Good morning, and welcome to the Sensata Technologies Holding N.V. Third Quarter 2015 Earnings Conference Call. At this time, I would like to inform you that this conference call is being recorded and that all participants are on a listen-only mode. For opening remarks and introductions, I will turn the call over to Mr.

Jacob Sayer, Vice President of Treasury and Investor Relations. Mr. Sayer, you may begin..

Thank you, Keith, and good morning, everyone. Earlier today, Sensata issued a press release describing its financial performance for the third quarter of 2015. You may obtain a copy from the Investor Relations section of our website at sensata.com.

As a reminder, 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, 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, Sensata's President and Chief Executive Officer; and Paul Vasington, Sensata's Chief Financial Officer.

We'll hold questions until after our prepared remarks I'll now turn the call over to Martha to review highlights from the quarter and trends in the end markets that we serve.

Martha?.

Thank you, Jacob, and thank you all for joining our third quarter 2015 conference call. Our strategic goal to win in sensing and drive long-term secular growth at Sensata remains intact and we continue to deliver on promised double-digit revenue and earnings growth for shareholders.

Key highlights for the third quarter include; net revenue of $727 million, an increase of 26% from the third quarter of 2014. Net revenue in Performance Sensing grew 40% in the quarter from the prior year, driven primarily by acquired revenue from Schrader and DeltaTech.

Organic growth of 2% was depressed due to weak China vehicle and heavy vehicle off-road production. However, revenue in our European automotive end market grew 19% organically driven by strong sensor content growth and new sensor program launches remain on schedule.

Net revenue in Sensing Solutions shrank by 9% in the quarter compared to the prior-year, and by 8% organically due primarily to weakening markets in China as indicated by seven consecutive months of weak manufacturing in PMI data and continued inventory de-stocking, weakening semiconductor manufacturing and communication markets and continued HVAC inventory rationalization from the SEER changeover in the U.S.

Adjusted net income was $123 million, an increase of 14.5% from the third quarter of 2014 or $0.72 per diluted share in line with our expectations. And adjusted net income margin in the core business, which excludes Schrader and DeltaTech, was 19.7%, which reflects continued progress towards our target margin range of 20% to 23%.

When we updated full-year financial guidance in July, we expected a quick inventory adjustment affecting Chinese vehicle production in Q3, a stabilization of the downward trend in off-road vehicles and an anti-de-stocking in the industrial HVAC and appliance markets. Given where we stand today, end markets look worse than our prior assumptions.

Consequently, we have taken further action to improve our cost position in order to align our costs with weaker demand, a portion of which will provide sustainable savings into next year. We are executing on our strategy to win in sensing with a growing pipeline of new business wins and the successful execution of our M&A strategy.

Despite weakness in our end markets, sensor content growth remains on track to deliver 5% to 6% growth this year, driven by high single-digit content growth in our core Performance Sensing business. We are prospering in a fast growing sensing market that is driven by safety, efficiency, and a clean environment.

We have a leading position, providing differentiated value to our customers by designing and manufacturing innovative custom sensors for mission-critical, hard-to-do applications.

We work closely with our customers to design and deliver innovative sensing products that drive secular growth for Sensata, fueling organic revenue growth even in years like this one, where markets are a headwind to revenue. Regulation and its enforcement is a critical catalyst for long-term sustainable sensor growth.

We believe a move towards real world emissions testing is more likely given recent revelations of diesel emissions irregularity. This would lead to an acceleration of emissions control development pipeline at OEMs.

For example, we will see more widespread adoption of systems such as selective catalytic reduction systems that include pressure and high temperature sensors enabling those systems. In the normal course, heavy vehicle emissions regulations in the U.S.

and Europe next year in Tier 3 and Euro 6c light vehicle emissions regulations in 2017 and 2018 will help to drive future sensor growth.

Inorganic growth through acquisition enabled by our strong free cash flow and a highly efficient capital deployment strategy is a key pillar to delivering long-term double-digit revenue growth and a core part of our value creation strategy. This year, acquisitions will deliver over 25% revenue growth for Sensata.

Acquisitions also open up new avenues for technological and adjacent market growth as well as cross-selling opportunities. The integration of each of our prior acquisitions is proceeding well and Schrader continues to exceed profit expectations.

During the diligence phase for Schrader, we identified certain product lines that are not aligned to our long-term strategy and were unprofitable, such as Schrader's Brazilian operation. In light of the current market backdrop, we are accelerating plans to reduce or exit these product lines. This will reduce net revenues, but will improve earnings.

During the quarter, we announced an agreement to acquire the sensing portfolio of Custom Sensors & Technologies, or CST. This acquisition is highly profitable with EBITDA margins in Sensata's core range. They are highly cash generative and we expect the acquisition to be accretive after the first year.

