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Accuride Corporation (NYSE:ACW)

Q2 2012 Earnings Call

July 27, 2012 10:00 AM ET

Executives

Greg Risch – VP and CFO

Rick Dauch – President and CEO

Analysts

Jimmy Baker – B. Riley & Co

Kirk Ludtke – CRT Capital Group

Robert Kosowsky – Sidoti & Couple of

David Owen

Barry Hynes – Sands Asset Management

Ren Wood – BB&T Capital Markets

Peter Chang – Credit Suisse

Emanuel Bell – Goldman Sachs Asset Management

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2012 Accuride Corporation Earnings Conference call. My name is Shenell and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Greg Risch, Chief Financial Officer. Please proceed.

Greg Risch

Thank you, Shenell and thanks everyone for joining us today. As we turn to page two, I want to remind everyone that during this call we’ll be making statements that could be considered forward-looking as defined in the Securities Act. We caution you that these statements are subject to risk in our businesses and we encourage you to read all of our SEC filings to understand what those risks are. Please turn to slide three.

During today’s call, Rick will provide an update regarding activities within the company along with key highlights in our industry. I’ll then review our second quarter results prior to open up the line for questions.

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

Rick Dauch

Good morning everybody and thanks for your continued interest in Accuride. Let me start off, talk about what we achieved in the second quarter. Our Fix & Grow strategy, we restructure and restore Accuride’s profitability remains on track. It’s a long-term strategy. The business did not get broken overnight and it won’t get fixed overnight. Wheels and Brillion were strong performance for us during the second quarter. Very important for us that we got Imperial’s Decatur and Texas facilities back under operational control.

We put an entire new management team in there. We’ve improved – we’ve eliminated the past dues situation. We’ve improved delivery performance. We’ve eliminated premium freight and we’re now in the process of reducing overtime and labor costs to get back on track from a profitability standpoint.

We’re also very excited to announce that we’ve earned $12 million to $15 million in new business with different customers than the normal Imperial customer base. That represent about a 10% uptick in 2013 over 2012’s current forecast for Imperial. Our aluminum wheel capacity expansions, projects are two to three weeks ahead of schedule in both Camden and Monterrey. And we have more than 25% of the new Gunite machine equipment now installed and operated at our Rockford facility, the second drum line just was installed and has been qualified and starts ramping up this week. And the new assembly line for the slack adjusters was installed just 10 days ago and we were there two days ago watching to make parts getting to ready to ship to customers.

We continue to examine the potential consolidation of some of our heavy duty steel wheel capacity in London and Mexico. And we’ve made a public announcement the difficult decision to close our Elkhart Indiana facility by the first quarter of 2013. These actions help to align our manufacturing footprint with market demands. We’ll improve our operating efficiency. We’ll reduce fixed cost structure and increase our profitability.

We did have some challenges in the second half. We started to experience some near-term net order weakness, which are causing OEMs to reduce their second half production schedules. Although now operation is stable, the Imperial consolidation has been delayed by about six to eight months. We’ve put it on hold for about 60 days till we get the plant down in Texas that we control and we’ve modified some of the building construction that need to be done. So that’s been the jag in our performance in the first half of the year but that would get much better in the second half.

Demand for aluminum wheels in the quarter continued to remain strong, our plants were running seven days a week all quarter long. Our new capacity, we’ve gone up about 5,000 wheels a week in the last six weeks and we’re going to add about another 5,000 wheels a week coming forward to next six weeks. So we’re going to get ahead of the capacity, a situation there for the first time in over two years.

We do continue to experience soft aftermarket demand in Gunite, mostly as impact of offshore pricing and we’ll continue to take a look at that whether we needed to take some actions to address some potential dumping issues on that side of the house. Let me switch gears and let’s talk about the overall industry fundamentals, okay. Overall, if you take a longer term look, the fundamentals are pretty strong.

GDP here in North America is expected to grow between 2% and 2.5% annually. Historically the fleet is at an all-time age of about 6.7 years on the tractors and over eight years on the trailers. Even if you adjust out the low miles in the currently 2008, 2009 the overall tractor was about 6.4 years old right now. Fleet utilization rates continue to run north of 90% so they are starting them to get some wear and tear. In the bottom line is the fleets are also making money and have the ability to invest in new trucks to replace the aging fleet at the time they want to.

However our next slide, near-term order weakness does persist. OEMs continued to build in the phase of weak orders in the second quarter and that just simply is unsustainable. Backlogs are coming down and OEMs are building some inventories, we’re starting to see some custom schedules. What’s causing the order weakness? Truck buyers are concerned about the economy in Europe. They are not willing to put on the extra debt in case there is some kind of a double-dip recession here. Obviously we have some political uncertainty here in North America that will not work itself out until November. Fuel prices were quite high earlier in the year, they have come down but now they are starting to creep back up a little bit and there are some new CAFE standards that are coming in with new engines in 2014, there may be some fleets trying to stretch out some of length of their ownership of the truck to get to those new engines.

Why do OEMs continue to build? First of all they ramped up pretty quickly in third and fourth quarter and it’s not so easy just to ramp right back down. No one wants to lose – risk of losing some market share. There is obviously a favor and there is some market share swing going on out there right there. They want to reduce the backlog of orders they did have and those with inventory creates some cushion there. So as I’ve learned in the last two years the summer months are very typically slow order months, July and August specifically so we’ll see what happens in September, October, November here.

But order cancellation rates remained very low, which is typically you get a lot of cancellation when there is, what we call a real downturn. If you go to slide nine now you do see from the June releases we got from our truck OEs where we were getting almost up to 2,000 trucks a day here so we have seen a cutback in the month of July, August, September, October of about 150 to 200 trucks a day and we expect and we have been told about further reductions potentially in August by one of the OEMs who might take up the eight days out of the schedule.

So let’s switch gears and let’s talk about the Class 8 forecast for the next couple of years. We had ACT talk to us last week. We have FTR coming in a few weeks. And both they have a projections that say even though we have near-term order weakness, there is still recovery here over the next three to four years in the Class 8 side. There is a little difference between ACT and FTR of about 50,000 trucks. So lot of work till that as it gets build on our budget for 2013.

Medium-duty still lags Class 8 and trailer but it is expected to start climbing as the housing markets starts to clear itself up and there has been a few signs lately that could be happening over the next 12 to 18 months. Trailers, we’re basically at all-time high and we think it’s going to be a strong trailer build for the next four or five years.

The bottom line, absent a complete economic meltdown in Europe or some kind of surprise in the Middle East, the industry remain healthy as we continue to execute our, Fix & Grow strategy this year and that puts us in a great position to realize the profitable gains that we’re going to have by restructuring the company here in 2011 and 2012.

Let’s talk about where we think we’re going, okay? The slide on page 12 was the one we showed you, this time last year we rolled out our Fix & Grow strategy. Our goal is to become the premier supplier of wheel-end system solutions to the global commercial vehicle industry. We’ve been very focused on the foundation of our period starting with the bottom and we made great progress on the bottom of people being more customer centric, restoring our technology leadership both on the product and process side of the house, identifying and divesting non-core assets, fixing the core business operations of the company and then creating a cost competitive LEAN structure going forward.

