Final Transcript: ST - Q1 2010 Sensata Technologies Holding N.V. Earnings Conference Call

FINAL TRANSCRIPT
ST - Q1 2010 Sensata Technologies Holding N.V. Earnings Conference Call

Event Date/Time: Apr. 21. 2010 / 12:00PM GMT
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FINAL TRANSCRIPT
Apr. 21. 2010 / 12:00PM, ST - Q1 2010 Sensata Technologies Holding N.V. Earnings Conference Call
CORPORATE PARTICIPANTS
Bob Hureau Sensata Technologies, Inc. - CAO, VP and Corporate Controller Tom Wroe Sensata Technologies, Inc. - CEO and Chairman Jeff Cote Sensata Technologies, Inc. - EVP and CFO Martha Sullivan Sensata Technologies, Inc. - EVP and COO
CONFERENCE CALL PARTICIPANTS

Robert Wertheimer Morgan Stanley - Analyst Bob Cornell Barclays Capital - Analyst Craig Hettenbach Goldman Sachs - Analyst Christopher Glynn Oppenheimer - Analyst Wamsi Mohan Bank of America Merrill Lynch - Analyst Jim Suva Citi - Analyst Amit Daryanani RBC Capital Markets - Analyst Ambrish Srivastava BMO Capital Markets - Analyst Phil Gresh JPMorgan - Analyst Jake Kemeny Morgan Stanley - Analyst
PRESENTATION
Operator Good morning, and welcome, ladies and gentlemen, to the Sensata Technologies Holding N.V. first-quarter 2010 earnings conference call. At this time, I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode. For opening remarks and introductions, I would like to turn the call over to Mr. Bob Hureau, Sensata's Chief Accounting Officer. Mr. Hureau, you may begin.
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FINAL TRANSCRIPT
Bob Hureau - Sensata Technologies, Inc. - CAO, VP and Corporate Controller Thank you, Ben, and good morning, everyone. This call will address the Company's first-quarter 2010 results. A press release was issued earlier today, which is also available on our Company's website, www.Sensata.com. Before we get started, I would like to remind everyone that this conference call will contain certain forward-looking statements that involve risks or uncertainties. For example, statements regarding financial and product development goals are forward-looking. The Company's future results may differ materially from the projections described in today's discussion. Factors that may cause these differences include, but are not limited to, the risk factors described in the Company's registration statement on our Form S-1 plus Form 10-K, 10-Q, and 8-K filings of our primary operating subsidiary, Sensata Technologies B.V. Copies of all the Company's filings are available from its Investor Relations department and from the SEC, including on its website, www.SEC.gov. On the call today is Tom Wroe, our Chairman and Chief Executive Officer; Jeff Cote, our Chief Financial Officer; and Martha Sullivan, our Chief Operating Officer. Tom will cover some of our financial highlights, provide some color around a few macroeconomic indicators we monitor as well as update you on a few business developments. Jeff will then cover the details of our quarterly financials, including our business segment data. We will open the lines for Q&A immediately following our prepared remarks, and Martha and I will join Tom and Jeff in the Q&A session. (Operator Instructions). We'll take as many questions as time permits. This call is also being webcast live and is available on our website, www.Sensata.com. I will now turn the call over to Tom Wroe, our Chairman and CEO. Tom?
Tom Wroe - Sensata Technologies, Inc. - CEO and Chairman Thank you, Bob, for the introduction, and thank you all for joining our first conference call post entry into the public equity markets. I would like to begin with a summary of our first-quarter highlights, most notably our initial public offering, followed by a few key performance results. We executed well in the first quarter, and I will review some of the drivers of our growth and add color to what we are seeing in our end markets. As you know, we completed an IPO on March 16. We are very pleased that we were able to complete the IPO in clearly a challenging market. This milestone came just shy of our four-year anniversary from the divestiture from Texas Instruments when we became a stand-alone Company. We executed well during difficult economic times, and believe we were true to our word that we will emerge from the recession stronger on the other side. Now for the financial highlights. Net revenue for the first quarter was approximately $377 million, an increase of $138 million or 58% over the first quarter of 2000 net revenue of $239 million. This is our fourth consecutive quarter of sequential growth and our second quarter of year-over-year growth. Although we believe some of this increase in revenue is related to inventory replenishment, we believe we have momentum to continue growth through 2010. Our growth mainly comes from content growth, mature market growth, emerging market growth, inventory replenishment and pricing in foreign exchange. Our growth in the first quarter of 2010 compared to 2009 of 58%, came from content growth of 13%; mature market growth of 14%; emerging market growth of 14%; inventory replenishment of 16%; and the balance from pricing, foreign exchange and other variables.

