Wabash National Corp (WNC) 2002 Q1 法說會逐字稿

Good morning. My name is Wes, and I will be your conference facilitator today. I would like to welcome everyone to the Wabash National first quarter earnings conference call. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on the telephone keypad. I will now turn the call over to Mr. Mark Holden, senior Vice President and Chief Executive Officer.

Thanks, Wes, one point of clarification, I am CFO, since my new boss is sitting across the table from me, just to clarify. [LAUGHTER] Good morning. Before we begin I would like to make an important announcement, as with all of these types of presentations this morning's presentation contains certain forward-looking information, including statements about the company's prospects, industry outlook, backlog information, and the like. As you know, actual results could different materially from those projected in the forward-looking statements. These should be viewed in light of the cautionary statements and risk factors. In the conference room with me this morning, is Bill Greubel, our president and Chief Executive Officer. I would like to welcome all of our listeners on the conference call, as well as the people on the webcast. I will try to provide as much as information as possible today. I will review and discuss the first quarter results, and financial condition of the company, and then Bill will have information about his background and future with the company. Then we will open the floor to questions from the listening audience. The U.S. trailer industry net order rate during the first quarter was approximately 33,000 units. 10 percent increase over the prior year, however is at very low levels. This translates into an annualized rate of 132,000 units. Annualized build rate for the industry was approximately 88,000 units in the first quarter of '02. Obviously, the industry capacity much has been rationalized with the industry building backlog for the first time in I believe over six quarters. The capacity rationalization has been driven by the contemplated bankruptcy filing of [inaudible] and their shut down last week. Great Dane purchasing facilities of strict purchasing facilities. Whether this capacity rationalization is temporary or

permanent remains to be seen. Trailer order rates are become negatively influenced by class A orders and new emission standards that become effective October 1, 2002. Carriers are using capital to purchase tractors as opposed to trailers. Trailer to tractor order rate was .58 to the 1. Historically 1.5 trailer has been ordered for every new tractor. We expect to see some improving trailer order rates over the last half of 2002, assuming the economic climate does not deteriorate further. Turning to first quarter '02 results, net revenue 162 million dollars, during Q'02 that declined 33 percent over the prior year, revenue of 243 million. Driving the decline in revenue is principally new production of trailer sales, 47 percent decline. We shipped 155,000 units. We significantly reduced our production rates in Q1 '02. The average price of our units sold in the first quarter was approximately 17,800 dollars. Used trailer sales increased 55 percent. I will speak to used trailers later. First quarter results lease revenues increased approximately 10 percent over the first quarter of 2001. Our net loss of 14.6 million compares to 17.7 million in the first quarter of 2001. Or 18 percent improvement on a 33 decline in revenues. EBITDA was negative 13.4, compares to 14.5 million in first quarter of last year. EBITDA 13.4 million includes non-cash charges of approximately 7 million dollars. Therefore, EBITDA on an adjusted basis would be a negative 6.4 million. Our restructuring action that is we have taken over the past nine months are beginning to be reflected in the financial results. Last year in the first quarter our results were negatively affected by our national operations which have since been divested. They were negatively by the Ford county and Scott Madison, Iowa operations. And they were significantly affected by the used trailer evaluation charges, which we have since then normalized. Q1 '02 results in 29 million in charges. 4 million for new trailer and used trailer charges. We continue to liquidate used trailers in the first quarter and we continue to aggressively campaign aged new trailer stock inventory. We also made additional bad debt provisions of 3 million dollars in the first quarter. Principally targeted toward one account. One period that went into chapter 7. In addition we also recognized 3 million dollars of

financing and restructuring fees in the quarter associated with our debt restructuring. We anticipate recognizing an additional 5 to 6 million dollars of restructuring costs during the second quarter of this year as we closed on our debt restructuring in April. Therefore, those costs, approximately 5 to 6 million dollars will flow through in the second quarter. Half of those costs will be expensed and I would expect half of them to be capitalized. Turning for the moment to used trailer situation, our used trailer inventory balance approximated 41 million dollars at the end of the first quarter. We sold approximately 24 million dollars of used trailers in the first quarter, and we purchased 9 million dollars. We sold 4,800 units in the first quarter, those are used trailers, and we purchased or took in approximately 2,000 units. Total used trailers in inventory are approximately 9,300 units. That compares to I believe a peak during last year of over 13,000 trailers in our used trailer inventory. Clearly, this is our best quarter in over six quarters for used trailer operations. As we discussed during the fourth quarter last year, we were going to aggressively fix our used trailer inventory problem. I am proud to declare that problem is fixed. We still have an opportunity to further lower inventories but for the first time in a long time we have our used trailer business under control. Our backlog at the end of the first quarter stood at approximately 188 million dollars. As a result we have increased production rates during the second quarter based on this demand. We expect the full year of 2002 to approximate our prior year shipments or approximately 33 to 35,000 units. We are becoming much more disciplined in managing our production rates with demand. Many of our poorer customers are publicly held and many are publicly held. Our balance sheet is prior to our closing on the debt are you structuring. Therefore many balance sheet items will look different today than they did at the end of the first quarter. For example, at the end of March we had cash of approximately 40 million dollars. Our accounts receivable were 65 million dollars. Inventory was 150 million. And total debt was approximately 400 million which included a rental facility for the rental fleet of used trailers, and our own balance sheet treatment for the [inaudible]. Capital expenditures during first quarter, again we maintained tight control

