Accuride Corporation (NYSE:ACW)
Deutsche Bank Leveraged Finance Conference Call
October 01, 2013 04:40 pm ET
Richard F. Dauch – President and Chief Executive Officer
Gregory Alan Risch – Vice President, Corporate Officer and Chief Financial Officer
Brian Modoff – Deutsche Bank Securities, Inc.
Brian Modoff – Deutsche Bank Securities, Inc.
Good afternoon. I am very pleased to welcome Accuride back to the Deutsche Bank Leveraged Finance Conference. So with us today are CEO, Rick Dauch and CFO, Greg Risch and over to Rick.
Richard F. Dauch
Okay, thanks Bryan, I appreciate it. Good afternoon. So I think we were here about a year ago, right? I and you in the room here a year ago, we withdrew guidance and didn’t publish guidance, so it was a long 90 days at the best, but it was the right thing to do for us, but let me take you through a quick presentation. We will try to save as much time for Q&A.
Starting with the second quarter numbers up there at $211 million in the quarter; that included our Imperial’s business, operating income about 2.5%, 3% almost, so slightly profitable I’d say. More importantly, the second line as measured by the customers significant improvement in our quality, our delivery and our lead times, that was the problem when we first got here back in 2011 where we didn’t have industry standard quality, didn’t have delivery record very well, no lead times were extended.
I was with the OEM last week, our PPM this year and wheels to that OEM at zero PPM, zero defective products. So our delivery is at 98% or above and our lead times are industry standard or better.
So improved liquidity, we are able to renegotiate the ABL in the second quarter. I’d like Greg cover that in more details. We didn’t sell the Imperial business a day after we did our second quarter’s earnings announcement and we got hung up a day before on some technicalities, but we’d like to done it all in the same day, but put $30 million of cash in the balance sheet and I’ll let Greg talk about that in terms of from an overall liquidity standpoint.
We are starting to see the impact of our emphasis on lean manufacturing in terms of working capital 8.2%. I think we are running the business with around $57 million of inventory now. I think we have another $5 million or $10 million that we can get out once we get every 100% stabilized in parts of our business.
We talked about two years ago, ‘Fix & Grow’ strategy. The ‘Fix’ is pretty much done, okay. The Gunite business is stabilized, the equipment is installed, it’s running at the levels we expected, some of it’s slightly better, we have one little hang now that’s not worth talking about that I have to focus on with my plant manager there, otherwise we are good to go.
Distribution as of today, we are now shipping out of Batavia, Illinois instead of Whitestown, Indiana. We put the inventory there, placed a lot six weeks, we’re clearing some extra inventory in few places. We switched the switch last night at midnight. Batavia is 74 miles from Gunite rather than 250 miles from Gunite. It’s a 150,000 square foot warehouse rather than 350,000 square foot warehouse. So I think we’re going to have some cost savings you will see reflected sometimes fourth quarter, first quarter, next year from the Gunite.
Wheel, steel wheel capacity. What we only can tell is not consolidated, both in Kentucky and Mexico and we’ve doubled our aluminum wheel capacity, all that equipment is installed that we are out aggressively trying to get new business in the aluminum side.
Non-core Brillion’s profitable. Even though sales were down over 30% this year mostly driven by the Caterpillar pullback and inventory build and that kind of stuff, we are still at a high single-digit EBITDA margin business, so a business that was running at $20 million a month in the second quarter of 2012 is running right now at $9 million or $10 million and we’re still at a breakeven or just slightly positive business and we sold our non-profitable and non-core assets.
So challenges we have, the industry still is operating at a levels that make us at basically a breakeven or slightly profitable level. NA truck, the global construction mining businesses and then above normal operating cost we incurred in the second quarter to put with the new warehouse and to close down the Elkhart operation. Those should be behind us now going forward.
And we still see some aftermarket pricing pressure from Chinese in the drums, but our North American competitors are staying pretty rationale in that side. So conditions, a mixed bag is I would say. Manufacturing index is down a little bit, fleet utilization is approaching about 90%, we have not seen the rates go up yet though, so we’re not seeing that the super profitability in the fleets to go back invest in their fleets. Fleet age is still in above six level for Class 8, the bottom left corner chart is now when we use the use we put in here that impacts our growing you’re seeing, and it actually reads from right to left, not left to right. That’s the build levels of retail sales of cash on a worldwide basis.