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We expect net revenue for the second quarter of approximately $370 million to $390 million, which, if you factor in the inventory replenishment in the first quarter, represents approximately 2% to 7% of sequential growth or 45% to 53% year-over-year growth. In the first quarter, we believe the inventory build to be approximately $13 million from the fourth quarter of last year. As you can imagine, this is a difficult figure to pinpoint due to its complexity, but this is our best estimate. We do not anticipate inventory replenishment going forward. Jeff will provide additional guidance on the second quarter in a few minutes. As you are aware, there are logistical disruptions in Europe. At this point, we do not know what, if any, this impact could have on our business. We're watching this event closely, reacting to it, and see how it progresses. Our book to bill as of this call was 1.14 on a year-to-date basis, and our order fill rate for the second quarter stands at 85% against the midpoint of our revenue guidance. As a reminder, we do have some seasonality in our business. On a relative sequential quarterly basis, from 1999 through 2007, the Company saw first-quarter revenue growth generally up 8% to 10% over the fourth quarter, second quarter up in the incremental 2% to 4% over the first quarter, followed by a typical contraction in the third quarter of approximately 5% to 7%, and then again, an incremental increase of 2% to 4% in the fourth quarter. Our gross margin for the first quarter was 38.3%, a 580 basis point improvement over the first quarter of last year. Given that over 90% of our cost structure is variable, we do not anticipate significant gross margin expansion going forward. Adjusted net income for the first quarter was $69.2 million or $0.44 per diluted share versus adjusted net income of $5.7 million or $0.04 per share for the first quarter 2009. Net income for the first quarter was $27.3 million or $0.17 per diluted share versus a net loss of $10.2 million in the first quarter 2009, a loss of $0.07 per diluted share. As we have discussed, our growth comes from increasing content in end equipment, growth in mature markets, emerging market opportunities and from acquisitions. Content grows due to the world's growing demand for energy efficiency, safety, and a clean environment. Examples of application that drive this are stability control systems, variable transmission systems, and common rail diesel rail fuel systems for diesel engines, all of which contributed to growth in the first quarter of this year. We believe the mature end markets we are serving are recovering from significant recent economic downturn. For instance, global automotive sales, according to CSM, are forecasted to be 61.3 million units for 2010, 66.9 million units for 2011, compared to actual sales of less than 59 million units in 2009. And the global economy is rebounding with gross domestic product projected to increase 3.2% this year, according to Global Insight. In the emerging markets, China continues to be a strong growth area for us, especially for our controls business. China's first-quarter GDP rose 11.9% from year-ago period, and Sensata specifically saw 84% growth in China year over year. We are experiencing growth in other BRIC countries, but to a lesser degree. You may have recently read the announced mandate in the US to improve fuel efficiency to 35.5 miles per gallon by 2016. That's a 34% increase from the current 26.5 mile per gallon level. Although this recent directive does not have an immediate impact on our revenue, it represents an opportunity for future organic growth with many programs now in development or actually being engineered. We also continue to focus our M&A activity through a robust pipeline of potential applications and end markets. We see M&A as an amplifier to our organic growth, and we'll keep you posted as we move forward. Our mix of business across geographies in the first quarter was 41% for the Americas, 27% for Europe and 32% in Asia.

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The mix of our business across our end markets in the first quarter was 22% for European automotive, 16% for North American automotive, 15% for Asian auto and approximately 1% for the rest of the world automotive. Appliance and heating, ventilating, and air-conditioning end markets represents 15% of our overall business. Heavy vehicle off-road 6% and industrial 13% and all of our end markets were 12% of our net revenue. We had some key business wins, and I would like to briefly discuss a couple of them. In our sensors business segment, we were selected by one of the world's largest auto makers to be their sole source supplier of high range pressure sensors through the calendar year 2015. We are providing a micro-fuse strain gauge technology, which will maximize fuel economy and minimize exhaust emissions in the customers' diesel engines. In our controls business segment, we had a major win in the China market, where our newly developed motor protector broke ground. This product was specifically designed for refrigerator and freezer compressors produced for sale in China. We were awarded the contract by one of the leading emerging manufacturers of compressors in this market. We shipped approximately 12.5 million units in 2009. This is a significant milestone for us in that it not only makes us more competitive in the Chinese domestic market, but helps us move us forward in our priority of being a leader in high-growth segments. All in all, I would say a very good start in 2010 for Sensata. I'd like to turn the call over now to Jeff Cote, our Chief Financial Officer. Jeff?
Jeff Cote - Sensata Technologies, Inc. - EVP and CFO Thank you, Tom. Before sharing the details of our first-quarter financial results, I would like to comment on a couple of the high-level developments during the first quarter. First, I would like to reiterate Tom's comments on our achieving a successful IPO during a time that was considered to be an unsteady IPO market. The Company received total proceeds of approximately $436 million after fees and expenses. We are very happy with the results and continue to drive the Company forward for long-term success. Second, I would like to review the results of the tender offer of our senior and senior subordinated notes and the decision to call our 11.25% senior subordinated notes and a portion of our 8% senior notes. As stated in our Form S-1, our intention is to use $350 million of proceeds from the IPO to pay down debt. On March 29, the settlement date of the tender offer we announced on February 26, we used $102.1 million to purchase bonds with a face value of approximately $96.7 million. On April 1, 2010, we called the balance of our 11.25% senior subordinated notes, which is approximately EUR65 million, and a portion of our 8% senior notes or approximately [EUR]139 million, on a pro rata basis. The redemption date for both of these notes is May 1, 2010. And now the first-quarter financial results. Cash at March 31, 2010 was $508.2 million, which is $359.8 million higher than the December 31, 2009 cash balance of $148.5 million. During the first quarter, we generated $35.6 million in cash from operations, used $5.5 million in investing activities, and generated cash of $329.6 million from financing activities. The cash from financing activities consists primarily of $476.2 million in gross proceeds from the IPO, less expenses of $40.3 million, $102.1 million related to the tender offer that closed on

