Accuride's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.24.13 | About: Accuride Corporation (ACW)

Accuride Corporation (NYSE:ACW)

Q1 2013 Results Earnings Call

April 24, 2013 10:00 AM ET

Executives

Rick Dauch - President and CEO

Greg Risch - Vice President and CFO

Analysts

Rhem Wood - BB&T Capital

Jimmy Baker - B. Riley & Company

Kirk Ludtke - CRT Capital Group

Operator

Welcome to Accuride Corporation First Quarter 2013 Earnings Conference Call. On today's call are Accuride's President and CEO Mr. Rick Dauch and its Vice President and Chief Financial Officer, Mr. Greg Risch.

My name is Rosa, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded and will be available for replay later this morning. At the end of today's call, I will give instructions to access the replay.

And now I would like turn the call over to Accuride's CFO, Greg Risch. Please go ahead, sir.

Greg Risch

Thanks, Rosa and thanks everybody for joining us today. If you turn to page two, I want to remind everyone that during this call, we'll be making statements that can be considered forward-looking as defined in the Securities Act. We caution you that these statements are subject to risk in our business and encourage you to read all of our SEC filings to understand what those risks are.

Please turn to slide three. During today's call, Rick will provide an update regarding activities within the company, along the key highlights in our industry. I'll then review our first quarter results prior to passing up to Rick for more comments and then we'll open up the line for questions.

With that, I'll turn it over to our President and CEO, Rick Dauch.

Rick Dauch

Good morning, everybody and thank you for joining the call. Today Greg and I will walk you through our operational and financial performance or the first quarter. Followed by a discussion how we see the balance of the year shaping up.

So slide 5, we had some highlights in the first quarter and we recently executed the capital leases, that we have been discussing for some time now. Our team has also done a good job of managing our working capital during the quarter and had kept it at a 9% of sales ratio. We're also working hard to renew our ABL under more favorable terms and all of these efforts have and will continue to strengthen our liquidity position going forward.

Our Gunite business is starting to stabilize, Gunite had positive operating income in March, the first time I think, Greg told me that since 2007, the new drum machine equipment and the new slack adjusters assembly lines are fully PPAP'd and running at planned performance levels and better than expected cost levels. Tremendous improvement, we also in our Board of Directors yesterday and they were amazed at the transformation.

We are addressing some lingering integration issues with our newly installed hub machining equipment. These issues are typical for any new machine lines launches and we exhibit are not these out early in the second quarter. We are strengthening demand and improved pricing in Gunite's aftermarket business. It also appears that we are seeing the first real break season in two or three years, it's amazing what bad weather in the Midwest and up North can do for business.

We continue to finalize and execute plans that we shared in December to reduce indirect and indirect material cost of Gunite as well as it -- or the distribution in other overhead cost. These improvements will show bear fruit in the back half of '13.

We did have some challenges in the first quarter as noted by our performance Class 8 truck builds at the OEMs remain extremely weak during the first quarter as they continue to work off excess inventory. We expect -- production levels to improve in the second half of the year, if end customers' orders remained strong.

In addition to soft Class 8 truck volumes we expect midterm industry conditions to remain challenging in Brillion end markets. Remember the 20% of Brillion sales are tied to Caterpillar, or Caterpillar suppliers and you saw they announced it yesterday.

We also expect continued pricing pressure in the aftermarket on Gunite's drum business in spite of the recent increases and are monitoring this market closely. Greg will cover these in more detail, later on the call but we had weaker than expected conversion during the first quarter due to a fuel operational issues and some one-timers. Specifically, carryover material pricing for the fourth quarter of '12 that impacted both our wheels and our Gunite business because we had bought some material in the fourth quarter that we didn't use up, when the volumes dropped off, abnormal operating cost as we complete the consolidation and press repairs and apparel and the hub line and launch of Gunite and a one-timer associated with the new capital leases put your little processing equipments.

Let's go to slide 7, talk about the industry fundamentals although is down slightly month manufacturing continues to be resilient with the ISN covering near or about 50 for the past several months. And almost 7 years the age of the remain high over 11 years higher means even higher. Freight volumes have continued the trend of modest growth and the starting point Volume have continue the trend of modest growth and starting to accelerate here in the second quarter.

We have been on the road the last two months talking to some major fleets and we heard the We did from everything from everyone, January and February were weak freight months but sometime in mid march we based -- they say a large uptick in freight volume and they think that bodes well for the back half of the year. We absolute think we hit the bottom of the trough in the first quarter of '13. In the cycle should start to come back.

Steady Class 8 orders over the past several months along with very low cancellations rates are a good indication that we are about experience increased rates of production here in North American commercial vehicle markets. With our operations fixed, we're in much better shame to probably capitalize on the upturn. We are working hard to ensure that we have things 100% button up, and every location prior to this industry upturn.

Slide 9. The build forecast for Class 8, medium duties and trailers continue to project a healthy outlook for the next several years. The disparity between FTR and ACT for 2013 Class 8s is narrowing with ACT at 263 and FTR 240. We based on our 2013 projections at the lower end of this range.

Medium duty builds should see the benefit and a continued strength in the housing and construction markets.

The medium duty forecast for 2013 is 180 and 2000 trucks. And we are at the higher end of this range, in our forecast today. The trailer segment of the markets is where we have seen them a why this forecast disparity with ACE over 230000 trailers, and FT at just over 215. Chuck Burns and myself are here at the trailer convention, and will be able to meet with many of the trailer customers across country in next two days and will have a better feel that we need to adjust the quarterly going forward.

Go to slide 11 please. Give you a quick update on our fixing work activity status, all of our critical capital investment projects are substantially complete. The aluminum wheel capacity expansion is complete and continues to allow us to gain profitable share in the market. This capacity will be especially important as the market continues its gradual shift from steel aluminum and we can now look customers in the eyes and tell them we have, we can fulfill their orders when truck OE schedules go back up. This is especially important for aftermarket and trailer customers, who in the past, always started (Inaudible) would let them down when OE line is not back up.

