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Wabash National Corporation (WNC) Q3 2013 Earnings Report, Transcript and Summary

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Wabash National Corporation (WNC)

Q3 2013 Earnings Call· Thu, Oct 31, 2013

$8.66

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Wabash National Corporation Q3 2013 Earnings Call Key Takeaways

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Wabash National Corporation Q3 2013 Earnings Call Transcript

Operator

Operator

Welcome to the Third Quarter 2013 Earnings Call. My name is Vanessa and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. And I will now turn the call over to Dick Giromini, President and CEO. Sir, you may begin.

Dick Giromini - President and Chief Executive Officer

Management

Thank you, Vanessa and good morning. Welcome to the Wabash National Corporation 2013 third quarter earnings call. This is Dick Giromini, President and Chief Executive Officer. Joining me today is Jeff Taylor, Acting Chief Financial Officer and Treasurer. Following this introduction, I will provide highlights for the third quarter, the current operating environment and our outlook. After which, Jeff will provide a detailed description of our financial results. At the conclusion of our prepared comments, we will open the call for questions from the listening audience. Before we begin, I’d like to cover two items. First as with all these types of presentations, this morning’s call contains certain forward-looking information, including statements about the company’s prospects, the industry outlook, backlog information, financial condition and other matters. As you know, actual results could differ materially from those projected in forward-looking statements. These statements should be viewed in light of the cautionary statements and risk factors set forth from time-to-time in the company’s filings with the Securities and Exchange Commission. Second, please note that this call is being recorded. Let me start by saying I am extremely pleased with the overall results that the team was able to deliver in the third quarter establishing new milestones of performance with record revenue, gross profit, operating income and operating EBITDA. All business segments contributed to this success with further opportunities ahead. We continue to gain momentum as we leverage synergies among businesses and pursue a higher growth in margin profile. Our growth strategy and disciplined approach to improving profitability includes driving operational improvements in all aspects of our business, in particular, our manufacturing operations and developing innovative product offerings that our customers value and need. Consolidated net sales for the quarter were $440 million representing the highest quarterly revenue ever reported by Wabash National…

Jeff Taylor - Acting Chief Financial Officer and Treasurer

Management

Thanks, Dick and good morning. In addition to the press release, we filed a 10-Q after the market closed yesterday as well. So I plan to hit the highlights. With that, let’s begin. Revenue for the quarter was $440 million, an increase of $34 million or 8% compared to the third quarter of last year. This year-over-year improvement in revenue is attributable to strong demand in our Commercial Trailer Products and Diversified Products segments offset by a slight decline in the Retail segment. As Dick mentioned, total revenue for the company is an all-time record for any quarter. Sequentially, total company revenue increased $27 million or approximately 6% on higher new trailer shipments from Commercial Trailer Products partially offset by slight decreases from Diversified Products and Retail. Moving on to the segment, Commercial Trailer Products net sales were $294 million, which represents a $12 million, or 4% increase on a year-over-year basis due to higher new trailer shipments of approximately 300 units. Trailer average sales price, ASP increased $200 per unit reflecting a stable or slightly improving pricing environment as well as our continued strategy to be selective in order acceptance and place a priority on margin over volume. On a sequential basis, net sales for Commercial Trailer Products increased $28 million, or 10% on approximately 1,000 additional new trailer shipments. Consistent with our prior guidance, new trailer shipments continued to ramp up in the third quarter while a number of anticipated September pickups occurred in October. Diversified Products net sales increased 21% or $23 million to $132 million on a year-over-year basis as a result of strong market demand from all businesses within this segment, Walker Group, Wabash Composites and Wabash Wood Products. Walker Group revenue was higher due to new trailer shipments increasing approximately 100 units. Wabash Composites…

Operator

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And we have our first question from Brad Delco with Stephens.

Brad Delco - Stephens

Analyst · Stephens

Yes, good morning Dick. Good morning, Jeff. How are you guys?

Dick Giromini

Analyst · Stephens

Hey, Brad.

Jeff Taylor

Analyst · Stephens

Good morning.

