Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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 -

Eric Reubel - Miller Tabak Roberts Securities, LLC

Unknown Analyst -

Viasystems Group (VIAS) Q2 2011 Earnings Call August 9, 2011 3:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to Viasystems Group Second Quarter 2011 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce Ms. Dee Johnson. Ms. Johnson, you may begin.

Dee Johnson

Thank you, Theresa. I'd like to welcome everyone to the Viasystems Group Investor Conference Call for the Second 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, which you'll find on our investor web pages under Events.

Our presenters today are Viasystems' Chief Executive Officer, David Sindelar; and our Chief Financial Officer, Jerry Sax.

In the course of our discussion, we are 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 remind you that adjusted EBITDA and adjusted EPS excludes certain material items and are not a replacement for the reported results under generally accepted accounting principles.

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

David Sindelar

Thanks, Dee, and good afternoon, everybody, and thanks for joining us. Our second quarter sales at $270.7 million set a new record for us, as we had expected, as a result of our building backlog over the past 7 quarters and continued market demand. Total sales were up 13.1% year-over-year and 13.4% sequentially. Our PCB segments (sic) [segment] grew 11.6% sequentially and 9.9% year-over-year, and our smaller Assembly segment had an even stronger quarter with revenues up 21% sequentially and 27% year-over-year.

As we had discussed in our previous conference call, our major focus in the second quarter was implementation of our price increases with our PCB customers, enabling us to recoup increased costs in material and labor. A majority of the price increase phased in late in the second quarter and early third quarter since orders and backlog get priced as originally committed. So the price contribution to the higher second quarter revenue was relatively minor. Most of the sequential and year-over-year growth is attributable to volume. Pricing will be a positive effect on the top line and is expected to drive margin improvements in the PCB segment in the third quarter. Summing up the first half, considering cost inflation and some of the other challenges we have faced in the first half of the year, I would say we've met these challenges fairly successfully.

Our adjusted EBITDA was 34.3% or 12.7% of net sales. That's a modest improvement in our EBITDA margin sequentially from the first quarter and compares unfavorably of the year ago quarter, reflecting the fact that the price increase had yet to take effect for most of the PCB sales in the quarter. The higher proportion Assembly business also dampened the margins in the quarter.

Earnings per share on an adjusted basis were $0.31. Not as strong as a year ago in the EPS as -- in which adjusted EPS was, on a comparable basis, $0.51, but well up from the first quarter adjusted results of $0.07 per share.

Turning to Slide 6. I'd like to talk about sales by end market for the second quarter. We had a record quarter in the automobile market. Our second quarter revenue in this market was up 22% year-over-year and 11% sequentially. The first phase of the capital investment we've made to increase our capacity for the automotive PCBs are now in place, and as -- are now in place at the -- as of the end of the second quarter, and we will -- and we are filling that capacity. Our capabilities in the high-reliability PCB and heavy copper boards position us well to continue to grow faster than the overall automotive market.

Sales to the telecom market made up 19% of net sales in the second quarter. It increased 17% sequentially but were down 15% from a year ago because of both volatility of demand and a customer taking production back in-house to their own production facilities.

Industrial & Instrumentation market represents 20% of net sales in the second quarter and increased 17% sequentially and 30% year-over-year. Our Assembly segment drove the increase in I&I with very strong shipments in the wind power area. As we have mentioned in the past, this market is particularly spiky, and that's what occurred in the second quarter. In our Assembly segment, it would be difficult to repeat the record levels we had in the second quarter. The stars were all aligned in the second quarter, and we had backlog demand and the timing in orders all worked out in our favor.

Sales in our computer and datacom market grew 16% sequentially and 17% year-over-year as a result of the increased demand in new customer and program wins. Sales in this market were 13% of the total sales in the quarter.

Our mil/aero sales were 4% of the total sales, off about $600,000 compared to the first quarter and increasing 3% year-over-year. We continue to be focused on this market and market share gains through new customers and program wins. As a result of our minor market position, we'll be prone to swings up and down based on this market. We still believe over the next few years we'll be able to grow our sales in this market through share gains.