Our Drum machine and slack assembly lines in Rockford, which both came in at budgeted cost, are running at or above planned raise. The new hub machine line and refurbished equipment, we half Brillion has been installed at Rockford and we are in the final stages of this of the launch.

This new equipment has allowed us to significantly consolidate our footprint from 3 factories down to 1 and will help us win back business with higher quality, improved delivery and more competitive cost. We've had several instances in the first quarter, where we've earned back business from customers who have not bought for Gunite in 4, 5 years, and you saw a recent announcement where we bring you the contract with [Bypar] go gain back some business we had lost to offshore competitors.

The work at imperial is almost complete, finally we are physically out of the lease facility in Tennessee and will be complete -- exited that plant on 4/30 end of lease. We're also in the final stage of completing the critical press repairs in our Decatur, Texas facility, we have had to repair eight, presses, we have two, that are remain put back together, one will be done by May 15 and the other by May 29.

We continue to negotiate with customers to address money-losing products and our Tennessee and Texas facilities, who'll either get a prices increase access or will exit the business here in the second quarter. These are the final steps of stabilizing Imperial's operations and returning that business to a positive performance.

Brillion continues to perform well, in the phase of significant in market softness, which began during the second half of 2012. As I stated before Brillion loss over $140 million over 10 year period. So we are pleased that on a relative basis Brillion is doing well. Their performance in the current environment is a result of a significantly reduced breakeven point in their business. And I think there's still some low-hanging fruit in terms of cost reductions opportunities at Brillion we can address, and we're doing that to through our lean manufacturing process, we've got that system running quite well in one of the plants there and we're now transitioned to what we call plants 2 and 4 at Brillion site.

As I mentioned last quarter, we continue to perform the necessary work required to purify our databases, and map our processes prior to implementing the new ERP system. We successfully changed over to the flex system on our headquarters' functions, at first quarter, and worked through to close the quarter without a problem. The ERP launch as a multiyear project which is scheduled to be completed in 2014 and we'll start our first operational site late third quarter early fourth quarter 2013.

With the heavy catch up investments and CapEx behind us, our CapEx will now be approximately half of what we spent the last two years, down between 3.5% and 4% on a go forward basis. What's the result of that capital investment, let's go to slide 12.

We continue to track each of our plans using a report card on slide 12 delivery, quality, and profitability are the key metrics that we focus on for each facility.

When our team arrived at Accuride in 2011 many of our plans were in bad shape both from the profitability standpoint, in ability to service the customers in terms of on-time delivery and a world class quality products. We now have our London, Ontario plant, which was losing money, making money at the operating income level. Operations at Monterrey, Camden, and Erie continue to run well as lean manufacturing principles continue to be implemented at the new capacity is put in place.

Camden right now is in a yellow status only because of the volumes are so low that we've slowed down some of the launch activities down there and we'll be ready to ramp up when the volumes come back so. With Gunite's operations now consolidated all into Rockford, we are beginning to see improvements in the fundamental operating metrics particularly on the Drum machine lines and the slack adjuster assembly lines.

We have zero past due on slack assembly, we are operating at less than 50 PPM on our drum lines, we are watching the lines run yesterday, we're running at reject rates of less than 1% on one line, I think it was 0.6% and the other line was 1.5% those lines used to average for the all lines was somewhere in to 5% to 7% rejection rate. So we're seeing some meaningful improvements there.

We still have some work to do back in casting areas but we've hired new manager there late in the fourth quarter, he's doing a damn good job and we're looking forward to having to meet with him in two weeks this time, where we spent a little bit more money to stabilize that operation, we replaced about 85% of the tooling, we repaired almost 90% of the hydraulics in that machine and we're seeing better improvement there as well as scrap rates dropping from it was 5% to 7% down to 1% on the casting line so.

Now we've got to earn back our business with our customers. We hosted members of our distributor advisory council in Rockford last week and they were amazed of the change and they told us we need put a video together and get it out in front of all the distributors across the country because of Gunite's reputation over the last five years and not delivering on time, we needed to be able to show them what we've done.

As I indicated earlier I'm very pleased with the progress of Brillion, we've taken that plant from money-losing operation to an operation that continues to make money and in spite of significant market softness and there more opportunities to further reduce for breakeven point with specific focus in the areas of scrap reduction, overhead cost, and to productivity in terms of getting more iron out with less man hours being worked.

And Imperial will be out of the [Ellis] facility Tennessee by the end of this month and we're making progress in the press repairs down in Texas. The last -- marine press repairs when we complete by the end of May. With the completion of the press repairs, and put around a much stronger asset base to drive, improve true quality, delivery and ultimately profitability of Imperial.

The savings from our work at Imperials Tennessee and Texas sites should pay off in the back half of the year. Reduced cost associated at the outside processing were presses have been down for repairs. The construction of a building additions at our Tennessee location and the transfer of five presses from one Tennessee plant to the other all occurred in the first and second quarter of this year.

At this point, I'm going to turn the call over to Greg, I'll let him to cover the financial results for the quarter.

Greg Risch

Thanks, Rick. Moving to slide 14, I'll make a few comments on our earnings results year-over-year for the quarter. Sales of $192 million, or 29% lower than Q1 of 2012 sales of $269.5 million, which is primarily related to the significantly reduced production for the commercial vehicle industry but also some of the industrial markets that we serve particularly Brillion.

Remember that our industry was pretty much running flat out during Q1 and Q2 last year with the second half of the year greatly reduced rate. So this year it's expected to be a mirror image, or flip flop with the slow start and a strong second half.

