Wabash National Corporation (WNC) Q1 2014 Earnings Report, Transcript and Summary

Welcome to the First Quarter Earnings Call. My name is Yolanda, 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. I will now turn the call over to Dick Giromini, President and CEO. Mr. Giromini, you may begin.

Thank you, Yolanda, and good morning. Welcome to the Wabash National 2014 first quarter earnings call. This is Dick Giromini, President and Chief Executive Officer. Joining me today is Jeff Taylor, Senior Vice President and Chief Financial Officer. Following this introduction, I will provide highlights for the first quarter, followed by a look at the current operating environment and our outlook for the remainder of the year, after which Jeff will provide an overview of our financial results. At the conclusion of our prepared remarks, we’ll open the call for questions from the listening audience. Before we begin, I would like to cover two items. First, as with all of 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 we are pleased with the ongoing progress we continue to make with the business and then the execution of our strategic plan. Importantly, we maintained the momentum generated in 2013. We achieved all time records for any first quarter in the history in both revenue and gross profit as we benefited from historically strong and more balanced top-line and bottom-line results across our three segments. These results demonstrate and validate the transformative nature of our strategic growth and diversifications initiatives. Perhaps even more impressive, we executed well despite considerable industry wide disruptions caused by severe weather conditions resulting in lost production days, shipment delays and higher operating…

Thanks Dick and good morning. In addition to the press release, we filed the 10-Q after the market closed yesterday so I plan to hit the highlights. With that, let’s get started. As Dick mentioned, consolidated revenue for the quarter is $58 million, an increase of $34 million or 10% compared to the fourth quarter of last year and a record for revenue in the first quarter. Total new trailer shipments were 9,900 units at the top-end of our guidance range for the quarter and 1,300 units [sold] year-over-year. Sequentially, consolidated revenue decreased $100 million or approximately 22% primarily due to a decrease in new trailer shipments of 4,300 units versus a seasonally strong fourth quarter. Commercial trailer products net sales were $227 million, which represents a $29 million or 15% increase on a year-over-year basis due to higher new trailer shipments of approximately 1,200 units. Average new trailer selling prices decreased approximately $600 per unit to 23,200 primarily resulting from the customer mix similar to the fourth quarter skewed towards large fleet customer with lower spec and lower price trailers, as well as a product mix bias towards lower price products such as dry vans, LTL trailers and converter dollies. Sequentially, we did experience a slight improvement in mix and pricing with ASP increasing $400 per unit. Diversified products net sales increased 7% or $8 million on a year-over-year basis to $120 million 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 primarily due to new trailer shipments increasing by approximately 200 units partially offset by lower sales of non-trailer truck mounted equipment, while Wabash Composites revenue was up year-over-year as a result of strong truck body demand in the first quarter.…

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Brad Delco. Your line is open.

Hey guys, it’s actually Ben on for Brad. So maybe first looking at the guidance, you guided 2Q ahead of our expectation and let full year in place which implies that 2H guidance is down 8%. Can you kind of give us more color on the conservatism around the full year guide?

Sure. We were probably a little bit out ahead of everyone else in our projections initially. When you look at where ACT was earlier in the year, they have subsequently increased in two consecutive months what their projections are for the year. So now they are little bit ahead of us. We are in that 5% to 7% projection on year-over-year growth specifically in our Commercial Trailer Products business which is the bulk of the unit volume. And they were at about 1% to 2%, about 1.5% initially; now they are in north of 7%. So we are on a wait and see attitude, I guess you can say at this juncture to assure that the code activity continues consistent that the order conversion rates continue and then our focus and commitment to favor margin over volume is playing into what you may view as conservative or not increasing the range. So, we feel it’s prudent at this point, we are probably leaning more toward the high end of that than we are in the middle. But we will take another look at it as we progress through the quarter, we will make determination of whether to increase. Obviously, we are well positioned to take advantage of the market and of the opportunities out there but it has to be at the kind of pricing that we believe we need and expect to continue to drive the margin improvement in the Commercial Trailer Products business.

Got it, okay. Thanks for the color. And then looking at gross margins in the commercial trailer products business, historically or at least over the last couple of years, you've seen a 200 basis point improvement sequentially in 2Q and given the strong delivery guide, is there any reason why we wouldn't see a similar margin increase this 2Q?