Brad Delco - Stephens

Analyst · Stephens

Just going to ask two quick questions. Dick, kind of hidden there in some of your comments, but you said you expect that the Commercial Trailer Products gross margins can hit double-digits in the next four to eight quarters, can you just kind of lay out for us what it would take to get there in four quarters and then what it would take for you to be there at the tail end of that eight quarters? What kind of pricing environment are you looking at? What kind of demand environment, etcetera?

Dick Giromini

Analyst · Stephens

Yes, obviously the demand environment would need to strengthen some, give us a little bit more pricing leverage. The pricing environment right now is stable and we continue to nibble at the edges, be able to pickup a little bit here and there. But if it strengthens, it can get close to what ACT is thinking that the numbers will be – then that gives us a little bit more leverage and that would help. Importantly, also is the – is out in the manufacturing floor, the workforce is much more stable and gaining – continuing to gain proficiency and productivity continues to improve on the factory floor. And as I commented, the opportunities to further optimize line speeds and be able to increase the absorption on a per unit basis for overheads will help that cause also. So it’s a combination of strengthening demand environment combined with continuing improvement on the factory floor will help deliver that. So the sooner we see some of that the sooner we get to the double-digit, but certainly I do believe that it is realistically achievable to get there over the next four to eight quarters.

Brad Delco - Stephens

Analyst · Stephens

Just to make sure I understand, so if demand is in line with the ACT forecast, you think you can get there next year, is that right?

Dick Giromini

Analyst · Stephens

Yes, I think certainly there is a possibility. And we will have to see how it all pans out, how quickly we can get the productivity improvements that we have laid out in our planning. So it’s possible, it could fall into the following year and that’s why I have kind of framed it at a four to eight quarter timeframe.

Brad Delco - Stephens

Analyst · Stephens

That’s good color. I appreciate that, Dick. And then second, Dick, it’s probably for you as well, you mentioned you guys are having pretty good discussions right now with customers for orders for next year and that it seemed as if those discussions are at least exceeding the same level of discussions you had the prior year. Can you kind of give us some color as to who these customers are? Has the mix changed at all this year versus last year? Is it smaller fleets, larger fleets, fleets where you think you could have more pricing power kind of just that dynamic would be helpful?

Dick Giromini

Analyst · Stephens

Yes. Early on in the coding season, typically the conversations are with the larger fleets. So I will just frame it that way. As you progress through the year into next year, you will be talking with more of the midsize and smaller fleets. So at this juncture, most of those types of conversations where numbers are actually being talked about as far as number of units needed tend to be with the larger fleets. And in most cases, there is a strong appetite by those customers for more equipment than what they were talking about it this time a year ago. So again, we have to see how all plays out as those discussions convert into actual orders, but we feel very good about where those dialogues are currently.

Brad Delco - Stephens

Analyst · Stephens

Great. Well, thanks for the color there. And I’ll turn it over to someone else.

Operator

Operator

Thank you. Our next question comes from Steve Dyer with Craig-Hallum Capital.

Steve Dyer - Craig-Hallum Capital

Analyst · Craig-Hallum Capital

Thanks. Good morning guys.

Dick Giromini

Analyst · Craig-Hallum Capital

Hey, Steve.

Steve Dyer - Craig-Hallum Capital

Analyst · Craig-Hallum Capital

You have done – on the gross margin line you guys have done a great job over the last quarters and years of really bringing that up pretty meaningfully. Volumes sort of all else equal, how much juice is left there, trying to get some sense as to the comments sort of implied, but we shouldn’t necessarily take that higher in future quarters, but how much – sort of how much juice is left in that gross margin line just assuming shipments are flat?

Dick Giromini

Analyst · Craig-Hallum Capital

I have used the terminology we can nibble around the edges. When it comes to gross margin, well, it comes to the pricing side of improving gross margin. We’ll continue to push and drive as I was just in my comments to Brad’s question we are still going to continue to push on the factory floor in all our locations, most significant in our Lafayette operations where opportunities to continue to improve line speeds will help bring some gross margin improvement. So there is still opportunity. We firmly believe that 10% double-digit gross margin for the Commercial Trailer Products business is well within reach. We just need to execute and we need a stable solid and some improvement in the demand environment to get us all the way there. So you could therefore say there is a couple points of opportunity over the next four to eight quarters to achieve there. On the Diversified Products side, I wouldn’t look for gross margin improvement as much as I would look for continued opportunities to grow the revenue side with new product introductions and getting into some other markets with Wabash Composites continuing to grow in that opportunity there. And even on the Retail side, it’s turning into – I guess you call it a mini growth engine as they continue expand mobile service opportunities, continue expand the ability to provide parts and service across all the locations for tank trailer products and also these customer site service opportunities. So there is going to be some opportunities there to continue to grow