The product portfolio is highly complementary and expands Sensata into attractive applications in aerospace, industrial, machinery, and medical end markets. The regulatory review is proceeding in line with expectations, and the parties are currently working towards the goal to close the acquisition on the 1 of December.

Organic growth this year has trailed our long-term expectations for single-digit revenue growth. End market performance has had a negative impact with a number of cars, trucks, appliances, and industrial and equipment manufactured this year in decline.

Vehicle production in China, which has been an engine for growth for a number of years, declined in the third quarter. We believe automotive and light commercial truck production in China fell by 10% to 15% as declining retail sales triggered OEMs to slow production to improve inventory positions.

While content growth remained strong in China and production is improving sequentially into the fourth quarter, we currently expect to see a similar production decline year-on-year in China in the fourth quarter. Long term, we believe the Chinese automotive market will be robust and will provide a continued runway for market growth.

Regulatory enforcement of emissions and fuel economy is improving, and OEMs are responding by producing cleaner and more fuel-efficient vehicles. These new vehicles include numerous new designs that drive significant sensor content growth.

Consequently, once we get through expected near-term market volatility, we expect China to again be a long-term driver of revenue growth for Sensata.

Our European automotive business continues to perform extremely well with revenue up 59% in the third quarter as compared to the year ago quarter, primarily as a result of the impact of the acquisition of Schrader, as well as from content and market growth, offset somewhat by the impact of foreign currency, all in line with our expectations.

On a constant currency basis, our revenue in the European automotive market grew 19% organically in the third quarter as compared to the prior year, primarily due to content growth, including the benefit of the Euro 6 emissions regulations.

In line with our expectations, third-party forecast continue to call for modest automotive production unit growth in Europe in 2015. We expect to see continued low-single-digit production growth next year as the European economy improves.

In North America, our automotive revenue grew 79% in the third quarter as compared to the prior year, reflecting the impact of the acquisition of Schrader and underlying production growth in the region.

While vehicle production is running at high levels in North America, we foresee low-single-digit growth in light vehicle production rates over the next year.

Our revenue from the heavy vehicle off-road market grew 2% this quarter from a year ago, reflecting primarily the acquisition of DeltaTech, offset by poor conditions in the off-road vehicle market, especially for agricultural and construction equipment, which appears to have contracted at a 15% to 20% rate.

We expect the HVOR market to continue to contract in the fourth quarter, principally in the off-road, agricultural and construction segments. For the next year, we expect HVOR revenue to be up slightly as increases in content growth offset an overall weaker end market.

Within Sensing Solutions, a small but growing industrial sensor unit serves OEMs in the HVAC and industrial markets. Despite market headwinds, Industrial Sensing revenue grew organically in the quarter, including low double-digit content growth. Next year, we expect Industrial Sensing to grow greater than 10% on continued content growth.

In addition, the acquisition of CST will add substantially to our Industrial Sensing product base revenue and end market access. However, the appliance and HVAC industrial and other end markets are primarily served with electrical protection products from our Sensing Solutions business that do not benefit from content growth drivers.

As a result of broadly weaker China, we saw continued weakness in these end markets and further destocking by customers. We also saw continued HVAC inventory rationalization from the SEER changeover in the U.S. and weakness in the semiconductor manufacturing and communication markets.

I'd now like to turn the call over to Paul to review our third quarter results in more detail to provide financial guidance for the fourth quarter and to discuss our initial take on 2016.

Paul?.

acquired revenue growth of 5% to 6%, including CST as of December 1; Performance Sensing organic revenue growth in the low single-digits, reflecting 5% organic growth in the core automotive business, despite lower vehicle production in China; flat tire pressure sensor revenue, and continuing weak demand off-road, agriculture and construction equipment; Sensing Solutions organic revenue to decline at a high single-digit rate due to continued weak demand in the industrial and appliance HVAC, semiconductor and communication markets; and changes in foreign currency exchange rates to be a 2% to 3% headwind for the total company.

Further, we expect adjusted EBITDA of $176 million to $188 million, reflecting a small unfavorable impact from CST due to initial integration charges; adjusted net income of $106 million to $118 million, reflecting increased operating efficiencies, higher sourcing savings, cost control, and the benefit of improved mix as we exit unprofitable product lines; and one month of operating results from CST, including integration charges and interest expense on the new debt rate to fund the acquisition; adjusted net income per diluted share of $0.62 to $0.69, which includes $0.05 to $0.06 of dilution related to one month results related to the acquisition of CST and a fully diluted share count of 171.7 million shares.

