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Executives

David Sindelar - Chief Executive Officer, Director and Member of Executive Committee

Gerald Sax - Chief Financial Officer and Senior Vice President

Dee Johnson - Director IR

Analysts

Matthew Sheerin - Stifel, Nicolaus & Co., Inc.

Nick Farwell -

Michael Pineau

Eric Reubel - Miller Tabak Roberts Securities, LLC

David Sagalov

Viasystems Group (VIAS) Q1 2011 Earnings Call May 3, 2011 2:00 PM ET

Operator

Good day, ladies and gentlemen. And welcome to the Viasystems Q1 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to introduce Dee Johnson. Ms. Johnson, you may begin.

Dee Johnson

Thank you, Stephanie. I'd like to welcome everyone to the Viasystems Group investor conference call for the first quarter of 2011. If you need a copy of today's earnings press release, you'll find it at viasystems.com. We've also prepared some slides. You'll find those also on our website.

Our presenters today are Viasystems' Chief Executive Officer, Dave Sindelar; and our Chief Financial Officer, Jerry Sax. In the course of our discussion, we're likely to make forward-looking statements. I wish to remind you that any forward-looking information we provide is given in reliance upon the Safe Harbor provisions of the Securities Litigation Reform Act of 1995. The comments we will make today are management's best judgment based on information currently available. Our actual results could differ materially from any forward-looking statements that we might make. The company does not intend to update this information to reflect developments after today and disclaims any legal obligation to do so. Please review today's press release and recent SEC filings for a more complete discussion of factors that could have an impact on the company's actual results.

Some of our discussion today will include non-GAAP measures, in particular, adjusted EBITDA and adjusted earnings per share. These non-GAAP measures are reconciled with our GAAP results in today's press release and in our slide presentation. Management believes these measures are useful for analytical purposes and to assist in comparing results over time and across companies. But I'll remind you that adjusted EBITDA and adjusted EPS exclude certain material items and they are not a replacement for the reported results under generally accepted accounting principles.

I'll now turn the call over to our CEO, Dave Sindelar, and Dave will begin with Slide 4. Dave?

David Sindelar

Thanks, Dee. And good afternoon to everybody, and thanks for joining. The first quarter of 2011 was characterized by continued strong demand, especially in the automotive markets and the Industrial & Instrumentation market, together with some challenges in the areas of cost and capacity.

Consolidated net sales of $238.7 million reflect a 4.4% increase compared to the pro forma combined sales for the first quarter of 2010 and a 2% decline from the fourth quarter 2010. As I discussed in our February conference call, our first quarter shipments were somewhat constrained as a result of extended maintenance, which took one of our plating lines out of production for about 1.5 months during the quarter. With this reduced throughput, overhead absorption was not what we would have expected, absent the downtime.

Coming back from Chinese New Year holiday, we experienced higher-than-expected attrition, which resulted in a significant number of new hires and excess cost in the form of overtime payments, training costs and in some cases, retention bonuses. As we mentioned in the press release, on April 8, wage inflation in China continues, compounded by increasing wage base social taxes on Western world employers.

Material costs have continued to rise based on not only on the underlying metals and other raw material costs, but also because in the strength of the global electronic markets. The laminate providers are able to command a higher price for their capacity in products.

Our adjusted EBITDA for the first quarter was $29.3 million for an adjusted EBITDA margin percent of 12.2% of sales, somewhat below our year 2010 performance of 15%. Adjusted earnings per share were $0.07 in the first quarter compared with $0.15 in the first quarter a year ago on a comparable basis.

We are working hard to achieve price increases in all of our customers to balance our cost pressure. These increases will be passed through of cost intended to maintain our margin dollars, and this will have the obvious mathematical effect on margin percents. Now that the temporary capacity constraints from the first quarter are well behind us, with the first quarter book-to-bill ratio greater than one in each of our end markets and with our recent capacity additions coming up to speed over the course of the second quarter, we would expect the second quarter to set a record sales level.

