Tower International Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.13.14 | About: Tower International, (TOWR)

Tower International (NYSE:TOWR)

Q4 2013 Earnings Call

February 13, 2014 11:00 am ET

Executives

Derek Fiebig - Executive Director of Investor and External Relations

Mark Malcolm - Chief Executive Officer, President and Director

James C. Gouin - Chief Financial Officer and Executive Vice President

Analysts

Itay Michaeli - Citigroup Inc, Research Division

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

David H. Lim - Wells Fargo Securities, LLC, Research Division

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Christopher Van Horn - FBR Capital Markets & Co., Research Division

Gregory M. Macosko - Lord, Abbett & Co. LLC

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Operator

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone into the Tower International Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Derek Fiebig, you may begin your conference.

Derek Fiebig

Thanks, Brandy. And good morning, everyone. I'd like to welcome you to the Tower International Fourth Quarter 2013 Earnings Call. Materials for today's presentation were posted on our website this morning. Throughout today's presentation, we will refer to the non-GAAP financial measures of adjusted earnings per share, adjusted EBITDA, free cash flow and adjusted free cash flow. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP are included in the appendix of the presentation.

As a reminder, today's presentation contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements relating to revenue, adjusted earnings per share, adjusted EBITDA, adjusted free cash flow, free cash flow, trends in our operations and expected future contracts. Forward-looking statements are made as of today's presentation and are based upon management's current expectations and beliefs concerning future developments and their potential effects on us. Such forward-looking statements are not guarantees of future performance. We do not assume any obligation to update or revise the forward-looking statements. Additional information and risk factors are available in today's materials and our regular filings with the SEC.

Presenting on today's call are Mark Malcolm, our President and CEO; and Jim Gouin, Executive Vice President and CFO. Also joining us in the room is Jeff Kersten, Senior Vice President and Corporate Controller. Following our formal remarks, we'll open up the phone lines for questions and answers. Now I'll turn the call over to Mark.

Mark Malcolm

Thanks, Derek, and good morning. We have a lot of good things to cover today so I'll be brief in my opening remarks regarding key takeaways on Slide 3. Fourth quarter financial results were solid. Compared with the prior year, higher revenue was converted into higher profit at a strong rate. Revenue was actually right in line with our guidance, with strong operating performance turned that into better-than-expected earnings and cash flow, making it the 14th quarter out of 14 since our IPO that Tower has met or beat the earnings consensus. An important nonfinancial milestone in the fourth quarter was the sale by Cerberus of its remaining ownership stake in Tower. I may be biased but I believe the factual record supports that Tower became a stronger and better company during Cerberus' ownership. And now that stock over-hang has been eliminated, and trading liquidity is significantly improved.

For 2014, our guidance includes higher revenue and an increase in adjusted EPS of 18% to 27% compared with 2013. We're also today announcing 2 meaningful new sources of profitable growth for 2015. We'll put those in context for how they will affect 2014 results, but also show the anticipated pay off in our outlook for 2015. And perhaps, the single most important takeaway today is shown in the bolded comment at the bottom of this slide. Tower is on track to achieve its business model objective of adjusted free cash flow equal to 3% of revenue in 2015.

Here's Jim to review the fourth quarter financials.

James C. Gouin

Thanks, Mark, and good morning, everyone. Slide 4 shows summary financial information for the fourth quarter. Revenue of $517 million was $2 million higher than our guidance, and up 2% from the fourth quarter of 2012. Adjusted EBITDA of $49.6 million also surpassed our guidance by about $2 million and was up 11% from a year ago. Adjusted EBITDA margin for the quarter was 9.6%, up 80 basis points from last year, and adjusted EPS was $0.45, up $0.40.

Slide 5 explains the year-over-year change in adjusted EBITDA during the quarter. Volume and mix was net unfavorable versus a year ago as Brazil and China experienced lower volume, which was partially offset by volume increases in North America and Europe. Foreign exchange translation was favorable, reflecting primarily the stronger euro. Net cost performance is favorable by $4 million as efficiencies more than offset economics and customer price reductions.

Slide 6 recaps the financials for the full year. 2013 revenue was $2.1 billion, up 1% in 2012. Adjusted EBITDA increased by $14 million to $212.3 million, a 7% increase. Full year adjusted EBITDA margin was 10.1%, up 60 basis points, and adjusted earnings per share of $2.28 per share was up over 100% compared with 2012.

