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Accuride Corp. (NYSE:ACW)

Q3 2008 Earnings Call

November 6, 2008; 11:00 am ET

Executives

Bill Lasky - Interim President and Chief Executive Officer

David Armstrong - Senior Vice President and Chief Financial Officer

Analysts

Kirk Luedtke - CRT Capital Group

Henry Kirn - UBS

Brendan Miles - Octagon Credit Investors

Sarah Thompson - Barclays Capital

Adam Plissner - Credit Suisse

Operator

Good day ladies and gentlemen and welcome to the third quarter 2008 Accuride Corporation earnings conference call. My name is Sandy and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s conference, Mr. David Armstrong, Senior Vice President and Chief Financial Officer; please proceed.

David Armstrong

Thank you, Sandy. Good morning everyone and welcome to Accuride’s third quarter 2008 earnings conference call. With me today is Accuride’s interim President and CEO Bill Lasky. You can turn to the agenda slide. On today’s call, Bill will provide an overview of the business and then I will follow up with a review of the company’s third quarter 2008 financials. Bill will then have some closing comments before we open it up for Q-and-A.

A couple of administrative items; if you could turn to the forward-looking statements slide. The financial information we released this morning includes our GAAP results for the third quarter for both this year and last year as well as non-GAAP information we believe is useful in evaluating the company’s operating performance, mainly adjusted EBITDA.

As required by Reg G, we have in our earnings release and also in the back of the slide presentation that we have, a reconciliation of non-GAAP information we will be discussing today to the closest GAAP equivalent result and the information which is available for you in those places.

Second, I’d like to remind listeners that comments made during the course of this call and the statements in our presentation will contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Statements made in the course of this conference call that state the company’s or management’s intentions, expectations, beliefs or predictions of the future are forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in our forward-looking statement is contained from time-to-time in the company’s SEC filings.

With that, it is my pleasure to turn the call over to Mr. Bill Lasky.

Bill Lasky

Thanks Dave and good morning. It’s a pleasure to be here this morning for our Q3 earnings call. Since I had the opportunity to talk with you all on the September 23, when we reviewed my employment as the interim President and CEO of Accuride, along with a review of our restructuring plan, the old adage “time sure flies when you’re having fun” has proven true one more time.

Although we’ve had to maneuver through some rough trade lately, the past quarter certainly was not the worst quarter in Accuride’s history and certainly far from the worst conditions through which I’ve had to lead a company. As a matter of fact operationally, the third quarter was a pretty damn good one.

In keeping with one of my core beliefs that some of you have heard me say oftentimes; A.B.C. or Action Beats Conversation, I want to share with you my key takeaways as I transitioned from the board level to the ground level. I think you’ll find them of interest and give you a better view of Accuride, a view that wasn’t as clear to me just seven weeks ago and possibly to you.

I focused my first 30 days at Accuride digging in really deep to better familiarize myself with the company’s team members, vent out and create a greater focus on our strategic business plan, identify true core competencies, visit our key manufacturing facilities, address our capital structure and its current challenges along with shareholder meetings and conversations and talks with lots of you, and most important of all I’ve been spending time with the most important reason for Accuride to exist, our customers.

In visiting with our customers, both OE and aftermarket, I’ve learned a lot by just asking what Accuride could do to be a better supplier? It’s always a little frightening to ask this question as you might need to have some thick skin and at the same time be willing to respond with positive actions.

So I learned that the way we handled a price increase back in 2006 cost us a lot of business. In my past, I have always captured material increases, but not always in sync with the market. As contract and agreements need to be honored, strong arm tactics aren’t acceptable; this is now behind us.

Another revelation was that our customers don’t quite think of all of our strong brands when you mention the word ‘Accuride.’ Recently we stepped up the integration of our sales and marketing efforts, so going forward Accuride will mean more to our customers than just the leading North American supplier of truck wheels. It will also mean Gunite, Bostrom, Imperial, Fabco and Brillion.

With the limited time this morning, I can’t list all that I learned from our customers, but the last one I will mention is critically important for success. Our customers love the quality of our products, along with the strong brand equity that each possesses. In all I found our customers looking forward to the new Accuride and I look forward to these promising results which will definitely make a marked difference when the market upturn occurs, which it will.

I’m sure you’re all wondering what I learned and what I’m going to say about our capital structure, meetings with banks and conversations with investors and analysts. Not being one to shy away from the facts, whether good or bad, I’m happy to say that any concerns that you may have about future covenant issues can and will be resolved.

It would be an understatement to suggest that anything to do with banks today is easy as it is not, but solutions are available and are of the highest priority for Dave and myself along with the Board of Directors. In fact since our banks are in a bit of a turmoil these days, we decided to draw down on our revolver, despite having strong cash balances and despite the fact that we were cash flow positive in Q3, and anticipate a significant positive cash flow in Q4, which should result in a neutral or slightly negative cash flow for fiscal year ’08; so that we could assure our customers and suppliers that we have more than sufficient liquidity as we all await some degree of return to normalcy in the business environment that we all face today.

As to the impairment that was part of our release this morning, we all know and understand the process for determining such a charge and you all know that it’s a non-cash charge that typically occurs when you have goodwill in the balance sheet and the market you serve has had a significant decline.

While I’m addressing these financial challenges that so many companies face today, I would be remiss not to mention our share price. From my perspective, two years ago, there was a lot of chatter that public companies in general were way overvalued; maybe so, but today I would say that most public companies appear to be significantly undervalued.

