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Executives

Rick Dauch - President & CEO

Greg Risch - Vice President & CFO

Analysts

Rhem Wood – BB&T Capital Markets

Jimmy Baker - B. Riley & Company

Jonathan Ferrugia - Sankaty

David Cowen - Midwood Capital

Scott Petralia - CRT Capital Group

Matt Hamilton - Morgan Stanley

Larry Chlebina - Chlebina Capital

Accuride Corporation (ACW) Q2 2013 Earnings Conference Call August 1, 2013 2:00 AM ET

Operator

Welcome to the Q2 2013 Accuride Corporation Earnings Conference Call. My name is Leslie and I will be your operator for today. 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.

I’ll now turn the call over to CFO, Mr. Greg Risch. Mr. Risch, you may begin.

Greg Risch

Thank you, Leslie, and thanks everybody for joining us today. We 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 we 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, including our major initiatives along the key highlights in our industry. I'll then review our second quarter results prior to opening up the line for questions.

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

Rick Dauch

Thanks Greg. And good evening everyone and thank you for joining our call.

Today, Greg and I will walk you through our second quarter results and our outlook for the balance of the year. We go to slide 5.

Let’s focus on our key events. During the second quarter, we had sales of $211.3 million and operating income of $5.7 million, which reflect the improvements we have made in the areas of quality/warranty, delivery and lead-times to our customers.

Our liquidity continue to improve as we ended the second quarter with $32.9 million in cash and total liquidity of $34.1 million. Part of the improvement liquidity is the result of the recently announced renewal of our ABL, which I will let Greg cover in detail later. The new ABL comes as more favorable terms that not only adds to our liquidity but lower our overall borrowing costs.

Our focus on working capital management continues to pay dividend with working capital and percentage of sales of 8.2% at the quarter end. Our Gunite business was stabilizing and improving. Gunite has had positive operating income for four straight months a sign that the hard work to fix the operations at the Gunite is paying off. Gunite second quarter performance was buoyed by a seasonally strong aftermarket sales and aftermarket price increases that deemed to be holding for now.

Although, we don’t expect to see the same seasonal strength in aftermarket sales during the back half of the year, we are executing ahead of schedule on our plans to reduce selling our direct and indirect materials and other overhead costs, which should help to offset potentially lower sales levels in the second half of the year. And part of this efforts we are moving our distribution warehouse from Whitestown, Indiana to a lower cost facility in (inaudible) Illinois. This move will not only lower our distribution cost but will allow us to take advantage of improved shipping lanes, it will allow us to serve our customers better. This move will be completed during the third quarter.

We did have some headwinds in the quarter and challenges. Weaker commercial vehicle volume and global industrial softness continue to put pressure on each of our business units. However, we spend a lot of work to lower the breakeven level of the company over the past couple of years which helped us during the second quarter. And maybe due to higher net income on $20 million less than revenue that we had in May of 2012.

We did still experience a few lingering costs during the quarter associated with the launch of our new hub line at Gunite and the initial problem associated with the warehouse relocation. Eliminate these one time costs, our operating performance (inaudible). While we have been able to hold recent (inaudible) increase in the aftermarket, we do continue to see pricing pressure from offshore competitors. We will continue to monitor conditions in the aftermarket and take measured actions as required.

Slide 7, all key economic indicators for the North American commercial vehicle industry are pointing in the right direction but we have still not seen robust growth trends. ISM standard (inaudible) close to 50 indicate a stable manufacturing sector. Housing starts continue to increase gradually while the automotive sector continues to strength. Both of these sectors are important drivers of fleet and ultimately commercial vehicle demand.

Commercial vehicle industry specific indicators are also point in the right direction. Fleet utilization is fleet age remain high employing some level of pent-up demand within the fleet. Although diesel prices have moderated slightly high fuel prices provided incentive for fleet to look for ways to improve fuel efficiency. Aluminum wheels and light-weight brake drums provide important fuel saving alternative to fleet looking to reduce weight and improve their fuel economy.

At both economic industry indicators continue to strengthen we expect that steady albeit slower than expected increase in the demand for commercial vehicles.

Slide 8, as you can see in the graph, Q1 was a trough of the current cycle steady Class A orders over the past several months along with very low cancellations rates are a good indication that we are about to experience increased rates of production in North American commercial vehicle markets. With our operations fixed, we're in a much stronger position to capitalize on the anticipated upturn in the cycle. As you can see there is a wide gap between ACT and FTR 2014 forecast over in the bottom right corner. The ACT is forecast in just over 300,000 Class A truck 2014 while FTR market service at 227,000 Class A truck next year. Putting the difference to the side, both agencies expected an increase and build for 2014 somehow between the up 11% to 15% range over 2013 which we like to see.

Let’s dig a little deeper and go to slide 9.

The relationship between net orders and production is very important because it identifies the size of the backlog relative to the current level of productions. That relationship is called the backlog to build ratio. The backlog to build ratio for Class A truck is at a lower end of the target range which typically implies downward build rate pressure. OEM build plan, however, our forecast to the increase for the remainder of the year, so we have seen push out in order the past four to six weeks, so we’ve seen some of the projected order for third quarter slip in the fourth quarter in terms of line rate adjustment and we’re not sure what’s projected in the fourth quarter is going to come through.

Slide 10, the build to backlog, the build ratio for the medium duty vehicle is slightly below the target range specifically implied again downward build rates pressure on this segment. This situation is indicative of the medium duty market for the past few years which is continued to slow recovery in spite of a relatively low backlog to build ratios. New housing starts were up recently did take a dip last month so let’s see if the Class 5 through seven segment take a similar path here in the third to fourth quarters.