Steve Dyer - Craig-Hallum Capital

Analyst · Craig-Hallum Capital

Perfect. Thanks for the color. Wondering kind of how you would characterize your visibility into next year, I know it’s kind of early in the order cycle. Some of our contacts in the industry have suggested that people are still really reluctant to buy a lot more than they really sort of have to in the very near-term. How would you kind of characterize your visibility out into next year maybe relative to last year or sort of your expectations?

Dick Giromini

Analyst · Craig-Hallum Capital

Yes, those are the comments I was making in my formal comments in responding to Brad that what we are hearing at this point and confirmed at the ATA Conference last week is that there seems to be a stronger appetite or need for more equipment this year than there was at the same time a year ago in the discussions. If someone was asking for 700 trailers last year, they might be asking for 900 this year. In some cases, it’s even more appreciable difference between year-over-year. What they end up actually converting from those discussions to what it actually ends up needs to play itself out. But certainly at this point, the dialog that’s been taking place is very favorable to a stronger demand environment next year than it was at this point a year ago. And there is noise both years. I mean, last year, of course, the noise was tied around the election, this year the whole noise is again tied around Washington. So it remains to be seen what – when customers actually pull the trigger and place the orders if they still feel good about where they are at, but discussions as recently as last week with those – with number of the customers was very positive.

Steve Dyer - Craig-Hallum Capital

Analyst · Craig-Hallum Capital

Okay, great. And then just in general, how would you characterize sort of the competitiveness/pricing in the industry is everybody still – it seems as though it’s pretty firm, can you kind of comment a little bit on that?

Dick Giromini

Analyst · Craig-Hallum Capital

Yes, I think that it’s stable. There is not anyone out there trying to really push price, I mean we are the guys that lead that charge and we have been very, very consistent with our approach. There is always those odd ball deals out there that you scratch your head and you go what were they thinking. And our guess is that some folks from time-to-time are looking to fill some build slots and they go after a deal here and there, but certainly the tide has risen significantly. Everyone is charging significantly more than they did a year and a half ago. So it’s solid, reasonably stable, but not seeing the kind of increases that we would have seen from a year and a half ago from the prior year. You are seeing much more nibbling, as I like to call it, nibbling around the edges.

Steve Dyer - Craig-Hallum Capital

Analyst · Craig-Hallum Capital

Okay, great. I will hop back in the queue. Thank you.

Operator

Operator

Thank you. Our next question comes from Jeff Kauffman with Buckingham Research.

Jeff Kauffman - Buckingham Research

Analyst · Buckingham Research

Thank you very much. Hey guys congratulations.

Dick Giromini

Analyst · Buckingham Research

Thanks Jeff.

Jeff Kauffman - Buckingham Research

Analyst · Buckingham Research

I just wanted to dig down a little deeper into some of the comments on the customer bad debt and try and get some parameters around number of trailers that you think probably should have shipped in September that ended up shipping in October so that we can make model adjustments?

Jeff Taylor

Analyst · Buckingham Research

Okay. Yes Jeff, I mean as I commented in my prepared remarks there, that the bad debt was specific to an individual customer. It’s something that was identified during the quarter and we certainly don’t expect that to repeat itself.

Jeff Kauffman - Buckingham Research

Analyst · Buckingham Research

Okay. Can you give us an idea of the materiality like $0.5 million, $0.25 million and $0.75 million?

Jeff Taylor

Analyst · Buckingham Research

It’s between $0.5 million and $0.75 million.

Jeff Kauffman - Buckingham Research

Analyst · Buckingham Research

Okay. And Dick on the trailers that shipped in October, it was interesting because we saw it in the working capital and the receivables and the inventory, are we talking a couple of hundred trailers, are we talking something closer to 500, 600, 700 trailers?