The next slide we also showed you last year. We told you it takes six to 12 months just to fix the basic fundamentals of Accuride before we start growing the company. We talked about investing a lot of money to catch up to our competitors. We had to clean and organize and plants. We had to fix or close on competitive operations, we’re in the process of doing that. We had to rationalize our capacity. We had to divest our non-core assets. We had to recruit a lot of people from the outside, some of them didn’t even come into the company until late October and even to the first quarter this year to bring the right talent to fix this company.

We’re right now in the transition phase here in the third quarter and early fourth quarter of going from a fix it to grow the company. And we are ready to go on I think our steel wheel plant in Henderson is world class. Our Erie plant is very close to being world class. You’ll be shocked that the improvement the next time you visit a Rockford, we’re only about half way through the investment down there and we got some lifting still down at our Texas plant.

What have we accomplished over the last six to 12 months now? Complete new senior leadership teams in place. We have repopulated the critical technical staff and quality, manufacturing, engineering and purchasing. We’ve got a development system for long-term development of our future leaders of the company in place. We’ve returned Brillion to positive free cash flow in June and positive net income I think is pretty in process of how quickly Brillion has been turned around.

The Gunite and Imperial projects are well under way. Gunite is right on schedule and Imperial we drop the ball, we’ll take responsible with that but we’ve got back on track. We now had introduced Common and LEAN manufacturing systems to every factory at Accuride. Some started a year ago, some just started last month. They work quite stable as they use there. So we’ve selected our new ERP system. We’ll start kicking that off in the fourth quarter of this year and we have either identified or already started to divest in the non-core assets.

We have also pulled ahead a little bit of the growth. We acquired the Camden asset and thank goodness we did. We’ll have tripled the capacity at Camden by the end of August here. We have two times more wheel Alum capacity and there is a shift going onto the marketplace to more aluminum wheels. The Imperial business wins, saw our first win in that business since I took over and we do have some opportunities for M&A growth once we get the balance of our company here running profitability across the board.

Let’s talk about what we’re doing here this year, our focus. First of all, it’s a year of execution and that’s to complete the operational turnaround of our core assets. Including the aluminum wheel capacity program, the steel wheel capacity, upgrade and rationalization, the complete overhaul of the Gunite operation, the consolidation of our Tennessee plant into our Texas operation for Imperial and the installation of the Common LEAN factory.

We’re working really hard on the supply chain both on the raw material side, on the indirect materials services side. And also we put in some people in SQD, we put them packaging engineers in here because those are some of the issues our customers told us were causing them hard aches. We got a very focused sales reorganization that was completed back in January and started to take root. We’ve talked to all of our sales people in last 30 days. We actually had some of the brief our Board this week. Our customers have accepted our new organization with open arms. We’re calling on customers, if someone hadn’t called on from Accuride in over five or six years where we used to be standard and would love to position and we’re getting ourselves back in the game. We’re having a very strong focus on the fleets, an area that was not well taken care of in the previous administration and we’re going after some of the trailer and aftermarket as well.

We do have a small team selectively looking at strategic acquisitions both here in North America and overseas. Our priorities for the third quarter include, complete the Tennessee consolidation and Imperial Texas and return the Texas plant to profitability. We did achieve positive EBITDA in the month of June in Imperial. It will only get better from here.

We need to complete the execution of the CapEx plans at Gunite and begin and hopefully finish the majority of the footprint consolidation by early first quarter 2013 in that plant. That includes transferring all the machining operations out of Brillion into the Rockford plant and then completely closing the Elkhart operation. That would be a very big move for us to restore Gunite to profitability. We need to finish up and we’re about half way there with the aluminum wheel capacity expansion and we’re going to initiate the migration to the IT systems, it will take us to about 18 to 24 months to complete that project.

So how do we assess where we are? For slide 16. Gunite Machining is completely on schedule and under budget actually. We’ve done a lot of work on our casting operation there. We’ve determined that we don’t need to spend quite as much money as we thought we were going to on the CAFE line. A lot of that was just basic block and tack and maintenance replacing of worn tools, tightening up some systems, replacing specific parts of the casting operation not the entire sections of it. So the aluminum wheel capacity as I said about three times already, it’s ahead of schedule, on budget, very important for us.

The Imperial consolidation was behind. It’s now starting to make the transition and we think we’ll have that back to a profitable business here in the third quarter. So Brillion is performing well ahead of that original expectations. The Gunite footprint consolidation as we announced this week, it was publicly announced that we told the workforce and the union there that we’re going to close the plant by the end of the year. The ERP migration has begun and we’re doing a lot of work.

One of the underlying root causes of our operational challenges at Accuride was the lack of a common ERP system, the almost non-existence commonality in our scheduling and inventory control systems. So we’re getting that really, really addressed. To give you some more details now about the aluminum capacity, you can see all the pictures on there of what our plan was. Bottom line is it’s on budget, it’s ahead of schedule. The first line in Camden is now shipping to customers and most importantly it’s been qualified by our OEM customers. That plant had never shipped to an OEM customer in its history. And now we have at least two trailer guy and one truck guy and the second truck guy coming online by the end of this month which is next week basically.

The Monterrey project is also installed and it’s ahead of schedule. So we’ll have the second line at Camden commercialized between now and the middle of August and we pulled ahead lines three and four in Mexico from first quarter of 2013 into the fourth quarter of this year. It’s really the early fourth quarter of this year. So by the end of this year, we’ll have more than double our aluminum capacity from where we were in back of 2010.

Next slide is the Gunite CapEx timeline. We’re right on schedule. The first machine was installed and launched about 11 days late which is pretty damn good with the amount of work we had to do there. It is up and running. The first shift is running about 80% uptime right now. The second shift is about 50% as we go through some training with our second shift people and we have not put the third shift on yet.

The quality coming of that line is amazing with all the hot days you’ve had in the summer that has a very sophisticated compensating engagements allows us to change tooling and season fees as the temperature goes up or down on the castings. And I can get you the details to become visitors but it’s pretty impressive. The second line was installed starting the July 4th weekend. It is now fully installed. It is fully qualified and we start to ramp up this week on first shift. The third machine, we actually delayed about five weeks because it’s the most complicated machine. It’s going to do a lot of our load runners and it’s going to take longer to run it off.

I think we’ve got about 28 to 35 part members who had to run off that machine before it leaves the supplier floor. We chose to do it there rather than doing on our floor. The Elkhart closure was announced and should be done completely by the first quarter. We will have the most competitive cost structure of the North American casting and machine drum supplier when we’re done early next year. We’ll be the only supplier in North America with internal casting capability and we think that’s a strategic benefit for us in the field.

Right now we don’t have a cost competitive structure at Gunite and that we have a hard time flexing down to meet some of the challenges of pricing because we have three plants, doing what we should be able to do with one plant by first quarter of next year. Let me give you a little bit of color on the Imperial situation which is slide 19. As I said that the turnaround is behind schedule but the worse is behind us.