While we'll give comprehensive financial guidance for 2016 during our fourth quarter results call in early February, we feel investors would benefit from our current thinking regarding expected revenue growth for next year.

We believe core automotive Performance Sensing organic revenue growth will be 5% to 6%, reflecting high single-digit sensor content growth and a low single-digit global production, which includes a recovery in China; higher pressure sensor organic revenue to move in line with markets, as 2016 is not a year with new tire pressure regulation.

HVOR should grow organically low single-digits due to sensor growth in a slightly weaker overall market. In the long run, we expect HVOR to be a strong growth driver for the company.

Sensing Solutions organic revenue growth to grow low single-digits, driven by the strength in Industrial Sensing and modest growth in markets over the electrical protection products, which do not benefit from content growth drivers.

We expect a 1% to 2% unfavorable impact on net revenue as a result of the changes in foreign currency exchange rates, as CST should drive approximately 10 percentage points inorganic net revenue growth next year.

In summary, despite weak end markets, Sensata delivered 26% net revenue growth and adjusted net income in line with our expectations for the third quarter. Sensata continues to deliver on its promises of strong double-digit revenue and earnings growth, partly enabled by superior capital deployment of high returning repeatable acquisitions.

We're happy to take questions that listeners may have. Operator, please introduce the first question..

Thank you, Mr. Vasington. Your first question comes from the line of Wamsi Mohan from Bank of America Merrill Lynch. Your line is open..

Yes, thank you. Good morning.

Martha, given the changes in demand, can you update us on your thoughts around how that CST portfolio is looking, especially given the weakness in industrial as you're heading into 2016? And are you expecting still breakeven to EPS in 2016 or does that now start to look accretive given the timing of the close? And I have a follow up..

Sure. When we look into the end markets of CST, we're still really excited just given what they will allow us to intercept on content growth over the long run.

Some of those end markets that are beleaguered in CST we saw during diligence, for example, there is a small exposure to oil and gas that was definitely part of our thinking in the investment case, so not a lot of surprise on that front; some exposure to the agricultural aspects of the business that we're experiencing now, but actually less exposure than we have at Sensata.

So all in all, feeling good about the end markets. We do expect to be at least break even on CST, probably slightly accretive in 2015.

And Paul, I don't know if you want to comment further on that?.

Well, that's right. The charges that were taken this quarter, Wamsi, the $0.05 to $0.06, is impacted by integration charges were taken this quarter. We expected those to be in 2016 since we accelerated those, we will be slightly accretive next year as a result of that..

Okay, great. Thanks. And as a follow up, Martha, it sounds like you spoke about increased opportunity from SCR applications, given the dislocations in the diesel market. There are clear worries that there might be a longer-term shift away from diesel that could impact you guys.

Can you help us think through or frame that a little bit, from a longer-term perspective, do you actually anticipate that diesel will become a headwind or do you think it will still continue to be a tailwind given your comments around the increased opportunity from SCR? Thanks..

Sure. Look, I think in North America, for example, in the U.S., diesel has never been a big factor in the passenger car market. Fortunately (25:34), it was beginning to build momentum and I think that momentum is off the table. That's not highly material to our business, Wamsi, given how low the diesel penetration rates were.

When we think about diesel more broadly, the market where it is most important, obviously, is in Europe. We don't expect end market increase in installation rates on diesel.

But when you look at the overall regulation in Europe, particularly the need to meet CO2 mandates, we're talking about 40% – 35% to 40% improvement in grams per kilometer of carbon dioxide emissions. The headwind to meeting that regulation, if diesels are off the table, makes that nearly impossible.

So we do not expect a major headwind in diesel installation rates in Europe. Just to remind everybody, when you look at the impact on Sensata, about a 5% movement in diesel penetration or market share is about a $10 million revenue impact for us. And so, beyond that kind of swing, we're not anticipating a headwind as we move into 2016..

Great. Thanks a lot..

Thanks, Wamsi..

Your next question comes from the line of Scott Davis from Barclays. Your line is open..

Hi. Good morning, guys..

Good morning, Scott..

Good morning, Scott..

The 19% content growth number you quote in Europe; that seem like a pretty nice number. And can you just talk to the sustainability of that as you think through 2016? I mean, Euro 6 is tough for us to get our arms around, really what kind of ramp in content you get and it would seem at least the initial impact would be pretty helpful.

Can you help put some context around that for us?.

Yeah, we can. So, one of the things we've laid out this time around is just to give you the sense for what our core Performance Sensing organic growth will be. When we talk about the 5% to 6%, it really is reflecting strong single-digit sensor content growth.

And so, let me help you reconcile the 19% we saw in this quarter with the overall longer-term development.