As we look ahead to the second quarter, we see continued -- we see demand continuing to be solid. Our markets are strong, although, like everyone else, we will be sensitive to global outlook for the economic growth for better or worse. Bookings were equal to shipments in the second quarter, setting us up with a strong backlog as we entered the second half. We expect the second quarter pricing increases will have their full effect in the third and fourth quarters, providing us the needed margin improvements.

The benefit of capacity expansions also begin to come into play as the initial new equipment has come on stream. We're not finished, however, and our capacity expansion programs remain in full swing for the next 6 to 12 months. The planned closure of our HZ plant in China at the end of 2012 has resulted in a lot of planning for capacity additions in our other plants. Most of the HZ production transfer will occur in 2012, and this obviously will be a major project for the next 12 to 18 months.

Another challenge for the second half of 2011 will be the potential need for China to ration electric power. This became a bigger issue than in recent years towards the end of June. We expect this will challenge us throughout the summer months of 2011.

We're also relocating our E-M Solutions facility in Mexico to a larger building, which should be completed by the end of this year. This will allow us to shift some work from China to Mexico and to in-source the powder coat paint process that we have been outsourcing. We like the growth opportunities in the E-M Solutions business, and we continue to cross-sell our PCB customers with metal fabrication, assembly and integration services. But I'm not looking for any immediate upside compared to the fantastic quarter we just experienced in the E-M Solutions business.

Summarizing, we are looking forward to the margin improvements that will result from the full effect of our price increases, and we continue to work on our capacity in the PCB segment to meet the customer demands. With that, I'll turn it over to Jerry.

Gerald Sax

Thanks, Dave. Before I begin my remarks on the quarter, I will cover a couple of administrative matters. Obviously, there have been a lot of distractions in the markets recently. So if you've not already seen it, I'll highlight that we announced our earnings in a press release earlier this morning. We plan to follow that up with our complete 10-Q filing tomorrow. And I'm not sure if any of you are using the XBRL tools for research and analysis yet, but I'll point out that our second quarter 10-Q filing will include our initial XBRL-compliant exhibit.

I'll begin my remarks on our results by referring to Slide 7 in this morning's presentation materials. If you don't have access to the presentation materials, you'll find substantially the same information included in the first table of this morning's press release.

As Dave mentioned, net sales increased by more than 13% on both a year-over-year and sequential basis. Let me also highlight that net sales through the first half of 2011 improved almost 20% compared to the first 6 months of 2010 on a reported basis and are up nearly 9% on an organic basis or pro forma for the Merix acquisition.

On the cost side, our second quarter cost of goods sold increased as a percent of net sales by 0.2%. The quarter included the full effects of the increased Chinese labor rates and social taxes that we began to experience during our first quarter. It also reflected a full quarter's effects of increased materials costs. Sequentially, these adverse cost trends were almost fully offset by improved economies of scale available on the higher production volumes as well as the beginnings of our selling price increases. Dave noted that our margins are expected to increase in our third quarter with the effects of the selling price increases, partly offsetting that, though, will be inefficiencies that we will encounter during the relocation of our Juarez factory.

Our SG&A expenses were $19.3 million in the second quarter. As a percent of net sales, our second quarter SG&A costs of 7.1% compare favorably to the 7.6% achieved in our first quarter and to the 8.6% in the same quarter last year while we were still pursuing the merger cost synergies.

At $16.3 million, depreciation expense in the second quarter is trending up, which is consistent with our increased levels of CapEx during the past 18 months. However, the depreciation as a percent of net sales has come back down to 6% from the 6.6% in our first quarter.

Operating income as a percent of net sales improved to 5.6% in the second quarter, primarily as a result of the improvements in the SG&A and the depreciation that I just mentioned. We expect to see operating income as a percent of net sales return near the 8% level we experienced late last year, and we expect similar improvement in our non-GAAP measure, adjusted EBITDA, which improved to 12.7% of net sales for the second quarter compared to 12.2% of net sales for the first quarter. Our usual reconciliation of operating income to adjusted EBITDA is available at the end of the presentation materials and in this morning's press release, as Dee mentioned earlier.

