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Executives

Chad Utrup - Chief Financial Officer

Merv Dunn - President and CEO

Kevin Frailey - President and General Manager, Electrical Systems

Jerry Armstrong - President and General Manager, Cab Systems

Pat Miller - VP and General Manager, Industrial Markets and Parts Division

Analysts

Ann Duignan - J.P. Morgan

David Leiker - R.W. Baird

Robert Kosowsky - Sidoti

Commercial Vehicle Group Inc. (CVGI) Q4 2012 Results Earnings Call February 14, 2013 10:00 AM ET

Operator

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2012 Commercial Vehicle Group Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we’ll facilitate a question-and-answer session (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I’d now like to turn the call over to Mr. Chad Utrup, Chief Financial Officer. You may proceed.

Chad Utrup

Thank you, Frances, and thanks everybody for joining the call today. As usual, before we begin today’s call, I’ll read through some Safe Harbor language. Merv will then give a brief company update and I’ll take you through our results for the fourth quarter and full year of 2012 and then we’ll take time to answer your questions.

With that, I’d like to remind you that this conference call contains forward-looking statements. Actual results may differ from anticipated results because of certain risks and uncertainties.

These may include, but are not limited to expectations for future periods with respect to cost savings initiatives, tax positions and estimates, financial covenant compliance and liquidity, new product initiatives, the economic conditions in the markets in which CVG operates, fluctuations in production volumes of vehicles for which CVG is a supplier, risk associated with conducting business in foreign countries and currencies, and other risks detailed in our SEC filings.

What that, I’ll turn the call over to Merv.

Merv Dunn

Good morning, and thanks, Chad. Our fourth quarter markets were difficult and disappointing. As expected third quarter softening continued into the fourth quarter, but more deeply than we had originally anticipated. Although, Class 8 was down sequentially, it was also really no surprise as we expected the market to soften in Q4. OEM market shift drove negative mix shift for us during Q4.

Our other end markets, however, declined significantly more than anticipated. Our construction revenues for example declined 29% compared to Q4 of 2001 and 17% sequentially versus the third quarter of this year. This was the result of weakness in both North American and Asian markets for our products.

We believe OEMs continue to use up inventory instead of building new equipment in addition to the construction market decline during the quarter. We also saw orders drop in the military, aftermarket and service areas of our business. Overall, we saw a sequential revenue decline of 15% compared to the third quarter of this year.

In response to the decline in our markets during the quarter, we quickly adjusted our cost structures we have done many times in the past. Since our peak levels in 2012 we have adjusted our total hourly workforce by over 1,600 employees.

We also finalized the closure plans for our Statesville, North Carolina facility. Products made there will be absorbed into other CVG facilities. These decisions are never easy as we know the impact whole families beyond the affected workers. Nonetheless, they are necessary to ensure that we adjust to the needs of our market.

As Chad will go through in a few minutes during the quarter, we also incurred certain cost related to foreign currencies, acquisitions and other items all of which we believe to be a short-term nature and impact.

It is important to note that while we have made significant adjustments in reaction to the markets during the quarter, we still strongly believe in our five-year plan for growth and that these market fluctuations are only short-term for CVG.

Based on this, we have continued to invest in our exploration of acquisitions and other growth opportunities, which can impact us in the short-term but are critical to our long-term goals.

As we look at 2013, we believe North American Class 8 bills will be in the range of 250 the 260,000 units. We expect our construction markets to be flat to down 5% when compared to 2012. We feel the global construction markets will be very strong over the coming years but hit a major correction of overbuilt inventory, which is what we’re experiencing now.

Chad Utrup

Thanks Merv. As we look at this past year, as Merv said, it is a dynamic of two very different halves. The first half of 2012 saw an annualized Class 8 build rate of 310,000 units and our annualized revenues were round $960 million. While the second half of 2012 saw annualized Class 8 build rates drops to 245,000 units and annualized revenues for CVG of $756 million.