Our content growth tends to be lumpy, so it can be accelerated around times of regulation enforcement, and we expected that that ramp in the second half here in 2015 in Europe due to this Euro 6 regulation that requires really more sensors, particularly in diesel engines in Europe.

There are other ways of regulation that will be coming in 2017 and 2018 in Europe, for example. There is a Euro 6c component that requires now onboard diagnostics and add sensing content to the overall vehicle fleet. At the same time in the U.S. and in China, there are fuel economy mandates.

We continue to see the need to meet stringent tailpipe emissions in HVOR and on and on and on. And so, this is just an example of where you can see the impact of Euro 6 regulation and the growth in our content. It's hard evidence that our overall growth thesis is on track..

All right. That's helpful.

And then it's a tough world out there now as you guys alluded to, but does this give you an opportunity to pull forward some of the consolidation initiatives and things I'm just thinking more specifically, I guess, around Schrader, but point forward maybe some of the integration efforts and getting us ahead on the curve on that?.

We think, it does, Scott. You saw a little of that in the call for the fourth quarter guidance that we have a small amount of revenue in the $5 million to $10 million range actually coming out of Schrader, which we had anticipated in the investment case.

So these are non-performing products, they're (29:38) not sensor products, and we are able to accelerate just given some of the softness in overall current demand, and we expect to do that as we enter 2016..

Great. Okay. Good luck. I'll pass it on. Thanks..

Thank you..

Thanks, Scott..

Your next question comes from the line of Samik Chatterjee from JPMorgan. Your line is open..

Hi, Martha. Hi, Paul. So the first question I had – and thanks for your comments on the diesel installation rates and that you see no major change in that.

Maybe if you can help us by talking about the opportunity, the content opportunity that you have on gasoline and hybrid vehicles related to diesel vehicles and what all of the shift would mean, even a small shift would mean in terms of content opportunity for Sensata?.

Sure. So we'll start first off on gasoline engines. When you look at the new content coming into gas engines, you hear about this now even in commercial these days, so things like gas direct injection, things like dual clutch transmissions that really drive fuel economy, are adding more sensors.

So, we have been very open about the delta between our content in diesels versus gasolines and that can be $10 or $15 on a very high-end diesel. That gap is actually shrinking over time as gas engines have to be more fuel efficient and as they also have to meet tailpipe emissions. So, we think gas engines are a great content driver for us.

Things like gas direct injection are still low penetration rates around the world, less than 40% of the overall fleet. So we're very enthusiastic about the evolution of sensors on gas engines. Hybridization is another development that bodes well for Sensata.

So, when you look at the sub-systems, on a hybrid vehicle, they tend to be the most energy efficient that you can find. So, for example, your braking system will have regenerative braking that requires multiple sensors to regenerate at each channel to the wheel versus a single sensor that we provide today in most stability control systems.

So we like hybridization and we like the evolution of gas engines over time for Sensata..

Great. Thank you for that comment. And just moving on to China where you've stated that you're assuming a roughly similar decline in production in 4Q as in 3Q.

And I'm just curious if that's based on your customer call-offs or is there something about your customer mix there, because when I look at IHS production estimates on the latest one, obviously 4Q seems to be a little better off than 3Q.

So, I'm just wondering, if that's something else that's driving that? And maybe on that line if you can give me what the organic growth in auto was in China?.

Okay. So, let's start with the first piece of that. As you know, there have been times and we have departed from IHS and this is one of those. We do not expect to see that 5% production increase that they are calling for.

And that is a combination of just shutdowns that we saw during the third quarter, the return production rates that are coming back in that time period.

The one thing I will call out here is there has been a much greater impact in China on vehicles produced by multinational producers versus the local China producers who tend to support – the latter tends to support the lower end segments in China.

So to answer your question about any specific impact to us, the overall sensor content growth in a vehicle produced by the multinationals and you can think of Volkswagen joint ventures, GM joint ventures, is higher than those produced by the local producers, so it's about a 2:1 ratio right now.

Over time that's a good thing, because it presents a lot of sensor content growth, and there is smaller-end vehicles and we see that coming. But as the market share shifts, given this recent correction, that does have an impact on overall sensor content, and it does have an impact on our business.

Again, we do not expect to see production growth in the fourth quarter. And in terms of overall organic growth in China....

And we were down about nearly 15%..

Yeah. We were down, between the combination of commercial trucks and automotive, we were down about 15%..

Okay. All right, got it. And finally just on the Sensing Solutions business. I believe organic growth has now been down roughly 8% for the last couple of quarters, and you're guiding to a similar sort of organic decline in 4Q.

