Accuride Corporation Q1 2008 Earnings Call Transcript

May.29.08 | About: Accuride Corporation (ACW)

Accuride Corporation (NYSE:ACW)

Q1 2008 Earnings Call

May 8, 2008 11:00 am ET

Executives

David Armstrong - SVP and CFO

John Murphy - President and CEO

Analyst

Kirk Ludtke - CRT Capital Group

Peter Nesvold - Bear Stearns

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2008 Accuride Corporation Earnings Call. My name is Jackie and I will be your operator for today’s conference. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today’s conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call Mr. David Armstrong, Senior Vice President and Chief Financial Officer. You may go ahead sir.

David Armstrong

Thank you, Jackie. Good morning everyone. Welcome to Accuride’s first quarter 2008 earnings conference call. With me today is Accuride’s Chairman -- CEO, John Murphy. We also have a webcast presentation that will be part of this presentation today that you can access through our website if you are not already on that. On today’s call John will discuss the operational highlights and guidance and I will then review the company’s first quarter 2008 financial results and then we will open it up for questions.

Couple of administrative items, before we start. First financial information that we released this morning includes our GAAP results for the first quarter for both this year and last year as well as non-GAAP information that we believe is useful in evaluating the company’s operating performance mainly adjusted EBITDA.

As required by Reg G we have in our earnings release and in the appendix to our web presentation provided a reconciliation of the non-GAAP information we will be discussing today to the closest GAAP equivalent results. Second I had like to remind listeners that comments made during the course of this call will contain forward-looking statements and management may make additional forward-looking statements in response to your questions.

Statements made in the course of this conference call, that state the company’s or management’s intentions, expectations or predictions of the future are forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time-to-time in the company’s SEC filings.

With that it’s my pleasure to turn this call over to John.

John Murphy

Thank you, Dave. Before getting into the specific agenda that we prepared for the call, I will provide a few overview comments to you all. First of all, and this is of no surprise to anyone that the economic environment in North America continues to be weak and uncertain. The industry fundamentals affecting our industry of course are related to those general economic issues. They in turn continue to be weak in a number of the fundamental categories including freight and so forth. However, order rates and backlog especially in Class 8 have shown some recent improvement and we are hopeful that we’ll see that trend improve and increase. In addition, we and, I think a number of analysts, at this point believe we have a bottomed out at this point in time.

On the raw material front, that’s a different animal and represents a major issue for Accuride and other suppliers at this point in time. You may be familiar that there have been dramatic recent increases in scrap and other raw material components including steel and other foundry charge elements. We have in the very recent past, had suppliers who are breaching their current year of contracts with us and forcing price increases that are dramatic.

This process at this point in time, I have to describe as dynamic, meaning, there is much yet to be resolved. And also the raw materials situation is very much out of sync with the weak North American fundamentals that I have mentioned. Much of this appears to be driven by other positives in the global economy and the voracious consumption of material in China. We however are very active in mitigating this issue at this point in time and we are taking a very assertive and proactive approach with our customers. Our goal on the material side is to fully recover material costs and also by working proactively and showing some flexibility with customers to potentially use this also as an opportunity to gain new business.

What are we doing? We’re in the process of raising prices, implementing surcharges, shortening pass through timeframes. We’re pushing back with our suppliers on the timing and the terms of the increases that I have discussed. We’re also working with customers to gain new business by showing some flexibility.

With what we control directly, we are seeing some positives. Organic revenue growth is starting to gain momentum. I’ll talk more about that. We’ve received new business awards; more are expected. Our operations improvement particularly in the components business is starting to show progress and will accelerate. We are controlling and reducing our SG&A cost and on the cash management front despite the weak free cash flow in quarter one we expect to be cash flow positive. We are decreasing planned CapEx expenditures judiciously, managing inventories to improve cash flow there and we will fully evaluate any non-core assets for potential divestiture as appropriate.

So what we would expect is that you will see continually improving trends in organic revenue growth and our operation’s efficiency. And with that I will now maybe move to our planned agenda and the first quarter operational highlights.

First of all in the wheel business segment, a couple of examples of what I just mentioned. We did secure new business and maybe you saw press releases in that regard related to both Wabash and Great Dane where we improved our positions substantially. We also are making very favorable progress on the aluminum press investment and the installation of that. We expect that project to be implemented on time and within budget; that will improve our capacity situation as well as our reliability and cost situations. So that’s a positive, that’s going to be fully in place in the second quarter of this year.