Yes Ben, this is Jeff. I think you're right, historically you do see the margin increase in 2Q and towards the middle of the year, when you see the indirect channel come more into the overall picture. Obviously in 4Q and Q1, we've talked about the mix and how it's got a significant portion of that servicing the large fleet and we saw that this quarter. We do expect that the margin will improve as we move into Q2 and we're currently seeing more of the indirect channel come in. I'm not going to provide guidance as to what the magnitude of that's going to be. But we certainly do expect to see improvement sequentially there.

Yes, let me just add to that Ben. As we progressed through the second quarter, one of the things that's always misunderstood in our business is the timing event of when these improvements flow through. First quarter shipments in many respects reflect fourth quarter builds. As there is the lag effect on pickups. And as you progress through the second quarter that improves because you're now building product that’s priced for the 2014 build and you're progress into third quarter and you get even further benefit of it with continued improving weather and all. So we do expect continued improvement in the quarter-over-quarter and then of course on a year-over-year as the pricing environment has become a much more stable and much more able to continue to push price through. So we do expect to see continued improvement.

Okay. Thanks and then one last one, can you maybe give us a little bit more color on the impact of weather on your 1Q core, maybe help us frame it up a bit?

Yes. Ben, I think the weather impact that we saw in the quarter was consistent with what we talked about in the fourth quarter in terms of higher operating cost during the quarter. We did have in January and February -- we did have some production days that were lost, we made those up by working additional shifts on the weekend and were able to really minimize the overall impact from over time and doing that. We do have a flexible workforce. And so we're able to manage around those types of scheduling issues. And so, it did have an impact on us in the quarter, we’ve absorbed that. I think the good news is that as you look at the margin in commercial trailer products specifically from Q4 to Q1, we actually increased by 10 basis points despite the challenges we were facing with the weather in Q1.

Okay. Thanks guys.

Thank you, Ben.

Our next question comes from John Mims. Your line is open.

Hey, good morning guys. Thanks for taking my question.

Hi John.

Hey. So let me look -- let me start with some of the ACT order numbers that have come out for first quarter. So if you look at the whole quarter together just in drive in net orders were up 55% year-over-year so big numbers and obviously you see that in your backlog. But can you maybe answer a couple of questions on that? The first how much are you participating in that big surge, I know you have said you are holding back more for price has your market share basically stayed same in that push and also how has that mix been evolving particularly in the March and then the April away from the large orders and away from the LTLs into the more indirect channels

Well our backlog as you heard grown to about little over six months kind of consolidate basis $791 million worth of backlog. So we have continued to see grow so our participate rate in what’s after being ordered is certainly evident with that when you think about the shipment levels and production builds that we had. So we are participating we don’t generally try and evaluate the market share until everything clears up for the whole year because there are so many moving parts with orders versus builds versus shipments which are all auto sync with each other certainly appears that we are getting our fair share of what’s out. We are being very deliberate on the orders that we are accepting. We stated over these last couple of years many times about our desire and need to continue to improve the margin profile in the commercial trailer products business we are committed to that. So we remain focused on that and have seen some nice improvement everyone is aware of. And we want to continue that to get to that double-digit goal that we put out there. That doesn't mean that we won't take advantage of opportunities as they are out there, they have to be attractive to us. Now clearly, the early order that come in in any order season are dominated by large fleets, who get in early and order for the full year and as we progress through the quarter and through the balance of the year, you'll get a lot more of the indirection channel orders that will come through. Those will carry not only higher pricing, but they also carry higher margin as it goes through and that mix between the high volume low respect products to the lower volume tending to be high respect product will shift as we progress through second and third quarter. So that helps drive the improvement also.

Sure. So but and you've commented on price stabilizing. When I see this type of order numbers, it would appear that, you're back into a good solid CapEx environment where orders coming in, funds are flowing in. So maybe [in your] segments, your ability to gain core pricing increases in this environment kind of offset by mix and separate the mix away from kind of what you're seeing from a core pricing standpoint to help us understand exactly how aggressive you can get in pricing now and how that should continue in the second quarter?