Our operating loss was $6 million on the lower sales translate to a decrement of margins of 17% that's normally in the lower 20s percentage wise, so that's to get thing. So representative of the operational efficiencies from our recent investments in both the equipment and lean methodology to fully understand the comparatives you have to know two other factors about the operating and environments from these two periods.

The first is a little more obvious, the higher sales demand in Q1 of 2012 will definitely lead to a higher production in the period which helps spread fixed cost over the higher demand meaning it's going to be favorable to earnings as compared to the lower demand environment in Q1 of '13.

The second factor is basically the same but it adds a little bit to it because of the inventory level movement with any to these periods. During the first quarter last year we build approximately $10 million of inventory while this year we reduced inventories by $4 million. So an operating environment that changed about $14 million in inventories does have an impact on our earnings.

Again the second factor is added into the first related to the first, but both lead to the lower earnings in the current period compared to Q1 last year. Also it's worth noting as Rick mentioned the two unique impacts in the period that weren't normal, we incurred a onetime charge of about $900,000 n our wheels business associated with executing the sale lease back. And we also experienced about 800,000 of higher medical cost at Brillion.

Let's now move to slide 15. Slide 15 shows the correlation of our revenue and earnings for quarter one of the current previous two years. While a year-over-year drop in demand of nearly 30% created challenges in the operating environment we've made significant process on our shop floor as you see continued improvement in operations throughout 2013.

When the industry demand picks up a bit we'll also demonstrate our much improved operations through strong incremental conversion on those increased sales dollars. And just like last time graphs on the bottom half of the page contained a full year 2012 results. The three key points are that we serve North American markets we also represent our largest segment and our large truck makers consistently represent a little more half of our revenue.

Next slide please. Slide 16, shows the trends of both our Wheels and Gunite businesses. Wheels business reflects the same trends as a consolidated company in regards to sales and earnings. Sales in Q1 out of $93.2 million represented about 48% of our total revenue this is a slight increase to some modest share gains for aluminum wheels that Rick was mentioning.

Year-over-year margins were impacted by a higher material cost and again the changing environment and production. Of all our operating units Gunite experienced a large drop in revenues of 43% mostly due to the share losses at the truck OEMs that we experience during Q3 last year. The good news is on the $29 million lower revenue earnings only decreased about roughly $1 million. This shows significant improvement in operations, and it was definitely pointing to a significantly lower breakeven point in this business. A little momentum on the volume side, and Gunite will be ready to shine in the second half of 2013.

Next slide please. In slide 17, we see the Brillion business continues to perform fairly well operationally despite the 31% drop in demand. As Rick mentioned that Brillion was facing much softer demand from their end markets. The adjusted EBITDA of $1.7 million represented a 20% decremental margin would have only been 14% if they hadn't experienced $800,000 of increased medical cost during the period which was really abnormal for them. Brillion's revenue of $30.4 million represents approximately 16% of the consolidated revenue for Accuride this quarter.

Moving to Imperial their revenue of $29.5 million fell 27% year-over-year which is in line with the Class 8 drop of production. The $10.7 billion reduction in revenue translates into a half million less of adjusted EBITDA year-over-year which is a pretty low decremental so little less than 5%.

Imperial still had a number of inefficiencies related to the exit of lease in Portland facility as Rick mentioned, so we look forward to the reduction of those inefficiencies as well as the reduction of fixed cost to getting here in Q2. Next slide. Top two graphs on slide 18 breakup the three components of our trade working, capital trade accounts receivable, inventory and accounts payable.

Receivables tend to trim with our revenue and showed stability in regards to the days outstanding. I want to thank our supply chain and our operations teams for working together to reduce inventories. Overall our working capital represented 9% of sales this quarter and it is little better than planned as we started the quarter.

Next page, please. Slide 19 shows our free cash flow for the quarter of negative $35.2 million which doesn't include $14.9 million of growth proceeds related to the sale lease-back of aluminum wheel machining equipment Rick alluded to. We received $10.1 million of net proceeds for the sales meaning approximately $5 million of prepayments and deposits that were associated with those leases are reflected in operating cash.

Clearly Q1 contains the $14.7 million interest payment on our note, along with a monthly interest on our ABL facility. The most significant portion of our CapEx for 2013 was been in Q1 since mostly represented a carryover of the heavy spending from Q4 of 2012.

Next slide. Liquidity moved up slightly from $64 million at start of the year to $64.5 million as of March 31st. Overall I have to give our Treasury group a lot of credit for managing Liquidity through the period and having a fantastic ending to the quarter with the sale leased-backs being executed in March. We continue to work on other liquidity opportunities listed here on the page including active management of CapEx and working capital, we continue to explore sales of non core and idle assets.

Additionally as Rick mentioned, we're currently working on refinancing our ABL revolver which may improve liquidity further. We'll provide an update once that transaction is completed.

Now let's turn to slide 22, to address our 2013 guidance. We're maintaining our guidance through the years which see no significant movement in our outlook for the year. However, I would like to mention two key factors that will be driving our top line guidance. First, driver is obviously commercial truck built, industry forecast are currently pointing to a significant increase in builds during the second half. As Rick discussed on slide 8, with Q1 being the trough.

The second driver relates to demand from the industrial segments that our Brillion business serves, so while we're comfortable with maintaining guidance, we want to offer caution that is early in the year and current indications that point you towards the lower end of the range of both revenue and earnings. Orders in quarter two are going to be telling as to when that recovery will begin.

We'll continue to manage cash and liquidity to have breakeven free cash while considering the gross leased-back proceeds for the slides purpose.

Now I'll turn the call back over to Rick for some additional comments prior to taking your questions.

Rick Dauch

I am going to slide 26. In summary, the fixed portion of our strategic plan is substantially complete. We've restored our core in North American operations to competitive positions including we've completed the consolidation of our heavy duty steel wheel capacity in the Henderson, Monterrey with very few exceptions of few oddball part numbers still left in our London, Ontario factory.

