Sensata Technologies Holding plc (ST) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Sensata Technologies Holding N.V. First Quarter 2013 Earnings Conference Call. At this time, I would like to inform you that this conference call is being recorded. [Operator Instructions] For opening remarks and introductions, I would like to turn the call over to Jacob Sayer, Vice President of Investor Relations and Corporate Communications. Mr. Sayer, you may begin.

Thank you, Brent, and good morning, everyone. Earlier today, Sensata issued a press release describing our financial performance for the first quarter of 2013. If you did not receive a copy, you may obtain it from the Investor Relations section of our website at sensata.com. This call is being webcast live and a replay will also be available in the Investor Relations section of our website. Before we begin, let me remind everyone that today's discussion contains 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-K and 10-Q filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections or goals described in today's discussion. In addition to U.S. GAAP reporting, Sensata reports 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 on our website. Comments made during today's call will primarily refer to our non-GAAP financial results. On the call with me today are Martha Sullivan, our President and Chief Executive Officer; Jeff Cote, our Chief Operating Officer and interim CFO; and Bob Hureau, who will join us for the Q&A section. Martha will review some highlights and will discuss trends in the end markets we serve. Jeff will then provide a more detailed review of our financial results, including segment data for our Sensors & Controls business units for the first quarter. He will also outline our financial guidance for the second quarter and full year 2013. [Operator Instructions] I'll now turn the call over to Martha Sullivan, our President and Chief Executive Officer. Martha?

Thank you, Jacob, and thank you, all, for joining our first quarter conference call. I'm pleased with our results during the quarter. Despite continued macro weakness in several of our end markets, we delivered net revenue and adjusted net income at or above the high end of guidance. The financial highlights include net revenue for the first quarter ended March 31, 2013 was $470 million, an increase of approximately 6% from net revenue of $445 million in the fourth quarter ended December 31, 2012; and adjusted net income for the first quarter was $86.7 million or $0.48 per diluted share, an increase of 1.6% from the fourth quarter adjusted net income of $85.3 million or $0.47 per diluted share. The macro economic landscape today continues to be weak in many of the end markets we serve, with a number of economic inputs still uncertain for the balance of the year. On the upside, the stage appears set for a modest acceleration of growth into 2014. In Europe, the economy continues to stumble from crisis to crisis, with one result being declining vehicle demand. According to third-party data, March marks the 18th straight monthly decline from the year-ago period in European light vehicle registration. For the first quarter, car registrations in Europe were down approximately 10% from last year to the lowest level of registrations since 1990. Europe's biggest market, Germany, experienced registrations down 13% for the quarter from a year ago, and France experienced registrations down 15% for the quarter from a year ago. As formal sales reports don't exist in Europe, registrations remain the best proxy for underlying sales. According to third-party data, first quarter light vehicle production was also down 8% in Europe year-on-year. The discrepancy between registrations and production data continues to give us pause to consider whether European OEMs have truly yet matched production to vehicle demand. As a result, we remain cautious on Europe for the balance of the year. In the U.S., while the market for light vehicles is recovering as indicated by a higher