Good day, everyone, and welcome to Sensata's First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. At this time, I'd like to turn the conference call over to Mr. Jacob Sayer, Vice President of Finance. Sir, please go ahead.

Thank you, Jamie, and good morning, everyone. I'd like to welcome you to Sensata's first quarter 2022 earnings conference call. Joining me on today's call are Jeff Cote, Sensata's CEO and President; Paul Vasington, Sensata's Chief Financial Officer; and Vineet Nargolwala, Sensata's Executive Vice President of Sensing Solutions and Heavy Vehicle Off-road. In addition to the financial results and other press releases we issued earlier today, we will be referencing a slide presentation during today's conference call. The PDF of this presentation can be downloaded from Sensata's Investor Relations website. This conference call is being recorded, and we will post a replay webcast on our Investor Relations website shortly after the conclusion of today's call. As we begin, I'd like to reference Sensata's Safe Harbor statement on Slide 2. During this conference call, we will make forward-looking statements regarding future events or the financial performance of the Company that involve risks and uncertainties. The Company's actual results may differ materially from the projections described in such statements. Factors that might cause these differences include, but are not limited to, those discussed in our Forms 10-Q and 10-K as well as other subsequent filings with the SEC. We encourage you to review our GAAP financial statements in addition to today's presentation. Most of the subsequent information that will be discussed during today's call will relate to non-GAAP financial measures. Our GAAP and non-GAAP financials, including reconciliations are included in our earnings release and in the appendices of today's presentation materials. The Company provides details of its segment operating income on Slides 10 and 11 of the presentation, which are the primary measures management uses to evaluate the performance of the business. Jeff will begin today with highlights of our business results during the first quarter. He will then provide an update on recent progress in our key electrification and insights strategic growth areas as well as share details about our recently announced acquisition of Dynapower. Paul will cover our detailed financials for the first quarter including revenue growth and market outgrowth by segment and business unit, and he'll also provide financial guidance for the second quarter and full year 2022. We'll then take your questions after our prepared remarks. Now, I'd like to turn the call over to Sensata's CEO and President, Jeff Cote.

Thank you, Jacob, and welcome, everyone. I'd like to start with some summary thoughts on our strong performance during the first quarter, as outlined on Slide 3. While production across all of our end markets declined nearly 6% during the quarter compared to last year due to supply chain disruptions and shortages. Our business model, which includes acquisitions and market outgrowth, served us well. As a result, we produced solid financial results in the quarter for shareholders delivering $976 million of revenue or growth of 3.5% from the prior year, above the guidance range we provided in February. We once again demonstrated strong market outgrowth above our target ranges. As a company, we delivered 790 basis points of outgrowth during the quarter. This includes 140 basis points of pricing recovery. Paul will discuss our strong revenue outgrowth in more detail. Quoting activity for new business awards has been extremely active during the first quarter, and we are currently on track to exceed the record $640 million in new business wins we secured last year. More than half of these new business wins are in our megatrend growth factors, and we expect them to translate into Sensata's future revenue outgrowth. Sensata's current revenue outgrowth is increasingly driven by rapidly growing positions in megatrend areas, including electrification and insights. We are investing more in these areas, and we believe this increased organic and inorganic investment, which for the full year is expected to impact our margin index by about 250 basis points is the right trade-off to expand our exposure in these fast-growing areas. Acquisitions completed in these areas over the past year contributed 410 basis points to company-wide revenue growth in the first quarter, and this is in line with our targeted acquired revenue growth. I'll share more details regarding our…