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March 29, and $3.7 million related to normal debt payments. We expect to use approximately $237 million plus interest on the call related to our 11.25% notes and the pro rata call on our 8% notes in the second quarter. Our cash conversion cycle was 47 days compared to 47.4 days at December 31, 2009. As you know, our target is 50 to 52 days, and we believe this level is sustainable going forward. For the first quarter, DSO was 46.2 days. Days on hand inventory was 51.4 days, and days payable was 50.6 days. On the tax front, $2.6 million of our first-quarter tax provision is considered currently payable in cash and relates to the Company's profitable operations in non-US tax jurisdictions. We recorded a total tax provision for the quarter of $11.2 million. The remaining tax provision relates primarily to deferred tax expense attributable to amortization of tax-deductible goodwill. Our cash taxes represent a tax rate of 4% of adjusted EBIT and 3.8% of adjusted net income. We consider adjusted net income to be a relevant measure for investors as it excludes certain items that are non-cash or non-recurring from GAAP net income. There is a detailed reconciliation in our press release, but I would like to take a minute to walk through these items now. The first item is the gain on currency translation on our euro-denominated debt and other hedging activities. This resulted in $57.6 million gain in the first quarter, which we subtracted from GAAP profit. These expenses reside largely in the currency translation gain and other line on our P&L. The second item is the amortization and depreciation expense associated with the carveout from Texas Instruments, and the subsequent acquisitions we have completed. This was $37 million for the first quarter. The majority of these expenses resides in the amortization of intangible asset line on our P&L. The third item is the deferred portion of our tax provision. This was $8.6 million in the first quarter and resides in the provision for income tax line on our P&L. The fourth item is the non-cash interest expense related primarily to the amortization of deferred financing costs. This expense resides in the income tax -- or excuse me, interest expense line of the P&L and was $2.6 million in the first quarter. The fifth and final item, which will only be in the first and second quarters of this year, relates to IPO-related expenses, and was $51.3 million in the first quarter. This includes $23.2 million related to the buyout of our advisory agreement with our financial sponsors; $18.9 million related to the acceleration in stock compensation related to performance vesting; $8.1 million related to the expenses and premium paid on the debt pay-down; and $1.1 million in all other IPO-related expenses. We would expect IPO-related costs in the second quarter of approximately $16 million to $18 million related to the completion of the debt call. The majority of these expenses landed in the SG&A line on our P&L. Our research, development and engineering costs for the first quarter were $20.5 million or 5.4% of net revenue. This is lower than our targeted range of 6% to 7% due to our strong revenue growth and the netting of some customer-funded R&D. We have engineering-related costs that reside in both our cost of revenue line and our R&D line on our P&L.

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CapEx was $5.7 million for the first quarter or 1.5% of net revenue, which is below the historical range of 3% to 4%. Although the first-quarter spend rate was low, we would expect to see this increase in subsequent quarters, and that will be in the 3% to 4% range for the full year 2010 and going forward. Our indebtedness at March 31 was approximately $2.1 billion, excluding capital leases. Our net debt was $1.6 billion, resulting in a leverage ratio of 4.2 times. We are targeting 2 to 3 times leverage by the end of 2011. As of March 31, we are in compliance with all of our financial ratios and reporting covenants included in our debt agreements associated with our primary operating subsidiary, Sensata Technologies B.V. B.V.'s pro forma adjusted EBITDA, which is the measure in our original credit agreement, was $383.5 million for the last 12 months. We anticipate filing our Form 10-Q with the Securities and Exchange Commission before the filing deadline of May 17, 2010. Before reviewing the segment data, I would like to highlight that we are continuing to manage our cost structure and balance sheet effectively. And we also continue to generate strong free cash flow in the business. Looking forward to the second quarter, as Tom mentioned, we expect to achieve net revenue in the range of $370 million to $390 million. We also expect to achieve earnings per share calculated in accordance with Generally Accepted Accounting Principles of $0.04 to $0.07 per share; adjusted net income of $72 million to $79 million; and adjusted net income per share of $0.41 to $0.44. This GAAP guidance excludes the impact of foreign exchange gains or losses on the euro-denominated debt, as this cannot be forecasted. Our share count of $177.7 million for the second quarter includes the IPO impact for the full quarter and is up from the first-quarter share count of $156.7 million. Now I would like to share some of the key financials concerning our two business segments -- sensors and controls. Sensors net revenue, which represents approximately 62% of total net revenue, was $232.6 million for the first quarter. This was an increase of $92.3 million or 65.7% over the first quarter 2009 net revenue of $140.3 million. The sensors business first-quarter profit from operations or PFO was $77.8 million, or 33.5% of sensors' net revenue. Geographically, we saw increases in all regions globally. We also saw increases across the board in our major product lines. Controls net revenue for the first quarter, which represents approximately 38% of total net revenue, was $144.5 million. This was an increase of $45.9 million or 46.5% over the first-quarter 2009 net revenue of $98.7 million. The controls business segment profit from operations was $51.2 million or 35.4% of controls' net revenue. Geographically, as with sensors, we saw increases in all regions globally. Controls also experienced increases in all of its major product lines. Turning to the outlook for 2010, we believe our leading market positions, our low cost structure, and our strong cash generation, position us very well for the remainder of the year. We would now like to open up the lines for questions. Operator, please open the lines.

