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Executives

Kelly Wetzler - Vice President of Corporate Development and Communications

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

Gerald G. Sax - Chief Financial Officer and Senior Vice President

Analysts

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

Jiwon Lee - Sidoti & Company, LLC

Unknown Analyst

Nick Farwell

Viasystems Group (VIAS) Q4 2011 Earnings Call February 14, 2012 3:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to Viasystems Group's Fourth Quarter 2011 Conference Call. [Operator Instructions] And as a reminder, this conference call is being recorded. I would now like to introduce Kelly Wetzler. Ms. Wetzler, you may begin.

Kelly Wetzler

Thank you, Matthew. I'd like to welcome everyone to Viasystems' Investor Conference Call for the fourth quarter of 2011. If you need a copy of today's earnings press release, you'll find it at viasystems.com. We have also prepared some slides, which you will find 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 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 provision 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 discussions 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 exclude certain material items and 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.

David M. Sindelar

Thanks, Kelly. Good afternoon, everyone, and thank you for joining our call. I will begin by referring to Slide 4 of the presentation material. We're very pleased with the strong finish of 2011. The finish was the result of solid performance with the benefits of premium sales to meet unexpected demand. Throughout our presentation, you will hear references to premium-priced opportunities that bolstered our profitability in the fourth quarter. Those opportunities primarily came from 2 sources: customers that lost PCB sources as a result of the Thailand floods and higher-than-normal premium sales from our existing customer base.

Our consolidated fourth quarter sales of $269 million grew 10.3% year-over-year, while seasonally declined 3.5% sequentially. Our PCB segment sales increased 13.9% compared to the final quarter of 2011, while our expected seasonal sequential decline in this segment was essentially offset by the premium-priced opportunities we captured. Our assembly segment sales declined 4.5% year-over-year and 17.2% sequentially. Fourth quarter bookings increased approximately 3.9% compared to the third quarter. As a result, we returned to a slightly positive book-to-bill for the quarter, which also resulted in a full-year 2011 bookings on par with sales.

In the fourth quarter, we achieved a 210 point basis -- excuse me, 210 basis point sequential improvement in our gross profit as a percent of our net sales, resulting in a gross margin percentage of 23.5%. The improvement resulted from a combination of PCB premium pricing, the overall higher mix of PCB versus E-M Solutions, the reduction in the PRC energy rationing limitations on our capacity and higher cost absorption from build ahead inventory to compensate for Chinese New Year factory shutdowns scheduled in January.

Our adjusted EBITDA was $44.1 million for the quarter or 16.4% of net sales. On adjusted EPS basis, we had $0.97 per share for the quarter. Jerry will provide more color commentary on the adjusted EBITDA and adjusted EPS in his comments.

Turning to Slide 5. I want to review our revenue performance by end markets. The automotive market continues to be the largest of our end markets, representing 40% of our fourth quarter net sales. Automotive sales increased 23% year-over-year compared to the fourth quarter last year. And while we saw a 5% decline in sales compared to the immediately preceding quarter, I want to note that our fourth quarter automotive bookings were up both sequentially and year-over-year. I think we have some momentum as we enter 2012 and customer forecasts seem to support a relatively optimistic outlook for the year.

Industrial and Instrumentation remains our second-largest end market at 23% of the fourth quarter net sales. And as a reminder, I&I is a catchall category for us and includes wind and solar energy, medical, locomotion and others. As I highlighted on our call 3 months ago, the seasonally -- seasonality of demand in this market was exaggerated by customer inventory corrections after a buying spike follow the Japanese -- following the Japanese issues in early 2011. We're seeing particular strength in demand for the wind energy product prior to the scheduled end to the domestic tax credits.

While definitional lines between Datacom and Telecom continue to blur with the convergence of voice data and video communications, we have enjoyed significant upside in demand from our existing and new Computer and Datacom customers. And it represented 18% of our fourth quarter net sales. In particular, I'm encouraged by the double-digit sequential growth and nearly 50% year-over-year growth in our Computer/Datacom sales. We're also looking forward to opportunities that may stem from the market trend towards cloud data storage.

