Hayes Lemmerz International, Inc. F1Q08 (Qtr End 04/30/2008) Earnings Call Transcript

| About: Hayes Lemmerz (HAYZ)

Hayes Lemmerz International, Inc. (HAYZ) F1Q08 Earnings Call June 5, 2008 10:00 AM ET


Marika Diamond – Director of Corporate Communications

Curtis J. Clawson - President, Chief Executive Officer and Chairman

Fred Bentley - Chief Operating Officer and President, Global Wheel Group

Marc Brebberman - Corporate Controller


Alberto Garciatunen - Imperial Capital

Mark Kaufman - MLK Investment

Nicole Terraco – Babson Capital

Dirk Friedkin – Troob

[Brian Hennessey - LightSpeed]

Jeremy Hellman - Singular Research

Unidentified Analyst


Welcome to the Hayes Lemmerz fiscal 2008 first quarter financial results conference call. (Operator Instructions) I will now turn the call over to Marika Diamond, Director of Corporate Communications.

Marika Diamond

On the call today, we have Curt Clawson, President, CEO and Chairman of the Board, Fred Bentley, Chief Operating Officer, and Marc Brebberman, Corporate Controller.

This morning, we will discuss our 2008 fiscal first quarter financial results. After the remarks, we will be taking your questions pertaining to our results. If you have not seen the slides that accompany today’s call, you will find them at www.hayes-lemmerz.com in the Investors Relations section under ‘Most Recent Investor Presentation’. We will refer to the presentation in our discussion.

Before beginning the official program, I’d like to remind you that during the call, we will be making forward-looking statements that are subject to risks and uncertainties. Some of the factors that could impact our future results are described in Slide 2 of this presentation and also included in our SEC filings. As mentioned in the forward-looking statement slide, we specifically disclaim any obligation to update any forward-looking statements in the future.

If you now turn to Slide 3, this shows our agenda. First, Curt Clawson will provide the financial highlights, and then the company’s strategy. Next, Fred Bentley will discuss how Hayes Lemmerz is extending the lead in Global Wheel, and then give a summary. Then, Marc Brebberman will review our first quarter financial results.

So with that, please turn to Slide 4, and I will now turn the call over to Curt Clawson.

Curtis J. Clawson

If you will, skip with me to Slide No. 5, I’d like to talk about the financial highlights of our continuing operations, mostly our Wheel business. You can see at the top of the page, sales were up 15% on a year-over-year basis to $574 million.

Adjusted EBITDA, up 9% from $50 to $55 million on a year-over-year basis. Core operating earnings, up 19%. Free cash flow, down $53 million. And liquidity, up 84% from $135 to $249 million. Couple of comments on the free cash flow number, first of all, for those of you that joined us in our fourth quarter call, I know that this number is not a surprise. At that time we mentioned clearly that we had some one-time stuff, and some of those things are coming back the other way in the first quarter of this year.

And secondly, on that call I mentioned that we would burn through cash in the first quarter because of the one-timers and also because of the normal seasonality of our business. Nonetheless, in spite of the $53 million negative free cash flow for the first quarter, we remain committed to our target and our goal for 2008 to be cash flow positive. And I will speak more of that later in the presentation.

Please go to Slide No. 6. Let’s talk about our strategy. We have four strategic tenets: first of all to invest in the right products; secondly to invest in the right geography; third to invest in the right customers and fourth to have a competitive global cost structure. I’m going to talk about a couple of these in more depth today. I’m going to mention all four so that you have a clear grasp hopefully of what our strategy is at Hayes Lemmerz.

If you’ll move on to Slide No. 7 then, first of all, right products for us mean wheels. And we always like to mention our largest new market innovation that we have going on right now. This is our VersaStyle wheel. That is the steel wheel that looks like an alloy wheel.

And we price it between the conventional steel wheel that you see at the top and the alloy wheel that you see at the bottom, at a mid price point for mid level cars. And we are off and running. We are gaining steam here, and I think we will sell upwards to 2.5 million units in 2008, which should have a meaningful impact on our financial results.

Also, under right products, if you’ll move to Slide No. 8 with me, please. In this section we also included the sale of our Nuevo Laredo powertrain facility because it is not part of our wheel business. So, by selling this segment it helps us to focus on our core wheel business and get to the right products.

And we are selling it not only because it’s not a wheel business but also because we are a niche player. It’s a single geography business for us with a concentrated customer base. So, we think this sale of the Laredo business, as good of a plant as it is, will help us both financially and particularly strategically as we move forward.