Since we aren’t alone and can’t alter the volatile market and the times we are experiencing, it would be unproductive to focus on what we can’t control. I will focus with the rest of the Accuride team on what we can control, which is aggressively improving our company for the long-term.

Another old adage is that “when it rains, it pours”. So the result of our share price decline prompted a recent notice from the New York Stock Exchange that we have fallen below our minimum share price listing requirement. The company had a six month opportunity to cure this deficiency.

Subsequently based upon our internal calculations and discussions with NYSE reps, we believe that due to our recent share price performance, the company has fallen below the NYSE’s minimum global market capitalization standard of 25 million which does not allow an opportunity to cure. As a result, we expect the NYSE to initiate suspension and delisting procedures for our stock.

We have been prepared for this potential outcome and expect a seamless transition to the OTC BB and pink sheets markets for the next few days and expect to provide more information with regard to this change in the near future. The transition to the new markets will not affect the company’s business operations and does not change the company’s SEC reporting obligations. I also asked my team if we would get a rebate, but I didn’t get a positive response to that.

Moving onto things that we can control; as a result of plant visits, evaluating our core products and competencies and a deep dive on our strategic business plan, I’m happy to announce that there is room for improvement, significant improvement. Our team has presented these potential changes to the Board of Directors and we will be sharing them with you all before the end of Q4.

While we are not prepared today to share the details, I will say that I anticipate this Phase 2 restructuring will annually contribute an additional $12 million to $15 million to the bottom line starting in 2010 and will actually add capacity to effective areas that we will enjoy and need with the return to the good business in the future. The onetime cash charges are anticipated to be in the $14 million to $16 million area with a 12 to 14 month payback.

In addition, there are a few products that we really don’t need to be in. They’re good, they’re profitable; they just don’t fit Accuride as well as they would another company. You can look forward to more of that down the line and you also can call me directly so I can avoid having to use a broker.

Before I turn this over to Dave for the details on Q3, I need to speak to the most promising takeaway I was able to learn since joining Accuride and that’s the Accuride team. We have a strong team of senior and middle management members. The hourly team members are equally as solid and capable.

With a renewed focus and a high since of urgency, I’m absolutely positive that Accuride will be positioned to rise to higher levels than it has ever achieved before. I might be an interim CEO, but the new Accuride will be a permanent change for the better.

Now Dave will review Q3 that operationally met our targets and then we’ll be happy to answer all the questions with the exception of anything surrounding our bank, our current bank amendment process and our Phase 2 restructuring as it would be inappropriate to discuss this at this point in time.

Dave, we’ll turn to you now.

David Armstrong

Thanks Bill. I would like to begin my part of the presentation by discussing two matters that kind of skewed our financial results for the quarter; that being goodwill impairment and the restructuring costs, so if you could turn to the goodwill and intangible assets slide.

As we discussed on our last call, due to the significant decline in our stock price we determined that an indicator of impairment existed and subsequently we began an impairment analysis as required under FAS 142.

During the third quarter, the company with the assistance of outside advisers performed a step one analysis of the fair value of its reporting units using various valuation approaches and after assessing the fair value of each of our reporting units, goodwill and intangible asset impairments were determined to exist.

As we were not able to complete the step two analysis, we recorded the estimated goodwill and other intangible asset impairment charges of $193.1 million and $19.1 million respectively in the third quarter. We’ll conclude the analysis during the fourth quarter and make any adjustments to the impairment charges as necessary, although we don’t anticipate much change there.

Again I want to emphasize that these charges are non-cash, do not affect the company’s operations, liquidity, tangible equity or debt covenant ratio. The slide illustrates the geography of the impairment charges. As you can see, the impairment charges are almost entirely related to the components segment, reporting segment that we have with a small amount in the other segment.

If you turn to the restructuring initiative slide, earlier in September, the company announced a series of strategic restructuring initiatives to reduce expenses, increase competitiveness, strengthen customer relationships and improve shareholder value and we during the third quarter incurred a restructuring charge of $11.5 million, of which $7.2 million will impact cash during 2008 and 2009. You’ll note on the slide the breakdown between segments and what is in cost of goods sold and what is in SG&A.

The restructuring cost is slightly less than what we discussed in our September press release and that’s mainly due to the fact that certain of the expenses will be recorded in the fourth quarter. It’s expected that the initial restructuring will save the company an estimated $6 million in 2008 and generate annual cost savings of $27.5 million going forward and as Bill mentioned, we are reviewing a Phase 2 initiative, which we hope to announce later in the fourth quarter which will provide additional savings.

Moving onto the next slide; this slide is a little busy, I apologize for that, but what I tried to do is isolate the impairment and restructuring charges so that we can provide a more accurate year-over-year comparison.

Third quarter sales of $239.5 million increased $18.9 million or 8.6% compared to $220.6 million in Q3, 2007. Year-over-year, we saw a very slight increase in Class 8 builds in the third quarter; however there was a significant drop about 23% drop in Class 5 through 7 and about a 27% drop in trailer builds. So overall, a net negative build compared to last year.

Sales in our wheel segment dropped $7.5 million or about 7.3% principally due to the year-over-year build reductions. The steel wheel decrease was partially offset by stronger aluminum and military wheel sales. Sales in our components segment increased $25.2 million or $23.6 million year-over-year, primarily due to the increase in aftermarket revenue and surcharge recovery of raw material costs.

