Sensata Technologies Holding plc
Q2 2013 Earnings Call Transcript

Published: 23 Jul 2013

[Operator:]

Good morning, and welcome to the Sensata Technologies Holding N.V. Second 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'd like to turn the call over to Jacob Sayer, Vice President of Investor Relations and Corporate Communications. Mr. Sayer, you may begin.

[Jacob A. Sayer:]

Thank you, John, and good morning, everyone. Earlier today, Sensata issued a press release describing our financial performance for the second 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-Q and 10-K filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections 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 in the Investor Relations section of our website under Financial Reports. Comments made during today's call will primarily refer to our non-GAAP financial results. On the call with me today are Martha Sullivan, our President and Chief Executive Officer; and Jeff Cote, our Chief Operating Officer and Interim CFO. Martha will review some highlights and will discuss trends in the end markets that 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 second quarter. He will also outline our financial guidance for the third quarter and the full year 2013. [Operator Instructions] I'll now turn the call over to Martha Sullivan, our President and Chief Executive Officer. Martha?

[Martha N. Sullivan:]

Thank you, Jacob. And thank you, all, for joining us for our second quarter conference call. I'm pleased with our results during the quarter. Despite continued macro weakness in certain of our end markets, we delivered net revenue and adjusted net income at the high end of guidance for the quarter. The financial highlights include

[Jeffrey J. Cote:]

Thank you, Martha. Net revenue for the second quarter of 2013 of $506.4 million increased 7.7%, compared to the first quarter of 2013. On a year-over-year basis, net revenue in the second quarter was up slightly from the second quarter of 2012. Adjusted EBITDA for the second quarter was $139.4 million, or 27.5% of net revenue. Adjusted net income was $95.7 million, or 18.9% of net revenue. The adjusted net income index was slightly higher than the first quarter of 2013 due primarily to higher volumes and planned synergies from acquisitions. The adjusted net income index was slightly lower than the second quarter of 2012 due, primarily to higher cash taxes in the quarter. In Q2, cash taxes were 7.2% of adjusted EBIT, higher than our guided range. As we've mentioned previously, we expect cash taxes for the year to be in the high end of the 4% to 6% of adjusted EBIT guidance range. During the second quarter, $3 million of restructuring and special charges were added back to determine adjusted net income. The restructuring charges related primarily to the movement of manufacturing lines from Korea. While we expect these charges to be offset by insurance proceeds in future periods, the timing of the charges and proceeds from insurance will be lumpy quarter-to-quarter. For the full year 2013, we continue to expect restructuring add-backs to be close to 0. Also during the quarter, we added back a $23 million loss related to commodity hedges that are mark-to-market from a GAAP perspective, but have not yet matured. In addition, we added back $8.6 million of charges related to the issuance of the new senior bonds and the pay-down of a portion of our outstanding term loan. These charges appear in the other net line in our P&L. Cash at June 30, 2013 was $234 million. For the first 6 months of the year, we generated $146 million in free cash flow. Cash provided by operating activities was $180 million. Cash used in investing activities totaled $33 million. And cash used in financing activities about, including the debt repayment and share repurchases, totaled $326 million. Capital expenditures for the first half were $34 million. We continue to expect to spend between $70 million and $90 million on CapEx 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 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. Given our belief in the growth prospects of the business, both in terms of revenue and earnings, we will continue to be opportunistic in buying back stock. During the second quarter, we repurchased approximately 2.2 million shares at an average share price of $32.21, using approximately $70 million in cash. As of June 30, our gross debt stood at $1.6 billion, and our net debt was $1.4 billion. Our gross debt leverage stood at 3.2x, and our net leverage ratio was 2.7x. Our target net leverage ratio continues to be in the 2 to 3x adjusted EBITDA range. Now I'd like to comment on the performance of our 2 business units. Sensors' net revenue was $361 million for the second quarter, flat from a year-ago quarter, and up 8.6% sequentially from the first quarter of 2013. Sensors' net revenue performance, compared to the prior year, reflects weakness in developed Asia light vehicle production and larger-than-normal product obsolescence in North America, offset by strength in the light vehicle production in North America and China, coupled with strong content growth in HVOR and China light vehicles. Sensors' profit from operation was $109 million or 30.1% of Sensors' net revenue. Sensors' profit from operations index was higher than Q2 2012 and the first quarter of 2013, due primarily to lower material costs and planned synergies from acquisitions. Controls' net revenue was $145 million for the second quarter, up slightly from the year-ago quarter and up 5.3% sequentially from the first quarter of 2013. Controls' revenue was up slightly year-on-year, but still somewhat constrained by the lack of capacity as a result of the fire in our South Korean manufacturing facility last year. The improvement, sequentially, is driven by broad-based demand, including strength in the industrial and aerospace sectors. Controls' profit from operations was $46 million or 31.5% of Controls net revenue. Controls profit from operations index is down from the year-ago quarter due to higher operating expenses, mainly in research, development and engineering, offset somewhat by lower material costs. While a number of risks remain for 2013 that may impact our performance, we remain confident in our ability to perform this year and are tightening the range for full year financial guidance as follows

