Accuride's (ACW) CEO Rick Dauch on Q2 2016 Results - Earnings Call Transcript

| About: Accuride Corporation (ACW)

Accuride Corporation (NYSE:ACW)

Q2 2016 Earnings Conference Call

July 26, 2016 10:00 AM ET

Executives

Mike Hajost - SVP and CFO

Rick Dauch - President and CEO

Analysts

Rhem Wood - BB&T Capital Markets

Doug Carlson - Bank of America Merrill Lynch

Trent Porter - Guggenheim Securities

Operator

Welcome to the Accuride Corporation Earnings Conference Call for the Second Quarter of Financial Year 2016.

Joining us on today's call from Accuride are the company's President and CEO, Mr. Rick Dauch, and Mr. Mike Hajost, Accuride's Senior Vice President and Chief Financial Officer. My name is Sabrina and I'll be your operator for today's call.

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

And now I would like to turn the call over to Mr. Hajost. Please sir, go ahead.

Mike Hajost

Thank you, Sabrina. Good morning, everyone.

As we turn to slide two, I want to remind everyone that during this call, we'll be making statements that we can be considered forward-looking as defined in the Securities Act. We caution you that these statements are subject to risks in our business and we encourage you to read all of our SEC filings to understand what those risks are.

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

Rick Dauch

Thanks, Mike and good morning everyone and welcome to our call.

Today Mike and I will take you through Accuride's performance in the second quarter. I will cover our operating results and update you on our progress implementing our turnaround plan at Gianetti. Mike will review our financial results and we'll both take your questions later in the call. So, let's get started and please turn to slide four.

We delivered solid and profitable results in the second quarter despite significantly lower year-over-year Class 8 truck builds in North America and continued weakness in Brillion end markets. Disciplined cost management helped us achieve slightly higher EBITDA margins despite these lower sales. Tight management and working capital led to strong cash flow performance and sequential improvement in our liquidity position.

Adjusted EBITDA for Wheels was $1.4 million lower year-over-year, mostly due to lower OEM production in North America and the negative results at Gianetti. Despite lower net sales Wheels improved its adjusted EBITDA as a percentage of net sales to 23.7% in the quarter.

At Gunite, adjusted EBITDA was down $400,000 year-over-year on slightly lower sales. Despite the net sales decline Gunite's adjusted EBITDA as a percentage of sales improved to 19% in the second quarter. We continue to find way to reduce our operating cost at Rockford while selectively and profitably winning back market share against tough competition. We now believe Gunite is the low cost producer of brake drums and slack adjusters here in North America.

Brillion's adjusted EBITDA of negative $1.7 million in the quarter was $1.4 million lower year-over-year. This was primarily due to reduced end market demand from the oil and gas, agricultural and mining markets. We expect these markets to remain at depressed levels well into 2017. It's a tough situations for sure.

To complete the picture, the corporate component of EBITDA was $1.2 million better than last year's second quarter. This reflects the swift actions we took earlier this year to reduce headcount and lower our SG&A cost when we saw sales coming lower on a year-over-year basis.

Turning now to our operational performance, I'm pleased to report that results remain strong in the quarter even as Class 8 truck volumes hold back by 25%. Our recent capital investments and the implementation of lean manufacturing principles across our operations coupled with our new Plex ERP system allow us to be very flexible in adjusting to ever changing heavy duty market conditions.

Given our expectations for lower customer build schedules we proactively took aggressive actions last quarter to align our cost run rates to expected lower volumes. These actions included adjusting schedules and staffing at select wheel plans, delay in some non-critical project work and proactively reducing our inventory levels.

Operationally, our North American plans did not miss a beat. Wheels and Gunite delivered strong operational performance for the quarter and maintained their award winning world class performance on the key metrics that matter to customer's; quality, on-time delivery and short lead times.

At our Gianetti business in Italy, we're pleased with the pace and scope of our progress in implementing our Fix and Grow turnaround plan there. The workforce is quickly adapting to our leadership team and to our lean manufacturing systems resulting in mark improvements in operational and financial performance over the past two quarters. I'll provide more detail on Gianetti later in the call.

Next, I'd like to highlight our significant opportunities for future revenue growth starting with EverSteel our revolutionary wheel treatment and coating technology. We launched EverSteel this January as the industry's first steel wheel warranted against corrosion. Since then, we've had numerous discussions with large fleet in the Midwest, Northeast and Canada. They like the value proposition of putting EverSteel wheels on the trailers especially. Fleets typically hold on to trailers three to four times longer than they do to tractors. And EverSteel virtually eliminates wheel refinishing cost for up to 10 years.

As a result, we have earned our first major order from a Midwest Fleet for over 200 trucks and 200 trailers with EverSteel. A number of additional fleets are conducting field test programs with EverSteel treated wheels. The bottom-line, EverSteel is a superior product technology to any other steel wheel coating in the market. Extensive lab and field test data and now customer orders support that claim.

Next, we secured a favorable data book position for steel wheels with a large OEM trailer manufacturer. That's going to help us increase pull through business of fleets who want our steel armor coating technology. We've seen our market share with trailer OEMs increase significantly since we introduced Steel Armor in early 2014.

I spent four of the last ten weeks out visiting key fleet owners and WDs in Texas, Indiana, Ohio, New Jersey, Alabama, Mississippi and a few Mid-Western states. The difference between our Accuride wheel coating technologies versus our cheap North America competitor and cheap Chinese dump wheels is astounding. This is a target rich environment for us to gain back market share and help fleets reduce unnecessary maintenance cost. As they used to stay in the old frame commercials in the 70s pay me now or pay me later. Smart fleets are choosing Steel Armor and EverSteel over cheap Chinese wheels.