Sales in our other segment is up about $1.3 million on stronger seasonal sales from Fabco and farm. The gross profit margin in the third quarter decreased $1.4 million from $13.3 million in 2007 to $11.9 million in 2008 and it’s important to note that the 2008 amount contains $6.8 million of restructuring costs and absent these costs, gross profit would have been $18.7 million or an improvement of $5.4 million, which is 40.6% year-over-year. The gross profit in Q3 2008 also included about $1.2 million of un-recovered raw material costs.

Gross profit in wheels adjusted for $4.3 million of restructuring costs showed slight improvement over the prior year quarter. Gross profit in components in Q3 showed strong improvement over Q3 2007 increasing $3.1 million or after adjustments for $2.1 million of restructuring costs, a $5.2 million increase from a negative $4.2 million in ‘07.

Excluding the impairment charges, operating expenses in the third quarter increased $1.1 million to $14.8 million compared to $13.7 million in Q3 2007. There were restructuring costs of $4.7 million in this number, so on an adjusted basis, the operating expenses were about $10.1 million in Q3 so a year-over-year decrease of $3.6 million in those expenses. Third quarter adjusted EBITDA increased to $20.1 million or 46% compared to the $13.7 million in Q3 2007. As you recall, those of you who followed us last year, Q3 was a difficult quarter for us in 2007.

Adjusted EBIT margin was 8.4% compared to 6.2% in Q3 2007. Net interest expense was flat year-over-year at about $11.6 million. In the third quarter of 2008 we receive tax refunds of about $1.7 million and we are estimating cash taxes paid in 2008 to be less than $5 million in total.

The third quarter net loss increased to $201.2 million, a negative $5.67 per diluted share and again the after-tax charges for impairment and restructuring of $202 million or $5.69 per share were the main drivers of that. Absent these charges, net income would have been about $100,000 or $0.02 per share.

If we move to the year-to-date comparison slide, for the nine-month period ended September 30, 2008, sales were $722.6 million compared to a $791.1 million in the prior year nine month period. The 2007 revenue included about $32 million of light steel wheel sales to Ford and GM and about $10.4 million of 2007 revenue that were related to a onetime resolution of a commercial dispute with our light vehicle customer.

If you factor out these light vehicle items, the decline in sales was in line with the reduced demand in the commercial vehicle industry we talked about previously. You also need to recall that the first quarter of 2007 was a very strong quarter due to the 2006 pre-buy carryover. Year-over-year on a nine-month basis we saw a little over 4% drop in Class 8 builds, a 19% drop in Class 5 through 7 builds and a 33% drop in trailer builds.

Gross profit for the nine months declined to $45.5 million or 6.3% of sales from $65.9 million or 8.3% of sales in the prior year, primarily due to a net reduction in sales from the industry weakness and the $6.8 million of restructuring costs and also we had $7.7 million of onetime charges related to the labor disruption at our Rockford, Illinois facility early in the first quarter of 2008. Cutting back these $14.5 million of restructuring and onetime labor costs, gross profit would have been approximately $60 million.

Year-to-date operating expenses are $41.2 million which also contain $4.7 million of restructuring costs. Absent these costs, year-over-year reduction in SG&A would total about $6.5 million. Income from operations for the first nine months of 2008 was a negative $207.9 million and again that’s due to the $212.2 million of goodwill and other intangible asset impairment, $11.5 million of restructuring costs and $7.7 million of the labor issues.

The company had a net loss of $209.5 million or $5.91 per diluted share for the first nine months, compared with net income of $1.8 million or $0.05 per diluted share in the prior year. Absent the special items of impairment, restructuring, work stoppage the nine month net loss would have been about $3 million; $2.1 million for a negative $0.09 per share and adjusted EBITDA was $58.3 million, 8.1% of sales for the first nine months of 2008 compared to adjusted EBITDA of $91.2 million or 11.5% for the same period in 2007.

Moving onto the free cash flow slide; in the third quarter of 2008 cash from operating activities was $5.5 million. CapEx totaled about $5 million resulting in free cash flow of about $0.5 million compared to a negative free cash flow of $13.5 million in Q2 2008 and free cash flow of $2.6 million in the third quarter of 2007.

Consistent with prior years we anticipate the fourth quarter will be the strongest for free cash flow as we continue to aggressively work through our inventory reduction programs and other working capital projects we currently anticipate, generating in the neighborhood of $45 million to $50 million in free cash flow during the fourth quarter, which is consistent to what happened last year by the way. Depreciation and amortization in the third quarter was approximately $11.4 million. We currently anticipate spending about $31 million of CapEx during 2008.

Moving to our debt and leverage slide, the company ended the third quarter with total debt of $572.7 million and $32.4 million of cash, giving net debt of $540.3 million. At the end of the quarter September 30, 2008 the revolver facility was un-drawn which resulted in total liquidity at the end of the quarter of $157.4 million. As we mentioned in the past, Lehman Brother represents about 19% of the revolver. As of the end of the third quarter, the leverage ratio as defined under our credit agreements was 6.62 times and all debt amortizations have been prepaid through 2011.

As Bill mentioned, in light of the current financial conditions and as a precautionary measure, we drew down $95 million of our revolver on October 30 to provide the company with greater financial flexibility. As anticipated, Lehman Brothers failed to fund its portion because of the bankruptcy, a result of net funds received of $78.4 million.

The company has indicated that the purpose of the draw was to preserve our liquidity and mitigate risks of banks not being able to fund in the future. We note that numerous other companies are taking similar strategic actions, given the uncertainty in the market. The draw will not materially impact our debt covenants since covenants are based on a net debt basis and nor will that affect any of our operations or customer obligations.