Yes. As I stated in the past. 2012 was a big year, we took a big step and really pushed hard and pricing decline if you will set stage for the industry to respond and we were highly successful between what we saw in 2011 versus the results were in 2012. since that time I have used the expression enabling around the edges and we have continued to do that. What we are starting to see now and if there is truth in the numbers on a macro basis for the industry, we are starting to get some demand levels that could provide opportunities as we get into the latter part of the year. So really push pricing more aggressively as we get more into the next year as order season. In a lot of cases the backlog that we have is locked up for the year for the large guys, I stated many times that the large fleet don’t order and order is not equivalent to shipment, because the other can spread out over the course of the whole year. So when you receive the order it’s not turnaround in 30 days it is turnaround in many cases and pieces over the course of 10 or 12 months. So as we progress through the year, we do believe the environment is becoming more favorable for the manufactures to be able to get better and better pricing and that’s a good thing. So we are excited about that and we will try and take advantage of that more so with the smaller orders and the indirect channels as we progress through the balance of the year.

Is there any risk with the order flow that you are seeing to some industry basis that component prices input prices start to pick up on the back half of the year or is margin squeeze on that side not a concern at this point?

Yes, other than the wood flooring that we talked about the well wood pricing that we dealt with earlier in the call relative to our wood flowing operation, everyone in the industry if facing them. When you get strong demand environment and you get cost inputs that everyone is being impacted by it is a lot easier to deal with those than if it was exclusive to us in particular. So, we feel pretty good about being able to deal with those increases that may occur, but in most cases, we've got lock commitments, lock contracts for the year with the vast majority of our large component supplier. So, that part is not an issue. And then on some of the raw materials as we've talked in the past with aluminum, we have lock based on the reunite orders. So the backlog, six plus months backlog that we talked about basically all of that is locked from aluminum standpoint, good percentages that is locked in this field side. And then on the component side, it's pretty much locked in. So, other than an input like the wood, which is a variable we have a pretty high percentage of certainty and what our costs will look like going forward?

Okay. Sure and that is helpful. And just one last question from me and then I'll turn it back over. Since the start of the call, the stock has had about 10% negative swing, I mean clearly the Street is reading your comments is it's kind of the factor guidance perhaps to the back half of the year and I don't think that's your intention. So, can you maybe, maybe kind of just walk through that again as far as your outlook for revenue and earnings growth in the back half that's maybe not being captured by the shipment range and kind of what you would need to see to provide better clarity for what happens beyond second quarter from a revenue and earnings standpoint?

Yes. I’m not sure about the implied cut in the second half because it’s certainly not what our internal plans would imply. As we’ve talked in the past many times, the second and third quarters are the strongest shipment quarters that we tend to see; our first quarter was just shy at 10,000 units, while pleasing relative to the winter that we faced and relative to last year an improvement is still just 10,000 units, with projections of 47 to 50 for the year. And as I said earlier, we are probably leading more towards a high-end of that at this point. We're talking 13.5 to 14.5 second quarter we have to match that type of volume in the third quarter and be some more close to that in the fourth quarter to be even at the top-end of our range. So, I’m not sure where that assumption is coming from that we’re cutting back on our projections. We are just trying to be a little bit more prudent at this point as we get further into this quarter and take another look at things as we get to the mid-year. And if we believe that the opportunities that we're looking at and the pricing is right then certainly we can take a look and see about adjusting the guidance that we provided. But at this point, we felt the prudent thing to do was to just reiterate our guidance, reroute (inaudible) forecasters were, I think that’s forgotten in this whole thing that they were much more conservative than what our view was. We saw where the market was heading and that’s why we were little more aggressive on our year-over-year projections than what they were earlier. They’ve caught out to us now and we’ll take a look at it as we progress through the quarter.

Okay. That’s really helpful. Sorry, are you going to add something Jeff?

Yes. John, I was just going to add I mean obviously we don’t comment on the stock price or changes in the stock price. But I think to reiterate some of what Dick said there, we had a really strong start to the year, Q1 has been a really nice quarter despite some headwinds out there in the industry caused by weather. We gave good strong guidance for Q2 and we’ve got nice favorable positive outlook and we really feel confident in the full year. So, we feel good about where we are and there is still opportunity as we progress through the year for things to continue to develop there.

Yes. I agree with you, I think it sets up really well. But I was just pointing out that the market seems to be reading it slightly differently, so just wanted you to readdress that. Anyway, thanks a lot and I will get back in the queue.

Thank you.

Our next question is from Steve Dyer. Your line is open.

Good morning, Dick, good morning Jeff.

Hey Steve.

Hi Steve.

Most of mine have been addressed, but I am wondering if you could talk a little bit about your sense of capacity in the industry both in the industry and for you guys as well, certainly it would seem like if you have extra it’s an opportunity to take price in the back half of the year. Are you seeing something similar we are hearing a lot of slots going up well into the year at this point, how do you see it?

