Viasystems Group's CEO Discusses Q1 2012 Results - Earnings Call Transcript

May. 9.12 | About: Viasystems Group, (VIAS)

Viasystems Group (NASDAQ:VIAS)

Q1 2012 Earnings Call

May 09, 2012 11:00 am ET

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

David M. Wong - Wells Fargo Securities, LLC, Research Division

Jiwon Lee - Sidoti & Company, LLC

Franklin Jarman - Goldman Sachs Group Inc., Research Division

Tony Venturino

David Sagalov

Operator

Good day, ladies and gentlemen, and welcome to the Viasystems Group First Quarter 2012 Conference Call. As a reminder, this conference is being recorded. I'd now like to introduce Kelly Wetzler. You may begin.

Kelly Wetzler

Thank you, Tyrone. I'd like to welcome everyone to the Viasystems investor conference call for the first quarter of 2012. 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, and good morning, everyone and thanks for joining the call today. I apologize in advance, I've got a little bit of a spring cold, so if I cough, I -- it's -- I apologize. But anyway, I'll begin with referring to Slide 4 of the presentation. And I'm afraid that our solid start to 2011 may be overshadowed by the exciting news of our acquisition of DDi Corporation, the announcement -- and the announcement of a long-term capital structure to support the combined businesses. I'll come back to those topics later but I wanted to start talking about our first quarter.

Our consolidated first quarter sales were $262 million, they grew about 10% year-over-year while seasonally declining about 3% sequentially. Our PCB segment sales increased about 11% compared to the first quarter of 2011, and while our expected seasonal sequential trend was affected by the absence of the PCB premium pricing opportunities, we talked about in our last conference call.

Our assembly sales increased about 7% year-over-year and approximately 9% sequentially. First quarter bookings increased by about 5% compared to the fourth quarter of 2011, and resulted in a 1.08:1 book-to-bill ratio for the quarter. Looking forward to the second quarter for a moment, we expect to see seasonal sequential increases in both net sales for each one of the segments.

Compared to the first quarter last year, we achieved a 40 basis point improvement in our gross margins as a percent of net sales resulting in a gross margin of about 19.5%. This improvement resulted from selling price increases implemented in the mid-2011 period partially offset by the cost of labor and material compared to the same period a year ago. The decline in our margin sequentially resulted from a combination of the seasonal costs associated with the Chinese New Year holidays and the reduction in the premium priced opportunities.

Our adjusted EBITDA was $33.1 million for the quarter, or 12.6% of net sales. Our adjusted EPS was $0.32 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 wanted to make a few comments about our revenue performance for each market. Automotive continues to be the largest of our end markets representing about 40% of our first quarter net sales. Automotive sales increased 15% year-over-year compared to the first quarter last year. A 3% seasonal decline in automotive sales compared to the immediate preceding quarter was related primarily to the Chinese New Year holiday and the premium sales that we talked about in the fourth quarter. I&I remains our second largest end market at 24% of first quarter net sales. As a reminder, I&I is a catch all category that also includes wind and solar energy, medical, locomotion and other industries. It sustained a demand -- sustained demand from a broad-base of customers as end market compensated for slowing demand from a couple of our larger customers. The acquisition of DDi is expected to deepen our customer base in this end market.

In our Computer and Datacom market, the trend of strong year-over-year growth began about a year ago and it continued to the first quarter 2012 resulting in a 41% growth in net sales compared to the same quarter last year. The year-over-year comparison will become more challenging as we move through the rest of 2012, but will remain bullish on our opportunity in this end market. Computer/Datacom represents 17% of our first quarter sales. DDi participates in this end market and as a result, supervise further momentum for the combined business. In Telecom, while the net sales comparison continue to look soft, I was encouraged to see a positive book-to-bill ratio in the -- for the first time in almost a year. With that said, expectations of increasing demand are just still expectations and we are not yet seeing any real signs of strength in this end market. This market end made up about 15% of our first quarter sales.