You see the recession on 2008, 2009 and 2010 on the right. Then the great build up and then you see the speed drop off and that’s what’s impacting our growing business right now. Housing starts gradually coming off the bottom. And then, earth moving sales over here kind of flat lined here this year so far.
Class 8 build productions, you can see we’re running flat out in the first half of 2012, it dropped off a cliff in third quarter, fourth quarter. We kind of hit the trough in the first quarter of 2013. Saw a pick up in the second quarter. Then in third quarter, it just kind of went flat line, it didn’t really go up very high. And in fourth quarter, we don’t see the big spike that we thought we would see three or four months ago.
And I’ve been asked lot of questions in one-on-one today, we do see push out and build schedules and build levels of truck OEs right now. Okay, we are not seeing the robust fourth quarter that we thought we’re going to see before, okay.
So, 2014, there is a number that’s FTR, that’s ACT. We had not come out with our 2014 not really today, but I think we’re being a little more conservative in both of those gentlemen right now, okay. So I just say we are building 250 plus or minus 25 type of range, we’ll see what happens with the economy here in North America.
Class 8 next four or five years, shows a little bit of an uptick in 2014 and 2015, it starts going down a little bit. Still coming off the very bottom of Class 5-7 and then trailer builders are hanging pretty tough. So we’ve had meetings in the last 30 days with two of the truck OEs and two of the trailer guys and we have a pretty good feel whether it will be in fourth quarter this year and what they are planning for 2014. So this year’s sales down and the builds are down 6.3% and next year it could be up 14%. So we’ll see where it is going to coming at, so.
Fix & Grow, just quick update, aluminum real capacity expansion complete, 100%; spend $55 million to acquire Camden, double our aluminum real capacity and in really good shape right now to go after the market. So market comes back in the past we’d run out of – about 250,000, 260,000 truck builds, now we can go truck builds plus 300,000 we can keep up with our friends at Alcoa.
Gunite machining; all equipments installed, all equipments key tested, all equipments running at the target levels we wanted except for one and we are working on that right now. The Gunite plants are consolidated, Elkhart is closed. All the employers laid off, 227 heads gone, and we have the asset up for sale and we are hoping to get that assets sold between now and end of the year. And the Brillion plant was closed and all the equipment that we did need sold, we took that charge fourth quarter last year, so we have a pretty clean going forward there.
Brillion, significant progress as I talked about we saw more opportunities there. This could be a nice business, it’s a nice niche, our competitors are primarily owned by private equity now, most companies we talk to are projecting a capacity shortfall in castings in 2014, 2015, 2016, basic supply and demand should put us in good position here. And we are starting our ERP migration. We started corporate on January 1, and we are moving into the plants next year, so.
This is how we evaluate our plants, red, yellow, green, green means it’s a profitable plant with good quality, good delivery. Red means it’s unprofitable and has some issues. Yellow means its marginally profitable, break-even or has some calling delivery issues. You can see the Wheels business is in good shape except for Camden, we don’t have enough volume there yet, we have two shifts laid off right now. The Whitestone warehouse, this will turn to green as we move to Batavia and then Rockford and Brillion basically we got off from losing money to breaking even and good quality reputations and deliver with the customers, we just need more volume to get across these assets. So these two classes are gone.
Gunite specifically two day improving on hand inventory. I think we have two or three more days we can get out between now and the first quarter next year, scrap down 3, 4 points year-over-year. When we first got here in 2011, our scrap run was running somewhere between 8% to 9%. Right now, we are more in the 3%, 4%. We think we can get it down to 3%, 3% is about where we used to be theoretically, 2% on cash and 1% on machining. We are probably right now around 3.25% I think right now.
Margin improvement; we have a positive EBTIDA business, actually double-digits in June, 9% for the quarter. That reflects a spring selling season coming off the winter months, truck coming, brakes are repaired. So I can’t report to you July and August yet, but I can just say the positive numbers should be good. The trends are not as high because it’s not the spring selling season. So I think right now, quality PPM’s and drums, less than 50 across all customers right now.