SAAR in the first quarter, production performed roughly as expected this quarter, flat from a year ago. Demand for heavy trucks and commercial vehicles continue to be weak, again, as expected. Off-road and classified to AA commercial truck production contracted 9% in the first quarter of 2013 compared to a year ago. On a brighter note, the Commerce Department said recently that U.S. housing stretch rose above an annual rate of 1 million units in March, which is nearly 50% higher than the pace a year ago. Not surprisingly, we have seen strength in our HVAC and appliance end markets this quarter from year ago. Finally, in Asia, China recently announced regulations to address the environmental impact of the rapid growth in vehicles. According to third parties, light vehicle production in China grew 10% year-on-year during the first quarter. Decreasing air quality, especially in the big cities, have driven the State Council of China's cabinet to reaffirm China's stake for requirements for heavy trucks by July 2013 and to put out guidelines in March that calls for nationwide adoption of more stringent fuel economy standards for light vehicles by the end of 2015. Vehicle production in Asia, x China, shrank 13% during the first quarter, partially reflecting a return to normal production after the temporary uplift, given the rebuilding of the automotive supply chain in Japan last year. For the second quarter of 2013, current third-party estimates call for year-on-year automotive production growth of 4% in the Americas and 8% in China. European production is expected to contract 3% and the rest of Asia to contract 10% in a return to normal production level as compared to the second quarter of 2012. Expectations are for global automotive production levels in 2013 to remain slightly higher as compared to 2012. Current third-party estimates for 2013 are for automotive production growth of 3% to 5% in the Americas, 9% to 11% in China, both slightly better than expectations in January. European production is expected to be down 2% to 4% in 2013 and the rest of Asia down 7% to 9%, both slightly worse than expectations in January. As a reminder, Sensata content per vehicle is the highest in Europe in diesel vehicles and the lowest in China. As for Controls, we serve many end markets, such as HVAC, appliance and a variety of industrial segments. We believe a good proxy for growth in the Controls business is mature market GDP growth. While U.S. GDP growth appeared strong in the first quarter, growth in the balance of the year is expected to be more modest as tax hikes, sequestration and other spending cuts further impact the economy. Europe's economy is expected to shrink again this year, and Japan, as a result of recent stimulus, is expected to begin growing again in the second half of the year. During the last earnings call, we shared our expectations for content growth in the 5% to 6% range for 2013, and our current expectations are consistent with that guidance. While we recognize that content growth tends to correlate with economic cycles, we are convinced in our ability to generate organic revenue growth from increasing content over the long run. Regulatory requirements for higher fuel efficiency, lower emissions and safer vehicles continue to drive the need for advancements in engine management and safety features that increase content. The first quarter was strong for new business wins and we appear to be on track in 2013 to win designs sufficient to grow content and organic revenue by 7% to 10% on average over the long run. In particular, we've recently won a transmission speed sensor design across platforms with a major North American heavy truck OEM and multiple High Temperature Sensing designs at a major European maker of light vehicles and heavy trucks. And our Cylinder Pressure Sensors continue to rack up impressive design wins with all major manufacturers of these vehicles. I'll now turn the call over to Jeff to review our first quarter results in more detail and provide guidance. Jeff?