The military and aerospace market remain 4% of our total sales for the quarter, but improvements both year-over-year and sequentially. This is another market which the combination of Viasystems and DDi will make us more relevant to this market.

Moving to Slide 6. I'll take a -- I'll make a few more comments about what we expect from our first quarter. The positive book-to-bill ratio in the first quarter -- what we expect in the second quarter. The positive book-to-bill ratio in our first quarter is consistent with our experience over the past couple of years or a seasonally strong second quarter sales. In addition, as expected, Beijing announced the minimum wage increase which will be effective during the second quarter, and as we move into the busier warmer months, we expect to see a return of the energy rationing in China. While we cannot eliminate the impact of both of these factors, our planning efforts will focus on minimizing their effect. We're making progress with our plans to consolidate the operations of our Huizhou and Qingdao plants into our other Chinese facilities. At this point, we expect to continue to operate in our Huizhou factory into the second half of the year while we are working with customers to approve the transfer of the part numbers to our others sites. Jerry will talk a bit more about the related non-recurring costs of these factory moves.

As you can imagine, we've been quite busy over the past couple of months, working on preparations to acquire DDi and on the completion of our long-term financing structure. When we announced the acquisition, I noted that we'd be -- that it would be accretive to our earnings without regard to expected synergies. Let me do a little quick math for you. DDi's adjusted net income in 2011 was just under $25 million, adjusted for the related interest cost of our incremental borrowings to fund the acquisition that would have resulted in about $0.05 net accretion to our EPS. If you factor in the $0.50 per share of expected synergies, the net overall accretion related to the acquisition would've been about $0.55 per share. On top of that, our interest savings from refinancing our existing long-term debt will net us an annual savings of about $8.3 million, or $0.40 per share. So as you can see, this series of transactions are very beneficial to our go forward EPS and I'm excited about the potential value both of these significant events will provide to our shareholders. With that, I'll turn it over to Jerry.

Gerald G. Sax

Thanks, Dave. As Kelly highlighted, we filed our press release earlier this morning and as an update, we'll plan to have our Form 10-Q on file with the SEC later today. I'll begin my comments by referring to Slide 7, or the first table 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 as usual, I'll start my comments with the SG&A line, which was $21.5 million or 8.2% of sales for the first quarter. If you're looking at SG&A cost trends, here are a couple of things to note. Included in the SG&A for the first quarter is about $1.2 million of due diligence expenses related to the DDi acquisition. In addition, based on equity incentive awards granted during our first quarter, our noncash incentive comp costs included in the SG&A line item increased to a total of $2.4 million in the quarter. Finally, cash incentive compensation costs increased year-over-year compared to the first quarter of 2011, but actually decreased sequentially compared to the fourth quarter.

Moving on to depreciation expense, which was $17 million for the quarter. It remained relatively flat compared to the immediately prior quarter. Much of our capacity expansion CapEx is still in the process of being installed and is not yet being depreciated, but I do expect depreciation expense to increase as we move through 2012.

You'll note that we reported $7 million of restructuring costs, which related primarily to estimated severance costs, which will be paid later this year in connection with the closure of our Huizhou facility. As I mentioned on our call, with you 90 days ago, even though the cash will be paid later this year, the accounting rules required us to accrue this estimate in our first quarter. A less significant portion of the restructuring costs were actually related as well to our plans to consolidate our Qingdao-backed operations back into our Shanghai factory. At this point, we're still estimating $13 million to $15 million in total restructuring cost in 2012 related to those 2 actions.

We're still in the planning stages for the integration of DDi and those plans may increase the total restructuring costs that we'll report as we move through 2012.

As you can see, operating income was significantly affected by the restructuring costs and the DDi due diligence cost in the quarter. And as we have done in the past, for the coming quarters in 2012, we'll separately identify further special items like these so you can distinguish the effects of recurring operations versus the special items.