The outlook is strong in both the PCB segment and the Assembly's business. The future effects of the Japanese disaster are, of course, unknown. It remains a possibility that raw materials and our components shortages somewhere in the electronics supply chain will cause one or more of our OEMs or CEMs customers to have to push out their orders with us. That's a risk to our second quarter outlook into the 2011 full year outlook. But barring these, orders look very good and our output is increasing because of factors I've mentioned.

Our capital expenditures of $24 million in the first quarter include approximately $6 million in connection with the PCB capacity expansion projects. You might recall that we announced $100 million capacity expansion plan in September of 2010. We have now committed or spent approximately $30 million under that plan. We will soon need to relocate the capacity of our Huizhou, China facility into the other PCB's facilities because our lease ends at the end of 2012, as we had disclosed in our 10-K. Given this need and the growing market demand, we expect to commit the remainder of the $100 million of capacity expansion during the next 18 months.

Turning to Slide 6, I'd like to talk about sales by end markets for the first quarter. Our automotive shipments were very strong and demand was even stronger. Automotive sales grew to 38% of the total net sales in the first quarter and increased both sequentially and year-over-year. The capacity additions that we are ramping up during the second quarter will give us additional throughput for automotive PCBs. If nothing happens elsewhere in the supply chain, this will continue to be a very strong market for us all year long. Most of the automotive production slowdowns we've heard about, so far, are with Japanese OEM where we have historically been under penetrated.

Sales for the telecom market made up 18% of net sales in the first quarter, falling by 22% sequentially and 14% year-over-year. The weakness in this market was across the various customers and was compounded by an inventory adjustment by one of our significant customers. As we look to our order book now, however, this market appears to be strengthening.

The Industrial & Instrumentation market represents 26% of our net sales in the first quarter, up 7% sequentially and up 15% year-over-year. The improvement was broad based coming from various customers in both the PCB and Assembly segment. The rebound in demand for wind power assemblies was a positive factor as were new program wins.

The computer/datacom market was 13% of our total first quarter sales, down slightly both sequentially and year-over-year. This decline was driven by a single customer. It does not represent a problem but just the timing of their demand, and was pretty well offset by increases in shipments to other customers.

Our Mil/Aero sales were 5% of our total sales and increased 4% sequentially and 8% year-over-year as the outcome of our customer qualification activity in 2010. Since our share in this market is small, the weakness in the Mil/Aero market overall doesn't affect us much as it does with those with a greater share. We are also putting more effort in getting qualified in commercial aviation projects where the outlook is much stronger than the military side.

Obviously, our priorities going forward are: first, to capture the price we need, to recover the increases in costs we have incurred; second, our capacity expansion activities including ramping up our recent capacity expansion and the relocation of our capacity to cover our Huizhou plant, which will be a major undertaking. There's a lot of work involved in qualifying the various products that will run on the new lines. We will complete this move, some duplicate -- excuse me, when we complete this move, some duplicate overhead costs will be eliminated but that is several quarters down the road.

Another priority is cost management, which is largely a matter of being very aware of our material costs and any materials may be in shortage or finding alternatives. It's one of our strengths that our people are very knowledgeable about actual cost, cost trade-offs, so that we can help our customers make cost-efficient design decisions.

In closing, I want to mention that Viasystems earned the supplier award from Ciena this quarter, the Quality and Service Supplier of the Year. Ciena is a customer for whom we do both quick-turn prototyping and high-volume production of PCBs. And this award reflects how well our plants in both the U.S. and China work together for a high level of customer service and quality.

And with that, I'll turn it over to Jerry.

Gerald Sax

Thanks, Dave. Before I address the presentation topics, let me begin by noting that you should be able to see our first quarter 10-Q on file with the SEC later today or early tomorrow.

I'll begin my remarks about the quarter by referring to Slide 7 in this morning's presentation materials. Shortly after we reported our 2010 year-end results, we became eligible to file a shelf registration. Like most public companies, we believe it's good fiscal management to have an effective shelf registration on file to accelerate the process of any potential future security offerings.

Following our original shelf filing in early March and the subsequent SEC review, the SEC declared our universal equity registration effective on April 7. This effective registration allows Viasystems to issue up to $150 million of new equity securities in one or more future offerings. We expect that any such offering would be accompanied by a prospectus describing that offering.