The new team has eliminated a past due and you can see the chart at top where we were past due 70,000 parts. Today we’re past due about 10,000 parts, 9,000 similar to those parts are internal to ourselves going to its customers. So we got to get that issue fixed and that’s related to specifically a press in a die that was damaged and easily fixed.

Labor and overhead costs are now being reduced. We’re shipping on timing, see as low as 40% on time back in February of this year we had about 600 trucks offline at PACCAR [ph] and of course we had a pay cut, when we disrupt customer plants we got to pay for that. You’ll see now at the end of June we were 99%, 95% on time, in July it’s actually even better. So we had the systems being scheduled. We were not using the ERP systems correctly.

We didn’t have a qualified people use it correctly down in Texas. We now have a complete new supply chain team who has got that thing working and we’ve identified some root cause issues we need to get address. And really important for us is we got $12 million to $15 million of new business for this company which we’ll launch in early 2013. So we’re poised to make that business make money and I think we got a great management team now in place to do so.

I am going to turn it over to Greg to cover the specific financials and I’ll wrap up before the Q&A.

Greg Risch

Thanks Rick. With that let’s turn to slide 21. As Rick noted production in our industry became to weaken through the second quarter. Year-over-year our sales from continuing operations for Q2 were about 11% higher but flat to Q1. Our operating income of $9.6 million exceeded the prior year income of $8.5 million primarily due to the overall increased demands but partially offset by increased costs related to fixing our facilities as part of our Fix & Grow strategy.

Our net loss of $800,000 was unfavorably impacted by non-cash charges related to currency translation and our tax provision. Even with sales to match Q1 our earnings per share improved about $0.04 sequentially. As stated in our quarter one earnings call our Wheels and Brillion businesses remain on track. Gunite operations improved during the quarter on the existing equipment as the launches of the first two drum machining lines began and are on schedule.

Gunite continues to face increasing pricing pressure on the aftermarket side. Our operations in our Imperial Texas facility are stable and improved through the second quarter. We’ll continue to see the new Imperial leadership team improve our financial results through the second half of 2012 as Rick previously stated. Next slide please.

Through the first six months of 2012, our sales from continuing operations were about 19% higher than last year. Our operating income of $16.8 million exceeded the prior year income of $9.9 million primarily again due to the overall increased demand. Our net loss was $3.8 million matched last year’s result but mostly due to recording non-cash gains in 2011 for stock warrants and our tax provision which is a little higher this year due to higher pre-tax income and jurisdictions outside of U.S. Next slide.

Slide 23 shows a favorable trend in our consolidated sales on our adjusted EBITDA, as well as a few charge for our 2011 revenue by our businesses, significant customers and the markets that we serve. While the trends on the upper charts continue to be going in the right direction, we look forward to turning the corner on our operations with our equipment losses to make it look even better year-over-year. Next slide please.

Slide 24 shows the trends for both our Wheels and Gunite businesses. Same as last quarter, our Wheels business reflects the same trends as the consolidated company in regards to the sales and earnings growth. Sales in Q2 of $112.9 million represented 42% of our total revenues. While we experienced fall in demand for steel wheels, we’re taking lead in the aftermarket due to pricing pressures and related unfavorable ruling for anti-dumping as Rick talked about we continued to see strong growth and momentum in wheels demand. Even as our capacity increases with new aluminum wheel equipment, our teams in Erie, Camden and Monterrey are working pretty much non-stop to meet this growing demand and I certainly appreciate their commitments.

Switching over to Gunite. Even though the businesses seem similar trends in increasing demand in the past periods, their revenue was flat year-over-year due to continued pricing pressures particularly again in the aftermarket. Operationally Gunite is on track with their equipment launches and we are pleased to host several of our Board members earlier this week in Rockford to show them the two new drum lines running and slack adjuster line recently installed and now ramping up.

Gunite’s net sales represent approximately 25% of our total consolidated sales but the earnings won’t reflect significant improvement until we achieve the productivity expected in our launch and the second half of 2012. Also important to note year-over-year net impact of $1.8 million of cost reflected in Gunite’s results this quarter for current market pricing related to certain castings and machine equipment from Brillion. Next slide.

Slide 25 covers Brillion and Imperial. The Brillion business is in a great overall position with significant increases in both top line and earnings growth with nearly 18% adjusted EBITDA. Considering the parent company sales to Gunite, the adjusted EBITDA rate is closer to 15% actually just a little over 15%. Dave Adam has done an excellent job leading the Brillion teams that continue to make improvements and I’ll look for them to continue that trend through the second half.

Imperial has seen significant growth for net sales year-over-year at almost 17%. I’ll remind you that for Q1, their sales growth year-over-year was over 60% which was really pushing our operations. The growth in Texas with the consolidation of assets from another Imperial locations resulted in extreme inefficiencies shown at excess freight, labor and charges from the customer during the quarter. We saw significant improvement during each month of Q2 and look forward to Greg Kern’s new leadership team in Texas continue that trend during the second half of the year. Next slide.

Top two graphs on slide 26 breakout the three components of our trade working capital, trade accounts receivable, inventory and accounts payable. As expected, total trade working capital dollars offsetting [ph] during the second quarter with similar overall demand. We continue to see improvements in the aging of our accounts receivable, days outstanding and payables. We also have some more to do with reduced inventories once the equipment launches are completed this year. And as expected we keep inventories at a decent level heading into July with the production shutdowns in our truck markets and so we do the same for our maintenance. Next page.

Slide 27 shows our free cash flow for the quarter of negative $1 million. Positive cash flow from operations of $14.2 million nearly matches our capital expenses of $15.2 million. I’ll remind everybody that our capital expenditures are higher than our historical norms due to being in the midst of our Fix & Grow strategy. Please turn to the next slide.

Our liquidity helps that even last quarter just over $110 million as of June 30. Accuriders [ph] is doing a great job working with our businesses and supply chain group to manage cash along with meeting expected overall operating results, our efforts we’re restoring our days outstanding and payables and increasing our capacity under our asset based loan during the first quarter had given us flexibility to complete the capital projects with ample liquidity.

Now let’s turn to slide 30 to address our 2012 guidance. Using the build out at the top of the page, we’re revising our guidance shown here on slide 30. We still expect net sales to remain in the range of $1 billion to $1.025 billion. Given the challenges at Imperial, adjusted EBITDA is projected to be in the range of $95 million to $100 million. Our loss per share should be in the range of $0.12 to $0.05 with free cash flow being use of cash of $5 million to $10 million.

Let me note a couple of items included in the EPS number. First as Rick mentioned, we announced this week that we’ll be closing the Gunite Elkhart Indiana facility later this year and expect that to have an impact on EPS by approximately $0.06. Also due to the increased pre-tax income in Canada we expect to record a slightly higher tax provision than previously expected which accounts for about $0.04. Remaining items reflect similar projections as previously communicated in both February and April calls.

With that I’ll turn the call over to Rick for a few comments prior to taking your questions.

Rick Dauch

Thanks Greg. So the bottom line is we are intensely focused on executing our Fix & Grow strategy here at Accuride. We do have favorable long-term industry trends despite some near-term work weakness that actually may work in our favor as we continue to put the capacity in place and push out some of the recovery that’s going to be help us become more efficient as we get our plants closed and our new equipment online.