Dick Giromini

Analyst · Buckingham Research

It’s always hard to pinpoint, which one.

Jeff Kauffman - Buckingham Research

Analyst · Buckingham Research

Understood.

Dick Giromini

Analyst · Buckingham Research

Fall from one month to the next month, it’s really when customers are able to come and pick that equipment up, but certainly several hundred units that we would have expected and anticipated in September rolled over into October. In my comments and I misstated when I said already exceeded 5000 what I meant to say we are already close to 5,000 units shipped for the month with certainty to well exceed 5,000 in October, but certainly over several hundred of them that rollover into this.

Jeff Kauffman - Buckingham Research

Analyst · Buckingham Research

Okay, so relative to your original guidance range your feeling was that’s the difference between being at the low end of the guidance range versus maybe the midpoint of the guidance range?

Dick Giromini

Analyst · Buckingham Research

Absolutely.

Jeff Kauffman - Buckingham Research

Analyst · Buckingham Research

Okay. And then just one other question I will turn it over. You guys are executing really well, the margins are up nicely, you are paying down debt, where are we in terms of consideration of allocating some of that free cash towards shareholder return on capital, whether it’s dividend or share buyback, is that something the Board would look to consider towards year end for 2014?

Jeff Taylor

Analyst · Buckingham Research

Yes, thanks Jeff. First let me say that we are very proud of the fact that we made $220 million debt payments this year effectively taking $40 million of debt out up to this point. We continue to work on lowering our overall total debt leverage ratio. So currently we are sitting at 2.8. We are comfortable with where we are as we move through the cycles, we get more towards the latter part of the middle innings and we want to be closer to two times in our total debt leverage ratio. So we are going to continue to work on that in the near-term. Longer term we always have discussions with the Board between the Board and management in regards to all of the options of returning capital to the shareholders and all the options are on the table in those discussions with the Board. But right now our priority and our focus is on debt reduction. We will continue to work on that.

Jeff Kauffman - Buckingham Research

Analyst · Buckingham Research

Alright, well go ahead and stop there. Thank you, guys and congratulations.

Dick Giromini

Analyst · Buckingham Research

Thanks Jeff.

Jeff Taylor

Analyst · Buckingham Research

Thank you.

Operator

Operator

And our next question comes from John Mims with FBR Capital Markets.

John Mims - FBR Capital Markets

Analyst · FBR Capital Markets

Hey, good morning and thanks guys.

Dick Giromini

Analyst · FBR Capital Markets

Hi John.

Jeff Taylor

Analyst · FBR Capital Markets

Good morning John.

John Mims - FBR Capital Markets

Analyst · FBR Capital Markets

How are you? So Dick let me start with you, when you have – the conversations you were having or have been having recently with customers and the conversations at the ATA meeting and the shipments you had so far, are you seeing any shift to organic kind of fleet growth or is this all primarily replacement?

Dick Giromini

Analyst · FBR Capital Markets

Well, you are always going to have some guys that are doing some growth as they pickup new customers that better run fleets that are picking up those opportunities on dedicated contracts and all. So there is always a little bit of mix of that, but the vast majority is replacement. We have got a fleet age that is at or near record highs, far above anything historically. You have got a regulatory environment with CSA that is increasingly challenging for these guys to keep that old equipment out there with the amount of service that they have put in equipment to keep it road worthy and a challenging environment in finding drivers and being able to retain drivers much easy to do when you got new equipment for them the haul puts them less at risk for CSA violation. So all those factors certainly point to the need for the fleets to continue to step up and put as much of the resources available that they have to invest in replacing the equipment and getting their fleets younger.

John Mims - FBR Capital Markets

Analyst · FBR Capital Markets

Sure, that’s helpful. And on the kind of the build plan for fourth quarter, last year you saw 30 basis points of EBIT degradation sequentially from third quarter into fourth quarter and the commercial trailer products division, as you said is kind of normal seasonality, but that was also helped by a big surge in pricing, so how should we think about that sequential change this year, because my sense based on last couple of quarters is that why you are aggressive with pricing last year that growth has sort of decelerated, so how should that offset from an EBIT margin basis, and also you adding to that where are you in terms of build slots for the fourth quarter.