Thank you, Jeff. Key highlights for the first quarter, as shown on Slide 9, include revenue of $975.8 million, an increase of 3.5% from the first quarter of 2021. Adjusted operating income was $182.5 million, a decrease of 7.9% compared to the first quarter of 2021, primarily due to lower volumes, inflationary material and related supply chain costs net of higher pricing and investments in our megatrend growth areas. Now, I'd like to comment on the performance of our two business segments in the first quarter of 2022, starting with Performance Sensing on Slide 10. Our Performance Sensing business reported revenues of $717.7 million, an increase of 0.4% compared to the same quarter last year. This was driven primarily by our market outgrowth of 650 basis points as well as revenue from acquisitions. Looking back, it appears customers built approximately $20 million of inventory in the first quarter last year that we are excluding from the outgrowth calculation. Performance Sensing op income was $180.6 million, with operating margins of 25.2%. Segment operating income declined due to lower organic volumes and inflationary material and related supply chain costs, somewhat offset by higher pricing, income from acquisitions and favorable foreign currency. As shown on Slide 11, Sensing Solutions reported revenues of $258.1 million in the first quarter of 2022, an increase of 13.2% as compared to the same quarter last year. This was driven by strong outgrowth, including the launch of new industrial electrification applications and acquisitions, somewhat offset by declines in the aerospace market. Sensing Solutions operating income was $72.5 million, an increase of 8.4% from the same quarter last year, with operating margins of 28.1%. The increase in segment operating income was primarily due to higher volumes and higher pricing, somewhat offset by inflationary material-related supply chain costs and higher…

Thanks, Paul. Let me wrap up with some key messages as outlined on Page or Slide 18. Sensata's business and organizational model is strong, resilient and reliable as we deliver mission-critical, highly engineered solutions required by our customers. While our customers' markets are cyclical, we aim to outgrow these markets by 400 to 600 basis points per year. We are confident in our ability to sustain this attractive end market outgrowth based on our record levels of new business awards and our large and expanding pipeline of new opportunities. We continue to invest in our megatrend-driven growth initiatives that are opening large and rapidly growing opportunities for Sensata across all of our end markets. We are making excellent progress in electrification and insights, both organically through strong new business wins and inorganically through bolt-on acquisitions and/or joint ventures. We are targeting adding 400 to 600 basis points of inorganic revenue growth annually. We will continue to innovate on behalf of our customers, solving their hard-to-do engineering challenges. We will also continue to provide differentiated solutions to a broad array of customers. Solving these mission-critical challenges enable Sensata to continue to deliver industry-leading margins for our shareholders, while also increasing investments in our growth opportunities and our people. And finally, I'm excited about Sensata's long-standing mission to help create a cleaner, safer and more connected world. Not just for our customers' products, but also through our own operations, we believe we are meaningfully contributing to a better world. We are on our way to achieving the targets laid out in our first sustainability report last year, bolstering the long-term sustainability and success of the Company for all of its stakeholders. We look forward to sharing our progress through an updated sustainability report to be published during the second quarter. Now, I'd like to turn the call back to Jacob.

Thank you, Jeff. We'll now move to Q&A. Given the large number of listeners Jamie, please assemble the Q&A roster.

[Operator Instructions] Our first question today comes from Wamsi Mohan from Bank of America. Please go ahead with your question.

Congrats on the deal. So, when we look at your 2Q trajectory here, it's a bit weaker, but you maintain your full year guidance despite the end markets weaker both on auto and HVOR from your prior assumptions. So can you maybe help us understand, what the offsets are? Is it pricing? Is it inventory build? Or is it something else? And to the extent that it has increased in content growth, what is it that's giving you higher content growth versus your prior assumptions?

Yes. Wamsi, let me share some high-level thoughts. So obviously, Q1 came in better than we anticipated. So that was in the positive column. But as we do look at the second quarter in terms of impact on overall demand, continued supply chain challenges and really exacerbated supply chain challenges associated with deeper in the supply chain, not necessarily caused by us, but caused by some of our customers' other suppliers that's causing them to have slightly lower demand. Second quarter is going to be a little lower than what we had originally forecasted internally. I know we didn't provide second quarter specific guidance back in February, but it's coming in a little bit lower. As you noted, content or outgrowth is higher, that's a combination of acceleration of events that we've always expected to accelerate in terms of the megatrends that's going to naturally drive more outgrowth for us as well as pricing. So first, in the first quarter, pricing was a little bit muted. It recovered most of the cost, but overall pricing impact in the first quarter was about 1.5% positive. We're expecting that to go up a little bit more in the latter part of the year. And then obviously, the M&A aspect or the acquired growth will help us as well. So there are several items on the positive and negative side overall market. We think is a little bit lower, but on the other side of our strategy in terms of outgrowth and inorganic growth, we're seeing those businesses that we acquired performed quite well and then contribute to offset some of that. Hopefully, that gives you a sense of things.

Our next question comes from Mark Delaney from Goldman Sachs. Please go ahead with your question.