Some items on the component side of the business. In the Gunite business, the wheel-end component and assembly business, you may have been aware of the fact that we had a labor dispute and a lockout at our Rockford facility. We successfully completed what I think is a groundbreaking contract there late in the third -- late in the first quarter that gives us significant work flexibility benefits. It reduces dramatically the number of job classifications and so forth. This is one key element of our strategic improvement at Gunite, which will ensure that we are competitive, where in the past we have had a competitive weakness particularly on the cost side there. So that competitive situation is improving and will continue to improve. In fact the production efficiency at the Rockford facility has exceeded previous bests already since that strike has been resolved.

We also have secured new business in the slack adjuster area again at Wabash, so, a nice business win for us there. And in the -- a couple of comments on the Imperial businesses which is our body and chassis part business. We have had management issues there and we have dealt with them replacing the two most senior people in that business with our best management. We believe we will see improvements in subsequent quarters there.

One business issue facing us is a new business situation with North American Bus. Our customer has delayed the start up of that business as they continue with some product design modifications. That delay as Dave, will probably indicate, has negatively impacted us in the past, impacted us negatively in the first quarter and that will continue to some degree in the second quarter. But the expectation is that the full-year revenue estimate can be realized in the second half of the year, so that’s our current game plan.

In other business units, the Brillion foundry business as well as Fabco, we have seen productivity improvements, inventory reductions at Brillion and also at Brillion we are continuing to see revenue and mix improvements. So that business is starting to show some nice signs of improvement under the leadership of Ed Gulda.

The Mid-America Truck show, we made a couple of important announcements and I can just tell you from a personal standpoint that there was a very high degree of excitement on the part of customers and other people we work with at the Mid-America Truck show. So it’s very encouraging in terms of the future for Accuride in terms of revenue growth and new products and new technologies.

One example of an announcement made coincident with that show was the Benecor joint venture. That’s a joint venture to provide urea-dispensing units to the industry. We are currently quoting quite a bit of new business with customers and we expect that to ramp up next year.

We also announced a co-branding relationship with the Chrome Shop Mafia, very interesting to watch at the show but that will be a key element of our aftermarket strategy, which again is being designed to double the participation we have in the aftermarket over the next two to three years. So we are seeing some very good receptivity to those two announcements.

Now shifting to the first quarter financial highlights. First of all I will read all the numbers but you can see that the comp’s obviously very negative relative to quarter one of 2008. You will recall that -- or I mean of 2007, you will recall that 2007 quarter one was really the last quarter of the previous upturn. The bright spot of these comparisons however is that Accuride’s actual revenue loss of 27%, which includes the loss of the business with Ford which we had previously discussed with you, which was for a variety of reasons. Without Ford was actually about 20% or so loss actually compares quite favorable with the Class 8 production decrease of 33%. So again this is evidence of the fact that we are gaining some momentum on organic revenue growth.

Looking at the consolidated results, obviously a very significant impact on adjusted EBITDA that reduction on an incremental basis is 28.6% of sales, if you exclude the one-time items principally related to the settlement of the lockout situation at the Rockford facility. So -- although obviously a large negative impact not out of line with our expectations based on our cost structure.

Moving to the 2008 guidance summary, as we indicated in our press release we are maintaining the overall guidance but really suggesting that the lower end of the range is where our expectation is currently. And although there are a variety of volume estimates and you could see the range of the pundits, we tend to be conservatively disposed at this point in time for a couple reasons. One, we haven’t seen a clear sustainable trends that would cause us to be bullish at this point in time and our customers in turn are indicating their production schedules are being aligned more towards the lower or less side of that range.

So we maintain at this point a conservative posture but are hopeful we will see signs of improvement in the near future. So we are maintaining our guidance at the low-end of that range. The raw material issue that I have discussed before presents an additional challenge as I mentioned that’s a work in progress. But we are giving that very active and proactive consideration with our customers to try to neutralize that impact and potentially actually turn that into a positive in terms of our gaining new business. But it’s a very serious issue and a concern that we are dealing with.

With that I will turn it over to Dave Armstrong for the financial section.

David Armstrong

Thanks John. Let’s turn -- if you can turn with me to page 7 in our presentation, the year-over-year comparisons. As John discussed the commercial vehicle markets continued at a recently slow pace during the first three months of 2008 compared to 2007. First quarter revenues of 238.2 million decreased 87 million or 27% from the 325.4 million in Q1 of 2007 and as John said the main story behind this decrease is volume related. Also as John mentioned, Q1 2007 included about $24 million of revenue from Ford that is not repeating this year. So that also skews the year-over-year comparison in the first quarter.