So our major initiatives are on schedule and budget and we now have Imperial back under control. We have adequate liquidity and are continue to improve it through working capital initiatives both on the AR, AP and days outstanding outside the house. We do have strategic opportunities. We’re exploring for the growth of the company down the road, but we pushed most of those out to the future until we get the balance of the North America business up and running the way we want to get it run.

We will restore Accuride to a profitable world class supplier and we’ll grow it into a global commercial truck industry supplier wheel system. With that we’ll take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question first comes from Jimmy Baker, B. Riley & Co.

Jimmy Baker – B. Riley & Co

Hi good morning guys.

Rick Dauch

Hi Jim.

Greg Risch

Hi Jim.

Jimmy Baker – B. Riley & Co

So as I work through the math of your updated guidance at the midpoint comparing let’s say the back half – your back half expectations to the front half, you’re looking for – you’ve got an 8% increase in EBITDA despite a 12% decrease in revenue? So 200 bps of EBITDA margin improvement despite lower OE volumes with obviously outstanding year-over-year incremental. It just seems to imply that you have a really high degree of conviction in the turnaround gaining traction here in the second half. I am just wondering how you would categorize your assumptions at this point and what level of conservatism is embedded there with regard to the turnaround at Imperial and Gunite?

Rick Dauch

Well I’m not sure I’m most conservative to get the word, how conservative we are but I’ll tell you what, we blew about $0.08 a share in the first half because of the Imperial and excess overtime (inaudible).

Operator

Ladies and gentlemen, it looks like our questioner has dropped from the call. Should we go into the next questioner?

Greg Risch

It’s Greg. I’ll take it Jimmy. So I think what Rick was alluding to was we blew about $0.08 with Imperial results in the first half. So if you add that back and that doesn’t affect sales, right? So that’s operating efficiencies not taking charge backs, not paying for excess rates. So if that’s going away in the second half, there is a nice improvement. So that’s pretty much Imperial in a nutshell. And it looks step back and go through other businesses on the wheel side, we expect some softening demand in the steel wheels that we saw in the second quarter and that takes throughout the second half.

Some of that we’re offsetting with efficiencies in most steel wheels but then maybe more importantly as the launch of completes aluminum wheels, that increases our capacities for both aftermarket and OEMs but we expected some of that in the aftermarket. And like we said, those guys are working for seven days a week, I’ll decided given them a few holidays. So we expect that equipment launches are going to do two things. One is they can either help supply to those increasing demands or we can reduce the inefficiencies caused by working seven days a week by getting back more parts per hour.

If we go in Gunite certainly we see – we’re going to see a second half that’s different than the first half predominantly through to the equipment launches and with the drum machining and slack adjuster and really not expecting this year to put in the launches in the late fourth quarter and first quarter for the headlines. So getting the older equipment out and having this new equipment run which really was nice to – it’s going to be definitely improvement for Gunite.

Rick Dauch

Can you guys still hear me?

Greg Risch

Yes, you’re back on Rick.

Rick Dauch

Okay. Yes, I think it was Jimmy who got, not me so.

Operator

Right. I do apologize. We’re waiting for him to dial back in.

Greg Risch

Okay. And then I guess for Brillion, we saw a really nice second quarter and we expect them to continue that, not only as relatively solid second quarter but even better as they break through a (inaudible).

Rick Dauch

Okay. So let’s take the second question and when Jimmy comes back on, we’ll take his question again.

Operator

Okay. Our next question comes from Kirk Ludtke of CRT Capital Group.

Kirk Ludtke – CRT Capital Group

Good morning everyone.

Rick Dauch

Hi Kirk, how are you doing?

Kirk Ludtke – CRT Capital Group

I am well. Thanks. How are you guys?

Rick Dauch

Good.

Kirk Ludtke – CRT Capital Group

I just had two topics I wanted to touch on and it really isn’t encouraging quarter. It’s nice to see that operational restructuring really is trying to come together, and I guess, I am curious when you have to start making some decisions regarding, I guess during the next phase which as I remember is the casting – some major casting decisions?

Rick Dauch

Yes, good question. So I think what when we bought an independent engineering team in to assess our spur line, down into Rockford. And we went through and put forward to the Board a pretty significant capital investment to upgrade that line Kirk. But as we got the right engineering talent into the plant, we start finding things about what we could do just an example about three or four things. There is a clamping system that was worn out and we’ve replaced that over the July shutdown. So that didn’t cost us much that we thought it was going to cost.

Two, we got into the actual Cope & Drag system and we had a bunch of worn pins that hadn’t been replaced for many, many years. We’ve gone into the new pins and we’ve done some testing on some longer pins that gives much more stable situation, we get a much better quality out there. We are seeing about two or three bps improvement in our scrap levels coming of that line just with the maintenance we did over the July shutdown, okay.

First of all the fact we didn’t have an engineer in the casting line when I got here, now we do. We didn’t have a quality manager at the plant. We’re actually getting data trends and facts so we actually address things and we’re deciding now where do we spend capital fixing where we get expense. We think we don’t need to address, replacing that line for a good eight to 10 years. So that’s important, okay. The second thing is at the Brillion line. We’re in our middle of our shutdown week actually this week. We did most of the heavy maintenance last July. We have to do a little bit maintenance this year. We have some – about $6 million of capital we need to spend at Brillion sometime in 2013 replace the front-end of one of our casting lines. And that will help us – that line today runs at about 65% efficiency and we think we can get up to 80%.

That would put out about 20,000 more tons a year. If you sell all the dump, that’s $46 million more sale, okay. And as of that when you almost cap out on capacity at Brillion, you got to look at some things down the road, but we’ve got a pretty sensible plan for our casting line. And we’ve got the right teams now to focus on how to run those things more efficiently. Does that help?

Kirk Ludtke – CRT Capital Group

So the major investment that you might need to make at Gunite is eight to 10 years away?

Rick Dauch

Yes, I think so.

Kirk Ludtke – CRT Capital Group

Okay, well that’s good news. And then the second topic is Navistar is a big customer. They are transitioning engine strategy as you know. And I am just curious how that might be affecting your business? I am sure its reflected in your guidance but I am just curious how if at all it’s affecting your business and because it does look like they’ve lost some share here? And then secondly do you feel like you even need to make provisions for an extended period here depressed Navistar share?

Rick Dauch

It’s a good question. Navistar is a large customer of ours both for the wheels and the Gunite side of the house. They have lots of market share. If they lose that market share to Daimler, we basically pickup the same steel aluminum wheel content we had at Navistar. We also have a large portion of the Gunite business out there at Daimler as well. If they lose that share to Volvo then we have the Gunite side but we don’t have the wheel side and we’re working with fleets to get us back into the Volvo. In PACCAR, we get the steel wheels, we don’t get the aluminum wheels that (inaudible) and we get the Gunite.