Now what really gives you, maybe a confidence into seeing anything on at the ground level that you're seeing that would give you more visibility going into 2016?.

So, one of the things that we look at, we've got backwards looking data out of IOL that tells us what the actual production rates were, and at the same time, we have some visibility customer-by-customer as to what's in the inventory channel.

I think the thing that drove our guide, drove our difference in thinking here was just the accelerating decline of the PMI in China. So PMI is an important market driver for our Sensing Solutions electrical protection devices, and so that's really what's been driving the overall. It's going to be important that that stabilizes.

If not, that probably would have an impact on our overall thinking in 2016..

Thanks, Samik..

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

Yes, thanks. Just following up on the comment on Schrader in terms of exiting some product lines.

Is that, as you look at the impact on sales, is that something that you can help quantify?.

In the fourth quarter, we know, we think that's in the $5 million to $10 million, probably closer to the lower end of that overall range. As we look into the year that's about....

Next year – next year it's going to be around $20 million or so....

Yeah, probably $20 million, and again actually a positive to earnings, no impact..

Got it. Thanks. And then just looking at the OpEx, you guys usually do a really good job in terms of aligning to the market.

Just curious, Martha, as you look at kind of the slowdown we're seeing now versus we've seen a number of these in recent years, how you compare in contrast maybe and then also how you see kind of visibility coming out of the current downturn?.

Sure. Look, I would say, at this time around it's somewhat surgical in where we're dealing with the issues. So, China is having most of the impact here certainly in the fourth quarter. In the past, we've seen much broader based overall market weakness. We're not seeing that in the business.

And so, as we look ahead, we continue to think, it's important to make sure we look at each end market and understand its dynamics. It does have us aligning our costs really across the business to make sure that we deliver to shareholders on overall earnings and that is the focus..

Got it.

And then maybe just one last quick one on CST, as you look to kind of close that deal since you announced it today and any update in terms of on your due diligence, in terms of market opportunities and things like that that you're feeling better or worse about?.

We're really feeling good about the synergies that we expect to drive. We feel good about how the business is positioned. Having now cleared or very close to clearance on the antitrust front, we're getting into dialog about customer plans and that allows us to continue to develop the overall integration plans. Feeling very good about it..

Got it. Thank you..

Your next question comes from the line of Matt Sheerin from Stifel. Your line is open..

Yes. Thanks. I just wanted to go back to your assumptions for organic growth next year, which given the headwinds that you're seeing in Q4 seem to be fairly optimistic at this point.

Particularly in China, are you just expecting that inventory correction to payout and are you seeing any signs that that will -- you'll start to see a resumption in growth in Q1 of next year?.

Yeah. We are seeing some of that now. So, we do expect production to improve sequentially. Now, let's talk automotive. We expect production to improve sequentially third quarter to fourth quarter, and our order rates are reflecting that.

So we feel confident that the overall vehicle inventory correction, which has been driving the myth on the second half is going to be behind us.

When we talk about the overall Sensing Solutions piece of it, as I mentioned previously, we have the ability to look back what actual production rates are doing, and we have line of sight in the overall customer channel on the inventory work down. Given the PMI deterioration, that drove production down, again in another wave of inventory correction.

So key to 2016 will be the stabilization of PMI in China. At this point, we don't view our overall outlook as being optimistic. We're not expecting any more than a 1% to 2% overall improvement or growth in that segment of our business. And, again, that – we think that's in line with what we are seeing in the marketplace..

Okay. Thanks.

And in terms of Volkswagen and the issues going on there, are you seeing any near-term impact on revenue or any expectation for share shifts among your customers?.

Yeah. We have about a $2 million – $2 million to $3 million impact, I believe, in the fourth quarter, all of that in North America just given that they stopped sales on those vehicles. But again, very low diesel installation rates in North America, so not huge.

When we carry that trend forward into 2016, that's about an $8 million to $10 million overall impact..

Okay. Thanks very much..

Thanks, Matt..

Your next question comes from the line of Rich Kwas from Wells Fargo Securities. Your line is open..

Hi. Good morning..

Rich..

Just want to follow up on, here in the quarter on Performance Sensing. So, Europe, strong organic growth, North America. What was the organic growth in the quarter for North America? I don't think you gave that..

It would have been around flat – flattish or so..

Okay.

What was impacting that? Suspect that you (41:00)?.

Year-over-year, we still have a good production growth..

It's primarily timing, Rich,....

Yeah..

...of when the content comes into play. We'll see organic growth in the fourth quarter in North America. So, keep in mind the launch and the timing of content adds tends to be lumpy. Very, very strong in Europe this time around, not so strong in North America. We expect that to rebound in the fourth quarter..

