Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Wabash National Earnings Conference Call. At this time, all participants are in a listen-only mode. And after this speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ryan Reed, Director of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Felicia. Good morning, everyone and thanks for joining us on this call. With me today are Brent Yeagy, President and Chief Executive Officer; and Mike Pettit, Chief Financial Officer. Couple items before we get started. First, please note that this call is being recorded. I’d also like to point out that our earnings release, the slide presentation supplementing today’s call and any non-GAAP reconciliations are all available at ir.wabashnational.com. Please refer to Slide 2 in our earnings deck for the company’s Safe Harbor disclosure addressing forward-looking statements. I’ll now hand it over to Brent and ask that you please refer to Slide 3.

Thanks, Ryan. Good morning, everybody and thank you for joining us today. Let me begin by saying that we hope you and your families are healthy. And then each of you have found the way to better connect with those you love. The world has changed at a remarkable pace since our Q4 earnings call and we have a lot of topics to get everyone up to speed on with regard to the current environment, the state of our strong liquidity position, current customer sentiment and our supply chain stability it is also – I’d also like to offer some thoughts and perspective on the company’s performance to the last recession in that 2008 to 2009 timeframe, and why we expect this experience to be very different. However, before we get into those details, I’d like to start by sharing the steps we’re taking to safeguard the health, wellness and safety of our people. As we are an essential business we have continued to operate from the onset of this pandemic. Wabash products and services enable our customers to transform critical goods, whether it’s tank trailers, hauling feedstocks, the pharmaceutical processors, refrigerated trailers transporting fresh food to groceries or our truck bodies completing the last leg of the journey in delivering goods to the home. We’ve been part of assuring the vital supplies and basic needs have been met, which has allowed people to stay home more comfortably and social distance more effectively. We’ve initiated a company-wide business continuity effort that’s been helping us navigate through this extraordinary time with agility and speed. In addition, we made organizational changes throughout our company to facilitate bringing fast and deliberate decisions to action, as we are – we act on and within the business to best manage this dynamic landscape. We have…

Thanks, Brent. We’re going to do things a little differently on this call by spending more time discussing metrics that have taken on greater importance in this environment, like our balance sheet, liquidity and debt structure. As Brent mentioned, we feel that we’re better positioned than at any point in our company’s history to not only a global recession, but also to use this period to set ourselves up to perform on the other side. But first beginning on Slide 4, I’d like to briefly give some color on our first quarter financial results. On a consolidated basis, first quarter revenue was $387 million, with consolidated new trailer shipments of approximately 9,150 units during the quarter. As Brent mentioned, customer pickups of equipment were below our initial expectations for the quarter leading to revenue also coming in below expectations. First quarter gross margin was 9.5% of sales, while operating income came in a loss of $110 million due to non-cash goodwill impairment charges. Operating income on a non-GAAP adjusted basis was a loss of $2.9 million. Given the uncertainty of the current environment, we recorded non-cash goodwill impairment charges totaling $107 million relating to the acquisitions of the Walker Group and Supreme Industries. Brent and I would like to reinforce in the strongest terms possible that our Final Mile business remains an exciting opportunity and a growth platform that we intend to leverage in the short, medium and long term. The progress we’ve made to recapture our share combined with Wabash’s technology offerings will continue to resonate in the marketplace, and we continue to work diligently on the operating performance within this business to ensure profitable growth. Finally for the quarter, GAAP net income was a loss of $106.6 million or negative $2.01 per diluted share. On a non-GAAP adjusted…

[Operator Instructions] Your first question comes from Justin Long from Stephens.

Good morning, everyone.

Good morning.

Good morning, Justin.

So it was good to hear that you expect to remain free cash flow positive this year. You know as we think about that outlook, could you talk about what you’re assuming for the working capital tailwind in 2020? Just curious how much you can adjust there? And then also, as you made that comment that you feel like the revolver pull of $45 million could cover a worst case scenario. Is there a way for us to kind of think about what that worst case scenario looks like from a trailer production perspective or any other way you want to frame that up?