Finally, one of our last sales items is to add, sales were off about 2.25 million due to the American Axle strike and its effect on General Motors production (inaudible) on Accuride at 2.25 million. Our gross profit margin in the first quarter was 5.2% of net sales down from the 7.4% in Q1 of 2007. As John described Q1 gross profit in our component segment was impacted by 8.1 million of expenses related to the labor issues at our facility in Rockford, Illinois. If you exclude that 8.1 million of one-time costs the gross margin would have been in the neighborhood of about 8.6%. And, the good news of all of this is that the labor matter is now behind us, productivity has improved to higher levels and we are moving forward.

Also affecting gross margin as John mentioned were startup costs of about 1.1 million at our Anniston, Alabama facility as we continue to experience a little bit of a slowdown from the customer side of things. Operating expenses decreased from 15.1 million in first quarter of 2007 to 13.7 million in Q1 of 2008 and this is principally due to cost reduction initiative in addition to some timing of accruals. We continue to focus on SG&A reduction and expect that operating expenses in 2008 will continue to be favorable to 2007.

First quarter adjusted EBITDA was 18.5 million compared to 49.2 million in Q1 of 2007. The adjusted EBITDA margin was 7.8% compared to 15.1% EBITDA margin in Q1 2007. As we compare year-over-year, I should also remind listeners that margins were positively impacted in 2007 due to an $8 million of revenue and EBITDA related to the settlements we have with Ford that John discussed. Quarter-over-quarter from the fourth quarter relatively -- on relatively flat build rates, Q1 ‘08 adjusted EBITDA of 18.5 million increased slightly versus the Q4 ‘07 amount of 17.7. Net interest expense in the quarter increased to 15.7 million from 12 million in the first quarter of last year, this was principally due to a non-cash unrealized negative swing of about 4.5 million in our interest rate swap. And it’s our expectation that this unrealized loss will reverse as we move through the year and the yield curve steepens, but that was just a one-time mark-to-market issue there.

Net income decreased to a net loss of 11.7 million or 33 -- negative $0.33 per diluted share in Q1 2007. If you exclude the one-time items that we have talked about, the net loss would have been approximately 3.5 million or negative $0.10 per share. We will move now to the free cash flow slide. And again a reminder that the first quarter is typically a high cash demand quarter given interest payments, management bonus programs and other prepaid expenses. In addition in Q1 we had an affect of about 6 million of cash that’s related to the Gunite labor situation. On a GAAP basis cash from operations for the quarter was a use of cash of 28.4 million compared to cash from operations of 2.7 million in Q1 2007. CapEx for the quarter was 10.4 million and free cash flow was a negative 38.8.

Looking forward despite the high cash usage in Q1 we anticipate being free cash flow positive on a full-year basis in 2008. We turn to the next slide I wanted to add a little bit color high-level color on our free cash flow year-over-year. As I mentioned, each year in the first quarter we have typically around $30 million of normal outflow related to bond and bank interest payments, annual compensation payment, and certain prepaid expenses. When you look at the difference in free cash flow year-over-year it’s driven by mainly by the reduction in the EBITDA coupled with the cash payments that I mentioned on the Gunite labor issues and some increased CapEx and then a little bit of a positive movement to offset that with some working capital improvements that we have.

Depreciation and amortization for the first quarter was about 11.7 million, which is less than the 21.7 million of D&A in 2007 for the first quarter. In Q1 of 2007 you will recall we had accelerated depreciation of about 9.8 million related principally to the light wheel equipment that was being retired.

We currently anticipate that D&A will be at this new Q1 level throughout the remaining quarters since 2008, a reduction year-over-year in our D&A. The effective tax rate for Q1 2008 was 35% tax, taxes paid were 3.2 million and for the remainder of 2008 we anticipate the effective tax rate should be 35 and 39% and we are estimating cash taxes to be under 5 million based on current EBITDA guidance.

We turn now to the debt and leverage slide. Total debt at the end of the quarter 572.7 million less cash of 46.8 gave us a net debt position of 525.9 million. This is a $13.2 million decrease compared to a 539.1 million net debt position that we had at the end of the first quarter in 2007. We ended this quarter again with an untapped revolver of 125 million giving us a total liquidity of 171.8 million. We still anticipate spending about 35 million on capital in 2008. We ended the quarter with a leverage ratio of approximately 6.7 which is well below our covenant level as we mentioned in our press release. We believe that we have adequate cushion in our debt covenant throughout the remainder of the year.