on capital spending. And it capex totaled 47,000 dollars. We closed our debt restructuring in April, therefore we used the cash that we had on hand in March to pay down debt. Looking at our new debt structure the main structural points of our financing are as follows: Approximately 107 million of the 125 million revolver which originally matured September 30th of '02, and 72 million dollars of the senior notes which originally matured over the next nine months were refinanced into a new term loan that mature on March 30 of 2004. In addition, an 18-million dollars revolving line of credit was put in place which also matures on March 30th of 2004. The company will make quarterly principle payments of 3.5 million dollars in 2002 beginning June 30th, '02 and then we will begin making 15 million dollar principle payments per quarter in 2003. This equates to 70 million dollars of principle reduction through 2003 which is in line with the company's objective of delevering the balance sheet as quickly as possible. The remaining 120 million dollars of senior notes maturing between December 17th, 2004 and December 30th, 2008 are structured to remain in place. The lenders participating in this refinancing are secured by all of the company's uncumbered assets excluding accounts receivable. We also replaced our 100 million dollar receivable facility with a new 110 million dollars [AR Securitization] facility, which is a two-year facility and will provide the company with enhanced liquidity. We continue to improve the liquidity position. As of today it is over 150 million dollars. Currently, we are working on additional transactions which are expected to net 30 to 40 million dollars of additional liquidity over the next three to four months. In summary, much has been accomplished in the last nine months. We have rationalized our manufacturing capacity. We have normalized our used trailer inventories. We have significantly reduced our cost structure. We have divested international operations. We have refinanced and restructured our debt structure. We have significantly enhanced our liquidity position. We have also maintained shareholder value. We have added new leadership at the board level and at the CEO position. Much remains to be done. But fortunately, we can now focus on our future as we have cleaned up our past.

I will now turn the discussion over to our president and CEO, Bill Greubel.

Now, Mark, you are sure I am the CEO; right?

Positive.

Thank you and welcome to all. I am proud and excited to be part of the Wabash team. I believe from the recent press releases most of you are aware of my background. Wabash issues are not exotic issues. Through my first day with the company I explained my forward key operating goals, make the numbers, operational excellence, grow the business, and focus on the customer. Within each of these goals we would collectively determine those critical actions necessary for success. These will be communicated to the organization explaining specific reasons, metrics, and timing necessary for success. For the foreseeable future that's all we will collectively focus on. On the next quarterly review I will give you further detail. I would like to share with you a few of my observations after a week on the job. The company has a dominant core customer base and product offering. We need to augment this customer brace with broader breadth in the small to mid-sized fleets. With the closure of our port Madison, and Scott county plants, we need to maintain our portfolio. Some of this will be outsourced and built under our strict specifications. The majority of the associates are committed to the Wabash position. There is a lot of pride within the associate ranks. They are ready to step up to the challenge. The company lax a realistic plan for managing the cycle, and got caught when the industry turned down. Basic blocking and tackling will create a positive cost and cash savings. Continuous improvement will be our guiding force. The industry should [inaudible] in the next few months. We are seeing larger bigger financed fleets picking up their orders. At this time the purchase of trailers has taken a second seat to trucks due to the pending emissions standards and could continue through the third quarter. We have a narrow window to get operations in order to leverage earnings potential with improving market conditions. The organization has already stepped up to the task, but clearly we'll have to move faster. The retail side of the business is not generating acceptable returns. You must be able to leverage this to be at a competitive advantage going forward. Clear expectations of improvement have been communicated.

There is a general lack of leadership, goals, and accountability at both the executive and functional levels within Wabash. My first task will be to create the team that measures and drives the appropriate change in culture. We will begin this process next week. In closing, a lot of heavy lifting has been done relative to the non-core business issues. I think Mark and the group have done a tremendous job. A significant amount of work remains at the operational and functional levels. This is where we will spend our time and focus. I expect to review with you our progress during the second quarter call in July. At this time we will open it up for questions. Thank you.

Wes, we'll open up for questions at this time please.

At this time I would like to remind anyone in order to ask a question, please press star then the number one on your telephone keypad. Your first question comes from the line of Andrew concern with Clifford capital.

Hi. Thanks guys. I just had a few quick questions. Who is the current auditor?

Current auditor is Arthur Andersen. And the audit committee is looking at various proposals from various firms including Andersen to fulfill that role going forward.

Okay. Will there be an impairment test on the intangibles at any point?