Slide 7 shows our cash flow for the fourth quarter and full year. We will now be reporting a new cash flow measure that we think will provide better transparency. Adjusted free cash flow will exclude customer tooling. As we've discussed in the past, customer tooling for each program nets to 0, but timing differences between cash disbursement and cash reimbursement can seriously distort cash flow in a specific quarter or year. For the full year 2013, adjusted free cash flow was $35 million, which was better than our guidance in October of $25 million to $30 million. Customer tooling was positive $21 million for the year, resulting in total free cash flow of $56 million.

Slide 8 shows our GAAP pension net liability. As a reminder, our defined benefit plan is frozen. During the year, the net liability declined by $46 million to $55 million at year-end 2013. Income and contributions into the plan decreased the liability by $17 million, and return on pension assets of 7.8% was slightly better than our assumed rate of 7.4%. The discount rate, which is based on the Citigroup Above Median Yield Curve, increased from 3.65% to 4.5%, reducing the liability by $25 million. Census updates and other items lower the liability by $3 million.

Year-end net debt leverage and liquidity are shown on Slide 9. As of December 31, we had cash of $135 million and $504 million of debt, resulting in net debt of $369 million. This is the lowest net debt position Tower has achieved to date. Leverage was 2.4x on a gross basis and 1.7x on a net basis, an improvement of 2/10 compared with year-end 2012. Interest coverage based on adjusted EBITDA to interest expense for the last 12 months was 5.4x, significantly better than last year.

Slide 10 presents our liquidity and debt maturities. Liquidity at year-end 2013 shown on the left panel was a record $315 million, up more than $100 million compared with year-end 2012. An additional $33 million of liquidity was added at the end of January, which I will discuss on the next slide. As we have mentioned in the past, we target $175 million of liquidity at year end. Having liquidity substantially above this target gives us good flexibility. The chart on the right shows that there are no pressing debt maturities.

On Slide 11, in mid-January, we launched the repricing of our $417 million term loan. Because of favorable demand and a favorable rate, we thought it prudent to marginally upsize the offering to further enhance our liquidity and take advantage of good market conditions. The new term loan of $450 million is an increase of $33 million. The new all-in rate is 4%, an improvement of 75 basis points. The net effect is that our annual interest expense will decline by $1.8 million.

And now I'll turn the call back over to Mark.

Mark Malcolm

With our strong liquidity position and free cash flow, it's an appropriate time to discuss our present priorities for capital deployment, which are summarized on Slide 12. The left panel shows that profitable growth is our top priority, with the consistent caveat that we will be patient, disciplined and opportunistic. Acquiring accretive major new business either through conquest takeaway business from competitors or from OEM outsourcing will generally be our lowest risk growth opportunity because it is an extension of our existing business. Accretive acquisitions can also work when the price is right and the business integration and synergies are manageable. In the absence of accretive growth opportunities, our best present use of free cash flow is to continue to reduce leverage. Those benefits are summarized on the right panel. Strong free cash flow yield as a percent of market cap should directly benefit our shareholders. And further strengthening our financial position and storing some dry powder for accretive growth opportunities can further reward shareholders.

For those who've been following us over time, you'll recognize these as basically the same 2 priorities we've been emphasizing since our IPO in late 2010, with the notable difference that reducing leverage was effectively Priority 1A when our interest rate was 11.25%. The accumulative way to our progress now positions Tower to most seriously pursue accretive growth opportunities. This is our path to increase earnings and Tower's earnings multiple. With the potential in our present opinion, to increase shareholder values significantly more than we could by returning capital through buybacks or dividends. And Slide 13 provides live examples of profitable growth opportunities that Tower is positioned to capitalize on. The 2 new growth sources reviewed on this slide will dampen 2014 headline financials because of the investment at launch, while boosting results in 2015 and beyond in a meaningful way. The new conquest award refers to new business for Tower where we are not the incumbent supplier, so this is a share gain for Tower at the expense of one of our competitors. To protect confidentiality, we are not disclosing the customer or competitor, but I will say that the effective vehicle is one of the best sellers in the U.S. The added revenue is positive financially, but I think it's even more significant for what-if signals about Tower's present capability and potential future prospects. The pending Mexico LOI will provide Tower's first production source in that market, which is where the OEMs are disproportionately adding their North American assembly capacity. In full disclosure, we do not yet have a contract for Mexico, but we believe it's sufficiently advanced and material to our business that's more appropriate to put it in context now than to wait. We're optimistic that this initial toehold into Mexico can lead to further profitable growth opportunities in the coming years. The yellow highlights in the far right column show the anticipated combined effects of these 2 projects on our 2014 results, and the green primarily highlights the anticipated 2015 effects. With the start of production on both projects presently scheduled for the fourth quarter of this year, we expect to add revenue of about $80 million in 2015 on the way to ongoing annual revenue of about $100 million. The projected average EBITDA margin is about 15%. In our view, this is the approximate financial equivalent of acquiring a $100 million business with a good margin at a multiple of about 2x EBITDA by considering CapEx and launch as the acquisition cost. That certainly passes our test for being accretive.

