Sensata's Q3 2025 Earnings Call: Contradictions Emerge on China Auto Growth, HVOR Segment, Aerospace, and Margin Forecasts

Date of Call: October 28, 2025

Financials Results

• Revenue: $932M, down $51M or 5.2% YOY from $983M in Q3 2024; organic revenue +~3% YOY
• EPS: $0.89 adjusted EPS, up $0.02 sequentially from Q2 2025 and flat versus Q3 2024
• Operating Margin: Adjusted operating margin 19.3%, up 30 bps sequentially and up 10 bps YOY; diluted ~20 bps by $12M of 0%-margin tariff pass-through

Guidance:

• Q4 revenue expected $890M–$920M.
• Q4 adjusted operating income $172M–$179M and adjusted operating margin 19.3%–19.5%.
• Q4 adjusted net income $121M–$127M and adjusted EPS $0.83–$0.87.
• Tariff costs and pass-through assumed at Q3 levels; guidance cautious given Novelis factory fire and potential Nexperia supply risks.
• No 2026 guidance provided; management reasonably comfortable with consensus but notes Q1 seasonality pressure.

Business Commentary:

* Financial Performance and Margin Expansion: - Sensata Technologies reported adjusted operating income of $180 million and adjusted operating margins of 19.3% for Q3 2025, which were 30 basis points sequentially higher than Q2 2025 and 10 basis points year-over-year. - This expansion was attributed to operational excellence, improved free cash flow conversion, and effective capital allocation strategies.

• Strong Free Cash Flow and Debt Reduction:
• The company generated free cash flow of $136 million in Q3 2025, marking a 49% year-over-year increase.

• Sensata's strong cash flow allowed for the commencement of cash tender offers to purchase $350 million of long-term debt, reflecting a focus on deleveraging and improving net leverage effectively.

• Product Innovation and Market Expansion:

• Sensata's product innovations, such as tire burst detection solutions and high-efficiency contactors, are driving growth across multiple end markets, particularly in China and the aerospace sector.

• The company is focused on expanding content in vehicles and capitalizing on global trends towards sustainable mobility, positioning itself to benefit from secular tailwinds.

• Leadership Changes and Strategic Alignment:

• Sensata announced key leadership appointments, including Nicolas Bardot as Chief Operations Officer and Patrick Hertzke as Chief Growth and Transformation Officer.
• These appointments are part of Sensata's strategy to enhance global operations, optimize cost structures, and align with growth opportunities, aiming to build on the momentum achieved thus far in the transformation journey.

Sentiment Analysis:

Overall Tone: Positive

• Management described Q3 as an "exceptionally strong" quarter, free cash flow conversion exceeded 100% and they commenced cash tender offers to repurchase $350M of long‑term debt; adjusted operating margins and adjusted EPS expanded sequentially and the company reported a return to market outgrowth.

Q&A:

• Question from Ashley Wallace (BofA Securities): On the tire burst detection, can you help quantify the revenue impact in China from these additional wins?
  Response: Design‑win to production in China can be ~6–9 months; individual win values undisclosed, but these wins support continued low‑single‑digit outgrowth above market in China.

• Question from Mark Delaney (Goldman Sachs): Based on wins and customer discussions, do you think your overall auto business can outgrow auto production next year?
  Response: Yes — double‑digit outgrowth in China and ongoing pipeline give management confidence in further automotive outgrowth into 2026.

• Question from Guy Drummond Hardwick (Barclays): Is the reported step‑up in HVAC revenue real growth or a reporting change?
  Response: It's real growth driven by two new A2L gas‑leak detection wins; gas‑leak revenue was recast into the HVAC segment for Q3 and YTD.

• Question from Joseph Spak (UBS): On the tender offer, any reason you wouldn't target the most expensive notes first, and is lower interest expense in Q4 EPS guidance?
  Response: Management declined to specify targeted notes while tender is open and said net interest change is not expected to materially affect Q4 guidance.

• Question from Joseph Giordano (TD Cowen): When will you shift from deleveraging to deploying capital for innovation/portfolio expansion?
  Response: Priority remains deleveraging and improving core operations; deployment to growth or outside investments will be reconsidered only after leverage is meaningfully reduced.

• Question from Luke Junk (R.W. Baird): Can you double‑click on aerospace IP/innovation and levers to grow faster?
  Response: Aerospace is growing (record Q3) supported by high backlogs, FAA approval increasing a key customer's output (~38→42 aircraft/month) and defense exposure — driving near‑term growth.

• Question from Shreyas Patil (Wolfe Research): What's Dynapower's strategic positioning and are you seeing customer engagements in grid/storage/data center?
  Response: Dynapower has been refocused on high‑energy grid‑stabilization use cases, with data centers identified as a primary opportunity.

• Question from Konstandinos Tasoulis (Wells Fargo): You guided organic growth 2%–4%; how are you parsing HVOR/housing headwinds?
  Response: HVOR/on‑road truck softness has weighed on organic growth; Q4 midpoint implies ~1% organic, and if China outgrowth and end markets hold, management expects low‑single‑digit organic growth going forward.