Sure. I’ll start with that one first. When you look at the timing that when we pulled it back in March, it was an era of pretty high uncertainty. So we looked at a second quarter pullback that would have been far greater than 50% drop year-over-year in revenue. At that point in time, in March, we weren’t sure what the reactions from the economy or industry would be. So we model something that was greater than 50% pullback in revenue as our worst case scenario. In terms of free cash flow and the working capital, we feel that number in the $25 million to $30 million to $40 million range is highly possible. Again, it would be dependent on how much revenue we’re to contract. So those obviously are connected. But we have already seen some nice efficiency in our working capital based on some inventory reductions. So it’s somewhere in that ballpark, we think we could reduce working capital and help our free cash flow position.

Okay, that’s really helpful. And obviously the outlook is really uncertain here. And we’re all kind of running different scenarios in terms of the top line and what it could look like. But you know, if you think about all the cost cuts that you’re implementing and it sounds like you’re taking a pretty aggressive approach there. Is there a way we could be thinking about decremental margins for the business? Do you have a specific you know target in mind, and maybe you could talk about decremental margin across the different segments and how that might vary?

I would say, as a total, what we saw in Q1 was something that we would feel pretty comfortable with going forward. You know, as it relates to the segments that we’re looking at it more in total. But I would say that, you know, the 15% to 20% of high teens, I believe was kind of a good range that we’re trying to manage within. And that’s because we’re able to do that because we are actively going after the fixed cost reductions along with the variable cost. And there’s two points in there that when people look at us, I think they sometimes overestimate the level of fixed costs, we have a pretty variable fixed cost structure, excuse me, pretty high variable cost structure, so we’re able to reduce variable costs with volume. And we are also taking some pretty quick action to move down fixed costs which allows us to keep those decrementals in that just under 20% range.

Yeah, and I would add to that just from a relative preparedness for this unseen, we’ll call it, environmental reality. Remember that when we think about our history with the ‘08-‘9 recession, the pre-planning that we’ve done, we had a pretty solid variable cost and we’ll call it, book of actions that we already knew what we would pull, how we would pull and the degree at which we would pull them on various market conditions. So we’re able to move relatively fast in that late March and in April timeframe on the fixed cost basis. You know we’ve been talking about the restructuring of the company really for the last year. We’re making – those are – were active evaluations and work streams that were in a way in place prior to the COVID-related crisis. All we’ve done at this point is accentuate and accelerate those as we move the business forward. So that’s why we feel good and how we’ll be able to manage those decrementals going forward we’re not starting from a dead stop and are thinking like many companies will be.

Makes sense. And one just last one on Final Mile, you know, I was a little bit surprised by the impairment charge. I was wondering if you could just give a little bit more color on that and you know maybe say how much of that is related to COVID in this downturn versus, you know, other adjustments that would have happened regardless of this downturn? And then just thinking about that Final Mile business longer-term. I mean, do you still feel like the financial framework in terms of the top line opportunity and margin opportunity is intact? Or you know structurally should we be thinking about something lower than what you’ve talked about historically?

Yeah. So the goodwill impairment, when you have the market disruption like we had in Q1, it forces us to relook at all our modeling on goodwill, usually you do that heading into the end of the year. So with a stock price pullback that we saw in the quarter, and then just overall market conditions that forced us to do another quantitative look. And I’ll tell you that the major change in our modeling of the Final Mile business was the near-term cash flows, which as you know, on a cash flow model, those have the highest impact. So it was really a 2020-2021 look, given the environment that we’re in, we believe that would have significantly lower cash contribution from Final Mile in 2020 and 2021 than what we would have modeled in Q4, let’s call it. That said, nothing really changed about our long-term outlook in that business. So we believe that business returns to the same level of long-term growth, cash generation and profitable growth that we had modeled at time of acquisition and time and earlier points when we were modeling the goodwill analysis. So we don’t think it changes the future outlook of the business, but there’s a short-term disruption based on the COVID.