If you’ll move with me to Slide No. 9 after we talk about the right products, let’s talk about the right geography and flip to Slide No. 10, please. In this section, I’d like to include the closure of our Gainesville, Georgia aluminum passenger car wheel facility. We hope to close this facility by December of this year. This is a negative EBITDA, negative cash flow business for us to the tune of double-digits in negative cash flow and EBITDA.

It was sales to Chrysler, Ford and Toyota, so we plan to transfer a large chunk of that volume to our Chihuahua, Mexico aluminum wheel facility. So, we are closing this for strategic reasons, because it reduces our dependence on a very tough US market. And also, we are closing this facility because we think it will help our financial performance, particularly starting at the end of this year or in early 2009.

If you’ll move with me now to Slide No. 10, another picture that I would like to paint of our geography, if we were to look at 2008 sales without Gainesville, you will see that, without Gainesville, the U.S. would only be 13% of our sales in 2008. So, this gives you a good snapshot of what our business will look like in 2009 and with what’s going on in the U.S. market with the turmoil there, we think that this the right move for us.

And I remind all of you that if you go back to 2001, our sales in the U.S. business were approximately 60% of our total sales. So, we have made lots of progress and are not as concerned as we used to be by the North American market.

If you’ll move with me then to Slide No. 12, let’s recap again the four strategies, I won’t go into too much detail on the other two in the interest of time, right products, right geography. Invest in right customers is number three. We now consider ourselves fully diversified from a customer perspective in all three of our segments: truck wheels, passenger cars and passenger car aluminum.

And finally, the fourth part of our strategy, aggressive cost reduction, we will continue to work away at our cost structure as you see on the left hand side of this slide. So, I hope now that it’s that the strategy of Hayes Lemmerz is clear to all of our investors and potential investors. We think that, for the long-term benefit of the business and the shareholders that we are on the right track.

If you’ll flip with me, please, to Slide No. 13, these are my keys for us, for Hayes Lemmerz to have a good year in 2008, and I’d like to speak briefly to each one of the three points. First of all, it’s important to us that the global markets stay strong. We know about the turmoil in the United States, but outside the United States, my synopsis is so far, so good. So, if the market remains strong internationally, this is a very, very big key to us, and through the first quarter, we are okay.

The second big key to 2008 for us is the restructuring that we have mentioned earlier in the presentation. We’d like to divest the Laredo facility, this is key. Number two, we need to bring down the Gainesville aluminum wheel plant in an orderly way. And number three, we continue to inspect our footprint in Europe to see if there are any other potential consolidations for any of our other plants there, so that would be the third part of that.

So, if the market stays strong and restructuring goes well, then the third thing that we have our eye on is the steel situation. All of you listening today know about the turmoil in the steel market. I am here to tell you right now that it’s too early for us to give you too much clarity. There is talk about surcharges. We have not seen official notification of that. So, it’s too early to predict when that impact could be, and what the impact would be.

But nonetheless, I reconfirm our EBITDA range for the year, in spite of the steel risk, at the current time if we get hit with steel charges; we anticipate that it might force us to the bottom half of our EBITDA range. But we think that we can keep it in there. Having said that, we haven’t seen a situation yet. So, I don’t want to speak over confident. We will react in the proper way, if and when the steel charges surface.

So with that, I would like to turn it over to our Chief Operating Officer to talk in more depth about our wheel business, Fred Bentley.

Fred Bentley

As Curt just highlighted, it is a challenging time in our industry, but I feel very confident with the actions that we’re taking, and we have taken over the past couple of years, that we are positioned very well to handle these challenges and to handle them well. We continue to make progress in our operations, and then the underlying financials of those operations, as Curt highlighted earlier in the presentation.

Our strategy of investing in the right geography, with the right products and the right customers is working. And what we mean by right customers is we want to be, with each of the OEM customers in the areas where they are growing, and we want to be a successful partner with them.

And I am pleased to show on Slide 14, a couple of places where our efforts have been recognized by our customers. Our plant in the Czech Republic, which produces steel wheels, was recognized by Ford in the last quarter as one of their top suppliers globally. We have invested in that facility recently, it’s one of our growth facilities, and I appreciate the efforts that the team has put in place to accomplish this and to be recognized for the second year in a row.

In addition, our facility in Brazil was recognized by Fiat as one of their top suppliers. So, again, congratulations to the team there. It means a lot to us when our customers say we’re doing a good job, so I’ll also say thanks to Ford and Fiat for doing that.