On the other hand, traditional telecom demand continues to languish. This end market has fallen to only 15% of our fourth quarter net sales. Our Telecom customers continue to slide upside [ph] for pending 4G and LTE buildouts, but I'm not seeing any momentum and there doesn't appear to be any other impetus for directional change in this end market. Perhaps the best thing I can say is that I can't see it getting any worse.

The Mil/Aero market sector remains about 4% of our total sale for the quarter, while the upswing in bookings that I highlighted 3 months ago turned into both sequential and year-over-year growth. Gaining market share with existing and new customers continues to be our focus for 2012.

Moving to Slide 6. Let's talk a little bit about what we're seeing for the coming year. As I mentioned earlier, it's difficult to imagine that the market will sustain demand for premium-priced products at the level we experienced in the fourth quarter. The Thai-based competitors are expecting their production to come back online mid-year, which supports my assumption. We think we permanently captured some of the displaced demand, but I fully expect some of the production will be sent back to those sites when they come back online. Conversely, we can certainly count on continued upward pressure on labor costs in China. Beijing recently announced plans calling for mid-teen percentage increase on minimum wage, which is down from the 20% increase we saw in 2011. This is not unexpected by Viasystems, and I think it is also expected by our customers. This doesn't mean that we'll be able to pass along these costs per se but we'll need to find offsetting production efficiencies.

Another challenge we expect to see carry over into 2012 is the PRC energy rationing, particularly during the summer months when demand causes peak energy usage across the country. Unfortunately, this cuts directly into our production capacity, in addition to causing inefficiencies in cost management. It is simple math but a day per week mandated shutdown of energy conservation reduces our productive capacity by almost 15%. In some cases, we have been challenged by 2 days per week shutdowns.

Another unique challenge that we will face in 2012 relates to the closing and relocation of our Huizhou or referred to HZ PCB factory in China. As a reminder, this is the result of the landlord's decision to redevelop the surrounding manufacturing campus into commercial/residential space. This will require us to build our capacity to allow us to transfer this production to our other plants. Expansion efforts are currently in process in our other Chinese PCB factories, which will provide the needed replacing capacity in the latter part of 2012. The subsequent redeployment of HZ's equipment should provide overall capacity expansion after the move but that will most likely not materialize until 2013.

As you would expect, there will be non-recurring costs associated with closing the factory such as severance, cleanup, transfer equipment, et cetera. Fortunately or unfortunately, we have had a fair amount of experience of factory closures, so I think we know how to make this as painless a process as possible. In order to allow us to quickly control this process, we plan to buy out the 15% of the business owned by our joint venture partners in early 2012. The cash buyout of an estimated $10 million is on top of the statutory cost of severance for the HZ employee base, as well as the cost to clean up and exit the site, which should be in the range of $13 million to $15 million in 2012. Jerry can add color to all the related expected financial reporting implications.

Summarizing, I think the capacity issues we face will limit our annual growth to a range of 4% to 8% in 2012. Fighting for improvements in our production efficiencies to offset the Chinese manufacturing environment cost increases should allow us to hold our traditional gross margin profile. The capital required to transfer the HZ production should begin to be depreciated in the second half. As a result, we'll see an increase in the non-cash costs. Excluding the non-recurring costs of the HZ closure, I would expect our operating profit rate to improve over our full-year 2011 rate.

With that, I'll turn it over to Jerry.

Gerald G. Sax

Thanks, Dave. I'll begin my comments by referring to Slide 7 or the first table included in this morning's press release, which highlights sequential and year-over-year comparisons of our quarterly income statement. Dave's already covered the year-over-year and sequential comparisons of our net sales and gross margin, so I'll jump down a couple of lines to SG&A, which was $21.6 million or 8% of net sales for the fourth quarter. For the full year 2011, SG&A costs were 7.6% of sales, so the run rate in our fourth quarter was a bit above the average. Based on the strong operating results for the quarter, incentive compensation expense was at a rate higher than our annual run rate, and SG&A expenses in the quarter also included approximately $0.5 million related to the proposed stock offering, which was ultimately canceled.

Moving on to depreciation expense, which was $17.2 million for the quarter, you'll note that the quarterly run rate continues to inch up in connection with our capacity expansion and site relocation activities. In the final quarter, we also reported just under $950,000 of restructuring costs, which related largely to the relocation of our Juarez, Mexico factory as we discussed on this call 3 months ago.