Expanded our aluminum wheel capacity and our manufacturing footprint from one plant in the North East to three plants in, one in Mexico, one in the South East part of the country. We consolidated Gunite operations from three, independent operating sites to one, while [significantly] machinery upgrading its manufacturing capabilities, 94% of the machining equipment at Gunite has been replaced or refurbished in the last 12 months, that's a hell of a job by our engineering team both at corporate head quarters and the Rockford facility. The consolidation of Imperial where we did step on our toes will be finally completed here in the second quarter '13.

Now where the sicker business going [bought], once we start digging into some of the details on the equipment. And we returned Brillion to a profitably and now it's at a breakeven level basically in spite of the market softness and again I think we have some low hanging fruits there to (Inaudible) last year to even make it a better business when that market recovers.

We improved on liquidity position in Q1 through a focused on effort on working capital management and the completion of the equipment leases. We have adequate liquidity to complete our turnaround plans and begin the focus on Accuride's long term work.

We believe that Q1 represents a trough of the commercial vehicle cycle. We expect North American commercial vehicle market to be in recovering the back half of 2013. And we have positioned the company to capitalize on this impeding upturn, with the added capacity and improved capabilities of our new equipment.

Fixing broken businesses is not an easy work, it's taken tremendous amount of investments, many hours of analysis, hard work, and sacrifice and coordination amongst our team. Now it's time to finish the job and reap the benefits, both here at Accuride and for our shareholders.

We're likely to choose to divest some noncore assets at the right and at the right price. And we believe there have selective opportunities to grow our core wheel business globally. We're focused on making the right decisions for a long term success of Accuride.

And with that I'll turn it back over to Rosa for the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) We have Rhem Wood from BB&T Capital, online please go ahead.

Rhem Wood - BB&T Capital

Hey, good morning.

Rick Dauch

Hey, good morning, Rhem.

Greg Risch

Hey, Rhem.

As historical revenues, when I was look at those sequentially they were stronger than we anticipated and they improved in just about every -- they did improve in every segment versus the industry which was -- production was down 5% as sequentially. So it seems to me that you're running a little higher than even your revenue guidance, can you talk a little bit I guess about where the strength came from, it seems like that you may be getting better customer acceptance and may be how we should think about that going forward.

Rick Dauch

Hey, Greg, let me take a shot at it, and we can talk about that. We do think we're gaining some share in the aluminum side of business we also gained back a little bit of the aftermarket business on our steel wheel while of the business. Rhem, that's where the revenues come in from right now, so.

Greg Risch

I don't have anything to add to that.

Rick Dauch

We have a little bit of uptick in our Gunite drum business in the back half of March. We started seeing some of the spring selling season come in as well that kind of came in about March 15 so we started seeing some significant orders changes for the Gunite business as well.

Greg Risch

Yeah, I think the only thing that I could offer would be is that, if sales in the aftermarket can be a little lumpy, they're not at not as smooth and obviously actually we've seen the OEM production be a little less and smooth, if you followed this industry for well fall that last as not you get it. But in the aftermarket you can get a slot order by and kind of boost things up, you hear that may happened one month and may not happen again for 3 or 4 months. So some of those I think we did get a couple of those actually in January so there's a couple of things they are bit overall I think we're, it was too far of off from expectations.

Rick Dauch

Yeah, and Rhem that was offset a little bit by weaker then expect the sales of Brillion, we actually took a extra week of shut down coming out of Christmas to do some maintenance so we do have a straight time rather over the holidays and then we took the plant down at Brillion for week at the end of March because the sales were so weak so.

Rhem Wood - BB&T Capital

Okay, very good, thanks. And then your SG&A, a little bit lower than we're looking for we think it's kind of the $55 million for 2013, but it seems your cost initiatives are is kind of coming in a little bit better than what we projected, should this level kind of continue going forward?

Greg Risch

Yeah I think, so we think so.

Rhem Wood - BB&T Capital

Okay, so kind of the $50 million range for the year maybe for to targeting.

Greg Risch

Yeah, that's not reasonable we don't give guidance on it, but that's not unreasonable.

Rhem Wood - BB&T Capital

Okay. And then in your wheels margins were up a little bit, you talked about the maybe can you kind of quantify how much of that was the onetime versus just how much is lower volumes?

Greg Risch

Yeah well in particular there's the onetime charge of $900,000 related to the sale leased back and then otherwise I would say that you know the combination of how we have our material contracts the lean and lag I guess the lag on the material pricing versus when the customer pricing comes then.

So this was the period a little different than last year, this is a period of the pricing impact versus the material was maybe I guess, just to compare to Q1 was on an answerable fact. Otherwise Rhem, I think the only true different than an operating environments for the wheels business would be that we've added the capacity for Camden and Monterrey, so you know there's slight uptick in their fixed cost, maybe a little bit and obviously we've got, where we're not able to cover all those fixed cost, or not that it's huge, but there's a piece of that, it's not running as far flat as we want it to be right, so we need to volumes come back there to make all that flow really work for us.

Rhem Wood - BB&T Capital

Okay, --

Greg Risch

So you're seeing -- go ahead.

Rhem Wood - BB&T Capital

Oh okay, one more and I'm turning over, with the Gunite that's improving sequentially it's still negative but you still feel comfortable you're 10% to 12% targets by you early 14 or may be even in this year?

Greg Risch

Yeah as far as our projects on what we're doing and I'll maybe even -- without having it in this call it wasn't in the presentation deck but if you'll refer back to some of our previous calls you'll see subset of those major projects that are going to get us there and those are continuing on and on track, so I appreciate that group and their efforts there.

I think the only, caveat that I would add to, it is that it is counting on getting some share -- getting a little bit of share back. So as long as the market continues to go as our experts and the forecasting are talking for our for industry and as long as we can think we get some modest gains and we are absolutely on track for that Rhem.