At the time of the drawdown, we did reach out to both of our customers and our suppliers to provide them assurances that the reason for the draw down was strategic and not operational and generally receive positive feedback. With regard to our receivables, our DSO continues within historic ranges at the end of the quarter and trade payables which at any given time, average around $80 million, continue to be paid within general historical BPO levels.

Moving onto the next slide; with the reduction in the build right that we have seen, we anticipate GAAP EBITDA for the year of between $80 million and $85 million and estimate our bank EBITDA to be between $85 million and $90 million. The difference, as we said in the past, consists primarily of some 123 R related expenses and some non restructuring related severance costs in the year or so. We anticipate that the total difference between bank and GAAP EBITDA for the year will be somewhere around $6 million.

We are certainly closely monitoring our debt covenants. We currently believe that we will be in compliance throughout the remainder of 2008. At the same time, we realized that though there are issues that could be facing us in Q1 of 2009, based on the general economic flowpath that we’re seeing.

We are in the process of analyzing various options and alternatives to address our covenant issues and as Bill mentioned due to the timing of these matters we are unable to comment on any details at this time and will not respond to questions on this topic in our Q-and-A. I can say that we are anticipating launching an amendment process later in the fourth quarter and that we have confidence that we will be able to reach a satisfactory resolution in our covenant situation.

Now looking forward to 2009; at one point we were hoping to provide a preview of 2009 during this call at a very high level; however as we look at the variety of moving pieces, including truck bills, raw material costs, currency exchange, changes, etc., this has proven to be very difficult, but one way we may be able to provide some help is to review a hypothetical situation and let’s hypothetically assume that 2009 is an exact mirror of 2008 with regard to truck bills, raw material costs, market share, etc.

In this hypothetical situation, if all bills were exactly the same, our EBITDA we anticipate would increase $15 million to $18 million, based on the restructuring actions we’ve taken to date, which will be slightly offset by some increasing nonmaterial related economic costs. Under this scenario, we would also anticipate being free cash flow positive.

Also to provide some very high level sensitivity and again this is speaking end generalities and not in specifics, but I believe it would be fair to say that in the event build rates increased or decreased by 10%, we would see EBITDA movement of somewhere between $12 million and $15 million up or down depending on the movement. Again, it’s very difficult to provide specific guidance on that because of the myriad of factors that would go into this calculation; however, from a high level view, that’s hopefully helpful.

At this time I’d like to turn the call back to Bill to wrap up.

Bill Lasky

Thanks Dave. Great summary and obviously we look forward to hopefully being able to give you some better look forward to next year as things stabilize or if they do stabilize.

In summary, I’d like to recap some of the highlights from our call today that I think are worth repeating or mentioning. First, we had a significant adjusted EBITDA improvement during the quarter. Our adjusted EBITDA of $20.1 million was up 46.7%.

Second, our restructuring plan that we addressed back in September is on track. I committed to you that I would shepherd that to make sure that it was on the flawless execution, that we meet or exceed all anticipated and expectations and we’re there. $6 million of savings we will happen in Q4 of ‘08, and an additional $20 million of savings in 2009.

Third, our second phase of restructuring that I shared with you has been analyzed and we are doing a little fine tuning on that. Preliminary estimates indicate an additional $12 million to $15 million of savings beginning in January of 2010.

Lastly, an important area of free cash flow, the company expects to generate the $45 million to $50 million of free cash flow in Q4.

So at this time, we would like to entertain any questions you have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kirk Luedtke - CRT Capital Group.

Kirk Luedtke - CRT Capital Group

You mentioned in the press release and in the slides a couple times, material costs, but I don’t see them quantified anywhere and I was wondering if you could give us the year-over-year change in material costs for the third quarter before and after recoveries?

David Armstrong

Sure. In the third quarter we had raw material costs of approximately $20 million increase and we had recovery of about $18.8 million, so $1.2 million negative.

Kirk Luedtke - CRT Capital Group

Negative impact?

David Armstrong

That’s correct.

Kirk Luedtke - CRT Capital Group

I guess from the slides, I got the impression that it was a positive impact year-over-year. So, the increases in gross margin year-over-year of $5.4 million in materials are actually a negative.

David Armstrong

Yes, impacted in that is a negative $1.2 million.

Kirk Luedtke - CRT Capital Group

Okay. So maybe you could expand on why components did as well as it did in the quarter?

David Armstrong

I think part of it is because of how poorly they did in the third quarter of 2007 and if you remember; I’m not sure if you were following us back then, but if you remember back in that time period, there was a lot of uncertainty among OEs in your order boards and we were receiving significant changes with very little notice and especially in a couple of the foundry businesses we had; we did not respond very quickly to some of the changes and there were some significant performance issues that occurred in that quarter, so that’s part of it.

The other part of it is that we have significantly improved performance in both Brillion and Gunite since last year, based on a number of changes that have been made that we’ve been implementing throughout this year.

Kirk Luedtke - CRT Capital Group

Okay, back to the materials for a second, what are you assuming in your full year guidance for materials, both with and without the recoveries?

David Armstrong

Currently the net on a full year basis will be about a negative 2 or 3, with recovery of that in 2009. That goes back to our lag issues, with what we have in our contract, but that is what we currently anticipate.

Kirk Luedtke - CRT Capital Group

Also could you give us a little more color on the strong demand for wheel end components; what was driving that?