What we’re going to do in 2014? ERP implementation. We kicked off the first real plant on January 1. It will take us two quarters to get all the real plants down. We have projected to that October 1. We’ve actually backed off. As we got into some of our order entry processing, you map up the processes and look at we really had a very convoluted system with seven ERP systems. We’ve dedicated about five, dedicated resource there. We’ll have that straightened now by January 1. Then Gunite and ADC next year to warehouse.
We’ll talk more of the quarterly earnings announcement about coating systems. We’ve come up with some proprietary coating technology that we’re going to roll out to the market next year. We think that’s going to be a breakthrough for us and nothing to share with you today about that.
Select foundry upgrades; we probably have another over a three year period somewhere between $25 million and $30 million of capital investment we need to make. But we can handle that within our 3% to 4% annualized capital run rate that growing in Gunite. I think those are built in. We got that straight away.
So those are the last parts of the fix. We need to get done. We’re really focusing now on growing the business. We think the new technology introductions both at Wheels and Gunite are going to be game changers in the industry. We don’t want to put that out probably to our competitors right now, but we are talking to our customers behind the scenes about that. But we have some new technology. We can get some better pricing for.
Aluminum wheel capacity, we’ve put it in. Now we’ve got to go earn, earn and fill it up. We have a reputation well earned over 10 years of short change in the after-market, when the OE builds go up. So our after-market guys are saying prove it to me that you have the capacity, and we are going at the key OE’s where we’re not the standard position. So PACCAR, Volvo, Utility Trailer we’re going after some other, also we think we need some wins going the next 12 to 18 months so.
We need to rebuild the Gunite brand, not a brand so much is the market share. We lost $60 million of business when PACCAR and Navistar resource away from us. If I was them, I would have done the same thing. We can’t deliver on time, you have quality spills about every six months, why should we be a supplier.
We’ve shown them now that we have the new plant. We are re-certified by Daimler as a standard option in their book. We are having some discussions with two of the other OE’s about getting back in and earning back some of that share. So that may require move one of the piece of equipment south of the border to do that, but that’s sort of the mix, that’s what we’ll do. So and then I think we are in a position were operationally I feel confident as a CEO, that I can spend more time talking to customers, investors and start looking for strategic opportunities to grow the business outside of the North America, okay. And we can talk about that in the Q&A section little bit.
So I’ll let Greg come up and talk about the quarter results and then we’ll get right to Q&A. Greg?
Gregory Alan Risch
Good afternoon everybody, for those out in the line, I am Greg Risch, I am currently the CFO for Accuride. I’ve been here for 19 years and I couldn’t be prouder to be the CFO and represent the Company in such a time, where we’ve made serious improvements in the last couple of years for quality and delivery, and we’ll help taking away our excuses for our outstanding sales force can make some improvement. So I’m likely to address and go on.
Now I’ll go through a couple of highlights for quarter two, may seem a little stale to some of you. Obviously the quarter three just finished up, and we’ll have our earnings call planned tentatively in the end of this month. So 30 days from now we’ll talk again.
But for now quarter two. So this is excluding the Imperial business that was sold right on August 1, just a couple of months ago, and so we’ll look at the continuing operations. So sales, one year ago of $229.5 million, in this year second quarter was $180 million. So we’re not seeing as much of a robust industry, and that was fully predicted and as expected, matter of fact, I believe we ended up exceeding our own expectations as well as others that were looking at the company. As far as our earnings, same thing. So on the change of the sales we like the percentage of contribution that we had and it shows the continued progress that we’re making not only at our plants, but how we are operating as a unit in the office as much.
On the bottom, you can definitely see the three graphs and these are graphs that we’ve consistently shown. So for the first time you’re not seeing them for – this is just a continuing operation excluding Imperial. So you can see a little bit of a switch in regards to Wheels becomes more than 50% of our business, and for the first time you’re seeing that the four big truck makers, the OEs are slightly less than 50% of our business. So little bit more than aftermarket focused company now. And so, you can see that in these graphs and certainly the market segments that we serve are no different even after moving Imperial.
I’ve talked specifically about the three business units and the Wheels business, certainly a change in the demand and that’s primarily on the OE side, and the earnings that go with it, fairly stable business. So we have the same number of operations this year versus last year. So not too much to say there.
For Gunite, we see definitely a drop in the revenue but we see – what we really like to see is an increase in the earnings despite the drop in demand.