In addition, our largest shareholder, VG Holdings, owns just under 80% of our common stock, which had not previously been registered for trading. In connection with our shelf filing process, we elected to register all of VG Holdings' existing shares along with the $150 million of new securities that I just mentioned.

Of course, the proceeds of any shares offered by VG Holdings would go to VG Holdings and will not be retained by Viasystems. However, such an offering would help address the issue of the small public float that exists today in the VIAS shares. We expect that shares offered by VG Holdings at any point in the future would be part of a well-coordinated process.

Moving on to Slide 8 of the conference call materials or the first table in this morning's press release. As Dave mentioned, sales were up year-over-year on both a reported and a pro forma basis. Growth in sales of our E-M Solutions products eclipsed the PCB sales growth after adjusting for the Merix acquisition during last year's first quarter.

Sequentially, sales of both PCB and Assembly declined by about 2% from the fourth quarter to the first. Dave already commented on the adverse effects of the margins from the stunted capacity availability during the quarter, as well as from materials cost increases and Chinese labor cost increases. I'll add that product mix and selling price pressures also contributed to the sequential decline.

Our SG&A expenses were $18.2 million in the first quarter or 7.6% of sales. While there is little total cost change both the year-over-year and sequentially, there are a number of offsetting factors contributing to each change. As we highlighted in this morning's press release, reduced short-term incentive compensation expense kept total SG&A costs from reflecting the expected year-over-year and sequential increases. On increased activities in the second quarter, we do expect to see SG&A costs more in line with our experience in the middle of 2010.

With the exception of income taxes, the remaining line items in the income statement are consistent with recent trends. The income tax topic is related to the new financial metric we introduced this quarter. So at this point, I'll jump down to the bottom of Slide 8 to introduce adjusted EPS metric, which we added in response to investor and analyst questions about industry and competitor comparisons.

At the end of this morning's earnings release and also on Slide 12 in this presentation, you can find a table reconciling GAAP earnings per share to this adjusted EPS. Of course, we'll continue to disclose GAAP EPS, but this new presentation gives readers a view to some income and expense items, which are commonly adjusted by our peers and competitors. While many of the items are recurring, the most significant item in this first quarter relates to our lease of income tax reserves expensed in prior periods, which we also highlighted in the press release this morning.

I've not include a balance sheet slide in the conference call materials, but as you can see in the second table in this morning's earnings release, the changes from the prior quarter end relate primarily to the topics, which I'll cover in my comments on cash flows.

Moving on to Slide 9 of the presentation and the third table on the press release, you'll note that cash provided by operating activities during our first quarter was just under $1 million. This cash generation was achieved despite the expected substantial semi-annual interest payment on our 2015 notes and our 2010 incentive compensation payout, both of which were included in accrued liabilities at the end of 2010.

Dave already commented on our CapEx in the quarter, and we had only minor cash flows related to financing activities in the quarter, so I'll not further elaborate on those matters. While our cash balance declined as expected from year end, we still maintained a solid liquidity position at the end of the quarter, including cash and available credit facilities.

The remaining slides in the presentation deck are supplementary reconciliations to our non-GAAP measures, being adjusted EBITDA and adjusted EPS reconciling to their GAAP counterparts. At this point, I'll turn the mic back over to Dave for his final comments before Q&A.

David Sindelar

Great. Thanks, Jerry. To quickly summarize, the short-term capacity challenges of the first quarter are behind us. We still have a lot of work in front of us to ensure that we get the benefits of the recent capacity additions plus the additional capacity that we think we will need over the next 18 months. Obviously, balancing price with cost remains an absolute focus for us. Aside from the risk of supply chain issues that may be a result from the Japanese issue, our outlook for the second quarter remains very, very strong.

With that, I look forward to your questions, and I'll turn it back to the operator who will conduct the questions-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Matt Sheerin from Stifel, Nicolaus.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc.

Just have a few questions here. Let's start with the top line in looking at your expectations for the June quarter. Dave, it sounds like maybe you talked about kind of record revenues, so that would imply sequential growth in the 8% to 9% range. Do you have good visibility in those numbers? I mean, obviously it looks like a pretty big snapback here.