If you’ll flip with me to Slide 15, and talk about new business wins. The wins that we had in quarter one were in line with our expectations, although you see a number of around $80 million. This is wider than what we normally have. For those of you who’ve been on previous calls, that number that we talk about is a little bit over $400 million annually to keep that at a flat level. The reason for the $80 million was steel wheel opportunities were lighter in the first quarter than normal.

We feel very confident that the balance of the year will be on track. May was actually very strong. We’ve already won a couple of steel wheel contracts in May that will make the second quarter a larger number. So, we feel good about the new business wins. We feel good about the continued balance that we get in our customer portfolio, and we feel confident that the full year will be in line with the expectations for ongoing growth.

If you’ll flip with me to Slide 16, in the last call, there were a few questions around timing regarding our expansion activities, and I wanted give a little more clarity on where we are with each of these expansions, and we’ve highlighted the progress on the expansions.

You can see the ones in green are the three that we completed in the last six months. You can see in yellow, there are six in progress, and then I’m pleased to announce that we are going to be starting a truck line expansion in our Brazilian plant. The Brazilian market’s very strong. This is one where if we talk about the dynamics of the market being important to us.

There are two suppliers in Brazil for truck wheels. Obviously, we are one of them. The market is growing. So, we want to be able to support our customers and their growth in that market.

The second piece of this, which is important, we will also be able to improve our quality and productivity with this expansion. So, the quality improvements allow us to better match the requirements of our global customers like Volvo and Mercedes that have strong presence in Brazil. So we are excited about that and it’s a new project for us.

And again, I think the point here is that we are always looking globally for opportunities. We are trying to be ahead of the market, trying to be good predictors of what’s going on, and I think if you’ll flip with me to Slide 17, you will see that. To explain this, we have talked about our global diversity and our geographic diversity. What we’ve tried to do on Slide 17 is put more clarity to what that means.

What we’ve done is taken each of our three product segments in each of the markets that we are present in, and shown the general direction of what’s going on in that market. I think the point is that in the places where you see redlines going down, meaning the market’s basically down in that market, we have been ahead of the curve with capacity. We manage our capacity very tight.

And as Curt mentioned, on a couple of our restructuring items earlier, we are going to continue to manage our capacity relative to what’s going on in the market. It’s more profitable for us to keep our plants full versus chasing volume to fill plants up at lower prices.

The second piece is, and I think more importantly is, when we invest, we have been very successful in predicting where growth markets are, and you can see that in East Europe, Turkey, India and Brazil. We have invested over the past several years, and continue to invest in those areas. And those markets have been very strong.

It’s helped our top-line and bottom line over the past year, and it’s made our business more predictable, as we’ve moved away from some of the more volatile markets like North America and Western Europe. So, we’re proud of this story from a standpoint that we’ve been able to put stability into our company, and more importantly, we’ve made the right bets in growth markets.

If you flip with me to Slide 18, this gives you a little bit more color around the type of growth in each of the regions where we’ve invested, and it shows you by product what the growth is in each of those categories, and you see that we believe for 2008 and 2009, the growth will continue in the regions and in the products where we’ve invested, and we will continue to see growth in each of those regions.

If you’ll flip with me to the summary page on Slide 19, a couple of points. We continue to effectively execute our plan. Our base financials are improving year-over-year. We feel comfortable with our new business wins. We’re on track in each of our regions, and we think 2008 will be a good year with our new business wins, although we were off to a little bit slower start in Q1, driven more by again, remember by product than us losing any business that we expected to win.

The second point is, as we believe we’re going to continue to expand our global lead, we’ve made good bets in growth, as demonstrated on the previous couple of pages. It’s given us a much more advantageous competitive landscape. We are able to balance the ups and downs in our product and geography, and will continue to do that. As Curt mentioned, we are targeting positive free cash flow. We do have restructuring, and we did have some one-time working capital, but we are targeting ongoing positive cash flow.

And then finally, to put a little bit more color around steel. It’s a turbulent time in this industry. There is a great deal of uncertainty and moving parts. We are in discussions with suppliers. The first thing that I want to make clear is we expect our suppliers to live up to agreements that we have in place and we are going to hold our suppliers to those agreements.

The second piece is, is I want to remind you if you go back over the past couple of years, one of the things that we’ve done very well that’s helped us with our financial performance is we’ve been successful in recovering steel from our customers. Our intention would be to have mutual discussions, but to recover the cost that we would incur in our facilities, with pricing on the steel piece.