Thank you, Martha. Revenue for the first quarter of 2013 of $470.4 million increased 5.6% compared to the fourth quarter of 2012. On a year-over-year basis, net revenue in the first quarter declined 4.4% from the first quarter of 2012. The year-over-year decrease in net revenue was primarily due to a decline in production of vehicles in Europe and developed Asia. Adjusted EBITDA for the first quarter was $126.8 million or 26.9% of net revenue. Adjusted net income was $86.7 million or 18.4% of net revenue. The adjusted net income index was slightly higher than the first quarter of 2012, due primarily to lower material costs, lower integration costs and synergies from acquisitions. This improvement more than offset the impact from lower revenue from the year-ago quarter. The adjusted net income index was slightly lower than the fourth quarter of 2012, due primarily to price reductions with customers that tend to be the highest in the first quarter of each year. During the first quarter, $5.4 million of restructuring and special charges were added back to determine adjusted net income. The restructured charges related primarily to manufacturing lines in Korea. While we expect these charges to be covered by insurance proceeds, the timing of the charges and the proceeds from insurance will be lumpy quarter-to-quarter. For the full year 2013, we expect restructuring and special charges to be close to 0. Cash at March 31, 2013 was $431 million. During the quarter, we generated $71 million in free cash flow. Cash provided by operating activities was $85 million, cash used in investing activities totaled $13 million and cash used in financing activities totaled $54 million. Capital expenditures for the first quarter were $14 million. We continue to expect to spend between $70 million and $90 million on capital improvements during the course of 2013. Capital allocation is very important for us at Sensata. We continue to believe that acquisitions will provide the highest return for shareholders. The acquisition pipeline remains full and the cash generated by the business, combined with our available revolver, gives us plenty of resources to pursue these transactions. In addition, we believe share repurchases are an excellent way to return capital to shareholders. During the first quarter, we repurchased approximately 1.7 million shares at an average share price of $32.42, using approximately $55 million in cash. We also have a goal to maintain a capital structure that serves the company well over the long haul. Earlier this month, after the close of the first quarter, we issued $500 million of 10.5 year bonds, locking in an attractive fixed rate of 4.875%. We used the proceeds from the bond issue, along with $200 million in cash from the balance sheet, to repay $700 million of our outstanding variable rate term loan. All in, the transaction will be slightly accretive to earnings per share in 2013. In conjunction with this transaction, our term loan now carries an investment grade rating by both Moody's and S&P. As of March 31, our gross debt stood at $1.8 billion and our net debt was $1.4 billion. Our gross leverage stood at 3.6x and our net leverage ratio was 2.7x. Our leverage ratio continues to be in the 2 -- our targeted leverage ratio continues to be in the 2x to 3x adjusted EBITDA range. Now I would like to comment in the performance of our 2 operating divisions. Sensors' net revenue was $333 million for the first quarter, up 5% sequentially from the fourth quarter of 2012 and down 7% from the first quarter of 2012. Sensors' net revenue performance, compared to prior year, reflects weakness in Europe and developed Asia light vehicle and North American heavy and commercial truck markets. Sensors' profit from operations was $93.2 million or 28% of Sensors' net revenue. Sensors' profit from operations index was lower than the fourth quarter of 2012, due primarily to annual price declines, offset somewhat by lower material costs, lower integration costs and synergies from acquisitions. Controls' net revenue was $138 million for the first quarter, up 6% sequentially from the fourth quarter of 2012 and up 4% from the first quarter of 2012. The Controls' net revenue performance, compared to prior year, reflects market recovery, share gains and a small acquisition completed in the fourth quarter, offset by capacity constraints related to the fire at our facility in South Korea. The improvement sequentially is driven by a broad-based support, including strength in the major home appliance sector, offset somewhat by weaknesses in defense and markets driven by sequestration. Controls' profit from operation was $43.4 million or 31.5% of Controls' net revenue. Controls' profit from operation is up from the fourth quarter of 2012 due to higher volumes and lower material costs. While a number of not unknown risk remain for 2013 that may impact our performance, we remain confident in our original guidance for the full year 2013, which includes the following: net revenue of $1.93 billion to $2.03 billion, an increase of 3.5% from 2012 at the midpoint; we continue to expect content growth in 2013 to be in the 5% to 6% range; adjusted net income per share of $2 to $2.20, approximately 19% of net revenue and an increase of 7% from 2012 at the midpoint; and free cash flow between $340 million and $380 million. Our guidance for the second quarter of 2013 includes the following: net revenue of $485 million to $505 million, which at midpoint is an increase of 5% sequentially from the first quarter. This is slightly higher than the normal seasonal growth for the second quarter. Our fill rate stands at 88% of the midpoint of this guidance. Adjusted net income per share of $0.50 to $0.54, approximately 19% of net revenue at the midpoint. And adjusted EBITDA of $130 million to $138 million, approximately 27% of net revenue at the midpoint. In summary, we are pleased to report that the first quarter results came in at the high end of expectations. While certain end markets remain fluid, most notably the European vehicle market, the business is performing the way we said it would, and we remain confident we can achieve our original revenue in earnings guidance for the full year. There were a number of notable achievements during the first quarter. We made solid progress on new design wins that will help to drive growth in future years. We generated over $70 million in free cash flow from the business. Consistent with one of our goals, we returned 55 million to shareholders in the form of repurchased shares. And we took a significant step forward, optimizing our long-term capital structure by issuing fixed rate long-term bonds and locking in a great interest rate. With that, we would now like to open up the lines for questions. Brent, please introduce the first question.