Yeah, and I’ll add to that, and I want to echo to the fact that we’re not retreating in any way shape or form from the long-term strategic impact that FMP will have with – hamper us both top line and margin performance. We are dealing with an unfortunate and unplanned environmental condition with COVID that has had a larger impact on FMP then we would have planned for if we can plan for such a thing. We were saying and we’ve talked about the knowing of what was impacting the variable cost basis of that business in Q4, we understood how it’s going to impact in Q1, we guided to it. And we saw incremental improvement on a month-to-month basis in that variable cost structure as we moved through. So for what we control, we’re acting on it. Unfortunately, that gets washed through when you have something as significant as a 40% top line reduction that’s caused by a myriad of COVID-related issues. I’ll give you one example, being unable to ship into New York and most of the East Coast, because of severe shutdowns and fear of contracting the virus and that is something that has been worked through over last 45 days to 60 days that’s not in someone’s game plan in terms of how you’re going to manage or manage your guys for the given quarter.

Makes sense. Appreciate all the time today. Hope you guys stay safe.

Thank you.

Thanks, Justin.

And your next question comes from Joel Tiss from BMO.

Hey guys. How’s it going?

Joel.

It is good.

I know you don’t want to give us any guidance, but somebody always has to ask the mandatory question if you can give us a little bit of color of what, how April and maybe the first week of May started you know just kind of some other companies have kind of hinted that, you know, week-by-week since the beginning of March or whatever things have gotten a little bit better or things are kind of stabilizing or just anything you can help us with there?

Sure. I’ll give you a kind of a round the horn view, some macro, some micro, right. So, one thing we talked about was that we furloughed the 90% of our salaried workforce and all of our hourly workforce effectively for two weeks in April to manage just overall cash spend, what we’re able to experience during that period was when those employees came back to work was a healthy, engaged and productive workforce coming right out of the chute. And that speaks to the resiliency of Wabash National, I think that’s something that we’re using, and I expressed to everyone on the call that should give some level of forward-looking stability for the company from an operational standpoint. Our operations were not impacted in the month of April from a what, I would call a mandatory shutdown basis in any way, shape or form in any material manner and we’re able to weather through without significant impact on from a supplier basis. And we see that rolling into two May as well. So the operating profit looks good. From a commercial standpoint, our customers are still ordering and cancellations have remained I’ll call it non-material at this point, as we manage the in and out of backlog. So we’ve maintained relative backlog stability. And that is a really good sign as we look at the remainder of the year.

That’s great. And then you gave just a little hint. And I wonder if you could spend another minute on, you know, what you’re hearing from your customers in terms of, you know, holding on to their orders, I’m sure they’re doing the same things as you guys trying to cut as much outside spending as they can or, you know, any color about when they plan to pick up the trailers, you know, those sorts of things? Thank you.

Yeah, well I would say, yeah that’s some more access that we have, we can see it in the earnings calls with some of our largest customers how they plan to maintain capital spending, specifically on trailers as they look to manage fleet age and operating cost per mile throughout the rest of the year. And what I, just as we have learned how to manage through a downturn, they have as well. And they don’t want to get on the wrong side of an average age per trailer, as they did come out of the ’08, ‘09 time periods. And as we tend to sell to the most sophisticated and well capitalized customers in the industry with that becomes a level of sophistication that they’re using today and how they manage their assets. We’ve specifically tracking our portfolio to leverage that going into the time, just as we’re in today. When we talk to them on a one-on-one basis, they echo back and we can see that in the context of the level of cancellation that we have seen primarily in our indirect channel, not in our large customers, as well as we have not seen significant push outs in trailers or other Wabash National equipment across all of our segments. So not only has overall backlog stayed stable, but we’ve seen a stability in the, we’ll call, uptake and sequence of product as well. And their intent – which signals their intent they need, will pick up, I will say pick up is the actual measurement of when they’ll pick up is it’s complicated by the nature of the time, we’re in. But ultimately, we’re a build to order company. They want their product, they want it scheduled when they scheduled it, it will get picked up.

And maybe also [technical difficulty] you know the diversity of our customer base, we have customers that this has been a very busy time for liquid tank, food grade hauler or a refrigerated trailer or truck body customer may have more demand than they’ve ever had. So it’s a very diverse customer.

Okay. And last one maybe it’s a little bit unfair. But can you see any signs of distress in any of your competitors or any chance to sort of consolidate the industry a little bit? You know, I know it’s not really the time to think about those kinds of things, but just anything that would give you a little bit of a tactical advantage, you know, a year from now? Thank you and then I’m done.