Looking ahead for a moment, as Dave noted, we expect to report restructuring charges in 2012 in connection with the closure of our HZ factory in China. While much of the cash outflow should occur late in 2012, I believe we'll be required to report a portion of the charge earlier in the year after our planning for the process is finalized. I think you may see some charges reported in our first or second quarter results, and we will separately identify those costs versus recurring operational costs when we do that reporting.

Turning your attention back to the fourth quarter of 2011, operating income increased sequentially to $23.1 million or 8.6% of net sales. Of course, this solid operating profit was driven primarily by the strong gross margin result.

Other income and expenses remained in line with the comparable sequential and year-over-year periods and as a result, income before taxes improved to $15.4 million compared to $13.3 million last quarter.

Our income tax provision in the fourth quarter, which was a tax benefit of $129,000, reflects an improved utilization of our U.S. net operating losses in 2011, based on some structural changes we've been working on for some time. It makes this quarter's effective tax rate meaningless but it improved the year's effective tax rate to about 22%. Looking forward, based on the expiration of statute of limitations for a couple of our historical tax contingencies, I expect that we'll report an effective tax rate under 35% for the first half of 2012. But for my planning purposes, I continue to use an overall 35% annual effective tax rate. I probably mention this on every call but China continues to be very aggressive in finding ways to tax foreign-owned companies that are doing business there.

Income available to common shareholders improved sequentially to $15 million and on approximately 20 million shares resulted in GAAP diluted earnings per share of $0.74. Our 2 non-GAAP measures, adjusted EBITDA and adjusted EPS, are reconciled at the end of the presentation materials and also at the end of the earnings release. As a reminder, we primarily use GAAP metrics to measure our business performance, but we also monitor and report these non-GAAP measures to allow readers to make comparisons to others in our industry. As Dave highlighted, adjusted EBITDA improved to $44.1 million or 16.4% of net sales for the fourth quarter after adding back our usual items, such as the non-cash effects of depreciation, amortization and stock compensation. And in the fourth quarter, our normal add-backs for cost of restructuring and equity transactions were a bit higher than in recent quarters. Adjusted EPS improved to $0.97 for the quarter after adding back such items as non-cash effects of stock compensation, amortization and our non-cash interests, together with the restructuring and equity transaction costs that I just mentioned.

Moving on to Slide 8 of the presentation or the third table in today's press release, you can see that the cash provided by operations in 2011 was $71.4 million. Of that $71.4 million, about $31.4 million was generated during the final quarter of the year. We have not included a balance sheet in the presentation materials but you may notice from the second table in today's press release that our invested working capital was a bit higher than usual at the end of the year. This increase relates primarily to the inventory buildup that Dave mentioned earlier, which was planned to allow us to continue shipments to customers during the January factory shutdowns for Chinese New Year.

Looking to investing activities, our 2011 CapEx was $101.7 million with the fourth quarter contributing near the $25 million per quarter pace that was fairly consistent during the year. As Dave mentioned, our capacity expansion activities continue, though much of the new capacity in 2012 will be dedicated to the relocation of the legacy Huizhou site production requirements. We'll probably exceed the $100 million CapEx market again in 2012 in connection with the expansion and relocation activities.

You can see that we have very low cash movement from financing activities during 2011. Availability under our domestic and foreign credit facilities was about $90 million at the end of 2011, which complemented our year-end cash balance of $71.3 million. Overall, our cash balance increased modestly during the final quarter of the year and declined about $32 million compared to a year ago, driven primarily by the increased investment in working capital together with our capacity expansion and site relocation projects. The balance of the presentation materials simply demonstrate the reconciliations of our non-GAAP measures.

With that, I'll turn it back over to Dave before we start the Q&A.

David M. Sindelar

Thanks, Jerry. With that, I'll turn it over to Matthew for questions-and-answer session. Matthew?

Question-and-Answer Session

Operator

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

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

First question regarding the strength that you saw in Q4 from Thailand-related orders. Was that in both the Datacom and the Auto business or mostly in the Datacom?

David M. Sindelar

Mostly in the Automotive business.