And the third point that I’ll make is that there are a few areas where we’ve had steel increases, but that’s normal, India and Brazil, and that’s part of ongoing business. And we are in discussions with our customers and have been successful in recovering that steel in each of those regions.

As Curt mentioned, we believe we’ve recognized what we know on the steel side in our guidance going forward; something that obviously we will be very close to, but we feel like we have a good handle on today, and we will be working very had over the next several months as the situation evolves.

With that being said, I think we had a good first quarter overall, and I am going to turn it over to Marc Brebberman, who is going to go through the financials in more detail. Marc?

Marc Brebberman

If you turn to Slide 21, I will walk you through our first quarter financial highlights. Sales for the first quarter of 2008 were approximately $574 million. And that’s up about $75 million, and we will get into the details of the year-over-year change in the next slide.

Adjusted EBITDA was $54.6 million for the quarter, up $4.5 million from the prior year, representing a 9% improvement. This is consistent with our guidance, and it meets or exceeds our expectations for the first quarter.

Core operating earnings increased by $4.1 million to about $25 million. Core operating earnings are a measure that we began using in 2007. We believe it’s a good measure of ongoing operational profitability. It excludes the impacts of items that are infrequent or non-operational in nature. We have included the definition and a reconciliation from earnings from operations to core operating earnings in the appendix, and we will discuss it in more detail later in the presentation.

Our net loss for the quarter was $12.8 million, an improvement of $2.5 million from last year. During the first quarter, we spent about $19 million on capital expenditures, an increase of $3.2 million from last year, largely due to the continuing expansion projects that Fred talked about in his section of the presentation.

Free cash flow, excluding securitization, was negative $55.3 million for the quarter. About $53 million lower than last year, largely due to the expiration of the special year-end payment terms that were alluded to earlier. And we will talk about this more in the free cash flow slide later in the presentation.

Overall, this is a strong quarter for the company. We have met or exceeded all of our key sales and profitability goals for the quarter, and we are about where we expected to be with regard to free cash flow.

If you turn to Slide 22, we have a walk through of our sales results from the first quarter of 2007 to the first quarter of 2008. Sales were $574 million for the quarter, up $75 million from last year. Stronger wheel volumes across our light vehicle aluminum and our commercial truck segment drove the increase in sales of $25 million.

This improvement would have been even bigger if it had not been for the American Axel strike. Our customer and platform diversity protects us from being affected on a large scale from these types of market events. But it did have a modest effect on our light vehicle steel sales, about $10 million for the quarter.

The continuing weakness of the U.S. dollar resulted in higher revenues of $70 million as foreign sales results are translated back into dollars. The impact of metal pass-through slightly increased revenues by about $2 million. The sale of our Wabash, Indiana powertrain facility in July 2007 resulted in a year-to-year decline in the first quarter of 2008 of about $17 million. And we will see a similar impact in the second quarter. Finally, other factors, principally product mix, increased sales by $5 million.

Turning to Slide 23, you’ll see that core-operating earnings increased 19% to $25.2 million during the quarter. As shown in the chart, gross profit was $7.5 million better than the previous year. The volume and mix net of price concessions were flat. We had good productivity in the first quarter that was offset by global increases in fuel and utility costs. Lower depreciation primarily resulting from asset impairments that we recorded in prior quarters and favorable foreign exchange were both positive factors.

These numbers also include the results of the Gainesville aluminum wheel and the Nuevo Laredo powertrain plants which we’ve announced our intent to close and sell, respectively. The combination of these actions will have a significant positive impact on both earnings and cash flow once they are completed. Finally, marketing, general and administrative, and research and development costs, increased by $4 million. And as we’ve called out in the chart, this is due primarily to foreign exchange rates.

Slide 24 summarizes our free cash flow for the first quarter. As previously mentioned, free cash flow, excluding accounts receivable securitization programs was negative $55 million, down $53 million from the prior year. Cash from operations was down $50 million from 2007 due primarily to unfavorable working capital of $53 million.

As we mentioned during our 2007 year-end call, in the fourth quarter we benefited from significant year-end special payment terms, as well as the timing of capital expenditure payments that were not repeatable and impacted our first quarter 2008 cash flow.

Quarter one is historically a period of cash outflow for us and this level of cash usage is essentially where we expect it to be at the end of quarter one. Our objective for 2008 is still a positive free cash flow, excluding the impact of restructuring activities. Capital expenditures increased by $3 million, primarily due to our continued investment in capacity expansions and leading cost in high growth regions.