I was hoping to better understand some of those price cost dynamics. Could you be more specific about how much higher you're expecting cost to be from raw materials and supply chain logistics cost. And you spoke a bit around what pricing did versus costs in the first quarter. But how much incremental pricing is now baked into guidance for the full year? Can you also talk through your confidence in being able to fully pass-through those price increases and customers' willingness to accept them?

Mark, it's Paul. So the traction we're getting on the pricing side is continuing to improve every quarter. As Jeff said, it was a bit of a headwind in Q1, still a little bit headwind in Q2, but we expect it to become a tailwind in Q3. So the pricing continues to grow as material costs start to flatten out. So, it's more of a second half improvement off the first half. And like I said, we're doing a really great job with commercial teams in terms of being able to work with customers to pass a lot of that cost on and to continue to make us very competitive financially.

Our next question comes from Matt Sheerin from Stifel. Please go ahead with your question.

I wanted to get back to your full year guide specifically on the transportation side. It looks like, Jeff, just backing into the rest of the year guidance, you're looking at a fairly big step-up in Q2 -- sorry, Q3 and Q4 in automotive. Is that an expectation that production at customers will finally start to improve as supply improves? What gives you that confidence that we're going to see that step up?

Yes, you're reading it right. If you look at the Company-wide in first quarter was -- market was down 6%. Second quarter, we expect market to be down again, off of second quarter of last year, call it 2% or 3%. So, the first half from a market standpoint, there's a net decline. We are expecting that to pick up. It's coming in a couple of specific areas. It is around automotive will recover off of the first half of the year. Also some of our insight-driven revenue will increase in the second half of the year. So, we're seeing some pockets where we see an increase versus last year. But I think you're absolutely right, the HVOR business has -- the overall market dynamic has come down. The European market expectation has come down, and China has come down slightly as well, but there are pockets of opportunity that will offset some of that.

Our next question comes from Samik Chatterjee from JPMorgan. Please go ahead with your question.

I guess, Jeff, you mentioned in your prepared remarks the visibility that you have in relation to wins for 2022 already being on track to eclipse 2021. And I wanted to dig into that a bit because it's still ratably early in the year. What are you seeing in terms of maybe you can share what's the run rate compared to this time last year in terms of your wins? And some investors would have assumed that given the macro, some of the quoting activity would have moderated, but clearly, you're seeing that ex-rate. So is it really being driven by auto OEMs? Or is it more on the industrial side? If you can share some color there.

Yes. I think the key here is, remember, we're primarily serving long-cycle businesses. So there has not been a slowdown in opportunity in terms of the NBOs and the quotes that we've had. It's been very robust. We mentioned in our teach-in that we have over $1 billion of NBOs that we'll be quoting during 2022 in electrification alone. So, the quoting activity is quite high right now. In terms of trajectory, what I would tell you is it was an extraordinarily strong first quarter, and it was an extraordinarily strong through the first four months of the year sitting here towards the end of April. And we're not expecting that trend to continue, but we're well ahead of our last year run rate of 640 on an annualized basis. And so, we have a lot of confidence in that. Again, more than half of them are coming in the areas that we're focused associated with electrification and insights. And again, remember, electrification is broadly not just auto electrification, but all of the end markets that we serve. And so that opportunity set continues to grow, and we're having some tremendous success in terms of selling our offering through to our customers, giving us, again, continued confidence in that out growth longer term.

Our next question comes from William Stein from Truist Securities. Please go ahead with your question.

Congrats on the acquisition and good results. I'm hoping you can speak in a little bit more detail about effects of the war Ukraine and the COVID in Shanghai, as to how you see these influencing the markets you serve overall and then your business specifically. I think in your prepared remarks, it sounded like this isn't having -- neither of these is having a material impact, but I wonder if you could maybe a good one deeper for us?

Yes, I'd be glad to. And I'm glad you asked the question because it's not having an impact that, that doesn't mean that it's not causing disruption more broadly in the supply chain, right? So when it impacts our customers, there's movement in terms of order book, they swap out some orders for others based upon the need that they have based on what components they're able to procure to allow them to make vehicles or other equipment. And so, there is volatility in the market, but the team has done a very good job in terms of managing through that. Additionally, there's minimal revenue or supply chain in the region, right? So when we talk about direct impact, that's the impact of Sensata. We're not dramatically impacted directly associated with that, but the knock-on effect associated with volatility in the market, we're managing through right now to have an end result which doesn't impact it closely like everyone is in terms of the longer-term impact of this conflict in the region on the European markets, overall demand and so forth. But right now, when you look at our order book, it's 95% filled against our guide for the second quarter, we're not seeing that impact as we sit here today.