Slide 11, talk about trailers, the backlog to build ratio for trailers is still within the industry’s deferred operating range. (inaudible) and seasonally lower production patterns point to potentially lower second half productions for trailer manufacturers. These three backlog to build ratio lead us to be politely more conservative and some of our industry segment peers on the actual strength of second half 2013, I hope for a long in the rise, we’ll see over the next few months.

Go to slide 12 and 13, I think it’s 13, sorry, all of our critical capital investment projects are complete and they were completed on or under budget. The aluminum wheel capacity expansion is finished and will continue allow us to again proper share in this important and growing segments.

With one of our theory is the focus for remainder of the year and in the 2014. Our drum machining is (inaudible) and Rockford continue to run at or above plant rate of production. The new hub machine line we talked about last quarter has been successfully installed launched (inaudible). This new equipment has allowed us to consolidate our operations from three plants to one and with help of win back visits of higher quality, improved delivery, shorter lead times and much more competitive cost structure.

The result has started to show up in operational and financial performance and almost every single customer. The consolidation of the Imperial operations in Tennessee and Texas have allowed us to reduce Imperial’s operating footprint. We exit the lease at the end of April in Tennessee and that plan is no longer a cost to us. But given this consolidation and the pressure there which are now complete will help our peer return of profitability for the first time in several years. Brillion continues to perform well in the phase of end market softness, which began during the second half of 2012 and continues as we head into the second half of 2013. As you saw Caterpillar announced the last month, they are taking an additional $1 billion off the $2 billion of inventory out, hopefully they will be able to get out of the system by the end of the year we will have a stronger recovery in 2014 at Brillion.

Great performance in the current environment is the result of a significantly reduced breakeven point in the business and I think there is more opportunity to throw the drive down cost up at Brillion. We are making the fundamental progress required and the important works acquired prior data basis and document our basic prophecy in order to implement our new ERP system on time. This is a multi-year project which is scheduled to complete in 2014 and it is an important step and time together all of the operational work we have completed so far here at Accuride.

Let’s look at the results on slide 14. Delivery, quality and profitability are the key metrics that we focus on each Accuride facility. The second column from the right gives you an idea of the condition of our facilitates when we bought on the fix portion of our fixed and growth plans. London, Ontario was losing money but it is not making money at the operating income level. Operations in Monterrey, Camden and Erie (inaudible) are understood and implemented.

With Gunite’s operations now consolidated at Rockford, we’re beginning to see improvements in Gunite fundamental operating metrics particularly on the drum machine line with the slag assembly line, we’re on time delivery for high volume part is impeccable.

As I will detail further in the next slide, the operational improvements – drive improved financial results at Gunite. We take a Brillion from a money losing operations for over a decade to an operation that continues to make money in spite of continued market softness and there are more opportunities again to reduce Brillion breakeven point even further.

The consolidates on fuel asset is complete; the press repairs are complete and the new launch for a powerful line is complete. Imperial now has a much stronger asset base with which is driven through quality, delivery and ultimately profitability at Imperial.

Let’s talk about Gunite specifically on slide 15. The investments we have made in our Gunite’s operations are begin to pay off. We have seen steady and significant improvements in key operational performance metrics during the first half of the year. We’ve taken two days inventory out of the system which has contributed to our improved working capital metrics.

Graph is down significantly and quality of assets, which is not only important to our customers but it is helping us rebuild our creditability with our customers which has been churned for a long, long time. These operational improvements coupled with selective aftermarket pricing or driving steady improvements in our margin, given what the fourth consecutive month of positive EBITDA for Gunite. Although, Gunite second half won’t have a benefit of season showing aftermarket sales that we typically see in the second quarter, our efforts to reduce spending on direct material, indirect materials and distribution cost would help offset some of that impact.

While, we are pleased with the Gunite’s recent performance remain laser focus on our longer term goal of restoring Gunite’s market leadership and improving is overall financial performance.

Let’s talk on slide 16 about shifting our focus from the thick to grow at Accuride. With the fixed portion of our Fix & Grow plan now complete, we can begin shifting our focus to continue improvement efforts and growth. You can’t improve processes that are broken, you have to replace broken processes and that’s what we’ve done in the last few years and that is very hard work. A lot of people out there in the best of community don’t quite understand exactly how hard that work is, sales dividend will come as the market recovery fore sure.

As mentioned the ERP implementation which is the fourth step that would tie our improved operation together. Implementation of real facility would occur late this year, Henderson and go through the first and second quarter next year. As soon as those are complete, we will move to our Gunite in our aftermarket distribution center which will become, will happen in the second half of 2014 and then we will move on to other asset in 2015.

We are in the process of significantly upgrading our coating systems and coating processes in our real division plan both in Henderson and Monterrey, Mexico. This improvements would create advance coating solutions that will lead to improved product performance, regular customer satisfaction and better profitability in our overall wheels business. It’s part of our normal long line capital expenditures, we will continue to make select upgrades in our Gunite and Brillion foundries.

These upgrades will be within our stated capital requirements as we talked before and will focus on greater operational efficiencies in terms of equipment uptime and transport per hour and improved quality metric.

Our shifting focus on growth will start with the organic growth that will come from new technology introductions. And you will see more about that in the third and fourth quarter this year. We will also drive organic growth as we look to fill our expanded wheel capacity and regain lost capital market at Gunite.

Now that we have adequate and capable processes and capacity in place. Growth may also come as we look for targeted opportunity to expand our real footprint in the market outside of North America. While, we have nothing to announce in the near term, we believe there are several opportunities for us to grow wheel business globally and our customers in North America, yet to expand our global presence.