In Europe, we've recently expanded our sales team placing the new OEM sales manager on the ground in Germany to grow our business with truck and trailer OEMs located there. We're seeing multiple RFQs coming in for both existing and new European OEM customers. We are confident that we will gain market share and meet our 2017 and 2019 revenue targets in Europe.

Lastly here on slide four, let's review our outlook for the rest of 2016 and early 2017. We expect tougher market conditions in the second half with Brillion end market challenges continuing, lower Class 8 demand as excess inventory is solely burned off at dealers and rising raw material cost specifically steep prices.

Given all that we've tweaked our guidance ranges a bit as noted in our earnings release today. Mike will go into that in more detail shortly, but let's take a look at a high level. First Brillion, Brillion's end market challenges are likely to continue well into 2017 with no clear recovery path yet for its oil and gas, agricultural and mining industry markets. Our largest customer of Brillion is tied to the oil and gas industry and expects some recovery in early first half of 2017 if oil prices remain stable in the mid-50 range.

As we announced in May Brillion secured more than $14 million in annualized new business across a broad range of industries. This helps diversify its revenue sources. This new business added $6 million to Brillion's top-line in the second half of 2016 yet not enough to offset its core market volume softness. Brillion's recent capital investments along with our relentless focus on lean manufacturing have made it a competitive supplier for light vehicle and commercial vehicle business for the first time in well over a decade. That's illustrated by its new contracts supplied Daimler's Detroit business units with machine flywheels for truck transmissions. This business launches in late fourth quarter 2016.

Turning to the North American commercial vehicle market, we're keeping close touch with our OEM and fleet customers on what they are experiencing and staying dialed in with ACT and FTR as they make their monthly forecast changes for 2016 and 2017 and beyond.

Excess Class 8 inventories and weaker freight conditions continue to impact order patterns and OEM customer build schedules. Daimler and Volvo in particular have taken significantly layoff to their North American Class 8 assembly plans to address the slowdown and all four of them have taken some weeks off the schedule in the third and fourth quarter. In addition we expect rising steel prices should impact our margins in the second half. This is really a timing issue as we will recover most of this pricing in the early 2017 when we adjust our product prices in January.

Now let's turn to slide five for a look at underlying economic and market fundamentals that are driving freight, truck, and trailer demand. Industry and economic indicators that influence equipment demand close out the second quarter on a positive note. All the signs of strength were there from manufacturing activity and how it starts to record pace auto sales and job growth. We continue to expect the U.S. economy to expand by about 2% this year and go up a little beyond that in 2017. After being stuck in neutral to start the year U.S. manufacturing is back in action.

The Institute for Supply Management's latest data, there in the upper left corner shows a nice uptick in activity from March through June. The 50.23 in green for June was the best performance for the manufacturing index in over 16 months. Moving across the top, housing starts jump nicely in June and are expected to grow more than 20% over 2015. Commerce department data had housing starts growing by nearly 5% in June, while new building permits increased 1.5%.

Healthy new home sales and continued job growth have both builders and buyers feeling optimistic. That's good news on a key driver of future Class 5 through 7 demand, which is key for our steel wheel business. U.S. light sales set a record for the first six months and could be headed for another record year here in 2016. Last week General Motors reported a great quarter in a U.S. market propelled by strong pickup truck and SUV sales where we have exposures supplying the KT2 [ph] program.

Forecasters continue to project total light vehicle sales will top 17.8 million units this year. All good signs that there will be plenty of freight yet to move in 2016.

Turning now to slide six, let's talk about the industry, Class 8 last quarter we talked about the impact of lower Class 8 demand and build plans for 2016 and that story continue to play out in the second quarter. The decline in Class 8 production is now leveled out with ATT and FTR projecting builds down 25% to 30% to between 233,000 and 236,000 units this year, versus well over 320,000 last year. That's just slightly below the average build rate over the last two cycles.

And as far as excess class inventories are concerned the initial expectations that we see the excess levels get attracted by mid-year but that didn't happen. One of our largest and most loyal fleet customers recently told me he expected that it would now take at least for the end of the year for the inventory situation to be cleaned up.

The lower Class 8 demand should be offset somewhat by the relative help of both the Class 5 through 7 and the trailer build markets. We're seeing Class 5 through 7 demand and builds hold steady and tracking with the strength of the housing and infrastructure investment projects across the country. The seasonal pull back in orders we saw in June really reflected the last year's superhot order pace more than any current weakness.

Class 5 through 7 builds in the past few cycles have averaged around 201,000 units and which will remain above that level in 2016 and well into 2017 and beyond. Trailer builds; trailer builds remain stable at a slightly lower level than last year and should hold there through year end. On the demand side June orders dropped about 10% to about just less than 12,000 units. There are some mix happening in the trailer space. Demand for tankers and dry vans are weak and we saw a few more cancellations from fleets in the quarter. But reefer trailer sales and build rates are strong and are basically sold out into early 2017. And we've talked to Great Dane and we've talked to utility, we've talked to Wabash about that.

Both forecasting agencies project that trailer builds will be down about 3% or 5% from 2015 yet still tracking well above the 195,000 unit average across the past few cycles. As far as backlogs go we are still seeing replacement demand for 15 to 20 year old trailers hold and maybe a little bit of pre-buy ahead of the upcoming Greenhouse Gas II Phase II regulation impact it's going to hit the trailer market this year.

We are pleased with our trailer business, which continues to gather strength as fleets pack in our Steel Armor Wheels and other products. Our meaningful share in both trailer and aftermarket segments is giving us some balance to offset week Class 8 conditions here in North America. And in the future it will get even more of a buffering the fact from Europe's healthy commercial vehicle market.

Let's turn to slide seven for a closer look at the European market conditions. The European economy is still showing signs of improvement despite some of the initial uncertainty created by Great Britain's decision to exit the European Union. As far as the heavy duty truck market goes we expect any impact from Brexit will be concentrated in Great Britain, with little if any spillover effect. There is only one large OEM truck assembly plant in England and we currently have zero exposure to that customer today.