• Question from William Stein (Truist): Remind us of the longer‑term margin outlook/targets?
  Response: Management remains committed to a 19% adjusted operating margin floor on a full‑year basis and expects potential sequential expansion depending on market recoveries.

• Question from Robert Jamieson (Vertical Research): What is driving the strong FCF conversion and is it sustainable; what are you seeing from benchmarking initiatives?
  Response: CapEx discipline and working‑capital improvements drove the strong FCF conversion (105% this quarter); internal benchmarking and smart automation have cut product costs, and management targets sustaining high FCF conversion (committed >80%).

• Question from Manmohanpreet Singh (JPMorgan): Which end markets will drive your return to growth?
  Response: Focus is on HVOR and aerospace as primary growth drivers, with industrial (notably gas‑leak detection) as an important growth engine; automotive expected to modestly outgrow production.

Contradiction Point 1

China Auto Market and Outgrowth Expectations

It involves differing expectations regarding the outgrowth potential in the Chinese auto market, which could impact strategic planning and investor expectations.

Can you quantify the revenue impact of these additional wins in China? - Ashley Wallace (BofA Securities)

2025Q3: The design cycle in China can be as short as 6 to 9 months from a design win to start of production. Due to wins with only a couple of OEMs so far, specific revenue values cannot be disclosed. However, Sensata expects to outgrow the Chinese market, with initial outgrowth projected in the low single-digit range. - Andrew Lynch(CFO)

How significant is China auto business for your total revenue? What's the outlook for China auto growth? - Shreyas Patil (Wolfe Research, LLC)

2025Q2: China auto is about 1/4 of revenue. Growth opportunities significant for returning to outgrowth by year-end. - Andrew Charles Lynch(CFO)

Contradiction Point 2

HVOR Segment Growth and Contribution

It involves differing explanations of the growth and contribution of the HVOR segment, which could impact investor perceptions of the company's operational and strategic focus.

Was the significant sequential increase in HVAC revenue due to segmental changes or actual growth? - Guy Drummond Hardwick (Barclays Bank PLC)

2025Q3: The growth in HVAC is real and driven by new business wins in gas leak detection, particularly with the HL product. Revenue was recast into the HVAC segment, reflecting this significant contribution. - Stephan Von Schuckmann(CEO)

What are your views on the short-term and long-term outlook for HVOR? - Shreyas Patil (Wolfe Research, LLC)

2025Q2: On-road truck production down. Expecting continued softness in on-road. Positioned for market recovery. - Stephan Von Schuckmann(CEO)

Contradiction Point 3

Aerospace Portfolio Growth and Innovation

It involves differing statements about the growth and innovation cycle in the aerospace portfolio, which could impact investor perceptions of the company's strategic focus and execution abilities.

Could you elaborate on the aerospace portfolio's innovation cycle and how it relates to your right to win comment in the prepared remarks? - Luke Junk (Robert W. Baird & Co. Incorporated)

2025Q3: Aerospace has achieved steady growth with a record revenue in Q3. Strong order books persist, with increased production levels from key customers. Growth opportunities remain in commercial and defense markets. - Stephan Von Schuckmann(CEO)

How are you assessing content per vehicle in China's new business wins? - Samik Chatterjee (JPMorgan)

2025Q2: We received design wins from key OEMs. We expect a ramping up of orders and revenue in the second half from these wins. - Stephan Von Schuckmann(CEO)

Contradiction Point 4

Impact of Tariffs on Revenue

It directly impacts expectations regarding the revenue impact of tariffs, which could influence company revenue and investor expectations.

What are the details of orders from Chinese EV OEMs and Japanese auto OEMs in Asia? Are these orders significant for Sensata’s revenue? - Mark Delaney (Goldman Sachs)

2025Q3: We have made progress in China and Japan, with wins including contracts with Mazda and Toyota. While the wins are small- to medium-sized, they are growing and represent a significant improvement in our presence in these regions. - Stephan Von Schuckmann(CEO)

Did Sensing Solutions' growth this quarter result from a tariff-related pull-forward effect? - Wamsi Mohan (Bank of America)

2025Q1: We have not seen a material impact from tariffs in our industrial business growth. The growth in Sensing Solutions was primarily driven by the launch of A2L gas leak detection products and improved demand, rather than tariff-related pull-forward effects. - Brian Roberts(CFO) and Stephan Von Schuckmann(CEO)

Contradiction Point 5

Margins and Production Cuts

It involves changes in financial forecasts, specifically regarding margins and production cuts, which are critical indicators for investors.

Can you outline your long-term margin outlook? - William Stein (Truist Securities, Inc.)

2025Q3: We are committed to maintaining a margin floor of 19%. Margin expansion is expected in higher-margin businesses, like HVOR and industrials, as market conditions normalize. - Andrew Lynch(CFO)

What are your margin expectations for the year considering current tariffs? - Mark Delaney (Goldman Sachs)

2025Q1: Excluding tariffs, we anticipate returning to a 19%+ margin range in Q2 and achieving expansion of 20 basis points per quarter in Q3 and Q4. - Brian Roberts(CFO)