I will now turn the phone to Greg and let him cover the details of the second quarter financials. Greg?

Greg Risch

Thanks Rick.

Please turn to slide 18 which summarizes our Q2 results. Sales are $211.3 million or about 21% lower than Q2 2012 sales of $268.8 million. Primarily related to reduce production for the commercial vehicle industry combined with the lower demand from our industrial and agricultural markets that we serve at Brillion.

Remember that those markets were running at a much higher rate in the first half of 2012 compared to the second half of the year.

Compared to the first quarter of this year, Q2 represented an increase of about 10%. Our operating income of 5.7 million on the lower sales translates to a detrimental margin of 7%, which is normally in the lower 20s percentage wise, first shows that we have made progress to lower our breakeven point. Progress in quarter 1 to quarter 2 is even important to us. While an increase of $18.8 million of sales, we generated $11.7 million more of operating income that’s a really nice contribution. The direct results of operational efficiencies from our recurrent investments and equipment along with the link methodologies that are continuing to flourish through our facilities.

Said in another way, we have improved our processes on top of having better equipments. And even then we know that we still have further improvements to make.

Let’s move to slide 19. Showing on here the results 2013 of revenue of $403.8 millions is about 25% decrease from Q2 -- from the first half last year. It’s about a 3% increase from the second half of 2012. But the earnings results for the first 6 months of 2013, the improvements in the Q2 results brought us back to breakeven in regards to operating income. Knowing that our industry trough is behind us, for slide 8, the Rick just reviewed, we are looking forward to a better OEM demand environment to utilize our new equipment and improve processes in the remainder of the year.

Please turn to slide 20. Slide 20 shows the correlation of our revenue and earnings for Q2 of the current and previous 2 years on top half of the slide. The reduced demand year-over-year merely resulting from the change in production rates from our customers was expected. Adjusted EBITDA is $17.9 million was an improvement over Q1 results of $7.4 million.

Last quarter, we discussed to able to show improved incremental conversion on increase sales dollars and quarter 2 did just that. Remember, our EBITDA margining Q1 this year was 3.8% compared to the current quarter of 8.5%. The graph from the bottom half of the slide contain the full year 2012 result. The three key points are that we have served only the North American markets, our wheel business continues to be the largest of our segments, and the large shot makers consistently represent a little more than half of our revenue.

Next slide please. Slide 21 shows the transfer of Wheels and Gunite businesses. Wheels business reflects the same trends as the consolidated company in regards to sales and earnings. Sales in Q2 of $99.5 million represented about 47% of our total revenue of the company, an increase over the first quarter of $6.3 million, mostly due to increased demand from our aftermarket customers.

Moving on to Gunite, we are seeing significant changes in earnings. On $16 million less sales, we improved adjusted EBITDA by $3.5 million. Improving earnings despite the 24% drop in demand year-over-year is a nice accomplishment. But everyone should also take note of the improvement over quarter 1, sales improved in quarter 1 by $11.8 million which represent the 30% increase, remember that the sales demand for Gunite is seasonally stronger Q2 over the other periods every year due to increase aftermarket demand related to a heavier maintenance period for brake drums.

I want to point out that adjusted EBITDA went from a loss of $600,000 in Q1 to positive $4.6 million in Q2. The key takeaway here is that the Gunite business continues to improve and we feel that the second quarter results are great indication that operational progress that should lead us to an adjusted EBITDA margin range in 8% to 12% next year.

Let’s move to slide 22 to review the results for Brillion and Imperial.

But we see a distinct change in operating conditions for Brillion. Sales this quarter of 29.3 million represents about a 40% drop in sales demand in comparison to last year. This decrease represents the most significant percentage change in demand among our segment. This change doesn’t reflect any loss market shares, just a change in demand at the market the Brillion third. But despite this demand change Brillion remain profitable for adjusted EBITDA margins with 11.3% in the quarter. Compared to the first quarter sales are basically flat, but adjusted EBIDTA improved from $1.7 million to $3.3 million.

The Brillion team is continuing their progress reducing the fixed cost while on the lean journey. We look forward to the eventual recovery of their markets and their earnings contribution that it will bring.

Moving on Imperial, their revenue is $31.4 million with slightly better than the first quarter revenue of $29.5 million, well below Q2 of 2012 revenue with $39.3 million. Adjusted EBITDA this quarter was roughly $100,000, but a slight improvement over the last year’s breakeven position and the prior quarter’s result at the loss of $800,000. So the improvements made during the quarter that Rick mentioned that existing the lease Portland facility on April 30th and finishing the (lot) as significant press repairs to continue to lower the breakeven point and reduce their ongoing operating cost.

Next slide, please. The top two graphs on slide 23 breakout the three components of our trade working capital, trade accounts receivable, inventory and accounts payable. We are continuing to see improvements in our trade working capital as a percentage of sales as Rick mentioned and seen on the graph. I expected receivables to track with sales fairly consistently our improvements on the inventory and accounts payable management side have been much more of a significant drivers.

I haven’t seen inventory managed better here at Accuride and what I really like most of about it is due to systematic sustainable changes. Overall, our trade working capital represented 8.2% of sales this quarter and I don’t think I’ve seen that in my 19 years at Accuride.

Next page, please. Slide 24 shows our free cash flow for the quarter a positive $1.4 million. The improved working capital position allowed us to increase our production levels from the first quarter yet hold our working capital dollars fairly flat. Continued focus on reducing our cash conversion cycle is really important to maintain positive free cash flow going forward.