Other income and expenses in the first quarter remained in line with comparable sequential and year-over-year periods. However, looking forward following our financing -- our refinancing completed in April, you can expect to see about $25 million of cash and non-cash costs to be reported in the second quarter related to the early retirement of our existing 12% debt. Our income tax provision in the first quarter reflects profitable operations in China, but with essentially no tax benefit related to the restructuring costs. It makes the quarter's effective tax rate completely meaningless, but the total provision in the quarter is in line with my expectations for a total annual cash taxes payable. Following the acquisition of DDi, I'm hopeful that our income tax effective rate will become much more meaningful.

Including all of the special charges in the quarter, loss per common share was $0.23. And as Kelly highlighted, 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 this morning's earnings release. As a reminder, we use primarily, GAAP measures 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.

Dave already highlighted that our adjusted EBITDA improved year-over-year to $33.1 million, or 12.6% of net sales for the first quarter of 2012. That's after adding back the usual items of non-cash effects for depreciation, amortization and stock comps, together with adding back the special charges related to restructuring and the DDi acquisition.

Adjusted EPS improved to $0.32 for the first quarter of 2012 compared to just $0.07 a year ago, again, after adding back the usual noncash effects of stock comp, amortization and noncash interest, as well as the special charges that I mentioned just a moment ago.

Moving on to Slide 8 of the presentation or the third table in today's press release, you could see that the cash provided by operations in the first quarter was $10.3 million, that compares to just $1 million a year ago. Looking to investing activities, our first quarter CapEx was $22.4 million, which is actually slightly behind the pace that we had over the past couple of quarters. Our capacity expansion activities continue and as we've discussed on prior calls, much of the new capacity additions in 2012 will be dedicated to the relocation of the Huizhou site production requirements.

The small amount of cash flows from refinancing activities reflects payment on some of the costs related to our actions to refinance the existing debt and to raise the funds for the DDi acquisition. Availability under our domestic and foreign credit facilities was about $86 million at the end of the quarter, which complemented our quarter end cash balance of about $58 million. Overall, our cash balance decreased modestly during the first quarter, which was driven primarily by our semiannual $13 million interest payment on the 12% debt that will now be retired but that was together with our recurring special and CapEx -- recurring and special CapEx projects. The balance of presentation materials are simply the reconciliations to the non-GAAP measures that I discussed earlier. So with that, let me turn the mic back over to Dave before we move to Q&A.

David M. Sindelar

Okay, thanks, Gary. It's been a pretty exciting quarter, exciting period time for us with the DDi acquisition. I think the results for the first quarter were pretty solid especially when you compare it to some of the other comparables out there, so we're pretty pleased with it. With that, I'll turn it over to the operator to move to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] I have a question from Matt Sheerin from Stifel, Nicolaus.

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

So, Dave, on the book-to-bill, I didn't get the specific number on the book-to-bill in the quarter?

David M. Sindelar

Yes, it was 1.08:1.

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

Okay. And then was it similar in your Telecom segment, or is that just over 1?

David M. Sindelar

It was pretty comparable across each one of the markets. We did have in the quarter, we had a lot of strength on the I&I side and we had a lot of bookings that came in and as I think we've talked about in the past, that GE on the wind power side comes in, in lumpy -- in bookings, so if there was one that was higher than any of the other ones, it would have been I&I.

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

And you talked about sequential growth and year-over-year growth in the June quarter, and I think historically, you're up sort of in the mid-single digits just on the more selling days in the quarter I mean, is that kind of what you're thinking about...

David M. Sindelar

Yes, I think so. Well, the Chinese New Year used to be a time -- you go back 10 years ago and nobody really cared about Chinese New Year, they are all working and they want to be overtime and when they work through Chinese New Year, they got triple and quadruple pay so they loved it. But they're becoming a little bit more western world in their thinking. So we're not working, unless we -- they're not working like they once did but so, that gets eliminated and we'll have the full impact. But I think your ranges are about right.