[Operator Instructions] The first question comes from the line of Wamsi Mohan.

Martha, I think you mentioned that Europe was down significantly, registration is tracking even weaker than production and you have a cautious outlook there. Are you seeing a slowdown in the exports to China and the premium brands within Europe, particularly at the high end? And is that something that's already factored in into your guidance?

We are, in fact. We did recognize a slight decline in net exports out of Europe from the fourth to the first quarter. So no, nothing dramatic. But that had been an area that had been trending a bit more positively through the fourth quarter. We saw that reverse into the first quarter. That is still inside of our range, which, for us, focuses on overall production. So when we look at who those exporters are, they're the primarily German makes, we look at where we expect their overall production to land. And when we look at the combination of that, they came in slightly below expectation. But I would say not an area of huge alarm if we look at where production landed. We're going to continue focus carefully on the delta between registrations and overall production. And not clear that we're seeing a big gap there, but there is a potential for some misalignment if you look at where March registrations landed, which were significantly low. So one month does not a trend make. We'll continue to watch it carefully. Production coming in fairly aligned to where we expected it to be. But given what we saw in March, we're going to stay very careful on overall Europe.

And Jeff, really quick. In the Sensor segment, PFO of 28%, down slightly. I think you noted price declines over there despite slightly higher revenues. So can you maybe talk about how the integration efforts are going on? And are we on track to sort of completely work through the inventory on the MSP side so we should see a tick up in end margins next quarter?

Yes. The integration is certainly going along as we would've expected, Wamsi. So I don't think there's anything new to report there. We had one other note, though, on the Sensors side is that we had forecasted to increase some of our R&D spend. As you may recall, the majority of our R&D spend is on the Sensors side of the business. And we increased that. We planned to increase that, and we actually did increase that going into the first quarter and plan to continue to do that for the year. So that would be the other factor. But from an integration standpoint, we feel really good about it. The line moves have been completed, the inventory is burning off as we would've expected, and so we feel good about the synergies associated with those.

Your next question comes from the line of Jim Suva.

A quick question. Given the CFO transition going on right now, does that impact your M&A strategy? What I mean by that is, do you need to take a little bit of a pause there for the new CFO to be in seat, unless it's Jeff in the long term? Or are those things completely independent of each other?

It will not impact our M&A focus, Jim. Certainly, with Jeff serving as interim, that allows us for the kinds of overlap and allows us not to skip a beat really on any of our important processors, including M&A. So I would not expect that to cause any pause at all at Sensata on our M&A focus.

Okay. And given what you're seeing globally going on, Europe softer and U.S. and Asia a little bit stronger, does that change your M&A pipeline at all near term? Does it open up more opportunity? Does it shift the opportunity or change with the scale and scope? Because last quarter, I believe you mentioned that you're opening up your scope just a little bit more.

That's right. If you recall, that discussion was about looking at vertical markets beyond auto in terms of sensor opportunities. The economic climate in the regions that you talked about are not significantly different than what we expected, so really not driving a change in that focus.

Great. And then finally, the content growth of 5% to 6% and then longer term at 7% to 10%, can you just remind us, is that like unit content growth or blended average revenue content growth that includes the ASP annual price decline? If you can just clarify that, and thank you and congratulations again.

Sure. Just to be clear, it is the blended impact of content on Sensata, so it's on a revenue basis. It does not include pricing impacts. So we track pricing impacts separately from that. So the 7% to 10% organic growth that derives from content is on a revenue basis, impact on total Sensata, without the impact of pricing.

And the normal pricing would be?

Normal pricing is in the 1% to 2% across the business. And typically, those pricing -- that pricing adjustment, I should say, 1% to 2% down, that pricing adjustment usually comes in the first quarter of the year.

Your next question comes from the line of Steve Tusa. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Can you just give a little bit more color on China and perhaps the linearity that you expect throughout the course of the year? And how much visibility you have on the business there?

Sure. China performed well for us in the first quarter. If you look at what the end markets that we saw a reasonable lift on end market in auto. We're seeing domestic demand in areas that are favorable for us in China beyond auto when we look at HVAC and the appliance market in particular. Our Controls business in China grew strong double digits to the low teens. We grew another 27% in China on our Sensors business and that is very much about our content win. In terms of expectation and linearity, we would expect there to be some lumpiness in China. We've seen that for the past couple of years. Our visibility in China is, I would say, similar to what we have in the rest -- of overall Sensata. We tend to get a good quarterly visibility rolling into the quarter, particularly on the sensors side. Typically, a little less visibility on the control side in China, where those orders come in inside of pretty short lead times. Our customers there are serving both the export market and the domestic China market. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: So what do you think the biggest kind of swing fact? What are you watching the most there? What's probably the #1 one item that you'd be most worried about over the course or at least just watching as an indicator over the next couple of quarters to determine direction?