I mean I guess the one thing I would add is that the market itself is assuming a decline in production in China in the second quarter. So, we're embracing that and seeing and embedded that into our guidance for Q2 and actually, we're a little bit more conservative there in the market. So that is having an impact in Q2, but we expect it reverses in the second half. So it's more timing than absolute demand.

Our next question comes from Luke Junk from Baird. Please go ahead with your question.

Jeff was just hoping the unpack Dynapower's exposure is a little bit better on Slide 5 in the presentation, you showed their clean energy exposure at about 55% of sales. Is it possible to parse that out a little bit more relative to some of the applications that you've this morning? And to what extent, if at all, are you including legacy exposures there such as mining for clean securely materials or similar things?

Yes, Luke. This is Vineet. I'll take your question. So Dynapower brings to us some really exciting opportunities to expand our end markets into the clean energy space. And this is running the gamut from renewable energy, so working closely with the solar field as well as green hydrogen extraction, which is supporting the electrolysis process as well as micro grids. So, it really runs the gamut, and we're really pleased with the end market exposure and the portfolio that Dynapower brings to Sensata.

Our next question comes from Joe Spak from RBC Capital Markets. Please go ahead with your question.

Maybe just some quick clarifications. The -- you mentioned that the inventory non-repeats now $110 million headwind, I think it was $90 million prior, but you also said $20 million in the first quarter. So is that the delta? Or is part of that increase the remainder of the year? And then on Slide 4, the $40 million EV win for a tire management system, I just want to clarify that. Are you including such business in your electrification classification? And if so, what is that $260 million that just relates to like an electric powertrain?

Sure, you want to get the inventory question and then I'll cover.

Yes. So, we're looking at the growth year-over-year. I went back and re-casted Q1 based on our analytical tool where we use a high market share pressure sensor to kind of gauge the market versus production. And what we found is that we were shipping more into last year into production that was being built. So, it was like Q2 and Q3, but in Q1 we didn't capture it, we didn't have the model to do that at the time. So -- it's a recap of some of the growth really was a headwind because of last year's inventory build. So, we've excluded that from the growth profile, and it's just a Q1 impact.

And that does represent the delta between the $90 million we had set a $100 million, $110 million citing now.

But it's all isolated to Q1.

Joe, when you -- in your question on the opportunity on the wind, as we've talked about it, a large portion of our solutions or our product categories apply in an electrified environment, right? So, there's -- I think there's a perception that all of our offering to combustion engine platforms goes away. That's not true. There are a lot of products that port over and in fact, have a stronger pull because the efficiency of the system is even more accentuated in an electrified environment. So, tire pressure or what we're talking about is a broader tire management. So, we've expanded the offering to include a higher value proposition given how important tire pressure and management of the tire is in an electric environment. So, to answer the first part of your question, absolutely, when we're selling our legacy offering to an electrified platform customer, that's an electrification win because it's going to last for the duration of electric vehicles. In terms of your other part of the question, the $260 million of revenue, we have a demonstrated 20% uplift today. When you convert from an ICE application to an electric vehicle application, we've talked about that. And so, embedded in that $260 million is electrified content we're providing for EV manufacturing for our customers, 20% demonstrated uplift. But given the wins that we're experiencing and the forecast going forward, we see a line of sight that doubling. So as the shift occurs from combustion engines to electrified there'll be significant outgrowth associated with that transition that we're selling in today. Some of it is embedded in those electric vehicles produced, but the forward look is dramatically higher in terms of overall content. Hopefully, that helps clarify things.

I think the one thing to add there would be that the $260 million is a company-wide figure. It's not just on the automotive side. So, we also industrial and heavy vehicle electrified revenue, including content that goes into charging stations, for example, which will go to our industrial business. Thanks, Joe, for the question. We have the next one.

Our next question comes from Chris Snyder from UBS. Please go ahead with your question.