Turning to Slide 25 you can see that liquidity remains strong. At the end of the first quarter we had liquidity of $249 million, up $114 million from the same period last year. This was due in large part to the equity rights offering and the refinancing completed in May of 2007.

On Slide 26 you’ll see on the left side of the slide our capital structure as of April 30, 2008, compared to April 30, 2007, and on the right side, our debt maturities by year. As a result of the refinancing and the rights offering, even with a substantial increase in the Euro compared to last year, and with most of our debt being Euro denominated, our net debt declined $95 million to $539 million.

And our leverage ratio declined to 2.7 times adjusted EBITDA. Also during the quarter Standard & Poor’s upgraded our unsecured debt to a rating of B minus. On the right you can see that the refinancing we completed in May of last year significantly extended our debt maturities. The earliest significant maturity date for our debt is now 2014.

If you turn to Slide 27 we will review our 2008 financial outlook. We are confirming our guidance for sales, which we project will be between $2.1 and $2.3 billion, adjusted EBITDA between $205 and $220 million, capital expenditures, between $95 and $105 million as we continue our strategic investment strategy. Last quarter we guided a positive free cash flow for the full year.

This did not fully anticipate the potential impact of steel cost increases or the full impact of anticipated restructuring costs. Our objective for ongoing operations is still positive free cash flow excluding restructuring costs. But we are stopping short of confirming this as guidance. During the next call, related to quarter two earnings in September, we will provide more clarity on free cash flow for 2008 as the impact of these issues become better known.

On Slide 28 we’ve provided perspective on the earnings growth in our continuing operations, which are essentially our wheel operations. In 2005 we reported an adjusted EBITDA of $185 million. This figure included the results from the hub and drum operations, which were sold late in that year. Similarly, 2005 and 2006 include the results from our suspension operations, MGG and the brakes business, which were all sold in 2007.

Excluding the results of these discontinued operations from previously reported 2005 adjusted EBITDA, we show a revised level of $139 million in 2005 from continuing operations. On the same basis in 2006, the figure would have been about $156 million, a 12% increase, and for 2007, $192 million, a 23% increase. For 2008 we expect additional growth of 7% to 15%, depending on where we end up within our guidance range.

So I think in summary, from 2005 to 2008 we expect total adjusted EBITDA from continuing operations to grow an impressive 47% to 58%. This growth in profitability reinforces what we have said in the past about the strength of our wheel business and the success of our strategic investments in that business.

Our quarter one results, where we’ve met or exceeded all of our key sales and profitability goals for the quarter and achieved a cash flow and liquidity level consistent with our expectations, reinforce the conclusion that we are on the right path.

I will turn the meeting back to Marika for the question and answer section of the call now.

Marika Diamond

This ends our formal remarks. We are ready to begin the question and answer session.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Alberto Garciatunen - Imperial Capital.

Alberto Garciatunen - Imperial Capital

The Russian expansion, how is that going? Who are you thinking of partnering with? Are you thinking of expanding in there more aggressively? And I also wanted to get more granularity specifically on the free cash flow number, because I saw last year, it was only negative $2.5 million. And this year it was negative $55. And your days sales were pretty comparable; it was 56 in 1Q, ‘07 and 54 in 1Q, ‘08. So, I just wanted to see if I could get a little more understanding why it was negative $55 million this year?

Fred Bentley

In Russia, we are in discussions right now about next steps. One of the things that we made clear when we talked about Russia over the past couple of years is we wanted to get some comfort level around operating in [inaudible]. I think we’ve done that. We are aggressively pursuing a couple of different options, one of which is greenfield, one of which is a joint venture.

We should have more clarity on that in the next quarter. It is a market that’s attractive to us. It fits the profile of the other markets that we’ve invested in. And it is a very interesting place to go forward. Alberto, we want to make sure that we make the right move there and we understand the business environment a little bit more clearly. We think we do have that understanding now, and in the next three months, six months at the top; we will have clear definition around what the specific plans are in Russia.

Marc Brebberman

Yes, I think we explained most of the negative free cash flow is related to working capital, and it really is attributed to the expiration of some special things at year-end as we talked about in our call. I think virtually all of the negative year-over-year comparison is related to the reversal of those one-time items. It’s a non-recurring, we may go through a little bit of cash in quarter two. But we don’t see anything at the level of what we did in quarter one.


Your next question comes from Mark Kaufman - MLK Investment.