Yeah, I will – I’m not going to speculate on we’ll call it, acquisition roll up or consolidation activity, that’s too early to talk about. What I will say is, I think a – something that we take into consideration is that, we have been very dynamic and planful in the way that we manage our sales and operations planning process coupled with how we’ve derived our customer portfolio, you see it on our backlog. And we were taking variable cost actions and rightsizing our business in the fourth quarter for what we intended the initial backlog and demand pulled to be we’ve further done that. I would say based on our backlog, our capacity changes are effectively done, I believe a portion – and I won’t speculate on the size, but a portion of our competitors will still go through capacity rightsizing as they move into the mid-summer period. I think that may put us in a very competitive situation and being able to respond to what demand could be in the fourth quarter as well as moving into 2021. It gives us much more responsive footprint, depending on what the world gives us. And that’s something that we’re looking to enable so that we’re at a higher level of competitive advantage to react to what our customers’ needs are.

That’s awesome. Thank you.

Thanks, Joel.

Your next question comes from Ryan Sigdahl from Craig-Hallum Capital Group.

Good morning, guys.

Good morning, Ryan.

Good morning, Ryan.

So first off, on so CTP and DPG gross margins held up well despite a challenging environment, but negative gross margins in Final Mile was certainly surprising to us, the magnitude there. I guess why the outsized pressure? And then how do you think about those margins trending throughout the rest of the year?

For FMP, I would say that the reason why they came in maybe more negatively than expected was because as Brent mentioned, we were seeing improvement through the first quarter. We knew the first quarter was going to be challenging and we talked about that in the Q4 call. And as we were seeing some of our operations – operational improvement, hours per unit and productivity move in the right direction. It came right at the heels of us hitting margin, hitting the pandemic and some of the slowdown. And also the revenue pull back because of that and some of the some of the comments that Brent mentioned, pickups and shipments became difficult. So the lower revenue base with the absorption and the improvement that stalled out based on the pandemic really caused those margins to be a little bit worse. We would expect improvement to continue into Q2, but the slowdown in the first quarter due to COVID as it really what caused us do the worst of all we expected.

Yeah, I think you have to really think about a 40% revenue decline that was predominantly occurring in that early February and into the March timeframe. You have to really look at how product has moved up or what. And in the vast majority of our product is customer pickup or customer arrange. In the truck body world, we’re significantly moving product in the urban centers, urban centers that are disproportionately impacted by municipal restrictions, they were significantly more impacted by literal COVID risk, populations were impacted, people were distracted and businesses were distracted. Picking up truck bodies were probably not high on individuals list during that specific period of time. Let alone, physical I’ll call it institutional barriers with getting product into these urban centers as well for the products that we sell specifically and the customers that we’re moving to. You also think about non-essential businesses that were shut down. In many cases, the dealer outlets for Final Mile related products were shut down or had skeleton crews. So their ability to manage the literal logistics of moving truck bodies were significantly impacted. Those are businesses that are – that really only through roughly the second or third week of April were really encumbered. Those are beginning to loosen up now as we move into the reopening phase for state and local government.

Great, that’s helpful. And then just kind of as we think, you know, over the medium-term, I mean, I don’t think anyone argues with the longer-term opportunity there in the secular trends. But Mike I heard you say that the biggest change to the goodwill analysis was changes to 2020 and 2021 cash flows. I guess we were previously expecting a pretty sharp bounce back in the second half of this year in Final Mile, but it sounds like that could be a little bit longer, I guess how do you think about the next, call it, 6 months to 18 months?

Yeah, we definitely would expect the second half to improve, but it would be a slower recovery than what we would have been expecting, say in Q4 on the call. We that – as we mentioned that we were seeing some improvements in that business in Q1 we’d expect to see that continue, we’d expect to see improvement through 2020 and definitely improvement – significant improvement in 2021. It’s just a matter of that those absolute levels will be lower than what we would have originally modeled at a year end timeframe you know, call it in Q4 of 2019.