David Sindelar

Yes, I think we have historically not given guidance, but I think as -- any kind of direct or significant guidance, but I think as a result of the first quarter and there were so many things going on with the plating line, Chinese New Year and kind of all different things, hiring new people back in, we tried to make a pretty strong statement on the top line just to make sure everybody understood where we were going. But kind of with that said, I think we feel comfortable with a revenue target for the second quarter of somewhere in the $260,000 to $270,000 range.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc.

Okay. And is that growth coming across the segments or segments that got hit the hardest in the March quarter like telecom and computer/datacom, will they bounce back faster? Or is it pretty much across the board?

David Sindelar

The automotive side continues -- has been strong, continues to be strong. And the biggest contributor to more growth in the automotive side is really capacity. So we would expect to see the continued strength in automotive. I&I continues to be strong, and we have seen, as I mentioned in my comments, at least we are one month into the quarter, but we have seen a strengthening in the top comp side. And computer/datacom is kind of we don't see anything, it's up, but we don't see it up dramatically.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc.

Okay. And on the gross margin in the quarter down 200-plus basis points, how much of that was due to the lower revenue because of some of the production issues that you had versus pricing pressure and in higher materials costs?

David Sindelar

Yes, I think it's probably about 50-50. We've kind of gone through and tried to analyze it. I mean, we did see some increased cost but then we were off on the volume, which obviously affects the absorption and things of that nature. So it was -- if I was to kind of go and characterize it, you have the material costs, you have the lower volume and then the hiring of a bunch of new people after Chinese New Year and the corresponding training costs and overtime to get the production up was kind of the 3 steps. So, Jerry, do you want to say anything about the margins or kind of give any additional color on the margin?

Gerald Sax

Clearly, the topics that you talked about were the issues that we faced in the first quarter. And the materials costs we are not going to be able to reverse that trend certainly. But with the addition of increased sales prices as we introduced that during the course of the second quarter and in thereafter, we anticipate that we're going to start recapturing some of that as we move through the quarter. It could be as much as a couple of points back on the gross margin rate compared to what we experienced in the first quarter.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc.

So a couple of points back, including the price increases or at least getting some of that? So I'm just trying to -- are you going to cap -- are you going to get back to the kind of 21% range? You're still at record revenues, you're still well below that 23%, 24% range you were at last fall. So I mean, do you think you're going to be able to get that back to that number at all?

David Sindelar

I think -- it's Dave again. I think the couple of things, and my personal opinion is that I think 21% kind of in that range, 21%, 21.5% is probably what I would hope for in the second quarter. And it's going to take us a while to get back and what you have to realize is that we have backlog when we accept an order, that order has pricing in it. So it takes us a while to get to the customer, get the price, negotiate it and start putting it in the order book. So it's going to be kind of the second quarter is going to be the combination of getting our volume back, which we're going to get some pick up, partial price increase and I don't expect to have the full affect of our pricing actions to take effect until the third quarter period. We were going to get some of it back but it's just not -- we're just not going to be able to get everything, get the backlog flushed out.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc.

Okay. And just last question for me here on the capacity expansion. As you bring capacity online, will that hinder margins at all because of the added costs or either yield issues or cost associated with ramping people to run those lines?

David Sindelar

It shouldn't, and any inefficiencies as a result of the new capacity should be more than made up by the kind of the pickup of the variable margin. So when you add additional capacity, you should pick up more than your normal gross margin or your EBITDA margin just because you're not adding on a like overhead to your cost. So we would not expect any significant change in that.

Operator

Our next question comes from David Sagalov from Jefferies.

David Sagalov

Just a few quick ones. Did you guys quantify the lost revenue from capacity constraints this quarter?

David Sindelar

To be quite honest with you, I didn't go back and do the math. So at this juncture, I'd only be guessing. Jerry?

Gerald Sax

No, we don't have a specific calculation and certainly not anything that we've disclosed publicly. I didn't think that that's -- there are a lot of movements around. There's a lot of mix issues that play into it. So I'm not trying to -- it's just something that we don't have at our fingertips.