Okay. And then, in terms of the outlook for next year, on the Performance Sensing side, I think, it's – mid singles is the outlook.

Did that include price or is that excluding price? Do we take price off of that?.

That includes price..

It includes price?.

Organic growth includes price..

So it does include price. Okay. All right.

And then, the same thing for Sensing Solutions, correct?.

Yes..

That's correct..

The Sensing Solutions has very little price, in fact prices could be slightly down..

Okay. Okay. And then, within that in terms of the outlook for Performance Sensing next year, so I know, Martha you talked about off-road, construction, ag, et cetera, that's been weak for some time, but there's growing concern around on-road, and I know that's a substantial piece of your business.

So it doesn't sound like you've assumed any downturn on the on-road side for next year.

So could you help understand your assumptions there?.

Yes..

We have, Rich. And so this is where content growth helps to offset..

Okay..

So we were aware of what's happening with Class 8 and then, looking carefully even at Class 6 and Class 7. So we do expect that to be a headwind next year, and hence, the call for a low single-digit in that part of the business..

Is there any way to quantify that in terms of the thoughts around what you're assuming within the outlook for on-road so we can....

For on-road, yeah, in North America and Europe. But for North America, we're assuming that the market decline is going to be something in line with what the production estimates are that are out there in the market today..

Okay. All right. And then, last one on free cash flow, Paul.

So is you vision again here on free cash flow, I understand is lower earnings, but anything else moving that number lower apart from that?.

There's a couple of things, Rich. There is, capital expenditures could be running a little bit higher than what we originally anticipated, which is a good thing as we continue to build manufacturing capability in Bulgaria as an example. Working capital is trending a little bit behind from where I would have liked it to been.

So, still making a lots of improvement there, continue to get better, but some of that may end up realizing in 2016. And then we have some other one-time things like the deal cost related to CST and transaction costs, this settlement here that we are looking to have with Bridgestone.

Those things were additional costs that were not anticipated in the previous guide along with the earnings decline that you mentioned before..

Okay. All right. And just, Martha, real quick. Just on the outlook longer term. What's your confidence level on a high single-digit growth rate organically going forward? I mean this has been a tougher year than you envisioned and next year doesn't look to be a lot better macro-wise.

So, how are you looking about that outlook that you provided back in February at the Investor Day?.

Yeah. Look, I think that the swing in this is going to be end markets. And so, when we look at the actual sensor wins that we're having and the launches that we anticipate, we feel better than ever about it. When we look at the access that we're going to get to some adjacent markets that will have sensor content growth, we feel great about it.

I think the swing is going to be some of these end markets that will be a bit of a headwind, they won't be a headwind forever. And at the same time, we are at some very low points in some of these end markets and that will begin to be a tailwind for us.

I think some of the things to recall about our overall business model, we did not anticipate that Schrader would drive organic growth in a meaningful way until we hit the next wave of regulations, that is playing out.

When we look at CST, we'll have work to do to take what has been in business that has been underinvested in and return that one or restore that organic growth on that front, which is going to create overall more growth for Sensata.

So I think in the near-term, feel very good about the content wins, are going to continue to watch closely the end markets. But these elements of our business are playing out really in line with our expectations..

Okay. Thank you..

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

Yes, good morning, and thanks very much for taking the questions. First question was on some of the costs – cost lines as we move into 4Q and for 2016, and just given there are some moving parts with the CST coming in and then also the cost reduction actions that the company has undertaken both in the third quarter and then incremental ones in 4Q.

Could you just help us think about how we should think about the SG&A line trending for the next couple of quarters, and then what sort of integration expenses there may be in COGS in the next few quarters?.

SG&A should trend in Q4 similar to what you saw in Q3. Mark, we continue to work the cost side very hard, we continue to drive efficiencies within the business.

As Martha said, we're restructuring those operations which are not growing, we are optimizing our network, moving manufacturing to areas where we think it's the most effective and drives the best delivered cost, so being very proactive on the cost side to continue to drive profitability in a lower growth environment..

Okay. And then for follow up question on the VW topic around diesel engines. I mean, there was a report on Reuters a couple of weeks ago quoting a German newspaper that VW is looking to find cost cuts of about €3 billion from their supply chain to help deal with some of the diesel regulations that they're going to have to contend with going forward.

Are you expecting to see any pricing pressure from your customers as it relates to diesel?.

Look, I think we see pricing pressure from customers every day. Keep in mind that we operate under multi-year contracts that have price reductions built into those as well. So we're not seeing any pressure at this point in time.

We think at the end of the day, it comes down to what's our ability to hold our competitive position, and we think we're very well-positioned to maintain the shares that we have and actually to grow our business over time. So I don't expect that this is going to be anything out of the usual..