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QUESTIONS AND ANSWERS

Operator (Operator Instructions). Robert Wertheimer, Morgan Stanley.
Robert Wertheimer - Morgan Stanley - Analyst Hi, good morning, everybody. So, I had a couple of questions. The first will be just bigger picture on C.A.F.E. standards. I'm curious as to whether you are changing your R&D strategy as a result of it. It seems as though it would have the impact of making several of your products more interesting or more profitable and more cost-effective almost immediately in future model years. So, have you seen that? Have you had conversations? I mean are you changing R&D spend for it?
Martha Sullivan - Sensata Technologies, Inc. - EVP and COO Hi, Robert. No, we're not substantially changing the core focus of our development strategy. If you look again, where we lead, we lead in pressure sensing. These macro dynamics are accelerating demand for our core product focus. So, not a meaningful adjustment. I would say that the pace and in some cases, the value-added functionality we are bringing to those products, is changing as a result of really acceleration on C.A.F.E. requirements and similar requirements around the world.
Robert Wertheimer - Morgan Stanley - Analyst Thank you. And second, just on inventory, how did you measure that? Does that include just inventory sitting at your customers? Or is it vehicles on lots or what is it?
Martha Sullivan - Sensata Technologies, Inc. - EVP and COO We really attempted -- because in the year-over-year comparisons, this is where this is going to be the most meaningful. We have attempted to look at it in terms of end equipment as well as areas of supply chain. So we look at it on a year-over-year basis, those are the comparisons. We really again believe -- you heard it in the script -- we really do feel going forward that is not a meaningful part of our sequential growth.
Robert Wertheimer - Morgan Stanley - Analyst Okay. And the last one for me, or a least I will get back in line, is just on the -- you've outpaced what we had thought for 1Q and I guess you're pretty well locked in at this point on 2Q as well. You expect continued strength in 3Q and 4Q or you just don't have a different view yet? I don't know whether the content you have had is enough to drive up that forecast for the back half.
Tom Wroe - Sensata Technologies, Inc. - CEO and Chairman You know, we talked about sort of not seeing inventory impact in the second quarter, that we thought that's behind us. We feel sort of the market side of this is sort of stabilizing. And then driving forward, it's really going to be the typical seasonality pattern that we've have, and we've given you what that is, which includes the content growth in that. So I would say a return to really the drivers of growth, of content growth, of emerging markets, going forward for the rest of the year.

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Robert Wertheimer - Morgan Stanley - Analyst Thanks.
Operator Bob Cornell, Barclays Capital.
Bob Cornell - Barclays Capital - Analyst So, you had a good quarter. I just wonder if you could give us an idea of how you experienced the pace of growth in the quarter. A lot of companies talked about March being unusually strong. I wonder if that's true for you. So maybe, so first of all, some color on the acceleration through the quarter.
Tom Wroe - Sensata Technologies, Inc. - CEO and Chairman Yes, I would say that March was a peak month, and I guess you could probably even see that in the receivables based on how much we've got outstanding from customers. And we saw January, February sort of equal, and then March maybe 15%, 20% above that run rate. What's important for us is book to bill though. That sustained pretty linearly through that period. And we talked about 1.15 year to date. So, we will see a more monthly pattern in the second quarter that may very well be very similar.
Bob Cornell - Barclays Capital - Analyst I guess the question obviously is what have you seen in April so far? It's a little early to tell, but --
Tom Wroe - Sensata Technologies, Inc. - CEO and Chairman Kind of early to tell. Nothing that's a disconnect from what we've seen.
Bob Cornell - Barclays Capital - Analyst I guess the bigger question too is, maybe as you start into these conference calls, you can give us an idea of what you see with regard to the content outlook. You talked about the two big wins, which is great, but maybe sort of give us a color on the funnel and so how many -- how would you measure the content outlook in that regard?
Martha Sullivan - Sensata Technologies, Inc. - EVP and COO Yes, Bob, the way we think about that and the way it unfolds on the business, what you've got to keep in mind is what drives our content growth and drives more product into unit end equipment at Sensata, are literally hundreds of developments all around the world. So it is not one major customer focused win per quarter. And so what we spiked out was fairly anecdotal. We've talked about the fact that that in combination with our emerging market position, we believe, positions us very strongly for strong double-digit growth. You've seen that in the comparison in the first quarter, and we are confident that the dynamic stays with us as we move forward.