This new information will be included in Jim's review of our 2014 outlook, then I will review our preliminary outlook 2015. Jim?

James C. Gouin

Thanks, Mark. Slide 14 shows our planning assumptions for 2014. For revenue, the assumptions are largely consistent with the initial indication provided on our third quarter call, except for a $20 million reduction for the dollar translation effect of the weakening Brazilian reais, now pegged at 2.4 reais of a dollar. For net cost performance, we expect launch-related costs to be about $10 million higher than 2013. About half of that is related to the conquest business and Mexican growth opportunities that Mark just discussed, and the other $5 million is from customer program timing. All other costs are expected to net to about 0 with deficiencies offsetting customer price reductions and labor and overhead inflation.

Slide 15 provides our preliminary outlook for 2014. Revenue is expected to be about $2.15 billion, up about $50 million compared with 2013. Adjusted EBITDA is expected to be in the range of $210 million to $215 million. Compared with 2013, higher revenue is offset by the higher launch cost previously discussed. Adjusted EPS is expected to be in the range of $2.70 to $2.90 per share, a significant increase from the $2.28 per share we just recorded.

Our outlook for adjusted free cash flow in 2014 is shown on Slide 16. As Mark mentioned, we expect about $20 million of CapEx related to the conquest and Mexico opportunities. Other CapEx is expected to be in our normal range of $85 million to $90 million. Cash interest is projected at about $30 million, pension contributions will be $17 million and cash taxes are expected to be about $10 million. Working capital and other, excluding customer tooling, is expected to be negative $35 million. Net adjusted free cash flow, highlighted in green, is expected to be about $15 million. However, excluding the impact of the opportunistic growth opportunities, adjusted free cash flow would be about $50 million. While customer tooling was favorable in 2013 by $21 million, we largely expect that to reverse in 2014.

The outlook for the first quarter of 2014 is shown on Slide 17. Revenue is expected to be in the range of $540 million to $550 million with adjusted EBITDA between $50 million and $52 million. Adjusted EPS is expected to be between $0.60 and $0.67.

And now I'll turn the call back to Mark to finish up.

Mark Malcolm

Slide 18 provides our present directional outlook for 2015. Excluding potential M&A, or additional opportunistic growth opportunities beyond the projects disclosed today, revenue in 2015 is forecasted to grow to about $2.3 billion. With this revenue growth and more normalized launch expense, adjusted EBITDA should increase to about $235 million. Adjusted free cash flow in 2015 should approximate $70 million, achieving our business model target amount and the timing that we've been signaling for the past couple of years. Just as an aside, I wanted to check the indicated free cash flow yield on Tower's stock so I divided $70 million by our present market cap. My calculator read W-O-W. With these projections, net debt leverage would further decline to approximately 1.3x by year-end 2015, which puts us on a path to achieve our long-term target of 1x in 2016. Adjusted EPS on an apples-to-apples basis with 2013 and 2014 would increase to about $3.75. As mentioned in the footnote, our profitability has grown and continued to the point that we presently expect to resume accruing U.S. corporate tax in 2015. With a directional annual effect of about $0.75 per share, that would put our 2015 EPS at about $3.