So the guidance seems a very strong back half margin recovery despite continued or ongoing cost inflation, the commentary suggest that the majority of this is being driven by price. So, I guess my question is, is this expected price improvement already agreed to. And we just have to wait for it to flow through the numbers? Or are these price discussions still being negotiated? And then also, are there any margin drivers into the back half the size price that we should be aware of?

So I would comment on the three things. So yes, pricing does elevate in the second half of the year versus the first as we continue to push that commercial excellence activity, some of that's already baked in, some of it still has to be achieved and work with customers, but we feel confident in our ability to achieve that outcome. Second is, volumes do increase sequentially from the first half to the second half. So we are getting volume benefit and we are getting leverage on that volume. And the third would be continued productivity improvements as we always continue to improve our cost structure quarter-by-quarter, and we see some additional cost savings coming in the second half that we did not realize in the first half.

And our next question comes from Nik Todorov from Longbow Research. Please go ahead with your question.

Just another question around pricing. Is your pricing assumptions for this year changed compared to 90 days ago. And it sounds like, obviously, the outgrowth for this year is trending above the 400 to 600 basis points target. Can you talk how much of that do you expect to come from pricing for the full year?

I mean a significant portion of the outgrowth is going to come from pricing in the second half. Yes, the narrative has changed in the last 90 days. Material costs continue and other costs continue to rise. So, we see inflationary pressures, and we're reacting very quickly and proactively to work with customers to pass it all on. And as I said, we've been pretty successful in the first half. We expect to be more successful in the second half as we gain momentum here. But it's something we going to have to continue to do as long as the input costs are rising, we're going to need to respond this way. And like I said, we've been successful so far in doing that and believe we'll do better in the second half.

And just to clarify, the 790 basis points in the first quarter, net of pricing is still above the high end of the range. And we would expect that we'll continue that. But when we look at outgrowth, including pricing, it's going to be even higher given the need for us to implement those commercial actions.

And our next question comes from Amit Daryanani from Evercore. Please go ahead with your question.

I guess I just want to clarify this part. When you think about this back half margin expansion that you're embedding, are you sort of assuming that your input cost aren't going to get any worse in the back half versus first half. Is that how you're thinking? Because I think the big concern investors are having today is the confidence around the operating margins ramping from 19% to 22%. So, I'm just curious, given the answer you had before. Is your assumption input costs stay stable or get worse? I would love to understand that. And then, Paul, I didn't quite get this. Are you including Dynapower in the 2022 guide or not yet?

So, we're not including Dynapower in the guide.

It's our practice not to do that. We have a closure occurs on a way to close.

But we gave you what we think the EPS accretion would be if we close early in the second half. Yes. So on the pricing piece, I would say that -- and we've been pretty consistent. The material costs have been rising very quickly. And so in the first half, we are a bit behind in terms of offsetting that, but we have a tremendous amount of momentum and effort to overcome that. And so, I would say the pricing rises faster than the assumptions around material costs. So, the material costs start to level out and we catch up, and that generates positive income in the second half that we didn't have in the first half. And then volumes, as I said, it's amazing, conversion on incremental volumes, the profit conversion is very high. We expect volumes to grow in the second half above where they were in the first half.

And Amit, the only item I would add is, given that we've seen inflationary pressures for the last 18 months, when we do a forward look, we don't ignore the trend that's behind us. So, we do forecast that it's going to continue to some extent. Now where that ends up, I don't know the answer to that. There's going to be a lot that's going to have to happen to conclude, but we haven't assumed that bad stuff stops, and we're only getting the recovery. We're expecting that those inflationary pressures will continue for some period of time.

And our next question comes from Brian Johnson from Barclays. Please go ahead with your question.

Yes. I would like to ask you a bit about just contractually, and you don't have to obviously go into trade secrets, but how the pricing works vis-à-vis the automotive suppliers versus your other end markets? A lot of Tier 1s are stuck in contracts with annual productivity price-downs and really have to go and beg the OEMs for price recovery. Since you're more of a Tier 2, a very important one, however, in the auto supply chain. Are you subject to the same pricing dynamics? Or do you have more flexibility in pricing your products?