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Bob Cornell - Barclays Capital - Analyst I guess another question -- related question would be -- you talked about gross profit margin staying level with the previous conversations we've had -- talked about piling money back into new product development; maybe you could update us there.
Jeff Cote - Sensata Technologies, Inc. - EVP and CFO Sure. On the gross profit margin, obviously, we saw some pretty significant increase in that margin from 34% on an adjusted gross margin basis in Q1 '09 to 38.6% is actually the adjusted number for the first quarter of '10. So strong increase there largely due to capacity utilization. As you know, we have 90%-plus variable cost structure. And we had some capacity that was available, and we've used up a lot of that capacity at this point. In terms of the incremental investing, I'll turn it over to Martha.
Martha Sullivan - Sensata Technologies, Inc. - EVP and COO We definitely have been increasing the investment, as planned. And quite frankly, the index is a little low just given how quickly revenue has come back, not because we have held back on adding resources. So we will continue to hold our index, increase our index, on the growth side of the business.
Bob Cornell - Barclays Capital - Analyst Okay, thanks. That does it for me for now. Thank you.
Operator Craig Hettenbach, Goldman Sachs.
Craig Hettenbach - Goldman Sachs - Analyst Yes, thank you. Can you talk about the growth outlook for Q2 by division by sensors and controls, how things are shaping up for Q2?
Jeff Cote - Sensata Technologies, Inc. - EVP and CFO We would say that it would be pretty steady across those two areas. In the first quarter, we did see controls grow a little bit faster from the fourth quarter. But we saw sensors grow faster from the first quarter of last year. So again, sequentially, I think we would expect somewhere around a steady growth rate across those two with no real differences between the two segments.
Craig Hettenbach - Goldman Sachs - Analyst Okay. And then just as a follow-up in the automotive market, can you talk about trends you are seeing by geography, and also just linearity of order patterns in that market?
Martha Sullivan - Sensata Technologies, Inc. - EVP and COO Sure. If you look at what drove the year-over-year growth, automotive was an important piece of that. But first and foremost, Asia automotive, where on a year-over-year comparison, we are seeing literally triple digit growth. And by the way, that is the
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case for most of our end markets in Asia, less Japan. But on the automotive, Asia really a leading segment within auto driving our growth. Very strong year-over-year growth in Europe as well, very content driven. And again, actually above the average on year-over-year from the Company. I would say on the balance of the automotive, more in line with Sensata's overall year-over-year performance.
Craig Hettenbach - Goldman Sachs - Analyst Okay. And then just last one for Tom, just on design win activity, with the macro environment firming up a bit here, does that change in terms of customer activity or what you are seeing from a new product activity if you will?
Tom Wroe - Sensata Technologies, Inc. - CEO and Chairman Getting back to the previous discussion, I think it doesn't shift us from what our core offering is. If anything, I think it accelerates it and sort of moves the sense of urgency around that. So our activity and pace is up in terms of really modifications and derivatives from the core initiatives we've had in R&D.
Craig Hettenbach - Goldman Sachs - Analyst Great. Thank you.
Operator Christopher Glynn, Oppenheimer.
Christopher Glynn - Oppenheimer - Analyst Thanks. Good morning. Just wondering if you could give some outlook on the -- the free cash flow outlook for the year of the cash flow from operations, whether as a dollar range or a percent of adjusted net income?
Jeff Cote - Sensata Technologies, Inc. - EVP and CFO As we've mentioned, we have not given full-year revenue guidance, but if you look at the cash flow statement for the first quarter, we have cash generated from operations of $35 million, recognizing that that number has in it a working capital use because of the increase in revenue of about $16 million. And it also has about $25 million of IPO costs in it. So that generates an adjusted cash flow from operations if you will of around $75 million, $76 million. And so, given the cash conversion characteristics of the business around low capital requirements, low cash tax expense, we wouldn't expect that to vary dramatically going forward in the year. And in fact, perhaps accelerate because the typical seasonality of our cash cycle is stronger in the second half of the year than it is in the first half.
Christopher Glynn - Oppenheimer - Analyst Okay. That's very helpful. And on the CapEx, just wondering, you're more assembly than manufacturing. Can you talk about, is that all maintenance CapEx or developing markets? Just kind of parse the investment areas.

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Tom Wroe - Sensata Technologies, Inc. - CEO and Chairman No, I would say that our maintenance capital has not changed much. It probably runs in the 10% to 15% of our capital profile. The CapEx we're dealing with is really incremental bottlenecks, capacity, and new product launch associated with multiple programs around the globe. We had talked previously about having capacity. If you look at these run rates, we're now running probably just in excess of 90% of utilization, given where the first quarter is and where we will sustain going forward. So most of the CapEx will be around capacity and new product launch.
Christopher Glynn - Oppenheimer - Analyst Okay, great. Thank you. And then just lastly, an update on capital allocation. Obviously you have some debt to pay down, but you can build cash pretty quickly. Any outlook for a dividend or how you see a pipeline and a kind of three or four year cumulative opportunity for targets? What's the scale of your intentions on the acquisition front?
Tom Wroe - Sensata Technologies, Inc. - CEO and Chairman Well, you know, we've talked about our acquisitions as amplifiers to our organic growth. And we characterize those as, in an ideal world, we think we would end up adding $100 million of revenue per year for example for the next five years. So that gives you sort of scope and scale, and those will be in the core of what we do. So the familiar products, familiar customers, familiar channels. So that was sort of the scope and scale of what our intended acquisition targets are at this particular point in time. Again, those will have to be fairly compelling in their value generation and align well strategically with what we do. And in terms of balance of use of cash, I'll turn that over to Jeff.
Jeff Cote - Sensata Technologies, Inc. - EVP and CFO Yes, I think that we've been very consistent and our strategy continues to be delevering in acquisitions at this point. And I think that certainly for the foreseeable future, we view that the cash that we're going to generate in the business can be deployed to affect that dual-pronged strategy.
Christopher Glynn - Oppenheimer - Analyst Great. Thanks a lot.
Operator Wamsi Mohan, Bank of America Merrill Lynch.
Wamsi Mohan - Bank of America Merrill Lynch - Analyst Thank you. Good morning. Your guidance midpoint implies a growth of about 49%. Can you help us think about sort of without the inventory benefit that you got, what -- given the visibility that you have, is the delta in that growth rate coming from content growth or more of an acceleration within mature emerging markets? Can you help us think about sort of your guidance in the same context as you laid it out this quarter?