David Sagalov

Yes, that's fair. I guess also just regarding gross margin, you made a comment that you don't -- you wouldn't expect price increases really to take hold until 3Q, given the backlog. If the price -- can you just talk about, I mean, customers' first reaction to the price increases, and do you have any other kind of leverage you can pull in case those increases go through? Any way to hedge that kind of increased material cost going through?

David Sindelar

I've never seen a customer that I've gone to and said, "Hey, we're increasing prices. Can you give me a big hug and a kiss?" To say that this is something that they were looking for would be great stretch. In today's environment, the majority of our customers, while they may not specifically like the size of the increase, I think they fully understand that copper makes up a big piece of our product. Resins, which have a lot of oil and they make up a big piece of our product. Their labor makes a decent size of our product and all those are getting double-digit increases, so it doesn't take a long time to explain to them. But with that said, when our suppliers come to us with price increases, we're not pleased no matter what the economic environment is. So it is a little bit of a battle. We have offered to try to work with our customers to change materials. Some materials are more expensive than others and in some cases, that works when they absolutely positively can't take the price increase, we've worked that. Unfortunately, I think that the level of our cost increases are going to necessitate a pretty sizable price increase. And then to go back to the comment about on the prices, from probably March 1 to March 15, we've begun the price discussion. So that's been in place for a long period of time. I wouldn't expect the price to be fully implemented until the third quarter, but we are going to get price increases during the second quarter. So I can't -- I don't want to lead you to believe that everything went up on April 1, but I also don't want you to walk away saying everything's going to go up on July 1 because it's going to be a mix throughout the second quarter, so that it'll be fully effective by July 1.

David Sagalov

Right. And last question. I think in the past you've spoken about a 15% EBITDA margin target. Is that still the goal?

David Sindelar

Yes. And I kind of alluded to it earlier, and I just do some kind of basic, basic math. But if you go through the mathematics and let's say you had a 15% margin and you have a 10% cost increase and all you do is pass the cost along, you don't mark the cost up just mathematically, your 15% is going to go down slightly. So we are looking especially in this environment to be competitive and keep our volume and everything else. We're looking to keep our margin dollars, not our margin percent. So that 15% by pure mathematics I think will shrink a bit.

Operator

Our next question comes from Frank Jarman from Goldman Sachs.

Dan Hertz

This is Dan Hertz for Frank. You mentioned the remaining $70 million of capacity expansion. CapEx is going to be spent over the next 18 months. Should we expect the near-term CapEx in the coming quarters to be in line with the higher number that we saw in 1Q?

David Sindelar

Yes. I think it should, and I think the -- I guess we're on about a $25 million run rate. And I think as we get towards the third and fourth quarter, that $25 million may jump up even a little bit more. So I think probably in the $30 million range in the latter 2 quarters, $33 million somewhere around there.

Dan Hertz

Okay. I mean, given that CapEx is going to be -- how are you guys thinking about free cash flow for 2011? And in addition to that, is there sort of a minimum level of liquidity that you guys are comfortable running at?

David Sindelar

From a liquidity standpoint, while I don't want to be -- I don't use want to use the revolver as a crutch, but we do have a $70 million revolver there. So as we said at the end of the quarter, if I recall, there was roughly $80 million of cash on the balance sheet.

Gerald Sax

$80 million in cash, and if you add the credit facilities, a little over $170 million total liquidity.

David Sindelar

So as we said today, I think we are obviously more than comfortable with liquidity levels. And as we look out for the rest of this year and quite frankly, into 2012, assuming there's no major dislocation in the economy and on and on and on, I think we feel very, very comfortable with the liquidity levels we have.

Gerald Sax

But to the first part of your question, yes, we do expect there to be a little bit of cash burn from a free cash flow standpoint on the full year because obviously, the spend on CapEx precedes the revenues and the growth that we should enjoy from it later.

Operator

Our next question comes from Eric Reubel from MTR Securities.

Eric Reubel - Miller Tabak Roberts Securities, LLC

Jerry, just to sort of recap for a second. So expect another -- expect that price increases over the next 2 quarters to kind of capture back the 200 basis points or so that you lost due to the price increases? And then with respect to the revenue levels and the margins that we were seeing last year, is there some mix element that could possibly mix up into -- near the back half of the year that can get margins even above what you're going to get back on the price increases?