David Armstrong

Aftermarket. I think as we talked in the past, that’s been a very significant area that we’ve had focus on and that’s paid off.

Kirk Luedtke - CRT Capital Group

Did you pick up a new customer or how did --?

Bill Lasky

I would say we picked up a greater percentage of our customers’ business both in the independent aftermarket and I think we’ve enjoyed some good pickups even with the OE service side.

Kirk Luedtke - CRT Capital Group

Okay, speaking of marketshares, how have your marketshares held up during the material costs recovery process and what’s your outlook for marketshares going forward?

David Armstrong

I don’t think we’ve seen significant deterioration at all. In fact, I think we’ve seen some increase in the aftermarket share and the other share, the OE share has been stable to positive, I believe.

Bill Lasky

Yes, I don’t want to hold up a red flag for our competition to take aim at, but I will tell you that I think there’s a good reason to believe that we can see some OE market share improvement over the next couple of years. Especially starting in ‘09 and certainly I think our focus on the aftermarket division that we created and the commitment to those people. I’ve spent a lot of time with both sides of the business from a customer point of view and I see us picking up some nice additional business for those components.

Kirk Luedtke - CRT Capital Group

Okay; last question and then I’ll get back in the queue. Given all the changes that are underway in the credit markets, how much total liquidity you think you need to run the business?

David Armstrong

To give you an idea, we anticipate ending the year with about $75 million, $80 million of cash on our books in addition to the $78 million of our revolver. So that gives us over $150 million in cash. Our fixed charges, you’ve got $43 million to $45 million of interest and somewhere between $30 million to $40 million of CapEx and we are in the process of preparing those budgets for next year and cash taxes are anticipated to be less than $5 million again next year. So I think we are in pretty good shape.

Kirk Luedtke - CRT Capital Group

Yes, but in terms of the interrupt quarter swings and that type of thing, how much do you think you could end it? How much total liquidity could you run the business at quarter end and still be comfortable.

David Armstrong

I’m not sure I’m quite following.

Kirk Luedtke - CRT Capital Group

I’m just trying to get a sense for; there was a time when you were saying that you could run the business efficiently with as little as $25 million of total liquidity and I’m wondering if that number has increased given all of the stress in the industry?

David Armstrong

Yes, certainly you have quarter-over-quarter swings. I think in a normal situation, about $25 million to $30 million is usually pretty much where we are comfortable. Obviously the big swings come in the first quarter where there’s a little more need for cash because of various payments and pensions, etc.

Operator

Your next question comes from Henry Kirn - UBS.

Henry Kirn - UBS

Without getting into guidance for where the truck end markets could go in 2009, what are your customers telling you they see from demand as the year progresses?

Bill Lasky

Go ahead, Dave. I’ll let you look like an ass.

David Armstrong

All over the board, and that is why we were not able to be a little more specific during this call and we were not able to, but I think what we’re hearing range from the ATT numbers of 225 to some significantly lower numbers that others have come out with. I think, generally, you’re looking in that 200 range right now, but I don’t think anybody really knows for sure.

Bill Lasky

I’d like to add that I think that the people who put out these forecasts with such turbulence in this industry, never expecting it to go into 2009 as a weak market. I think after having their forecasts off so much over the past few years, I think right now there’s some possibility that one or two of them are just being overly conservative, but we are not anticipating that it’s going to be a better year than ’08, let me put it that way and I did not believe that our customer base has any reason to believe that it would be better than calendar year ‘08. Is that fair?

Henry Kirn - UBS

That’s fair. I guess bigger picture Bill, the structure of the company, what do you think it could look like in a few years? What’s your goal for Accuride down the road?

Bill Lasky

I know my belief is that this company has some really strong product lines and some real positive market share and the brand equity is so strong that I think the first thing to do is as you’ve probably heard me in my prior life is that you’ve got to really look at the foundation and you’ve got to patch some of the cracks in the foundation.

I want a strong foundation because after your foundation is built, most people don’t want to go back and look at it. So I want a damn strong foundation to go forward on the core products of this company and to utilize the strengths of our competencies. Then I think we need to shuck a few little things that we don’t need and then we need to build on what we have.

This company quite honestly, I hate to say it, but it never really integrated the TTI acquisitions. That needs to be completed and it will be completed with haste. We’re making a lot of movement on that right now. I vetted it out, we looked at it from every which way you possibly can and first thing we need to do as a part of our strong foundation is integrate an acquisition that happened a few years ago and go forward with that and capitalize on the strengths and either support the weaknesses or get rid of them.

I think as we do that, then we’d have a strong base for our OE and aftermarket customer base to supply them those four or five products that we have and then I think we need to add to them, but I want to really get this process in this company streamlined. It’s not difficult and quite honestly this team is totally up to it. We just had to open up the opportunity for them to go forward with it.

We shift wheels back and forth and back and forth before they are completed. That is not a Star Wars process and it just needs to be all in one facility. We need to do a lot more machining right and our foundries right off-line, we had the unique competitive advantage of having two very, very good foundries that we’ve done a lot of work on over the last year.

Brillion and our Rockford foundry are doing an excellent job. It’s a competitive advantage I think, because there’s not a lot of people who have foundries anymore and they can contribute to our profitability. So I wanted to do the machining right there in the same facility and then I want to take the inventories to the OE customers directly. We wasted a lot of money shipping drums and wheels around doing different processes.

So really the next year or so is to get ourselves really to be streamlined. I like to look at it as going from a sundial to a Swiss watch and then going forward we need to build out our strong customer base that wants to buy from us and the logical products to continue to grow with.