Through the second quarter of 2012, we achieved 13 consecutive quarters of adjusted operating income growth then in the third and fourth quarters our markets began to weaken. Being in all of the markets is not new to us and we have a variable cost structure to flex up and down as needed.

That said, we want to point out today the impact of the market paused during the most recent quarter and its impact on our bottom line relative to our strong push towards our five-year plan to grow our revenues to $1.6 billion through organic growth and acquisitions.

Achieving this target is not possible without staying the course with staffing appropriately around the globe and investing in the development of new products and processes to ensure our aggressive organic growth targets are achieved.

We continue to focus on the integration of our new facilities in Mexico, Beijing and Ukraine, each of which are very important steps for both new business wins already achieved, as well as cost improvement efforts for the long-term.

In addition to these efforts, we completed two acquisitions during this past quarter, one domestic and one international. Both of which require resources, time and expense regardless of what our markets do in the short-term.

We think it is very important to understand the full scope of our efforts which may impact our short-term result yet provide long-lasting benefits.

Overall, we’re disappointed with our results for the fourth quarter of 2012, but at the same time extremely excited about the opportunities that await us in 2013 and beyond. We firmly believe in our five-year plan and are committed to achieving our objectives.

Looking specifically at the fourth quarter of 2012, our revenues were $173.4 million, which is a decrease of $52.5 million or 23% from the fourth quarter of 2011. This decrease is primarily the result of the reduction in our OEM truck revenues, which declined approximately $30 million or 27% versus the fourth quarter last year.

We also saw a decline in our global construction market revenues, which decreased approximately $16 million or 29%, as well as a $6.3 million decline in our military and aftermarket revenues from the prior year quarter.

On a sequential basis compared to the third quarter of 2012, our revenues declined approximately $31.5 million or 15%. This decrease is primarily related to the decline in our OEM truck market which decreased approximately $21 million or 20% versus the third quarter.

In addition, our global construction market revenues declined approximately $8 million or 17%, while our military and aftermarket revenues declined approximately $3.8 million or 11% in the third quarter.

Overall, our revenues for this past quarter saw sharp decline in each of our key end markets, notably in our military, aftermarket and OE service end markets, which can have a higher impact in our profitability levels.

When it comes to our OEM truck markets, we saw negative mix shift impact us in the fourth quarter as our revenues declined further than the general market. While this mix and market shift occurs in any given period during the year, this past quarter was certainly more noticeable.

To give further clarity on this from a full year perspective, our domestic OEM truck revenues for 2012 increased approximately 12% versus 2011, whereas Class 8 production levels increased only 9%. This positive trend for the full year 2012 versus 2011 is related to both content improvements and new business wins, as well as changes product in product mix.

Unlike our OEM truck market, we saw positive increase for the full year 2012 versus 2011, our construction market revenues declined approximately 6% year-over-year and our military revenues declined nearly 20%, primarily related to the dramatic decline experienced in the second half of this past year and most notably in the fourth quarter. We believe this high-level overview of our end markets is important as we look at year-over-year impact as opposed to the fourth quarter in isolation.

That said, the impact of our markets on our fourth quarter was difficult. From November to December alone, as customers reduced orders and took out production days, we saw a decline in revenues of nearly 25%. We reacted with a reduction in our workforce and cost accordingly without making short-term decisions that would be harmful to our long-term objectives.

Compared to the third quarter of this year, our operating income decreased approximately $11.1 million on a $31.5 million decrease in revenues, which is a contribution margin of 35%.

As mentioned in the press release, we did incur certain unique expenses during the quarter, including foreign exchange impacts of approximately $1 million, $0.3 million additional costs related to the final stages of ramp-up of our new Ukrainian facility and approximately $0.5 million of cost related to two acquisitions announced during the quarter.