Next slide. Here on slide 25, we see our net debt liquidity, our liquidity improved to $74.1 million from the prior two quarters of roughly $64 million and $64.5 million. This improvement reflects the new ADL in place. I want to thank our banking partners for the successful closing of that facility that puts Accuride in a more flexible position for adding more liquidity while reducing our borrowing costs.

We continue to work on other liquidity opportunities including active management of CapEx and working capital as well as continuing to explore the sales of non-core or idle asset.

Now, let’s turn to slide 27 to address our 2013 guidance. While we are previously guiding you to the bottom end of our guidance range last quarter based on our first half results and the lower end of the industry estimates for the projected North American commercial vehicle market recovery in the second half. We expect our 2013 net sales to be in the range of $775 million to $800 million and adjusted EBITDA ranging from $60 million to $65 million for the year.

This guidance also reflects continued weakness in Brillion’s core construction and mining equipment market as well as slightly lower aftermarket demand and both our wheels and Gunite segments in the second half. I would like to remind you two key factors that continue to drive our top-line guidance. First is obviously commercial truck build. Industry forecast currently point to a significant increase in builds during the second half and as Rick discussed on slide 8 with Q1 being trough. Obviously, the second driver can be the demand related from our Brillion segment with their industrial and agricultural business. We’ll continue to manage cash on liquidity and expected our free cash flow will be positive for the second half of the year for moving concept with the change in earnings expectation.

Now I’ll turn the call back over to Rick to summarize prior to taking the question.

Rick Dauch

In summary, the fixed portion of our strategic plan is now complete. We have restored our core North American operations to competitive positions including consolidated improving our heavy duty receivable capacity and capability, expanding – significantly expanding our aluminum wheel capacity and our manufacturing footprint. Consolidating Gunite’s operations from three to one is significantly upgrading, overall capability. Returning grade in the profitability is part as much the market office down almost 40% year-over-year and consolidated Imperial’s operations that complete the long overdue (inaudible).

We improved on liquidity position in both Q1 and Q2 through a focus effort on working capital management to get recent equipment leases and renewing our ADL. We have adequate liquidity drive further improvement to the business and begin to focus on Accuride long-term growth and I think we have under $5 million of working capital accrual we can get after get this year we get there. In the Q1 commercial vehicle cycle trough behind us, we expect the North American commercial vehicle market has strengthened in the back half of 2013.

We have positioned the company to capitalize on this impeding upturn, with the added capacity, improved capabilities of our new equipment, clean operating system, and revamping (advocacies) at the local operating side. We will likely choose the best non-core asset, the right price in the right time and we believe there are select options to grow our core wheel business globally.

We are pleased with the results we are beginning to see the business. However, we remain focused on making the right decisions for the long-term success of Accuride.

With that, I’ll turn it turn it back to Leslie for Q&A.

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question-and-answer session. (Operator Instructions) Your first question comes from Rhem Wood with BB&T Capital Markets. Please go ahead.

Rhem Wood – BB&T Capital Markets

Thanks, good afternoon guys.

Rick Dauch

Hey, Rhem.

Greg Risch

Hey, Rhem.

Rhem Wood – BB&T Capital Market

I want to start with your guidance. When I look at your guidance slide of page 27 now that compares to the first quarter you guys essentially left Class A flat, you raised your outlook for medium duty in trailers, but then I mean, last quarter you talked about being more controlled with the lower end sales and guidance, can you lower that slightly, but I mean really when I think about, your new guidance is that really just your concerns about Brillion or you feel like you being like kind of overly cautious I guess on the commercial vehicle space at this point?

Greg Risch

Yes, I don’t know that I would categorize it over cautious but you hit on a good point. And it is first of all, would be Brillion; Brillion though is not driven by those market segments. And so anything that’s driven there is, just not going to affect them until, you can more follow releases from somebody like Caterpillar to kind of know what’s driving Brillion. So you are right, that’s the big portion of it.

I say in other side, as we saw a pretty nice aftermarket demand in the second quarter and we think some of that was a little bit of pull forward. So the aftermarket is the other significant segment that wouldn’t be accounted for in those billed numbers.

We got to remember Gunite is roughly 75% aftermarket, on the other businesses have pieces in there too. That it doesn’t make it any easy way to predict from your sample. And in regards to the build at the top of the page, there is much more to the story to really fill it off.

Rick Dauch

Hey, Rhem. I think if you look, you read Caterpillars release last week. They talked how much inventory was taken out of the distribution dealer network in the first half of the year. And they are still projecting another multiple billion dollar take out of inventory, right? So, we are seeing that in the orders that are coming in Brillion. That’s the bad news. The good news is, we will keep working on, making the – the operations better putting the leases, when the volumes go back it will be a more efficient operator of Brillion. And we are seeing that almost every week and I get the daily operating results for Brillion, we are getting better in terms of scraps, (inaudible) man hour, safety. Almost every operational metric at Brillion is moving in the right direction. We think the volume will come across that asset.

Rhem Wood - BB&T Capital

Yes, that’s a good point. When I look at your margins. They improved sequentially in every business you have and I think for the two that were not doing so well last quarter, it was in the last quarter Gunite and imperial. You were only profitable for maybe call it half of the quarter this time. So I mean, essentially you are still going to, do you still have the opportunity to be profitable from a consolidated EPS basis in the third quarter. And it looks to me like you almost pulled that for the quarter?