Yes, there will be. Under the new accounting rules, goodwill intangibles have to be measured from an impairment standpoint. Wabash does not have the significant amount of intangibles on the balance sheet. I believe in total we have maybe at 30 million dollars. That's principally related to two acquisitions that were made. One the [Cloud Oak Flooring] operations in Arkansas. I believe that's roughly 16 to 18 million dollars of goodwill. Secondly, the [Bredner] acquisition in Canada that was made last year, and I believe that's roughly 10 to 12 million dollars of goodwill. And I believe the implementation date for that new accounting is sometime this year. And so, yes, we will comply with that. I do not anticipate anything of significance relative to the adoption of that accounting standard.

Okay. And could you go over your cash position quickly.

Sure. I guess the way I look at it today,

we measured certainly from not only a cash but simply a liquidity standpoint. Given our cost of capital and cost of debt today, we do not sit on very much cash. We pay down as much debt as possible. So if -- virtually today from a cash standpoint, I would say it is under 5 million dollars. From a liquidity standpoint liquidity being defined as cash availability of borrowings under our revolving lines of credit, and available under receivable facility that, totals over 50 million dollars.

Okay. Thanks very much.

Your next question comes from the line of Tom [Albreck] with [BB&C.]

Thanks, good morning. Got a number of questions here, Mark, first off the different charges you detail in the quarter, are they in the cost of sales or the SG&A line items because I don't see a line item just for the charges.

Sure. Good question. 4 million in the charges for new and used trailers will be cost of sales. The additional bad debt provision also run through SG&A or G&A. And the 3 million of financing and restructuring fees will be below the line. I guess whether we call them interest, expense or other, remains to be seen. But it will be below the gross margin line.

Okay. And then it is still difficult for us to get a sense as to your progress in moving towards the break even level on the performance of the manufacturing and the retail and distribution businesses. Can you share roughly what the operating income or operating loss was for those two businesses since they are usually in the 10 K -- excuse me 10 Q any way?

Sure, I would say from a macro standpoint, if I take a look at our loss before taxes, which is after interest, of roughly 6 million and other million. And on an operating basis, the corporation did right at 20 million dollar loss and included in that are our costs, the charges of 10 million. And so I would tell from you an overall perspective, the corporation at a 5,500 unit level lost about 10 million dollars on an operating basis. Now then, how that breaks down between entities, retail would have lost roughly 5 million dollars. And that's what will get reported as a segment. Manufacturing reportable loss from operations is roughly 15 million. And again those have charges in it. Hopefully, that gives you some insight.

Okay. And then wanted to go back a couple of numbers, Mark. You were giving them pretty fast. You said the used -- excuse me the decline in new trailer

sales was down 47 percent for manufacturing. Is that correct?

That is correct on revenues with 57 percent decline in units.

55,000 versus 11,000.

Over year.

Then what's the status of some of the pending asset sales, namely the two shutter plants. I believe at one point you were close to a transaction with the old Arkansas facility. Can you walk us through what is going on, what you are active in trying to sell, and what you are maybe not trying to sell?

Sure K we have and we had approximately 20 million dollars of idle property that includes, as you mentioned the two facility, one in Iowa, one in Tennessee, also the idle property in Arkansas. In addition to those three properties, we also have various properties around the country that at one time were a branch location that we are no longer operating in. And that's the bulk of the remaining portion of our 20 million dollars. We are actively marketing and disposing of all of the property. In fact, I believe we are due to close this month on a branch property, I believe out in Seattle. And that, for example, I believe is a 4 or 5 million dollar property. And that will bring in 4 or 5 million dollars in cash. While we are aggressively marketing these properties to divest them and convert them into cash. So the Iowa plant, Tennessee plant, we have had a number of interested parties in. And we have had a number of parties through the facilities. And we are in the process of entertaining bids on those two manufacturing facilities. We have also have received recently an offer on our shared Arkansas property. I will tell you my expectation will be that the various idle properties will be disposed of this calendar year and over the course of the next three quarters.

Should we expect some sort of a write-down on those properties, perhaps in the second quarter?

No. Any write-down that is we expected have already been reflected in our various restructuring charges. For example, Tom, the largest one would have been Scott county, Tennessee. And as you recall, I believe we recorded roughly 25 million dollars associated with the write-down of that facility. The 20 million dollars of idle property that I referenced have been written down to basically liquidation value, if you will.

Okay. And then -- let's see. How many used -- you sold 4,800 used trailers. Is that correct?

That's correct.

Okay. How many new trailers did you sell through the Retail Network?

Good question. I don't have an answer off the top of my head, Tom. That's one I will have to follow up on.

Okay. And then did you take any additional steps in the quarter for head count reductions or the amount of employees that you list in the 10 K at year-end, is that roughly where you stand today?

I believe if anything, in terms of full time equivalents, it would be roughly the same. I will tell you however, given a fairly sizable ramp up in our production rates, we have added to the work force through the use of temporary workers. Our temporary head count today, I don't have any precise number. But I would estimate it somewhere between 700 and 1,000 people. And backing up for a moment, Tom, we sold through our Retail Network just right at 1,000 units, new trailers in the first quarter.