We are -- so let me start with we take pricing with our customers very seriously, right? So, I do not want to be cavalier regarding this because we do have long-term arrangements with our customers regarding what normally is productivity based upon volume expectations. Very frequently, we have material adder clauses. More frequently, we have inflationary clauses that we've baked into contracts. And so, we're trying to adapt to the new world that we're living in, but there are instances where we had to go to customers and explain to them that the cost to make their product is going up dramatically and in order for us to be viable sustainable supplier for them, we need to have the pricing discussion. And they're hard conversations to have, but we're having really good success as evidenced by the first quarter results and our expectation is that those results will improve into the latter part of the year, but there are conversations that we must have, and I know every company out there is having with their customers. Hopefully, that...

When you say customers -- just a follow-on. Is that to OEMs? Or is that generally Tier 1?

It could be either. As you know, we're largely directed by the OEM. But oftentimes, we have to go to a tier as well and discuss that. So sometimes it's a three-party conversation in terms of what we need to accomplish, but it can be both in terms of who we are ultimately contracted with.

And our next question comes from David Kelley from Jefferies. Please go ahead with your question.

Just in light of the strong industrial outgrowth in the quarter, can you talk about industrial order visibility today and how maybe we should think about the content opportunity versus that 1% end market decline you're expecting for the full year?

Yes. So historically, our industrial business has shorter lead times and therefore, less visibility into the order pipeline. But given the general market conditions, we're seeing very strong fill in industrial as well, well above where we historically have and we're factoring that into our guide. You see that in the form of the fill rate against the whole company, but it's safe to assume that across each of our businesses, we're seeing higher field than we would normally see. And so the other element of what you're mentioning is, we are seeing significant content growth, which we had historically, when I say historically three or four years ago, we were not seeing as much in industrial. Part of that is due to trends that we're seeing -- our clean energy solutions business lands in our Industrial segment. And we're seeing trends toward acceleration in that area. So think of the GIGAVAC acquisition and the contactors that go into industrial applications as well as the businesses that we're acquiring that land in that space. So, we're seeing more opportunity for outgrowth in that market than we historically would have seen. And you see that in the results given basically an assumption of a flat market on a year-over-year basis, we're down 1% on a year-over-year basis. The strategy is playing out, right? We're investing in more high-growth market segments -- and we're seeing it in near-term revenue, we're going to see it more in long-term revenue as well.

And our next question comes from Shreyas Patil from Wolfe Research. Please go ahead with your question.

Last quarter, you talked about kind of the nature of the cost inflation you're incurring this year. And it sounded like it's a little more structural related to whether its wage inflation and/or Tier 2 price increases. So I'm wondering the nature of the price recoveries that you're getting, are these going to be such that they carry forward for the next few years, if we are going to be in kind of a structurally higher price environment? Or are these sort of one-off recoveries and that you'll have to go back to the OEM customers periodically for recovery? And then, you talked about a step-up in productivity in the second half. And I just wanted to kind of understand what are some of the -- what are some of the factors that drive the productivity improvement? And typically, what do you see per year in terms of productivity for the business?

Yes. So let me hit the pricing question and maybe Paul can hit the question on productivity. So if you recall, when we were talking about this last year, in the first half of last year, we basically, as a company, absorbed a lot of the incremental costs that we are experiencing with our customers. In the second half, we started to go back to them and recover a lot of that cost and more of what I would describe as a surcharge rather than a pricing change. But during the fourth quarter of last year, we pivoted on that pretty hard to have discussions with customers about an ASP, an average selling price on the piece part change. And so, that gets to your point where it's a more embedded cost. We don't anticipate that some of these costs will go away. And so, the pricing will stay, but it's on a customer by customer, part-by-part discussion that we're having. But way more of our discussions are around it's a change in price as opposed to just an add or for a higher logistics costs that we would expect to go away over time. And obviously, we'll readdress that. In the future as we go forward, but it wouldn't be my expectation that a lot of those costs would magically go away at some future point in the quarter, and we need to make sure that we're preparing for that.