Rick Dauch

Yeah, Rhem, and it's me, I'm in there too, as you know, we have a history here that the aftermarket is a little bit dubious and are the thing in towards act again in terms of when the OEM volumes go up in the past then I had a service those OEM contracts, right. That will be no longer how that Navistar and Paccar business that's no longer true. If the OEM volumes go up somebody else has to service those markets and we can shift our capacity towards the aftermarket we make a little bit more money.

We're going to prove that to people right, I was on the phone yesterday the gentlemen who hadn't ordered any Gunite parts for over five years, we met him back in November, he said he'll give it a shot. We've got three orders from him already this year, we had a few bugs in delivering some things mostly because of the trucking company but he was pretty pleased and he is glad to be back as a Gunite customer so that's a win right. Put one on the one side one in a time we lost customers over the years, one at a time, we need to get it back one at a time.

I am very confident what I see when I am on the factory I used to be up there every two weeks now I am up there about every four or six weeks but the drum lines more than capable, the slack line we work through a couple technical issues in the first quarter they've got engineers got resolve and now that lines really coming, both from a quality standpoint and production standpoint.

And the last big way to get done is the launch of this hub machines and then we pull a lot of complexity in that plan I think we have all over 5,400 part numbers now. But the next big thing we do from a lean manufactures is go through new all the hard work to do the scheduling economic order quantity has been maxes that done on slacks that's done to the most part of drum, with few exceptions and we're just starting that process on hub. So we've got I told the guys (Inaudible) probably have their good six months of hard drum manufacturing work to get the hub line completely settled in where we think it should be when it's all done. Does that answer your question?

Rhem Wood - BB&T Capital

Yeah, great colors, thanks for the time. I appreciate it.

Rick Dauch

Okay. good.

Operator

You have Jimmy Baker from B. Riley & Company. On line with the question.

Jimmy Baker - B. Riley & Company

Hi good morning guys.

Rick Dauch

Hi Jimmy.

Greg Risch

Hi Jimmy.

Jimmy Baker - B. Riley & Company

So just had a quick follow up to the question on the I guess the uptick in Brillion sales sequentially, I know you recently announced personal work force reduction there took a shut down in March should we expect that Q2 for that business maybe revert more to the Q4 run rate closer to $8 million to $9 million a month net of intercompany sales.

Rick Dauch

Yeah, I think so Jimmy at this time last year we have 11 crews, we had to go to union offer permission to work on a full time seven day week basis without having payout time and today we're running with six crews. So I think yeah you're going to be somewhere in that let's call at 8 to 10 million monthly run rate I have challenge our guys to keep taking cost out of the business and as they're starting to see as we put the lean system to into our plant one they show significant change, I will give you little color here right that plan has one casting line it runs a 110 part numbers we now have those 110 part numbers on a scheduling Wheel that's tie to the chemistry of the casting that we may, their scrap throughout from 4.5% to 1% in the last month.

All right, so now we're not doing the rush change over or the unscheduled changes as we have much more efficient okay on time delivery for that line was 98%. The bigger challenge we have is we have three casting lines up in plants 2 with 880 part numbers and we're doing all the mathematical work now to figure out how we best schedule those across the five different multi furnishes we have so that's the kind of work we're doing this quietly under the covers out there those plants, all right.

Jimmy Baker - B. Riley & Company

Okay. And then maybe you could give us an update on the expectations for the impact of raw materials sequentially in Q2 from what you experience here in Q1?

Rick Dauch

Greg, do you want to take that.

Greg Risch

Yeah, I will do, I would expect slight improvements, I think there is a couple of things that have been work through that will and some more mid quarter so without getting into too much numerical definition, I would expect improvement in the second quarter.

Jimmy Baker - B. Riley & Company

Okay, that's helpful and at any particular division at Wheels or Brillion or how should we think about it?

Greg Risch

I think it more Wheels and Gunite.

Jimmy Baker - B. Riley & Company

Okay, and then at Gunite you did talk about some issues with the hub line launch I was just hoping get a little bit more color there and then if I think about that kind of on balance we're strength in aftermarket drum you still think you can get to kind of that 4 to 6% EBTIDA range for that business here in Q2?

Rick Dauch

Good question, I will give you the color on the let's start with the hub line launch first right that's the combination of couple things we moved some a bunch of equipment that was at Brillion that was cleaned up put back in condition and installed those lines stabilizing quite nicely, one of those pieces of equipment had to go out for a major rebuild and that just got a installed basically beginning of January, it's got a lot of automation in there, and we're programming now all the different part numbers across at different automation right. And that line runs about 35 or 40 different hub part numbers and so you got to do all the software program, that's the kind of sale I am talking about launch issues, okay.

The bigger challenge for us here was we bought in very sophisticated set of machines from Italy, those arrived in January, also arrived in December, we left them on the ground in Italy to work out some bugs there, those lines are going to do 150 different casting part numbers. And so we're going through cast number by cast -- part number to getting qualified, I think we have about 20 of them being done right now, so it's going to take 60 days Jimmy to get all those part numbers qualified and so you got to go and change through and change software program. So that's just take some time.

What we did to supplement right now that we moved to cover all lines out of Accuride that are running on a daily basis somewhere between 120-150 parts, we really don't want to run those machines, but we have to going to run them for another day in the second quarter run into the third quarter, right. That's the kind of color I can give you on the hub line now, okay.

The other thing I think we say that as we dug into the part number complexity of hub lines we are pretty amazed that all different six levels of product definition that you can have all kind of different bolts, stud, side rings seal and we try to work with our product engineering person to figure out do we really need that many. Our part numbers or that some we should absolutely get rid of it, should we get hands on all the material that we had here, okay. So that's the kind of challenge we are working through right now, okay. What was your second question? I forgot.

Jimmy Baker - B. Riley & Company

Margin here in the second quarter.