Got it. Last one for me, then I’ll turn it over. So you talked about Q2 kind of the worst case scenario back in March was expected to be down 50% or more. As you know, has that expectation changed and things improved, worsen since then, I guess, you know, any high level kind of directional guidance you can give without being too specific? Thanks.

Yeah, yeah, no problem. It’s really more along the lines that we’re running multiple scenarios and at the end of March when we decided to tap the revolver, I would say the range of scenarios were a little wider than they are now, because it was hard to see the bottom at the end of March, just from an economy perspective, a recovery in the case array of COVID or any of those things, so we were modeling things pretty severely down. As we stand today, I think our general base case of that we’ve kind of tried to outline qualitatively is relatively intact. It just – it really feels like the bottom is a little bit more coming up a little bit and a little bit more stable. So it’s not so much the base case has moved too much. It’s just the bottom is more easy to see. So we feel pretty good. We feel pretty good at our liquidity levels and what we did and we’re actually very comfortable and probably wouldn’t need to pull that money today if we knew then what we know now.

Great. Thanks, guys and good luck.

Thanks, Ryan.

Thank you.

Your next question comes from the line of Felix Boeschen from Raymond James.

Hey. Good morning, everybody.

Good morning.

Felix.

Hey. Maybe if I could start with a bigger picture question, Brent. I appreciate some of your comments on social distancing measures within facilities. I’m curious if you can maybe expand on that topic a little bit exactly what you’ve done within the facilities? And maybe how you think about increased automation opportunities going forward or any maybe short-term increases to cost we should be thinking about?

Yeah. Well let’s see where to start on that one. Well, obviously we have two different types of facility considerations. We have the office environment, we have the manufacturing environment. From an office environment standpoint, we’ve got roughly 40% to 45% of our salary workforce working from home right now to facilitate social distancing within the office environment accordingly, right so we can get the spread that we need. We have significantly changed I’ll call the administrative and physical layout of certain common areas, break rooms, cafeteria, salon and what we will do is a phased approach of reintroducing some portion of that salaried workforce back into physical environment at the pace at which we can maintain effective social distancing. So we’ll make additional facility modifications to allow that to happen. But we probably will not have the same density of people in our office environment that we saw in the past. And that’s going to change physical needs going forward and I would say, in total, will lessen and that gives us opportunities potentially for facility rationalization, office consolidation going forward. So net-net, I see that as a reduced fixed cost activity for the company. From a manufacturing environment, we have been able to implement effective safeguards on the manufacturing floor across all of our businesses and we have a very diverse set of manufacturing systems, but they do lend themselves much more than other industries such as automotive, we have a much easier time putting in those appropriate procedures and where those can’t be put in place physical barriers, right to prevent the literal coughing and sneezing transmission through droplet to nearby workers. And so for the – the vast majority of cases, the productivity impact has been, I will say, minimal. We did see on the Final Mile business initially some impact in the March timeframe, but that is something that we’ve been able to continue to mitigate over the course of the last 30 days. And we just went through a round of work to understand how we can even further reduce that accordingly. What it has done. So from a capital standpoint, I don’t see us at a point right now, where we will need to shift capital to tackle COVID-related social distancing protocols that are impacting productivity, I don’t see that. I actually see the opposite. I see us being able to understand how to make use our enterprise lean tools to understand how we reduce the – and improve our standard work on the shop floor to encourage social distancing through efficient use of people without the use of capital. And that’s the direction that we’re heading down at this point.

Okay, that’s very helpful. And then maybe a question on the backlog. I think obviously, the $1 billion from $1.1 billion is much more stable in the broader industry. Is there any way to parse out that $1 billion any further? How much is maybe Final Mile contributing to that versus the legacy trailer side? Just any color on that would be helpful.

Yeah, I can’t – I’m not going to give, I can’t give. I’ll call it super specific and I know you know that. What I’ll tell you is that, the breakdown of backlog by business reflects the normal breakdown that we have seen over the years. So we do not have some disproportional mix issue with backlog, it reflects our normal customer behavior, it reflects normal seasonality. It is stable in many ways beyond the top line, obvious number, and that gives us great confidence at this point and how we look to manage our business in the future.