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

Okay. And on the gross margin, I know that was down sequentially for the reasons you stated, but I also noticed that the assembly business was up sequentially after a pretty weak December quarter. Did that have a role in the lower gross margin? And as you look to the June quarter, are you expecting sort of a typical 40% sort of margin contribution or there are other effects there such as the higher wage rates that might impact the gross margin contribution?

Gerald G. Sax

It's Jerry. I'll start with the first question. The decline in the assembly operating income was driven in part by the margin but the biggest portion of that was the about $600,000 of restructuring costs in connection with the Qingdao factory relocation. So when you add that back, it's still modestly negative and while we don't call it up because it's not terribly significant, there are still some growing pains in Juarez related to the new factory and the installation of the new paint line, et cetera that are creating some inefficiencies that at least temporarily depressing our margins in the assembly business. I think your comments about the margin improvement in the second quarter are on the whole accurate. Obviously, with the -- we talked about many times in the past, additional volumes and can absorption help fall through to the bottom line much more ritually. But we will see the minimum wage increases and those effects counteracting that a bit. As Dave mentioned in his comments, we know that we have to face the minimum wage increase and the power rationing as we move into the second quarter. And our focus on other efficiencies and cost-reduction activities is to offset the effects of this.

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

Okay. And then lastly, could you remind us what percentage of your cost of goods come from labor?

Gerald G. Sax

It's a little bit different answer everywhere and if you look at the PCB business in China, direct labor is only about 10% of our cost. If you look at the PCB business in North America, it makes up about 30% because obviously, the wages are much higher there. In our E-M Solutions business, it's probably closer to 5% to 10%, that business is mostly impacted by materials.

Operator

Next question is from David Wong of Wells Fargo.

David M. Wong - Wells Fargo Securities, LLC, Research Division

Could you give us any idea about the pattern of orders through the quarter? And did momentum continue into the current quarter so far?

David M. Sindelar

Typically, the way the bookings go -- and I think, and Jerry, correct me if I'm wrong, but I think when you start off a new year especially January, everybody gets back from holidays and they're a little kind of just getting reset and re-gauging what the year's going to be, so we tend to see kind of a positive momentum throughout the 3 months coming into the first quarter. While we don't give any kind of further guidance, we're kind of seeing the continuation. I'm not trying to indicate that we're seeing a 10% increase in our bookings but I think the general strength that we saw in the first quarter is continuing in the second quarter. We are beginning -- and it's -- the market right now, I would kind of characterize it as being about as mixed as I've ever seen it because we're getting positive signs, we're getting other signs of -- Europe, we're hearing a lot of rumblings about Europe and Europe slowing down. I'm not so sure we have seen that in our bookings as of today but we are kind of mindful of what's going on with Europe and with all the -- Greece, I think Greece kicked out all their political people, France changed over, so we are keeping an eye to that to figure out what, if any, effect that may or may not have. One of the benefits that I see to Europe is that Europe didn't really recover from the '08, '09 period nearly as strongly as United States has. So if they dip back into another recession, they are already at pretty low levels.

David M. Wong - Wells Fargo Securities, LLC, Research Division

Great. Could you give us any feel for component supply and pricing?

David M. Sindelar

Yes. We've -- most of the component pricing that we have seen has been pretty steady for the last couple of quarters. I haven't much seen much up or down.

David M. Wong - Wells Fargo Securities, LLC, Research Division

And I noticed in the March quarter, your inventory was down. What happens in June and the second half? And is there any special inventory build you need to do related to that translation?

Gerald G. Sax

Not really anything extraordinary related to the transition. As Dave said in his comments, we'll be operating -- continuing to operate the Huizhou factory while we're adding the new capacity at the other factories. And so, we'll be able to move the part number production on a fairly seamless basis. Back in December or 90 days ago, when we were talking about the December result, I highlighted that we had an inventory buildup in advance of the January Chinese New Year holiday so that we could at least continue to make some shipments even though the factories weren't operating. And so the inventory reduction that we saw was pretty much in line with what we anticipated. We had a small market size holiday in China at the beginning of the quarter as well, so we actually brought in some raw materials in advance of that holiday period as well. So I'm frankly hoping to see a little bit more reduction in the inventory balances as we continue to move through the rest of 2012.