Okay. Thanks. I'll turn it over..

Thanks, Mark..

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

Hi. Good morning. I'm going to talk about Wabash and DeltaTech and the accretion expectation for 2016, knowing that there has been some end market tumult.

I think both were expected to maybe deliver about $0.10 of accretion for 2016, if you could just give us an update on kind of what you expect it to contribute next year?.

So, on the cost side, we're making great progress from both of those acquisitions. Wabash is now just about fully integrated. And DeltaTech is a little over a year into its integration journey. I think what's going to be a bit of a headwind in achieving those numbers is the fact that they both serve markets that are weak.

So to the extent that they are selling into the HVOR end market, they are seeing revenue challenges similar to the rest of our business. And that is going to create some top-line headwinds and also some bottom-line headwinds as well..

Just one thing to recognize, the 19.7% A&I that we called out on our core business included Wabash. So you can see now post-integration, we're able to align these businesses up with our core profitability..

And the headwinds being experienced by both Wabash and DeltaTech is similar to what you're seeing across the aggregate business or are they seeing greater or better trends?.

To the extent, (49:21) they're consistent. DeltaTech is entirely off-road, so it's feeling more of that than Wabash..

Okay.

And then just on the cost side, is there a way to sum up everything that's being implemented, say, in the back half of the year, what type of aggregate benefit that will be to the P&L in 2016 given the number of moving parts?.

There are a lot of moving parts. I can tell you that the actions that we're taking continue to support A&I margin expansion towards the 20% to 23%, but there'll certainly be a lot more to come when we get together again in February..

So, again, and I think more color on that when we provide our guidance, as Paul called out. We do think 2016 is a year when we'll absolutely see earnings grow faster than overall revenue and we're positioning ourselves to make sure that that happens..

Just to clarify on the wordings.

So, the comment means incremental actions will be announced between now and February is what I was expected to take from that comment?.

No..

No, it meant that we'll provide the impact, what we expect that to contribute when we provide our guidance in February..

All right, perfect. Thank you, Martha..

Thanks, Shawn..

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

Hi. Thank you. Quite a few questions answered, I just had a few blocking and tackling ones.

I don't think I heard if we look at the fourth quarter guidance, what is the impact of CST in those numbers that you provided?.

The impact of CST is....

On revenue..

On revenue – we're assuming about $15 million to $20 million of revenue is the range for December and December is typically a lighter month..

Okay. Got it. Thank you. And then two quick ones is, how should we – and thanks for providing an early look into 2016.

What I didn't hear – I don't think I heard was, what's the assumption for China auto production? And then also, free cash flow, is CapEx going to be similar to what we've been running at and then also free cash flow to sales margin? Thank you..

Yeah. So, for China, we're expecting growth to be slower than it was coming into the downturn, so in the 3% to 4% overall production growth on China. We expect it to grow better than that just given content growth..

Your next question comes from the line of Amit Daryanani from RBC Capital Markets. Your line is open..

Thanks a lot. I guess a couple of questions guys. One, Martha, you talked about 2016 seeing EPS growth faster than revenue growth.

I'm curious, does that anchor organic revenue growth of 5% or so, or is that anchor revenue growth of mid-teens with the CST acquisition?.

Oh, I understand, Amit (52:18). That was really on the organic basis. So thanks for the opportunity to clarify that. I appreciate that. Yeah, we think that CST we think will be slightly accretive..

Fair enough.

And then as I think about the guide for December quarter, how do you guys think gross margin and OpEx plays out on a sequential basis versus September quarter that you guys have?.

Gross margin, I would expect to improve in the 80 basis point to 100 basis-point range and I'm looking for operating expenses or research development, SG&A to be about sequentially flat..

Fair enough. And then, I guess, just finally, I think towards the end of the quarter you guys announced Martin Carter had resigned from his position and Jeff Cote was going to takeover or has taken over.

Could you just talk about what led to the transition and change, and what do you think Jeff is going to do differently in that business as you go forward from here?.

Yeah. Listen, this was very much a personal decision by Martin. We are sorry to see him go. He's had a great impact on our overall Industrial Sensing strategy. So, it's purely a personal decision. I think Jeff brings a lot to the role particularly when we look at the elements of this business that don't enjoy secular growth.

And then the opportunity to really align those front to back to continue to contribute earnings growth. And, I think, Jeff will do that really well..

Perfect. Thank you..

You're welcome. (53:52).

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

Great. Thank you for taking my questions. First, Martha, I'm hoping you can give us an update on Schrader with regard to the company's progress in manufacturing in China and also expectations for regulation of TPMS or mandate for TPMS in China..