Okay. And then how about pricing in Retail Network of new trailers. That has been the bigger source of pricing weakness compared to the manufacturing sectors as I recall it. What was the average price for new trailer in retail?

Again, I don't have that in front of me, Tom. I think you are correct. We perhaps had more to do with the weakness than anything else in that we were very focused on moving our aged stock inventory, and as a result, we cut our pricing pretty aggressively to move equipment. And it looks like just in bulk, our numbers, the average price for a new trailer in retail is roughly 22,000 dollars in the new quarter. Again on a retail basis, mix can influence that average pretty significantly because from a product offering standpoint, the principle products on new trailers are a sheet post trailer, a refrigerated trailer, which if we sell retail, typically including the refrigeration unit on it and would be a $40,000 price tag on it, and the other is tanker trailer. And that's greater than $50,000. How the average of that pricing for the retail market compares quarter over quarter, one needs to be a little cautious in drawing some conclusions to that.

Yeah, I am glad of that because I know that the numbers had been more like 15 to 17,000 dollars. So I appreciate that expansion. What about as we look forward here, you are hopeful of doing 33 to 35,000 units in total this year. Did you 5,500 at the manufacturing level in Q1. What does that

apply for the second quarter, 8 to 9,000? And can you comment on whether or not you believe you will be able to perform at a break even level within the manufacturing division during the second quarter?

Could I comment? Sure. Will I? No. I think at this point in time given Bill's arrival as he alluded to strategically, we are in the midst of some very important discussion and reviews. And from my perspective some very exciting discussions and decisions. How ultimately those play out in the next few quarters, I would simply Tom, tell you, I would reserve -- the right to come back to you obviously at the end of the second quarter and give you probably some better insight as to how those will affect our future. Having said that, I clearly expect and if we -- the company is targeted 33 to 35,000 units on an annual basis this years, we did 5,500 in the first quarter, and I would correct you on one statement you made, the 5,500 is in total including retail.

Okay.

So manufacturing would have done roughly 4,500. Having said that the balance of the year looks like to be anywhere from 33 to 38 hundred units. I am encouraged by what I see out in front of me both from a strategic visioning standpoint but also more importantly from a results standpoint. I think the second quarter clearly we are taken up production rates pretty dramatically. Ultimately what the number turns out to be, remains to be seen.

Can you share then your expectation for production today for just the second quarter based upon your workers, etc. or do you want to wait on that.

Yeah, I will wait on that. Again as you know, fourth quarter is seasonally a slow quarter because of the holiday and plant shut down. I would expect both quarters to be fairly comparable from a production standpoint.

Lastly, I will leave it open for some others here. But on the breakdown between SG&A what was G&A, and what was the selling component there?

G&A was approximately 14 million and that includes the bad debt provisions I referred to earlier. And selling was approximately 6 million.

Okay. I am sorry I thought of one more. Backlog for [Duraplate] was either in dollars or percentage of your total?

Sure. Hang on just a second. I actually have that one. Again, the total backlog was 188 million and [Duraplate] would have been approximately 60 to 65 million of the total.

Okay. Thank you.

Your next question comes from the line of Darren [Hiteman] with [Schneider Capital].

Thank you. Let me follow up on the [Duraplate] backlog because it strikes me as being an unusually low mix of your backlog. Am I remembering that right?

Keep in mind that we are in the midst of completing a fairly large order for J. B. Hunt. That order however is for [Duraplate] containers as opposed to [Duraplate] trailers. And so the percentage that I gave Tom was for [Duraplate] trailers. And so if you were to add in [Duraplate] containers, you would add probably another 25 percent of the backlog.

Okay. Tom covered a lot of my questions. I wanted to also ask about used trailer pricing do. You see that recovering now that you are quite through your inventory correction?

I do. I don't. Actually our salespeople do, Darren. The word I hear from the Retail Network is, yes, indeed we are seeing improvement in pricing which is very encouraging. Obviously again I think we had more to do with used trailer pricing in the market than anything. Clearly it was a weak market. But we were out there liquidating trailers at very rapid pace over the last nine months. Last couple of months we have not been in that liquidation mode. And as a result, I think a combination of simply the thruput that we are seeing in the distribution channel as well as overall economic conditions have resulted in a general improvement.

It seems like a recovery in trailer pricing could get your retail operations in a break even state. Is that too optimistic?

No, I don't think. Historically speaking, used trailers as product line for the retail business used to be 15 to 20 percent gross margin business. It used to be that since we owned it. It is just for the last two years when we have not been disciplined on the acquisition side that we have -- I would -- combined with clearly the economic fundamentals -- but that we have disrupted that product result. So I think our expectation is to see our used trailer business return to a historical level as Bill alluded to. We have some very clear expectations on [inaudible] for Retail Network. They have been communicated and they will be measured and evaluated. I think that will go a long way towards improving retail. I would say the other thing that would benefit retail simply from a infrastructure standpoint, we are beginning to see the cost side of the equation decline

because we are not having to rent yards all over the country, parking used trailers. And at one time we were spending two and a half, three million dollars annually just to rent acreage Arnold the country. That is declining as we speak. In addition, we have to hire people to man the yards. So our infrastructure costs are beginning to decline as well. So I think there is a lot of good things that can happen now that we have normalized our used trailer inventory.