Yes, and we really are watching very carefully what's happening with overall construction and some tightening on that front. For our business, the fitting out of buildings is more important than the actual construction of those buildings, but it can be a leading indicator, so we're watching that very carefully. We've seen consumer incentives outside of automotive that have had, I think, modest impact. If those were to pull off, that might an issue for us. We're not seeing any evidence that, that would be happening. And I would say the third area is recognizing that a portion of what we ship into China, particularly for our Controls business, is exported from China. So the mature economies are important in terms of our China revenue as well. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Great. And then one last question just on, I guess, the areas that had destocked the most over the last 1.5 years. Are you seeing incremental destocking? Do you think it's pretty much in line with demand now? I mean, my guess is, given your revenues were okay, that destocking has pretty much run its course. Just curious as to your sense of inventory level of your customers.

Right. So again, back to China and the inventory levels there, which have been somewhat volatile in the past for us, so we watch those closely. Those do seem to be in line. We feel comfortable about where the retail inventory sits for the Controls business. When we look at vehicle inventory in the areas where we can get good line of sight on those, those are well in control. I will say, again, the one area we do remain concerned about in terms of inventory, particularly vehicle inventory, is in Europe. It's much more difficult to get your hand on vehicle inventory levels. And we saw in March a pretty low number on retail sales in Europe. It will be important to understand if production is lining up against that.

Your next question comes from the line of Amit Daryanani.

So first off, maybe just your thoughts on the 2013 guidance you got at lead trading. I mean, it looks like you're implying some fairly healthy revenue growth of 10% plus in the back half versus seeing declines early in the first half, at least in the area basis. Maybe you can just talk about what's your comfort level on growth coming back in such a strong way, fully realized auto production data on improvement? I'm curious if you can touch on maybe you've had some new design wins so the new Sensor products have to ramp up. Is there something else that gives you more comfort for that hockey stick ramp in the back half?

Yes. I think part of it, Amit, is just taking a look at the comps from a year ago as well. So particularly in the second half of the year, if you think about what we saw in Europe declines, the comps become much easier comps for us in that portion of our overall business. We also saw a very big correction of the commercial truck market that happened late in the year. And so when we just look at some of those markets continuing to run at fairly low levels will in fact deliver growth because of the comps going back to the second half of 2012. We do have some content wins that come into the second half of the year. There is some areas where seasonality will be somewhat helpful as well, but it's primarily looking at what happened in the business in the second half of 2012.

Got it. And then Jeff, I think you mentioned that in the Controls side, you guys were slightly capacity constrained. I want to make sure I heard that right. And secondly, could you maybe quantify how much revenues you potentially left on the table if you were truly capacity constrained in that business? And then on the Korea insurance claims, it sounded like you'll get those payments back in 2014. The best guess, kind of on which quarter that will come in?

Yes. So on the capacity side, we are absolutely seeing higher demand on the Controls side of the business than we can serve. And in fact, we're delaying some of the moves in Korea, which are sort of postponing some of the savings on that in order to make sure that we can optimize in terms of servicing that demand. To quantify it, I'd say it's somewhere in the 3 million to 5 million range for the quarter that we were not able to serve. Obviously, it's important to us to make sure that we're satisfying the customer need. As I think everyone knows there's a lot of instances where our customers are buying only from us. So that does create some challenges, and we're working very hard to increase that capacity and slowdown those moves to make sure that we can get through, if you will, the Controls high season, which tends to be the first and second quarter of the year. So that's the point on the capacity on there. Insurance, we're hoping to get this resolved in 2013. As we had mentioned, some of the restructuring costs that we did add back in the first quarter, we do expect to have insurance recovery on that. But that will come later in the year rather than then we incurred the costs. And we're hoping that during '13, we'll be able to settle that up. There's a chance it will slip into '14 as we go -- work through the administrative aspects of this with the insurance company, but our goal would be to wrap it up in '13.