Our income tax expense for the quarter was $3.3 million, which is a bit above the effective rate that I use in my modeling. But I'll point out that these mid-year calculations still contain several estimates about our full year results, and we expect income taxes in the future to be impacted by the effects of our selling price increases. Net income of $3.6 million resulted in $3.2 million of income available to common shareholders, that is, after subtracting the income attributable to our China joint venture partner.

Basic and diluted earnings per share were $0.16 in the second quarter. And as Dave said, adjusted earnings per share were $0.31 after adjusting for certain noncash and non-recurring items. The adjusted EPS showed substantial improvement from the $0.07 we reported in the first quarter but was not yet back to the levels of late last year. The adjustments we use for noncash items and non-recurring items are detailed in a table at the end of the presentation materials and in the earnings release. And again, we believe these adjustments are similar to those adjustments presented by others in our industry. We provide this supplemental information to assist readers in making comparisons.

As we noted in our press release this morning, our working capital metrics at the end of the second quarter were in line with historical trends, so I will not comment specifically on the balance sheet.

And moving on to Slide 8 of the presentation or the third table in the press release. You'll note that the first line of the table that cash provided by operating activities during our first quarter was $17.7 million. While we don't show the quarter results separately, if you compare to our first quarter report, you can see that $16.7 million was provided during our second quarter compared to $1 million in our first quarter.

CapEx of $25.8 million for the second quarter drew our 6-month spending total to just under $50 million. This 6-month spend includes about $17 million spent on the capacity expansion projects launched late in 2010. While our cash balance declined as expected from year end, we still maintained a solid liquidity position for the quarter, including the combination of cash and available credit facilities.

As I've highlighted previously and Dee mentioned, the remaining slides in the deck are supplementary reconciliations of our non-GAAP measures to their GAAP counterpoints. So at this time, I'll turn the mic back over to Dave for any final comments before we move to Q&A.

David Sindelar

Thanks, Jerry. Kind of with that, I will turn it over to the operator so we can move directly into the questions-and-answers session.

Question-and-Answer Session

Operator

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

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

So as we think about revenue expectations for the third quarter, you sounded vague or there’s some mixed things going on here. It sounds like bookings were strong. Backlog looks good, but you did talk in the press release about expected inventory correction in some of your end markets. And does that mean that, that would be down? It sounds like Assembly business is not going to repeat. So that may be down. And -- but then, you've got the positive impact from the ASP increases. So how should we think about September here? Are you looking kind of flattish? Or is it going to be up sequentially?

David Sindelar

I guess as we mentioned, there's a bunch of different things, and we went into the quarter with a strong book. We have the PCB price. The second quarter on the E-M Solutions side, and we tried to signal that, is that we had a great second quarter, kind of all the stars and moons aligned for the second quarter on E-M Solutions. So I would expect PCB to be up, and I would expect E-M Solutions to be down to -- flat to slightly down. So that all equates to kind of a marginal increase quarter-over-quarter, second quarter to third quarter. So a lot of moving parts, but I think we're going to see some minor growth as we go into the -- when we finish up the third quarter.

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

Okay, that's helpful. And on the ASP increases on the PCBs, can you give us an idea on the blended rate what the increases are and what percentage or -- of success you had in terms of pass-through to customers?

David Sindelar

Our -- we had a -- and don't get me wrong, it wasn't an easy discussion with any customer. I mean, it was a lot of work, and it was a lot of effort on a lot of fronts. And I think, quite frankly, unfortunately for this industry, it would appear at times that we tend to lead on the price side. But again, when you have the cost pressures that we had and everybody has in this industry over the last 6 months, it's something that I think all good prudent business people would do. But with that said, we had pretty much 100% success across-the-board. And in each product, each customer, the pricing is a little bit different based on materials, copper content, things of that nature. But overall, we had -- I think if you took an average, it would be high single digit, but the range probably was, on some very simple printed circuit boards, probably in the 4% or 5% range, and some very complex heavy copper could be mid-double-digit type price increases. So again, we had -- it was kind of across the board. As we kind of look at what that means to us in the second half of the year, I would say that from a modeling perspective, probably high single digits is probably where you ought to look at.

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

Okay. And then just lastly on the Auto segment, which was up strongly both sequentially and year-over-year, where is that growth coming from? And do you see -- I mean, typically, there's a slowdown in the summer. But of course, with the implications from Japan, it looks like the seasonality is sort of out the window right now. How do you see that playing out for the next couple of quarters?