Final thoughts are provided on Slide 19. We're pleased that Tower delivered on several promised breakthroughs in financial results in 2013. We achieved the double-digit adjusted EBITDA margin despite some challenging market and customer conditions that led to below-trend results outside North America. Adjusted earnings per share more than doubled. We successfully made the transition from forecasting positive free cash flow to delivering positive free cash flow. And with significant improvements in leverage, interest coverage and liquidity, Tower's balance sheet is sound and our financial strength is considerably better than ever. But for me, the gratification regarding the progress achieved in 2013 is to work by the excitement for what the future can bring for Tower. The path is laid for 2014 to be a follow-through year, heading straight toward a higher growth trajectory in 2015 that we believe can extend into the future.

That concludes our presentation. Thanks for your patience. Let's please turn the Q's and A's.

Derek Fiebig

Brandy, if you could please remind callers how to get into the queue for question-and-answer, please.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Itay Michaeli with Citi.

Itay Michaeli - Citigroup Inc, Research Division

Mark, just first question on the new business awards. Maybe take us into kind of how they came about, why did Tower win these awards? What kind of -- what was it about your business that got you at the awards? And then, how are you seeing that the current quoting activity for the future today versus maybe where it was 6 months ago or a year ago?

Mark Malcolm

Yes. It is a great question. And I apologize in advance for being somewhat delicate around it. Again, it's -- our view, and it's been our policy, we don't get too deeply into the customers' or competitors' business. But I'll tell you, it is -- what I've described in the past is what describes the winners and losers in this sector and, of course, you have to have competitive costs. Of course, you have to have good ongoing quality. But a big differentiator often in our sector is, "Can you launch tough programs on time and with the quality, keep up with the launch ramp of the customers?" We have some of the toughest parts, tools, et cetera, on occasion to launch. And I think in this particular case, as much as anything, is our track record in delivering programs is what differentiated us and won that business. But obviously, I don't have full insight as to what the customer way but that's what we think. We think this is a quality and launch experience-driven decision. In terms of quoting activity, it's interesting. There is a lot going on that hasn't happened for a long period of time on big things. I hesitate to get too deeply into them. That's why, to me, if it feels some excitement in terms of what can be there for the future. We're being asked to take a look at some big things that haven't been around in the past. Some might even, if I can use this term I've thrown around before, dare I say, OEM outsourcing. It's all there. Now whether or not these studies turn into actual decisions by an OEM, and whether we win because, obviously, these will be a highly-desired programs when they come, we'll see and they'll play out over a period of time. But the amount of quality, I would say, of the type of activity that we're being asked to quote on is what excites me the most right now.

Itay Michaeli - Citigroup Inc, Research Division

Absolutely, that's very helpful. And then, a question on the 2015 outlook, it does look like even with the new business awards, the revenue growth rate seems to be accelerating a little bit. And the incremental margin seems to be improving a little bit as well. Anything else going on there in terms of cost savings or mix that might be helping you in 2015? There seems like a pretty, solid outlook overall, even when you kind of remove the new dues on the new business wins?

Mark Malcolm

Yes. No, I don't think we're counting on anything special in there, to be honest with you. We can't -- don't have perfect insight in, we're expecting kind of a normal launch, et cetera. We haven't assumed any type of breakthrough for Europe, which was the main thing that will move our numbers if the time comes, but it's going to have to accelerate the growth a lot more than both IHS is projecting now than we're projecting. I think it's kind of the follow-through of what you've been seeing us duly pay, to be honest with you, and there's nothing special in those numbers. Frankly, they're numbers, I would hope by the time we get there, we can beat. On the revenue side, I'll tell you there is some other new business, it's probably about $50 million worth of net new business in that projection. Beyond these 2 big programs, there's also some negative mix that we've had in the past, although to a lesser amount as we get further along. So that kind of reflects -- and we have a lot of carryover activity in that year, which is why, to some extent, it's $50 million versus that kind of $100 million that we typically can win when there's less carryover activity to use up our capital and resources. But I think that's what Tower looks like right now, and growth can turn into really good things for us.

Itay Michaeli - Citigroup Inc, Research Division

Absolutely. And I just -- lastly, Mark, I want to get your insights around what you're seeing generally around the world? And what regions, perhaps, today were you more or less than it did 6 months ago? Maybe just talk about South America a little bit. You've been hearing North America with the weather and whether you're seeing any risk there near term to the production schedule, then maybe some thoughts on Europe as well.