So as Rick said, we had a really nice demand quarter from the spring selling season, as everybody gets out of the winter months and it’s time to replace those brake drums and we’d like that Gunite was able to capture that share and shows their profitability, and I think what’s as important for Gunite is not only the year-over-year pay down on demand, but increased income. I think you need to look at the quarter one versus quarter two, just a sequential here in 2013, $18 million more of sales in the quarter, yes, $12 million more on operating income. So that is certainly the leverage that we’ve seen.
Gunite having a 9% EBITDA quarter and second quarter was definitely some validation. They were doing the right things operationally and when the whims of the market are there then we’re definitely on our way. So it’s great to see that actually happen.
Brillion segment, it definitely represents the one that’s most challenged year-over-year, 40% drop in revenue and that’s certainly – we have plenty of data to show that that is not a drop in market share as much as just a drop in demand from the industrial and other segments that they serve. What we have like to see is that if you compare to 2011, this is representative of the work that’s been done by that team, it’s less sales versus 2011, higher profitability.
And again I would point you to sequentially, if you look at, first quarter versus second quarter here in 2013, Brillion’s demand, our sales revenue was basically flat quarter-over-quarter, yet they made about another $1.5 million, $2 million of income. So they’re going to continue to chip away their costs and make improvements waiting for their industries to come back as well.
Trade working capital, as Rick said, about 8.2% of sales and so you can see the red graph or the red line on the bottom graph is definitely representative of work that has continued to be done and we know that we still have some work to do, and we’re challenging our business units. But this isn’t going to be done just because we challenged and do it. It’s being done because we’re going through a process that’s very methodical and systematic and this is going to lead to sustainable results and that’s why we really like to see.
Free cash flow, I think the important thing to understand about our second quarter here on Slide 20 is that, despite the low demand, despite kind of a non-robust quarter we are still able to be positive as far as free cash flow. I think the other think to get from this page is, if you look versus last year, last year we spend out $15 million on capital and this year much reduced down to $6 million, and so as promised we would be spending less capital after the 2011 and 2012 years. 2013 doesn’t require as much. So, you’ll see that going forward as well.
Net debt and liquidity. A lot of action, a lot of movement here in 2013 and more importantly in the last 60 to 90 days. We ended the year, last year was $64 million. End of the first quarter was $64.5 million, and as we got to the end of the second quarter including the impact from the ABL that was refinanced, we had $74 million. So that doesn’t include, that would be the third bullet point on the recent improvement actions and that would be the divestiture of the Imperial assets.
So that divestiture should add between $10 million and $14 million, kind of depended on which quarter you’re looking at. If you want to kind of go back and work it through, it’s in the $10 million to $14 million range. So we like where we are liquidity wise. Everybody know, if you paid attention to Accuride at all, you know that it’s a very cyclical industry. It’s seasonal, it’s cyclical and so, to have liquidity like this, it’s helpful for me and it’s helpful for our banking partners and our investors to know that we’re in solid shape, and so this is no small part, helpful from what we’re doing on the operational floor all the way through the confidence that we have in the external markets to know that we can get such a good ABL in place. So we appreciate that.
Otherwise, as we see at the bottom minimizing and deferring CapEx is what we’ll continue to do, and working on our working capital reduction. Rick mentioned a minute ago, we’re still pushing on the inventory on inventory side. We’re relocating our distribution business. So we’ve held a little bit more inventory than traditionally normal in the last few months and facilitate better things to come there.
Regards to the 2013 outlook, this slide is no different than last published, subsequent to the sale of Imperial. If you remember the chain of events, we actually issued our press release for the second quarter earnings on the morning of August 1, had our call in the early afternoon and by the end of day had sold Imperial. So a little bit strange twist, but these numbers are unchanged in regards to what we had shown by the end of the day.
With that, I’ll let Rick finish up with the summary.
Richard F. Dauch
Okay. So as I again have said, the ‘Fix’ portion of the ‘Fix & Grow’ is pretty much complete, just get the warehouse changed, get the paying systems launched over there, keep working on the improved liquidity. I do think based on my experience in doing, putting lean manufacturing a couple of other companies, I think we have $5 million to $10 million of more inventory we can take out of the system.