David Sindelar

Yes, the -- and this is -- and Matt, I know you and I on conference calls and in different times had a lot of conversations about what effect we thought Japan may or may not have. And I still believe that it had an effect, and I'm trying to figure out and pinpoint what that is. I think it's probably been on the smaller side than the larger side, but I think what it really did was it probably helped out the Western world auto producers more, obviously, than the Japanese guys. We continue to see fairly strong bookings in the automobile side, and I think we would expect to see that continue. We don't see any real weakening of that yet, and I say yet, just we have not seen any weakening of the automobile side. I think as we look at where it's coming from, it's pretty broad based. I think the -- one of the things that we believe we have is we have a very unique capability, high-quality, high-reliability printed circuit boards for the automobile side. And as a result, there aren't a huge number of people that play in that market. And as a result, I think we're getting at or above the market growth rates in the automotive side.

Operator

Our next question is from Frank Jarman of Goldman Sachs.

Unknown Analyst -

This is Carl Bueno [ph] on for Frank. I wanted to focus in on telecom. I see sequentially up 17% but down year-over-year. Can you give more detail into your sort of line [ph] drivers and growth expectations for telecom?

David Sindelar

Yes. The down year-over-year really relates to at the end of 2010. We had a customer decide to bring a fairly sizable chunk of business back in-house. They were producing it in-house, then we took it over from them, produced it for them, and they took that back in-house. So on a year-over-year basis, that was really the decline. On the telecom side, we -- the telecom market, and it's a bit of a mixed bag as you go around the world. Up until recently, the United States has really been the laggard of technology, the last one to move to 3G. And I think, based on everything I read in here, that going forward, the United States is going to lead the 4G implementation. So that should have a positive effect for our telecom sales going forward. I'm still waiting -- the trumpeted 3G implementation seemed to be coming for about 4 or 5 years. The 4G hopefully comes a little quicker and a little faster than the 3G implementation, but that should have a positive implication to us as it starts to get deployed.

Unknown Analyst -

Got it. And then just wanted to follow up here on the capital spending plan. Can you share with us the capacity utilization that you've seen and whether you're thinking about perhaps paring back the plan now that we have pretty uncertain macro trends surfacing?

David Sindelar

Yes, the dilemma that we have related to capital, and I'm sure everybody has a dilemma related to capital as we have, and kind of as a result of your question, but we have had -- and I'd have to go back and check. I know for a fact we've had 7 -- 6 quarters of positive book-to-bill. Throughout 2010, we built backlog to the tune of close to $70 million to $80 million. And so far this year, our backlog has grown by another $20 million. So with the demand that we've had, meeting customer requirements and things are going to require us to put some capital in. What we attempt to do is we try to do it in increments of capacity. So you build the -- you either build out the infrastructure you have or put the infrastructure in, and then you put increments of capacity in on the equipment side. So we try to make it scalable, and we try to make it such that we can pull back increments of that as we go. But as we sit here today, it's -- what I know today and what I knew last month and what I'll know next month is 3 different things, and we'll adjust accordingly. Based on backlog and what the market demand looks like and what our customers are telling us for 2012, I'm not sure that we'll -- I'm not sure that we're going to go in and dramatically cut our capacity reduction. In addition to that, you need to keep in mind that we are going to be moving out of our HZ facility somewhere over the next 12 to 18 months, and we need to make sure that we have that capacity at our other facilities. So it is a bit of a balancing act, but one that we've spent a lot of time planning and getting ready for.

Operator

[Operator Instructions] Our next question is from Eric Reubel with MTR Securities.

Eric Reubel - Miller Tabak Roberts Securities, LLC

If I could ask a little bit on the margin. Jerry, you mentioned that the pricing increases are going to take effect this quarter, but there could be some offsets from impacts of movements in Mexico. Could you give a little more color there? And how should we think about margin in Q3?