Europe's truck industry reflects the progress being seen in the broader economy. With truck sales continuing to rebound through the first half of 2016 prompting the upwards revision of forecast expectations. High Fleet age is driving the need to replace equipment, together with positive economic trends equipment replacement is supporting truck build growth in the range of 4% to 5% this year.

Looking ahead builds are expected to grow steadily through 2020 with heavy trucks showing solid growth next year in both Eastern and Western Europe and the medium duty market staying essentially flat over 2016.

Now to Europe's trailer market. We are not a player today in this sector at all. But it's a significant focus for our new business effort at Gianetti. We have solid products that meet the needs of customers in this segment and we're out generating interest. Trailer volumes are expected to grow about 7% and peak this year and we are working to get our fair share of this market in the future.

Let's turn now to slide eight for an update on our Gianetti business. Last quarter we talked in detail about the Fix and Grow turnaround plan underway for our Gianetti Ruote wheel business near Milan in which we took a 70% majority stake in last November. We couldn't be more please with the pace and scope of the progress we are making, which was clearly born out in our second quarter financial results.

We saw a strong sequential improvements in Gianetti's financial results in the second quarter. Net sales were up slightly to $10.8 million while operating income losses were cut nearly in half versus first quarter. That represents a $700,000 improvement in less than 90 days on relatively flat sales. We are making a substantial gains towards break even performance which we now expect to see happen in early 2017.

We've also seen improvements in this working capital metrics and the cash management controls we've put in place upon taking control of the business. We've cleaned up pass due AR and AP with customers and suppliers and we are quickly getting our hands around inventory and production schedule in the plant and across our supply base. Our goal is to drive operating and financial performance of [indiscernible] to equal our Henderson and Monterrey plants by 2018.

As I mentioned earlier we've seen a significant opportunities for growth revenues in Europe. We've seen a significant jump in coating activity of European truck OEMs and that includes request for coats from both existing and potential new OEM customers. We feel good about the chances of winning our fair share of these starting in 2017 and beyond. I mentioned that our new OEM sales manager in place. He has strong relationships with the key German based truck and trailer OEMs both sets of customers especially the trailer OEMs represent revenue expansion opportunities for Gianetti.

We've also begun to work to establish an aftermarket distribution network for our Wheels across Europe, which should allow us to meaningfully increase our aftermarket presence, which today makes up a very small portion of our revenue base at Gianetti. We've made significant progress upgrading Gianetti's facility and operating capacity. Our capital projects to install new or upgrade existing equipments to Accuride centers are on track to timing and budget. You can see some of the equipment we are installing here on the slide. We've also seen the implementation of our lean manufacturing quality systems start to take hold. Here are a few results from the second quarter. And all but one customer we are already achieving zero parts per million levels of quality at Gianetti. We've improved lead times by 27% from where they were back in November.

Year-to-date we've reduced raw material inventory by 25% and cut assembly and paint rework in half with more improvements scheduled to be made during our August shutdown period. There were some long pass due maintenance on a couple [indiscernible] of equipment that we are taking care of in August here.

In addition we are aggressively implementing Accuride's standards for housekeeping and visual operating systems across the site in its [indiscernible] of course. These efforts are working well. This allows us to fully engage the entire workforce on an hourly, daily and shift basis to identify areas for improvements. The reception by the workforce has been outstanding and the very pleasant surprise especially in the midst of tough nation level and labor negotiations that are above our pay grade.

Our objective here is to transform Gianetti's operations to Accuride's wheel performance and financial standards, and use these more capable and competitive assets to grow our Wheel business across all sectors of European commercial vehicle industry. We're confident we have the team to do it. We're seeing good cultural fit between management, the workforce and our union leadership. They're making solid progress together on the turnaround of this business.

And now I'd like to turn the call to Mike, he'll review our second quarter results and I'll come back to wrap up and take your questions.

Mike Hajost

Thank you, Rick. Turning to slide 10, I'll start with the income statement. Net sales in the second quarter were $164 million, which was down $21 million or 12% from the second quarter of 2015. The decrease was driven by $6 million related to the continued softness in demand at our Brillion business unit, $12 million in pricing related to the pass through of lower raw material cost and $14 million due to lower demand in North America for wheels and ancillary Gunite products. Partially offsetting these decreases were $11 million in net sales related to our recent majority investment in Gianetti.

Accuride's operating income was $11 million for the second quarter. This compares to operating income of $14 million in the second quarter of 2015. The year-over-year drop in operating income was primarily due to the incremental margin loss on the lower demand in our North American Wheels and Brillion business unit. And the expected negative operating loss of $800,000 in the Gianetti business.

So in total, we recorded a net gain attribute to stockholders of $3 million or $0.05 per share. We generated $24 million of adjusted EBITDA in the second quarter, which represents 15% of sales. This is slightly ahead of last year's second quarter EBITDA margin. For the year-to-date results, through June 30th, we achieved $39 million of adjusted EBITDA at a slightly lower year-over-year margin. As you may recall Brillion had strong performance in the first quarter of 2015.

Turning to slide 11, I'll make a few comments on the free cash flow in the quarter. Free cash flow was $19 million in the second quarter, which saw no change in working capital, a modest pension contribution and $5 million of CapEx spend. This brings our year-to-date free cash flow to break even, which we think will be the result for the full year.

As we turn slide 12, you can see that our available liquidity position significantly improved sequentially, as our strong free cash flow was used to repay our revolver borrowings and increase our cash balance. Our overall liquidity of $78 million at the end of the second quarter remain solid with $28 million of cash on hand and $50 million of availability under our ABL's credit facility.