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

Okay. And do you expect to see -- are you still seeing orders related to that this quarter? And would you also expect to see premium margins? Or is that starting to go away?

David M. Sindelar

I think what we'll see and it's really kind of hard to tell when the competitors are going to come back up online. I think what we'll see is anytime you have a shock like that, there's an immediate order need to keep things running and then they try to filter it into the normal production size. So I would expect some premium sales in the first quarter nowhere near the same level, and I would expect them to kind of run off as we go through the first half of this year.

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

Okay. And is that primarily, Dave, connected to the PCB suppliers selling into the Japanese food chain -- the automotive food chain?

David M. Sindelar

No, not really, not really. It's -- the company went down over sold to Western world companies as well, but it did have a minor -- it had an effect on the Japanese as well.

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

Okay. Because typically -- with Chinese New Year, you typically have a down March quarter. I mean, are you expecting to be down seasonally even with Thailand?

David M. Sindelar

Yes, yes. We will. We will.

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

And then you'll see sort of a standard margin erosion quarter-to-quarter because of the lower utilization rates?

David M. Sindelar

Yes, absolutely.

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

Okay. And just a question regarding -- or 2 regarding your Huizhou facility in that transfer. What percentage of sales comes out of that facility?

David M. Sindelar

Total -- company-wide, total sales are probably 8% to 10%.

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

Okay, 8% to 10%. And then, are you build -- how many weeks of inventory are you building in advance of that transfer?

David M. Sindelar

And right now our plan is to begin the takedown of that facility starting some time in the second quarter, latest third quarter and kind of just take it down in chunks as we go throughout the year. So our hope is that we won't have to overbuild too much inventory. We've been in the process of trying to get the other facilities approved from a product approval standpoint -- production standpoint. So what we're hoping to do is to take chunks of business out, and we are going to take it and move it into our 3 other facilities. Zhongshan facility will take the bulk of it, but Guangzhou is going to take a piece of it and our Huiyang or HY facility will take a piece of it as well. So it's not just one plant going into another plant. It's one plant getting sliced up into 3 other facilities.

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

Got you. And customers need to -- can requalify you then because you're in a different facility?

David M. Sindelar

Yes. And most all the business in that facility is automotive and automotive has a pretty extensive approval process. In some cases, we already have approval -- a multi-plan approval. But in a large number, we did not and we have started this process. We started the cross-qualification probably 6 to 9 months ago, so it'll continue on until the -- we're hopeful that by mid-year, we'll have everything cross-qualified.

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

Okay, great. And then regarding the energy-related factory shutdown that you anticipate in the summer, remind us what happened last summer? And do you see a repeat? Is that just basically changing the seasonality of your business now? Or is there other things that you can do?

David M. Sindelar

During all of 2011, and quite frankly, part of 2010 and 2010 wasn't nearly as large or significant as 2011 was. But 3 of our facilities had anywhere, which was Zhonghsan, HY and HZ, had at least 2 to 4 days of rolling blackouts. And sometimes they're able to negotiate more and sometimes the energy peaks are there and sometimes they're not. But that was pretty consistent and I think from a planning standpoint, we -- as I'm sure you're aware, we put some additional capacity in throughout the last 6 to 9 months. We're going to put some additional capacity in this year but with that said, with the blackouts in the hot months, we're not getting the 100% of that capacity. So as a result, it kind of shaves down the May, June, July and August ability to ramp at 100% of capacity. So what we're doing to try to counteract that is we're looking to potentially build some ahead and looking to potentially push some out into September, October time frame.

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

Typically, how much of visibility do you have on that?

David M. Sindelar

Once we get into the months, where we have -- where they're starting to have energy issues, we're able to, for the most part, kind of negotiate. It is Mondays or it's Fridays or it's Sundays. Some of the things that we're trying to do to offset the effect is just that we have periodic inventory stock-taking days, and we're going to align our stock-taking days with the blackout periods. So we're going to take our factory down anyway to do it because of the inventory -- kind of our inventory. So we might as well do it on a blackout day. So -- and again, you have the normal -- we're going to go to the government and to the electric company and twist everybody's arm and tell them that we need more power and more electric and things of that nature. One of the things that we did do probably 5, 6 years ago and we spent a fair amount of money for a power substation at our Guangzhou facility. And what that allows us to do is it allowed us to hook up power coming from 2 different power plants and it broke down at our substation, which has allowed us to have Guangzhou be -- to have little or no effect as a result of the rolling blackouts. So it really just affects 3 of our facilities, not all 4.

