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Three Bankruptcies Later, Grede Faces Upbeat 2011

The supplier’s prospects are surprisingly strong in the ferrous-iron casting sector, not known for high valued-added content. And signs point to an improved second half.

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SAE World Congress

DETROIT – Few auto suppliers can say they endured three bankruptcy filings within the last six years and lived to tell about it.

Grede (pronounced gray-dee) Holdings is among the few. Private-equity investments one year ago resurrected the supplier of ferrous-iron castings used in engine, transmission, steering, chassis and axle applications, as well as for brackets, manifolds, slip yokes and housings for turbochargers and pumps.

Today, business prospects are surprisingly strong in a commodity sector not known for high valued-added content: Sales were up 42% from 2009 to 2010; capacity utilization at the company’s 15 North American foundries averages an impressive 90%; and a sizable investment of $27 million is being plowed into facility and equipment improvements this year.

Plus, all three of Grede’s sectors – automotive, commercial vehicles and industrial equipment – are doing well this year, bucking the cyclical see-saw trend that has prevailed historically.

“Right now, everyone’s saying the economy is starting to get a little soft,” says Douglas Grimm, Grede’s chairman, president and CEO, at a media briefing here during the SAE International World Congress. “But we say get ready for the second half. It will be better than the first.”

Fueling his forecast is his No.1 customer, Caterpillar, which says demand for heavy equipment should rise in the coming months as the reconstruction of northeast Japan gets under way after the devastating earthquake and tsunami.

“They’ve said overall to expect their volumes to double over the next two years,” Grimm says of Caterpillar, which purchases 1,300 part numbers from Grede. “That’s their goal. They’re bullish, and they buy right now from seven of our 18 plants.”

Grimm also predicts the turbocharger market will quadruple over the next eight years. Grede is North America’s No.1 supplier of turbocharger housings for Class 5-8 trucks.

Grede Holdings was formed in February 2010 by combining Citation, Grede Foundries and Blackhawk USA. Each company had struggled to remain independent. Citation filed for bankruptcy in September 2004 and again in March 2007. Grede Foundries landed in bankruptcy in June 2009.

Enter private-equity fund Wayzata Investment Partners from Wayzata, MN, which acquired and consolidated all three companies several months later. Three foundries were closed in Texas, South Carolina and Kansas, and a fourth was sold.

Group sales improved to $735 million in 2010 and that figure is expected to reach $875 million this year.

This week, Grede acquired two foundries in Mexico near Monterrey from Grupo Proeza for an undisclosed sum. Factor in the additional Mexico sales and Grede’s 2011 revenues should approach $1 billion, if business remains good, Grimm says.

With its restructured balance sheet and laser focus on the bottom line, Grede is in a position to make money – not a ton, but enough to sustain itself and the interest of its investors.

“We’re just trying to make 4%-5% net income, to be a regular company, to pay taxes like we do now,” Grimm says. “We’re not in the electronics business making 30% net income. We’re just trying to make a decent return to invest back into the company.”

Grede has 4,600 employees at 18 facilities in North America, including the two Mexican foundries, 11 more in the U.S. and three machining operations.

The supplier has disproven the notion that U.S. manufacturers cannot compete with low-wage regions of the world, particularly in the mature field of iron castings. Grede plans to inject some new technology into the sector by integrating lost foam casting into its manufacturing operations.

Conventional green sand casting of ferrous-iron components has been the norm for decades, but those parts generally need to be machined afterward. The lost foam process allows complex shapes to be manufactured in a single lightweight casting that requires little or no machining afterwards.

Grede says the process saves energy, requires fewer suppliers and reduces weight up to 30% and overall cost up to 40%, although additional equipment is necessary. The supplier’s plant in Columbiana, AL, is dedicated to lost foam production. Despite the benefits, Grimm admits some customers are reluctant to make the switch.

While carving out a tidy niche in North America, Grimm says his company does not intend to go global, focusing instead on its “knitting” in the home market. The industry trend for more than a decade called for auto suppliers to set up satellite operations in far-flung locations to support their OEM customers wherever necessary.

But that philosophy has lost traction as wages rise in emerging markets, offsetting some of the cost advantage.

“Everyone’s kind of moving more toward their region of the world to supply,” says Grimm, who worked in purchasing at Chrysler and Dana and recalls mandates during the 1990s that 10% of a company’s purchases needed to come from China.

“Every purchasing vice president in town had that objective,” he says. “You don’t hear that anymore. It’s truly gotten down to, ‘Yes, it’s a global supply base, but where does it make sense to buy your parts? Where is the best quality, the best price, the best logistics, the best total acquisition costs?’”

With so many automotive suppliers – and two U.S. auto makers – landing in bankruptcy court, Grimm says the relationship between parts producers and OEMs has become less adversarial.

For proof, he points to car companies increasingly willing to accept that suppliers must pass along raw-material price increases.

That was unheard of until the last few years, and suppliers had no option but to swallow the extra costs. As a direct result, Grimm says several iron-casting producers went bankrupt in 2004.

Eager to avoid repeating history, Grede will not supply customers unwilling to accept raw-material price increases. “We can’t do that,” Grimm says. “Nobody can sit back and say, ‘We’re going to absorb this stuff.’”

What keeps Grimm awake at night is concern about his plants. One of Grede’s foundries dates back to 1920. If any machines break down, a customer order might not be filled, which would be disastrous.

The challenge is to keep the furnaces hot at 2,000º F (1,093º C) and the machines running and producing, while finding enough time for maintenance, generally on weekends.

Shutting down the foundry for a week or two and turning it back on “costs a ton of money,” Grimm says. “We’ve got to keep our foundries moving. That’s when they run efficiently and make good parts, and we have a chance to make money. If we’re not doing that, it’s bad.”

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