Mark Kaufman - MLK Investment

About the tax rate, could you give me a little more clarity on that? And also, related to the last question about the special items at the end of the fourth quarter, accounts payable or whatever, receivables, I am not sure, which again. Do those come back again toward the end of the year?

Marc Brebberman

The first question related to tax rate. As I think we have talked about in past calls, it’s a bit of a complex situation for us. We have in the United States and certain other countries, we actually have net operating carry-forwards. And we don’t have either cash or any significant cash or book expense for taxes. When our 10-Q comes out today, you will see that our projections, our actual amount for quarter one was about $9 million and for the rest of the year, about $47 or $48 million. So, we’re in the $55 to $57 million range at the profitability we’re at.

In order to determine where we go from here, it depends on where the profitability grows. We’ve tended to do that obviously in places where we’ve made our strategic investments. And there is quite a range of tax rates in those countries; anywhere from zero to I don’t know 35% or 38% or 39%.

So, we’re at about a $56 million run rate. We have significant activities going on internally to try to improve that, and we think we will be over time be successful at improving that, but also as the business grows, the taxes will increase as we make more money in countries where we have a tax rate.

Mark Kaufman - MLK Investment

Would those come back as you get the special terms again at year-end?

Curtis J. Clawson

Well, I think when we look at cash flow, there is probably two different categories of things we’re going to work on. One is the discretionary items, and that would be things like capital expenditures where when we have to meet customer commitments, and we have to keep our plants maintained that there is some discretion to the timing of that.

And then when you look at those things that we can improve through our focus and effort, obviously, the core profitability is one, our footprint, and I think we’ve been pretty aggressive about our willingness to make tough decisions about plants that are not a strategic fit or not performing well.

And then the third area in that category would be working capital. And so, we will work on both trying to make permanent improvements in working capital. We will work with our customers and our suppliers and our internal processes in buying and planning to improve permanently our working capital, and then when it makes sense, we will work on improving taking advantage of special situations that take place. So, we’re going to work all those things and the payment terms would be one.

Mark Kaufman - MLK Investment

On taxes now, what were the cash taxes actually in the first quarter?

Curtis J. Clawson

Was about $9 million.

Mark Kaufman - MLK Investment

You’re thinking around the $50, was it 50?

Curtis J. Clawson

About $55, $56 through the full year.

Mark Kaufman - MLK Investment

Cash taxes for the year?

Curtis J. Clawson



Your next question comes from Nicole Terraco – Babson Capital

Nicole Terraco - Babson Capital

Cash flow, could you quantify what the one-time impact was this quarter? What of the working capital of that $53 million negative is one-time?

Marc Brebberman

Yes, I don’t think we typically give that detail, but I would say that it’s the vast majority of the total $50 million. Without putting a specific number on it, it would be the majority of that.

Nicole Terraco - Babson Capital

What’s your revolver availability and do you have any LCs outstanding?

Marc Brebberman

We have $125 million, and there is basically nothing drawn against it. LCs, I think we have one small one. Basically the $125 million is pretty much available, virtually all of it.

Nicole Terraco - Babson Capital

About $1 million in LCs, you’re saying?

Marc Brebberman

Yes, it’s probably a little bit more than that. But you probably have the right number of digits in the number.


Your next question comes from Dirk Friedkin - Troob.

Dirk Friedkin - Troob

On Slide 25, you show how your liquidity’s improved over time, and we’re just wondering what if you can give us some color on what the potential uses of cash are going forward, if there is a potential of maybe buying some shares back or something along those lines?

Curtis J. Clawson

We continue to listen to your advice on this, from firms like, well Troob and other people. I want to get through the summer, I want to see what going on with steel, and I’m still a little nervous about the global marketplace. So, I would agree with you all that we have some space on cash, but given what could become a little bit after everything I’ve lived through here, I want to be a little careful with the market. I want to be a little careful with the steel, and as I’ve shut down a couple of plants, I want to have a bit of a buffer.

So, I think you’re making a good point. I just feel it’s too early for me to make a decision. I want to get through the steel thing and I want to get through the restructuring thing, and then, I think it’s a more timely moment for the question. I think it’s the right question, but as much as I know you hate it, I want to delay the answer until the fall, until I’ve got more confidence on what we need to execute between here and there.

And maybe that’s just too many years of living on the edge here, but now that I’m not on the edge any more, I just want to be careful for a little bit longer.


Your next question comes from [Brian Hennessey - LightSpeed].