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Martha Sullivan - Sensata Technologies, Inc. - EVP and COO Yes, if you look at the major contributors, you can see how important the content piece was for us year over year. It will continue to be, we believe, the most important aspect of our growth. That's clear from a sequential basis, and you can see how important that was on a year-over-year basis. We think that that dynamic holds for us as we move forward. The other thing that might be helpful to understand, there was questions about our end markets and how they've moved. Keep in mind we began to see recovery midway through the third quarter of '09. And so that may give you a sense for when this inventory question starts to become not very relevant.
Wamsi Mohan - Bank of America Merrill Lynch - Analyst Okay, thank you. And Jeff, can you bridge the gross margin improvement sequentially, what some of the puts and takes were? Is it mostly volume very end to end, and some of the reversals of the one-times that you saw last quarter? Or was there anything else in there?
Jeff Cote - Sensata Technologies, Inc. - EVP and CFO Yes, I think that it's largely volume. So when you look at the gross margin from the first quarter of last year to now, or I would even take it a step below that, Wamsi, if that would be okay with you, to look at the $0.40 growth in our A&I per share. It's coming from gross margin increase, which is 33% of that. And then there's a $0.07 increase associated with lower interest associated with debt paydown. So those are the two primary factors that are contributing to the adjusted net income per share growth year over year.
Wamsi Mohan - Bank of America Merrill Lynch - Analyst Okay, thanks for that. And last one for me here. Can you size how much of the R&D was customer funded? And what are typical levels for that? And do you have visibility on -- and is that a sustainable sort of dynamic model?
Jeff Cote - Sensata Technologies, Inc. - EVP and CFO Yes, it's a fairly small percentage of the total. It does vary a little bit, but it's $1 million to $2 million in any given quarter, sometimes a little bit lower than that, but it's a small component of the overall.
Martha Sullivan - Sensata Technologies, Inc. - EVP and COO And a regular repeat function every quarter. So this tends to be one-off negotiations with specific customers.
Wamsi Mohan - Bank of America Merrill Lynch - Analyst Okay, thank you. Very helpful.
Operator Jim Suva, Citi.

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Jim Suva - Citi - Analyst Thank you, everyone, and congratulations. A couple questions. First is on your SG&A, can you give us a little bit of outlook as far as what we should expect from there as it appears demand trends are progressing and the economy is getting better; should we expect that to be stable or start to go up from here? And is there any impact on your business or more importantly the supply chain from the European volcano shipping and things like that around that? And the final question is on the gross margins, you gave some good seasonality for the sales. Would it be fair to say that gross margins should also, to some extent, mirror the sales trends up and down on a quarterly basis and we should expect a little bit of a softening in gross margins for Q3, although last year, you did see gross margins actually improve? Thank you.
Jeff Cote - Sensata Technologies, Inc. - EVP and CFO Let me hit on the SG&A and the gross margin question and then Martha can cover the other question you had. We, on an adjusted basis, SG&A was 9.1% of revenue in the first quarter. We would expect to be able to maintain that or improve that going forward. And as we've talked about, any leverage that we would get there, a part of that would drop to the bottom line to provide some margin expansion but more importantly, it would be reinvested in the growth drivers for the business. From a gross margin standpoint, I would not expect gross margin to move around with our seasonal revenue. Again, the fact that we've structured the business with high variable costs, we are able to move those with that revenue run rate and would be able to maintain that range of gross margin going forward.
Martha Sullivan - Sensata Technologies, Inc. - EVP and COO The question about the logistics disruptions in Europe, it's one we're watching closely. At this point, we have not included that in our second-quarter guidance. I will tell you that we view the situation as moving toward stability right now, but we are not seismologists, and, again, it could move towards destruction. Having said that, we have been able to get our products to customers. We found alternative logistical routes. Any impact on our revenue would most likely come from our end customers having to shut down or taking days out of the schedule. There have been some announcements along those lines at BMW, and at Nissan. The conversations we've had with customers is that they anticipate trying to claw back those days later in the quarter, so that's how I would characterize that issue today.
Operator Amit Daryanani, RBC Capital Markets.
Amit Daryanani - RBC Capital Markets - Analyst Thanks. Good morning, guys. I just had a question, just looking at the full-year seasonal trends that you guys talked about, it looks like Q1 and Q2 are both stronger than the historical seasonality that you guys have talked about. Could you just talk about what the puts and takes would be and why you wouldn't be able to sustain better than historical seasonality in the back half of 2010; given that we are coming out of a recession, broadly speaking, the macro environment seems to be getting better.