Dick Giromini

Analyst · FBR Capital Markets

We are solid as far as backlog through the balance of the year. So that’s not a factor, certainly we will build less than we are going to ship. This will be a much stronger ship quarter, the lower build less operating days that we talked about, more holidays we take timeout during the Christmas timeframe to do a lot of equipment and systems maintenance. So that factor alone will decrease the absorption and decrease the build levels as a result. So you are going to get some – you will get some impact as a result of that.

Jeff Taylor

Analyst · FBR Capital Markets

Yes John, I think in terms of the pricing environment we are in currently it’s stable as Dick commented previously. We did see a slight increase on a sequential basis this quarter that’s primarily driven by mix and we talked about that in our comments in regards to the mix we have in Commercial Trailer Products. I would expect that mix to continue into the fourth quarter to be similar. And I think the other comments we made would imply that we expect normal seasonality to see some pressure on gross margin and that would flow to EBIT.

John Mims - FBR Capital Markets

Analyst · FBR Capital Markets

Sure, sure. Again, one last question, and I will turn it back. When you are talking about pricing in the comment that you made about the larger fleets moving in early and that certainly makes sense. Do you think – think about the Wabash products, I mean, a lot of what you are offering is quality and also that customization optionality? As you start to move down that customer food chain right, you go to the smaller and smaller shippers or truckers that may have less capital flexibility than some of the larger guys. Can you still hold the same market share and pricing power that you have had in the beginning or do you start to – does optionality start to lose out over pricing when capital dollars are limited?

Dick Giromini

Analyst · FBR Capital Markets

We have a very strong dealer body and also our Wabash National Trailer Centers when I say dealer body, include the retail branches that we own in that mix. They do a great job getting out in front of customers. And so the smaller fleets go through those centers through our independent dealer network in our retail branches. And they do a very good job of selling the value of the Wabash national product. It really comes down to the ability for smaller guys to gain access to financing they need for equipment. So I don’t have a really good response for you as far as the optionality whether or not somebody, the options some other trailers just to meet basic needs. We don’t – I have not seen that. We have so many customers, but most customers I think go in the other way. We are seeing a lot more folks opting for galvanized rear frames, for example, so that they can address the corrosion issues that they face and get longer life going forward out of equipment without having to take it out of service to be blasted and recoded or replaced if that’s the case. So I think we are seeing so much more installation of skirts, because they get benefits from the aerodynamic benefit of having those side skirts on. I am not seeing in that and I am not aware of that we are hearing customers taking options out of trailers because of cost.

John Mims - FBR Capital Markets

Analyst · FBR Capital Markets

Sure. Are you seeing people just adding skirts and fixing trailers, older trailers just to get by in this market or people – or is the price point close enough that it makes more sense to just go ahead and buy new?

Dick Giromini

Analyst · FBR Capital Markets

I think you get a mix of all of that. You have got some folks who may not be as financially sound as some others who may opt to carry equipment longer than that they would like to. And then you got other guys who are going out there and really trying to have very young fleets to attract the best of drivers that are available out in the marketplace. In all cases, customers recognize the challenges that they face because of CSA and the challenge of road worthiness if you will of the equipment and not wanting to have low CSA ratings. So there is pressure on that standpoint, but you are going to have a mix of folks based on what their individual financial situation is and what their philosophy is on equipment. Some like to have young fleets and some like to get as much out of the equipment as they can. So it varies from five-year trade sell and refresh to as much as 13 or 14 years.

John Mims - FBR Capital Markets

Analyst · FBR Capital Markets

Right. But do you feel like there is still enough well-healed customers that have yet to come to market that are still out there to kind of push you forward?

Giromini

Analyst · FBR Capital Markets

There are a number of folks that over these past couple of years have little by little trickled back into the market getting back in the game that had not purchased trailers. We had a number of them this year that had not purchased trailers for several years. And next year, there is others that have not been purchasing trailers that are talking about finally getting back in the game. But again, we have to see how that all plays out. But going back to my earlier comments, certainly based on numerous customers who we have been having dialogue with over the past month or so continue to talk about needing equipment in volume numbers exceeding what they would have been looking at a year ago this time.