Gerald Sax

I think it's fair to say yes, that could all happen, but at this point, we're not predicting anything about the back half. We can spot the trends currently as Dave talked about, and we are pretty comfortable with what we see going into the second quarter. But there are still a lot of things to do between now and in the second half of the year to determine exactly how the mix will work out and how the price increases will play out with every customer.

Eric Reubel - Miller Tabak Roberts Securities, LLC

Could you just describe briefly the mix in the current quarter? What were the mix effects that kind of pushed the margin down that you briefly mentioned in your prepared notes?

Gerald Sax

For example, and I'm not going to be able to quantify a dollar amount for you, but automotive-type demand is typically not as high layer count. And high layer count is not the only measure of high technology. But as we looked for more and more available capacity for automotive, we looked to the productive capacity that had formerly been dedicated to telecom, which was down a little bit. So some of our inner layer production capacity was underutilized. So it's not that automotive or telecom is better or lesser mix, but just the way it enabled us or forced us to utilize our productive capacity didn't allow us to fully utilize everything and did have a small dilutive effect on our overall margins, just for example. If that makes sense.

Eric Reubel - Miller Tabak Roberts Securities, LLC

That's helpful. And then, Jerry, you also talked about the impact of closing or moving capacity as your lease closes in China, are you going to be moving into -- moving that capacity into another facility, how should we be thinking about the costs associated with that? How much fuel costs will be running and when should we start to think about that ramping up? And how should we think about it ramping down once you complete the move?

David Sindelar

We're playing tag team here so I'm going to jump in and try to give you a little bit of direction on that. We're in the beginning phases of figuring out when it's going to transfer and how it's going to transfer. What we're hoping for is that we can get it into kind of distinct buckets so that over a 3- or 4-quarter period, we can transfer blocks of production from one plant to the other. Right now, I don't want to act like I'm dodging the question just want to give you the honest answer, is, is that we are working with our customers. And as you can imagine, a lot of our customers, especially out of Huizhou plant are automotive, so they have to go through a production -- a preproduction approval process. So we're working with them right now to get the timing of the approvals when we're going to start one lineup, when we're going to shut the other lineup. But I think the answer is whatever effect it will be, will be primarily in 2012.

Eric Reubel - Miller Tabak Roberts Securities, LLC

Okay. And then one last one for me, Jerry. You mentioned comments about SG&A in the second quarter. I didn't quite get them. So if you could repeat that, sorry.

Gerald Sax

I said that I expect the second quarter total SG&A to more closely resemble the run rate that we had in the middle of 2010. Said another way, I think both the fourth quarter of '10 and the first quarter of '11 were a little bit low. Part of it because of the reducing sales during that period of time when we pulled back the reins. But part of it just the timing in the way we recognized our incentive comp expense.

Operator

Our next question comes from Nick Farwell from Arbor Group.

Nick Farwell -

Maybe just follow up on the pricing issue and, Dave, could you talk a little bit about the flexibility of implementing price increases in the auto sector, given at least my impression that most of the contracts are longer term in nature?

David Sindelar

Sure. Each customer is different. We have various, without getting into a lot of details and kind of going through the various customers, but we have customers where we work on kind of more of a gentleman's agreement on what price is going to be and as we go through the years and we've had -- we've done this historically, we've gone back and either increased them and quite frankly, at sometimes we've decreased them. So we have gone and begun discussions with all. There are portions of some customers that are on longer-term contracts, and there are portions of those customers that are not on long-term contracts. So it's really a case-by-case, really a product-by-product analysis, and in some cases, you're right. We will not have any ability to increase prices until the latter part of this year. But for the most part, we believe that we're going to be able to get price increase in the majority of our revenue.

Nick Farwell -

To what degree did you encounter any customer challenges, if that's the right expression, given the capacity problems you experienced in the latter part of the fourth quarter and part of this quarter, especially in the automotive sector in terms of delivering the products on a timely basis?