Operator

Our next question is from Jiwon Lee of Sidoti & Company.

Jiwon Lee - Sidoti & Company, LLC

Just a few quick questions, if I may. Dave, you've seen good growth from your automotive area last year and I wonder, where do you expect the growth to come from this year in that market?

David M. Sindelar

Sure. I think if you look at the -- and again, I can -- we look at a number of different things but there's a lot of statistics on where unit volume's going and over the next 2, 3 years, I think everybody is projecting that unit volumes are going to grow in kind of that -- kind of 5%, 6% range. I think on top of that, I think you're going to continue to see an increase in electronic content to cars and as you've gone back historically, it's been for weight, energy efficiencies and things of that nature has gone into safety and I think we're going to go through another round of safety applications over the next several years. But I would -- everything that I read, everything I see, China continues to grow, there's some debate on whether it's going to grow at 8% or 9% or 10%, but I think it's -- everybody says the growth is going to slow, but there's still growth. I think the April car sales in China were probably in the 10% increase year-over-year. If I read the article correctly, United States is bouncing back, it's probably about 14.5 million to 15 million units this year. South America continues to be strong from a unit volume. So if you take the total automotive market in the world, it's probably in the 78 million units. And so, it would appear today that all the markets are stable to growing except possibly, Europe. And if I recall, the European numbers are in the $11 million or $12 million range. So I think any shrinkage in Europe will have the effect, the dampening -- dampening the automotive unit volumes. Some of the statistics that we follow, I think, knocked the 2012 growth rates down to 4.5% and between 3, 4 months ago, it was in the 6% range. So I think you're seeing that the actual unit volume, globally will come down and then that will be spurred along by the increase of electronic content. So that's kind of, I think the -- whether it's PCB or unit volume or electronics, that's kind of the data points that at least, I look at.

Jiwon Lee - Sidoti & Company, LLC

So that's -- this whole process. And not to get the too excited, but the Telecom booking is rising a little bit. Could you give us a little more color as to where you're seeing some better improvement or at least a hope for better improvement?

David M. Sindelar

I know it's pretty much broad-based. I can't say that the -- we continue to watch the announcements and who's chasing who and who's winning things. But we're seeing some -- and again, I don't want to make it sound like we're going to see a $50 million increase in bookings. It's relative to where it's at and we'd expect it to continue to increase. But we are starting to hear about some of the major carriers, telecom providers are starting to announce installation plans throughout the United States and so, we're kind of chasing those and making sure that we're not missing any opportunities.

Jiwon Lee - Sidoti & Company, LLC

Okay. And Dave, previously, you have stated on organic revenue growth of about, I believe, 4% or 5% this year. With the market conditions kind of mixed, as you highlighted, does that growth expectation change or does that still hold water?

David M. Sindelar

No, I still think that's -- I think that still holds water and I think, generally, we would in a, what I call, a normal year, and I'll I try to describe what that is, we would try to grow at twice what that market gives us. But this year, as we've identified, we do have to shut down a facility, we have to move an $80 million, $90 million facility into, primarily 2 or 3 other Chinese facilities which causes a lot of capital, a lot of manpower a lot of everything else, so we are kind of judiciously spending capital, while not trying to break what we have. So I think as a result of that level of activity to accomplish what we're trying to accomplish, we think that if we can grow at kind of the industry growth rates, that we would be happy this year as we go forward. Again, we need to execute, we need to do a lot of things but our internal kind of goals and drive is to grow at 1.5 to 2x whatever the industry grows at.

Jiwon Lee - Sidoti & Company, LLC

And lastly, for Jerry, do you have the figures for headcount at the end of last year and at quarter end?

Gerald G. Sax

I don't think that I have a specific number in my mind for the end of the year. But it wasn't too far away from the 14,600 people that we disclosed in the press release this morning. That was the quarter end figure.