John Mims - FBR Capital Markets

Analyst · FBR Capital Markets

Sure, okay. Thank you so much for the time.

Dick Giromini

Analyst · FBR Capital Markets

Yes.

Operator

Operator

And thank you, we have our next question from Tom Albrecht of BB&T Capital Markets. Tom Albrecht - BB&T Capital Markets: Hey guys, good morning. Kind of two questions here. First of all, Dick on the potential for double-digit gross margins, I didn’t really take that necessarily as an annual target, but just some sort of eventual possibility on some of the quarters, is that the way you meant it?

Dick Giromini

Analyst · BB&T Capital Markets

Yes, that is a fair way to look at that, because as we know we have got the seasonality challenge that we always faced in the first quarter and the fourth quarter each year because of build rates, so you tend to have a little bit more difficulty in those quarters on holding it, because you don't have the builds to absorb the overheads. So it does put some downward pressure. The second and third quarters typically are the strongest quarters from builds and strengthening shipments. Tom Albrecht - BB&T Capital Markets: And the other thing, I was a little bit confused, Jeff, by your comments about the fourth quarter obviously you have highlighted some legitimate things that our seasonal higher utility cost oftentimes a little bit of a gross margin degradation from Q3 to Q4, but – and I can’t remember what exactly what you said, but it sort of implied like lower results, but when I look at last year’s fourth quarter, Walker – excuse me, DPG had a very big quarter in revenues for everything, there were over $140 million. You are also going to deliver more trailers this quarter than you have all year. So are you trying to say that results will be down at the bottom line even with maybe a bigger top line?

Jeff Taylor

Analyst · BB&T Capital Markets

Yes, Tom so a couple of comments there. First of all, in regards to the Walker or the Diversified Products revenue last year, yes, I think we commented last quarter that we were doing some revenue recognition adjustments in that business last year, which certainly bolstered the total – the top line revenue had a relatively minimal impact on profit and op income, but certainly impacted the top line there. Then in regards to the fourth quarter, I think if you break it down and think about it in a couple of components, first of all, I think we laid out that we expect to see higher operating cost in the quarter due to lower production levels, colder weather, where we have higher utility and operating cost. That will certainly put some pressure on margins in the quarter. I think the other thing I would say is you can expect probably the margin to be impacted by the overall mix. Trailer shipments will be up in the quarter. And as you know, Commercial Trailer Products is the lowest margin segment of the company so just by virtue of it being the larger portion of the total company I think you can expect that to have an impact on the overall margin as well. Tom Albrecht - BB&T Capital Markets: Okay. So I am a little slow here, but you basically did $0.24 in the quarter on continuing ops that you would expect earnings to be down slightly from that this consensus is $0.26 I think?

Jeff Taylor

Analyst · BB&T Capital Markets

Right. And Tom, we don’t provide guidance on quarterly EPS estimates, but I think our comments in general would suggest that we expect pressure there. Tom Albrecht - BB&T Capital Markets: Okay. And then just one last question here and let me see margins could production – within the retail segment even though it had good gross margin performance, it’s operating income fell by almost 50%, what was behind that.

Jeff Taylor

Analyst · BB&T Capital Markets

The Op income in the retail segment was impacted by two things. First of all they had fewer new trailer shipments in the segment during the quarter that’s really I think normal variation as with all of our segments that sell trailers, they can be lumpy from time to time. And if I remember correctly it was down from about 900 last year to 800 this year. So that’s part of it and the other part of it is we have higher SG&A overhead costs there as we are investing to be able to the support growth in that segment going forward. The SG&A has increased somewhat this year over last year.

Dick Giromini

Analyst · BB&T Capital Markets

One of the – one of the growth initiatives and we commented on it is increased opportunities to do customer site service activities. So we have ramped up some infrastructure to be able to support that to manage that process and that’s going to pay back pay dividends as we move forward over the next couple of years, but there is a cost to it at this point. Tom Albrecht - BB&T Capital Markets: Okay, alright, thank you very much guys.

Jeff Taylor

Analyst · BB&T Capital Markets

Thank you.