[Brian Hennessey - LightSpeed]

What was the capacity of the Gainesville facility? I’m just trying to understand the barriers to entry in the steel wheel business. Can you give us a sense for what percent of the total cost of steel wheel consists of freight cost for the Chinese exporters? Just trying to get a sense for the threat from imports in North America and in Europe?

Fred Bentley

The answer to your first question was about 1.2 million wheels annually was the capacity. And utilization in the plant was never quite that. As a matter of fact, we are running at about 600, 650,000 wheels in that plant today.

Most of that volume we intend on moving to our plant in Chihuahua. It actually works out fairly well because we have a large program that ends in Q4 of this year that frees up some capacity in our Mexican plant. So, it allows us to get out of a losing plant from a cash standpoint, and fill a hole that we had in our Mexican plant for 2009 and ‘10. So, it’s a good move both from a capacity utilization and from a cost standpoint.

The second question on steel and barriers to entry. There is a big difference on steel in a couple of areas relative to barriers. One is, is that it’s a much more capital-intensive business. It requires a significant investment in press-type capacity, which is more expensive than on the aluminum side.

And the second piece is there is a technological understanding of making steel wheels that I’ll tell you it’s more complicated to get up the learning curve on the steel side.

The third piece which is not talked about often is just the capability of steel suppliers. We use certain types of steel in both Europe and around Europe and North America that is not readily available today in Asia, and is probably several years away. So, there is also a weight difference on the steel today that probably will at least remain for the next several years. So, those are the three largest barriers to entry.

The third piece, we do not give a lot of detail around specific product costs, but I will tell you that the freight piece typically and again, with what we know today, if currencies and all that changes, it maybe is a difference answer tomorrow. But today, the freight piece on a passenger car steel wheel is more than the labor content on most steel wheels. So, there is a significant freight penalty from Asia into both Europe and to the US. And obviously, there is an exception or two to that, but as a rule, that’s the way it works, which is different than on the aluminum.

[Brian Hennessey - LightSpeed]

Unless things change dramatically, you would expect that the difference in labor costs is not enough to offset the freight cost?

Fred Bentley

Assuming that the playing field’s level, and there’s not significant subsidies, and the steel price is a global steel price, yes. And today, that is the case more or less.

[Brian Hennessey - LightSpeed]

I think aluminum wheels, and this is true of steel wheels as well for passenger cars. There was a major subsidy pretty much out of China, right?

Fred Bentley

There were a number of incentives and subsidies on aluminum and aluminum exports that are slowly going away. But yes, absolutely, that was the case. And it was a targeted industry for export, were aluminum products. Now, again, tomorrow that may change. The other benefit on steel is it’s a big energy user to produce steel. And with what’s going on in that area today, it’s probably less likely going forward that you would subsidize this, but that’s a hard thing to predict.


Your next question comes from Jeremy Hellman - Singular Research.

Jeremy Hellman - Singular Research

Fred, if we could go to Slide 18, I just wanted to have you give some color in terms of the relative size of your expansions in your growth regions? Are these all getting roughly equal amounts of capacity, or are there are big variants from market to market?

Fred Bentley

Yes, why don’t I do it this way, because I don’t want to give that amount of detail, but what I can do is characterize the type of expansion. So, for instance, in India on our truck wheel plant, that’s a new plant. So, it’s a significant investment. Our light vehicle plant in India is a new plant, so it’s a significant investment. In Thailand, South Africa and Eastern Europe and Brazil on the truck line, those are expansions to existing capacities, so it’s more of an incremental increase than a significant increase.

And then in Turkey, we have both in our pass car steel and our truck wheel plants they’re incremental investments. And the aluminum plant was a new plant that was zero wheels, and it’s going to be about a million wheels of output this year. So, it’s a little bit of both. And hopefully that’s enough color. I do not want to give the details on units in each of those, that’s public information.

Jeremy Hellman - Singular Research

As you are going about adding this capacity, I know you’ve been pre-selling some of that. Has there been any marked change in the amount of capacity that’s being spoken for in these plants?

Fred Bentley

We are on track with what we expected to sell. We do not have any plant that has significantly lowered. So we are feeling good about the investment. And then in a few places we’re adjusting a little bit around to meet some unexpected requirements. But in both cases, it’s not significant enough to make it a big deal.

Jeremy Hellman - Singular Research

Turning to the U.S. and obviously, you are continuing to ratchet down your U.S. exposure. But is there any discussion that’s warranted around a lot of the recent news is around the Big Three really shifting their production mix away from larger vehicles to smaller vehicles. And I want to see what implication that may have for you in terms of smaller units and so forth?