[Operator:]

[Operator Instructions] And our first question is from the line of Wamsi Mohan with Bank of America.

[Wamsi Mohan:]

It's good to see Sensors' margins back up at what, 30% now? Jeff, maybe you can bridge the 200 basis points of margin improvement quarter-on-quarter in Sensors. How much was it from the benefit of higher revenues mix? And I think you also mentioned lower material costs in synergies.

[Jeffrey J. Cote:]

Yes. So -- but the biggest driver there is the planned synergies, as we had talked about, the acquisitions that took place back in 2011, really were not expected -- at least the MSP acquisition, was not expected to really see benefit in the P&L until the high-cost inventory that was produced sort of burned through. And so that was the largest portion of it. We have a very concentrated and an aggressive program around material-cost reduction as well, so that would also be a factor. And then the volume would be the next item that would be in the list. As you know, we have largely a variable-cost model, so although there are some lift in terms of overall SG&A leverage as a result of that, that would be the 3rd on that -- on the list that drove those margins up during the quarter.

[Wamsi Mohan:]

Great, Jeff. And Martha, in Controls, are you hearing anything about the reinstatement of the appliance subsidy program, perhaps in the fourth quarter, and is that built into your guidance? Or is it too early to comment on that coming in on the fourth quarter?

[Martha N. Sullivan:]

Yes, we've been careful about commentary around incentives and building in and not building it in. Some of that is lessons learned, if we go back to 2012. So we have been hearing about it. When we look at the overall impact, we don't think it's a big swing up or down in terms of what we've guided for the balance of the year. We're just spending a lot of time on inherent demand and on inherent production, and making sure we understand what do overall inventory levels look like, Wamsi.

[Wamsi Mohan:]

Okay, Martha. And last one for me. Given where we are with production and inventory, do you think content goes back to 7% to 10% range next year? Do you still feel pretty comfortable about that?

[Martha N. Sullivan:]

We continue to monitor now what the actual take rates are on things like the obsolescence portion of production that's affecting us this year. So that's going to be a piece of it. We look at the overall design wins and the planned launches and we feel good about where we sit relative to those. So we generally don't opine on where we're going to land in the coming year till we give guidance, but those are the things that we're watching, and we remain fairly confident.

[Operator:]

And your next question is from the line of Jim Suva with Citi.

[Nick Jones:]

This is Nick Jones on behalf of Jim Suva. Could you talk about what drove top line growth this quarter, and if that is sustainable going forward? And then, can you also talk about the difference between kind of gas-powered vehicles, hybrid and electric, and how that would affect your products going into the vehicles?

[Martha N. Sullivan:]

Sure. So if you look at what drove us sequentially on overall revenue, we saw some improvement in the production basis from the first quarter to the second quarter. Certainly, in many of the global vehicle markets. We also give some benefit from content that comes in lumpy. It doesn't come in on a linear way, or smooth throughout the year, so that's another area that has some benefit for us. Relative to the impact of electrification, we do well with electrification. And in fact, one discovery point in dealing with the team lately is where we sit with our content on the Chevy Volt. So average almost twice the content on that vehicle in North America than our average content in North America. So the exception of that comes when you have a plug-in, fully electric with no range extender or no power plant whatsoever on board. And that's a trend that's not a good trend for Sensata. It's also a trend that's not very evident or pronounced when you look out the -- outward. So not a lot of projection for this very small segment of electrification to get any bigger. It would be one that would be a headwind for us if that were to occur.