Turning to slide 13, this is the last slide I'll cover with your today. Based on our current view of our end market and operations, we're making some modifications to our most recent guidance. On the slide, the previous column shows the guidance information we provided during the first quarter earnings call back in April. The current column represents our view as of today. The items that are shown in red are those that changed. The downward revision for the Class 8 build forecast have been widely publicized and we're taking down the top part of our range by 5,000 units.

However our assumptions for Class 5 through 7 trailer and European truck builds remain intact. We're feeling a little more pessimistic about the prospects for Brillion's revenue to grow this year as continued market weakness for agriculture, mining and oil and gas products is overshadowing the initial impact for the new sales opportunities we outlined during our last call. Due to these factors we are lowering our full year net sales guidance to be in the range of $625 million and $650 million. This is down from prior guidance range of $650 million to $700 million.

Looking at our full year adjusted EBITDA; we're factoring into our guidance the expected impacts from lower sales and higher steel cost, which will have a negative impact on our second half margins. For these reasons, we're lowering the top end of our adjusted EBITDA range from $80 million to $75 million. We remain comfortable with this narrowed full year guidance range for Adjusted EBITDA as we continue to aggressively manage cost and performance across all of our business units.

Despite the modifications to the sales and adjusted EBITDA ranges, we remain committed to achieving our full year target of breakeven free cash flow. With Plex fully implemented in our North American operations, we have more visibility into the business that should allow us to better manage working capital and cash flow.

Let me now turn it back to Rick for some closing comments.

Rick Dauch

Thanks, Mike. Please turn to slide 15 for a brief wrap up summary. In closing, we continue to stay focused on our 2016 priorities, which remain unchanged from what we shared last quarter. Before we take questions, I'd like to quickly make a few points on our progress against them.

Market share, first year in North America our best-in-class operational performance and leading technology such as Steel Armor and EverSteel are enabling us to profitably grow share from position of strength. We continue to earn market share at Wheels and Gunite three ways, directly with truck and trailer OEMs on long-term agreements or new data book positions, through diverse aftermarket channels where there is some winners and there are some losers and via fleet specifications. Our updated sales team starting with me is out on the road, meeting with customers at all levels and winning back profitable new business on a daily, weekly and monthly basis.


In Europe we are introducing ourselves to both existing and new customers and they are fully supportive of our current and future plans for Gianetti. The coating activity with current and new OEM customers and our progress in the trailer and aftermarket segments is encouraging.


Gianetti, we are making good progress in outcomes with the Fix and Grow turnaround plan as we've discussed. We're relentlessly driving top-line growth, measure to our ability to handle higher volumes. When we took over the business we only build about 600,000 steel wheels by the end of the year will be at 1.1 million of available capacity and operating improvements to reach our profitability targets. And stay tuned on the new truck technology front later here in 2016 we have a couple of developments under test at customers that we think are game changers for the European market.

Brillion, although Brillion remains a non-core business we continue working to grow at top-line, maximizing the value of its recent new DISA 250 machine investment and tightly controlling cost to work through very tough market conditions. Our return to profitability is still in our plans for the 2017 and 2018 timeframe.

On the technology front, we continued our intensive R&D efforts to develop new industry leading products such as EverSteel, as well as new lightweight products in our Wheels and Gunite businesses that will enable us to grow share. For example, our aluminum metal metrics break drum program is right on track with positive test results and solid progress on friction material development and the manufacturability of the drum. We expect to start field testing for these drums in second half of 2016 and be ready for production in early 2018.

Again EverSteel is the industry leader in advanced steel wheel coating technology and treatment technology. Fleets have been wild by the money they can save thanks to longevity and corrosion resistance by these wheels when they're coated with EverSteel.

Finally our Plex ERP implementation is complete at our AOT facility in Ohio and that wraps up our ERP implementation here in North America. Now we're going to launch Gianetti in September and we'll complete the ERP project again on time and under budget and not many companies can say that.

In conclusion, we're pleased with our progress here at Accuride. We had a solid quarter, good margin percentage expansion from both our Wheels and our Gunite businesses even on a weaker year-over-year market conditions, but there is one thing I've learned in five years here is the heavy duty industry in North America is quite cyclical, it goes up quickly and it goes down even faster. So right now we're in a down turn and that will turn around probably next 12 or 18 months.

The steps we took in the first quarter to adjust our cost run rate to expected volumes gave us a nice lift in second quarter. We are in solid shape financially here at mid-year with healthy liquidity levels at $78 million and clear progress to breakeven cash flow for 2016, while investing $10 million to Fix and Grow Gianetti and over $8 million on future R&D initiatives at Wheels and Gunite. We'll continue to pull levers at our disposal so we can deliver the full year results Mike just shared with you.

And with that I'd like to now open the call to your questions. Sabrina, please go ahead with the instructions for the question-and-answer portion of our call.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Rhem Wood with BB&T Capital Markets. Please go ahead with your question.

Rhem Wood

Hey, good morning guys.

Rick Dauch

Hey, Rhem.

Rhem Wood

First, can you talk a little about Gunite? It seems like that aftermarket was down there, I know you took some price increases in that market and you want competitors were going to follow. I guess how much of that aftermarket being down was due to some of these price actions and how much are just the market being down? Just what's going on with the aftermarket in Gunite?

Rick Dauch

Yeah I'd say a couple of things, the aftermarket reflects the pass through on material prices in the first two quarters. We did raise our prices effective June 1st, our largest competitor follow the suit. And we'll see if the other guy is do or not and so we're monitoring that pretty quickly on the day-to-day basis.

Rhem Wood

Okay. And then with regard to your guidance your forecast, you didn't do anything with medium-duty and trailers, but those particularly the trailers maybe seem like they've taken a step back more recently and cancellations have picked up. How comfortable do you feel with this forecast or do you think there is still risk and the downside there?