Got it. And just finally, really quick on the Sensors side, x the acquisition in efficiency and restructuring, are the margins still running at a 32%, 33% run rate?

When we look at the performance of the business, it is in line with that overall goal of 20% to 22% ANI. That's where the business is running.

Your next question comes from the line of Steven Fox.

Just one major question on the content growth. I think I understand what you were saying about the year-over-year comps with content, but just -- if I was to think about a reacceleration and maybe the risk of that as the year goes on from the 6%, 5% to 6% level towards back, towards 7% to 10%. How will that sort of play out into next year, given maybe the risks in Europe affecting the mix versus some of the new wins you have?

Sure. I think what's important when you start to look ahead to 2014, 2015, we watch very carefully the timing of regulation. And there are some important milestones that come next year where our customers are -- have mandatory requirements to hit the emissions levels. That's keeping those launches on track, and that's driving a lot of our confidence that we see a return to the 7% to 10% over the long run. That's tracking very, very well. In addition, we continue to see strong new design wins that will roll out over the next 2 to 3 years and launch in that time frame.

And is there anything in particular we should pay attention to within some of the new wins that would affect that, say, in 2014 in particular? Obviously, the long-term story for auto content is still very positive for you guys. But just trying to find an inflection point is proving rather difficult at this -- on the content side.

Understand. I do think the one thing we watch in Europe is whether or not we see major consolidation and whether that consolidation disrupts program launches from 1 OEM to the next over 1 quarter or 2. It's not a long-term concern relative to content. The stronger players in Europe are the most content consuming, so that's actually a trend that I think works well for us. So the concerns that we would have would be more quarter-to-quarter perturbations for an economy that is in the doldrums and will probably be there for a while.

Your next question comes from the line of Christopher Glynn. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Question on Controls. Just having a little trouble reconciling the comments that you're gaining share there but also missing sales because of capacity.

Yes. So we are gaining share from customers, but there are certain product lines that were -- that capacity was impacted by the fire in Korea, Chris. And it took some of that capacity out. It takes somewhere in the neighborhood of 6 to 9 months to get that capacity back on line. We got going on that very quickly. We hope, toward the end of the summer, we'll have those lines back on line. But this is highly automated, very specific equipment that we needed to rebuild that was destroyed in the fire last fall and winter. So that's what's causing the gap there. We're seeing a share gain in other product families where we have capacity still, but there are several product families that we work with in the Controls business.

Okay. So it sounds like the capacity constraint is fairly siloed then. And overall, what's kind of the origin, an inflection point of the share gains and kind of the phase in curve, if you will?

Sure. The origin really is very, very targeted. If you look at our Controls market shares, we sit it extremely high market shares in our mature markets. So I think 70% type positions. In the developing economies, particularly in China, the opportunity for us is to gain share with what we call emerging producers. So these are the local Chinese manufacturers who are, in fact, gaining overall share from the multi-national joint venture. We're very, very focused on picking up our market share in that particular area. And so in that case, we're sitting at about the mid-30% type market shares. So good opportunity and making great progress. Our market shares there, if you go back 5 years ago, we're below 10%. The roll out of those is a little shorter cycle than we're used to talking about the in the Sensors business. So there we're talking about the ability to launch production within 18 months, possibly 20 months, sometimes as short as 12. There is an engineered and engineering engagement on that front and these are customized products so it's not instantaneous, but we're seeing really good traction on that overall initiative. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: And then just the last one. Commented on the very low retail sales in Europe and also that it's tough to get an inventory view. But given the former content, is it too early to kind of bank on expecting an extended 3Q seasonal shutdown impacts?

Probably a little early to call that. So what we look at is sort of a normal schedule in the second half of the year. And so, again, I think that's one where if we continue to see a trend towards registrations dropping faster than production, we would start to expect there to be an extended shutdown. But it's early for us to make that call.

Your next question comes from the line of Shawn Harrison.

A few questions. I was hoping just for a clarification in the North American auto business. How much of the decline year-over-year was solely light vehicle? Or what else was the other factor?