[Operator:]

And your next question is from the line of Mark Delaney with Goldman Sachs.

[Mark Delaney:]

I was hoping, first, if you could elaborate a little bit more on the full year revenue outlook. And I understand some of the hesitation on European auto and in the Controls business. I'm wondering if that's based on your own analysis of inventory levels and production or if you're actually hearing anything from your customers in terms of the actual orders? If it's just potential hesitancy from customers or they've actually started to reduce orders so far?

[Martha N. Sullivan:]

Yes, it's actually both our own analysis, and then it is conversations with customers. So when we look at our analysis and we look at where registrations have been, and they've been down year-over-year -- albeit that decline is decelerating somewhat, so I think that's sort of positive in terms of the market bottoming out -- and then we look at where actual production rates are. And that is an analysis where we look at the demand for our products, which is a good proxy for where production is. And we also look at what the third party is saying and what our customers are saying. In terms of the conversation with our customers, we're not seeing yet in any order rate, something that would have caused us to slightly lower the midpoint of our revenue guidance. What we are hearing, though, is that they remain very cautious for the balance of the year. And that there's not an expectation for an upswing as we get into the late stages of the year. When we put all that together, Mark, and we look at the fact that we've had 2 years running now where late in the year we've seen production corrections, inventory corrections, in that part of the world. So that being the case, we're staying very prudent and heads-up on what we see happening, combination sales and production.

[Mark Delaney:]

That makes a lot of sense. And then, Jeff, for my follow-up

[Jeffrey J. Cote:]

Yes. So if you look at the guidance that we've provided for the balance of the year, you can build -- you can basically extrapolate out that we would expect the margins to increase by about 50 basis points each quarter. So we forecasted the midpoint of guidance in Q3 to be about 19.5, and on. In order to get to the guidance range, another 50 basis points would need to come through in the fourth quarter, or around that range. So it's a gradual uptick, but as we have said in the past, we would expect at the end of the year that the business will be at a run rate at or very close to what our guided ANI index range on the bottom end is, and we feel good about trending in that direction.

[Operator:]

And your next question is from the line of Christopher Glynn with Oppenheimer.

[Christopher Glynn:]

Just wondering if you could quantify some specifics around the Korea plant impact? How's that resolving, what some of the numbers were in the quarter related to that dynamic?

[Jeffrey J. Cote:]

Yes, so in the second quarter, we would estimate that the revenue impact was about $4 million to $5 million in the second quarter. And so the -- some of the lift in -- going into the third quarter and the fourth quarter will be recovery associated with that as we get capacity back in place. And then the restructuring charges of around $3 million were almost exclusively related to the moves associated with Korea and exclusively related to Korea. So with the cost associated with that is winding down at this point. We do have some insurance recovery ahead of us that will offset those expenses that we've recorded in the P&L, but feel as though we're at towards the end of that event.

[Christopher Glynn:]

Okay. And was that all at Controls, Jeff, the revenue impact?

[Jeffrey J. Cote:]

Yes.

[Christopher Glynn:]

Okay. And then on the material cost tailwinds, how much of that is just your programs versus deflationary macro? Just wondering what you keep on a go-forward basis.

[Jeffrey J. Cote:]

Yes, so the impact of commodities will help us in the future. But as you know, we hedge commodities out a year to create certainty around our guidance. And we don't hedge 100%, so we do get a little bit of tailwind associated with the significant drop in commodities that we have seen. But as I think you know, the material initiatives, the cost reduction initiatives that we embark on every year really intended to maintain or increase margins only slightly but really do one thing, which is offset the impact associated with the price down in the business. So that's why we're able to maintain the margins because we do have aggressive programs around, not only material, but efficiency on the manufacturing line, as well as other costs lines of the P&L.

[Martha N. Sullivan:]

And Chris, keep in mind that the overall commodity exposure we have is 10% to 12% of our overall spend. So not a major swinger.

[Operator:]

And your next question is from the line of Steve Tusa with JP Morgan.