In addition, we also experienced an increase in certain health-related claims and other cost of approximately $0.5 million, as well as an incremental $0.5 million of depreciation and amortization expense related to changes in our capital investments, as well as incremental amortization from the Vijayjyot Seats acquisition in November. Excluding these items, which we believe are unique to the quarter on a sequential basis, our contribution margin on the decline in revenues was approximately 26%.

Depreciation and amortization was approximately $4.1 million and capital spending was approximately $4.8 million for the quarter.

Our effective tax rate for the quarter was 25%. As we move into 2013, we expect our tax provision rate to be in the 35% to 40% range for the full year. Subject to fluctuations that may occur within the periods of the year based on the timing of the income in certain regions where we operate.

From a fully diluted EPS standpoint, the quarter came in at a loss of $0.20 and the full year was a $1.76 positive, primarily driven by the unique tax benefit in the third quarter.

As of the end of this past quarter, we had a cash balance of approximately $68.4 million, this cash balance combined with our ABL revolver capacity means we have approximately $106 million of liquidity immediately available as we continue to look at strategic opportunities.

The primary driver for the change in cash balance from the end of the third quarter of 2012 is the use of approximately $24 million related to the two acquisitions announced during the quarter.

Looking to 2013, our estimates for North American Class 8 units as Merv mentioned is in the range of 250 to 260,000 units and our expectation for our global construction market is to be flat to down 5% year-over-year.

We saw a very strong first half construction market in 2012 followed by very weak second half. Our current expectation is that we may see the weakness in the construction market linger for another quarter and begin to pick up through the balance of 2013.

For as much as we saw a certain negative market impacts in the last half of 2012, we are excited about the coming year. We expect the two acquisitions from last quarter to contribute positively for the year.

In addition, we expect the new business with Skoda which was the basis for our Ukraine start up to ramp up throughout the year and as we finalized the moment of product to our Saltillo facility, we currently expect approximately $2 million of cost saving versus 2012.

We will also continue to focus on growth in all of our key markets through new business wins, as we target an additional 4% to 6% organic growth rate for 2013, and we will continue to focus on strategic acquisitions, both domestic and international.

With that, I’ll turn it over for final comments to Merv before we take questions.

Merv Dunn

Chad bailed me out a little bit. I was stuck in a car so he took over for me. But I wanted to finish out during the coming year we do expect business awards from Foton, JAC, Cummins and Skoda to begin ramping up. A few of these programs have been delayed and not in launch but in ramp-up.

So we also had our two most recent acquisitions to begin to providing revenue and profitability for the year. In November we acquired the seat assembly Vijay Seats, and Vijay has lease facilities in Baska, Pune and Dharwad regions of India. And Vijay supply seats to the India’s passenger, school and coach bus markets. Its top four customers are Tata Motors, Tata Marcopolo, Ashok Leyland and Volvo/Eicher.

In December we acquired the assets of Daltek, LLC, a U.S. company specialized in applications of custom -- customize industrial films, paints and other interior and exterior finishes. Daltek has two lease facilities in Dalton, Georgia. In addition to the heavy truck market Daltek serves ATV and UTV markets. Its top four customers are Honda, John Deere, Yamaha and Bemis. We expect Daltek to contribute around $13.2 million to CVG’s topline in 2013 and approximately $0.07 per share for the year.

During the quarter we also realigned our leadership team to better support our objectives in North and South America, and also to have on the ground effect in Europe. We hired Timo Haatanen as European Managing Director. He has substantially management experience in U.S. and Europe. He will be responsible for operations and market developments across Europe.

Greg Wells has been with the company since 2005 will serve as Asian Managing Director. He will be responsible of our China operations, including market development and growth in that region.

Gordon Boyd is CVG Veteran, will focus his international manufacturing experience on development of our Indian and Australian markets.

Overall, despite the short-term market conditions, we continue to invest in product developments and across accretive acquisition opportunities. We intend to stay focused on our long-term strategy to expand our global footprint, broaden our product portfolio, draw our customer base. We feel our cash position and balance sheet puts us in an excellent position to do that on a global basis.