So it’s not devastating to us let’s say that. One of the things when I first got here and Chuck Byrnes got here, we went out and saw all the customers and we listened very intently to the big four truck guys and the trailer guys in the aftermarket about what we do well and what we don’t do well. And Volvo was the most vocal about how poorly we treated them back in 2006 about aluminum wheels. And we’ve done a lot of work with the Volvo purchasing team to show them our new aluminum capacity and we’ve earned some new Volvo business almost 25,000 aluminum wheels already this year with them.

And we’re also our plan in Camden puts us in a good position because closer to the Virginia plant. We’re out there aggressively trying to get some back into the fleet. And we’ll see how Navistar does. Right, as I told our guys, Navistar has got good leadership. I know Troy Clarke is the new President. When he was at General Motors, really good man. And we worked close with Persio and the purchasing group and we’ll continue to support them as they need us to. And if they don’t need us in some areas we won’t. So we’ll see how plays out over there, okay?

Kirk Ludtke – CRT Capital Group

Okay. I appreciate. Thank you.

Rick Dauch

All right.

Operator

And we have Jimmy Baker back on the line.

Rick Dauch

Jimmy, you’re back.

Jimmy Baker – B. Riley & Co

Sorry about that, disconnected. A couple of more questions, first, you said the Decatur is back under control and I apologize if you already went over this when I was offline but I am just interested if you could be a little bit more specific there with regard to your expectations at Imperial. How has Imperial performed during July? What kind of EBITDA do you think contributed in the back half of the year?

Rick Dauch

Yes, let’s talk about it a little bit. You probably dropped off when we said this. In the first half of the year, Decatur was off budget by about almost $8 million, so almost $0.16 a share. We think we’ve arrested that. The Imperial business unit actually had a positive EBITDA in June. July is a shutdown month so it’s not as robust of a month in terms of sales. We’re taking advantage of some of the slowdown to get all of our (inaudible) terms of eliminate a 100% past dues to put the right inventories between us and the customer.

We have every expectation that by end of the year we can get the Texas plant above 10%. We already have a couple of the EBITDA level. We already have a couple of the Imperial plants running ahead of their budget. It’s just Tennessee and Texas we had to get under control. And Tennessee was disrupted in the closure because Texas was having such a hard time. We had to take some dive back up to Tennessee and that was very costly shipping parts back and forth. We’re getting that done.

As part of the consolidation, we’re expanding our plant in Tennessee II, the Tennessee II plant that won’t be done until the last week of September. Then we can move the last remaining pieces of equipment out of Tennessee I into Tennessee II and then we’ll have that – we have two presses that were damaged. One was damaged during the move and one was damaged because of lower use and we’re getting those presses back on line hopefully this month.

The hydraulic press back up running this week and the 1,000 ton we have the Crown [ph] right now trying to figure out what’s wrong and we’re trying to figure out how to repair that press. So we got about 30 to 45 days of press repairs but then we should have plant pretty stable and it’s going to grow. The Texas plant just choke going from $30 million to a $90 million plant, simple as that. Does that answer the question?

Jimmy Baker – B. Riley & Co

It does.

Rick Dauch

Okay.

Greg Risch

I gave you more details than you want.

Jimmy Baker – B. Riley & Co

I appreciate it. Switching over to Gunite, as you benefit from the lower cost structure there one deep machine lines are ramped, just kind of given everything that you’re seeing in the marketplace today, do you feel like there is any risk that pricing pressures essentially force you to concede what would have been margin gains just to maintain share and that you may not be able to get to mid-teens EBITDA margin in that business?

Rick Dauch

Yes, there is risk of that. We’re doing some studies right that are exactly, we know how it costs for raw materials and raw materials cost the same pretty much in the world of less some governments buying it for that supplier, right. We can pretty much calculate freight rates come out to China and other places and then we know cost of machine is wrong right, whether it’s Chinese labor or U.S. labor, union or non union. So we pretty much back our way into the cost structure some of our competitors. And if we find out that there is some dumping going on, we’ll pursue some of that in the future.

And we think we can be some of the U.S. based customers but it could put a damper on a little bit.

Jimmy Baker – B. Riley & Co

Good. Fair enough. And then just if I could jump ahead to 2013 for a moment, I mean are you comfortable with getting back down to a more normalized CapEx, rate of around maybe 3.5% sales and if you can just talk about what level of free cash flow you think you could achieve in maybe flat year-over-year volume environment?

Rick Dauch

Yes, I’ll take the capital and I’ll let Greg talk about free cash flow but we’ve committed you guys and we’ve told our people in the company that we’re going to go back to a more normalized 3.5% 4% of sales capital level. We start our meetings August 2nd going through the wheels business followed quickly by the other businesses. If you go at the high level, we don’t need to put much more into our aluminum capacity. There is one tranche we might want to put in, in terms of efficiency standpoint.

Steel wheels we’re going to address over the next three years some of our equipments older. It’s cable but its older and we take a look at that. The Gunite business, we don’t need to put any capital on the machine side. It’s just a matter of how much more we want to put into the facility or to the cash win at Rockford. We have some discussions underway with Brillion about how we take that business from a $220 million up more towards even a higher, maybe even $300 million business what that would mean to us from a capital standpoint.

And in Imperial, we’re really focused on the stability of it right now. And we may be sure of one or two small process when you take a look at or (inaudible) but I would better feel for the exact details by the end of the third quarter and I’ll let Greg comment now on free cash flow impact in 2013 by reduced capital.

Greg Risch

Yes, I think the point to focus in on Jimmy is what is fixed, we’re talking about 2013, 2014, 2015 necessarily. Just to focus on what we’re going to spend or what we have to cash flow and so we know that we’re going to have to pay roughly $31 million, $32 million of interest expense. We’re going to have CapEx and then $35 million to $40 million range. And then whether prices will have catch up to do on pensions $5 million to $10 million.

At some point we use that for our NOL and cash tax payer but not in 2012 or 2013. So just depending on where it’s going to be on the top side, where is the market going to go. We see a pretty big screening right now for 2013 between ACT and FTR. So it’s been a (inaudible) where those markets, or where the expectations are there. I guess I am not ready to announce 2013 guidance here.

Jimmy Baker – B. Riley & Co

Sure, that’s helpful, great. Do you think you might repay any meaningful amount of the debt in 2013?

Greg Risch

I think that is a possibility. We’re going to be good students of our cash, so depending on where things go Rick mentioned earlier, potential divestitures. So things like that could open up further to make that happen (inaudible) until 2014, so I wouldn’t see any significant change in the overall notes but we certainly are able to pay down 10% 103 for calendar years that’s the possibility.

Rick Dauch

Yes, I’d say Jimmy, we have certain target amount in terms of what – where our cash position is with today where we think it could be in 2013. If we divest one of the non-core assets, what is our priorities to use that excess cash we have on the balance sheet, right? You can go from anywhere from stock at $4 or $5 a share, you can buy back stock. You can take a look at buying down 10% of the bonds if that’s the right payback. You could make some incremental CapEx if needed that’s not in the plan right now or you can start looking at some of these acquisitions we talked about in the future, right.

Jimmy Baker – B. Riley & Co

Sure.