[Charles Stephen Tusa:]

So I don't if you answered this question already, and if you did, then just move on to the next one. But anything below the line in the fourth quarter, the third quarter that moves around, whether it's tax or corporate or anything like that?

[Jeffrey J. Cote:]

I think -- well taxes was at a high point in the second quarter; 7.2% of adjusted EBIT in the second quarter. So we should see that come down going into third and fourth in order to get into that 6% -- 5.5%, 6% range for the full year, that would be one thing. The other would be in terms of corporate cost. The second quarter is the bump up for merit increases for largely corporate costs, so that moderates for the balance of the year. Those are the 2 big things that I think would be sort of seasonally different for second quarter versus the balance of the year.

[Charles Stephen Tusa:]

Yes, because I mean, the fourth quarter is flat despite revenues higher sequentially, and I would think that there would be some restructuring savings kicking in. So are margins going to be down sequentially in the fourth quarter? I guess that's what the guidance would imply. I'm just trying to figure out those moving parts, the above-the-line stuff.

[Martha N. Sullivan:]

If you're looking at the year-over-year, Steve, if you think back to where we were in the fourth quarter of '12, that was a quarter where we sort of more clamped down on all of our overall spend, had no variable comps in that fourth quarter. We expect -- and the team here has their own set variable comp, we expect that to continue in the fourth quarter. Those will be some of the swings on that particular comparison.

[Charles Stephen Tusa:]

Got you. And then just for the China stuff on HVAC and appliances, I mean, it's tough to call anything normal over there. But I'm just trying to understand, is there any kind of seasonality there in China and HVAC? Is -- how do you kind of look at the normalized trends there as you look back at the second quarter?

[Martha N. Sullivan:]

Sure. There is some seasonality because on -- in HVAC, in particular, a lot of what we're shipping ends up being exported. And so you have some seasonality, obviously, in your mature market, but also some seasonality in China as well. We would have viewed second quarter as having been a strong quarter, first half having been a strong quarter globally for us in HVAC. We saw a little bit of a slowdown first and second quarter -- second quarter in HVAC in China, but still overall growth.

[Charles Stephen Tusa:]

Okay, great. And then one last question just on next year. I mean, you sounded -- previously you sounded a little more confident on the content stuff for '14. I mean, is there a bit of a change in tone on the visibility around what's going on in Europe? It -- I mean, it doesn't sound like Europe is -- has changed that much, maybe a little bit weaker. But anything in the end markets that kind of make you a little more squishy on that content for '14?

[Martha N. Sullivan:]

Yes, look, I think not major squishy, so don't mean to imply that. But I would say the one thing is we're sitting on the ground in Europe saying, "Where is the recovery? When is the recovery?" Now independent of that, our content growth and our design ends remain on track. Recall that we saw some correlation to that late in 2012, and so we're just remaining very vigilant and close to the customers to understand if any of that repeats. At this point, we don't see any evidence of that at all, Steve.

[Operator:]

And your next question is from the line of Steven Fox with Cross Research.

[Steven Bryant Fox:]

Two questions for me, please. Just following up a little bit more on the comments on potential inventory corrections. The explanation makes a lot of sense to me. I was just curious about the volatility and when you could see it? Because you mentioned inventory corrections at the end of the year in Europe. Sometimes, you get the extended plant shutdowns in August. I guess, at the same time, you're talking about better seasonality for Q3. So does that mean you feel like the visibility around how Europe plays out between now and end of September is pretty clear, and it's definitely the fourth quarter? Any more color on that would be helpful. And then I have a follow-up.

[Martha N. Sullivan:]

Yes, history would say that if that happens, it happens late in the year. And when we look at where our backlog sits and we look at overall production rates, where they're expected to land in the third quarter, it's more of a late year concern.

[Steven Bryant Fox:]

Okay. And then in terms of the heavy truck market, you mentioned it has a bright spot. And I was just curious, when you looked at that -- the growth rates you're talking about or that optimism for the rest of the year, how much are you factoring in pre-buys potentially ahead of regulatory changes for next year? And if not, what would be the timing of that is in your experience?