At this point, I think we’re ready for questions. Frances?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Ann Duignan from (inaudible). You may proceed.

Ann Duignan - J.P. Morgan

Hi guys. This is Ann Duignan, J.P. Morgan. I’m not sure where she got that job title. I still am at J.P. Morgan. Any way Merv could you talk a little bit about your construction revenue decline? Can you talk to us about what you saw in North America versus what you saw in China? And what kind of feedback are you getting from your OEM customers? We know we neared the bottom, are we couple of quarter in? Are we kind of crossing our fingers in China, if you could just address the fundamentals in both regions that would be great?

Merv Dunn

North America Q3 to Q4 was down much more. But the one thing that we really saw, Ann, is what -- touched on a little bit was the overbuilt during the Q3 that really people were selling out of inventory and the other area was mining was hit big. And Kevin Frailey, President of the construction wiring business is in here. Kevin you want to speak to anything on this?

Kevin Frailey

Merv, I would agree with you that decline in Q4 was a real tough one, especially the month of December. I attributed that to that destocking situation with the number one construction equipment company. They had deliberate strategy to pull back on inventory. I’ll tell you my experiences that’s the double we know, that’s volatility, that’s what we deal with, that’s what keep competitors out. But we have reacted, we’ve taken about 1,000 people on the awful addition since our peak back in that April/May timeframe.

When this starts to happen, it makes me think about what the recovery might look like. I’d really struggle to correlate what’s going on with the customer and their equipment sales with what goes on with harness sales. I guess the rates of ups and downs are probably double, triple for us.

Merv Dunn

Yeah. Also on Kevin’s point is, we’re -- for example in the plant that builds a lot of the electrical wiring harnesses for his area, due to the country that we produced in, there is basically a five month of severance, so whenever you eliminate the hourly positions, you continue their payroll for five months. So even though we took the people out, we’re still hit with the cost of them.

Chad Utrup

I think, Ann, as you look at where we go from here, our general thought is as Merv said North America from a sequential basis Q3 to Q4 was hit harder for our total construction business than the rest of the world. And as we look out into the next couple of quarters, what we’re really seeing is or currently expecting is that the weakening we saw in the fourth quarter is probably going to continue through the first quarter. And then we believe it’s going to start picking up shortly beyond that point.

Ann Duignan - J.P. Morgan

And would you expect sequentially or quarter-over-quarter Q4 to Q1, are you anticipating a decline of that enormity like down 17, Q3 to Q4 or you expecting an additional?

Merv Dunn

We expect it to be flat.

Chad Utrup

Yeah. Q4 was down fairly significantly and we’re currently expecting Q4 to Q1 to be relatively flat from a construction standpoint.

Ann Duignan - J.P. Morgan

And could you address the same question then on the truck side. What are your OEM customers telling you on the truck side in terms of production?

Merv Dunn

Jerry Armstrong, President of truck business is in here.

Jerry Armstrong

Yeah. From Q4 to Q1, we expect the truck business to be up slightly.

Ann Duignan - J.P. Morgan

And that’s for the full quarter, is that on a daily build rate?

Jerry Armstrong

Yeah. The adjustments that our customers have been making at this point has been dropping days out or weeks out versus change in their build rate. It takes them a while to go through the process of changing build rates shifts, taking shifts out or -- realigning their capacity. So we do not anticipate them doing any of that in this quarter. It would just be we have sales, we are building -- we do not have sales we’re going to drop a day out here or there.

Merv Dunn

And based upon what we saw on the sales that orders that have come in like in January, it’s a very strong month.

Ann Duignan - J.P. Morgan

Right.

Merv Dunn

We see positive signs there.

Ann Duignan - J.P. Morgan

Yeah. I regard that world of concrete last week and no question, there seems to be some level of excitement in terms of the impact of the construction cycle on things like dump trucks and cement mixers, so hopefully that starts to support orders going forward in production. And just finally, the five-month severance and when did you start to incur that, when do we see the benefits of that cost rolling out?