Gerald Sax

Yes, directionally, obviously, the price increases are going to improve. And how much of that -- exactly how it comes out is somewhat dependent on volumes and everything. We're seeing a couple of points up on the price side, as Dave suggested, on the PCB business. It's kind of middle to upper single digits. The move of Mexico will certainly have some impact, and it'll be phased over probably third and fourth quarter. I can't say that I have a specific number in my mind. But based on our experience with other factory closures and kind of what we anticipate happening as we relocate, it's not a big distance to move, and there won't be the severance and things that go along with a factory closure, as we've done in the past. I'm looking at spending something like $5 million to $7 million all-in for the move, most of which will relate to CapEx rather than expenses. But I also know from experience that there's some amount of inefficiency and building ahead and moving equipment and all that sort of thing. Between kind of non-recurring restructuring costs of just repairs and maintenance at the old factory and inefficiencies, perhaps we spend $1 million to $2 million over the next couple of quarters that will show up on our income statement rather than as CapEx.

Eric Reubel - Miller Tabak Roberts Securities, LLC

And sort of on the same lines, as you’re moving out of HZ over the next 12 to 18 months, do you have any sense of what the cash costs, if any, that will be associated with that wind down? And the transfer of products to other existing factories, and -- will that require sort of the building of working capital to support inventory to -- while you're qualifying the process in the move?

David Sindelar

Yes, we haven't kind of finalized the actual details. I mean, we've got a lot of details and plan on where we need to put the capital and capacity. And we're kind of working through a couple of things, and that's when the capacity is coming on, when in fact we should be shutting the plant down. We have it through December 31, 2012. So if you lived in perfect world, which we don't, we should be able to produce out of that plant throughout all of 2012. And what we're working on and we’ll probably have a little bit better vision to what that is by the end of -- or by the third quarter earnings call is the actual pluses and minuses and when we expect things to transfer and when the shutdown is actually going to occur. Our hope as it sits today is that we will be working diligently on getting our other facilities approved over the next 12 months so that we can just transfer the production as opposed to having to build inventory. Because we -- if the plan works, we'll have the capacity to move into, and we won't have to build inventory and then move the equipment and get it up and running. But long story short is, is that most of our effort to date has been with discussions with customers, beginning the approval process, getting the capital approved and getting it planned and getting it in place. And we're going to be refining the costs as we go over the next couple of months.

Eric Reubel - Miller Tabak Roberts Securities, LLC

Fair enough. One more question on CapEx, related question on CapEx, if I can. You’ve spent just less than $50 million in the first half of the year. There's the planned $100 million expansion plan. Can you give any guidance on where you think CapEx spending will come in for the year?

David Sindelar

Yes, I think if -- and again, the -- trying to balance what's going to show up as a cash capital versus what you're going to have to do to commit to doing it, because to spend $100 million over the next 12 months or $80 million over the next 12 months or whatever the number is, you have to commit a lot. And then -- and when the cash goes out -- but I -- right now, I would -- we're kind of modeling internally that we're going to write checks for a total of about $125 million worth of capital this year.

Eric Reubel - Miller Tabak Roberts Securities, LLC

One last question, if I can, and I’ll get back in the queue. I wanted to try to understand automotive a little better. You mentioned in your remarks that you believe that your manufacturing capabilities sort of differentiate you in the market that are -- and particularly with respect to auto, grow somewhat faster than the market. A lot of my other automotive -- other companies that have large automotive exposure have guided down for September, and they see a resurgence in Q4. But of course, that's going to be subject to economic demand and what's going on right now. What are you seeing that's giving you the confidence that you're going to see growth in Q3 out of auto?

David Sindelar

Our backlog.

Eric Reubel - Miller Tabak Roberts Securities, LLC

Your backlog.

David Sindelar

As I mentioned, we -- literally, if you look at 2010 and all the way this year, we've had a positive -- during that period of time, we've had a pretty substantial positive book-to-bill. So we have backlog in place. We're sitting here in the first or second week of August, and we do in fact get EDI runs so we can kind of have a vision to where our customers think they're going to go for 4 weeks or so out. And unless there's a -- they pull the string in really, really hard here in the next 30 days, which I don't believe is going to happen, I feel pretty comfortable that we should have a pretty solid third quarter. My -- again, if I was going to be concerned about the quarter as I'm sitting here today, I'd be concerned about the fourth quarter, not the third quarter just because I don't have as much visibility to it. Not to say that I am, but it's an interesting comparison of your other investments or accounts or whatever.