Yes, we’ve heard some of the same comments that some competitors have taken on some business that’s pushed out their backlogs quite a bit. We feel very good about where we are at and the approach that we have taken. We have installed capacity and I always say mixed dependent, installed capacity to do upward across our whole business, upwards of approaching 75,000 units across the whole business. So, with our guidance there, two-thirds of that we still have opportunity to take advantage. If the market continues to show strength as we progress into the middle part of the year, we’ll be well positioned to take advantage of what could turn out to be a very favorable pricing environment.

Okay. I'm wondering if you could break out your backlog in terms of the different, the different product areas, commercial products group it's trailer traffic get some senses, this is obviously a big backlog number, but try to get some sense as to where that shakes out?

Yes Steve, obviously the backlog as Dick said was $791 million; it was up from $711 million in the prior quarter, so really strong growth in the backlog there. We don't break it out by a segment or product line, but what I would say is that the backlog and all areas of our business is healthy and within the range we would expect it to be in.

And is the convey [skirt] order; is that in there?

No, the convey skirt order would not be included in the backlog.

Okay. So that's additive. And I know Jeff you didn't want to kind of comment specifically on margin guidance, but you have kind of the cross wins of mixed working against you sort of offset by the much bigger volumes trained workforce all those types of things. Is there any reason you wouldn't be able to sort of keep gross margin sort of flat at a minimum year-over-year going forward throughout the remainder of this year?

I don’t see why we wouldn’t be able to maintain at or near that level, I mean obviously the mixed plays an important role in that. And I think the things we’ve talked about in the past are that when we look at our mix on our product by product basis, we maintain price and or increase price in all situations there. Our manufacturing operations ran very well in the first quarter and continue to run very well. So, I think when you add all those things up, we would expect on a apples-for-apples the margin to be certainly at a minimum equal to if not better than what we’ve seen in the past. And once again that will be mix dependent, but we will make the appropriate value for the products we failed.

Okay. That’s all I have. Thanks guys.

Our next question is from Mike Baudendistel. Your line is open.

Thank you. Just wanted to clarify a comment that Jeff made, Jeff I think you said that on the ASP was up $400 per unit was that adjusted for mix and customers what that number was?

It’s not adjusted for mix, it’s a pure, just a pure calculation from the total revenue and the total number of unit shift. So mix price of factor and then pricing is also playing a factor in that Mike. That was the sequential increase, it’s up approximately $400 so we do – it will do see some improvement coming in the mix there.

Okay. And you haven’t estimate of how much the negative mix impact from the customers and low value products had on the commercial trailer products that gross margin segment in the quarter when we think about the trajectory there?

I don’t an estimate of that, I mean the probably the best indicator you have ASP of a year-on-year basis. I did say that it decreased $600 that was pretty much all mix driven, if not all mix driven. And once again, when we compare on a product by product basis pricing for our products to be the flat or up and in most cases it's up. So, that's entirely mix and that can give you a sense for how that changes. I think that, translates into a 2.5% decrease in net price.

Okay. And you talked about the commercial trailer products margin improving and you're making operational improvements there. What are some of the specific things besides from higher volume that you are doing there to improve the margin?

It's continued to as the workforce has matured more and more and gained proficiency, line velocity improvements which really helps the efficiencies and the operation. Those efforts have continued and we're seeing more and more the benefits of much more stable workforce, a workforce that's becoming more trailer builders each day. So, we're able to introduce even more advanced concepts for them to deal with it as we continue to work on the velocity side of things and that will continue throughout the year and beyond then. So, that's those are the main things that we've been working on from that regard.

Good. And the last question from me is, there were some news articles in the past week or so about the shale activity driving improved demand for the tank trailers. I don't think I heard you mentioned that as one of the drivers. Is that something that you are chasing your most focus in the traditional markets in that segment?

Yes. We’ve seen some recovery in demand for the crude oil products we produce out of our Walker Group business, not as much on the shale side or the frac side of the business. That business was pretty well saturated with equipment during the strong periods of couple of years ago; and over the last year and half or so, there is just a lot of equipment out there that’s, so we're not seeing a lot of demand for that at this point in time.

I think having said that we are in a position where if that does turn out Michael and we have the opportunity to participate in that, obviously it’s a product we’re familiar with and we have some experience in the market as well.

Great. Thanks very much.