Merv Dunn

We started incurring it probably in May, maybe, June and then you know we’ve been incurring it all long. And I think our last cut back was in December -- December. So but it’s obviously of the thousand that were cut back there. There was a lot less of those in December. So that amount that will affect Q1, will be quite a bit less than what was effective in say November or December.

Ann Duignan - J.P. Morgan

Okay. And then finally Merv, can you give us any kind of an outlook for your military business and aftermarket?

Merv Dunn

Well, aftermarket, we see that is remaining -- what hit us in aftermarket probably more than anything were some of the cabs that we produced that are shipped as aftermarket units into the export area, I believe, the way that is. And so we think aftermarket will be doing well.

The big area that we see is in the military. It’s just based upon any of the speeches that we’ve heard as of late. We’re pulling out of one country and then we’re going to increase spending in military. So Pat is head of our aftermarket area. Pat Miller, you want to speak to that?

Pat Miller

Yeah. Sure. On the aftermarket and OES side, we follow some of these traditional aftermarket indices cut across our industry. And those trends were showing some reductions in the overall business segments through Q3 and even into Q4 and that affected us.

I think one of the things that we were pretty excited about is we’ve been trying to grow that segment and we saw that our reductions were less than what those industry indices were reflecting. So we think our share efforts and our growth efforts are going to pay benefits to us as the aftermarket starts to come back strong this year.

What we saw with most of the reductions were in the OES side and that channel tended to be focused on inventory reductions similar to what we’ve talked about with the construction. And the OES side is for -- I'm sure, you know, but it’s Original Equipment Service, so it is going like to the dealers. It’s bought through the OEM.

Ann Duignan - J.P. Morgan

Yeah, I probably would’ve figured that out. Thank you. I will leave it and get back in line in case there is somebody else in queue that wants to ask some questions. Thanks, guys.

Merv Dunn

Thank you, Ann.

Chad Utrup

Thanks, Ann.

Operator

Your next question is from the line of David Leiker from R.W. Baird. You may proceed.

David Leiker - R.W. Baird

Good morning, everyone.

Merv Dunn

Good morning, David.

Chad Utrup

Good morning, David.

David Leiker - R.W. Baird

I got on the call little bit late, but it sounds like you talked about some business that -- new business ramps that were pushed out a bit here in the quarter. I don’t know if you care to put a number on how big that was at all?

Chad Utrup

Well, I think the biggest thing for us, David, is the mix shift that we saw, what we’ve talked before some of the higher content products we have like structural components for example. So when we have our key customers that have market share shifts between the OEMs on the truck side, where it affects our higher dollar content, products like structure, that’s going to impact us. And that could have been anywhere from something like say $4 million to $5 million between Q3 and Q4 as a mix change.

And I do not know if you were on the call for what I went through earlier. But if you -- that’s looking at the fourth quarter in isolation, if you step back and look at the full year, our domestic truck business revenues went up about 12% year-over-year, 11% to 12% versus the Class 8 that went up about 9%.

So if you step back and look at the full picture, the new business wins and contents, and makeshift was positive for us year-over-year. But if you look at the fourth quarter in isolation, it’s certainly not the case.

Merv Dunn

That’s one thing we have always kind of talked about, David. We’re using average content kind of as a misnomer for us because if it is a truck or we have cab, the interior, the seats, the mirrors and the wipers, you know, it’s a high content vehicle. If we only have the seats in it, it drops the content significantly.

So anytime we have a market dip that takes away the cab portion of the business, the structures then that’s our highest revenue item and that really cuts into our market, our revenue dollars, significantly.

David Leiker - R.W. Baird

Yeah. I understand that. On this new business number, it’s kind of a nebulous number, as you model things out. But we’ve been looking for that number in 2013 that would be $50 million to $60 million of what you launched, given some of the things you are talking about that number would seem to be too high today?