We turn to our outlook slide, kind of a brief summary on the -- some of the items that John and I have talked about. As we continue navigating to 2008 we will continue to pursue some key management action. So far this year we played significant emphasis on driving organic revenue growth and it had some good success story that John had mentioned and we have graded our sales force and anticipate continued growth in this area. After a difficult first quarter we announced the improved efficiencies in our foundry operations as we both mentioned and we anticipate that operating performance will continue to improve throughout the year especially as volume picks up.

We have implemented a number of programs to drive down SG&A costs, including reductions in salary as well as hourly head count and these reductions included not only lower level employees but also affected mid and upper level executive ranks and we will continue to pursue cost-cutting initiatives throughout this year. From a cash management perspective we will continue to closely monitor CapEx expenditures. We are turning back to a $35 million base; in addition we will closely scrutinize working capital issues to effectively manage our cash situation.

As John mentioned we have also responded to recent raw material cost increases by implementing a detailed recovery program to neutralize the negative effect. We are going to be working closely with our raw material suppliers and customers to reach win-win resolutions in the industry wide problem. And as we work through this it’s a very fluid situation we anticipate there will be some point of negative impact in our second quarter results followed by recovery in Q3 and Q4 and a neutral effect on the full year business is our current objective.

In summary as John mentioned we are maintaining our guidance and anticipating at the lower end of the range due to the uncertainty surrounding the anticipated increase in truck bill. You are probably aware ACT recently announced that April orders increased to 8.9 -- 18.9 which is a good sign. Backlogs have also been increasing and are now above 80,000. As a rule of thumb OEs will typically respond and increase production rates once backlogs reach 100,000 so there is still a little bit of uncertainty as to when that will exactly occur. But there has been an increase of about 20,000 units in the backlog, since the first part of Q4 last year. With that I would like to turn the time back over to Jackie for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question will come from the line of Kirk Ludtke from CRT Capital Group. You may proceed, Kirk.

Kirk Ludtke - CRT Capital Group

Good morning.

David Armstrong

Good morning.

Kirk Ludtke - CRT Capital Group

Can you hear me?

David Armstrong

Yes.

John Murphy

Yes.

Kirk Ludtke - CRT Capital Group

I was wondering if -- you mentioned a liquidity number and I was curious; does that reflect the covenants in the credit agreement and letters of credit and all that?

David Armstrong

It reflects all covenant issues. It does not reflect letters of credit, which is about $18 million.

Kirk Ludtke - CRT Capital Group

Okay. Thank you and what is the intra quarter swing attributable to working capital?

John Murphy

From the fourth quarter?

Kirk Ludtke - CRT Capital Group

Just in general. I suspect that there’s -- customers pay you at different points in time and I’m just curious if there’s a range that you are working capital swings up and down during a quarter?

David Armstrong

Well it varies quarter-to-quarter certainly especially in the first quarter because you have significant ramp down in production at the end of the fourth quarter. So there is always a ramp up and receivables are dropping in the fourth quarter and increasing in the second quarter.

John Murphy

But I think it’s an important point to keep in mind. A lot of people look at averages over the course of the year. What really becomes important when you look at is the receivables at end of the quarter, that month and that day, specifically relative to that prior quarter. So sales are going up or down. That’s probably the biggest single swing factor typically. Does that make sense?

Kirk Ludtke - CRT Capital Group

Yeah, I can imagine it’s complicated and it probably varies a lot from quarter to quarter. You mentioned earlier that you would consider selling non-core assets. Is there a -- do you have a kind of just a ballpark as to how much the sales and EBITDA are of the assets you consider non core?

David Armstrong

Not at this time. That’s a little premature. I mean we’re currently evaluating kind of all options there and I have not put together a definitive plan of action.

Kirk Ludtke - CRT Capital Group

Okay and --.

David Armstrong

I think it’s safe to say at this point that probably anything that would be in the evaluation category would be less than 10% of revenues at this point of time.

Kirk Ludtke - CRT Capital Group

Okay. Are there any other ways that you would consider raising liquidity like -- anything else that you’d want to share with us at this point?

John Murphy

I think not at this time, I guess currently as Dave indicated we think our bank agreements are adequate to sustain us through this choppy water that we’ve been in. And on clearly on the equity side, it’s a very low -- kind of level to consider accessing equity markets. So not at this time as hopefully we get some visibility improvement on this business cycle, as those conditions change, we’ll continue to reevaluate that with an opportunistic eye, but the short answer is not at this time.