Operator

Our next question comes from Jiwon Lee with Sidoti & Company.

Jiwon Lee - Sidoti & Company, LLC

First, just wanted to go back and get an idea for how much of these premium pricing that you talked about help the revenue and the gross margin?

David M. Sindelar

Yes. On the top line, it affected us to the tune of about -- I think the number is about $6 million. And then on the margin side, and again, I don't have the exact number in front of me. But I believe it's in kind of that $2 million, maybe $3 million range.

Jiwon Lee - Sidoti & Company, LLC

That's helpful. And in relation to the China energy rationing and the Huizhou relocation, are you suggesting there might be some revenue loss potentially?

David M. Sindelar

On the -- currently, we believe that based on what we're predicting to be the blackouts, we will not lose revenue. But again, if China comes in and says we need 2 days instead of 1 day a week, that is a risk. We don't think that's going to happen. We think we are going to be able to manage through the peaks and the valleys. Unfortunately, the -- probably the highest -- one of the highest demand periods for the automotive sector is kind of in that May, June, July time frame and that's the period where the energy blackouts are the highest. But right now we think we can balance between plants or we can balance with production. So it is something that we had in 2011, and it is a big issue that we're going to work through in 2012. But right now, we don't believe it will affect our revenue and in kind of the ranges we gave you is where we think. With the HZ, Huizhou facility, currently, we believe that we're going to be able to in blocks of business and primarily, when I say blocks of business, it's customer transfers. So we've got a transfer plan that will take customer A and move it to Guangzhou on this date. Customer B, this block will go to HZ or Zhongshan on this date and the current plan is that we don't believe we will lose any business.

Jiwon Lee - Sidoti & Company, LLC

Okay, great. And then, in conjunction with your Auto 8% revenue growth expectation for this year and also the push and takes you talked about the costs in China and what not, how should we be thinking about the gross margin from the fourth quarter level over the next few quarters?

David M. Sindelar

I think our -- we think that kind of historical levels and obviously, the fourth quarter because of the premium pricing is not kind of historical level. But I think we took the historical levels for all of 2011. It's kind of where we think the margin profile is going to be, maybe slightly higher.

Jiwon Lee - Sidoti & Company, LLC

And the materials costs, especially the laminate, it appears that they may be coming down a little bit. Is that the kind of a trend that you guys see? Or anything that you could highlight that might be different from the fourth quarter?

David M. Sindelar

Yes. Now the -- as I'm sure you remember from the first half of last year kind of January through April, we saw some pretty dramatic increases and that followed the spike in copper. And then towards the end of the year, we had some copper weakening and we saw the beginnings of what I would refer to as the market softening a little bit. But just recently, copper spiked back up. And I'm not sure that I would expect to see any dramatic decline in our copper-clad laminate prices. So we've had some go down slightly. We've had most of them stay the same and the drums I'm hearing right now is we may see some firming to slight increases.

Jiwon Lee - Sidoti & Company, LLC

Okay, that's helpful. And one for Jerry, I may have missed the comment about when and how this $13 million to $15 million of the non-cash charge may break out in later part of this year or early next year.

Gerald G. Sax

The rules -- the accounting rules will dictate. As we solidify the various facets of our plan for shutdown, we'll be required to accrue pieces of that overall charge. So it's not going to all happen in one particular quarter, even though the final shutdown will probably happen in the fourth quarter. So, for example, I believe that the rule is, if you're going to pay out severance to employees, you'll be required at the end of any particular quarter to accrue any severances that you will pay out in a 60-day period. So it's -- as Dave suggested, we'll do this in bite-size chunks. A portion at a time will be accrued earlier in the year, representing the things that are required to accrue. So we don't have the plan really finished right now. So I can't tell you what any -- specifics what that is but just for overall planning purposes, the $13 million to $15 million is kind of the range we're looking at for the full year.

Operator

Our next question in queue comes from Parker Poland [ph] with Wells Fargo Securities.