Our AR has been pushed back to pre-bankruptcy days. So I think that’s going back in the 30, low 30s we want to get more like 35 days. We think first quarter of 2013 was the trough of the cycle. Like everybody else in the industry we keep thinking there is going to be some big recovery, but we’ve told our guys don’t bank on it. We are ready for it if it comes. If it doesn’t come what else can we do to drive cost out of our system, and if some catastrophic happen what we will do. We have those game plans in the shelf right now. So I think we are in a good position.
When I first got here in 2011, when the market took off we were not ready to run at truck build level of 300,000. If truck builds go to 300,000 or 325,000, I think we can run very smoothly and very efficiently with a good contribution margin. If truck builds drop down to 225,000, I think we can work on the cost structure to get to a break even position.
I think in May this year our sales were about $20 million off of last year, if I remember correctly and yet we made more money. That tells me we’re doing the right things to get the cost out of the business, so we can make some money when the business does come back. So, growing the business back is critical for us. I think we now can go out and show what’s hard data facts and trends to our customers that we have fixed the business from a quality, delivery, capacity, marketing type of standpoint. We’ve got to go back and earn business. You don’t lose a business overnight; you don’t get it back overnight. You got to get out there and fight everyday for it.
So Gunite, we have a large focus down the aftermarket. We formed a Distributor Advisory Council, the first six months we’re here and we had a meeting last week of Monday and Tuesday and they gave us big time to those and they think they can help us grow that business back. So I’d like to get Gunite back to above $200 million. Right now we are running at probably the $170 million, $180 million rate. We’ve proved basically, based on the second quarter numbers we can get that business running at $200 million plus rate. We can get to north of 10%, 12% EBITDA margin. And then again, as appropriate assets become available on the world or opportunities for our customers to bring us to other parts of the world we are ready and prepared and are starting to work on some of that kind of stuff.
When I first got here, there was lot of talk about, I think we want to become a real company and then I put the hope of that within the first 90 days and said, no let’s work on our business here in North America. I would say now I feel very comfortable that North America is ready to run and we’re now prepared to start looking at how we grow the business on a global basis.
And with that, I think we’ll turn it over to your questions. We got about 16 minutes. So fire away. We can talk about the baseball playoff, sort of talk about. So don’t be bashful. All right, Brian.
Gregory Alan Risch
Okay. Organic growth, we’re not standard at PACCAR. Alcoa was there. They’ve got about 95% share. I think that we can talk to PACCAR about growing our aluminum wheel business there. We are not standard at Volvo. We used to be standard in 2006. We lost that business. We only have 3% penetration at Volvo. So if we just got out 35% market share that would be a significant opportunity for us to fill aluminum capacity.
I think we’re strong on the steel wheel side of the house with the OEs right now. We’re holding our own in the aftermarket even against imported Chinese wheels. Right now we’re holding a decent share I think. So wheel business, I think we’re good and we have opportunities to grow in North America.
Gunite, we’ve got to go back and earn back that business we lost. We need to do that through differentiated technology, not just price. Something that gives the fleets and the OEs something to go out and sell in terms of the lighter weight drum or more technically advanced drum, I’ll say, right. I think we can do it on lead times. We have the shortest lead times, I think right now in the industry from a drum standpoint. We can pretty much ship our high volume drums within a week. Okay. So that’s where we want to go.
At the Brillion business, because of the ownership by private equity and some of the large casting operations we’re seeing an in audited amount of opportunities to quote casting businesses that we hadn’t seen in the past. We got to find a niche that makes sense for us. So both at the truck OEs, some of the auto suppliers and even some of the ROEs there is some interesting opportunities for our Brillion business. So that’s the organic opportunities that go to business.
On a global basis, our vision is to be the number one or number two basically premier supplier of wheel and systems to the global commercial markets. Global commercial markets mean off-road wheels. Whether that’s off-road small vehicles or off-road large vehicles, I think there are some systems we can put together with the Gunite. We have told ourselves, we got to prove to ourselves, our Board and our investors that we can make Gunite a viable business before we start looking at where we have product portfolio in the outset.
If it’s round and it rolls on a commercial vehicle, it could fit our space. There are assets out there ranging from $50 million of sales a year to $800 million a year. That would maybe good fits for our company down the road. How we finance and how we do the deals, all of the bankers work with our team to do that, but I think I have a proven track record with team that we know how to go and take over some scraggly manufacturing supply chain operations and fix them and I think there is opportunity to do that again in other places in the world. I’ll just say that. Is that okay? Okay, okay. Other questions? Yes, sir.