Rick Dauch

All those things are on the table and I’d say that, what I’ve told our team the Board in gave me clear direction too as let’s get 95% of our efforts right now to fix the underlying businesses here in North America. If w do that, and the market recovers, we will generate lots of cash in order to go out and grow the company which is what our plan has been all along.

People forget sometimes that this business really was – in some of the areas we’re really damaged and we’re just now getting the new equipment, right. When you get new equipment, it takes three or four months to get it all fine tuned really running at speed and then you’ve got to close down the old assets, that’s a lot of heavy wrestling we’re still doing here and we’re right in middle of it right now.

Jimmy Baker – B. Riley & Co

All right, thanks a lot. Well looks like price of that non-core asset is going up by a quarter here. So thanks for the time. Good luck in the back half.

Greg Risch

Thanks Jimmy.

Rick Dauch

We’ve really done hell of a job and the team up at Brillion has done a great job and couple of things on the Brillion. One, it’s a tight market for this pricing opportunities with customers. Two, we’ve been able to shift some of our capacity from a gray iron to a duffle iron which sells for a higher level. And three, we are able to work with the unions to put in work weekend crews they can work on straight time to get out more irons. We’ll get about 13% more iron out the door right now.

And we’ve got a small investment that’s going in August. The machine should be arriving here in the next week or so which will break a big bottleneck in our finishing operation. We’re probably leaving a $1 million or $2 million of sales in the table right now at Brillion that we could get out of the door if we get the right lining equipment there. So that should be here helping break the bottleneck by the end of August.

Operator

Our next question comes from Robert Kosowsky, Sidoti.

Robert Kosowsky – Sidoti & Co

Yes, hi. How are you doing?

Rick Dauch

Hi Robert.

Greg Risch

Hi Robert.

Robert Kosowsky – Sidoti & Co

Yes, I was wondering in Gunite, what percent of the revenue was aftermarket versus OE?

Rick Dauch

You want to take that, Greg?

Greg Risch

I do. I can’t see my fingers on right now hold on. Just give me a second. Do you have second question, I can look that up for you.

Robert Kosowsky – Sidoti & Co

Yes, just the second question on just like when I just saw red I saw a little bit of risk in Imperial like $12 million to $15 million new revenue coming in, in 2013 given all that production issues right now and kind of what you guys need to do to kind of right size the capacity for that and kind of just get ready for that increase in core volume given that hiccup this year?

Rick Dauch

Yes, great question. First of all the new business – part of the new business is coming into our Chehalis Washington plant which is very stable. It takes a minimal CapEx to put that in for us. And it should be a great business for us. It’s an outsourcing by one of the OEMs to us. They’ve already informed the union and we will start pickup that business late fourth quarter of this year. So it doesn’t impact the Texas plant at all.

The second tranche is that some tubes for exhaustive which we already do every day for Volvo. We picked it up for another OEM and we have excess capacity and are doubling Virginia plant. We’ll probably end up moving some of that closer to the customer by moving it down to our Texas plant, okay. But right now we want to make a huge capital investment there either. So it doesn’t impact the Texas plant in 2012 or early 2013.

We will move some of the Virginia business that we just run down in Texas just from a freight savings to the customer in late 2013 or early 2014.

Robert Kosowsky – Sidoti & Co

Okay, but it’s something that – okay, so Texas is not being jammed with $12 million of extra business?

Rick Dauch

Yes, got a straw on the camel’s back, right.

Robert Kosowsky – Sidoti & Co

Exactly. And then as far as Brillion, kind of how are you looking at the end markets for that segment? And do you think this might be kind of like the high watermark for revenue in Brillion from like a market standpoint, little bit more economic slowdown like pressure construction sales or maybe ad sales go down. Just kind of any thoughts on that from when the high point of revenue might be?

Rick Dauch

Really this Caterpillar when they’ve got a pretty robust forecast going forward and they got some significant demand above and beyond what the industry can provide them right now in North America. So we’re talking to them about what we can do to increase some capacity for them. Second largest customers is oil and gas provider in terms of pipelines and it’s pretty robust right now, with all the fracking going on right now.

The third and largest I’d think is us at Gunite. We obviously got down a little a bit and we’re taking advantage of that to sell that same capacity to customers with a higher margin. So right now Brillion’s near-term forecast looks very strong and with breaking the bottleneck there and then putting the fixing the one line next July, we should be in a position we could take it about $220 million as long as the market holds together. So but right now we don’t see signs of that of any massive drop.

In fact, we’re only on time shipping to our customers out of Brillion now are on 65% because we’re just oversold, right. There is a significant fundamental industry shortfall capacity in North America. Too much capacity was taken out of the casting industry in 2008, 2009 and 2010. That’s almost 900,000 tons of iron disappeared. Only about 150,000 that can come back online. So you’ve got to see some massive investment in castings to get back in line and especially if there is a recovery in the future both in the auto, the truck and the off-road business.

Robert Kosowsky – Sidoti & Co

Okay, that’s helpful. And then finally just any kind of margin outlook you can provide on wheels would be helpful just because I know sometimes the raw materials kind of swing it around too?

Greg Risch

We don’t basically give our guidance by business unit or upward. So we’re not going to speculate.

Rick Dauch

Yes, margins are strong in wheels, let’s just say that.

Greg Risch

And to follow-up, Gunite aftermarket was about 54% of their net sales in the quarter.

Robert Kosowsky – Sidoti & Co

54% was aftermarket?

Greg Risch

Yes.

Robert Kosowsky – Sidoti & Co

Cool. Thank you very much and good luck from everything you’re doing.

Rick Dauch

Thanks Rob.

Operator

Our next question comes from David Owen [ph] (inaudible).

David Owen

Hi guys. Was linking on the call, and then maybe you could just summarize the puts and takes sort of between your kind of higher level build sort of change in that forecast, it looks like the only changes on your Class 8 builds and the fact that your revenues are same but your EBITDA is actually been brought down in your annual guidance. So you could sort of explain the drivers – your key drivers for the different businesses that are behind that revenue and EBITDA forecast?

Greg Risch

Yes, I would say Rick, I’ll take this one. I would say overall we’re at the top end of our guidance previously and I would say overall the EBITDA change where we predominately related to the challenges that we’ve had at Imperial.

David Owen

Okay.

Greg Risch

I think as the businesses are doing really well in regards to Wheels and Brillion, you can look back on those pages and see nice top and bottom line earnings growth. And then obviously with Gunite, we’re just going through that transformation right now so right in the heart of that and we like where we are with our launches as well with aluminum wheels.

David Owen

And I mean what is the – how do you translate the financial impact of 10,000 unit decline in Class 8 builds into your P&L? How should we think about that?

Greg Risch

I love that. You kind of have to go business unit. Our business unit is probably backwards really and I would say not really any affect if they are predominantly serving the industrial castings market. So I won’t go with the Class 8 indicators and they continue to increase.

David Owen

Yes.

Greg Risch

I would say Imperial is highly tied to it particularly with PACCAR [ph] and then Gunite but it was just over 50% aftermarket. It’s tempered, and then wheels are not as they are heavy on the steel side with five through seven and Class 8 and Class 8 can be a little bit push into aluminum that aluminum demand is going strong, our guys are working 10 days a week and few holidays.