Unknown Analyst

I'm trying to wrap my head just around the end-market side of things and looking forward, should we sort of expect the end markets to stay kind of the same? Or trend with kind of Computer and Auto continuing to increase as a portion and Telecom declining?

David M. Sindelar

I guess my sense of it is that -- what I'm seeing in the automotive side is pretty strong and it continues on. I mean, it was also -- it was strong throughout most of 2011 and took a little bit of a breather in kind of September, October, November time frame. But I would believe and what you see is -- I think I saw January Auto sales came in at $1.2 million. So you're really on a 14%, 14.5% pace for North America, which is pretty encouraging. So I would expect the Automotive continue to be strong. It looks like the Computer/Datacom is going to continue to be strong. If you believe all the hype on the Telecom side, sooner or later, it's going to wake up and it's going to start growing. But the much touted 4G/LTE installation in North America, if they're installing it, we're not seeing it. And quite frankly, everybody I talk to doesn't seem to be seeing it either. So I think from a planning standpoint, I'd rather plan for the downside and be pleased with the upside. But right now, we're not planning any near-term spike.

Unknown Analyst

Okay. And then within the ASP, the impact this quarter, was that pretty much across the board? Or did certain segments benefit more or less? And then, I forget if she actually covered this in the last question, but how should we look at sort of the ASPs going forward off of that?

David M. Sindelar

Yes. The premium-priced product came in the automotive sector. So that would raise the average selling price for automotive and everything else is pretty consistent. And as we move forward, we will make minor tweaks here and there but by and large, I think the average selling price will stay relatively consistent x the premium-priced product.

Operator

[Operator Instructions] Our next question comes from Nick Farwell with the Arbor Group.

Nick Farwell

I missed the very beginning of the call so if this is repetitive, please tell me and I'll re-listen to it. But you commented on the Auto to some extent but I didn't hear another comment about Telecom.

David M. Sindelar

The only comment I made about Telecom is that it's weak. It's been weak and it was weak during the second half. And we're not seeing any bounce. I've been trying to poll the world to figure out if there's a bounce but anybody is seeing a bounce and I haven't. If there's one out there, I haven't seen it, neither heard about it.

Nick Farwell

It's also that it may be just seasonality but the fourth quarter Auto sales relative to summer or third quarter Auto sales, obviously, showed some improvement worldwide not just domestically. Is there just a lag associated with your business sequentially, that is third versus fourth?

David M. Sindelar

I think what you saw in the third quarter is you kind of saw the culmination of a bunch of things. We were struggling with the rolling blackouts on electricity and therefore, limited in our capacity and our backlog was building. And then once the rolling blackouts kind of calmed down, we had the capacity to shove the sales out. So I think we saw kind of an artificial spike in the third quarter. I guess, if you take the third quarter anomalies out a bit, I think, if I remember, we were up almost 25% quarter-over-quarter, 11 to 10, which was pretty significant growth.

Nick Farwell

So what would you expect going -- given these U.S. sales in January, if that's any sort of one data point, what would you expect your Auto in general should be up this year? Just a range.

David M. Sindelar

I think the kind of the overall revenue guidance in that 4% to 8% is kind of as we're sitting here today and we're basing that on being able to put the capacity in, particularly for moving the HZ facility in and trying to put growth capital in and everything else. So that's kind of the overall guidance on the top line.

Nick Farwell

Right. And to what degree is that a function of changing an ASP in auto? That is you're getting rising ASPs but perhaps somewhat slightly lower units. That unit growth might be 2% but ASPs are up 4%. So you're growing 5% or 3% or something like that. Do you follow what I'm saying?

David M. Sindelar

I do and I haven't gone back and compared. I don't have the data on the top of my head. Quarter-to-quarter, fourth quarter to first quarter kind of going run rates, we don't see much substantial change in the ASPs.

Nick Farwell

Okay. On another question, I just want to make sure I understood correctly. If you would take operating income for the fourth quarter and you adjust out restructuring, just out my numbers, say, $1.5 million for the incremental premium business you have, if I'm correct, you end up with $22.5 million of operating profit or 8.4% of the volume of $269 million. If you use that as a matrix or use that as a base point, what kind of guidance would be -- the year was 6.8% on the same adjusted basis. What kind of guidance would you suggest, given all the changes you have in front of you and recognizing it's incredibly difficult to project this? But what kind of guidance would you suggest for operating number normalized taking out all restructuring charges associated with HZ?