Richard F. Dauch
Great question. So Maxion and Borlem/Hayes Lemmerz, back in 2011 closed the deal in 2012. So they established a global footprint. They opened a plant in China. They’ve added some capacity in other places of the world. So they are truly a global wheel supplier for steel wheels, okay. So if we want to be a global supplier we have to figure how to create that footprint, right. They don’t make aluminum wheels, right. They don’t make brake drums, they don’t make slack adjusters. And so, if you went to a fleet, I can sell the fleet steel wheels, aluminum wheels, brake drums, slack adjusters, hubs and rotors on one contract, one salesmen, one warranty program versus five suppliers in that. That’s the savings that is necessary to the customer.
Alcoa has filed us and they have a couple of large investments in automotive machine centers I think, where we place some auto equipment. They’ve also opened a plant in China, okay. So they haven’t stood still either. So on the Gunite side, Stemco Motor Wheel, so they put in the Stemco portfolio of products there. Webb Wheel made their big investment earlier in the decade. Over $100 million will make Webb Wheel more competitive than Gunite. We didn’t do anything for 13 years, right. So we got our ass kicked for a while. Now it’s our time to do some ass kicking I’d say.
And then the Chinese, it will be interesting to see whether the Chinese guys won some of the business as the Chinese market recovers, are those Chinese suppliers going to keep going here in North America. They are going to take care of their customers in China. I guess that will be a big decision. We’ll see how that plays out in the next six to nine months, okay.
On the Brillion side of the business, there’s been a lot of movement in terms of who owns the assets for the last 24 months and we’ll see how that plays out in terms of – I’ve seen again before where a private equity guy goes in and has a capacity shortfall somewhere here and they can raise prices and all of a sudden there’s interesting dynamics in the marketplace and that could play out in our industry as well. Does that answer your question? Okay. Others? Yes, sir.
Richard F. Dauch
Well, that’s a good question. So if we want to be the biggest guy in the commercial truck space, we’ve got to go to Asia, specifically China. It’s a worldwide [indiscernible] over there. It’s probably 50 guys who make steel wheels. Some of those are state-owned enterprises; some of those are truck OEs and so make their own steel wheels.
So we’ve taken a lot of trips over there to look at different assets and if we could find the right partner to acquire – I’m not really a big joint venture guy in China. I have heard so many horror stories about bad joint ventures. I’ve done a Greenfield base in American Axle, but I think that’s one. Our customers would tell you that there is a monopoly for steel wheels in Brazil. So they like us to come down there. We said, we’d love to, give us a PO, let’s make it work for both parties not just you. And then our same customers would like to see the competitors to Alcoa in Europe as well. So we have a plant in Canada. It’s not a secret.
We have a lot of idle capacity. We’ve talked the work force about that there. I think we have 1.5 million annual capacity of large truck steel wheels sitting in Canada that could be redeployed. We can break it into two segments of 750,000 that could be redeployed to either Asia or Brazil, don’t need in Europe right now. European market is now recovering. Now there is too much idle capacity in Europe for steel wheels. So does that answer your question?
Richard F. Dauch
So at Asia – customers tell me, right, basically Daimler, Volvo, PACCAR; Daimler and Volvo are global competitors. PACCAR is basically a North America-European, going to South America. Navistar stands alone here in North America and TWNA [ph] and Scania that were both North America. So we need to talk to those guys and helps us lead the way. What I told them and what they told me is make sure you are ready to run with us during the next upturn. You can no longer have excuses of why you can’t keep up with us. So we took and put the money in North America first. Now we’ve done that now we are prepared to start talking about similar [ph] going global.
And from day one, Accuride had a great reputation in the wheel business. Every customer I went to said, we’ll give you an A or green or 90% rate on steel wheels. We don’t like the capacity aluminum wheels, but if you get that we like your wheels business. You’re very confident wheel manufacturers. We’d like you to grow globally with us. So that’s what our goal is long-term. Okay. Other questions? Yes, sir.
Richard F. Dauch
You want to take that?