Henry Kirn - UBS

Okay, one final one and then I’ll get back in queue. Have you started discussions on the businesses that you intend to sell?

Bill Lasky

Absolutely. I made reference to them in our presentation. I’m pretty zeroed in on what we’re going to do. The only thing is because of people reasons, etc and finalizing plans. Also it is not the best of time for buyers, but we are not talking massive units. I think that we’ll probably be moving forward with our restructuring and then some direction on this most definitely before the end of Q4.

Operator

Your next question comes from Brendan Miles - Octagon Credit Investors.

Brendan Miles - Octagon Credit Investors

You mentioned that a plus or minus 10% change in the build rate would drive EBITDA down to 12 to 15. What build rate specifically are you using? Is it the Class 8 build rate or is that the combined 5 through7 and 8?

David Armstrong

Yes. It’s all bubbled.

Brendan Miles - Octagon Credit Investors

So if we used 5 through 8 plus or minus 10% would drive those EBITDA numbers and trailers, everything.

David Armstrong

Yes. That’s why it’s hard to pinpoint this because they never move exactly the same way, but again that may give you some high-level --.

Brendan Miles - Octagon Credit Investors

Right, but now we have something to figure out.

David Armstrong

Yes.

Brendan Miles - Octagon Credit Investors

Another quick one; your union contract situation, you have the Fabco facility in California expiring in August. Can you give us an update of what happened there and what does the ‘09 negotiations look like?

David Armstrong

The Fabco negotiation is ongoing; the contract was extended for two months while they worked. We don’t see any potential problem with that. I think we are in good shape as far as union relations during [inaudible]. The next one coming up I think is London, March of next year.

Brendan Miles - Octagon Credit Investors

Which union is that?

David Armstrong

DAW.

Brendan Miles - Octagon Credit Investors

And then just one last one; with the dollar strengthening quite a bit recently maybe you could just give us a little snapshot; how do you view the competitive situation?

Bill Lasky

With the strengthening of the dollar, unfortunately today we are not doing business in Europe. The strengthening of the dollar doesn’t affect us, but that is going to change and we will enter that market first in the aftermarket and then certainly we will seek strategic alliances from an OE point of view.

It is my position and I believe the Board shares this and most people would, is that if you want to be in business today and you should be a global player and you should strive to be No. 1 or No. 2 in market share on a worldwide basis. So therefore we need to move in that direction. So therefore that’s something that we have on the drawing boards down the road.

Certainly today our focus is as I just said earlier with Henry is to focus on our foundation and position ourselves to excel in the products we’re already in, but I think we do have one positive thing is we do have that London, Ontario facility, where over the last couple of years, the dollar and the Canadian dollar were closed to parity and so the advantage that we always enjoyed had disappeared on us and now with the Canadian dollar down, we’re approaching more traditional disparities between our American dollar and we start to pick up an advantage.

So at this point in time, it is an advantage to us. Had we been exporting a lot of business to Europe right now, it would be a disadvantage, but that is not the case.

Operator

Your next question comes from Sarah Thompson - Barclays Capital.

Sarah Thompson - Barclays Capital

Actually it’s a follow-up on what you’re just answering. Is it possible you can detail for us how much the Canadian dollar helps you in the quarter?

David Armstrong

In this particular quarter?

Sarah Thompson - Barclays Capital

Yes.

Bill Lasky

I think some of the movement has just really happened, but --.

Sarah Thompson - Barclays Capital

Or if you can, in other words what’s your sensitivity to a cent change?

David Armstrong

Year-over-year, it was actually negative, but the change has typically been about $800,000 per $0.001, but it probably a little bit lower there because the volumes dropped down in London. That was what it was historically.

Bill Lasky

It can be very significant and I will tell you as the Canadian dollar weakens, it positions our London facility to actually be our low-cost facility.

David Armstrong

So probably closer to the $500,000 in the current volume.

Sarah Thompson - Barclays Capital

Okay, and on your cost savings from the restructuring, is that based on any particular volume level?

David Armstrong

Not really, no. I mean, the Phase 1 restructuring?

Sarah Thompson - Barclays Capital

Yes. I mean is that presupposing a certain level of business?

Bill Lasky

Phase I, the lion’s share of it was reduction in people that out of that, a portion of it would’ve been just layoffs, but most of it is going to stick.

David Armstrong

A lot of it was salary instead of hourly and then in addition; we’ve had some efficiency improvements that the thinking is that when the volumes do come back that we would not need as many people.

Bill Lasky

One of the things Sarah and if you remember from my past, because I know we’ve communicated a lot of the last years; this is the right time, we can’t avoid the recession or the decline in the truck build, the soft business, so I don’t focus on the sad sight of that.

What I look at is right now is the time to improve your process because you can still ship your customers needs, but you can improve your product, your process and what we need to do over this fiscal ‘09 is we need to get those processes improved to the point that we don’t need to bring back the lion’s share of the Phase 1 restructuring.

Phase 2 restructuring, obviously could affect some people, but what it really does is it changes the flow of our product, the process of our product and we can’t give any more detail on that, but obviously take out a lot of just wasted costs that didn’t need to be there and doesn’t need to be there in today’s style of manufacturing and we can’t give any more color to that until probably sometime in early December.

Sarah Thompson - Barclays Capital

I guess, part of my question is that I’m trying to understand how it is that it’s only going to cost you $7 million of cash to get $27.5 million of savings and why you wouldn’t have done that before, that’s what I’m trying to figure out.