Rick Dauch

Let me take it first and Mike then can comment. We're gaining share on the trailer side, it's pretty clear. If you go back and look at our 2012 as percentage of our sales trailers were about 7% of sales today they're almost 13%, 14%. I think a combination of the Steel Armor and EverSteel has allowed us to go get some of that share. And then in 2015 when the market was running at white hot levels at the Class 8 market we were able to maintain our production of aluminum wheels and not have any supply disruptions to any of our customers. We're able to pick up probably 3 to 4 points on market share in aluminum wheels in 2015 which is carrying over into 2016.

So we feel pretty good about that. So is there downside, we'll see. Your guess is as good as mine right now I'd say right now what we gave you is our best estimate. And we're monitoring like I get a report every Monday on where we are. July sales look pretty good so far and we'll see how August and September play out.

Rhem Wood

Okay. And then in Europe sounds like that's going fine post Brexit on the UK Exposure. But how much visibility do you have there?

Rick Dauch

Yeah I think we're getting our hands around all the different forecasting agencies over there. Chad Monroe on vacations otherwise I haven't on that, but we got a pretty good handle on it. Less than two and half years ago there was not even a sales person in Gianetti, led alone an organization that could look out at the future customers. And so we've added a couple of sales people there, Scott Hazlett over there about every four to six weeks. I'm there about every three months. And so as Chand talking to the big OEM. And so we have pretty good exposures to the OEs on the truck side. And we're just now reintroducing Gianetti to the trailer guys. We've been out of that market for several year. Pretty stable though I'd say Rhem right now.

Rhem Wood

Okay, good color thanks. And then…

Rick Dauch

In fact we're happy of that because we want to get the plant fixed first right. We want to get the scheduling system fixed, we wanted to get some of the machines back online and get them back dialed in from a quality standpoint. We have a hell of a lot of work going on over there in the factory if you go over there you'd see rooftops you see new building going up that do some stuff from scrap containment. We got three new welding cells that are in there it's been run off as we speak. We got new CNC machine, and we get our first disk finishing line will be shipped in late October-November. So we'll be in much better position to handle the higher volumes at Christmas time and going into 2017 that was our original plan.

Rhem Wood

Okay. And then last and I'll turn it over, just can you give us any thoughts help with 2017 and modeling. I know if North America Class 8 and trailers are down, but potentially Europe keeps growing and you got some new products and you could take some share. I mean how should we think about earnings as we look out into 2017?

Rick Dauch

Mike you want to comment on that. And then I'll jump in after that?

Mike Hajost

Yeah I think overall I'd say certainly we're kind of modeling in there a lower overall Class 8 build, which does have impact on our business. But as we say 5 through 7 is going to remain in our view strong. We're making a lot of positive movements within a fairly strong trailer market as well. We're starting to see possible impacts of the Greenhouse Gas emissions and some pre-builds. So I think we're overall looking at generally and in Gianetti also exhibiting positive EBIT that year. We can help I think that Brillion will be better in 2017 than this year to some extent. So I think overall there is probably a number of different points that I would say we'd expect 2017 to be certainly inline or slightly better than where we are today.

Rick Dauch

Yes, I think there is three major factors Rhem, one is what's Class 8 going to be in North America is it going to be down 215,000 or is it going to be 240,000. Right now there is a mix consensus. There is no consensus right now between the fleets, FTR and ATT I have heard as low as 210 and I have heard as high as 250. So we'll monitor as we go forward. That really depends on how the inventory is cleared out of the dealers between now and end of the year.

Second is I would say our ability to convert the RFQs we've received and to launch that business over Gianetti on time and on schedule, that's pretty critical. And then I think three is going to be as you know at some point our largest customer Brillion that business will come back. We've been supplying them since 1978. Typically $2.5 million to $3 million a month and since the last I think 18 months we've sold a total of $400,000 to them. So eventually they'll run out of inventory we'll have to make some more parts for them.

Rhem Wood

Okay. And one more, just do you think that the inventory that's reasonable to get cleared by year-end or do you think it's going to be well into 2017 at this point? How much visibility do you have there?

Rick Dauch

We hosted our largest fleet customer at Rockford last week and they are big buyers of trucks and trailers and he told me very clearly he was 100% confident that you have the inventory we cleared out by the end of years that's what he told me. That's what I hope he is right.

Rhem Wood

Okay. Thanks for the time.

Rick Dauch

Alright. Thanks, Rhem.

Operator

Thank you. Our next question comes from Jimmy Baker with B. Riley. Please go ahead with your question.

Unidentified Analyst

Hi, good morning, guys. This is Austin [ph] on for Jimmy.

Rick Dauch

Hey, Austin. How are you doing?

Mike Hajost

Hi, Austin.

Unidentified Analyst

Good. So last quarter you actually raise the Brillion guidance and now you are lowering it again. Can you elaborate on what changes during the quarter? And are you seeing any early indications that the business could form a bottom in the back half of the year?

Rick Dauch

Mike, do you want to take it?

Mike Hajost

Sure. I think we certainly were pretty enthusiastic last quarter when you had all the new business wins that they were winning. We kind of thought that that would kind of help on a relatively stabilize business kind of help support that a little bit of growth in that business. And really what we've seen, Austin, since then is just really continue to see even some further softness in some of its core markets that deteriorated.

So I think overall the incremental deterioration that we've seen this kind of over shadowed some of the new business wins. And again most of those new business wins were sort of targeted into the fourth quarter to be sort of incremental. But as we move into 2017 we should really start to see a full year effect to some of those.

Rick Dauch

Yeah, and Austin I do think we are going to hit the bottom here basically late second quarter or early third quarters when you take your July shutdown periods both of the customers in our plants. So July will be a week month and then we will start seeing upticks in August going forward. But it's going to get better. This business drop down to almost less than $16 million of sales during the great recession and this year we will probably be some where in the $75 million, $80 million. So we are getting down the great recession type levels in that segment. But we are starting to see some upticks in some of the analyst for that part of the industry and off road type stuff. But we haven't seen the orders yet.