Is the current spread between the used -- cost of a used trailer coming in versus the market price of a used trailer going out, is that enough of break even at 4,800 units a quarter.

Today I would say no.

Not quite?

No, as we have talked in the past we still have some trade deals, legacy deals that were made that we are burning off. We have continued to honor those -- some of those positions and some of them we have gone back and discussed with our customers the condition of a company and basically we have renegotiated them. We still have some work to do on that front. Nonetheless, we still have open trade commitments today of probably over 30 million. That is down say roughly 10 million compared to year-end. Year-end if you recall I mentioned that we felt we were upside down on those by 8 to 10 million dollars. I would tell you we are probably upside down on the remaining obligations or commitments of roughly 6 million.

Okay. And now if I could switch over to Bill. This is my first opportunity to hear from you. Could you talk about the challenges that you have faced before. Because in your last position when you took over leadership of that company, was that a turnaround or was that already operating at a pretty high level?

No. It -- there is a lot of similarities here. I don't know whether I want to say fortunately or unfortunately. But they were pretty much the same type of business. We certainly at that point weren't as highly leveraged as we are, or as [Accuride] is today. But that was due to the buyout. If you look at fundamentals we bunched a good people at [Accuride]. But a lot of that was [inaudible]. The people were more focused on how do you get the wheel out, or in this case with Wabash, how do you get the trailer out to meet customer demand and to the heck with the costs associated with it. Fundamentally both companies are doing a good job as far as supporting the customer. In some respects though they have to learn to manage their customer better than

what they are both doing today. The first thing that I did was -- and it is the same thing I am doing here this week and next week is to put together the leadership team. I am not looking for managers. Really what I am looking for are leaders because this organization is devoid of that type of structure. We have a lot of people in both businesses that are willing to do whatever is necessary but they had to be told how, why and what. I am looking for are people that can take this responsibility on themselves. And from that, direct other people to, you know, to the improvement of the business. We then started focusing on continuous improvement. At [Accuride] for some of those people you might want to just check the industry but their ability and their success with continuous improvement is very, very good. We started this process when I came on in late 1994. In '95 we actively began the training and the development of people and skills to associate what it means to save money to improve process, to reduce overtime. We looked at every aspect of the business. Believe me, there was not a stone that wasn't uncovered. Now with Wabash, given the loan covenants we have, and the importance of the cash going forward, we are going to push this process a lot quicker. We don't have the cadre of people I would like to have internally to do this. So we are going to go out and bring some people in. These won't be ads to the staff. Simply put, as we bring in new people, we will unfortunately have to get rid of some of the existing staff that we have. Once we have that, we will start to identify and train. And this will all be done within the next couple of weeks, and actively go after some of the programs. It is interesting that when I came in and I have had my first week of discussions, there are some good programs in process. The problem that I see is there is no expectation as to when these programs should ultimately come to task. And when you say, who is in charge? You know, who is the leader or the business leader that has responsibility for this action it gets quite confusing to understand who just is going to do that. From my perspective you clearly have one of the executive leaders in charge of most of the continuous improvement. They are the one that is are held possibly. They are the ones that have to force the process down. So I think we will be able to do that. During the midpart of my career with [Accuride] we were purchased by KKR and then assumed a significant leverage position

with banks. This again is something that I am not all that concerned with. Have been there and done that. I know what it means. And really, again, what needs to happen here at Wabash is every day is critical. And I don't think that we face every day as being a very critical day. When you have a leverage that we have, and again if you want to look at [Accuride] I am sure that there are comparable leverage there. There are simple double-digit leverage. They were able to survive and prosper under there. That's not where we want to be in the long-term. We do want to pay down our debt. We are being to be very conscious about cash and the process used to garner cash. And from the bank's perspective and from the bondholders we have, that we are going to pay down and be very aggressive in doing that so we delever. When it is all said and done I think some of you people who know some of the analyst that is followed us, JP Morgan, Citibank, you may want to touch base with them. They were not only analysts but also some of the big banks that I worked with as [Accuride]. And I think they can tell you about the trials and tribulations that we went through. [Accuride] is a very profitable business. They are generate ago lot of cash and just about everything that we did successfully there that took probably three to four years to learn we are going to compress that and push it forward here. [Accuride] also is being one of Wabash's largest suppliers has offered us some of their templates in the continuous improvement process so that we will be able to bring that in-house and a lot of the learning and training will be embedded in those templates that we will be able to push forward. And hopefully we will be able to work on that in the next week or so.

The document that I saw showed very healthy double-digit operating margins at [Accuride]. Is there any structural reason you couldn't achieve that at Wabash?