Mark Malcolm

Yes, I think -- and you asked for my opinion these days, and so that's what you'll get and it's just kind of sense of my judgment and what we hear from our customers. I personally think that there's upside beyond what IHS is forecasting right now. It actually is still a little bit in North America and in Europe. If I say in Europe, compared with a year ago, customers feel a little bit better. The term coming back from our president is the -- of Europe is the customers aren't euphoric, but they're more optimistic than pessimistic. I think that's a fair way to characterize Europe right now. Not euphoric, but more optimistic than pessimistic. Now I'll tell you in North America, will it affect the production schedules in the first quarter? I think it could. I mean, there is some risk in the first quarter production schedules that even are baked into the numbers that we gave right now. But North America is at a stage of the cycle and in my experience, that if you believe the U.S. economy is going to grow around 3% this year, and that's where I am. I think we'll do the numbers, the people have up for this year are a little bit better. If you don't believe the U.S. economy is going to grow at about 3%, I think that will be the determining factor. It's not going to be that same kind of, dare I say the term, pent-up demand, the draw bust as some of their earlier years. And it will require economic growth, but I personally feel the 3% should certainly be achievable in the U.S. Brazil, I'm not as optimistic on. If there's a downside, we're somewhere, it just doesn't feel real solid to me in Brazil right now. And in China, I don't think I'm the best one to even give any kind of experience because, again, we don't have -- we don't cover the whole market. We're more customer-specific over China.

Operator

Your next question comes from the line of Ryan Brinkman with JPMorgan.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Just want to make sure I understand the $35 million of opportunistic-growth investments that was highlighted in the press release. I see there on Slide 13, you've called out $5 million of primarily launch costs and $20 million of CapEx associated. Just I understand with the conquest award and the Mexico win, but that -- I imagine the $25 million is part of the $35 million of total opportunistic-growth investments. So if you can kind of brief us on what is the other $10 million?

Mark Malcolm

Yes. When you see our cash flow forecast, you'll see it down at working capital and others. So there's some working capital build to get the pipeline right.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Okay. And that's associated with these programs?

Mark Malcolm

Correct.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Okay. Okay. And then on Slide 17, you walk us through the 1Q '14 outlook. I understand you also made $52 million on 1Q '13. So can you kind of just help on the bridge there? Can you help at all on the cadence of the launch cost, the working capital, the CapEx or whatever throughout 2014 associated with the conquest? Just more specifically, how much of that is in 1Q?

Mark Malcolm

Yes. I won't get on the specific number, I'll tell you 1Q does have an impact by launch. And also, you'll recall from prior discussions, launch affects productivity actions as well. You're not only getting expense associated with getting that program ready, but you can't simultaneously be working on the efficiencies. So what you're really saying is on a year-over-year basis, and it's different every year, it's not just the launch of this particular programs but everything that's going on, including your ramp-up for carryover-type programs that affect our factories. That's the kind of detail we can see, not only what's happening this year but how that happened a year ago, which was pretty clean for us, to be honest with you. And so the cadence in terms of our productivity in addition to the launch, it is driving those comparisons year-over-year. And frankly, as we take a look at both revenue and otherwise, the first half of the year for us is softer than the back half of the year, generally speaking. But that's tied in exactly into the program of the program timing and our ability to go in and get the productivity efficiency, and I think we have a pretty reliable track record of delivering.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Okay, great. And then, just latest thoughts on normalized contribution margins. Because if I kind of exclude the $10 million of launch cost from '14 guidance and say that EBITDA would be $220 million to $225 million, maybe without that at the midpoint, and then I look at the guidance for $70 million higher revenue ex-currency, that's about a 14% incremental, is there something strange about that? Or is that kind of the incremental thing about going forward?

Mark Malcolm

Your math went quicker than I did, I don't -- I..

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Is the 14% contribution margin reasonable, or just -- or is that being impacted by...