Operator

The next question is from Frank Jarman from Goldman Sachs.

Franklin Jarman - Goldman Sachs Group Inc., Research Division

I guess the first question I have was just around CapEx. You spent $22 million in the quarter, and I think $9 million of that was related to capacity expansion and relocation. How should we think about that going forward? When should the spending for the Chinese facility relocation be completed and how much more do you have to spend?

Gerald G. Sax

Obviously, as Dave said, we continue to look at how and when to spend all of the CapEx and most of the capacity expansion will continue to be focused on that move during this year. But if you wind back the clock a couple of quarters before we were looking at moving that factory, we were talking about building additional capacity for growth. So I don't think that you'll see a significant swing in our CapEx trends over the next several quarters because we'll finish the capacity expansions at our existing sites in order to allow this move but then, we'll get back on the track of building up capacity in order to allow us to grow. What I've been looking at is not significantly different from kind of the $25 million a quarter pace that we were on last year. First quarter was probably a little bit low, frankly, because some of the expansion projects were shutdown during part of the Chinese New Year. It could spike up a little bit in one quarter or another but I don't think you should expect to see anything too significant, different from our recent pace for the next several quarters.

Franklin Jarman - Goldman Sachs Group Inc., Research Division

And does that assume the DDi CapEx as well?

Gerald G. Sax

Yes, their -- as we look at their business, and we're still coming to understand that, their factories are obviously much smaller scale than ours and their business in total is much smaller scale than ours. And they've undergone a lot of change in their business over the past year or so, anyway. So we're not anticipating any significant spend related to them other than the recurring maintenance things outside of -- that they announced last quarter, that they're moving their Anaheim operations out of that existing sort of 7-building campus into a single building site, about 3 blocks away from where they exist today. There will be some spend related to that. Frankly, I don't know where they are in that project today, so it's hard for me to forecast exactly what impact that will have on us. But I think they were anticipating spending some $5 million to $7 million on that move.

David M. Sindelar

Is it fair to say, and I'm going based on my memory that DDi over the last couple of years, has spent somewhere in the $10 million to $15 million of CapEx on an annual basis so they're maybe on the Anaheim move, so if we close midyear, you would assume there would be a $7 million additional CapEx, give or take a couple of million bucks.

Franklin Jarman - Goldman Sachs Group Inc., Research Division

Okay. And then as I think about just debt on the balance sheet pro forma for your recent bond deal. Can you talk about what your target leverage multiple would be going forward in sort of how comfortable you are today versus where you'd like to maybe run the business in the future?

David M. Sindelar

Yes, in the -- first of all, the leverage we have on the company today, I think we're extremely comfortable with and we're happy with that. But I think as managers of the business and managers of the company that is -- stock is publicly traded, I think the public markets probably benefit you for being less leveraged than being over-levered. So I think the goal is to go in and increase EBIT and pay down debt to the extent that we can get it somewhere to less than 2x debt to EBITDA. I think that puts us in a position that if something strategic comes up, and I don't know what that might be, but if it puts -- something strategic comes up, it allow us to accomplish a strategic transaction because my personal goal would be not to be more levered that we are today and to reduce it. So I guess that's kind of the first level of, kind of, goals and targets.

Franklin Jarman - Goldman Sachs Group Inc., Research Division

Great. That's helpful. The last question I had was just I know you guys talked a little bit about the minimum wage increases and energy rationing risk but going forward, and I do understand you plan to offset the majority or all of that in the upcoming quarter but is there any way for us to better quantify those 2 headwinds?