Operator

Our next question is from Nick Farwell of Arbor Group.

Nick Farwell -

Can I just get a clarification of -- I came in a little bit late, and the noise in the background. I wasn't sure if you were indicating that the high-single-digits guidance for the third quarter is price or is that incremental dollar volume from the second quarter?

David Sindelar

I think the -- I'm trying to recall what the guidance was or what the comment was, but I think when we were talking high single digits, I think it was relating to the effects of the price increase for the PCB customers. So as it relates to PCB, we had prices that range anywhere from 4% or 5% up to mid to high teens, and that if you took it as a total, it would be -- the price effect would be a total -- kind of in that high single digits. As it relates to overall volume, again not to get too confusing but try to be informative, is that we would expect the demand in printed circuit board to kind of continue with some price increases. But on the E-M Solutions side, because of all the things that occurred, strong demand, strong backlog, historically the second quarter in E-M Solutions has been high. It's kind of the installation season for the wind power product. That tends to be the biggest quarter. And so I wouldn't expect to see growth from there. Last year, we saw second quarter as the largest quarter in E-M Solutions, and then it drifted down. The third and the fourth quarter was a little less. So you get a -- so the E-M Solutions stuff is a little spiky based on weather, demand and a bunch of different things. So, net-net, we would expect this third quarter for us to be again slightly higher than the second quarter, but I wouldn't expect it to be double digits up.

Nick Farwell -

Right. So simplistically, if you were up, say, 7% or 8% and you had same unit volume, which is clearly simplistic, so you took the 250, and you might be 230, 235. Those are my guidance, not yours. And solutions could be down slightly for the reasons you mentioned earlier.

David Sindelar

Yes, I got Jerry punching in a calculator to make sure that when I say yes, it makes sense to say yes. But I think that makes sense.

Nick Farwell -

Okay. And then in terms of looking at incremental margins -- I’m unfortunately on the road, so I don't have my worksheets with me, but the incremental margin in the PCB business was roughly 14%. How does that compare with your own internal expectations and sort of where you think that number should be over time? Obviously, Printed Circuit Boards business is volatile and nothing is normalized, but if there were such a concept as normalized, where is that incremental margin? How does that look like relative to what you think it could be in a more sort of a normalized environment?

Gerald Sax

Nick, this is Jerry. It -- the price increases that we were looking for did not come in as quickly as we wanted them to. So the second quarter result is still lower than our objective. We’ve talked in the past about as we pass along $1 cost increase and charge another $1 price but doesn't add any incremental margin percent, but it does sustain the margin dollars. All of that being said, I think the sort of margins that we achieved in each of the segments last year in the third, fourth quarter, ought to be the continuing targets for this business. Obviously, we can't completely control the timing of materials cost increases or labor cost increases or all the things that plagued us during the first quarter this year, and we can try as hard as we can to pass along the price increases that go with that. But ultimately, that's somewhat outside our control. So you're going to see a little bit of variability, I believe, from quarter-to-quarter. But fundamentally, the business still ought to be the way the business was late last year, if that makes sense.

Nick Farwell -

Yes, well, and I'm trying to remember. Unfortunately, I didn't look at that before I left. But incremental margins of 14% were modest compared to what you -- I assume could -- you earned last year when you were operating in a more normalized environment in the second half. Is that -- do I remember that correctly?

David Sindelar

No, I think that's true. And -- but I think you can’t -- the first and second quarter were hit with a bunch of different things, and the timing of each one of those were hit were -- had an effect. So I think as you go through and look at the incremental margin or what is incremental margin from the first quarter to second quarter and what's that going to be in the third quarter -- for example, the minimum wage went into effect mid to end of February. So while our margins were hit in the first quarter, they're also hit on a full basis in the second quarter when you compare quarter-to-quarter. And so you had costs coming up and you had some -- we ran out and tried to get price as fast as we could, and then we had the incremental margin. So to get in and specifically fillet the effects of each one of those, I'm sure Jerry can do that. I'm not sure that we have that at the tip of our fingers right now. Because I -- and again, I'm not trying to dodge the question. I'm just trying to give you my honest reaction.