Gregory Alan Risch
Yes, it’s definitely possible and I think we will watch some of those commodities. They are going to move and they are going to fluctuate and I think the important thing for us is that we have established procedures within our contracts that are able to help us recover that on a lag basis. So it varies frankly. If steel or certain iron or aluminum goes up, then we’ll recover that for our contracts and our competitors are going to see the same thing.
Richard F. Dauch
After market we can adjust prices every 30 days. OE contracts, we’re going to adjust every six months. So if it goes up, we get a higher price. If it goes up January, we get the price in July. If it goes down January, we give up the price in July. So we are pretty well insulated from that. Yes, quarter-to-quarter swings are semi-annual swings, but we feel pretty comfortable there.
So our real drive is to figure out how we use less raw material. If you’re generating 9% scrap at Gunite, that’s a lot of mature you’re buying that you’ve run twice, right and that was our big goal and that’s how we replace the machines up there. So I got to say we’re down to 3.5%, 4%. Now I think we get down to 3%, but 3% is pretty benchmark I think so.
Wheel plants, our steel wheel plant last six months, I think our scrap rate is 0.3%. I’ll match that up against anybody in the world, right. Most plants I go to, when I was in the machining side of the business is about 1%, 1.25%. That is more of a welding and foaming, so it’s really damn good. But our Mexican plant is not there yet. So let’s figure out how we get the Mexican plant down to 0.2%, 0.3%.
Aluminum wheel pant, we launched Camden. It was like at 4.7%, Erie was at 2%. We have Erie down in the 1s now and we’ve got Camden down to 2%. So Camden is chasing. That’s just a matter of training the operators how to handle things properly, same is true in Mexico. So if I could transplant you to our quarterly attributes in the plants, we go through the high-level safety issues, any organizational issues, any union issues, any customer quality issues, any warranty issues, any delivery issues. Now we spend the bulk of the time either on the factory floor looking at stuff or going through the cost of goods sold charts and we track it by raw material, labor, overhead book and the indirect labor, scrap, MRO, utility costs, those kinds of things.
We have a common system now across Accuride where every plant has the same metrics, the same measurements and it varies by which segment we’re in, right. Scarp rate for machine used to be 1%. It might be 2% cash for that. Brillion was at 4%. We have four lines up there. We have one line down below 2%, 1.8%. We have the other three lines coming from four down to like low 3%, we think we can get it down two. So we are really, I’d say, into the operational details, which is they don’t like me when I come sometimes, but I say if you do good I only come every six months. If you aren’t doing good, you see me every week and if you’re doing probably good, you see Greg and I every quarter.
So we have two plants. We see now every quarter. The wheel plants we see every six months. When we got here at the wheel plants every four to six weeks, and I was in Gunite and Brillion every other week. So that gives you an idea that – and my level is that I feel comfortable with those guys, that are running the plants into the details now. So that should be a word of confidence for them.
So, any last questions, we’ve got about four minutes here. Brian, the other question, which is a starter question, so Detroit Tigers and I don’t know. I don’t care about that. I don’t know.
Brian Modoff – Deutsche Bank Securities, Inc.
Richard F. Dauch
Steel wheels plenty of capacity. We have 5 million. We’re only running about 2.7 million right now I think. So we’re fine there. That’s why we want to move some stuff there. Aluminum wheels, we should tap out around 500,000 to 600,000 aluminum wheels. Now we have 1.1 million. We used to short change the aftermarket first, take care of the OE customers, really start change some of the smaller OEs. Now I think we can handle both. So we got to prove that.
And on the Gunite side we shed those two contracts, they were money losing contracts with the OEs and that capacity can be redeployed and we make $5 or $6 more a drum, same drum. We sell in the aftermarket five or six more than we do in the OE side of the house. So it’s the right place to sell I think. Did that answer your question?
Brian Modoff – Deutsche Bank Securities, Inc.
Richard F. Dauch
And we’ve gone through OE aftermarket and so here is our installed capacity. We don’t put them up here. So our competitors don’t see it. They probably have a copy from some other presentation, but I think we’re showing that we can do that. I can’t tell you how many times I’ve been to aftermarket conferences where people come and say, well you’re the sixth CEO and I’ve heard that sorry for just you’re clear with me buddy and that kind of, stuff. So I can’t wait to do that, right.
Brian Modoff – Deutsche Bank Securities, Inc.
All right, great. Thanks a lot. I appreciate your attention. Have a good day.
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