Yes. On the productivity side, get to the weeds here a bit, but it often comes from better throughput through the factory. So less -- better yields moving manufacturing to higher-performing output, better cost structure, it's continuously driving more efficiency in the plants, more automation of our manufacturing processes to mitigate the inflation that we're seeing on the labor side. So it's a lot of different levers that we pull consistently within our manufacturing as well as we get the leverage on the volume when we don't have to add cost at that to deliver that incremental volume. So there is a bit -- quite a bit of operating leverage that we gain as well as volumes increase. Those are the main things. Obviously, material is a challenge where it used to be a cost savings for us. And we're just taking a different approach by dealing with that material inflation now with higher customer pricing.

And also this is not an unusual phenomenon for our company. Usually, our first quarter is a lower margin quarter for us because typically, a lot of our pricing takes effect then and also our merit increase -- global merit increase happens in the first quarter, and then we have to digest that throughout the quarter or throughout the year, excuse me.

And our next question comes from Joe Giordano from Cowen. Please go ahead with your question.

I know we're not -- how do you think of inventory levels of components at your customers now? I know you're not calling for any build or liquidation, but like how elevated is it in like whether you want to think about it in dollar terms or like unit terms? Like where are they right now, do you think?

It's difficult for us to know that because we don't get insight. But what we do know is how many days of inventory, let's say, the dealerships, which remains to be pretty low. We do know that Europe is struggling a bit. So, I don't think anything has changed dramatically, and we saw what they built up. We're not assuming that's unwind or anything new to happen, so stable. And if we're still in a situation where we're still feeling the pressure on making sure we're supplying our customers on a real-time basis. So, there's still a lot of pressure on the things are starting to get a little bit better, but I think we said back in Q4, we felt that was the worst it probably still is the worse and things are slightly getting better. But obviously, it's going slow given what we're seeing in the first half. And now, you add in the Ukraine and COVID in China that just continues to create disruption. But again, we're looking for a better second half, which is in line with what the market is expecting. And we've seen improvement over the last six months, although just slow.

Our next question comes from Jim Suva from Citi. Please go ahead with your question.

Just to, again, bridge the math difference here, you just had a spectacular Q1, great results, you beat your expectations and everything. But then again, the full year, you're not increasing. And I think you said you're not including the recently announced acquisition. But then the reason why you're not increasing the full year for the peak, is it mostly on the auto side or the HVOR side? Or you mentioned you're more conservative than the industry consultants out there. But can you just help us again bridge why Q1 strength is absolutely not flowing through to the rest of the year?

Yes, I would say Q2 is probably coming in a little lighter than given some of the macro factors that we're all dealing with. But the -- in our second half looks a little different than when we started the year where automotive and HVOR, but we're seeing better outgrowth and we're seeing better pricing environment. So, it's -- the mix has changed a little bit, but the outcome remains largely the same.

I get it now.

And our next question comes from Michael Filatov from Berenberg. Please go ahead with your question.

Just a quick one. I mean, obviously, HVOR outgrowth has been quite remarkable over the last, call it, I don't know, two years or so. And I was just wondering if you could speak maybe the dynamics that are driving that? I know, there's been some regulatory tailwinds on TPMS and in other aspects, but yes, just the working dynamics that are driving that outperformance? And when should we expect that outgrowth to maybe moderate a bit?

So I think the one thing we keep bringing up is that we're still getting a very nice tailwind from the adoption of NS VI for trucking in China. And we're not at the end of that cycle. So that's still benefiting our outgrowth quite a bit here in Q1 and will continue in Q2, and we've talked about other levers, other launches of new content for new application starts to pick up, whether it's type pressure sensing, seeing really nice content growth and operator sensing controls, which is just hydraulics to electronics and offered equipment. Sorry or jump in any you run these.

Yes. So the only thing I would add is, as we look further ahead, we see the impact of electrification coming in, and we do see much higher content on electrified platforms than we do on traditional diesel platform. So, we expect the outgrowth to continue to be in the range that we've guided to.

And ladies and gentlemen, with that, we've reached the end of today's question-and-answer session. I'd like to turn the floor back over to Mr. Sayer for her closing remarks.

Thanks, Jamie. I'd like to thank everyone for joining us this morning. Since -- and we will be participating in a couple of investor conferences later in the quarter, were sponsored by Oppenheimer and then Stifel. We look forward to seeing you at one of those events or on our second quarter earnings call, which will be in late July. Thank you again for joining us this morning and for your interest in Sensata. Jamie, you can now end the call.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending the presentation. You may now disconnect your lines.