure on gross margin in the quarter? Or maybe my model wasn't properly calibrated?.

Yes. Look, Paul can elaborate, but recognize that businesses we acquire are almost always, I would say, always operating at gross margins well below Sensata's. And prior to the integration playbook is to get the overall margin index up. We focus primarily on adjusted net income when we do that.

In some cases -- I would say in all cases, we'll see gross margins improve in the acquired businesses. In some cases, they will not get to Sensata's same level as the growth margins, but they will get there as we leverage SG&A. They will get there on the adjusted net income line..

That's very helpful, Martha. And maybe if I can squeeze in one more, you have, I think, improving or more stringent CAFE standards in the U.S. I think coming online starting next year. Correct me if I'm wrong on that.

And then I wonder if either that is -- if you expect that to have any impact on the business? And what you're seeing from the perspective of any incremental adoption of diesel cars in the U.S.?.

Yes. I'm going to be careful about opining on diesel take rates in the U.S. because that's -- it still tends to be a pretty low installation rate. We've seen that come up a bit but it's -- there are parts of this country that are not terribly diesel friendly when it comes to passenger cars. Your point, though, about the CAFE standards is the right one.

And so as those continue to tighten, we see lots of applications going on vehicles that have our content. I mentioned some of those like turbocharging, returnless fuel systems, a lot of launches associated with that content.

I think even more promising is, when you look out over the long run, that standard continues to tighten, and we get to 54 miles a gallon in the 2025 time line, and we don't see any backing off of those regulations quite frankly, all around the world. So a really important growth driver for Sensata..

And we do have another question from Rich Kwas with Wells Fargo..

Just a quick follow-up. On the restructuring, you talked -- Paul, you talked about efficiencies for the core business.

Should we think of this quarter as being atypical in terms of that activity on the stuff you're pulling out?.

Yes, we don't -- it's not something that we normally put forward. This quarter, we felt like this was a good opportunity to look at ways to optimize the organization and the structure. The investment has a 2-year payback. We thought it was a very smart thing to do to drive savings for next year..

As there are no more questions, I'd like to turn the conference over back to Mr. Sayer for closing remarks. Mr. Sayer?..

Thank you, Melissa. I'd like to thank you all for joining our third quarter 2014 financial results call today. Later in the quarter, Sensata will be participating in RBC's TMT Investor Conference in New York on November 10 and Bank of Montreal's Technology Investor Conference, also in New York, on December 9.

We appreciate your continued interest in and support of Sensata, and I look forward to speaking with you on the road and again, next quarter. Thank you, and goodbye..

That concludes the call for today. You may now disconnect..