Rick Dauch

I think we are really happy with May in terms of the new, correct me if I’m wrong Greg, May of 2012 our sales around $94 million, in this quarter they were $74 million. We made more money in this quarter we did last year 2012. And in June, sales were a little bit lower and we almost got the breakeven in the quarter – in the month. So, I think we are moving the ball in the right direction.

April, we are still digesting some of the closer cause in Tennessee in the transfers and we are still struggling with the hub margin that’s now behind us. So we get the lease in volumes you are going forward and continue to keep our nose in the ground and so I think we got this business turned around and go in the right direction so.

Greg Risch

Yes, Rick, those statements are definitely correct and I think I would summarize the same, the things that are in our control are rolling really well and mentioning the second quarter, Rhem, if you have to think about there are no shutdowns, there is no maintenance shutdown which are typically done in July and December. The quarter two doesn’t have any of that. Quarter two has a strong brake selling season for Gunite. So, you kind of get to enjoy a lot of benefits in the second quarter. So traditionally you have seen as a fairly strong quarter in earnings. But, Rick is right, what’s going on in our -- what we are going operationally is definitely got some nice momentum.

Rhem Wood - BB&T Capital

Okay, great. And then last, I think last time you were kind of shooting for a price increase at Imperial, can you give us a little update on the bad, how that’s going?

Rick Dauch

We are still in some discussions in the – let me finalize those negotiations and then we will see – we will come out. Let me know how I did. We are making progress. We will say that.

Rhem Wood - BB&T Capital

Okay. Greg answered. Thanks for the time.

Rick Dauch

Thanks Rhem.

Greg Risch

Thanks Rhem

Operator

And our next question comes from Jimmy Baker with B. Riley & Company. Please go ahead.

Jimmy Baker - B. Riley & Company

Hey, good afternoon everyone.

Rick Dauch

Hey, Jimmy.

Greg Risch

Hey, Jimmy. How are you?

Jimmy Baker - B. Riley & Company

Great, thanks. Let me start by just saying what a really impressive quarter this was, great incremental margins across the board but I think especially at Gunite congratulations on the progress there. I know its been a tough fight.

Rick Dauch

Thanks Jimmy.

Jimmy Baker - B. Riley & Company

So, obviously the stock reacting to the guidance provision and I think the total year question in regard to how that should be compared against the CV market revisions that’s helpful. But can we just elaborate on your expectations for Brillion and maybe relative to the Q2 run rate as we move through the back half of the year.

Rick Dauch

I think – (inaudible) hung today is because we thought we have Brillion going in the right direction in terms of the revenue and then also Caterpillar came back with a release last week cutting even further in the third quarter. So, we are juggling down the revenue and Brillion is a little bit more than we thought, right?

So, last year, in the second quarter we are running Gunite, I mean Brillion, correct me if I’m wrong Greg in the $18 million to $19 million revenue per month.

Greg Risch

Correct.

Rick Dauch

And we are getting double-digit EBITDA and this year, we are basically somewhere high single digit, just over $10 million revenue, we are still closing in on a high single digit EBITDA. So, that shows we are doing the right thing operationally but we don’t control the demand out in the marketplace. And we don’t have any chi rellay to the automotive industry which is driving another cost, we are heavily tied to industrial market and that were some of the off road market. We are heavy mining and some of that is down right now. As they clear off their inventory blob, we will start seeing some better bills in late – hope in late 2013 but maybe in 2014. But, does that help you?

Jimmy Baker - B. Riley & Company

It does. And then I’m also just interested, have you taken out any capacity at Brillion as part of lowering the breakeven point and can you maybe just speak to what levels of incremental margins we could look for there assuming 2014 uptick?

Rick Dauch

I will take the capacity. And I will let Greg talk about the incremental margin. Last year this time we had 5 casting lines, we are running a 11 crew 24/7. Today, we have eliminated one of those casting lines. It was a very old line, it only operated about four days a week. So we cleaned out that four states and we are running four casting lines with 6 crews basically 4.5 days a week. So there is plenty of capacity to be filled. We have taken this break to do the heavy maintenance during the July shutdown period. We just finished at Brillion. We are pairing some of those. Almost every customer we talk to, whether that’s an automotive customer, we would like to brake into but it probably require large investments.

Our industrial customers, our oil and gas customers, our ag customers are all projecting increases in 2014 to 2015 and are now concerned about a castling short fall in the near term that should be out and it continued with ramping up right now so.

You want to talk about (inaudible) Greg?

Greg Risch

Yes, I think, Jimmy, you can typically expect us roughly 20% and I think that’s historically accurate. So, what I’m expecting for next year is probably a little north of that and maybe 22%.

Jimmy Baker - B. Riley & Company

Okay. Just to be clear, we are talking EBITDA or operating?

Greg Risch

Yes, I’m sorry. EBITDA -- adjusted EBITDA.

Jimmy Baker - B. Riley & Company

Okay. Thanks. Last one from me. I will pass it off. Just want to understand kind of why you are comfortable that you can deliver let’s say implied by the updated guidance $10 million to $15 million higher EBITDA in the second half, despite lower sales compared to what we see in the front half?

Rick Dauch

Well, Greg, you have here. But, we are not talking about the hub launch. We eliminated a tenancy plan. We have reduced footprint in our warehouse. We have some pricing in it that we got in the late second quarter that’s got to carry on to the year and the back half of the year. And we are facing some headwinds, the raw material cost, there were carry over from the – in the fourth quarter of 2012, the carry over to early second quarter of 2013. Is that about it Greg?

Greg Risch

Yes, yes. We with the dollar assigned to those, you hit on all of them and I think to add to hit, Jimmy, if we think about maybe some of the significant actions that have been taken in the second half, its really limited. We have one – I would say one major capital project going on for our coating for steel wheels at our Henderson, Kentucky plan which is going really well.