[Martha N. Sullivan:]

Yes, that is something that we've looked at. We don't think that that's a factor this year. So when we sort of dial out the content wins that we've had and the production movement -- and by the way, we see very strong double-digit growth in that segment as a result, don't think that's tied to overbuying on the regulation.

[Steven Bryant Fox:]

Okay. So, not to put words in your mouth, but based on the production you're seeing between now and the end of the year, your customers aren't anticipating pre-buys? Or I'm just trying to -- because that's happened in the past, I'm just trying understand what that [indiscernible] this year.

[Martha N. Sullivan:]

You bet. You bet. That has happened in the past. The production grades are not exciting. So the point is, if you look at that overall market, there's little of that growth coming from production rates.

[Operator:]

And your next question is from the line of Rob Wertheimer with Vertical Research.

[Robert Wertheimer:]

I'm not trying to pin you down too much on disclosure you don't want to give on content, but it seems as though the first half is running light of the goal -- and, again, we can't see everything, so maybe that's not correct -- but it seems like it's running light of the goal. Do you expect acceleration in content in the back half? And maybe if, Martha, you could comment just on the mix that's been impacting you in Europe, maybe that's not like content that's just mix, if that continues to be a drag -- on drag?

[Martha N. Sullivan:]

Yes, I mean, I think a couple of things we can say. If you look at second quarter growth in Europe in the Sensors business was 5%. If you look at overall production rates, second quarter to second quarter, that was flat. So there's really only one way for us to deliver that, Rob. And if you try to look at the fact that we've called out content growth for the year to be 5% to 6%, we feel like we're performing pretty much in line with that overall call.

[Robert Wertheimer:]

Okay. And then can you -- I don't know if you're willing to talk about the mix. I think that trucks -- on highway truck as in HVOR, has the mix shifted? Is that 1/2 truck? And can you just give us a sense of how big that is now?

[Martha N. Sullivan:]

We include both off-road and on-road in HVOR, but the predominance of businesses is definitely engine and on-road. And that it continues to be about 9% now, 9% of our overall revenue.

[Robert Wertheimer:]

Great. Okay. And then, Martha, just a quick clarification. Your strong 2-digit growth in HVOR and on highway you mentioned, that was right now what you're seeing not what you expect to see next year as more emissions regulations roll on, is that right? So you're seeing that content already and you've got more next year?

[Martha N. Sullivan:]

That's correct.

[Operator:]

And your next question is from the line of Amit Daryanani with RBC Capital Markets.

[Amit Daryanani:]

A couple of questions. One, maybe just talk about -- you've talked about concerns on the slowdown in Europe in the back half. I think IHS was looking at down 2.6% to 3% production in Europe. And just -- can you maybe just quantify what number are you guys looking for or what you're baking in at the midpoint of your guidance?

[Martha N. Sullivan:]

Yes, we came into the year calling that down about 3%. And when we look at -- if when an inventory correction were to come, we might see another point of reduction on the overall year. And so part of that, Amit, is just, if you looked at what the first half registrations look like, way down -- way, way more than 3%. At some point, production and sales have to line up. Or conversely, sales has to really tick up for the balance of the year. And we think the good news is that it feels as though it's stabilizing. So the deceleration is profound versus the strong month-over-month, year-over-year declines that we've seen. But having said that, we just don't think it's likely that the market is going to grow its way from a sales standpoint into the production rates. Not a huge inventory correction, but enough of one that would -- or production alignment, enough of that, that has us somewhat modifying our overall guide on the revenue.

[Amit Daryanani:]

Fair enough. That's helpful. And then speaking of the new emissions mandates, the E6 mandates, that are supposed to roll out late this year through 2014

[Martha N. Sullivan:]

Yes, it's just -- it is so OEM by OEM, Amit. So it really is different depending on how they've decided to address the problem. So I don't have a number for you.

[Amit Daryanani:]

All right. And then just finally, if I could just ask you, is the expectation that we will finish the buyback, the entire $250 million, by year end? And if so, maybe you can talk about why the expectation that share counts will be flat through the end of the year?