Unidentified Analyst

Okay, great. That's helpful. And then as you approach the step down in the call premium on your senior notes, do you have any color on the timing of your refinancing or the expected rates?

Rick Dauch

I'll let Mike handle that.

Mike Hajost

Sure, happy to. Austin, obviously it's our top of mind and top priority to address our debt situation and we have just about two years until our notes mature. So our actionable time to us is really for the most part really over the next six to nine months or so. As we've talked really on the last couple of calls we kind of saw where we'd want to see both the bond market improving we would like to see our own bond price improving and I think and also the call premium going away. So I think we are kind of moving in that direction of seeing all of those things happen.

So we are little bit more encouraged today than we were three or six months ago. And I think right now we have the ability to refinance and there is a number of different ways that we can go about doing that. And I think as we continue to get past the August first call premium and continue to see again improvements in the high yield bond market, I think we'll be able to do something that's not that far often where we are right now from a rate perspective.

Unidentified Analyst

Okay, thank you guys.

Mike Hajost

You're welcome.

Operator

Thank you. Our next question comes from Doug Carlson with Bank of America. Please go ahead with your question.

Doug Carlson

Thanks guys.

Rick Dauch

Hey, Dough.

Doug Carlson

Just a little more on EverSteel, seems like a great product and helping you win share. Is it able to win you better pricing, is it something that you could expand into product globally distributed? Just kind of getting a little more color on that.

Rick Dauch

Hey good question. So, right now it's not globally used. We don't have that capability right now at Gianetti, nor do we know if that market requirement is needed like we do in North America. So we got to do a little bit research on how they treat the roads during the winter months in Northern Germany and Scandinavia and those kind of places and then we'll come back and decide we will do.

It does have a premium price on it, a good margin product for us. We think it's a win-win. It's a good win for us if we're in that business. And for the customers, they basically avoid typically a steel wheel without our Steel Armor it gets changed about every two years. And that was down at one of the tire refurbishers and steel refurbishers in Texas and I saw 5,000 steel wheels sitting outside in some kind of rusty color, right?

And so, it's a big headache for the truck fleets out there in terms of wheel and tire management and it's a decent opportunity. We got to get out and prove it. We proved it now to two winters that the guy who did the first order for it. He actually took the first 20 wheels we gave him, didn't getting back to us. That's where we did the field test, he was so happy with them, because they had no rust on them at all. So…

Doug Carlson

That's a good sign.

Rick Dauch

Yeah it is. We see our competitors doing quick, trying to catch up to us right now. We have couple of things up our sleeves to say that much further ahead of them. So...

Doug Carlson

That's perfect. When I look at the Class 5 through 7, I look at the Class 8, the build projections obviously for Class 8 are more cyclical and challenging, but if I were to answer like why those two kind of end markets kind of deviated, because the kind of the medium duty 5 through 7 seems to be almost at peak expectations for 2016 and 2017, but yet we're down like 100,000 units of most Class 8.

Rick Dauch

Well, different applications, right? Class 5-7 we would like to refer to those as work trucks, right? Some of those are bought by State Government and National Government for infrastructure projects. They are the guys who buy the concrete mixes and the dump trucks et cetera school buses. So for a while they are coming out of recession the government didn't had much tax revenue right. So, they couldn't afford to revamp their fleet. Then they also had to go to two really tough winters up North and on the East Coast where they were truck stuff. So we're starting to see some of that recovery.

And then housing starts have gone up from less than 800,000 back in the debt of recession to close to 1.5 million, not to back to where they were previous session over 2 million, but they're common and that's driving construction. And that's driving the work truck Class 4 through Class 7 basically.

If you go back and look Doug in 2006, they were nearly 350,000 Class 5 through 7 trucks built. It was only a year and half we finally got back to 200,000 Class 5 through 7 trucks. So I think we're just in the steady recovery and there is a lot of old trucks that were purchased over 10 years ago that need to be replaced now in the next couple of years.

Doug Carlson

That's helpful. And finally, my last question on Brillion. It looks like this could be a cost driven improvement over the next let's call it year and a half to get your business a little bit more on track. Is there any specific business wins that you maybe see in the 2017 or 2018 that could help on the revenue side in that business? You could elaborate on.

Mike Hajost

We just won the Detroit -- it used to be called Detroit Diesel now it's called Detroit won about a $7 million and $8 million contract that will launch late fourth quarter that will be in our revenue next year of Brillion, that's a meaningful uptick in our sales. As I said earlier, as our largest customer starts back online you could see an uptick of anywhere from $15 million to $20 million. I don't know how much we'll get next year, but I think that's the normal run-rate for that customer somewhere between $20 million and $30 million a year. So to have your largest customer basically going to shut down mode since March of 2015, and still here through July 2016 is pretty devastating to the Brillion guys.

Those are the two big wins we have. Otherwise you got to go out and win $2 million or $3 million at a time and we've won some defense business for some bombs, practice bombs I'd call them $2 million here and there. And it got some other things taken in the background as well.

Doug Carlson

Right, well thank you for answering the questions and good EBITDA margins in the quarter. And we'll back soon.

Rick Dauch

Thanks.

Operator

Thank you. And our next question comes from [indiscernible] with Cowen. Please go ahead with your question.

Unidentified Analyst

Hey, good morning guys.

Rick Dauch

Hey, good morning Curt [ph].

Unidentified Analyst

Regarding Gianetti for a second. If I remember correctly you thought originally it's been EUR20 million on this over three years. And you thought that the business could maybe double or triple in size over a longer period say 2018 to 2020 if I'm remembering correctly?

Rick Dauch

That's right.

Unidentified Analyst

If I'm doing the math right, that's an incremental $20 million of EBITDA by 2018 to 2020. Is that still now that you have been in there six months, is that still the expectations?