And otherwise I think Rick got it right, some of this noise from finishing things off and closing Imperial, Portland down, getting repaired, getting the hub line going, which we saw big change from Q1 to Q2 for Gunite. We expect that to continue and get a little better.

So you got to remember Jimmy though, we are on the inside, so we know the improvement, we walk the floor and we can see even more improvement. So, those will continue on. And like I said, without the distraction of major capital projects going on that leaves local plant management to focus even more to continue to drive our costs down.

Rick Dauch

Yes, I will say a couple of things Jimmy then kind of hidden secret sauce that will really show up as the volume comes better as the lean visibly put in play. I would say at Henderson deeply rooted lean systems now in terms of all the part members, what’s on four, what’s on five (inaudible) et cetera. Those plants are running at historically low working capital numbers from an inventory standpoint.

We are just starting that process at Gunite. We just quoted the way into that of Brillion. We haven’t started to get into Imperial. So low hanging fruits to get at. But, the heavy capital intensive expenses and close your plants in the severance, so people were really out of plant that’s up behind us now. We are ready to roll, right? We weren’t ready to roll in the second half of 2011, but we are ready to roll if we get a good upturn here in the second half of 2013 and early 2014.

Jimmy Baker - B. Riley & Company

That’s very clear. I appreciate the color. Thanks lot guys.

Rick Dauch

Thanks.

Greg Risch

Thanks Jimmy.

Operator

Next question is from Jonathan Ferrugia with Sankaty. Please go ahead.

Jonathan Ferrugia - Sankaty

Hi, guys. Congrats on the quarter.

Rick Dauch

Thank you, Jonathan.

Greg Risch

Thank you, Jonathan.

Jonathan Ferrugia - Sankaty

Just to go to Gunite, you guys were at a 9% EBITDA margin this quarter, do you think that improved from here and kind of to that point there were hub line start up cost, I think that’s in that quarter. How much were those in, were they added back?

Rick Dauch

Yes, go ahead. Yes. Let me take this one, Greg. No, they were not at the back, so those, I guess, those impacted our EBTIDA for the quarter, roughly about $700,000 right into the hub line. And I think what I want you to take away Jonathan is, don’t be fooled by a strong spring selling season for brakes, that doesn’t happen every quarter. So you can’t expect that they are going to have that aftermarket demand every quarter. So that hurts their ability, that’s a very seasonal business.

So, usually expecting to fluctuate and bounce through the year in regards to margins not necessarily, how we are operating that’s the same. We are using one system to operate. But, it’s a very strong Q2 and so you should expect our metrics, our quality, our delivery, out cost to improve it. But, the demand is for us to watch.

Jonathan Ferrugia - Sankaty

Got it, okay. And on Imperial, obviously -- given this quarter, can you talk a little bit about on an EBITDA basis, can you talk about how that progress through the quarter and if you have any color on July and what you expect for Q3 and Q4.

Greg Risch

Yes, I guess without disclosing exactly what the numbers were, I can definitely tell you that there was progression. Clearly closing our Portland, our lease facility in Portland was good, still now being out of that and not paying the lease and not cleaning that up and having a distracted team and having to move equipment into relocate that, that’s going to be great, not to have to deal within quarters 3 and 4.

Then, I guess I would put on top of that, Rick was discussing a minute ago to Jimmy question on pricing, and maybe this is Rhem’s question on pricing for Imperial. So without saying any more, we are at the table currently, so we will let that one go but fairly commercial actions are going to help, and aside from that, I think they are just continuing to improve even outside of the Portland closure.

Rick Dauch

Yes, it’s been still struggle at Imperial, right? Too much capacity, too many plant, crafted that have been long overdue to be repaired, the more we dug the more snakes we found. We think we killed 95% of the snakes that are out there. Much improved delivery performance to Pacar. Much improved delivery performance in terms of quality, we have capacity in the right regional locations, and we are starting to look like we can earn some business back there outside of the Pacar family as well.

Jonathan Ferrugia - Sankaty

Got it, so just lastly on Wheels. The incremental margin, I guess the decremental margin year-over-year this quarter was again higher than expected from our perspective. Is that still some of the raw material mismatch flowing through and I think on the last call you said that that would continue its way into Q3. Can you quantify how big that was this quarter?

Greg Risch

Yes, I would say it was an effect this quarter, I would say that’s by $1.2 million.

Jonathan Ferrugia - Sankaty

And that’s run all the way through at this point?

Greg Risch

Yes, yes, you can r count on that really not continuing on that Q2.

Jonathan Ferrugia - Sankaty

Got it. Thanks guys.

Rick Dauch

Thank you, John.

Operator

Next question comes from Scott Petralia with CRT Capital Group. Please go ahead.

Rick Dauch

Hey, Scott.

Operator

Sir, your line is --?

Rick Dauch

But Stephen will back to Scott to get back in queue.

Operator

All right. So the next question comes from David Cowen with Midwood Capital. Please go ahead.

David Cowen - Midwood Capital

Hi guys, I just had a couple of questions on CapEX which if I am not mistaken based on prior sales, you guys had a percent of sales that equated to $28 million to $32 million now it’s $40 million. And I am wondering what contributed to the increment and on a related note, you guys have part of your focus in 2014 on select foundry upgrades and I am wondering how much capital you are looking considering investing behind that?