Gerald G. Sax

I understand the question and as you said, there are a lot of moving pieces in here, not the least of which is the fact that our depreciation expense should continue to increase and that's going to start trimming that operating income a bit.

Nick Farwell

And also it really happened, though, here in the fourth quarter. I mean, sequentially, you went up from 16.5% to 17.6%. So you're already capturing presumably a part of that the fourth quarter.

Gerald G. Sax

You're exactly right. But it will continue to go up as we continue to do our expansion. So as the machinery and equipment comes online it's a little bit of an art to predict exactly when the depreciation expense will take off. I've said on a number of occasions that I think 8% operating margin remains a long-term recurring target for this business. There are going to be quarters where we're are ahead of that and quarters where we're behind it but I think kind of even-keeled across a period of time, 8-ish-percent is not a bad target.

Nick Farwell

Okay. And one last thought is to what degree have you guys given consideration to diversifying your production outside of mainland China?

David M. Sindelar

I can tell you I've given it a lot of thought, and it's not as easy as you might think on a -- from a 60,000-foot level. Some of the issues that you're dealing with in China are increases in electric, increases in labor. On the labor side, you have to realize that when you get a 15 or 13, I think Beijing just announced last week that the overall country minimum wage is up 13%. When you apply 13% to $120 a month, it's kind of hard to justify moving a $300 million, $400 million facility outside of China. So that's number one. Number two, we've tried to look to see if there's low-cost regions of the world that we can transfer new production to. But when you look at where your major material comes from, your copper-clad laminates come from 3 regions of the world. It's either North America, Europe or China. So if you move to Northern Africa or Eastern Europe. You can't use your European produce to copper-clad laminates because they're overpriced. You have to ship it from China. So it becomes a pretty difficult decision. There has to be a good supply of electric. There has to be a good supply of water. We continue to look and analyze and trying to figure out where and when it makes sense. I would tell you, as we sit today, I have yet to figure out the -- for lack of a better description, the new China, where to go. We went to China back in 1999 and I'm looking for the 2012, '13 or '14 version of China and I have yet to find it. So...

Nick Farwell

Just one thought on that and that is there's been a fair amount of discussion and some actual capital investment over the last 6 to 9 months back here in the United States. I'm not aware of that occurring necessarily in your sector. But given the nature of the business domestically and the fact that there's probably still some excess capacity, would that be of some interest to you guys looking out to the next year or so?

David M. Sindelar

We try to balance what our customers are telling us in our production capacity. In the United States, we still have some capacity in our San Jose facility. So if the demand is there -- a quick turn but there's still some capacity there. On our Forest Grove facility, with some purchases of equipment to fill in some bottleneck operations, we should be able to expand the production capacity there fairly significantly for our Forest Grove. So if, in fact, we get a spike, we should be able to take care of it. Now if all of a sudden the world changes and we have to double the capacity out of Forest Grove, we'll be looking for something different. But based on kind of my understanding of what's going on in the market, we have some flex to upside our production in North America. Our North American production is -- our total North American production is probably $140 million, $150 million right now and if we spend a couple, $3 million, $4 million, we could probably increase it to $200 million.

Nick Farwell

Yes. And then I'm assuming that's Forest Grove, given that they had the old Merix operation?

David M. Sindelar

Yes, yes, absolutely.

Nick Farwell

Which data creeped up maybe 2, 3 years ago. So I would assume to be able to add incremental $50 million or so would not be too much in the way of an incremental capital cost?

David M. Sindelar

Yes. And I think it's -- we could probably spend a couple of $2 million to $4 million to get capacity up, which you're also seeing is 3 to 4 years ago, they were throwing in -- I guess, it was probably -- maybe 4 or 5 years ago, they put some capital in there. But some of that had been transferred over to China.

Operator

And at this point, I would like to turn the program back to our presenters for any concluding remarks.

David M. Sindelar

Great. I truly appreciate everybody's time and questions. And I look forward to talking to you all very soon. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may now disconnect.

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