Well, I think the definition of healthy is something that we have to understand. There are differences between the two companies. Double-digit, yes. I think I can sign up for that and would agree to something like that. In the 20 plus range, I don't think that's something that we'll see in the foreseeable future. What I have been able to see -- it has been a real exciting eye-opener for the first five or six days, especially when I got a chance to walk the plant. At [Accuride] we used to measure continuous improvement as

are you tripping over Tor do you have to climb a tree to get it or what are you looking at. I think it is safe to say that at Wabash there is a lot of low hanging fruit you are kicking. This is something we will work on very, very quickly to identify and then get done. The biggest problem that I see, and I put it in my notes is I wish I was here six months sooner. At that point we were not running some of the production lines to the extent that we are doing today. So some of the change, the fundamental change that we have to do in creating a more lean manufacturing organization is going to be a little bit more difficult because the most critical lines that you want to effect are right now running full out. And we are going to have to work that process. I am not saying that it can't be done. I am just saying that we may have to choose where we are going to pick off some of this cost improvement and then when we looked at general process improvement, it may be time to more towards the fourth quarter when we think the business will not be as strong as it cyclically is in the second and third. We will get to it. It was one of these things that everyone was asking me, are you coming back when I left on Friday. And I absolutely -- this is the challenge I wanted. I certainly have one. And I am very anxious and actually couldn't wait to get back to start the process on Monday.

Okay. Great. I will yield to someone else. Thank you.

Your next question comes from the line of Dan [Knoll] with [Goldsmith & Harry].

Good morning. Mark, when you talked about the trailer tractor ratio, you have described what is clearly somewhat of a crowding out for your product. I was just wondering how you see that. If you are right it takes into the third quarter to work through, how does it correct itself? I mean over what period of time. Are you looking at a year '03 where you have a big catch up?

I think a lot of it will be tied to the fundamentals driving for the new equipment. We have reviewed some of the dynamics right now as being artificially induced. By that I mean with the emission standards coming on or going into effect October 1, clearly there is an imbalance. And we expect that imbalance to begin to correct itself this year. How quickly it corrects itself and to what magnitude it corrects itself, you know, it is difficult to say. I will let -- I will leave that one to Tom.

Well, the industry I didn't follow it that

closely at the time, but the trucking industry has been through this kind of thing before. Is there anyone there who has looked at the past periods of crowding out where you have had a similar occurrence?

If you go back to '91, I think the industry has changed significantly. And certainly the way that people use freight at that point that you can make that comparison. I think it is pretty safe to say that we are cautiously optimistic that on a quarterly basis, certainly the second and third quarter of this year will be relatively good for us. The fourth quarter I guess where we believe based on the use of trailers, will be down. But I think if you look into 2003 and the economy were to hold and improve, we should see some good numbers coming out. And that's what we want to prepare ourselves for.

Okay. Bill, I had just a couple of questions for you. You mentioned four goals, and I only was able to copy down three. You had make the numbers, operational excellence, grow the business, and what was the fourth?

We need to focus on the customer. Create responsibility. There is -- we need to learn how to manage the customer so we win more than we lose. I think at this point in time our focus on the customer is excellent. But in negotiations and relationships we have we are tending to lose more battles than we win.

Okay the grow the business goal is the one that I am a little curious about. There doesn't seem to be a lot of secular growth in the trailer industry. And your previous management, if I understand the primary critique was that they focused too much on gaining share. How do you walk that line where you don't have a whole lot of room?

Good question and a very pat response is I first have to fix the house and put it in order. So the growing of the business is something that we earn after we are able to afford and basically delever ourselves in order to get involved in that. There are some areas that I have some questions. Remember, as a wheel supplier, I am very aware entire industry, because we had just about everybody as a customer. On a line like this one, generally our competition is also listening in. I think you have to bear with me. But at this point in time, I think from the bankers and bondholders standpoint, first, we get our house in order before we look at anything as far as growth. And that's critical. Again at [Accuride] we did the same thing. It took us two, two and a half years before we really

started looking at expanding our business. However, we are going to make the branches work. And that's very critical to us and to our future. It is an asset we have that we are not using. And by, gosh, by golly, we either do it or we look at potential rationalization of that asset. But clearly in the next six to eight months the branches are going to be under a lot of pressure to show their stuff. And at that point in time we will make a realization whether we want to go forward or we want to hold or we want to maybe rationalize further. In my mind each branch must make a profit. And that profit must equal a certain floor or bench level that we have, not only within our business but with our competitors.

Thanks.

Your next question comes from the line of Darren [Hiteman] with [Schneider Capital.]

Thanks, Bill, I just wanted to make sure we were talking about the same thing when I -- you said you were willing to sign up for a 10 percent margin. Were we both assuming a 10 percent operating margin or were you thinking gross margin? And again let's use some kind of trend line industry to [inaudible] 250 you know, or whatever you think it is.

Certainly, that's a question I said I couldn't answer. I said I would sign up to double-digit. You will have to give me a few more months to give me a business plan on that. But certainly it is going to be based on a -- at this level of demand within the industry, I am not willing to sign up to anything.

No, I don't think it is realistic to expect it.