The decline on that front is -- this is an area where, if you look at what impacts our content growth, there is a positive factor, there's a negative factor. The negative factor we talk about is obsolescence. We're seeing more of that obsolescence, as predicted, impact overall -- impact the North American portion of our business. Again, that's not a long-term development. That's something that moves on from -- on a quarter-to-quarter basis, but that's what's driving the passenger car piece of that. We did see -- we have seen significant reduction in heavy vehicle production. That's a major impact on North America. So going back to what we saw beginning in the third and really accelerating in the fourth and now extending into the first, commercial truck in North Americas, those production rates are down significantly.

Okay. And then 2 clarifications. In the annual guidance, is there any additional share repurchase activity included within that? And then what, I guess, would be the new interest expense number expected for the second quarter?

Yes. So we have assumed that for guidance that we have 179.4 million shares, so we have not assumed. But you'll see when we file our Q that we've continued to be active in the market. So we have to disclose in the Q this coming Friday when we anticipate filing that. We've continued to be active in that buyback market so there might be some lift associated with that, but we wanted to put a sort of stick in the ground in terms of the share count for purposes of giving guidance. And interest is about $22 million for the second quarter. Expectation, it will be slightly higher than that going into the third quarter, given that we did replace some of the term loan that was at a lower rate with some of the bonds that were slightly higher, but around that $22 million range per quarter.

[Operator Instructions] Your next question comes from the line of Ambrish Srivastava.

I actually just had one question, Martha, on Japan. And kind of two part. One is a little bit more color on the incentives there that you mentioned. Some other companies have also talked about it, but I just wanted to get your perspective. And then within Japan, it has been a couple of years since we have been talking about potentially getting more traction there. So where are we on that front in engaging with the manufacturers there?

Sure. Our comment is relative to stimulus in Japan. We're really at the macro level. And so if you did see what they're doing with currency and what they're doing to try to reboot that economy, that's something that we track as it relates to the Controls business and also somewhat to auto demand in Japan, which is, frankly, still quite low. Our traction to expand share beyond our traditional close partnership in Japan is going very, very well. Again, long cycle time. And so that relates to programs in combustion sensing. It relates to programs also in advanced braking, making good progress on those as well.

But I was just trying to get some details and kind of what -- and I know you recognize it's a long cycle time, but what should we expect in terms of a couple of years out from now or year out when we begin to see revenues?

I think we would begin to see revenues and I'm going to give you a range because it's still very early in those developments, but we would see them probably late 2015 into possibly a launch into 2016.

Your next question comes from the line of Rob Wertheimer.

So if I come and take North America auto just based on the split you gave on end market revenues, was that down around 10%? And Martha, that would be auto, not the heavy truck you mentioned. I'm just trying to understand the bridge between that and the builds which were about flat. And if I've got that wrong, just feel free to just comment generally on the bridge between builds in North American, European auto in your revenues there.

No, I don't think that's way off. And, again, that was a comment I was making previously. We have a program that is sunsetting, and we've got a new design win that comes in. There's a bit of a gap on that inside of a few quarters. So you're seeing that correctly, and that's what that overall impact is.

Okay. So it's actually fairly material. And then so that would be part of what's driving lower content growth this year? And you said a few quarters. It's not like next quarter, it's going to bounce back. It's sort of better for this year. And then European auto is a lot closer. I mean, I think down '13, and you mentioned the registrations and the build and the difficulty in the numbers. Is there any similar issue there with the temporary gap? Or is that just one?

No. In fact, we're doing better. If you actually look at what specific OEMs did and how down they were, think of German registrations down 13%, than where we say our overall performance. So no, there's not a similar issue there. And in fact, we're still seeing very strong content increases on the European side.

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

Thanks, Brent. I'd like to thank you, all, for joining our financial results call today. Later in the quarter, we'll be participating in Barclays' High Yield Investor Conference in Chicago in May 21, JP Morgan's Industrial Investor Conference in New York on June 4, and Bank of America Merrill Lynch's Technology Investor Conference in San Francisco on June 5. We appreciate your continued interest in and support of the company 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.