Mark Malcolm

Yes, where we are right now, it moves around. Generally speaking, let's say we're in the -- I would set 12-ish type of percent of fully accounted type of margin. Sometimes depending on where they get, we can go -- a full variable margin can be 25% and yet some go the other way. Depending on what you have to do for cost to get into support it if you get a step function increase in cost to deliver the volume or to fit. If your math came out at 14%, that's remarkably, straight on, what of my kind of average expectation would be.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Okay, great. And then on Slide 13, too, you also make very persuasive case here, that this was the correct thing to do an acquisition multiple, as you put it, of about 2x. So just curious. And then, you had these comments, also, when you're concluding the comments about capital allocation and how it makes more sense to pursue things like this given that also your cost of that is lower and so forth. Basically, what's the chance or I mean, would you do this again in 2015? Would you choose to reinvest your operating cash flow into CapEx or your earnings into launch costs, such that your 2016 free cash flow would be substantially higher, or are we now putting the stake. We are saying 2015 is going to be the free cash inflection?

Mark Malcolm

Yes. I think I'll give you a real definitive answer of it depends. I mean, it will depend on what is the nature of the opportunity and what will it would do to the numbers. Deploying some of the free cash flow for really unique good opportunities, I think, will be the right thing to do. But that's a very generic answer and I think you'll have to see both what kind of opportunities we make it and then we will have to stand tall on whatever decision we make, it would put it out. I'll give you -- I'll tell you right now that what I did not say is the definitive, no, we would not invest anymore and we'll let it come through. What we will do always is show the same kind of length in terms of what would that free cash flow advance, so you can follow it. And whenever the time comes that being patient and opportunistic means when it's not there, the free cash flow will come -- will cover everything through. But taking that free cash flow to invest it anywhere along these lines, I think, will be the best thing for our shareholders' personal view. And if I can give kind of a longer-term perspective going back to since the days of the IPO in 2010, there have been a series of legitimate kind of Yavacs [ph], when people talk about why not pay more for Tower share of stock. Think of the things that will rattle through. Very high leverage, very high interest rates. Don't know if you can get the double-digit EBITDA margins. Kevin seen you actually deliver positive free cash flow, and if you add on top of that, and you've been a private equity owner and no float and no liquidity. It would have trapped out a lot of those things that have been negatives, and the single one that has been mentioned over a period of time, and frankly, for reasons of balancing everything else, we haven't aggressively pursued as bent growth. And I think we've tried to balance things as we go and you should be feeling we think there's a chance to get -- and I'm not talking about not promising double-digit growth. What we've always said, we can grow at an industry for a little bit better, and I think that's what we have a chance here to demonstrate over those next couple of years. And I hope that can, therefore, lead to the type of re-rating that our shareholders deserve.

Operator

Your next question comes from the line of Rich Kwas with Wells Fargo Securities.

David H. Lim - Wells Fargo Securities, LLC, Research Division

This is David in for Rich. So I just wanted to talk a little bit of more about this possible OEM outsourcing that you've talked about. Do these OEMs currently insource or do they even have any degree of outsourcing for their stampings?

Mark Malcolm

Yes, when I refer to something, when I say outsourcing, when I -- I'll translate my own verbiage here. That means it's something that they typically would make inside themselves, they have changed their sourcing pattern.

David H. Lim - Wells Fargo Securities, LLC, Research Division

Got you, got you. And then, when we talk about the tooling reversing in 2014, is that mainly the function of the new business that you've announced that's going to start in Q4 of '14?

Mark Malcolm

No, it's really kind of the flow of programs that have existed, including through last year. We brought in a lot in the fourth quarter and, frankly, I would've expected that to show up in the first quarter. Our people did a good job of getting the tools signed off and collected from the customers, which is what you have to do. And I expected that to come probably into this year, and that's why you should expect early in the year, a lot of that negative will show up to balance itself off here, right now. So it's a continuous flow process. It affects not just new business but carryover programs, and it is really less driven by us than the nature and timing of our customer's programs.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Got you, I mean, so there is an obviously an inherent choppiness to that figure. Then on to Mexico, I just wanted to make sure that I heard you correctly. It's not a signed contract that you guys are very close.

Mark Malcolm

That's the way I would describe it, yes.

David H. Lim - Wells Fargo Securities, LLC, Research Division

Got it. And then, on the debt increasing $33 million, I know I might be being a little nit picky here but you increased your leverage -- I mean, relative to what you've had before, you went from $417 million to $450 million. Do you have additional plans for that $33 million or is that sort of, as you said, just to maintain a little bit more liquidity?

