Hayes Lemmerz Intl: Reinventing the Wheel
It’s been a long and sometimes rocky road for Hayes Lemmerz International (Nasdaq: HAYZ) since its founding companies manufactured wood-spoke wheels for Henry Ford’s Model T. The Northville, Mich.-based maker of steel and aluminum wheels has survived the decline of the Big Three automakers in Detroit and a Chapter 11 reorganization earlier this decade, and now seems on track to reap the benefits from its concentrated effort to restructure operations and restore profitability.
The company earlier this month announced solid gains in sales and earnings for the first fiscal quarter ended April 30, and said it was on target to reach full-year goals of $2.2 billion in sales and $200 million to $210 million in EBITDA, compared with $2.06 billion and $188.6 million in the year ended January 31.
Hayes Lemmerz is the global leader in supplying steel and aluminum wheels to passenger cars and steel wheels to commercial vehicles. It has had a laser focus in the past couple of years in positioning itself in the global automotive market and now realizes three-quarters of its sales outside the United States (and four-fifths of its wheel sales). While it still depends heavily on the Big Three in the Unites States, it has won virtually all the major European and Asian carmakers as customers as it shifts production to low-cost sites in Czech Republic, Turkey, Thailand and India.
At the same time, it has shut down and sold off non-core operations in the Unites States and in general downsized the company, going from 43 facilities and 11,000 employees when it emerged from Chapter 11 in 2003 to 30 facilities and 8,500 employees now. Of those 30 facilities, only seven, with 1,500 employees, are in the Unites States – the remaining 23 facilities and 7,000 employees are spread among 13 foreign countries. Wheels, which represented two-thirds of sales in 2003, are projected to account for 84% in 2007. Other products include components for brakes and powertrains.
The company followed up its operational efforts with a successful capital restructuring this spring, raising $180 million in a rights offering, plus a $13 million direct investment by manager Deutsche Bank, to retire senior debt. It consolidated the rest of its debt in a $495 million syndicated loan and a $175 million euro-denominated note offering in Europe, so that the end result is to slash $24 million annually from its interest expense ($76 million in the past fiscal year), extend maturities (the earliest now is 2013), and better match its income streams.
The share price, at about $5.50 recently, is off its 52-week high of $7.98 in April prior to the rights offering, and still way above the 52-week low of $1.64 last August. Current market cap is about $550 million. Support for the rights offering was enthusiastic – it was “significantly” oversubscribed, enabling the company to raise the maximum projected amount. The company hasn’t yet regained the attention of analysts; the only two participants to ask questions on last week’s conference call to discuss quarterly earnings were from Deutsche Bank and Bank of America.
That call was upbeat, as top managers discussed expanded production in Turkey and India. Capacity expansion always comes to meet demand, they stressed, and not on speculation. Capital spending for the current fiscal year is projected at $90 million to $95 million, compared with $123.5 million last year.
Curtis Clawson, chairman and CEO, came to the helm of an ailing Hayes Lemmerz in 2001 and took it into voluntary bankruptcy proceedings. The young Harvard MBA, then 41, had spent 14 years in the automotive industry before joining Hayes Lemmerz. Clawson brought in Fred Bentley, who now, at 41, is chief operating officer and head of the Global Wheel Group, accounting for the lion’s share of the company’s business. He is a Six Sigma black belt, a certification of expertise in “lean enterprise” operations strategy.
Company officials attributed first-quarter sales increase of 11.4 percent to $561 million to the weak dollar and the ability to pass through cost increases in aluminum and steel as well as to higher volume. Wheel sales in low-cost areas increased 16%, the company said. Executives noted that the increase in sales came despite an 8% decrease in production by the Big Three.
Earnings from operations were $20.1 million in the quarter, compared with $7.4 million in the year-earlier period. Adjusted EBITDA was $54.6 million, up 20% from $45.4 a year ago. The net loss in the quarter was $15.3 million, or $0.38 a share, compared with $17.6 million, or $0.46. The loss from discontinued operations in the current year period was $4.5 million, or $0.11 a share. The net loss for the full year last year was $166.9 million, or $4.36 a share, with the loss from discontinued operations contributing $46 million of that. While free cash flow was a negative $5 million in the first quarter, executives said the company is on track to achieve positive free cash flow for the year.
Hayes Lemmerz continues to expand its business in industrialized countries – it won new orders in the first quarter from Toyota Motor Corp. (NYSE: TM), Honda Motor Co. Ltd. (NYSE: HMC), Nissan Motor Co. Ltd. (Nasdaq: NSANY), Volkswagen AG, Audi AG, BMW and Renault. But it is also positioning itself to seize opportunities in industrializing countries, particularly the BRIC nations – Brazil, Russia, India and China.
By their own reckoning, the management team at Hayes Lemmerz has not quite completed their restructuring goals, but they are nearly there. What’s certain is that there will be lots of cars and trucks sold globally in the coming decade, and each of them will have four wheels. In its various markets, Hayes Lemmerz faces competition from Accuride Corp. (NYSE: ACW), Alcoa Inc. (NYSE: AA), ArvinMeritor, Inc. (NYSE: ARM), Otto Fuchs, Superior Industries International Inc. (NYSE: SUP) and Japan's Topy Industries, Ltd. – but a lot of those wheels will be theirs.