But I think what we will do and we will come out generally I would think at the next conference call and give you a better indication of where we are going. But from my perspective, at the bottom line, our goal is to be in the double digits.

For operating margin?

Yeah.

And what was your market share of orders through the first quarter?

I don't have an exact number, Darren. It was clearly greater than our market share of shipments. And our shipment percentage was about 25 percent a share. And I would say our share ever orders probably exceeded 30 percent.

And that's due to the big public carriers

being healthier than other carriers?

That's a good reason.

Okay. Mark, what's your variable costs for your manufacturing operations as a percent of I guess, percent of revenue.

Percent of revenue today I will give you a range, Darren. Our variable is probably on incremental production is probably 15 to 20 percent. On a static basis, right now the way we are operating variable is probably 10 to 15.

Okay. And then I guess back to Bill, sorry for jumping around. You said -- I think what you are saying is you wish you had more slack in your production lines because it is easier to make improvements. That kind of implied that your capacity right now given your current assets wouldn't be anywhere near the 65 to 70,000 that you did in '99 and 2000.

Remember, back then we did a lot of overtime and had other plants up and running. My concern is there are probably two or three very critical lines within the Lafayette facility. And those are the lines if you are going to make, hey, you want to do something with those. At this time those lines are pretty much in use five days. It doesn't give me the opportunity to do some of the changes that I could have done six months ago when one or two of those lines would have been in partial use.

Okay. So if the industry demand in 2003 gets back to normal and you have the market for 63,000 trailers, will you be able to make them?

Yeah, I think we will. Certainly, that will be a challenge. I think what you will really see is we will market 60,000 trailers. I am not certain we will make 60,000 trailers.

Okay. Then I also want to get your view of [Duraplate]. It has been my assumption that that's a very -- it is a premium product. The customers value it. I think it carries about 10 percent premium to other products. Do you think it should be higher, lower?

This is one where I will get myself in trouble by answering. Let me stick my foot in my mouth a little bit on this. At the current customer base that we have now with our strong large fleet core customers, the price of the [Duraplate] trailers will be probably pretty much where it is going to be. I think we will really focus on [Duraplate] as far as reducing the cost of manufacturing so that the focus with the core accounts will be on [inaudible]. If we can raise the price we will. But I don't think given the degree of

trailers that we have already sold to these people that we really can do much in that area. However, we can reduce the cost of the [Duraplate] significantly. And I think that's what we need to focus on. Remember, this game is not necessarily how many trailers you can sell. That's what got us into this trouble. The real thing we are looking at here is how much can we make on each individual trailer? Honestly, we don't have to make them, but we can sell them and make a markup on them, and I think that's a hell of a lot better. So we will look at that. That's critical. The other aspect to [Duraplate] you can broaden the expanse of the product down into the smaller fleets. At that particular area there these people don't have the purchasing power that the big Schneiders and Swift have. Therefore we can get a premium for that product. If you look at it the mix of [Duraplate] have been in the large users. As we move the mix down, we should see the average selling price start to move up. So, you know, I am not one that will say, hey, I want to sell 60,000 trailers. I what I want to make is a lot of money. And I am going to look at every aspect there. And from my standpoint it is very difficult to go into a Swift or a Schneider or someone else and say you have to raise your price when I really don't know in effect how much I can reduce the cost of that trailer. And that's my focus. We are going to take a lot of money out of the cost of building trailers. We are going to bring our break even down. And we are also going to focus on other accounts that can use [Duraplate] that need to use it and at this point in time aren't currently buying it. So it is a two-pronged approach.

I would add, Darren, another piece of the equation is -- has been the trade-in. And while I will agree that we have gotten a premium on the [Duraplate], we probably gave most, if not all of the premium back on the price that we gave for the used trailer. So I think as we look at our business processes today, surrounding trade-in's, that's another way we can significantly take cost out of the total equation, simply by doing a better job of buying the trade-in.

Right. But I guess but that begs the question, will the market bear a 10 percent premium for [Duraplate] or not?

We clearly believe so. We have some accounts that do not have any trade associated with the deal. On a relative basis we see the premium that is possible. I think from our perspective, yes. It is the only

product of its type out in the market. We don't see a competitive product that is commercially acceptable. And so it has been a huge success. And I think we need to be better disciplined on the cost side on trade. And as Bill says on the cost side on the manufacturing operation.

Bill, what line items of the manufacturing operations are most likely to be decreased? Labor I guess.

I think you can start with A and end up with Z. We are going to look at everything. I think what is really important here is this isn't where we are going to have 1,000 people take ago step at a time. We are really going to focus on the critical areas that we can affect very, very fast at very high savings. So as we talk to you in the future, we will talk to you about specific programs that will be big hitters.

Okay. You can tell -- I am pretty hungry for information. But I appreciate the fact you have only been there for a week. Would you mind telling us about your compensation structure and how much of it might have been in options or is there cash bonuses based on profitability targets?

Most of my compensation is based on options. There is very little cash bonus this year. Going forward, I hope it is mostly based on options. That has to be reviewed at the board level. And so I really can't state any more.