Mark Malcolm

That depends on whether you're past-looking or forward-looking. You could certainly make the case that we just spent the $33 million to add $100 million worth of 15% market business.

David H. Lim - Wells Fargo Securities, LLC, Research Division

Great. No, that's true. That's true. I'm on the sort of the side where if you don't need to add more, you don't have to. But I just wanted to get your perspective on it.

Mark Malcolm

I don't think our business is much different than life in general. If you got cash in your pocket, you have a better chance to be able to buy things and get things done at a good price. We haven't had any cash in our pocket. And there are some opportunities out there that we've passed on previously that we won't have to pass on now. And don't forget, I mean, this debt, if it ever came down to it, is pre-prayable with net. So if we ever decide that, that's not a good thing to have at an attractive cost, we can reverse that in a heartbeat.

David H. Lim - Wells Fargo Securities, LLC, Research Division

Very true. And finally, my last question is: a lot of talk about domestic D3 inventory buildup at the end of January, and I know that you've sort of cautioned that there could be some risk to Q1 production, if I heard you correctly. I mean what is your take right now in relations to the dynamics that's going on within the industry? And does your current Q1 guidance bake into the risk -- bake the risk into the guide that you've provided?

Mark Malcolm

No, I think there's probably a little bit of downside risk to the first quarter, if in fact, they are unable to make it up. But just depends on how bad the weather is going to stay there. I mean it's the capability right now on the schedule, we believe, to make up the issues that have happened up until now in March. If it continues to extend on the way it is right now. That could go back. If it makes any sense, I could put a negative part in and then all will sudden come with a surprise in the first quarter, I'd rather explain because I think everybody will see it, you'll see it in the OEMs' numbers when they come. I believe, personally, that seeing different talk about all high inventories and all high marketing, I personally don't feel that or buy that, I think that so. Weather does affect it. And again, we threw it and it's beyond quarters. If you believe the U.S. economy can grow above 3% this year, I believe we will hit or exceed the production numbers that have been published for the full year. That's my belief.

David H. Lim - Wells Fargo Securities, LLC, Research Division

Just a follow-up on that. So it's not a demand related risk, it's really, in your view, more weather-related than anything else?

Mark Malcolm

So far, year-to-date, that's my view, yes.

Operator

Your next question comes from the line of Chris Van Horn with FBR Capital.

Christopher Van Horn - FBR Capital Markets & Co., Research Division

I just really have one of question and could you -- just going back to the international puts and takes of Europe, Brazil, China, North America. With that -- could you give us a little bit more detail? Was it more kind of a macro-driven demand puts and takes, or was there program related, some program stronger than others? If you can just give a little more detail on that, that would be great.

Mark Malcolm

I think it's not so much a one-time type of thing, it's a macro type of issue. Certainly that way in Europe, has been and again, I'd like to see that it's going to come up a bit this year. But it's not going to be enough to make a huge difference. But going up is better than going down. In Brazil, the same thing, it's just very choppy. Our 2 biggest customers happen to be the 2 market leaders, but in addition to the market choppiness, we lost some share recently. But it's still the 2 dominant customers in the market. And for us, in China, our specific customers have not fared as well, our domestic Chinese customers have lost some share, and Fiat, that we think can provide a lot of growth out there of their first venture in China, still coming up kind of the learning on the growing pains of their first vehicle coming into the market. So it's largely macro driven, much more so than what I would call any type of program choppiness in terms of what's happening to us.

Christopher Van Horn - FBR Capital Markets & Co., Research Division

Okay, great. Great. Just one follow-on if I could, when you talk about conquest, share gain, opportunities versus kind of OEM outsourcing, and not necessarily a versus but kind of additional to OEM outsourcing. When -- in just terms of which one would you kind of -- which one is more of an easier process for you, would you kind of prefer to get share gains if you had to choose, or is OEM outsourcing a little more difficult? Because I'm sure they think they do it really well today. And they're probably a little hesitant to outsource. What's kind of your take on that?

Mark Malcolm

Yes. From a business perspective from us, there is no difference. I mean it's the type of parts that we're having to make. The timing that we have, what we have to do to win the business. We're disciplined. We don't buy the business just to get it. So we've got our financial hurdles to get through. We to try win it not only by being competitive financially, but winning it for nonfinancial reasons. I think the important part being both of those. I mean, if you will, they're just what we do now. It felt with me, I'm not going to -- it doesn't feel bad or hurt our competitor at the same time. So what could have been that kind of slightest benefit, business wise, there's no difference.