David Owen

Okay. Thanks.

Operator

Our next question comes from Barry Hynes [ph], Sands Asset Management [ph].

Rick Dauch

Hi Barry.

Barry Hynes – Sands Asset Management

Hi everyone.

Rick Dauch

How are you doing?

Barry Hynes – Sands Asset Management

I had actually three questions, maybe I’ll just do one at a time. So the first is given the new Gunite consolidation that you just announced and given the experience in Texas for the material what were the lessons learned or what you can tell us to make us comfortable that Rockford is going to go more smoothly than Texas did? That is my first question.

Rick Dauch

Apples and oranges, we moved the bunch of equipment under the Tennessee to Texas including some presses from Washington down there. That’s one. So we’re not moving any equipment out of the Elkhart. It’s basically a closure of the assets there. No equipment gets moved, it’s all equipment that was moved down to Rockford back in 1983 and some of that was 50 or 60 years old. We’re going to destroy most of the equipment actually.

Two, we put a lot of work in since late third quarter last year to the structure and systems in place at Rockford. So those are taking root right now as we speak and it will be a simpler plant at Rockford, so it’s a total different situation.

Barry Hynes – Sands Asset Management

Okay, great. Super. Second question, just had to do with the aftermarket. You talked about the aftermarket being softer and how much of that is industry-wide versus how much of that is market share? Are there some market share losses from some of the overseas competitors maybe just talk to that a little bit?

Rick Dauch

Greg, you want to try to get that. I don’t have a good feeling. The overall aftermarket was weak in the first half because of the mild winter we know that for a fact. A lot of distributors had stocked up from big winter. We had build inventory big winter and it didn’t come so we all were sitting on a bunch of inventory. And then we do have pricing pressure. We think the Chinese drums are coming in somewhere between $5 and $6 cheaper than what were offered in the market right now.

So it’s putting some pricing pressure but retain some share and we don’t like to do that while we’re still sitting on this burdens in cost structure. We’ll have a lot more flexibility to do something back in next year in January and February.

Greg Risch

I think I would add to that about saying so you’re currently talking about the Gunite business unit. So we definitely lost some shares and we’re struggling to get that back. Certainly the mild winter did not help things, so we’re not very excited with the situation right now. I’d say on the steel wheel side, we can look back to the April announcement by the trade commission and since the ruling on the anti-dumping certainly causing to be a change in ordering patterns in our aftermarket. So we will just talk to there, otherwise there is strong demand and aftermarket for aluminum wheels and I would have my comment regards to softer aftermarket for Imperial.

Barry Hynes – Sands Asset Management

All right, great. And then my last question was the new ERP initiative, could you talk a little bit more about what the timeline is on that and what the cost there will be? Thanks.

Rick Dauch

Yes, I am not sure we put out the cost, Barry, but as we chose the system called Plex Online. It’s a system we’ve used – I’ve used it before when I was at American Axle. It’s a very robust manufacturing system. We’re going to take basically the third quarter of this year to get all of that data lined up, customer list, supplier list, part numbers all those kind of things, routing. There is a lot of work to do there.

You’ll start seeing the transition hopefully you won’t see that all for you guys. Sometime in early fourth quarter here corporate consolidations one of our wheels plant. It will take us the balance of the first six months of 2013 wheels plant all in line. Then we’ll go to Gunite and then we’ll go to Imperial. Imperial has a much more amount of complexity in terms of finished goods SKUs and so that will take us the balance of 2014. And we haven’t decided whether we take Brillion out of that system yet or not.

So basically it’s an 18 to 24 month project depending whether we do Brillion or not.

Barry Hynes – Sands Asset Management

Got it. Thanks very much.

Rick Dauch

Great question, Barry.

Operator

Our next question comes from Ren Wood, BB&T Capital Markets.

Ren Wood – BB&T Capital Markets

Hi guys.

Rick Dauch

Hi Ren, how are you?

Ren Wood – BB&T Capital Markets

Doing well, thanks. You guys mentioned that customers kind of embraced your new sales organization, but can you maybe quantify some of the specific numbers kind of the opportunities and maybe the trailer markets and medium-duty and other areas and also what percentage of your businesses is tied to the medium-duty market?

Rick Dauch

Let me take and then I’ll come back to let Greg talk about how much is tied to medium-duty, okay. First and foremost by reorganizing the sales staff, we’re able to take out nine people. We took out a whole layer basically. That allowed us to then fund the expansion of our purchasing organization where we spend to have a lot of money we need to get our hands around completely.

Two, we put in office in the Chicago. We now have four people who live 10 miles away from Navistar, 20 miles from Great Day [ph], 20 miles from BIPAR [ph] and we’re seeing more and more face to face and we think face time with customers is up 20% since going to new organization, okay. Our trailers were being covered by one sales person out of Kentucky. He got to trailer guys that spread across the country. Now we have specific people who’ll find the specific trailer companies in each one of the region.

Our fleets are being covered by junior sales manager out of Minnesota. And now those are being covered by up to my level. Myself and Chuck Byrnes and I’ll call him on senior leaders of the large fleet site Roger Penske [ph] and the guys at Swift that those kind of guy. Both smaller fleets are now being covered by regional guys and each regional guy covers with us every quarter the top 10 fleets in his region and the top 10 trailer manufacturers and other OEMs like fire truck manufacturers especially vehicle guy.

So we’re getting much more face time with customers, if you have face time with customers you can talk about our products and then capital investments we are making we get some good insights. We get a lot of feedback and positive RFUs [ph] okay. Greg, can you answer the question what percent of our business is tied to medium-duty?

Greg Risch

Yes, I’ll somewhat answer it. It’s really hard for us to separate medium from heavy because our wheels – both Wheels and Gunite products know on either and it’s hard for us, we don’t know that information. Brillion I would say not and then Imperial more time to Class 8.

Ren Wood – BB&T Capital Markets

Okay, fair enough. And then just to be clear with your Gunite consolidation, you’ll have plenty of capacity there and your intentions you are not too downside that (inaudible).

Rick Dauch

I’d say we told you guys before when we have to pricing with the OEs there was a chance we can lose some of the OE business, right. And I fully expect we’ll lose some of the OE business in the future. We’ll see how that happens right. We have a history for many years of being a poor supplier in terms of on time delivery, quality and then we raised prices, right.

So we have a few pitfalls OEs that way. We’re going to earn back our reputation at Gunite both in the aftermarket and the OE by being 100% on time delivery, perfect quality, the last five months were less than 50 PPM out of Gunite. Before that we had two qualities build, lot of cost inspection that guys after getting things right. And then we got to be cost competitive, right.

And then we’ll earn back that business. So we might take a step down before we take the bigger step back up. But we will have some excess capacity there probably and we can do some excess capacity we didn’t decide how we want to use reflex in the future. I want to make sure if you understand. We’re the only guys in this sector who can cast and machine their own product. There is a sector out there both in the aftermarket and the trucks who only want made in the USA, all right. Not all and some won’t on the Chinese wheels, the Indian wheels whatever but a lot of truckers still want the made in USA. We have some fleet to only say made in USA.