[Jeffrey J. Cote:]

So because it's uncertain in terms of the amount of buyback activities that we'll undergo, we thought it was conservative to hold it at the 179 million, which is where we are today. I think as we had talked about, we'll continue to be very opportunistic. But we do believe that the best use of the cash is around M&A, so we're constantly balancing cash on hand and deploying it on the buyback program versus keeping it on the balance sheet for opportunistic M&A as well. So more to come on that. But I think, as we've talked about, those are the 2 uses for the cash and that's going to be the plan for the foreseeable future here.

[Amit Daryanani:]

Are you, Jeff, borrowing in M&A? Would you expect to finish the buyback or maintain the pace of the first half?

[Jeffrey J. Cote:]

I think we could technically do both of those, but it'll depend on the pace of both of them. I don't think we want to increase leverage dramatically. But short term, we have availability on the revolver to affect both of those transactions or both of those deployments of cash throughout the year.

[Operator:]

And your next question is from the line of Shawn Harrison with Longbow Research.

[Shawn M. Harrison:]

Just maybe one last question for the European auto question, a bit. I don't think anybody has asked this. But is the export market in any way to explain kind of maybe what you're saying versus -- registrations versus production? Or is there anything within kind of what's being exported that could explain away some of the back half risks that you're articulating?

[Martha N. Sullivan:]

Yes -- no -- well, let me put it this way. If the export market, if their net exports were to tick up, that would be helpful. If you look at where net exports have been, they've been down from the fourth quarter and flat through first and second quarter. So we're not seeing any evidence that net exports are going to move up.

[Shawn M. Harrison:]

Okay. And then just a follow-up

[Martha N. Sullivan:]

I think, indirectly, we mentioned this, that the PMI index is one that we think is a good kind of short-term leading indicator of what can affect us. And certainly, that crunch I'm sure had an impact on PMI. We've seen PMI in China tick down a bit. That does have an impact on a little bit of the caution that you hear.

[Operator:]

And your next question is from the line of Ambrish Srivastava.

[Ambrish Srivastava:]

I had a question on acquisition. Maybe you could just kind of walk us through, what are some of the 1 or 2 top things that are preventing you? Is it not finding the right opportunity? Is it valuation? Or is it trying to deviate from what you guys have made in the past? That was my first question, and I have a follow-up as well.

[Martha N. Sullivan:]

Yes, I would just say, it really is a function of the individual projects. And those projects range from proprietary deals, in some cases, we're involved in auctions as well, and it's the pace of those processes, more than anything. We've talked, I think, in the earlier calls about valuations being misaligned. It feels as though that alignment has improved. And if we just look at the sheer pace of projects, the sheer scale of projects that we have versus 1 year ago or even 6 months ago, that's accelerated significantly.

[Ambrish Srivastava:]

Okay. And my follow-up, Martha, just maybe going back to your earlier comments when you said that the pace of decline has decelerated and you gave a first half EU production number. Could you just remind us what the second half 2012 number was, for us to gauge that?

[Martha N. Sullivan:]

Yes, I think -- are you asking from a production perspective then?

[Ambrish Srivastava:]

Yes, I'm just trying to triangulate what you've said in your prepared remarks. You've said -- I think you've said the first half is flat year-over-year. I'm going back to my notes with what you said earlier.

[Martha N. Sullivan:]

All right. If you looked at where production was through 2012, it ran in the 20 million units, dropped to the mid-19s and low-19s at the end of the quarter. For the first half now we're running mid-18s and some uptick in the second quarter, some seasonality down in the third and fourth quarter. But -- so significantly below where production ran 1 year ago.

[Ambrish Srivastava:]

Okay. And then last question is what is the normal obsolescence rate that we should be a thinking? Because you brought that up as 1 of the factors that you're watching when you think about next year.

[Martha N. Sullivan:]

Sure. Normally that runs below 2%. We're running at twice that rate for some of the reasons that we've discussed in the past. But normally, that's about at 1.5%, 2% rate. And so when we give guidance on content, it's net that obsolescence.

[Operator:]

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

[Jacob A. Sayer:]

Thank you, Don. I'd like to thank you all for joining our Q2 financial results call today. Later in the quarter, Sensata will be participating in Citigroup's Technology Investor Conference in New York on September 3, and Morgan Stanley's Industrial Investor Conference in Laguna Beach on September 16. 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.

[Operator:]

That concludes the call for today. You may now disconnect.