Greg Risch

Let me take that, so that Rick may be you can follow up. I think on the capital base, the capital projects that we initiated this year should still in that range. There was carry over from last year into this year, so the some of the cash gets moved from previous expectations of December into January and February. So, I guess our point was we are trying to guide to project that we will initiate each year roughly in that range, we got about $8 million carry -- $8 million carry.

David Cowen - Midwood Capital

Carry from last year to this year?

Greg Risch

Yes, yes, if a lot of the work gets done in December, we don’t actually fund those in December, some of that falls into January and February. And there is a lot of work been done in Q4 and so we have roughly $8 million carrying over.

David Cowen - Midwood Capital

Greg, when you already incorporate that in your first quarter guidance, in your guidance for 2013, when you came out with that guidance in the first quarter?

Greg Risch

Yes, yes, it’s a good point, it was definitely considered on a free cash flow guidance, it just in that one line of the percentage that was noted on there, that was just related to the project that would be initiated this year.

David Cowen - Midwood Capital

Okay.

Greg Risch

And then in regards to foundry, Rick, you might want to comment more on what foundry projects?

Rick Dauch

I can talk about that. So, when we got here, we first had to get that the basics are still in back in shape. Most of that works done, we still had some root repaired in Gunite, they have got a lot some people get rained down, (inaudible) stormy out there, have a roof collapse that we had in the spring.

But we brought in a very seasoned foundry manager back in the October, November into Gunite, and we gave him 90 days to assess these the big line we have here. He has come with incremental investments that we have, they are actually less, we have projected back in 2011 and we have a detailed plan over next 3 years, what we are going to invest up there. I don’t want to go to details project by project, just the bottom line is we are taking the older line and we are making some incremental approve to it, we are much fishing casting operation in Gunite, you will see the results in the bottom line.

David Cowen - Midwood Capital

So for the three year plan, what kind of area expand is that roughly ball part to be?

Rick Dauch

I will say that, just for the foundry, the foundry people equipment is somewhere between $2 million to $3 million a year, okay. When you get into the roots, we are still trying $2 million or $3 million or $4 million dollars in roof repairs we guys paid.

That’s the kind of CapEx we don’t like to spend but guess what you have to spend it, right, and we only fix roof so much at a time so much at a time, there is only --

David Cowen - Midwood Capital

Right, right.

Rick Dauch

We’re still doing this.

David Cowen - Midwood Capital

Okay.

Rick Dauch

And then Brillion -- we have a little bit of roof repair to take care of in flat too. And then we’re basically focused on what we call the ancillary equipment there. At the (inaudible) you have to do some finishing. The finishing is still on the manual operations that’s a dangerous, hardworking job and we’ve done some casting on some automated machining that can automatically finish. We’re getting better productivity it’s a safer operation and we get 7 day week capacity. So we’re looking at some of that over the next few years. High level cost is $5 million to $6 million.

And then we’re also looking at some of the older mold machines this is the molds you make before you pour the metals. And most of that equipment is somewhere in the 30 to 40 year range and we have 46 equipment and we think we can get a significant productivity improvements by going newer more automated type of equipments now. We’ll detail that – we’ll detail it out later on this year probably what we make those firm commitments.

David Cowen - Midwood Capital

All right.

Rick Dauch

We present – we call it.

David Cowen - Midwood Capital

Thank you.

Greg Risch

Okay. Thanks very much.

Operator

Next question comes from Scott Petralia with CRT Capital Group. Please go ahead.

Scott Petralia - CRT Capital Group

Sorry about that. Good afternoon.

Rick Dauch

Hi, Scott.

Scott Petralia - CRT Capital Group

Looking at your implied second half guidance with respect to cash flow, it looks like you have about $20 million of CapEx to go, are you expecting a contraction working capital to offset that?

Greg Risch

Yes, that’s the possibility so as I mentioned on my liquidity your net debt liquidity slide that we’ll continue to watch our CapEx and we could see some of that simply being pushed out.

Rick Dauch

Yes, and I would say we built a couple of things so if you look at consolidation is Tennessee, we’re basically leading ourselves off those things down in Texas. And then we also had a bank built to do the consolidation of our card and we’re fully not some of that inventory as well so we have an opportunity to get some of that inflow out of there.

Scott Petralia - CRT Capital Group

What would you say a normalized level of CapEx should be?

Rick Dauch

About 3%, 3.5% a year of sale.

Scott Petralia - CRT Capital Group

Okay. And it looks like you have about $10 million of pension funding for the year, how much you left in the second half?

Greg Risch

I think there is about $6 million left in the second half and just to make it clear on those pension funding that’s excess of what we have for expense it’s not excess and what we’re required to fund, if this one we do the walk from like earnings spent to cash would it make clear this is an excess of what we have to expense.

Scott Petralia - CRT Capital Group

Okay. And any cash restructuring, you expect?

Greg Risch

Negligible.

Scott Petralia - CRT Capital Group

Negligible? Okay, got it. Thanks a lot.

Greg Risch

Thanks Scott.

Operator

Next question comes from Matt Hamilton with Morgan Stanley. Please go ahead.

Matt Hamilton - Morgan Stanley

Yes, I just want to jump the gun a little bit here. But just taking down the line, could you comment a little bit more about international expansion how that would go, what’s driving this and would you be building plant internationally or concurrent capacity support this, would you be, I mean if you’re building that, you know how you find that’s like CapEx through bank, pawn markets, so I’m just trying to think bigger picture here.

Rick Dauch

Great question. Probably premature to talk in details. I can tell you that we all know that we have any plan in Canada that only running about 20%, 25% capacity utilization. So, we have a lot of idle equipment that is sitting up in Canada. We got the engineering team out there this week to make sure we assess that and really understand what is capable work to be competitive?