Okay. And then my last one maybe for you, Mike. On the CapEx side that 50% reduction. Correct me if I’m wrong, but would you kind of categorize that still sort of maintenance levels? I guess I’m trying to get maybe a better flavor for what exactly it is that you’re maybe deferring or cutting this year?

Yeah, so the $20 million would be primarily maintenance, safety, regulatory. There will be a couple key strategic initiatives that we continue to spend on in there. MSC, for example, it could be contained in that. But it would largely reduce significant growth CapEx. But we feel like $20 million allows us to not only maintain that’s like Brent’s comments around our customers maintaining their fleets, we believe that allows us to maintain our facilities for the future to come out of this pandemic really running hard, but also allows us to maintain some of our most important strategic initiatives with some level of funding.

Okay, I appreciate it. That’s all I had.

Your next question comes from the line of Jeff Kauffman from Loop Capital Markets.

Thank you very much. Good morning, everyone.

Good morning.

Quick question, you mentioned the customers didn’t pick up the trailers to the extent we would have liked. So sales are down about 27%, receivables at about 30%, inventories only down about 3% or 4% on a year-on-year basis. As these pickups balance out, where do you believe inventories go?

They’ll come – the inventory level that you see at the end of Q1 especially in our finished goods will come down. So a lot of those sit today, Jeff in finished goods. So we had a situation we built significantly more units in the first quarter than we shipped. So finished goods inventory levels will come down at all things else remain equal.

Yeah and I think, Jeff I know you know this, but I want to say it for the call. The way that our – when you look at the characteristics of our finished goods. Again, we’re a build to order business. We invoice upon finish. We recognize revenue upon moving off our lot in many cases, we have been paid for – the units been paid for prior to recognizing that revenue, and I don’t want anyone to – have a misconception that these are speculative in any way. Effectively, every unit in finished goods is expected to ship. It’s just a matter of timing.

And it’s important to know we’ve been – we watched the receipt, as Brent mentioned we watch the receivables closely because there’s scenarios where we regularly will get paid for units that are still here on Wabash property. So we can’t recognize the revenue on that, but we’ll actually have cash and our cash flow has been really positive, even to the early parts of Q2 and part of that is because, while customers aren’t always picking up in a timely manner, they’re paying in timely manner.

Well, I think a new couple paying in a timely manner where I think get pressure on making those units still thereby our customers are still calling every day, wanting to make sure those units are available. They’re paying effectively on time, they’re not extending terms as well as they continue to make logistics plans to pick up those trailers, everything still boxes that that need is out there.

All right. So if I think about to your point on the free cash as we convert a lot of this finished goods inventory and to revenue that’s going to help free cash flow. How should I think about where you want to position your inventories in this environment? I mean sales are down 30%. Is it reasonable for me to assume and I’m not asking for forecasts more how you think about inventory positioning? We should, in theory, see inventories down about that much overtime?

Yeah, we would certainly strive to reduce inventories in line with revenue and that’s kind of my comment on working capital. We would expect to see a reduction in working capital, that exact level and timing in this environment it’s tough to project but we are certainly planning on and we will see some reduction of working capital which would be a benefit to free cash flow.

Okay. Just one other question if I can. We talked about deferring non-essential CapEx. There’s a lot of new products that were slated to be introduced this year, whether it was some of the new DuraPlate products or the development of MSC as you know that now in the media, there’s a big focus on refrigerated right now and refrigerated final mile solutions. How is this environment you’re facing impacting the timing of some of these new product introductions?

It has – Jeff it has had zero impact on the timing of the products that we have communicated to the market. Our so core product is out on the road. Our MSC is where we want it to be – that Michael alluded to we maintained funding for that. So there’s a host of others we have not delayed in many cases they are already commercialized and they are available to the market right now.

Okay, great. That’s all I have. Congratulations and good luck.

Thanks, Jeff.

Thanks, Jeff.

Well, seeing as well that’s all of our analysts who have –

I would now like to hand –

We’ll close it there. Thanks, Felicia, and thanks for everyone for joining us today. More importantly, stay healthy and safe and we’ll look forward to following up during the quarter.

Thank you.

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