Your initial option grant was based at the current market price or at the time you accepted it. And then they just vest over a certain amount of time a very traditional option package.

Right.

Okay thank you.

Your next question comes from the line of Tom [Albreck] with [BB&C].

Thanks. I have got a couple of follow-up questions. Mark, on the potential sale of the Seattle branch, that sounds like that's an on going operating branch that is generating 4 to 5 million dollars of revenues. Hypothetically, who would be the buyer of that? Would that be the manager of that office basically where you kind of convert it back from a company facility to kind of an independent sales office?

Yes. Actually that one is closed. We have not been operating in that location for some time. It has substantial value simply because of the real estate location is now -- at one time you could be on the outskirts of the city when Fruehauf years ago

acquired it. Today it is virtually considered downtown. So from a functional standpoint for a trailer dealership or a branch location, it really is not practical. So we shuttered it some time ago. It is simply the four or five million that I referenced is the value of the real estate, not the sales volume.

Okay. I misunderstood you. I think in your comments you had suggested at one time it did 4 to 5 million in business. But it is shut down now. So that helps. What was the approximate break down in dollars for retail sales and manufacturing sales and your inner company eliminations?

Sure. On a revenue basis manufacturing was approximately 82 million. Retail distribution was approximately 86 million. And elimination was about 7.

Okay. And then on the 9,300 used trailers that remained in the fleet today, I was thinking that was going to be a little bit lower than that. Can you discuss what you believe would be an optimal level going forward and whether you are going to be focused more on the dollar value of used trailers or the number of units? Dollars is what, 41 million. That would seem to be close to an optimal limit. Maybe it goes 35 million. But what are you looking to monitor once that trailer inventory gets to where you need it to be? Is it going to be the units, is it going to be the dollars. Want to hear your thoughts there.

Sure, that's a good question. From my perspective that will be weighted more towards units only because units obviously will drive the infrastructure cost, one. Optimally, our retail people say they believe roughly 4 to 5,000 units would be a target or is a target. And so we still have a ways to go from an overall inventory of units standpoint. Certainly, on a cost basis today you can quickly figure out what our average is. And again that's a part of our strategy to move the equipment and to convert as much as we can to cash. But also to take out infrastructure cost. So I think we are there, certainly on an average per unit basis. We still have some work to do relative to units.

Okay. And then lastly, should we go ahead and continue to expect additional used trailer write-downs for another quarter or two? I have got roughly 3 to 5 million dollars each of the next couple of quarters. I just feel like maybe as a safety precaution that's where we should be. But what's your examination?

I would agree with that, Tom. What the

number is, you know, is anybody's guess. But I would agree that the risk of further write-down or loss is there. Again we have open commitments today on past deals that we have made. And you know, those alone may account for about 6 million over the next couple of quarters. So I agree with your thought process.

Okay. Thanks.

Your next question comes from the line of Andrew [Kerns] with [Clifford Capital.]

Hi, guys. I just had a few quick follow-up questions. The first one is if you could talk about debt covenants, if there is any that you are close to breaching or the one you are closest to breaching. Is there one with the 20 million EBITDA requirement? Could you give color on that.

Sure. There are various covenant. Probably the most restrictive is the EBITDA test or covenant for the 9 months -- the last 9 months of '02. That covenant is a negative EBITDA of 20 million. And then going forward, it steps up in 2003 and it steps up very quickly. That's why I concur with Bill's comment from a sense of urgency standpoint the organization needs to understand the sense of urgency. But clearly the EBITDA in my opinion is the most restrictive and will be the most restrictive going forward. We have other covenants such as capex. We have a limit on capex I believe is 6 million annually. From my perspective I don't see that as a problem. However, that -- there is a balance between the capex and accomplishing some of the things that we want to do out in the plant. And so that will make that challenge, perhaps, a bit more challenging. But --

Okay. I just wanted to be on this. This is a negative 20 million for the next 9 months. It is not a positive.

No, it is a negative for the next nine months.

You mentioned a balance sheet. Will you going to put out some information on that soon.

In fact, we will tomorrow since our 10Q is due tomorrow. The balance sheet will be filed tomorrow.

Okay. I think in your filings we saw [inaudible] that says the last day of the fiscal quarters of the quarter occurring in calendar year 2002, you must maintain solid EBITDA [inaudible] and ending on the last day of that quarter at an amount of not less than 20 million.

Yes.

I don't see anything there about negative EBITDA.

I don't see it -- well, I don't have the document that you are referring to in front of me. All I can tell you is this particular covenant I can assure you was negotiated pretty heavily with the lenders. And it is one that I can clearly recall.

Okay. It is in schedule 2 to the master amendment agreement.

Okay, schedule 2 to the master agreement. I will look at that. But I can assure you, it is negative 20.

Okay. Thanks very much.

At this time, sir, I am showing no further questions.

Very good. With that I think we will close. And I appreciate everybody's participation and attendance today. Thank you.

That concludes today's conference call. You may now disconnect.