Kirk Ludtke - CRT Capital Group

Okay. And then, I have just one big picture question on the industry. I remember couple of cycles ago, commercial truck cycles ago, and trucks were being sold with repo agreements effectively? And I’m curious -- did you -- can you give us a sense, if that happened in the last cycle?

David Armstrong

You mean this cycle?

Kirk Ludtke - CRT Capital Group

Yeah the May ‘06, ‘05-’06 upturn was that?

John Murphy

I don’t think we’ve got any significant concern relative to the past history that you are referencing. So hopefully lessons have been learned, I think it’s more of a fundamental demand issue at this point in time as opposed to that one you might call synthetic due to those leasing structures and so forth that aggravated what was already a weak -- weak economic cycle.

Kirk Ludtke - CRT Capital Group

Okay. Thank you, very much.

David Armstrong

You’re welcome.

Operator

Thank you gentlemen. And your next question will come from the line of Peter Nesvold from Bear Stearns. You may proceed, Peter.

Peter Nesvold - Bear Stearns

Good morning guys.

David Armstrong

Good morning, Peter.

John Murphy

Hi Peter.

Peter Nesvold - Bear Stearns

If you look at your aftermarket business historically, how good of a predictor or coincident indicator has that been of overall freight activity and, number one, and number two, what is that business telling you right now as far as what’s going on with the truckers?

John Murphy

That’s an interesting question. I think the after market probably was not -- it’s the usual thing, it’s good to have because it’s less affected by the swings in demand. But I don’t think it was really for Accuride at least Peter, probably a great predictor and I’ll tell you why. The aftermarket really isn’t a big business for the wheel business. And on the brake side of the business where most of our historic aftermarket is done that’s really due more to wear items. So there is a connection to some degree with delayed purchases perhaps, but I wouldn’t say there is a significant predicting aspect to that.

I think in the future maybe to get my plug in here, what we’re really trying to do is grow the aftermarket much differently than we have in the past. We are doing now with a much broader approach adding new products focusing on the aftermarket as a top customer as opposed to the last person to get served after all the OEs have everything they need. And so we’re approaching it differently, we’re marketing it differently. The Chrome Shop Mafia is an example of that. So in the future, maybe we would have a more predictive capability but fundamentally our strategy is just to grow the aftermarket very significantly relative to the OE sale space.

Peter Nesvold - Bear Stearns

And in the slide you referenced the Benecor JV, which was to your point announced at MATS and seems to be very intriguing. I mean when do you think you can start to quantify what that means from a revenue perspective, both magnitude of revenue and timing?

John Murphy

Probably later in the year. We’re actually getting some prototype orders and so forth. But given -- and that is going to become a real issue in the industry I think, because even though the regulations don’t take effect till 2010, based on lead times and so on I think there’s going to be a need to get a lot of that in the pipeline in ‘09. So we’re actively pursuing that, but I think as the year in the -- later in the second half of the year I think we’d be able to give more visibility on that, Peter.

Peter Nesvold - Bear Stearns

And any sense of what the capital commitment from you is going to be? Whether it’s some kind of JV investment, or whether it’s internal spending on CapEx and frankly given where volumes are, given where margins are, as a result also of materials cost, do you have the head room under your bank covenants really even to fund this opportunity just given where we are right now in the cycle?

John Murphy

Good question and I think this is just a positive. I think the business model we’re currently looking at, and we haven’t made all final decisions, but right now it’s quite possible that we would use a minimum amount of capital actually through the use of proprietary technology and also the way we manage the supply chain, we might actually outsource the manufacturer of the units themselves. So that the value added would come from managing the overall supply chain in the process. So this -- right now our current model is that we would do this with very little capital and would not be an issue relative to the covenants and so forth you alluded to.

I also think this is a good example where we’re going to come up with what we believe are creative business solutions that are atypical in terms of historic CapEx intensity, meaning, much lower CapEx intensity, which is still generating a lucrative margins and therefore high relative returns. So that’s how we are approaching that.

Peter Nesvold - Bear Stearns

And I think in the release you referenced to -- at least some of the margin hit this quarter was due to taking more actions and being protected on materials. My understanding was that you were at least hedged on aluminum for the first half of this year. So what are the incremental actions you were taking? Are you pushing out those hedges out further in the year or what else is happening there that is driving down margins?