David Sindelar

And I'm going to say this, and I don't say this as if I'm proud but even with the capacity constraints we had, we met all customer requirements. So we didn't shut any of their lines down. They didn't shut any of their customers' lines down. So we were able to manage and quite frankly, we managed it by doing what Jerry said was we're using capacity that wasn't ideally suited for automotive production. And as a result, I think when we talked about whether it's mixed or just not the ideal production environment for various products, we probably took it in the shins a little bit on margins. But we, in fact, met our customers' requirements. So kind of with that said, as I mentioned our book-to-bill and obviously, with the level of the billings, one would be very disappointed if we didn't have a positive book-to-bill, but we do have a positive book-to-bill. We've got a very strong backlog, and we're starting the quarter out nice on the booking side as well. So I don't think that there was -- to go in and the customers if they were looking for some reason to yell and scream, they could look at the capacity constraints, they could look at the requirement at the end of 2012 to move out of the HZ facility. The fact that they don't like price increases, I mean, they had about 3 or 4 they could use to beat us about the head but that still doesn't take with the fact that we have seen real cost increases both on the material and labor side. So it's just something that we need to do and we think that the industry is doing as well. So if the rest of the industry isn't doing it, then I think it's shame on them.

Nick Farwell -

And I'm a little surprised when you comment about second quarter outlook recognizing that it's -- I understand you're only a month into the quarter, but still you wouldn't expect some greater improvement than, say, roughly 200 basis points where I believe Jerry commented much of that might be flat price when in fact, you presumably have somewhat more optimized production both loading, as well as mix, some price increase on top of that. If you don't experience somewhat higher gross profit margin sequentially going from the 19% in the first quarter to seeing better than 21% in the second quarter...

David Sindelar

Yes. And my response is that, and Nick, as you know, we really don't historically, and this is the first time we've kind of stepped into the guidance path, and we think that as a result of all the things that went on in the first quarter that could give anybody any pause for concern, what we're trying to do is we're trying to guide you to a reasonable expectation. There's lot of things we could go through and say, "Well, this is going to happen or that's going to happen." But I think what we're trying to do is give you some things that we feel fairly comfortable that we can achieve. So I'm not sure -- I don't want to say that we're sandbagging there, I don't want to give you a number that's pie in the sky but we think we're comfortable with what we've said.

Nick Farwell -

I wasn't trying to push you so hard as to kick in the sense only that you're not [indiscernible]. And then last thing I wanted to clarify and that was I think I heard Jerry say that they're -- this year, if you hit the internal projection you will have a cash burn. I didn't hear it if you said there were some number associated with that. I assume that's largely because of CapEx and the increase in CapEx? For some reason the line was flaky and I just didn't hear his comment.

Gerald Sax

I did not give a specific number. It's just exactly what you talked about though, the CapEx spend together with kind of the working capital to support the growth, the interest and taxes all combined to use a little bit more cash than what we're going to generate from operations.

Operator

[Operator Instructions] Our next question comes from Mike Pineau from Hartford Investment.

Michael Pineau

You mentioned that in the first quarter, pricing pressure actually contributed to some of the margin pressure. How dioes that play into your ability to raise prices going forward?

David Sindelar

Yes, we were -- every -- again, when you look at a customer and you look at the customer profile and the product mix and the margin mix and what you're going to get and what you're not going to get and what the volume they're going to provide and it's kind of the sales and marketing activities. And in some instances one or 2, we had given certain products, certain customers a price break for additional volume to fill up certain plants. So as we went into the first quarter, those actions obviously had a negative effect on the margins. Again, I don't want to say that the majority of the decline in the first quarter related to pricing, but as we describe all the different things that affect it, we did, in fact, do a number of things to try to either balance out production in plants, to gain additional market share, whatever it is. So that, in fact, was one of the contributors in the first quarter. But with that said, come February 15 when the Chinese government increased minimum wage by 18% to 22%, that's a fact that may or may not probably wasn't known when we cut the original deal back in September, October and November. So that's kind of the background of that comment. And so the added cost increase that came in December, January, February was sufficient enough that we're back at the table saying, this is what's fair, and this is what we need.

Michael Pineau

Okay. So that was more contractual in nature rather than competitive pricing pressure. Is that fair to say?