Operator

Operator

And our next question comes from Joel Tiss with BMO Capital Markets.

Joel Tiss - BMO Capital Markets

Analyst · BMO Capital Markets

How is it going guys?

Dick Giromini

Analyst · BMO Capital Markets

Hi Joel.

Jeff Taylor

Analyst · BMO Capital Markets

Good morning

Joel Tiss - BMO Capital Markets

Analyst · BMO Capital Markets

You guys are awfully patient, there are lot of questions. Just can you talk a little bit about the receivables and inventories they seem a little bit they are up quite a bit year-over-year, can you just talk about where we might end the year. And I am just – it’s more of a free cash flow kind of the question?

Jeff Taylor

Analyst · BMO Capital Markets

Certainly Joel, receivables are up certainly this quarter sequentially and year-over-year driven primarily on higher revenues, so that’s a reflection of the strong performance we are seeing in the business. We expect certainly on the trailer side to – that continue into the fourth quarter. Having said that, in the other segments, we should see a little bit of gain there in the fourth quarter. For inventories, I think we ended the quarter with about 5000 trailers or close to 5000 trailers, finished good trailers in inventory that’s basically flat with where we were in Q3. We anticipated it would be somewhat lower than that, but certainly as we move through Q4 we are going to ship more trailers that we produced. We would expect that finished good inventory to come down. I think if you look at last year’s number we would expect to finish closer to that in terms of number of trailers that are on our lot somewhere between 1500 to 2000 fewer than we currently have.

Joel Tiss - BMO Capital Markets

Analyst · BMO Capital Markets

Okay and then can you translate that into as a free cash flow estimate for 2013, can you just update us on what you are thinking there?

Jeff Taylor

Analyst · BMO Capital Markets

Joel I don’t have a free cash flow estimate for the full year in front of me that will be something I will have to check my numbers get back to you on.

Joel Tiss - BMO Capital Markets

Analyst · BMO Capital Markets

Okay no problem and then just last, can you give us a little bit of an update of where you are on the Walker and Beall integration process is there more juice to squeeze out of that in ’14 and ’15?

Dick Giromini

Analyst · BMO Capital Markets

Yes, the integration is going really well. Beall has is still in their ramp up mode as they continue to add staff and continue to increase their build rates and go out now and quote and bring in orders to support them going forward. We are very pleased with it, but certainly there is a lot more steam to be gained from the Beall side not only out in Portland to support West Coast consumption needs but also taking that the product designs that we have acquired with Beall and bring those to the Midwest and then leveraging that. So we get some – we will get some top line and profit contribution from being able to market and sell those Beall products in the Midwest and in the East. So yes, we are not done with that. And as far as Walker we still got opportunities just like in any diverse business to continue to make productivity improvements within the businesses and continue to increase the product offerings there. So we are not done with it. My comments earlier about gross margin and not getting overly enthusiastic about seeing gross margin in that business continued to increase quarter-over-quarter-over-quarter, they are sitting in that 22% to 24% from quarter-to-quarter that’s probably good range bound area. I don’t think you are going to see a lot there. You will see top line and bottom line improvement going forward. And then the Wabash Composites side, they will continue to have growth opportunities there. So we feel very good about it, but we are not done with integration opportunities to answer your question.

Joel Tiss - BMO Capital Markets

Analyst · BMO Capital Markets

Great, thank you very much.

Operator

Operator

And our next question comes from Rob Wertheimer with Vertical Research Partners.

Rob Wertheimer - Vertical Research Partners

Analyst · Vertical Research Partners

Hey. Good morning guys. Just a quick follow-up Dick you mentioned I think hours of service and the impact, have you had specific I am just curious what your specific conversations with fleets are and whether you have heard anybody changing the tractor to trailer ratio and how that’s playing off sort of at a micro level rather than a macro?