Rick Dauch

Yeah I think our internal projections were more around $14 million to $15 million. But that's just I think there is upside to what we have right now. I think we're on track. I would say I'm pleasantly surprised with a couple of things. One, the customers are helping us they're pulling forward they want to give us more business. We're telling them we'll take it when we're ready we don't want to get overwhelmed on a plant that was only running 400,000 wheels a few years ago. And we projected the almost 650,000 this year and start going towards 1 million next year.

Second thing is we wanted to get our systems in place in the plant. And I'm really pleasantly surprised having worked across Europe in my previous company with 15 plants. The workforce is responding quite well to our manufacturing systems. We don't have any labor issues as to speak off, they're giving us great feedback, they're helping us identify problems and we're going after it. And I think they like the fact that we are in there cleaning up things. Whether it's a bathroom that need to be fixed or windows that were broken or chains that were stretched too much has been redone or fluid levels on machines have been checked for 10 or 12 years it's just it's a target rich environment to improve the business to what I'd say.

Unidentified Analyst

Okay, that's helpful. Thank you.

Rick Dauch

And I don't think we just told our Board last week. We didn't miss anything in diligence that scares us. We've had a couple of things popped up from a maintenance standpoint, but that's expected in older factories, older equipment. But I'm pretty confident we have our hands around the business we just got to drive, drive, drive.

Unidentified Analyst

Right, well thank you. And I'm guessing that the CapEx will be front end loaded and the EBITDA will be towards the end of the period. Is there…?

Rick Dauch

Yeah, that's right. You got to pay some money upfront to fix the business before it could start generating money.

Unidentified Analyst

Right. And is there a -- do you have a forecast for CapEx next year at least for Gianetti if not on a consolidated basis?

Rick Dauch

Sure we probably next year in Gianetti somewhere around EUR8 million or EUR9 million.

Unidentified Analyst

Okay, great. Thank you. And then back to Brillion for a second, is there a path to EBITDA breakeven at these sales levels or you have to get more revenue through there you can't do it just with cost?

Rick Dauch

It's a revenue, you got to revenue. We're getting to the point now we actually even have one of our board members who has extensive past experience go out there and make sure we weren't miss anything in. Further cuts up there right now will really damage the business long-term. We're not interest -- that's happen to this business before where they didn't do the maintenance to the train they cut out the salaried engineering team. But you can't grow sales if we don't have sales people. You can't qualify new products without engineering. We can't you have to have at least one shipping person to ship on the dock whether you have $100 million sales or $50 million sales right.

So we're getting there. As there a little bit weaker trim around there yeah we've taken a hard look at it right now. We need to get revenue across those assets. And it doesn't do us any good to have metal sitting there on Friday, Saturday and Sunday being warm, but we can't pour it because we don't get volumes. But you still got to keep the metal warm and pay the utilities. That's one of the challenges.

Unidentified Analyst

Right. Is the equipment there -- how much of the -- I know you mentioned how strong the light vehicle market still is and that's been very successful for other iron foundries, how much light vehicle revenue could you do up there. I mean in other words is how much of the equipment how much of the capacity there is capable of making light vehicle, meeting light vehicle specs?

Rick Dauch

It's a great question. I don't have the crib note with me right now, but I can tell you that that's why we've put the new DISA 250-C in. It can run at 425 molds per hour. That's more like automotive type parts high volume, big platform type numbers, and we turn the sales guys lose once we got a decent in the fourth quarter and we're starting to get opportunities for [indiscernible] type components. So differential carriers that those kind of part hubs, stuff that I used to make at American Axel.

So there is opportunities there I think. But as you know when you win automotive business it's usually a couple of years out. You are qualified on that power chain or drive chain. So the business we are quoting now is not going to help us short-term, it's going to help us more in 2018 and 2019.

Unidentified Analyst

Right, right. Okay. Well I appreciate it. Thank you very much.

Rick Dauch

Thanks.

Operator

Thank you. And our next question comes from Matthew Page with Gable and Company [ph]. Your line is now open.

Unidentified Analyst

You guys start these calls in Italian now.

Rick Dauch

All right.

Unidentified Analyst

So, could you elaborate on some of the pass through cost that you've mentioned and just remind us what's so obviously outside of steel, which are the most important for you looking forward?

Rick Dauch

Yeah, Mike, can you take that?

Mike Hajost

Sure. We think overall the really the things that we see here from a raw material standpoint are going to be steel, which is probably the most impactful. We got aluminum and then we also have scrap. So those would be the ones that probably have the biggest impact on our business. Most of those Matt, as we've talked through you tend to be more of a timing as oppose to we have different lag effects within how we buy the materials and versus how we price materials and over a given period of time, you have a lag that's reported sometimes it goes against you, but you know overall it tends to sort of work out to be about even.

Unidentified Analyst

Got it. And then may be outside of Brillion, you had mentioned continued EBITDA expansion in the second half, could you talk about any further areas you see to take cost out on the wheels of the Gunite segment?

Rick Dauch

Go ahead, do you want to go Mike, go ahead.

Mike Hajost

I'd say, I just wanted to talk, I think from overall I think what we are really kind of guided towards is a little bit of probably some contractual a little bit in the EBITDA margin in the second half of the year. So I not really sure we are seeing a lot of expansion in EBITDA, I think based on the factors we're seeing here with Class 8 and continued weakness at Brillion those are continue to impact us on the margin side a little bit.

Q - Unidentified Analyst

That's a contraction sequentially? I am sorry.

Rick Dauch

Go ahead Mike.

Mike Hajost

Yeah, I think from margins standpoint that would be correct.