Yeah. We're making a great progress in China. So, we have launched and are now producing and are actually loading some demand into China that actually would serve, for example, the aftermarket of the tire pressure sensing business as well. So, very good progress on that front. On the regulatory front in China, we follow it closely.

So at this point, we are working in the Standards Committee to develop a unified standard that would then go to rule making in China. And that continues to move well. So, we are on track with our assumption that in late 2018, 2019, we would expect to see regulation in place and impacting demand in China.

Having said that, we continue to work with China OEMs right now on applications for tire pressure sensing. So most OEMs recognize that this is going to be coming and we're starting that work today so that would allow us and allow them to be compliant as the regulation comes into place..

That's very helpful. And then maybe a follow-up more on the VW topic, understanding that long term it sounds like this is more of an opportunity for Sensata, but that next quarter you expect $2 million to $3 million impact from, I guess, VW cars being held back in the U.S.

We think we've seen news reports of similar restrictions to VW sales in many other countries as well.

Do we have that wrong or does that somehow have smaller impact on the business or how can I reconcile that?.

Yeah. So we've seen that. Interestingly it's been Euro 5 vehicles. And so, if you look at the number of those vehicles that are in the marketplace, there are not very many. I think there are some isolated cases where small countries have done that across the board.

Interestingly, what that does is that it takes inventory right out off the dealer lot and usually into somebody else's hands. So, we've not seen a high volume impact on that in Europe and we think that that gets served very quickly with other OEMs, so we have strong content..

Great. Thank you..

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

Thank you. And thank you so much for your team for all the details that helps out a lot. I have one question, kind of on the same line, but kind of two parts.

First of all, the diesel slowdown and challenges with the emissions by that one OEM, are you seeing any production slowdowns from that OEM in Europe? And then the second part of that question is, are you building any potential share shifts away from that OEM to others because, yes, you may have similar footprints with other European automakers but there is a chance, or maybe I'm misreading it, that some of them go to say some Japanese OEMs that maybe just don't have as much Sensata content? Thank you..

Yeah. Sure, Jim. It's a fair point. So, to answer the first question, we have not seen any slowdown in production and you got to be a little bit careful here because some of what we get is proprietary information. We're not saying that.

When we talk about the $8 million to $10 million in overall headwind on the VW issue for us, it is with the assumption that the rest of the market takes that share at the market mix today. So, we're not assuming that, and it necessarily goes to say a more favorable OEM versus a Toyota, if you will.

So, we use the overall balance of the mix on the marketplace to make those assumptions..

Okay. That helps a lot. Thank you so much for your details..

Thanks, Jim..

Thanks, Jim..

And your next question comes from the line of Jeremie Capron from CLSA. Your line is open..

Thanks, good morning.

Wanted to follow up on Sensing Solutions where I think margins looked pretty strong despite the revenue shortfall, and you talked about incremental cost actions taken to protect margins on the way down, I wonder if you could give us a little more clarity around what these actions are, and I think Martha you said some of these would be sustainable into next year.

So, again, color around this would be appreciated. Thanks..

Look, I think it's just recognizing that there have been some dislocations on that business. So, for example, in China, with the downturn that we're seeing, we've looked very hard at what we could expect overall emerging market growth to be for that business, and it's going to be very slow.

And so, in the case of the appliance market, the HVAC market, China is beginning to perform more like a developed country. That be being the case then, our alignment of our OpEx needs to be aligned to that new reality and we think that that's quite sustainable.

We've looked closely at utilization rates in our factories for that business and we see opportunity to consolidate there as well. So, again, quite sustainable as we go forward..

Thanks. And quickly on the R&D. I mean, you have a large increase in R&D spend year-over-year. I understand quite a bit of this comes from acquired businesses. I wonder if you could give us an idea of how to think about R&D intensity going forward as a percentage of sales, for example..

So you're correct in terms of the – much of the year-over-year increase relates to acquisition. But we've also been very proactive in adding engineers to support our new business wins and our opportunity pursuits primarily in the Performance Sensing side.

We will continue to make those investments as deemed appropriate to support those programs as we win them. So increase in R&D related to expectations and increase in revenue growth in the future..

All right. Thanks very much and good luck..

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

Sayer?.

Thank you, Keith. I'd like to thank you all for joining our third quarter 2015 financial results call today. Later in the quarter, Sensata will be participating in RBC's Technology Investor Conference in New York on November 10, and Bank of America Merrill Lynch's High-Yield Conference on December 3.

These events will be webcast live and available for replay on the Investor Section of our website at sensata.com. We appreciate your continued interest in and support of Sensata and 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..