Ren Wood – BB&T Capital Markets

Okay, great. And then last question. I think your steel contract pricing reset in July, is that perhaps – is that happened and how will that shape out?

Rick Dauch

Greg, can you take that?

Greg Risch

Yes, Ren there is not a lot of movement here. So I wouldn’t expect any significant changes in that happens.

Ren Wood – BB&T Capital Markets

Okay, great. Thanks for the time.

Greg Risch

All right, thanks.

Operator

Our next question comes from Peter Chang, Credit Suisse.

Peter Chang – Credit Suisse

Hi good morning gentlemen, thanks for taking my questions.

Rick Dauch

Hi Peter, thanks for taking coverage on us.

Peter Chang – Credit Suisse

It’s my pleasure Rick. My first question is on the Elkhart announcement. If you assume like a flattish year-over-year your heavy-duty truck build maybe some growth in medium-duty, I mean how much is this consolidation at Elkhart into Rockford going to help operating margins next year? And in terms of the timeline we’re achieving double-digit margins in Gunite. Is this going to push forward or what are your thoughts around that?

Rick Dauch

I’d say whenever you can close a plant and you can stop maintaining all 30 or 40 of your equipments. You go to a much simpler machine system which more automated system, you take a lot of overhead cost out. In addition, you’re going to take out more than 200 people out of the Gunite cost structure by basically first quarter of this next year. So I think that answers the question. I won’t give you specifics but it’s a significant step down in cost structure which should drop right to the bottom line for us, okay?

Peter Chang – Credit Suisse

Great, that’s helpful. Thank you. And then on the timing of potential Brillion divesture, I mean how many positive quarters are you going to wait for you to already in discussions on that asset?

Rick Dauch

I’ll say that we’ve explored our strategic options with Brillion. The business has recovered much quicker than we thought possible but as we really got into running as a business and not as a factory, it’s a pretty damn good business and we’ll see just how interest the potential suitors might be and if not then we will go ahead and invest in the business and keep growing.

So we’re in a point now run rate is about $220 million. We think we can break the bottleneck and get it more to $240 million, $250 million and after that we’ve got to put in some capital into get it up closer to $300 million. So if we don’t find a right suitor at the right price, we’ll go ahead forward in the investments business. So we’re not going to give the business away. It’s been run quite well by David Adams and Randy Brull and Brad Rolfe, who is the sales guys there and we’ll see how that plays out.

Peter Chang – Credit Suisse

Great. And last question Rick, I mean you went through some of the fundamentals of the North America truck industry that – it seems like it will be an attractive place for investment over the long-term but auto was little pause here but I mean do you have a initial look at 2013 I mean especially if you look at the two different consultancies that provide an outlook there, their vastly different. I mean where exactly are you thinking that?

Rick Dauch

Yes, we’re just discovered this is Board. Trailers are strong, so that’s okay. And that’s why we want our sales guys to more focus on earnings in that trailer business. The medium-duty seems to be stabilizing where slowly growing as the housing recovers. It’s all about the Class 8, right. Is it going to be a 300,000 builds as ACT says or 233,000 as FTR says. We’re going to wait and go out. We have around meetings set with the big truck guys in the third quarter and we’re going to do that as part of our budgeting process and give an update on how we’re doing our restructuring.

So we haven’t set it down yet, but we’re going to take a look. Chad [ph] and I are starting to look at how we’re going to roll the budget out for the budget planning process and we’ll probably do somewhere $275 million $300 million range but we’ll also probably run what is down there to $225 million $230 million range if there is some low back from Europe, right.

Peter Chang – Credit Suisse

Right.

Rick Dauch

That’s kind of where we’re at. I think we’re at most plan two budgets for next year right. It’s not in our control because we don’t control what the hell is going to happen in Italy, Spain, Greece and those kind of places that that blows back and impacts the rest of the world’s economy.

Peter Chang – Credit Suisse

Fair enough. Well thanks.

Rick Dauch

I’ll tell you today I am glad I am not Europe today. I am glad I am not in Brazil today, right.

Peter Chang – Credit Suisse

Right. No, North America is certainly for this year at least is definitely doing better than both of those.

Rick Dauch

In longer term, we need to be more than just North American company but I am glad to be just the North American company here in 2012 and 2013.

Peter Chang – Credit Suisse

Fair enough, Rick. Thank you very much.

Rick Dauch

Great, thanks.

Operator

Our final question comes from Mr. Emanuel Bell [ph] Goldman Sachs Asset Management.

Rick Dauch

Good morning.

Emanuel Bell – Goldman Sachs Asset Management

Good morning, just two quick questions on the Wheels business. First what’s the aftermarket versus OE breakdown for that business?

Greg Risch

Aftermarket is 15% or less on wheels.

Emanuel Bell – Goldman Sachs Asset Management

15% or less. And then what’s aluminum versus steel at this point, I know that’s quickly changing.

Greg Risch

Yes, right now break down is at 60% steel, 40% aluminum.

Rick Dauch

That’s been traditionally at 67/33 and now it’s at 60/40.

Emanuel Bell – Goldman Sachs Asset Management

Okay. And what I am trying to dimensionalize by asking those questions is just sort of looking at Class 8 builds, year-over-year it was about 30% increase in Q2 ‘12 versus ‘11 and then if you just look at may be, medium-duty it was about 20% but that business only grew 10%. Is it just like a capacity issue where you’re just – you can’t produce any more or how should I think about that?

Rick Dauch

Can you take, Greg?

Greg Risch

Capacity issue in regards to steel wheels or?

Emanuel Bell – Goldman Sachs Asset Management

I guess may be steel wheels, there is not really much growth there and then your capacity constrained on aluminum. I am just trying to figure out sort of why that business grew so much more slowly than the market or production overall?

Greg Risch

I’d say we have very higher market shares to being with. And on the steel side, maybe I’ll take this separate on the steel side our aftermarket is softening. A lot more pressure go through some our aftermarket is I would say dropping off. We experienced that in Q2. Aftermarket demand is picking up but steel side that’s dropping off. And we had plenty of capacity on the steel side probably I would say overcapacity and significant way. Aluminum side, I think we’ve said earlier, we run at seven days a week. So we’re certainly running to capacity issues in regards to demand just keeps increasing.

So even as we increase our efficiencies on our existing lines and as we launched new lines like I was kind of doing as the demand is there, it just keeps growing. So that’s what I’d like to say about that.

Emanuel Bell – Goldman Sachs Asset Management

Okay, thank you.

Greg Risch

Thanks.

Operator

And there are no further questions at this time. Now I’d like to turn the call back over to management.

Rick Dauch

Well we appreciate your interest in Accuride. We continue to focus on fixing the business and we look forward to see you. We’ll probably likely host an Investor call or Investor Meeting at Rockford sometime in October if you’re interested in seeing the progress we’re making there. So have a great day. Talk to you later. Bye.

Operator

Ladies and gentlemen that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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