And we are contemplating moving some of that equipment to regions that have monopolistic type of situation right now or an area where there is technology advance we can bring our technologies somewhere. So, we look through Asia, South America, but still we’ll, I mean I think there is some opportunities for them to move out in other parts -- other world as well.

Okay, so basically wheel expansion plan it is basically customer pull where they needed competitor or they need a filling instrument technology standpoint and other than I say it’s a little premature to talk about specific like customer or countries.

So, there is probably a combination of -- if we can find the right asset purchase of equipment into it or it could be a greenfield site. Okay. And then we got to figure out how Greg can talk about, how we refinanced our bonds next year and then how we do that could, we have a pretty tight liquidity right now in terms of that way. All right, in terms of what we can do again there.

Greg Risch

We don't really have a lot of room currently on our structure to do something that significant and so yeah, we would have to get creative within something next year or to play with that.

Matt Hamilton - Morgan Stanley

All right. That’s helpful. Thanks guys.

Rick Dauch

Thanks.

Operator

Next question comes from Larry Chlebina with Chlebina Capital. Please go ahead.

Rick Dauch

Hey Larry.

Larry Chlebina - Chlebina Capital

I got quick question on your aftermarket sales, you said 75% of Gunite is aftermarket or was that aftermarket in the second quarter, is that right?

Greg Risch

Yes, it’s actually, that’s more on a four year.

Larry Chlebina - Chlebina Capital

Okay.

Greg Risch

For the quarter --

Larry Chlebina - Chlebina Capital

So, what I’m after is the fluctuation, what kind of fluctuation or seasonality do you see in those sales?

Greg Risch

Roughly, you get an increase of 20% to 25% in the quarter.

Larry Chlebina - Chlebina Capital

And what is that in the wheel division?

Greg Risch

It’s takes a lot less than that. Wheels is roughly 20% aftermarket. So, they don't see as much of a spike an increase, (inaudible) because that if you think about the two different products that they are completely different, brake drum is the wear item. You expect to change it every year, does wear out as the wheel, its maintained properly can last the live of the vehicle. So, the demand for those is different analytically.

Larry Chlebina - Chlebina Capital

What I’m after, I’m trying to gauge the uptick in the classic truck in the second half versus the fall off in the aftermarket, in the wheel side, the uptick should overcome any effect on aftermarket seasonality?

Greg Risch

I don't think, it’s that strong that it overcomes completely.

Larry Chlebina - Chlebina Capital

Okay. All right. That’s all I have.

Greg Risch

All right, thanks.

Operator

Next question comes from (Jimmy Kruger with Kruger Capital). Please go ahead.

Unidentified Analyst

Thank you. It was asked and answered already. Thank you.

Rick Dauch

Thanks Jim.

Operator

Next question is from Jimmy Baker with B. Riley & Company. Please go ahead.

Jimmy Baker - B. Riley & Company

Thanks for taking my follow-up, just a quick one on the international expansion and I realize it can’t comment specifically on the numbers but can you maybe just help us frame the capital needs for international expansion the wheels business against potential proceeds from your non-core assets?

Rick Dauch

Yes, 210 Jimmy. We got the rough number; well it takes to deal a couple of regions and I think that based on what we think we can sell some of the assets what we have some adequate capacity moving a very cautious step by step basis, okay. If there is something that is steady out should do from an acquisition standpoint or major, major, you have to figure out how to fund the direct sales. Does that help?

Jimmy Baker - B. Riley & Company

That is suffice. Thank you.

Rick Dauch

All right.

Operator

(Operator Instructions)

Rick Dauch

Is that it Leslie?

Operator

We have one more question from Jonathan Ferrugia with Sankaty. Please go ahead.

Jonathan Ferrugia - Sankaty

Hi, guys, I just wanted to follow-up quickly on the aftermarket seasonality versus uptick of the truck market point. So in terms of the Gunite presumably seasonality is the more important point but there just so I understand that is there any seasonality whatsoever from an aftermarket perspective in wheel?

Rick Dauch

No, much less than that. It’s not noticeable amount.

Jonathan Ferrugia - Sankaty

Okay. So, when we think about wheel going forward, we should really just look at kind of OE build, filled actually?

Rick Dauch

Yes, Jonathan that the wheel basically want to go and build for us trailer, it lives the live of that vehicle of the trailer right?

Jonathan Ferrugia - Sankaty

Yes.

Rick Dauch

So, why the aftermarket sales and wheels are basically related to very small OEM or small trailer manufactures who can’t buy direct from us because they are too small or you get vehicles that has been racked or trashed some of blue tire and they damage a wheel in that case.

On the Gunite side, those are replaced in parts right, brakes wear-off, right, they are wear-off quickly on the truck, big dump trucks so they wear out on trash trucks, so that’s when you’re seeing the difference in the aftermarket. Is that right, Greg?

Greg Risch

Yes, that’s it.

Jonathan Ferrugia - Sankaty

Got it, thanks guys.

Greg Risch

All right, thanks, Jonathan.

Operator

I’ll turn it back to Greg for closing remarks.

Greg Risch

You know, I appreciate your interest; we appreciate your patience as investors. We are absolutely doing the right things to fix this business down to fundamental, people, operation, capacity and we are poised to breakout when we get some recovery in the market. And so we will do what will keep around those (inaudible) keeping driving cost out and drive money to bottom line. Thanks a lot.

Operator

Thank you, ladies and gentlemen, this concludes today’s conference. Thank you for participating, you may now disconnect.

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