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Tom Wroe - Sensata Technologies, Inc. - CEO and Chairman Yes, you tell me what the mature markets are and I'll give you the answer. That's the question. So what we are dealing with [around] is what's our content growth, what's our emerging market; we firm up around that. We've sort of assumed stability in end markets at this point in time because sales [segue] rates are going to have to change as we get into some of those comparisons going forward. When we look at third and fourth quarter, you can do the math on what were those macros back then. And they are not as extreme as they've been historically. If you think about it, we had troughs in the second quarter of last year. And then we've had sequential growth every single quarter since then. So I'm not going to try to frame it up. Basically I would say we're calling stability for the balance of the year on the end markets.
Amit Daryanani - RBC Capital Markets - Analyst Got it. And then there's been a decent [talk] I think around component shortages impeding just final sellthrough. I'm curious if you guys actually ended up leaving some revenues on the table in the March quarter because of component shortages on your end?
Tom Wroe - Sensata Technologies, Inc. - CEO and Chairman No, I would say the answer to that is no, but there's a lot of diligent work to make sure that doesn't happen in getting more than your fair share. So I would say that the supply chain in total is clearly tight, and we are spending more than the average amount of time making sure we get the supplies that we need.
Amit Daryanani - RBC Capital Markets - Analyst Got it. And just finally for me, given the cash on hand and the expected future cash generation, can you just talk about two things? One is, are you targeting towards some debt to EBITDA number over the next four to six quarters out? And then broadly, how much cash do you think you need to run the business on a day-to-day basis?
Jeff Cote - Sensata Technologies, Inc. - EVP and CFO So on the first question, we've talked about getting to a 2 to 3 times leverage by the end of 2011, and I would expect that to happen pretty naturally over that period of time. So I don't think there's any quarter that's going to have a more dramatic impact than others, given the sort of steadiness of our margins and therefore cash flow in the business. So, that, I think, is where we would be on the leverage question. And then in terms of how much cash we need to run the business, we've typically said $30 million to $50 million of cash is sort of the movement. It's a business that has a pretty steady cash flow picture. We have a little bit higher cash flow needs in the second and fourth quarter due to bond payments in those quarters. But other than that, there's not a lot of lumpiness associated with the cash cycle.
Amit Daryanani - RBC Capital Markets - Analyst Got it. Thanks a lot, guys.

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Operator Ambrish Srivastava, BMO Capital Markets.
Ambrish Srivastava - BMO Capital Markets - Analyst Thanks. Just to close on the inventory question, Martha, you mentioned that it's not going to be a factor going forward. You guys actually quantified it. I just want to understand which segment did you see the build? And then, just so that we understand, and I understand your supply chain is inherently more complicated than probably most of the companies that at least I follow. How do you get a handle on whether you look at inventory in the channel to say these are the bands that we feel pretty comfortable with? And then I had a couple of follow-ups please. Thanks.
Martha Sullivan - Sensata Technologies, Inc. - EVP and COO Sure. So just to answer the specific segment, we certainly saw most of that build in the automotive segment, and particularly North America, where the selling model puts end equipment on the lot. So clearly that was the biggest piece of it. But we saw the automotive supply chain really around the world being affected. So to answer your question on the -- how do you decide how much is in the supply chain; we attempt to look at our end markets, what we know about production, equipment production and our content on that end equipment. And we look for meaningful disconnect between the two. And that's how we will align that to supply chain. It's not an exact science. And again, we think it's not important. We probably won't get to that level of granularity as we look at sequential growth going forward because at that point, we really do believe it's major end market movement that are going to govern here.
Ambrish Srivastava - BMO Capital Markets - Analyst Okay, great. And then, my follow-ups were around the rest of the year. Which segments or end markets do you think are going to outgrow the others? And then also, kind of related to that is when you look at your business and visibility, I know you guys have talked about visibility being inherently better for your business given your long-term contracts and sole-source relationships. Which segment do you have better visibility between the two? Thanks.
Martha Sullivan - Sensata Technologies, Inc. - EVP and COO I think if you look again, what drives Sensata's overall growth, and this generally holds in the time period. The major driver of our growth, when you look at stable time periods, has been this content growth and emerging market growth piece. The content growth is stronger on the sensor side of our business. Emerging market that's tending to pull in the near term more on the control side, but between the two, you see sensors more growth-full as a result of the content piece. We would expect that to hold going forward. In terms of visibility, we do get more visibility on the automotive side of the business. We have fairly good visibility really across the business given the customized nature of our products and given the development cycles of the products.

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Ambrish Srivastava - BMO Capital Markets - Analyst Okay, great. Thanks for the color.
Operator Steve Tusa, JPMorgan.
Phil Gresh - JPMorgan - Analyst It's Phil Gresh in for Steve. I appreciate all the details. Most of my questions have been answered, but a couple of quick ones. You talked about pricing in the quarter and the press release. Was pricing positive? I know you typically tend to give back a little price. Just curious what the dynamics are there and if that's something that was positive that turns negative or how that plays out?
Jeff Cote - Sensata Technologies, Inc. - EVP and CFO Yes, we had put it into the category of all the other with foreign exchange. And as you can tell from the statistics that we provided, it didn't result in a meaningful movement. The FX was slightly negative, so you could infer from that that during the year since last year, we've had some success on the pricing side. But long-term, we've talked about the fact that there would be some impact associated with that going forward.
Phil Gresh - JPMorgan - Analyst Okay. And on the control side, could you talk a little bit about the HVAC piece there? Is the growth there mostly out of Asia, or what are you seeing on the US side out of curiosity?
Martha Sullivan - Sensata Technologies, Inc. - EVP and COO Yes, the growth is definitely much stronger out of Asia. But let me emphasize, we saw all of our end markets grow. The one exception is a very small exception is aircraft and the military market moved sideways for us. So across the board, across end markets and geographies, we saw growth. And the segment that you asked about specifically, yes, the growth is definitely stronger in Asia. And again, back to this year-over-year comparison, which gets us to almost triple digit growth.
Tom Wroe - Sensata Technologies, Inc. - CEO and Chairman Although Steve, I would say we're beginning to see a little bit of the seasonality come back that you know in the North American HVAC markets that had not been there last year.
Phil Gresh - JPMorgan - Analyst Right. Okay. All right, thanks a lot.
Operator Jake Kemeny, Morgan Stanley.