John Murphy

Yeah, good questions. Let me break it down, probably maybe at least three parts. First of all you mentioned aluminum, and yes, we have hedges and protection in the first half of the year. Then we’re continuing to evaluate the second half of the year and there is a concern because aluminum prices at least the futures now are still at fairly high levels. So there is some uncertainty there but we’re actively managing that. But it is a concern. What I referred to on the foundry business is the one that would be the main consumer, the scrap steel and other charge elements. That one, we actually realized probably within the last two to three weeks, 60 to 70% increases in scrap steel which is a commodity and that’s not something it’s just subject to negotiation. That is the spot market price.

That’s one area where now we’re actively working with our customers. We’re doing several things. One initiating where possible immediate price increases, immediate surcharge increases and where we need to work with them, which is what I indicated, because we’re not going to take an approach where we just give an ultimatum and a cram down approach to our customers, we do not think that’s in our best interests. But we are being very assertive. We are trying to work that through and either modify pass through arrangements which could be up to six months, Peter, in some cases or less. Some of them are monthly and tied in the foundry business.

So we’re doing all of those things in addition trying to look at ways, with showing some flexibility we can gain new business. And so that’s true principally on the steel coil side of the purchase and the scrap side tends to be -- the pass through tends to be more immediate, based on just the normal mechanism. So it’s a variety of approaches, a very aggressive approach. And in addition, we’re continuing to fight the fight with the suppliers that are cramming down these increases to us and in fact breaching contracts that are in place.

Peter Nesvold - Bear Stearns

And then last question. If you look ahead to 2009, to the extent there is any pre-buy, it will probably would be pretty compressed it seems unless we get some kind of robust economic improvement late ‘08 or early ‘09. Are you inclined to re-ramp up capacity in ‘09 to capture that? How disruptive is that to operations and to margins? Can you really monetize a compressed pre-buy in 2009 or do you just elect to not add that capacity temporarily and just wait for the overall business cycle to come back?

John Murphy

The good news is we’re ready, willing and able to assume anything the market can throw our way at this point. We’ve got adequate capacity despite the fact that we restructured, for example, our steel wheel business you recall last year. Even though we temporarily reduced the capacity, meaning the production capacity, we didn’t idle permanently some of those equipment lines. So we are able to just -- it’s not like they were mothballed, but we’re able to meet whatever market peak might be out there even if it’s well beyond current estimate. So that it is not going to be a significant issue for us. There is always some, call it growing pain, as you might need to add a shift, bring certain workers back, but we welcome that opportunity, you know as we have been on oxygen for demands for probably a year and half now.

Peter Nesvold - Bear Stearns

Got you. Okay. Thank you.

Operator

Thank you, gentlemen. And your next question will come from the line of (inaudible). You may proceed.

Unidentified Analyst

I just have a question about comments you made earlier related to Class 5 through 7. You said you expected -- it has bottomed that you have already seen better order activity. I just wondered if you can elaborate on that.

John Murphy

Just to make sure I understand your question, to elaborate on why we believe it’s bottomed out.

Unidentified Analyst

Right. And you have sort of seen the orders you’re seeing now, sort of what class it is, you think they are going to stay in the 20,000 order range? I mean how are you sort of thinking about that when you say you think it bottomed?

John Murphy

Well, I think we’ve been -- remember originally the expectation was that 2008 was going to be a strong year and of course the bubble burst on that with the weak economy. But fundamentally we’ve experienced low levels of production now throughout ‘07, continuing in the first quarter, and to some degree will carry over to the second quarter. So we’re -- we believe we’ve stabilized when I say bottomed, where our concern is I suppose is how quickly will we see significant improvement and ramp up, but I don’t think we see a significant further downside; that’s really our point. And I think the evidence of that both Dave and I cited is probably more weighted to the class 8 side now in terms of order and backlog improvement. Class 5 to 7 that will tend to attract the general economy fairly well. So as the general economy improves we should see improvements in that. And I think even though people continue to debate -- most people would agree we had a “recession” and we are in one but I think most of the pundits believe that, that will be relatively short lived and we should see some improvements as the year progresses.

Unidentified Analyst

So most of the order activity you are seeing from your customers is that mostly -- it’s all second half driven. Is it possible that you can get pushed down to ‘09 given further economic deterioration?

John Murphy

That’s not in -- I mean that’s not inconceivable I think the big driver there is the economy and the uncertainty.

Unidentified Analyst

Right, its basically you are saying it’s stabilized now at very low levels and you are starting to see some pick up and you think that should occur in the second half of the year as you see some sort of recovery?