Our next question is from Tom Finan. Your line is open.

Good morning guys. I’m filling in for Kristine.

Hey Tom.

Hey. So, most of mines have been answered but assuming that you could be a little conservative on your guidance, and how the workforces improved, would you need any additional headcount to meet demand above 50,000 trailers?

It’s very incremental. We were able to and part of what of my comments just a moment ago about improving the line velocity, you gain a lot through those CI efforts without having to add any significant amount of personnel to support it. So it would be just variable labor addition to support some incremental volume but very little, nothing like what we faced a couple of years ago.

Right, right. Okay, great. Thank you. That’s helpful.

Thank you Tom.

We have a question from John Mims. Your line is open.

Hey guys, thanks. Just one quick follow-up, on the used trailers that you sold in fourth quarter and then in first quarter, much stronger than historical levels. Can you comment. I guess one, what’s driving that strength? And then also provide some framework on incremental margin basis as far as your gross margin but also the EBIT per trailer that you are getting on with U.S. being a larger piece of the mix, because the EBIT per trailer and commercial products swung, it was up 34% year-over-year. So I wanted to know how much used trailers actually impacted that.

Let me comment about the demand side of the used trailer. Some of that was the seasonal demand. The unusual winter weather conditioned created some real tightness in capacity. So, you had a significant demand for equipment short period of time. So, we saw some of that lift during the quarter. So I don’t know that you would want to look at that as something that is continue ongoing demand. But yes, we aren’t -- I mean that’s not a huge part of our business, the used trailer part but we did have some opportunity as a result of the weather conditions.

Right John, this is Jeff. Obviously used trailers have increased as we talked about that’s largely driven by fleet trades. Can’t say that we track EBITDA per use trailer, the use trailers has a lot of variability in it based on the type of trailer it is, the age of the trailer, the condition of the trailers. And so there can be pretty big swings in what that looks like as we evaluate those. And obviously we evaluate each one of those trade packages independently to make sure that it makes sense for us and we're making -- getting appropriate value for taking those trades and then moving them out.

Yes. Sure, that's helpful. I was just thinking if you're getting them for almost nothing but selling them for $6,000 and certainly the last two quarters that sales numbers been up more than 100% each quarter; is that all going to the bottom line and that's maybe making on the margin, making the whole Group’s returns and margins a little better or if that’s still just kind of a minimal impact that’s kind of is what it is?

Yes. That certainly not -- it's a [false] to think that we're getting the trailers for nothing. Generally, the margins on used trailers are still in that similar range bound kind of margin that you see across our business. I mean some of them, you're happy to breakeven on, because they are fleet trades and it’s part of the acquisition of the order for the new equipment. And other cases, you may have opportunities to get an attractive margin, but we're not talking about margins in the 30% or 40% kind of arena or higher, we're talking about 10%, 15% kind of margin that you get on a huge trailers. So, it' not like you -- if it was that good, we all be just used trailer guys.

Yes. That’s fair. But going forward it’s still above 1000 a quarter is reasonable but that 1,700 trailer level is probably the high that’s what you are saying?

It will be dependent on the market, John. I mean we obviously forecast something there closer for a longer term run rate but it could be over that below it depending on the current environment but what the availability of those fleet trades in the market is.

Yes, that one is a real tough one John, because it’s not a core piece of the business, it’s one out of convenient to support to customers, often times customer will sell their equipment on their own, or they’ll want to include it as part of a trade package for a new order that is coming up. So it’s always difficult to predict which path that they are going to choose. So, it’s not a piece of the business that we count on as a revenue profit generator for the company, it’s more a convenience to support customers for the most part. On our retail side, we do some of that when we go out in the market and find some opportunities, but again it’s not a huge revenue or profit piece of the business. So I don’t think it should be driving any decisions or any significant lose in any modeling that you’d do.

Yes, great. That’s exactly what I needed. Thanks again.

Thank you.

We have no further questions at this time. I will turn the call over to Dick.

Thank you, Yolanda. In collusion, we are extremely pleased with the results we are able to deliver in the first quarter of 2014. That said, we see even further opportunities to accelerate our top line growth, expand our product to market breadth and to delivery even greater performance in almost all aspects of our business. And with a key focus on execution and delivering results, I'm certainly confident that we'll do just that. Thank you for your interest and support of Wabash National Corporation. Jeff and I look forward to speaking with all of you again on our next call. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.