Merv Dunn

Delays. I think it’s mostly in the delays that we have had with it rather than it being too higher number. I think that the Foton, for example, in Asia like in the U.S., if you remember, we had trouble getting the diesel to match up with the compliance of the engines already in place. And they have separated a little bit of that in Asia. So…

Chad Utrup

Yeah, David, I think when you talk about $50 million to $60 million, I think some of the -- just take the business, the new business awards that we have announced like the Foton that Merv talked about, the Cummins piece, the JAC piece, some of those don’t all start production in ‘12 or ‘13.

But Foton is a good example where we’ve seen delays that’s going to impact us I think $50 million to $60 million probably included $10 million or $15 million or maybe even $20 million number for Foton. That’s likely going to be maybe even half of that. So I think there is some impact relative to what you are saying with delays and things like that.

David Leiker - R.W. Baird

Okay. And then on the other side, is there an opportunity just follow on this with Cummins and them picking up incremental business with Navistar and that new business award you had there, is that -- does that move the needle that big enough to move the needle for you at all?

Chad Utrup

Yeah. I think for us being in with Cummins, I think that could have a favorable impact maybe a couple of million dollars for us.

David Leiker - R.W. Baird

Okay. And then on the large side, I know you’ve talked about some of the actions you have done on the cost side. Where do you think here in North America you’ve taken your break-even point to context of Class 8 truck demand?

Merv Dunn

That one has been -- is may be a little difficult to answer at this point because we’re in a process of -- as we’ve talked about closing one of our facilities in North Carolina, opening up to new plants or campus plant down in Mexico. There will be other products moved into there. That plant has won quite a bit of new business. It’s spread out over -- we originally went in there with only one customer. It now has -- Jerry, three?

Jerry Armstrong

Three.

Merv Dunn

Three customers, Daimler, Navistar and PACCAR. So that and we’ve got some construction business that we are quoting on out of there. So that one as you continue to make that shift, you are now -- you are currently running with a couple of sets of overhead that will go out of the overhead numbers as soon as those plans get either downsized or eliminated.

Chad Utrup

That’s what -- I don’t know David, if you were on the call. What I had mentioned to is what Merv is talking about with the consolidation or closure of and the movement of sale product into that Mexico. We expect to see about a $2 million benefit in ‘13 versus ‘12 because of just the timing of adding those two locations opened during 2012.

David Leiker - R.W. Baird

So when do you think you would have those costs right sized then for the demand, and get everything moved around where you wanted to be?

Merv Dunn

Mid year.

Chad Utrup

I think yeah, roughly midyear ‘13, David.

Merv Dunn

And we also opened a new plant in the Ukraine that Kevin is responsible for -- well, Timo is responsible for now. So that one is and the Skoda ramp up is just now starting. So those are all coming into effect too, David.

David Leiker - R.W. Baird

Okay. And then just one last follow-up and before I heard you talked about on some of these program launches been delayed, is that something that you catch up? And is that Q2, Q3, Q4 timeframe that you got there, or is some of it just lost volume because of where the markets are?

Chad Utrup

No. I think that’s definitely a catch-up. And I’d say it will be to -- some of it will be in two but most of it will probably be in three.

David Leiker - R.W. Baird

Okay. Great. Thank you much.

Chad Utrup

Thanks, David.

Operator

(Operator Instructions) Our next question is from the line of Robert Kosowsky from Sidoti. You may proceed.

Robert Kosowsky - Sidoti

Hello. Good morning, guys. How are you doing?

Chad Utrup

Good morning, Rob. How are you doing today?

Robert Kosowsky - Sidoti

Doing pretty good. I was wondering and Chad, you kind of alluded to a little bit of this with some of the product mix changes. But I was wondering if you could kind of segment or bridge the operating margin or operating income that we saw in the third quarter versus fourth quarter and bucket it into product mix versus under-absorption of fixed costs versus just incremental spending on growth, just kind of give us a order of magnitude and specifications would obviously be better.