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Jake Kemeny - Morgan Stanley - Analyst Thanks for squeezing me in. Congratulations on the IPO. It's a bit of a different conversation than we were having about a year ago at this time. So I just wanted to kind of take your pulse on the longer-term capitalization of the Company. Longer term, do you want to be an investment-grade company or do you think staying high-yield offers you certain advantages?
Jeff Cote - Sensata Technologies, Inc. - EVP and CFO You know, I think that during the next three to five years, we believe that leverage will be a component of our capital structure from a debt standpoint. I think that as that leverage comes down, you would expect that the quality of that debt that we have in the marketplace would increase dramatically. And you've seen that already in terms of the ratings from the rating agencies as we have come out of this. And so, we would expect that when we get down to the 2 to 3 times leverage, you will continue to see improvement there. And then as we continue the migration of our capital structure, we will speak more to that in the coming years. But I think looking out the next two to three years is the timeframe that we are currently focusing on from a capital structure standpoint.
Jake Kemeny - Morgan Stanley - Analyst Okay. And in terms of reducing the debt further, what kind of mechanisms can you use? Are they going to be additional tenders or just kind of open market purchases? Or will you continue to issue equity for debt reduction?
Jeff Cote - Sensata Technologies, Inc. - EVP and CFO I think that on your point, the first two would be true, so tenders or privately negotiated transactions would be techniques that we would look to. And so, I don't think that at this point we have any plans associated with issuing more equity to pay down debt. But, I wouldn't rule that out in the future. I think that, again, it's just looking to all of the avenues that we have to continue to migrate down that path of where our strategy is, is what we will continue to do.
Jake Kemeny - Morgan Stanley - Analyst Okay. And then, how much capacity do you currently have under the different indentures to actually pay dividends today?
Jeff Cote - Sensata Technologies, Inc. - EVP and CFO I believe at this point, given the leverage ratios that we have, we would have technically the capability within the agreement to do that. Again, what our strategy is -- is to use the cash generation in the business to pay down additional debt and to put that cash to use for accretive transactions.
Jake Kemeny - Morgan Stanley - Analyst Okay, great. And then just one housekeeping, what was the actual EBITDA or the adjusted EBITDA for the quarter?

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Jeff Cote - Sensata Technologies, Inc. - EVP and CFO Sure. It was $112.5 million for the first quarter compared to $55.8 million for the first quarter of 2009.
Jake Kemeny - Morgan Stanley - Analyst Great. Thanks very much.
Operator And we will take our last question from Robert Wertheimer, Morgan Stanley.
Robert Wertheimer - Morgan Stanley - Analyst I think actually my follow-up was answered, Jeff. I just wanted to know the clean SG&A number X one-time (technical difficulty) charges and such.
Jeff Cote - Sensata Technologies, Inc. - EVP and CFO Yes; $34.7 million.
Robert Wertheimer - Morgan Stanley - Analyst Perfect. Thank you.
Operator With no further questions, I would like to turn the conference back over to Mr. Hureau for conference updates and closing remarks. Mr. Hureau?
Bob Hureau - Sensata Technologies, Inc. - CAO, VP and Corporate Controller I would like to thank you all for joining our call today, and I would like to announce our participation in an upcoming conference. On June 9, we will be presenting at the JPMorgan Diversified Industries Conference in New York City. We will be issuing a press release with details as we get closer to that date. Again, thank you all for being on the call with us today. We appreciate your continued interest in and support of the Company, and we look forward to speaking with you again next quarter.
Operator Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.

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Final Transcript: ST - Q1 2010 Sensata Technologies Holding N.V. Earnings Conference Call

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Final Transcript: ST - Q1 2010 Sensata Technologies Holding N.V. Earnings Conference Call

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ST - Q1 2010 Sensata Technologies Holding N.V. Earnings Conference Call

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CONFERENCE CALL PARTICIPANTS

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QUESTIONS AND ANSWERS

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Operator Bob Cornell, Barclays Capital.

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Operator Craig Hettenbach, Goldman Sachs.

Craig Hettenbach - Goldman Sachs - Analyst Great. Thank you.

Operator Christopher Glynn, Oppenheimer.

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Christopher Glynn - Oppenheimer - Analyst Great. Thanks a lot.

Operator Wamsi Mohan, Bank of America Merrill Lynch.

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Operator Jim Suva, Citi.

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Operator Amit Daryanani, RBC Capital Markets.

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Operator Ambrish Srivastava, BMO Capital Markets.

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Operator Steve Tusa, JPMorgan.

Operator Jake Kemeny, Morgan Stanley.

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Jake Kemeny - Morgan Stanley - Analyst Great. Thanks very much.

Robert Wertheimer - Morgan Stanley - Analyst Perfect. Thank you.

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