Dick Giromini

Analyst · Vertical Research Partners

We have not had someone make that specific statement. We have had them make reference to more of a generic statement saying you will see more drop and hook activity as a result of this. Without anyone quantifying, new targets for ratios, but we have heard that comment on more than one occasion that will be a likely outcome that you will see more drop and hook. So we feel good about that longer-term. We will just have to see how it all plays out. I have one fleet actually tell me, this is a smaller fleet tell me that they were seeing a 20% productivity impact as a result of hours of service. Now my guess is that they have just certain limited routes that they are able to run. They are not able to optimize those as much as the larger fleets can. We have heard some comments 2% to 3% impact. We have heard ranges 5% to 14% and then we had this one outlier that actually said 20% impact at this point. So it’s going to continue to shake itself out over the next several quarters as fleets figure out ways to optimize their routing software and then address it through physical means through adding equipment drop and hook what have you.

Rob Wertheimer - Vertical Research Partners

Analyst · Vertical Research Partners

That’s really helpful. Thank you. And then just one quick question the government disruption and such did that have I know you mentioned it earlier, does that have a differential impact on big fleet versus smaller fleet. And do you think it had a material impact at all on your order curves? Thanks.

Dick Giromini

Analyst · Vertical Research Partners

I can’t respond on if there was a difference in impact between large and small for that short period in time. The large guys just by nature are more sophisticated in the systems and process they have, and they got the staff, they got experience, and they try and take advantage as much as they can, but I really don’t have any specific data relative to that. What was the second part of your question Rob?

Rob Wertheimer - Vertical Research Partners

Analyst · Vertical Research Partners

No, that’s fine. Thank you very much and I will say thanks.

Operator

Operator

And we have time for one more question. Our final question comes from Kristine Kubacki with Avondale Partners.

Kristine Kubacki - Avondale Partners

Analyst · Avondale Partners

Good morning. Hopefully in the last, but not least, just one quick question, most of my questions have been answered, but on the – in terms of the third quarter was there any reason why the fleets were a little bit late on picking up their trailers. And I mean was it due to hours of service or was it due to the seasonal uptick in freight. And then I guess absent in any incentive and the real question I am asking is there any reason why there could be a risk despite what you have already seen in October, is there a risk that we could see some of those orders or some of those pickups fall into January especially given that we are going to be looking at a compressed holiday season for the fleets this year?

Dick Giromini

Analyst · Avondale Partners

I don’t know that answering your first part of your question I don’t know of any specific reasons that equipment may have slipped, it’s you have conversation with customers. They tell you when they plan to pickup and in some cases they get there and they pick up a whole bunch and then the next day they are not able to because maybe they had loads that they picked up. My guess is and typically is that if you got and I say this all the time we are talking about this. If you go live load versus sending somebody to dead head and pick up an empty trailer which one you are going take. You are going to take the live load and generate revenue and profit for yourself. Most customers started really ramping up pickups as we are getting towards the latter part of the quarter. And that may have been part of it that they waited a little bit too long and got there got their systems, got their scheduling in line and it was just later than what would have been expected and that’s why you see such a large number of them rolling into October and just continue in October. Now, its crunch time, they have got to get the equipment in place to meet that holiday rush that it still does happen maybe not to the extremes that it would happen years ago but they still need that equipment. And we are just we are pleased that they are finally responding. Will there be risk to them getting them picked up by the end of the year. I mean there is always – there is always risk until it happens and you can you can book it. With the bonus depreciation with the fact that it’s a model year changeover, I think you are going to see majority of pickups occur. I think the fleets want to get that equipment. They want to get it registered in a place so that they can take advantage. They are profitable, so they can take advantage of the bonus depreciation.

Kristine Kubacki - Avondale Partners

Analyst · Avondale Partners

Okay that’s helpful. Thank you very much. I appreciate it.

Dick Giromini

Analyst · Avondale Partners

Yes.

Operator

Operator

And that concludes the question-and-answer session. I will now turn the call back over to Dick Giromini. I do apologize I will now turn the call back over to Dick Giromini for closing remarks.

Dick Giromini - President and Chief Executive Officer

Management

Thank you, Vanessa. In conclusion, we are extremely pleased with the record setting performance that we are able to deliver this past quarter. That said we see even further opportunities longer term to accelerate top line growth, expand product and market breadth and to deliver even greater performance in almost all aspects of our business. With the key focus on execution and delivering results, I am confident we will do just that. Thank you for your interest in and support of Wabash National Corporation. Jeff and I look forward to speaking with all of you again on our next call. Thank you.

Operator

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.