Bill Lasky

That’s a good question. I’m sorry but it could have been done before, it should have been done before. I did share with you when I came onboard; the Board was very instrumental in Phase 1, more instrumental than typically a Board should be operationally and it could have been done sooner and it should have been done sooner and it’s done now and that’s behind us.

David Armstrong

But to answer your question even more specifically, in addition to just people, there were also some movement of equipment that will significantly cut down on freight costs and so that adds to the benefit going forward.

Bill Lasky

Yes, that was about a quarter of that total savings, correct?

David Armstrong

Yes.

Sarah Thompson - Barclays Capital

Then theoretically, if this isn’t volume dependent you think you can utilize it more efficiently then arguably that number could be higher than 27.5 if your volumes pick up?

David Armstrong

On the portion that was a process improvement, yes.

Sarah Thompson - Barclays Capital

Okay and then last question, which you may choose not to answer, but you said you expect to increase the market share in 2009. Could you just give me a bit more idea of how you managed to do that? I understand that’s been a big initiative on aftermarket size and so that may just be a new focus, but I’m somewhat interested on the OE side.

David Armstrong

I guess the most general thing I could say about that is I think that the team and Rick Schomer, our Senior Vice President of Sales and Marketing who joined us just a year ago now, really looked in quickly to the relationships of our customers and what had happened on some of the, I call it strong-armed tactics on recouping some of the material increases which we had really wet ourselves on.

The bottom line is that with a lot of effort on the team and the good service we’ve been giving and the fact, believe it or not and I say “believe it or not” because I’m just so proud of this company that the customers do like our products a lot and they want to buy from us, that I believe we have an opportunity to gain some of the market share on the OE side that we have lost because of some of the way we handled some of the material increases back in the end of ‘06 timeframe.

So we’ve had good indications, but again we don’t want to challenge our good competitors out there to just jump all over us, so I don’t want to go any further.

Operator

Your next question comes from Adam Plissner - Credit Suisse.

Adam Plissner - Credit Suisse

Bill, I think in your opening comments you mentioned in regards to when you chose to draw down the revolver, you were trying to ensure suppliers that you guys had sufficient liquidity; was there any implication that the vendors were growing any concerns or looking to change terms?

Bill Lasky

I’ll answer that and then I’ll let Dave add to it. The general thing is that have any vendors wondered with our stock going down into the $0.20’s if we had a bigger problem than they could determine by looking at all of the public information on the company? Yes there were a few, customers and vendors. We haven’t had any significant problems.

In some of the customers we’ve talked to, some of our bigger customers, I’ve been able to share that they’ve also enjoyed or experience some of the same challenges which they could appreciate. One of the things a good Board does, certainly typically on the audit committee side, is review the risks that companies have.

I know that I’ve always done that, do it on the boards I’m on now and in looking at the risks, you always have to look at your key suppliers and wonder what’s the emergency plans, what’s your plan if they couldn’t ship you and in doing that, you create a list of those people that you may be saying, “What is happening with this customer or supplier?”

We are big suppliers to some of the OE’s. They had the right at their risk evaluation to want to know a little more about the long-term viability, the health of Accuride and after Dave and his team have met with them on the phone and reviewed the circumstances, I think we’ve done very well, but the drawdown was just for that added level of comfort zone that I felt was necessary for our customers and our suppliers to have.

Dave, do you want to answer that?

Bill Lasky

I think you summed it up very well. We had a number of calls with our suppliers and as I mentioned previously we did reach out at the time of the drawdown to talk with them and I think it’s been a fairly positive response.

Adam Plissner - Credit Suisse

That’s helpful. In the fourth quarter and I think you’ve given us enough full year assumptions here to double it back into the fourth quarter, so I’m going to check my math here. Dave, when you look at the working capital assumptions that you are assuming to recover in the fourth quarter, it looks significantly below the types of recoveries you had historically. Is the number somewhere around $12 million, $13 million recovery in the fourth quarter? Does that sound right?

David Armstrong

Recovery of..?

Adam Plissner - Credit Suisse

Working capital, sort of a source of cash in the quarter; it’s sort of where you stand year-to-date and where you need to get to reach your commitment of thinking you are going to use $5 million to $10 million in use on a full year basis. Just sort of backing into it and I’m not sure my math is accurate.

David Armstrong

Yes. I’m not sure I’m quite following. I mean, we anticipate we’ll have a significant drop in receivables, we’re going to have a drop in payables, inventory is going to drop significantly.

Adam Plissner - Credit Suisse

Do you have any idea what size is that number you’re looking at to get to the $5 million to $10 million use overall. I was just looking at your general year-to-date work capital and getting...

David Armstrong

Yes, 35 to 40.

Adam Plissner - Credit Suisse

Then I’ll swing back in on my math for the total free cash that might not be working. Can you just sum up the cash restructuring charges you anticipate for the full year ‘08 and ’09; maybe ‘09 obviously includes phase 2?

David Armstrong

Yes. Phase 1 is about 3.7, 3.8 in 2008 and about 3.4 in 2009.

Adam Plissner - Credit Suisse

Okay and then just lastly the EBITDA that’s implied for the fourth quarter, somewhat up 30%, the bulk of that is the $6 million of anticipated savings. Is there any relationship as it occurred in Q3 where you talked about sort of the last year being a comparable quarter where I think there were some inefficiencies that flowed through. Is there anything unusual about Q4 of last year?