Nick Farwell -

Yes. And I'm under the distinct impression that there’s so many moving parts in your business to be able to say anything is normal is a misnomer to begin with. I appreciate that concept. It's just given the amount of capital you're putting into the business, an incremental margin of roughly 14% for this quarter is not a very attractive rate of return for an incremental $100 million.

David Sindelar

No, and I would agree with that. And I -- but I would also say that the incremental margin on a stand-alone pure basis is much higher than that. And we've always -- internally -- and I don't think we're backing away from it, is 30% to 35%.

Nick Farwell -

And just to make sure I understood on the solutions side of the business. And that is, I think what I hear you saying is because of seasonality and because of transfer of the manufacturing facility to a nearby larger facility, that there'll be an impact on margin. So if it’s going to be, as Jerry suggested, $1 million, maybe $2 million, sometime during the second -- I'm sorry, third and fourth quarter. If you generated $3 million in operating income, that's a rather notable amount you're going to absorb in the second half of the year then.

David Sindelar

No, I think that's probably an accurate statement. But the purpose of the move is really for growth opportunities. While the Juarez facility is being expanded, it's being expanded to accept production for one of our customers' products that are currently being produced in Asia. And then we have another customer coming online to back up the Asia sales. So net-net, it's -- we're doing it to grow in Asia, but it's really to accept an existing business. So it's -- on top of that, our Juarez facility had a lease that was running out. So we were either going to have to decide to stay where we're at, or we needed to move. And we decided to move into obviously a bigger facility, better facility, better-fitted facility for what we do and has the ability to grow with the transfer of that production from China back into Mexico.

Nick Farwell -

Right. And just 2 more quick questions. Does the fact that you had a seasonally strong wind power delivery out of the second quarter enhance operating margins or detract in general from operating margins?

David Sindelar

Typically, from an E-M Solutions standpoint, it's an enhancement overall. It doesn't have an overall because of the Printed Circuit Board margin.

Nick Farwell -

Right. Okay. So it's an enhancement to Assembly, of course. And you get scale effects. So you -- both of that's being reversed in the third quarter along with the expenses of the move?

David Sindelar

For that segment, yes, which then, obviously, our intent would be to offset any negative there by the growth in PCB and the increased pricing, yes.

Nick Farwell -

And Jerry, what was the tax rate as accrued for the first half of the year? I don't have that number in front of me. And then -- and what do you expect for the second half of the year?

Gerald Sax

I don't have a first half number in front of me. And as you know, it -- as I discussed on the last call, there were a number of old matters that are now past their statute, and we had some positives impacting in the first half. So it's really sort of confusing. I'll just say that I'll continue to use 35% in my modeling on a go-forward basis, and there should not be any noise from reversals of prior matters in the second half. I don't have a first half total in front of me, but it's something closer to 35% than the 50% for the quarter.

Nick Farwell -

Okay. So for the full year to be 35% or for the second half it will be 33% -- I'm sorry, 35%?

Gerald Sax

I always apply a 35% on a going-forward basis, and kind of what happens in a quarter is history. So I just use that as my model.

Nick Farwell -

Okay. So that would suggest then if it's 35% for the year, for the sake of discussion, that there will be a much lower tax rate likely in the third and fourth quarter, which may enhance earnings as reported?

Gerald Sax

Let me just do a quick calculation to make sure that...

Nick Farwell -

Do you follow what I'm saying?

Gerald Sax

Yes, it's -- actually, on a year-to-date basis, it's something closer to 30%, because we had the -- well, we had the negative in the first quarter and a big positive in the second quarter. So it's about $2.7 million year-to-date tax provision on $10 million.

Nick Farwell -

Okay. So 27% roughly?

Gerald Sax

Right, right.

Nick Farwell -

Okay, great. That helps me.

Operator

[Operator Instructions] I'm showing no further questions in queue at this time. I would like to turn the conference back over to Dee Johnson for any further remarks.

Dee Johnson

Thank you, Theresa. Thanks, everybody, for joining us today for Viasystems Group’s Second Quarter Conference Call. We'd be happy to do follow-up calls with you or help you with any background information you might need. Thanks for your interest in Viasystems. This concludes our conference call today.

Operator

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Viasystems Group's CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts