Welcome to the Q2 2017 Wabash National Earnings Conference Call. My name is Christine and I will be your operator for today's call. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the call over to Mike Pettit. You may begin.

Thank you, Christine and good morning. Welcome everyone to the Wabash National Corporation 2017 Second Quarter Earnings Call. This is Mike Pettit, Vice President of Finance and Investor Relations. Following this introduction, you'll hear from Dick Giromini, Chief Executive Officer of Wabash National; and Brent Yeagy, our President and Chief Operating Officer, on results for the second quarter, the current operating environment and our outlook for the remainder of 2017. In addition, I will provide an overview of our financial results as Jeff Taylor is suffering from laryngitis. At the conclusion of the prepared remarks, we'll open the call for questions from listening audience. Before we begin, I'd like to cover 2 brief items. Please note that this call is been recorded. Second, as with all these types of presentations, this morning's call contains certain forward-looking information, including statements about the company's prospects, earnings per share guidance, the industry outlook, backlog information, financial condition and other matters. As you know, actual results could differ materially than those projected in the forward-looking statements. These statements should be viewed via the cautionary statements and Risk Factors set forth from time-to-time in the company's filings with the Securities and Exchange Commission. With that, it is my pleasure to turn the call over to Dick Giromini, CEO.

Thanks, Mike. Let we start off by saying that we're pleased that we delivered another solid performance overall in the second quarter. However, not up to recent standards and we know that we can do much better and will. Diversified Products Group suffer -- continued to suffer from market softness in certain end markets, requiring us to reevaluate the pace of methods needed to improve the profitability of this segment, placing a greater emphasis and urgency on cost optimization activities. I'm both pleased and encouraged by the actions already implemented to date, along with other improvement opportunities already identified that are currently in process of implementation or will be implemented throughout the balance of the year. Brent will provide more specifics on these actions in his remarks. Despite the recent challenges faced within some parts of our DPG segment, we're confident that we remain well positioned to deliver another stolid full year performance and are even more encouraged by what we now see for 2018. While demand for some business units within the DPG segment have continued to be weaker than anticipated, the Commercial Trailer Products segment demand activity and execution remains strong, delivering in line with our expectations from earlier in the year. Overall, in the second quarter, we continued to generate historically strong margins and profitability in the overall business. These results position us with ample resources to fund our internal capital needs to support both organic growth and productivity improvements; secondly, to assure contingent servicing and/or reduction of any debt obligations and return capital to shareholders; and finally, to selectively but more actively pursue strategic acquisitions. On the growth front, now approximately 3 months after closing on the Little Falls property acquisition, we continue ramping up the workforce there with significant activity underway as we install the…

Thanks, Dick. We continue to strengthen collaboration across the enterprise in the second quarter and have maintained an intense focus on identifying opportunities for cost reduction in many areas of our business. With the recent leadership changes announced in the Diversified Products Group, we have committed to improve the pace and breadth of our activities, as we right-size operations to be more in line with present market realities, as well as developing a keener focus on opportunities for revenue growth. We will continue to leverage our Wabash Management System or WMS, to optimize our manufacturing supply chain and sales effectiveness across the total enterprise. These actions will enable acceleration of our initiatives, contained within our $10 million overhead and SG&A savings we have targeted to achieve from the next 2 years. With that, let me get into some business specifics from the second quarter. I will start with Diversified Product Group or DPG which includes our tank trailer, aviation and truck equipment, process systems and composites business. Overall, results in the segment improved slightly with an increase in both revenue and operating income as compared to the first quarter. Second quarter revenues were $91 million with operating income of $5.1 million, better but not up to our expectation as gross margins for the second quarter were lower than projected at 18.9%, impacted by lower-than-projected sales and pricing, most notably, with our tank trailer business. The tank trailer business experienced an unexpected downshift in markets during the course of the second quarter. While the business continues to realize slightly improving demand levels order placement has not turned out to be as strong as quote activity was indicating earlier in the year. While the food, diary, beverage markets within our tank trailer business have continued to see stable demand, some of the…

Thanks, Brent. We're pleased by the overall solid performance the company has continue to demonstrate, delivering margin and profitability levels believed unachievable in the not-too-distant past. As we continue to benefit from actions taken over the past several years to grow and diversify this business. That said, we have high expectations for all of our businesses and as you heard from Dick and Brent, we're proactively addressing the areas that need improvement. Before discussing the results for the quarter in more detail, I'd like to comment on recent capital allocation activities, specifically, on our return of capital to shareholders. In the second quarter, we repurchased approximately 1.2 million shares of stock for $26.1 million. Additionally, we returned approximately $3.9 million of capital to shareholders through the dividend payment in the second quarter. We also successfully repurchased 4 million face value convertible notes to reduce debt and equity dilution. In terms of our capital efficiency efforts, we continue to remain laser-focused on the efficient deployment of capital, as we not only grow the business but also assess the effectiveness of our existing operations, to maintain a return on invested capital greater than 20%. We recently announced a deal to transition our Texas WNTC branches to an independent dealer that we expect to close in the third quarter. This action reduces our plant, property and equipment levels as we transition that sales territory to an independent dealer, while also expecting increased profit generation from our new channel partner. With that, let's turn to the financial results for the quarter. On a consolidated basis, revenue was $436 million, a decrease of $36 million or 8% compared to the second quarter of last year. Consolidated new trailer shipments were 14,150 units during the quarter, in line with our shipment guidance. Component, parts and service…

Thanks, Mike. Let me give you our views on the market and prospects for the remainder of 2017. We remain confident that overall demand for van trailers in the Commercial Trailer Products business will remain historically strong throughout the year and beyond. This belief is based on a number of factors that continue to be positive trailer demand drivers and remain consistent with what I've stated for several years now. Factors include an excessively aged driving population remaining for the significant industry under buy of 2008 to 2010, increased use of drop-and-hook strategies and a most stringent regulatory environment, including CSA and hours-of-service, influencing both driver and carrier behaviors and leading to the continued need and desire to refresh equipment. Load ports have tightened recently as freight rebounds, driving up spot rates in June to 11% above 2016 levels. Looking forward, in the event that ELD implementation is upheld for December of this year, additional capacity will be removed from the market, creating continued upward pressure on trailer demand. On the order front, the 2017 order season has shown continued strength in trailer orders. Our backlog is at a seasonally strong $762 million overall as of the end of the second quarter. While down sequentially, this drop is seasonally typical as bill levels ramp up in the second quarter, while customer order placements slow until late fall. This backlog level represents a healthy 6-plus months of build volume overall an average, weighted more heavily in dry and refrigerated vans with shorter backlogs for other product lines. We continue to expect another strong year overall for our industry with order levels well above replacement demand. The 2 primary industry forecasters continue to make adjustments to their projections, now reflecting very similar views as to the relative strength of 2017. ACT is…

[Operator Instructions]. And our first question is from Jeff Kauffman of Aegis Capital.

Well, congratulations. I know shares are down a little today on the print. But I mean, it sounds like there's a lot of good things going on beneath the hood, particularly with some of these new initiatives. So congratulations. I wanted to ask a little bit because I think the big surprise to everybody was the gross margin generation this quarter. And Brent, you gave a really good idea of how we're going to fix that in DPG. But I was just wondering, all these investments you're making in Little Falls, in the Honeycomb product are these weighing more on the manufacturing cost level or is the cost of these facilities showing up in G&A? And kind of where is the cost of investment showing up in your P&L right now, I guess is what I'm asking.

Thanks, Jeff. It's primarily within the COGS element of our P&L. And it's still on a relative basis, a fairly minor impact at this time.

But the point is that some of the weight on COGS is coming from this investment in new products and eventually there will be revenues to offset some of this.

Absolutely. In future periods they'll more than offset each other.

Okay. And you mentioned the independent dealer transfer question, how is this going to affect cash flows and working capital in the second half of the year?

When the -- Jeff, this is Mike. When the deal closes, we would expect to see some cash inflow from the sale of the plant, property and equipment as well as the working capital inventory that is on site in the Dallas and San Antonio. So it would be a positive for working capital in the second half of the year.

Okay. And just one more follow-up on growth initiatives, big headlines Amazon purchased Whole Foods. I know that this was one of the areas we were focusing on a little bit in the last mile. Is this a positive for you? Is this a negative for you? Is this a no change in our business plan for you? What would this mean for last-mile delivery and some of the molded structural composite customer areas you might be looking at?

Yes, Jeff, I think anytime that we see mature disruptive players move into the final-mile space, I think weren't working. It continues to bolster our position that Wabash has a place to play with innovative and technology-driven products. So we see it as a positive, as an opportunity.

Our next question is from Brad Delco of Stephens.

Dick, I had 2 calls going on, so I may have missed some of this. But it seems like there is a little bit more conversation or talk around acquisitions. I know, that's always been a part of your kind of capital deployment strategy. Am I reading too much into it, it sounds like there is more of an intense focus here. And if that's the case, can you put into context the relative size of things you're looking at?

Yes. Certainly, there is increased focus. We've stated that in recent quarters that with the health of the company, the strength of the balance sheet really provides us an opportunity to increase the focus and effort in that arena. We're taking more targeted approach. Not simply waiting for opportunities to come across the transom. And we've discussed in the past that we believe there's significant growth opportunities in the composite of our business. We want to grow that as we stated in the call notes that we really look for opportunities to become a global player with composite offerings. The other area of the business that we're extremely excited about and we talked about this in the past and that's in the final-mile space. It's an area that we have invested in and continue to invest in organically here. And we continue to look at opportunities in that space to grow through strategic acquisition.

But in terms of size of deals, can you...

We don't want to put a limit on the size of deals, we evaluate those deals. We likely would be leaning more toward a larger deal rather than a small tuck-in deal because of creating critical mass for those, the 2 efforts that I talked about. So I hate to put a framework around it, but probably north of $100 million type opportunities, certainly less than $1 billion opportunities. I know, it's a pretty wide span that you have to navigate between, but I don't want to put anything on it. As we look at opportunities, we want to have open mind to look at those. If they are nicely accretive to the business, if they create nice synergies for our business, then we want to be open-minded on what they would be. We're not going to do anything crazy. We've always said that we will be -- remain good stewards of the business. We will be strategic but selective in what we do. So we're going to be prudent as we go forward.

No, that makes sense. And that brings, I guess, to my final question on this topic. When you say it's accretive, obviously, you are looking at earnings, but does it still sort of fall into the framework of helping you achieve a 20% return on invested capital?

Yes, long term -- Yes, Brad, long term that would be true. Obviously, any acquisition that you would do in the near term can negatively impact a return on invested capital calculation. So we recognize and understand that. But the overall value for shareholders can increase dramatically with the proper acquisition.

Sure. And then last question, if I could. It seems like the comments were that you've seen some competitive pricing in DPG. Have there been any changes on the CTP side of the business with the additional capacity that has been widely talked about in the industry that was added this year or over the last 12 months?

Yes Brad, this is Brent. I think we have seen generally the competitive pricing that we built into our margin compression estimates for CTP back on the Q1 call. So nothing that has dramatically changed in that environment.

Thank you. I will now turn the call back over to Dick Giromini, for a few closing comments.

Thank you, Christine. So while this past quarter certainly was in line with expectations. We certainly come a long way and will continue to push forward. We'll continue to be strategic but selective in pursuing opportunities to grow our business, in addition to organic growth initiatives already underway. We'll continue to seek out ways to increase returns and value for all shareholders, while assuring that the proper balance between risk and reward is considered in all decisions. Thank you for your interest in and support of Wabash National Corporation. Mike, Brent and I and Jeff look forward to speaking with all of you on our next call. Thank you.

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