John Murphy

That’s correct.

David Armstrong

Yeah, if you look at backlog for example, you have a $20,000 -- 20,000 unit increase since the first part of the fourth quarter in 2007 to now. If that continues going up and production is going to start increasing fairly soon, if that leveled out then we will see more even production. But if you look at the last few months, there is some momentum going in the backlog orders that is positive. So we are both Class 8 and (inaudible)

John Murphy

So we are seeing some anecdotal evidence of improvement and signs of life. We are being a little bit cautious because these are robust sustainable trends at this point in time that’s really, that’s really the point. So that’s why we think it has bottomed out we are hopeful that it’s going to get better but we are not here calling a major upturn today or anticipate that in the next month or two.

Unidentified Analyst

Okay. And I guess how much advance warning would you have if order rates suddenly changed -- do you have a good sense of when that will happen, if you start to see weakness so that will be a pretty quickly for you to adjust your sort of billed rate and everything else?

David Armstrong

Yeah, I mean orders are probably the leading indicators, and for our business and of course we see those directly through our customers and if you would see our internal scheduling and our forecasting. You would see a sheet for example even on a summary level that might have 50 different major customer locations that indicate there are order rate and changes in their billed level. So, yes we would see it on a rather a quick basis. So that’s why we tend to look at orders as the key leading indicator and that’s why we are looking for fortification, of this positive trend to give us confidence that we are going to see a sustained ramp up in future volumes.

Unidentified Analyst

Do you have any idea of how much of your order rate you are seeing this year is that impacted by Mexico’s pre-build?

John Murphy

No, I think that’s probably a limited impact for us.

Unidentified Analyst

Okay. Thanks.

David Armstrong

You are welcome.

Operator

Thank you gentlemen. (Operator Instructions). And your next question will come from the line of (inaudible) you may proceed.

Unidentified Analyst

Good morning guys. How are you?

David Armstrong

Good morning thanks.

Unidentified Analyst

I’m just worried a little bit about, it sounds almost counter intuitive, but being overly proactive with respect to getting price increases from your customers and getting surcharges and I guess the reason I say that was -- I say that is back in the ‘03, ‘04 timeframe when steel pricing was an issue and maybe not as great as it potentially could become this year. But I remember transportation technologies, management said that they had a shortfall of I think the number is about 30 or $40 million of EBITDA in terms of steel price charges that they could not -- or steel -- raw material price and steel price increases that they couldn’t recover from customers because they were the first guys to go in before it became a real issue. Is that risk pretty much not as great this time around just because it’s so widely known this time around?

David Armstrong

No (inaudible) I think, we haven’t been first in. I think some of the competitors in our industry have already gone with very hard and fast mandates on price increases and we have come in after that. So I think it’s a little bit different environment than it was in prior years.

John Murphy

I think that’s right. So I think you are right in saying it is a different world. I think two things; one, everyone lived through that and everyone went through the denial, we will push it back, we will try to get you to absorb the issue and so forth. I think now, when you see a 60% increase in scrap that’s known to the world, there is no real good alternative other than to push that through the supply chain. I mean we could talk about the alternatives but they are pretty negative. So when we say proactive, what we mean is, we are working it through with the customers, we do have agreements in some cases. We already have pass through mechanisms so that does afford us that opportunity, but some of them -- at six months position will be very negative. So that’s why we are working to adjust those.

We are increasing price and as well as surcharges wherever we have that opportunity. We are talking very open and frankly with our customers and we are trying to, as Dave indicated, come up with what I call a win-win, which is to work that through in a way that they can live with it and perhaps by being somewhat flexible actually resolve the new business. And we are very mindful of that and we are looking for those opportunities. So I don’t want to give you the impression that this is easy. It’s a very difficult environment, it’s dynamic and there is more work to be done, but our goal is to come out of this whole or whole and with new business.

Unidentified Analyst

Got you. And in terms of, for 2008 what percentage increase are you expecting on raw materials? And is there a number that you could sort of give us?

David Armstrong

I could have told you that number when we started the year. In the last two weeks, I had given you a couple of examples. We had 60 to 70% increases in the last couple of weeks on scrap and other charge elements. I told you about the people on the cold steel side that are breaching contracts, it has come out with 30, 40, 50% increases that they are trying to cram down. So we haven’t even been able to add up, what the weighted average effects would be yet to tell you the truth. But we are actively working on the mechanisms to work through the supply chain.