David M. Sindelar

On the energy one. The energy is probably the most difficult to kind of quantify because we have to work with the local governments and try to figure out when they're coming, when we can shut down, how do we do it, can we do it in half days, we can do it in full days? And so we do a lot of different analysis paralysis on the -- with that said, we will have roughly the same amount of shutdowns as we had last year. So it's not like it's going from 1 day to 25 days, it's -- we expect it to be pretty consistent with last year. So I think if you kind of analyze where our margins were in the hot months in China last year, that will probably have the effect. On the labor component, and as Jerry had mentioned in response to Matt sharing his comment, on the China PCB side, direct labor is about 10%, on the E-M Solutions side, it's about, as you said, 5% or so. And so those are kind of the box card numbers and the minimum wage increase was about 12%. So maybe that might be able to help you kind of do some of the math.

Operator

And the next question is from Tony Venturino of Federated Investors.

Tony Venturino

Actually all of my questions have been asked but just -- well I have 2 questions. Looking at again at the cost and specifically, in SG&A, Jerry, you said that stock-based comp was up. Just wondering, is that kind of a onetime thing, was that a catch up for something or is that kind of a new level that we should expect going forward?

Gerald G. Sax

No. The trend has been that at our first quarter board meeting, sort of annual stock grants are awarded. I don't know that I can promise you that, that will continue or not. I was just trying to draw attention to the fact that sequentially, there was a difference from the fourth quarter to the first quarter because that happened during our first quarter results and it increased. I would expect that to be on a constant level for the remaining quarters of this year so what we reported in the first quarter should hold true based on the way that the accounting rules require you to do it. But then, if there's an award again next year, it will probably ratchet up in the first quarter again.

Tony Venturino

Okay. And then, so the other kind of onetime thing in SG&A was the $1.2 million for DDi? Is that correct?

Gerald G. Sax

Yes.

Tony Venturino

And do you expect any of that going forward? Is that all taken care of? I would imagine there will be some maybe in Q2 since it doesn't close yet but...

Gerald G. Sax

There will be some in 2Q as well. And again, we'll call that out as a separate event. From a cash standpoint, you can think of that as being financed by the debt that we raised for the acquisition. But we will obviously, report it as expense in the second quarter where -- because a lot of the activity actually happened in April, you'll still see a fair amount there as well.

Tony Venturino

Okay, and then if I could, I know you talked a lot about gross margin but I just kind of want to make sure I understand it. You did have a sequential or sorry, a year-over-year increase of 40 basis points and what was the main driver of that?

David M. Sindelar

The main driver is last year, during the first quarter, kind of mid-first quarter, we saw a tremendous amount of cost increases. So we weren't able to follow on with that on the price increases until throughout most of the second quarter. So it was really kind of the price increases to offset the cost increases we weren't able to shield by the price increases.

Tony Venturino

Okay. And then maybe there was some mix because of higher assembly this quarter, is that fair?

Gerald G. Sax

On a sequential basis, yes, a fair amount of that but both segments grew fairly consistently compared to the same quarter last year. So the mix was not a significant factor in the year-over-year comparison.

Tony Venturino

Okay. And then going forward, do you expect an increase in volume offset by the cost that's in China that you were talking about, the energy and the wage. Did that get you back? Does the volume itself get you back to kind of the historic levels that you talked about, the low 20% range?

Gerald G. Sax

Directionally, it heads there and I'm being a little cautious because we don't give specific guidance. But your thinking is not out of line.

Operator

Next question is from David Sagalov of Jefferies.

David Sagalov

I was wondering, can you give any sort of guidance on long-term business models? So, a long-term EBITDA margin target, maybe kind of a business mix as far as end markets ago? Have you given any sort of that detail?