Fred Bentley

Yes. It really actually it works for us on the aluminum side because the only plant we have left is in Mexico. So, if it goes to smaller we’re able to compete in our Mexican operation. And then on the steel wheel side, I’d go back to the earlier question. The smaller the wheel gets the more the logistics piece plays to our favor. So it reduces the risk of having import wheels come into the U.S. And our steel wheel plant in Missouri is more than capable of being competitive, both on large wheels and small wheels.

Jeremy Hellman - Singular Research

I don’t think I have ever run into a management team that didn’t think their stock was undervalued. I certainly think it’s undervalued. If you’re willing to share with us, why would you think that your stock is undervalued right now, and what are your plans to address that?

Curtis J. Clawson

To the extent that we trade at a lower multiple than colleague peers and depending on who we talk to we get different answers to that, so. But to the extent that that may be true, we believe that we are valued and compared to domestic automotive stocks that are more U.S. Big Three-based, Detroit Three-based, as opposed to what our geographic and customer and product portfolio is, which is more international, diversified customer base with a big chunk of international commercial vehicle wheels.

And so we think that that the underlying thesis of what we are trying to do and what we have accomplished in the last several years is probably not well understood in the maelstrom of bad news that has become the domestic automotive industry and automotive stock performance today in Detroit and in the USA.

We hear different views on how to break out of that. We remain, number one, focused on performance and executing this strategy of diversification away from North America. And number two, spending as much time as we can on both sides of the ocean beating the drum so that more and more people can understand the story.

I personally believe that the technicals drive the stock in the short term. And in the longer term, this execution story that I just explained to you will become more understood, and as there’s less trepidation out there it will therefore ignite our stock price.

But I am patient. And I believe that if we do the right things and we continue to expand in the right areas and build our EBITDA and our cash flow that the recognition eventually will come. If you pin me down on when that’s going to be, I just can’t tell you. But I do know that I feel pretty happy with where we are, although not yet satisfied and confident about the future.

Jeremy Hellman - Singular Research

I just wanted to see if you have any update you can share with us on the CFO position?

Curtis J. Clawson

First of all, I want to say that we thank Jim Yost for his contributions to the company. I think just, if you think about what he and his team accomplished over the time that he was here, it is just undeniable. It’s a great success. So we wish him all the best and his departure was a very positive thing. And we miss him, but we’re happy for him. And we remain close friends of Jim, with me and with the entire group.

Part of his success, of course, was driven by the fact that he was smart enough to surround himself with a strong team. And therefore, we have a strong team here today. I think you get that sensation and that feeling if you listen closely to Marc Brebberman. He and the other folks around this table today are on top of the details.

So therefore, I don’t feel as CEO of the company in an immediate rush to fill the void because we do have such a strong team there. And we are in conversations now with other Board members on how to decide to move forward. And other than that, I don’t want to preface anything, although I am really confident in the short-term things will continue on the same path. And whoever fills that job has got a great team around him or her. I think by the next conference call, of course, will have this sorted out.


Your last question comes from [inaudible].

Unidentified Analyst

I have one question on the working capital movement and the swings you had in the first quarter. Do you expect it to revert by the end of the fiscal year, the swing you had in the first quarter?

Marc Brebberman

Do we expect it to revert? We will take actions to try to optimize our balance sheet. So, but I don’t think we can predict that. I don’t think we would predict that it would reverse, but we will do what we can to optimize our balance sheet.

Unidentified Analyst

For the full year you gave a guidance of positive free cash flow. But given where you are today in the year do you expect for working capital to be a positive to your yearly cash flow, or is it too soon to say?

Marc Brebberman

We did not reconfirm our guidance for free cash flow. I think what we said was that we have an internal goal to be free cash flow positive and that we would give you more direction at the end of quarter two, on our quarter two call, when we have a bit more clarity around steel costs and around the restructuring initiatives. So, we did not reconfirm that. We stated that as an internal goal.

Unidentified Analyst

I see a slight increase in your long-term debt, but I see nothing in your cash flow from financing activity that suggests this increase. So am I right to believe that this is FX-related?

Marc Brebberman

Yes, it’s almost all FX-related, yes.

Marika Diamond

Thank you very much. We would like to thank you for participating in Hayes Lemmerz’s 2008 fiscal first quarter conference call. We appreciate your continued support.

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