David Armstrong

I don’t think so. Well, some of the inefficiencies did carry over and also we had a Gunite labor stoppage and we would’ve had inventory issues because you would have been building inventory for the negotiations. So there’s a little bit of noise in 2007

Operator

Your next question comes from Kirk Luedtke - CRT Capital Group.

Kirk Luedtke - CRT Capital Group

I know you don’t want to talk about phase 2, but how much of your revenues do you think are non-core?

Bill Lasky

Unfortunately, if I were to start sharing that, then it would be giving a little more information away. I don’t think it’s necessarily big dollars, but it’s significant enough to warrant working on changing our structure a little.

Keep in mind that the most important asset of any company anywhere in the world is the resource and it’s about the money. We need that obviously, it’s the people’s resources and the distraction that you can have, the noise you can have from something that is not in your core area and so therefore I think the best thing this company can do to get to levels that it should be at, that it’s never attained is to focus, focus, focus on those core products and so therefore I think it is critical that we eliminate the distractions.

Kirk Luedtke - CRT Capital Group

You mentioned the military business in your MD&A and I was curious if you could give us a little bit more quantification on what it meant in the quarter and if you think it’s sustainable?

David Armstrong

The increase in the quarter was about $1 million to $2 million and Bill maybe you could comment. You did a lot of military there.

Bill Lasky

Yes I had the opportunity to go to the AUSA Army Show in Washington about a month now already and I can tell you that we had a very modest booth there. Compared to all the massive booths from Blackwater and BAE, M General and those types of companies and all the pieces of equipment there, I have to tell you, you go around and you count up the wheels, you count up the brake drums, you count up the fabrications like our Imperial Group does in the gas tanks and stuff like that or fuel tanks, there was so much opportunity for us in that business just alone, just the Army show.

I’m an ex-Army officer and in fact the head of AUSA was number 232 chief of staff of the Army is a graduate of my college and bottom line is, is I had the opportunity to talk to him about where they think things are going and some personal issues, a little more insightful and I think the opportunity for us is endlessly opened and we have been doing so little overall with the military.

Recently just some months ago, Rick Schomer put a guy in charge, Jim Eaton in charge of that military side who is really good at it, really focused and has good relationships and I see us building business just really good. The OshKosh does a lot of military vehicles. I know some of the people there and spent some time with them. So I think it is a great opportunity for our company to grow and because of the products we have and they need some good technology and we have it.

Kirk Luedtke - CRT Capital Group

The $1 million to $2 million, was that sales or operating income? The increase of $1 to $2 million, was that a sales number?

David Armstrong

That was a sales number; increase in sales.

Bill Lasky

That was the increase in sales yes, but to answer your question sustainability is definitely yes.

Kirk Luedtke - CRT Capital Group

To follow up on the Canadian dollar series question. The $500,000, that’s a currency benefit at which level of your income statement; that’s a profit impact, the 500,000 per $0.001.

David Armstrong

Yes.

Kirk Luedtke - CRT Capital Group

And that’s an annual number?

David Armstrong

Yes.

Bill Lasky

A little add-on just to the end of that on the military is the other nice part about it, is that cycles in the military business have nothing to do with the cycles that we experience in normal business, because they’re obviously directly related to war efforts and other kinds of actions that are going around the world that we support. So therefore, it’s nice to have something that the cycle has nothing to do with the truck business, the automotive business, etc.

Kirk Luedtke - CRT Capital Group

How big do you think the military wheel business is?

Bill Lasky

I know Rick who’s not here would have that answer. I don’t know what it is, but I can tell you they have a hell of a lot of wheels on them and they also get those wheels blown away. Not that that’s what we wish, but there’s a good replacement for them, so therefore there’s just a lot of wheels.

As you would expect the wheels, the components that go onto these military vehicles in many cases are significantly beefed up for the applications. Most of the wheels have run flat tires. We don’t want our troops who are under attack having a problem of not being able to move their vehicles if they have a flat tire. So the value add in these applications is significant and it is a great opportunity.

Kirk Luedtke - CRT Capital Group

How much of your sales today are military?

David Armstrong

About $25 million this year. That’s up from about $5 million a couple of years ago.

Bill Lasky

Yes. It can grow exponentially. Every vehicle has a wheel under it. Every vehicle has a brake drum on it. I mean it’s just a great opportunity that the company wasn’t focused on some years back and I think we have the right people to capitalize on the opportunity and we have the right products.

David Armstrong

And I think that is sustainable and the growth is sustainable. We did get a new award on L Pass wheel for next year of about $13 million, $14 million. We’re also on the MRAP vehicle; some of that may be declining a little bit next year, but this other new award with.

Bill Lasky

That was just last week I think.

David Armstrong

So I see a lot of good potential there.

Bill Lasky

Great opportunities.

Operator

Ladies and gentlemen, this concludes the question-and-answer session and I would now like to turn the call over to Bill Lasky for any last-minute closing remarks.

Bill Lasky

Thanks so much, Sandy. All I wanted to do was thank you for your time this morning and you’re participating in our call, your great questions. We do look forward to giving you more color on Phase 2 restructuring and anticipate we would probably put a call with that when we come out with that sometime in December, so you have the opportunity to get some of the answers that you would have liked today, more fully vetted out in that time frame. So, again thanks for your continued support and have a great day.

Operator

Ladies and gentlemen, this concludes the presentation and you may now disconnect. Have a great day.

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Source: Accuride Corp Q3 2008 Earnings Call Transcript

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