Rick Dauch

I think we are slightly drive towards that numbers hopefully so it more occur in the pricing, right

Greg Risch

Yeah, it is I was going to say the same thing Rick and Jimmy yesterday Rick and I was there and hosted a pair of our board of members and walk floor in Rockford and they are very pleased with the things that they have completed so I know they will get to (Inaudible) passed on pretty quickly. And I was really pleased with the drum machines they run on less than 1% scrap and they are little bit long so and I think we are extra right I think couple of those commercial thing take care of themselves have long is passed it and we are on our way

Jimmy Baker - B. Riley & Company

Okay, great. Last one for me, you talked about what drove the sequential out performance in your wheel business relative to what we saw in terms of sequential industry production. Some aftermarket benefit there but also some next year gain, can you just talk about may be any opportunity not only maintain the share gain that you acquired so far but towards 2013

Rick Dauch

You know last year we want our sales force go to more over regional focus to improve our face time with customers. Second thing we did was we really put a concentrated effort on giving the right people in front of the right fleet at the right time. And we some of that. I will give you an example where myself and Chug Burns , large fleet operator in Atlanta area, he was get ready to buy I think 400 trailers, we are not specified as the primary source for those wheels. We called on him, we worked with himself and the supplier the trailers and he changed over to us. Okay, that was about nice pick up of couple of million dollar of sales.

I give it another example of a rough trailer who had been specified on our competitors for aluminum wheels for many- many years. And we went and we gave a pitch on what we could do for a wheel, drums, slacks and hubs and he has changed specification over to 100% Accuride aluminum wheels, he asked us also take a look at doing something with as well on slack assembly line, he and his boss are coming to Rockford really made to see our equipment. And now that people come to see our equipment at Rockford we have a winner rather than looser right. I used to be embarrassed to take people Rockford now it's our chief destination to take customers I'd say.

Jimmy Baker - B. Riley & Company

That's very helpful, thanks Rick, thank Greg.

Rick Dauch

It's time, the opportunity to take a -- simply their time in fleets so. Thanks, Jimmy.

Operator

Our next question comes from Kirk Ludtke from CRT Capital Group. Please go ahead

Kirk Ludtke - CRT Capital Group

Good morning everyone

Rick Dauch

Good morning, Kirk

Kirk Ludtke - CRT Capital Group

I just have a couple of follow up. I think you mentioned that you would point people toward the low end of range in terms of your guidance and I was hoping just to get a little bit more clarity as to why that it is, it sounds like it might some combination of slower than expected orders so far this quarter and may be some not a lot of visibility on Brillion, is that a fair characterization?

Rick Dauch

I think it is latter Kirk in terms of Brillion is weaker than we expected and calculus announced yesterday was not surprising to us based on the order we see, and so we will be pretty cautious about that backup. We're hoping to be little bit more aggressive with Brillion but it doesn't seem like the market stabilize and hope there to get that done.

Greg Risch

Yeah I think Kirk that can be a wild card because just like we saw last August and not to point that one customer gone to make or break a year, but we are seeing that segment and particular that Brillion serves turnout to take about 50% and it's very short period of time.

So I think what could happened specifically because I was mentioning caterpillar last year they were building on inventory this year so far they have been taking inventory down, so may be their retail sales are going to be little soft this year, but as they head into 2014 and things are picking up and that means that they may turn that figure right back on later this year so I think our cautious guidance is to say that we are not sure that's going to happen or not yet. It's little early to tell and so we'll see, and like a very good saying it's not classic story that's an industrial segment that Brillion serve separate from that.

Rick Dauch

I am relatively new, I can't say much longer in terms of being these set of industry both the heavy truck and off road business, but this time last year we were struggling to keep at Brillion and pushing $20 million sales a month, right. And figure out which one we're going to allocate not allocate, now we are earning $8 or $9 million right, but I told our guys let be disciplined, don't let the OEM take advantage of the temporary short term capacity situation to jam or some bad pricing for future.

Everything we read every customer we meet with, whether from the auto side, the truck side the supply side or the off road side there is pending crisis of cash and shortfall as early as 2014 between 15% to 20%. We're going to work real work hard just like we've in other parts of the business to make sure when that volumes comes back we're going to be as efficient as we can to get more capacity out, we're looking what we do right now to break bottleneck so we don't have today but we know what going to happen in 2014, right.

So wheels this time last year we are arguing among ourselves so which customer we are going to fly parts or premium freight too and we put all the capacity in place and the truck market collapse by 30%. So those margins will come back and we're going to well positioned when they do to be much more efficient and profitable as the volumes go up, they have to run seven days a week and we can run five and five and half six days a week. So that the premium freight should be normal freight etcetera okay

Kirk Ludtke - CRT Capital Group

That's helpful. I appreciate and you touched on during the call but I just want to – with respect to Paccar and Navistar de-sourcing is that fully reflected in your first quarter results

Rick Dauch

I think Navistar absolutely is, I will go back and to talk Chug where is the guy I think the Paccar majority of the Paccar is being reflected now. I believe that sure Kirk

Kirk Ludtke - CRT Capital Group

Sequentially we are kind of done with that.

Greg Risch

I think that's fair Kirk because it doesn't mean that we loss 100%, there also be some (inaudible) there will be small share there so I think the point is that you can look at like that and more significant changes is coming in the next quarter or something like that.

Kirk Ludtke - CRT Capital Group

And you are starting to see actually see some share gain or we are steel .

Rick Dauch

Yes, I say both in the steel and after mark we have gain that some, and I think we also started to see some gains in the aluminum side as well

Greg Risch

Yeah Kirk I point a little bit here too as long as the medium duty segment stays strong and housing looks at least – the comments that I guess that it's more solid and there is good stability there that's good for our steel wheel business and we have some dominant out shares there. So that's good.