Rick Dauch

We're fighting two headwinds. We're fighting the lower Class 8 volumes, especially aluminum wheel business. And we're fighting the higher steel price on the steel wheel business. And we're trying to offset that. The good news is that with our new ERP systems, we're able to look and see real time, minute-by-minute, hour-by-hour, how we're doing production wise. And we're able to make some adjustments in our cost structure. That's one of the reasons where we are driving our EBITDA up even on lower volume places like Gunite and the Wheels business right now.

Unidentified Analyst

Okay. And then, the last question from me is you talked about Gianetti your capacity moving from about 400,000 to 650,000, looking to get up to maybe 1 million next year is that where your capacity lies there? Is that the end game?

Rick Dauch

That's where we'll be at least on the assembly and then I have to go back and look specifically at the disc lines and rim lines. The rim can do over 2 million wheels, the assembly line on two shifts can do about 1.1 million. So we want to go to Saturdays and Sundays three shifts. We got to make sure we understand the labor laws. And I think eventually the bottleneck what we are paid for -- we've to do some more work. Right now, we just want to fill up, we want to fix the equipment we have, make it capable to make the kind of quality of products we want to make there. And then we want to take on the customers smartly at a profitable levels to get to that 1.1 million and after that while we're getting there then we'll start thinking about what we can do to get little higher.

Unidentified Analyst

Alright perfect. I appreciate the time and good luck we'll talk soon.

Rick Dauch

Thanks, Matt.

Operator

Thank you. The next question comes from Andrew Guy [ph] with Cantor Fitzgerald. Your line is now open.

Unidentified Analyst

Thanks for taking the question. I was just wondering if you had any sort of a path to sales Brillion if that's still just waiting for the business to turnaround first?

Rick Dauch

Mike you want to cover that, with respect to Brillion?

Unidentified Analyst

Yeah, I think overall again we consider a non-core business for us. We have invested a lot of money. It's certainly at a point in the cycle it's relatively lower right now. But I think it's got really, it's got good assets that certainly could be utilized by another strategic buyer who wants to be able to perform the capability that it can. Again, we probably have uses for the cash from the sales of Brillion that we can redeploy into our business into really more of a core operations. But again while we own Brillion we're certainly going to do everything we can to improve its profitability.

Unidentified Analyst

So there is really nothing in the near-term as yet?

Mike Hajost

With respect to sale of Brillion?

Unidentified Analyst

Sale yeah.

Mike Hajost

I mean it's nothing that we can talk about at this point.

Unidentified Analyst

Got it. And then also I was wondering with regarding to Gianetti I think that your JV partner takes on a lot of the redundancy cost that might arise. I was wondering if you can give any color on that.

Rick Dauch

Yeah one of the things I learned when I did the Accuride restructuring as it's very costly to restructure and lay people off of redundancy cost in Europe and we've reached an agreement with our partners where basically we take about 10% of the redundancy cost in year one. And after year one they take the rest of the burden 100%. So we're doing it very smart way with our partners and with the unions so we understand as we grow the business we need some people, but if we can grow it faster we need a few more people. So we have a pretty good layout and pretty good plan of what we do on the next two years based on demographics and volumes.

Unidentified Analyst

Got it, it sounds like a pretty good deal. Thank you.

Rick Dauch

Great, thanks good questions.

Operator

Thank you. And our next question comes from Trent Porter with Guggenheim Securities. Your line is now open.

Trent Porter

Hi, guys. Just had a couple of clarification questions of Brillion. The first one, when you put in the new DISA 250-C in addition to the higher volume or throughput. One would think that you've also become cost competitive. And so you talked about the $16 million of new business that you've won, but I think only a fraction on that is because of the DISA 250-C. So is that -- should we expect more on to come or is there more business kind of in the qualification process or are you just reserving capacity for the light vehicle? And then the follow on question to that is I just want to clarify how the qualification process on light vehicle works. Do you bid on business and then basically you've got the business if you qualify and you're just waiting for the qualification process or do you qualify first and then bid?

Rick Dauch

Yeah the three things, first of all the machine replace was about 33 years old was on its last legs. So the business we used to run on what we used to call 2130 DISA is going to see an incremental improvement in productivity in terms of uptime lower scrap higher throughputs. So that's good for the business. The 189 part numbers run across the old machine that are now qualified to run across the DISA 250-C. Unfortunately the volumes there are down 50% to 60% because of the industry they serve.

The automotive industry typically works where parts and components are sourced anywhere from 18 to 36 month out. So you can earn the business today and I'll start launching it at Christmas time of 2018 alright. The engines and transmissions and axles have to go through extensive dynotesting to be qualified road testing and those kind of things. So business you win today you won't want to for 18 month minimally unless there is a crisis where a plant burned down like it happened about 10 years ago in Virginia or someone went bankrupt when they can shift over and they got to do really quick qualifications.

So we replace the old one with the new old to be more cost efficient on current business. We've already earned about $7 million at Detroit on that new line and we've got about $10 million or $15 million of coat activity right now. So we're moving in the right direction, but it's lower than we like.

Trent Porter

Fantastic, thank you very much.

Rick Dauch

Great.

Operator

We have no further questions at this time. I would now like to turn the call over to Mr. Rick Dauch for closing remarks. Please go ahead, sir.

Rick Dauch

Thanks, Sabrina. We appreciate your interest in Accuride. We continue to fight a good fight here in a cyclical industry. We're in a little bit of downturn in Class 8 right now. But I think there will be a better days ahead forward for sure. And again we'll manage the leverage that we can control. I appreciate your interest and we hope to see you out in the road at an investor conference or if you want to come visit one of our plants just give us a holler. Thanks and have a great day. Bye.

Operator

Ladies and gentlemen thank you for participation in today's Accuride second quarter earnings conference call. As a reminder this call will be available for playback beginning at noon Central Time today until 11:59 PM Central Time on August 2, 2016. You can access the replay by calling 1855-859-2056 in the United States or 1-404-537-3406 internationally using the access code 48742818. This concludes the conference. You may now disconnect.

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