Chad Utrup

Yeah. I think the biggest thing, Rob, to start out with is some of the one -- not the one time but rather the unique items when we are bridging Q3 to Q4. So let’s just start there because there is three or four of them. So we had FX expense, mostly all related to the decline in the yen, which I think everybody knows dropped about 10%. Unfortunately, it hasn’t recovered yet but dropped about 10%.

So that’s most of the decline, so we had about a $1 million expense increase from Q3 to Q4 related to that. We are obviously working on plans to curb that long-term. And then we had about a $0.5 million of incremental expense just related to the acquisitions. We did two and we closed two acquisitions during the quarter. There was obviously expense related to that.

Then we had, if you look at depreciation and amortization, if you are talking about operating income there is roughly another half a million dollars of increase, when you look at it sequentially. Some of it is related to the increased amortization from Vijayjyot Seats and the balance is just related to the change in the capital structure from PP&E.

And then we had roughly $0.5 million and just unique increase like healthcare claims and other type of costs that we consider unique or one-time that we don’t expect to recur at least at this point in time. So when you back all those things out, plus the roughly $300,000 of incremental Ukraine start up costs, which is in its final phase, it’s roughly about $2.8 million. You back that out of the operating income sequentially and you get to a 26% range, which is, I think I even said it on the last call.

When you get into market declines of 10% to 20% from one quarter to the next, we’re going to be at the higher end of the 20% to 25% range. So if you kind of back all those things out, obviously we don’t like to give a laundry list of this business, when they are all negative, but I think they are all explainable and some of them are related to FX and some are related to acquisitions which are positive things. So does that help kind of bridge you from Q3 to Q4 and get you to. We still firmly believe in our 20% to 25% contribution margin, I think that illustrates how we did not achieve that level from Q3 to Q4.

Robert Kosowsky - Sidoti

So that’s helpful. And is…

Merv Dunn

David, one of the things too -- Rob, I’m sorry. One of the things too is acquisitions when we do them, like we did in India and other countries where we have been looking at them very seriously, it’s a lot more expensive to do them there than it is to do them in down in Dalton, Georgia because you are having to do translations. You are having to try to travel. The travel itself is extremely expensive. So it takes more costs into it.

Chad Utrup

And that’s where we were trying to focus our growth, is in the emerging markets.

Robert Kosowsky - Sidoti

Okay. And so basically that’s certainly helpful. And so, Chad, if you back out those items, you get about 26% detrimental and embedded in that is a negative product mix because cap structures was worse than in the fourth quarter than it was in the third quarter, is that correct?

Chad Utrup

It is, but rather than that, Rob, I would point to the change in the aftermarket and military drop because as we have always talked about those markets for us are generally 10% to 15% higher than normal margin conditions. So instead of a 20% to 25% contribution, you have to look at the severity of the drop that we saw in military and aftermarket and that really, frankly, you can attribute almost a 40% contribution to that piece.

And so when all of your markets including military, aftermarket truck and construction drop at the same level, we are in that 20 to 25. But when you see more of a dramatic decline in higher margin, end markets like military and aftermarket, you are going to see an even higher detrimental.

Robert Kosowsky - Sidoti

Okay. So that means that I guess the productivity in material utilization was actually very strong given the ultimate mix.

Chad Utrup

Yeah. Absolutely. As Merv said from our peak to December, we have taken out 1600 people out of our hourly workforce. And so our operations have done just a great job of flexing down the cost and the workforce. But what we’ve kind of said is the travel and all the one-time things we talked about in the mix shift, that’s really what gets us to the higher end of -- let’s say the 26%.

Not only from a result of, we are taking out costs in the operations and the hourly workforce, but we’re really being conscious and not cutting out the things that we’ve tried to put in place and build around the globe that are so critical to achieving that $1.6 billion target in five years. So we’re being real conscious to take out areas that makes sense for short-term but not long-term.