Kirk Ludtke - CRT Capital Group

Okay, good and then lastly you mentioned your negotiation to (inaudible) ADL, how much additional liquidity would you free up by doing that

Rick Dauch

Well, we're not quite not done yet. So it's little early to tell but I would say it's going to be north of $5 million

Kirk Ludtke - CRT Capital Group

Just by tweaking upward the advance rate

Rick Dauch

Yeah. I would rather add some caution here, that we have a $100 million facility today, and we would not anticipate we don't want to increase unnecessarily primarily because our –rates wouldn't really justify with our current business. All the work that we are doing with lean it reduces our inventory. So, that reduced our volume base so no need to go get further liquidity on that. So the $100 million facility will -- so you are right on track is that will -- advance rate to get a little more liquidity.

Kirk Ludtke - CRT Capital Group

And the other terms don't change, still be no covenants?

Rick Dauch

It will, I will say that covenants wise and maybe we are just waiting so that we get that transaction completed and will give you all the details there.

Kirk Ludtke - CRT Capital Group

Great, awesome. And the sale lease back was after that was in March so its reflected in March 31, balance sheet?

Rick Dauch

That's correct.

Kirk Ludtke - CRT Capital Group

Okay. Do you have any more of those?

Rick Dauch

No. We are not currently working on anymore.

Kirk Ludtke - CRT Capital Group

Okay. I appreciate. Thank you.

Rick Dauch

Thanks.

Operator

(Inaudible) from Citi is online with the question.

Unidentified Analyst

Hi. Thanks.

Rick Dauch

Hey. Good morning -.

Unidentified Analyst

Hey. How are you?

Rick Dauch

Wonderful.

Unidentified Analyst

Couple of things. One, I guess Greg, on the Kirk's earlier question on liquidity. What sort of the normal liquidity that you feel comfortable with obviously more is better but do you sort of have a number in mind?

Greg Risch

Yeah. I think you're right more is better. I think ideally when you're not coming offer very low commercial vehicle demand period when you're not coming out and intend operational turn around and a fix like we have been doing and adding to invest, I think the ideal place would be in the 70 to 80's that's what I just – somewhere in that 7% to 8% of revenue. However, we are very completely, we are very comfortable where we are and I was very pleased typically – I know you have followed that for a while I think you also has as well is use to our liquidity dropping a bit from 1231 to 331 just primarily due to the investment and account receivables. So as I have mentioned before I appreciate that things are able to manage our inventories and our payables to help offset so that we can basically maintain the liquidity. So I am very pleased with how we ended the quarter.

Unidentified Analyst

And as far as cash flows it's fair to assume that cash flows will kind of mimic the improvement in EBITDA over the course of the year.

Greg Risch

Yeah. There is no reason that wouldn't absolutely.

Unidentified Analyst

So, from an EBITDA in cash flow perspective Q1 it's safe to say was the pros.

Greg Risch

Yeah. Its typically use anyway because it's just that's not back receivables from 1231 to 331 in an addition to -- that shutdown period in December or our investments you actually pay those bills you actually cut those checks and say January and February. So quarter one is typically heavy use of cash quarter so you are absolutely on track with that the only knowing that would be obviously the February and August interest payments on the notes 14.7 million each, so outside of that it will flow exactly as you are mentioning.

Unidentified Analyst

Okay. And then Rick a question for you clearly the last year 15, 18 months you have been fairly focused on getting Accuride to the level playing field looks like all the facilities or at least most of them are in the green zone and the yellow zone as suppose to red. I guess when you kind a look out maybe 12, 18 months out, where do you see the opportunities in terms of growth which you sort of touched on earlier fix and growth strategy. Maybe if you can just sort of help us gauge your vision 12, 18 months out for the business.

Rick Dauch

Okay. Great. So, we didn't put that slide at this time, we set a goal for ourselves of long-term business become a global wheel in supplier to the commercial vehicle industry and that's our goal. We have had preliminary discussions with most of the big truck guys about how we will take our wheel in and wheel franchise global, there are opportunities to do so, I think it is pretty mature for us to do that right now until we get everything bought down here in North America, once again North America completely done, so I know we can deliver on time, quality products and make money doing so then I think will shift gears and start looking at some of those opportunities.

If you can take a look at the wheel market globally, I will called it got a monopoly basically outside the United States, our friends in Brazil, Maxion acquired Hayes-Lemmerz asset and they have got a very strong position down in South America and we still doing some preliminary work over in Asia where there is still over million trucks build a year in China then there is a pretty nice market really in India right now with some of the investments that Volvo is making with Eicher and Daimler is making to create--.

And I think one of our wildcard is Volvo's recent announcement the joint venture with Dongfeng. Dongfeng is a big truck manufacture they still make wheels in house so we will see how that all plays out and we're pretty close contact with those truck guys as they started to go globally.

Unidentified Analyst

Okay, thank you Rick.

Rick Dauch

Okay.

Unidentified Analyst

Yes, absolutely and Greg thanks as well.

Rick Dauch

Thanks Manish.

Operator

Charles – is online with the question.

Unidentified Analyst

Hi guys thanks for the call.

Rick Dauch

Hey Jonathan.

Greg Risch

Hey Jonathan.

Unidentified Analyst

So just on the Gunite business you talked about seeing some pickup in terms of -- season based on the bad weather, is that mean that you have seen a ramp in orders through the spring on the brake business or has that just been relative to depress levels over last couple of years.

Rick Dauch

I think that's use when I first got here in February '11, I think we have seven weeks past two week we would make enough drums, we went from like 3,000 drums a day we got it up to like 9,000 or 10,000 to the catch up work. I think right now we were running somewhere in that 5,500 to 7,000 drums right, so far March was good April continues to be good we'll see how that rolls over May or not and then you get right into what they call the school bus season where the schools come off servicing the kids they go into the maintenance sessions in July and August and we are prepared for that as well so.