Operator

[Operator Instructions] Your next question comes from the line of Gregory Macosko with Montrose Advisors.

Gregory M. Macosko - Lord, Abbett & Co. LLC

With regard to Mexico, you mentioned very nice margins there at present, you have no specific contract although you have hopes for that. Is there a potential for, perhaps, some shift in business over time from the U.S. to Mexico to that plant or down to Mexico?

Mark Malcolm

Not much from us. I think the clear trend in the North American OEM industry is that a bigger percentage of North American production will be in Mexico over time. That's why we've pointed at that is, if you will, the best risk reward market -- new market that we have said we wanted to enter. So this just gets us in, gets us familiar. And we hope from there, over the next few years, that the OEs extend their business down there. We will now have familiarity operating but start to have a footprint that's more conducive. Because as you know, Greg, we can't ship our things from the U.S. down to Mexico and be competitive. You have to be there.

Gregory M. Macosko - Lord, Abbett & Co. LLC

And then with respect to Europe, could you give us a sense of your mix there, sort of pass car versus light truck, versus anything in heavy?

Mark Malcolm

Yes. I mean, it's reasonably represented to both the market. Light trucks, as we think of them here in the U.S, are not such a big deal, and in Europe. We've got things like the sprinter van, it's kind of a tall van, could use a lot over in Europe. But the best preponderance of our product is passenger cars, which is true in Europe. We do have a range, we go for very small with VW Up! which is the very small end of the market, it goes with the middle part of the market. And we've got the Porsche Cayenne, that you will call it an SUV or kind of a luxury-type vehicle we're there as well. So I think we've got coverage. And when you add in other mix like Fiat and Volvo. We've got a fairly representative in terms of types of vehicles in the market.

Gregory M. Macosko - Lord, Abbett & Co. LLC

And then, finally, with respect to 2015 in your expectations, if I look to the upside there and the possibility for upside, would you define Europe as perhaps the most likely upside or perhaps Mexico, if it came on stronger than expected? Where would you see the upside in terms of the EBITDA margin there?

Mark Malcolm

Now for '15, Mexico will be too early on. You've seen the whole Mexico, assuming we close on that contract and dig straight into those numbers, and that growth will happen in future years either in that factory or elsewhere when the time comes. Certainly margin-wise, in Europe, I expect that we will be at double-digit. When Europe gets back up to the kind of levels that existed previously. I personally think that's going to be a slow and steady march over -- it could be 5 years, Greg. So when we're doing nearly 8 percentage type of range, I think that, from what I can see out into the market, is bad for an auto parts supplier, but it's going to be a slow and steady March in Europe. In terms of Europe's capability and its present margin, that's almost by definition, when you talk of just margin, it would have to come from Europe. But it would be a surprise in volume and I don't want to kid anybody, that would be a surprise in volume, that I personally don't describe to planning consumption, at least right now.

Operator

And your next question comes from the line of Rich Kwas with Wells Fargo Securities.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

I just had a quick follow-up. On the new business win that you mentioned, given that you took it away from an incumbent supplier and the complexity of what's being demanded, how should we think about the EBITDA margin on that business, is it going to be comparable or slightly better than your corporate average margin?

Mark Malcolm

And it is, in the total. I mean I've shown you about 15% of the 2 programs combined. I want to protect confidentiality of customers, I never talk about margins on a given program. And that's got as much to do with not providing important insight to our competitors, but those 2 programs combined are therefore a little bit above average. The capital could take a look at it relative to the revenues a little bit above average. And as you know, and was discussed in the past, typically higher capital investment type of products bring -- should bring, on average, a higher margin because the real metric when all is said and done is the return on invested capital. These 2 programs together are above. Should be in the neighborhood of above 15%, so they certainly help in terms of our average margin.

Operator

And there are no additional questions at this time, I'll now turn the call back over to the presenters.

Derek Fiebig

Great. Well thank you, all, for joining us. If you have any questions, please send me an e-mail and I'll catch up with you soon as I can. Thanks.

Operator

This concludes today's conference call. You may now disconnect.

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