Robert Kosowsky - Sidoti

Okay. That’s helpful. And then back at the Analyst Day, you had about $70 million -- $75 million target for revenue in 2012 in China. I’m wondering what that came in and kind of how you think that nice stair step chart you have, how that’s changed given all the changes in market growth assumptions.

Chad Utrup

Yeah. So, China was 75 with what happened in the second half of this year is really closer to 65, 60. I don’t have it in front of me exactly, but it’s between 60 and 65. So we saw a decline in the second half of the year, similar to what we’ve been talking about today.

Merv Dunn

The two big ones for the construction market for the inventory situation and the second one was the launch of the Foton business.

Robert Kosowsky - Sidoti

Okay. That’s helpful. And then finally as far as the Daltek deal, how do you cross-sell this because it seems like a pretty unique high margin business that’s there? And I’m wondering, if you can bring it into the core truck or construction business and…

Chad Utrup

Well, it already is in the core. It already is in the core. It goes on the dashes. It goes on the seat panels. There is a lot of it that our customer originally came to us. I got a call from one of our larger customers and they said we’re having -- really struggling in this area of the business.

With our current supply base and we know you buy some of it to use on our dashes and on our door panels. Have you thought about would you acquire this company? And we looked at the one they suggested to us and we said no, we won’t acquire that, but we’ll look for that area of business because it does allow us to be more vertically integrated. And then it reports under, Jerry, you want to follow-up with it?

Jerry Armstrong

Yeah. The existing -- they were the largest. It was the largest independent supplier of this hydrographics or film process. And it is a decorative thought process and their existing business portfolio is primarily in the recreational. They have less than $0.5 million in truck and the entire truck market for decorative is probably in $12 million to $15 million range. The stuff that we mold and send out to be decorated, we sent out to somebody else because we didn’t have the process.

A lot of our competitors were vertically integrated on this process. So it sort of makes sense with our trim philosophy. And our trim strategy really is a one-stop-shop. I call it the Wal-Mart Supercenter. And we sell you tires, we sell you ice cream, but we prefer to sell you both. And so this further augments our ability to be that one-stop-shop on stuff like IPs, like the instrument panels where you put the wood grain finish on the hard plastics that type thing.

So we think that cross-selling is really easy opportunity into the truck market. And we are also in the recreational market with some of our molding and it brings some additional customers to us there, which we hope to cross-sell into hard plastic, maybe some hard plastic molding at some point if it makes sense for us.

But the thing that they -- that makes them unique is they’re big parts. Fully robotic lines that handle big parts, so their base is not something that you can buy from China or Mexico that ships very well and you put that with the truck piece over here that we have and we’re very excited about the opportunity.

Merv Dunn

A week after we closed on that, I was back down for a visit and I got the management on the phone and we called one of our three top customers. And they responded so favorably right after I got back from China, a week ago, we had probably a six inch-high stack of business to quote on. So, we do feel very, very good about the ability to cross-sell this business.

Robert Kosowsky - Sidoti

Cool. Any idea on the revenue potential that’s there, maybe five years down the road, just some kind of stretch goal?

Merv Dunn

We hope to probably double it.

Robert Kosowsky - Sidoti

Okay. Cool. Thank you very much.

Merv Dunn

Thanks Rob.

Operator

At this time, we have no other questions in the queue. I’d like to turn the call back over to Mr. Merv Dunn for your closing remarks.

Merv Dunn

Well, I appreciate all of you taking the time to hear what we had to say today. Earnings when the truck market and the construction market and the military and all this go down for the substantial amount that they have, so quickly, in a matter of two-month period.

It really put a lot of stress on the operations people here to cut the costs and I think they’ve responded very, very positively, and the whole management team here did a great job in responding to the radical swing in the market and very proud of what they have done. And thank you again for calling in.

Chad Utrup

Thank you everybody.

Operator

Ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a good day.

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