Unidentified Analyst

Got it. And, one more question.

David Armstrong

I will give you some examples, steel -- cold steel price would be probably at this point double what it was this time last year, 100% increase.

Unidentified Analyst

Well. Okay. And one more question and then may be I can jump back in queue, but pertains to U.S. pricing? Obviously U.S. pricing has been pretty robust heretofore, primarily because of huge demand from overseas. How is that going to be impacted by a potential rally in the U.S. dollar and also somebody had alluded to the Mexican changeover happening in summer. What about Australia, did that affect you at all?

John Murphy

Well maybe we can break that down a little bit. First of all Australia, I would see as the non-issue other than the extent they may be a component of various raw material supply chain. Let me see if I got this right. With regards to -- your concern was what China consumption?

Unidentified Analyst

Well there are a couple of -- I mean with respect to U.S. truck prices, there are a lot of U.S. trucks that are going overseas right.

John Murphy

Yeah.

David Armstrong

Yes.

Unidentified Analyst

And primarily a lot of that is driven by a weak dollar? And to the extent that the dollar rallies and you know U.S. trucks seem relatively more expense than they were prior to the rally. How is that going to affect demand for trucks from your customers? As well as you know if I could add on maybe second part of the question that is with trucker bankruptcies increasing and credit tightening across the system, do you think that will impact your stock prices?

John Murphy

Well, couple of things. I don’t -- you are right. I mean clearly there are some individual bankruptcies and so forth in that. In a weak economy typically is the case that that is a fundamental that it exists and is a concern and that’s where we are looking for the strengthening economy. I think overall as I would pursue it the weak US dollar has actually not been our friend in a number of ways. We have Canadian operations that caused us negative foreign exchange effects. The weak US dollar actually has aggravated these high global steel prices that I have mentioned. So I see actually a strengthening dollar is a good thing for us. We have yet to have major penetration with exports, we continue to look at that but there is a variety of reasons specific other than just relative exchange that impact our ability to say export steel wheels for example. So without dramatic export opportunity, I think our biggest concern has been the skyrocketing raw material costs which are in part tied to weak US dollar and may be more significantly tied to other stronger global economies in Europe, Southeast Asia and also like I said China which is becoming like the super stock of raw materials, where they have large percentages of the global consumption and steel for example at this point in time. So those are actually the larger concerns than the ones you mentioned.

Unidentified Analyst

Got you. Thank you.

Operator

Thank you gentleman. And you have a follow-up question with (inaudible). You may proceed.

Unidentified Analyst

Just a comment on you mentioned that coiled steel prices went up 100% year-over-year, I know the quarter’s not over yet, but given where raw material prices are to the quarter, what would your expectation be of the impact of raw material prices on your earnings this quarter versus the prior year versus the first quarter? In terms of how negatively they would impact you?

John Murphy

Dave will answer the first question.

David Armstrong

Yeah. First quarter there was no real effect. I think we will see an effect in the second quarter as we work through the issues.

Unidentified Analyst

Right.

David Armstrong

For the timing lag. But again our plan is to have a neutral effect by year end. Now the other thing is that we are not really sure about there is whether this is establishing a new high or a new level. Whether this is more of an aberration due to a number of different things that have come together to increase the prices and we may see some softening in these increases towards the latter part of the year. So it’s still kind of wait and see, how things turn out. But we do have plans in place to neutralize the negative effects.

Unidentified Analyst

So it is difficult now to estimate the impact of the second quarter?

David Armstrong

Exactly, yeah.

Unidentified Analyst

Okay. Thank you.

John Murphy

I think what Dave signaled is there is a lag element that is likely to impact us in the second quarter that’s what we are working actively to overcome in future quarters.

Unidentified Analyst

So you are not able to quantify these things?

David Armstrong

That’s correct.

John Murphy

Not at this time.

Unidentified Analyst

All right.

David Armstrong

And mainly because it is still a very fluid situation.

David Armstrong

All right.

Unidentified Analyst

All right. Thank you.

John Murphy

Yep.

Operator

Thank you gentlemen. And at this time you have no further questions, so I would like to turn the call back over to John for closing remarks.

John Murphy

Well, we appreciate everyone’s participation and we look forward to an improving environment going forward as well as one with momentum on revenue growth and internal improvement. With that again, thank you for your participation. And Jackie I think we are prepared to close the meeting.

Operator

Thank you, gentlemen. Ladies and gentlemen, you may now disconnect and have a wonderful day.

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