David M. Sindelar

I'm not sure we've given any kind of specifics but let me try to maybe -- and it's a little bit kind of in the interim because we have -- there's the statistics today versus the statistics after we merge with DDi. And obviously, the ones that come readily to my mind and my memory are the ones from Viasystems because I live it every day. But as you look towards kind of going forward, I think on a combined basis, we will see Automotive go from roughly the 40% down to about 30%, and that's just pure mathematics. We would expect that to continue to grow and be a vibrant market for us. The I&I market will probably be in the 20% to 25% range. I think the Computer/Datacom and the Telecom, those 2 markets should be kind of in that 15% to 17% range and then the Military and Aerospace market will be in about a 9% to 10% range. And so, that will kind of be the new mix of our business. So the combination with DDi, will really kind of let us balance out a little more, kind of beef up I&I, beef up the Telecom and the Computer/Datacom market. So that's kind of -- and as we go forward, I would, as we said today, I would expect the split of those markets to remain pretty constant. I mean, there may be some 1 or 2 markets where we're picking up a new customer, developing a new product or something like that where it may take Computer/Datacom from 16% to 18%, but I wouldn't expect it to go to 25% in a short period of time. So, and then on the kind of the margin front, I think what we've said and, again, if you look at our business, usually the first and the fourth quarter are the weakest and the 2 quarters in the middle are the strongest, so it's kind of a little bit of a bell curve, but by and large, as we go through and we have stable costs and stable prices, we would think EBITDA margins for the combined bases in the 14% to 15%, 16% range would be kind of our internal goals and direction.

Operator

[Operator Instructions] Our next question is a follow-up from Matt Sheerin of Stifel, Nicolaus.

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

Just a couple of follow-ups. One on the Datacom computing strength that you've seen over the last few quarters, how much of that is cross-selling opportunities and share gains given the Merix relationship with customers in that space and your ability to win volume contracts from those customers that traditionally had used Merix for prototype or smaller volume runs?

David M. Sindelar

That's a good question, it's quite frankly, one I was thinking about in the last week myself and I haven't gone back and kind of analyzed it and sliced it and diced it because for the either fortunately or unfortunately we're -- the acquisition was 2 years ago. So in my mind, it really goes to what is our customer base and how we're growing. So it's difficult to go in and not asking the question and slicing the data to come up with it. I think we're having nice growth with a lot of the Merix customers. I think in all reality, Merix probably had a much stronger position in the Computer and Datacom market and as we go through on the site charters, and we explained that a little bit, we kind of went, when we merged the companies together, we just took each one of our sites, one -- the Merix sites and tried to decide which plant should serve us which product lines and which technologies and things of that nature. So we took, quite frankly, some of the Via customers and ran them through the Merix plants and some of the Merix customers and ran them through the Via plants. So we kind of lose track of identifying which is which. But I would say that we are probably benefiting as a result of just being a bigger, more full-service company for our suppliers, and then we've probably been able to do a little bit more of the cross-selling. And quite frankly, investing in capital and technology where we need to which may or may not make a lot of sense but if -- when we -- prior to the merger with Merix, they were a little cash strapped. And as a result, they weren't investing a lot of capital, a lot of things in different areas, so by us going in and being able to invest in that capital and that technology, it allowed Merix customers to give Merix more business. So the cross sell becomes a little bit more confusing. But I would say that a lot of the headwind coming from the Computer/Datacom is the result of the relationships that Merix had. Did that help?

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

Yes, it helped somewhat. And I know that you give the customer concentration, the top 10 customer percentage on an annualized basis. I know you haven't broken it out for this quarter, correct? Is there any big change there in terms of what you're seeing in terms of customer percentage breakdowns and is your top 10 customer still on the 55%, 57% range?

David M. Sindelar

Yes, I think that's still the case. There hasn't been any big shifts or changes.

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

And then lastly, Jerry, given the corporate refinancing, what should we be thinking about interest expense for the June quarter?

Gerald G. Sax

That's a good question. Based on the way the financing work, we've closed on the new debt effective April 30. And so, we'll have $550 million outstanding for all of May and June at 7.875%. At the date that we closed on the new debt, we called the 12% debt, and that call will not have those bonds retired until the end of May so we've also got $220 million outstanding for all of April and May at 12%. And I haven't actually done all that math but those are the principal components.

Operator

There are no further questions at this time. I'd like to turn the call over to management for any closing remarks.

David M. Sindelar

Great. I really don't have any additional comments. I just want to thank you for your participation and look forward to talking to you soon. Thanks.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.

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