Unidentified Analyst

Got it. And then on the wheel business have you seen obviously we have seen orders coming have you seen any order ramp on the wheel side coming familiar.

Rick Dauch

We still see relatively low orders right now but as they project out and we talked to the customers down at the mid America truck show in 101 meetings we're seeing some pretty optimistic schedules out in third and fourth quarter and one of the customer is basically showing run rates that are similar to the fourth quarter of ‘11 in the fourth quarter of ‘13 we will see if those come – right. We'll be little conservative probably versus what some of our customers are saying right now.

Greg Risch

Yeah Jonathan, -- your math I think the thing is that if I heard this phrase once I heard numerous times that the phrase consciously optimistic. So I think Rick's is right working,-- telling us -- seen any orders yet.

Rick Dauch

The other wildcard for us is, we are standard on both steel and aluminum wheels of Navistar and over the last couple of years Navistar has lost significant market shares somebody other guys that were not always standard on. And everything we read and everything we discuss with the Navistar team is that we are right on track with the restructuring plan SG&A cost, the R&D cost the closure with dollar facilities, with -- sales non-core assets the qualification most importantly of the common engines both of 13 liter and 15 liter series and so as the Navistar regains strength that means we gain more strength on our wheels business as well. So that combination plus the -- market uptake and I have yet to be here what we have make more than 200,000 Class 527 trucks majority of Class 527 are steel that is our strength and so we are looking forward to all of these things coming together right.

Unidentified Analyst

Yeah.

Rick Dauch

You might probably catch the -- for one.

Unidentified Analyst

So just on the raw materials point I know you talked about that a lot but when does your past through resale with customers, I know the price has come down but I think is it every six months that you have a pass through resale.

Greg Risch

Yeah that's right.

Rick Dauch

Aftermarket we are going to adjust -- right Greg?

Greg Risch

Yeah, I think your point was on wheels and so that was correct that comes and we actually monthly in regards to aftermarket.

Unidentified Analyst

Is that in July then if we set on wheels?

Greg Risch

Yes, January and July.

Unidentified Analyst

Okay and then finally just on Imperial where do you think you can bring margins in that business once the restructuring and the consolidation is finished by end if April where do you think kind of a run-rate margin is going forward or maybe where the –show rate margin for that business?

Rick Dauch

Alright, EBIT standpoint?

Unidentified Analyst

Correct.

Rick Dauch

I think right now we are planning targeting once we get everything behind actually get some decent buyers we can get back 10% plus or minus 2. That's with the current business days before the downturn we were working close to the 2 truck OEs to take on more to the business and we thought we can even push a little higher than that once the volumes came down than those programs kind a dried up one customer change technologies on – so we stopped turn up with that program and another one had a union issue that are going to sense a part top to us and so we decided not to do that because of the cost and structures into their local factories. So we will see how that plays out here in the back half of the year.

Unidentified Analyst

Got it. Okay thanks.

Operator

[Robert Stewarts] from (Inaudible) is online, please go ahead.

Unidentified Analyst

Yeah hi. Most of my questions have been answered I just a couple ones for Greg though. One was so the lease that you entered into is that a just not on the balance sheet right there will be something close to the income statement?

Greg Risch

Robert there are sale lease backs and so you should see that on there you should see that on balance sheet.

Unidentified Analyst

Okay. So that show up is like debt?

Greg Risch

Yeah that's right.

Unidentified Analyst

Okay so when I look at your net debt charge didn't seem like.

Greg Risch

Well it won't show, we won't classify it's another liability but I think so I won't show that in our net debt figure.

Unidentified Analyst

Okay but that—through interest expense

Greg Risch

Well the portion note is interest expense.

Unidentified Analyst

Let me what's – any impact on the EBITDA by having complete

Greg Risch

There is a slight impact the rent payments. There is a slight impact.

Unidentified Analyst

Okay. And then I think for the year you are trying to get working capital being a source of cash I am just wondering what are the leverage you have to pull to make that happen I would think that its sales actually comeback in the back half of the year it would be tough to have working capital to be a source?

Greg Risch

Yeah that's the challenge for us to make it that way so obviously we are working on inventories pretty good but the receivables going to be the X-factor there and you are right on track in regards to what is going to be its really about the revenue weeks or months or so leading up to that into the period so at the end getting one period it's really about the receivables. So that is our challenge to keep that down. And obviously we track our days and track our past to think like that so we are watching all of those variables and we have very good tight control on those. That's our challenge that's all we are going after.

Unidentified Analyst

And if working capital that use cash is that mean to -- hit your breakeven free cash flow guidance?

Greg Risch

Well I guess that depends on what reason of that is, is it the reason of that are markets aren't performing or the demand is not there so therefore we build inventory that we can't sell that's the problem you have – double of hitting the revenue and any – invested into the working capital. So but its maybe the – that we are investing in working capital because we have – taking off little more than its impact.

Unidentified Analyst

On your guidance what are – working capital?

Greg Risch

Well I guess specifically saying what it is, I would say that we are expecting that percentage to say fairly constant but the levels show that at least on receivables if you look there are receivables with the ones that can go up and be offset with the other.

Unidentified Analyst

Okay. Thank you. Alright.

Greg Risch

Thanks Robert.

Operator

We have no further questions at this time.

Rick Dauch

Okay. We appreciate your interest and invest in Accuride. If you have questions give us a call. Thanks have a great day.

Greg Risch

Thanks all.

Operator

Thank you ladies and gentlemen, I would like to remind you that a replay for today's call will be available from 11:30 AM Central Time until May 1, 2013 at 11:59 PM Central Time by calling 888-843-7419 in the United States, or 630-652-3042 internationally, using access code 34735601. Again the number for the United States is 888-843-7419, internationally, it's 630-652-3042 and access code is 34735601.

This concludes today's Accuride earnings call. Thank you for participating you may now disconnect.

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