David Sindelar

Yes. Hopefully -- it's kind of hard to go back and then kind of thinking out loud and talking. We have a customer and we're doing x million of dollars with them and they come to us and say we have this product and it can fit into this factory and we can absorb better but we want to have a 2% price reduction. But the margin we pick up and the volume and the variable margin all make sense and net-net we're up. So it's, it's kinda, unfortunately, the real answer is probably both. It's probably contractual and it's competitive because we're trying to, I mean, we're trying to be competitive to get the business and that's what the customer says we need.

Michael Pineau

Okay. And just a couple of more questions. I don't know if you've ever said, on the $100 million program, part of it is to move production, but also part of it is to expand capacity, I believe. Have you talked about, have you quantified how much of your production capacity will be expanded through those programs?

David Sindelar

We have, and what we've said in the past that typically $1 of capital provides anywhere from historically, it's been $2. But I'd say probably $1 of capital is somewhere around $2 of sales and depending again on where you're at with various increments of capacity, it could be $1.75 for $1 of capital, but some are between $1.75 and $2 of sales for each $1 of capital.

Michael Pineau

So how much of the $100 million program is to expand capacity as opposed to replacing the Chinese production ability?

David Sindelar

Yes, the -- and again, we haven't given that granular disclosure. We are still kind of -- not to make this overly complicated, but unfortunately it is. We need to have the authority and the ability to put the capacity in place to that we can transfer and accept new orders. So we think that $100 million worth of capital from August last year through the next 18 months will give us sufficient capacity to grow the market and it'll give us sufficient capacity to accept the HZ shift in production. Now as we go through this process depending on when we get the approval, when the new capacity comes in place and when we can turn off the old factory will allow us to transfer existing equipment out of the old factory into the new. So to give you a clean-cut answer as to, it represents 33% of it or 25% of it, I think would be a little difficult. But in the kind of the overall scheme of where we think the market's going and where we're going to put the capacity in, we should have capacity to meet reasonable growth expectations and move the production out of HZ into the other facilities.

Michael Pineau

Okay. Then finally, on Japan. Is there any way of giving us some kind of boundary or estimate as to what the risk could be to production? Based on the Japan factors?

David Sindelar

Yes, I don't want to be kind of a smart ass or flip on it, but if I knew that I could retire. Right now, most everybody that we're talking to thinks that there may be some minor hiccups on some components or subcomponents or raw materials. So I don't think that any of our customers, and I mean, you read the same things I read. If you're a big supplier to Toyota and Honda, I would be sweating bullets right now. The good news and the bad news is, the good news is we're not; the bad news is we're not big suppliers to Honda and Toyota. That doesn't mean that a component for GM or Ford or Chrysler isn't made in China, and it may not have some disruption. So my belief right now is it's something that we have to be very, very cognizant of, one, so we don't get on hung out on inventory, we don't get hung out on cost and different things. So I think short term we have to be on the lookout and make sure that there aren't any issues out there. With that said, I believe long term that it's going to be good for our business because our business is automotive. I think everybody's going to come out of this, and they're going to say specifically the Japanese OEMs are going to say I cannot have all my eggs in one basket. You're finally, going to break the Japanese keiretsus and all the different things. So I think long term it has a positive effect for us, and I think for the next 3 to 6 months, if it has an effect, I'm hopeful it will be a minor one right now.

Operator

Our next question comes from Nick Farwell from Arbor Group.

Nick Farwell -

Jerry, I just wanted to follow up on the tax rate issue. What do you think is a number we should use for at least the second quarter or for perhaps the year as an effective tax rate?

Gerald Sax

I'm still using, Nick, in my models 35%. The Chinese keep coming up with new taxes to confound my calculation. It could sneak up a little bit but I continue to look at 35% in my model.

Nick Farwell -

Okay. So on the reported basis, at least as you reported to us on a GAAP and non-GAAP basis or do -- we should use the 35% rate?

Gerald Sax

That's what I'm using.

Operator

I'm showing no further questions at this time, and would like to turn the call back to Dee Johnson for closing remarks.

Dee Johnson

Thank you, Stephanie. Thanks, everyone, for joining us today for Viasystems Group first quarter conference call. We would be happy to do follow-up calls with you and to help you with any background questions. Thank you for your interest in Viasystems. This concludes the conference call.

Operator

Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.

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