Wabash National Corp (WNC) 2002 Q3 法說會逐字稿

Good morning. My name is Thea, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Wabash National Corporation third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, you may press star and the number two on your telephone keypad. Thank you. I will now turn the call over to Mr. Bill Greubel. Sir, you may begin the conference call.

Good morning. Before we begin, I’d like to make an important announcement. As with all these types of presentations, this morning’s presentation contains certain forward-looking information, including statements about the company's prospect, the industry outlook, the back log information, financial condition and the like. As you know, actual results could differ materially from those projected in the forward-looking statements. These statements should be viewed in light of cautionary statements and risk factors set forth from time to time in the company's filings with the Securities and Exchange Commission.

Welcome to Wabash National third quarter earnings call. I’m Bill Greubel, Chief Executive Officer. In the conference room with me this morning are Mark Holden our Chief Financial Officer and Dick Giromini our Chief Operating Officer of Wabash National Corporation. I'd like to welcome all the listeners on today’s telephone conference call, as well as those listening via live via the Wabash National internet site webcast. We have much to cover today and we'll try to provide as much information as possible. I will comment on the status of the industry condition and on our business. Dick will discuss our critical operating initiatives and Mark will review and discuss the third quarter of 2002 financial results and the financial condition of the company. At the conclusion of the prepared portion of our presentation, we'll open the call for questions from the listening audience.

Let's first start with the industry update and some statistics. Industry net orders for trailers fell 28% compared to second quarter of '02, but were up 47% versus last year. For the third quarter, the net order rate for trailers annualized at 140,000 units versus 87,000 units in Q2. Industry production increased by 33% versus Q2, '02. Q3 '02 showed an annualized build rate of 163,000 versus 123,000 units in Q2 '02. Wabash share of year to date net orders has dipped a bit to 20.5% reflecting our focus on profitable business as opposed to market share. Our share based on shipments is 22.8% year to date. Given the disparity between the production build rates and net orders, it is expected that the industry may adjust production downward in the fourth or first quarter. At this time, however, Wabash is all of our build slots are filled throughout the fourth quarter.

Pricing is holding steady on new trailers. We intend to index and pass through all raw material increases associated with flooring and metals in 2003. We're actually doing that right now. For the next quarter, we still see softness on the demand side. This is a combination of weak economic activity and a trucking industry that is more disciplined in adding capacity. We believe shippers will experience shortage of capacity in 2003, which should further facilitate rate increases. Given the significant emphasis on the truck pre-buy in 2002, we would expect to see a greater buying emphasis on trailers in 2003. Most of our core partners’ respective businesses continue to improve. Wabash National continues to enjoy an excellent relationship with the key freight providers in North America.

A little bit about Wabash. I would like to briefly discuss the areas that I view as critical to this success of the business. They are, number one is generate and de-leverage the balance sheet. Our goal is to exceed our bank covenant plan for liquidity and pay down debt as quickly as possible. We're well ahead of schedule and on track to exceed it our agreement with our lenders. Mark will discuss in detail later, but this continues to be a number one priority for the company. And I'm very satisfied where we are and more importantly with the opportunities that we continue to harvest.

Two, cost productivity and process improvement. Our goal is to generate cost savings of $35 million by May 1st 2003, and an additional $35 million within the following two years. The opportunities to improve our process can take costs out or very dramatic. I'd like to have Dick share with you the results of our CI initiatives to date. I continue to be very bullish in my belief that we will exceed our goals in this area.

Three, schedule attainment and capacity expansion. We intend to meet or exceed our stated capacity by December. In addition, we are continuing the process to increase and implement low cost, flexible capacity in Lafayette to better service our dealer branch network as well as gear up for the cycle change. We have made much progress towards schedule attainment especially in our two major DuraPlate lines. We still have much work to do and work is currently in progress on the remaining lines and will be substantially completed by year end. We recently announced the addition of a new sheet and post line in our Lafayette operation. We expect to install this line by the first quarter of '03. Pilot samples are now being delivered to our branch locations and we are getting very positive responses.

Number four is quality. World-class quality is our only option. There's a significant opportunity to reduce costs associated with the cost of quality and waste in any business. Wabash National is no different. We will continue to pay very special attention to this throughout 2002 and 2003. We expect to significantly reduce our warranty costs which have run in the $10 to $15 million annual range. Preliminary feedback from our customers has been very positive. We have begun to actively continue to monitor our warranty cost on second quarter production to measure our success.

Five, branch integration and optimization. I have been holding this one and have not discussed this in some detail in the past two conference calls. And I'll go in a little bit more detail into this at this time. As I have stated before this continues to be a work in process. I believe there's significant value in our retail and dealer network, measured in terms of top line growth, margin enhancement and everyday solutions to our customers. We have uncovered four major issues which we are now in the process of resolving. First and foremost, our branch leadership and structures is generally not up to standard. We're in the midst of piloting ten centers of excellence where we'll acquire skilled talent, establish specific guidelines and goals associated with profitability and customer service, and provide the necessary oversight to ensure success. Secondly, our branch operations have been burdened over the last few years with the responsibility of selling off huge numbers of used trailers. Simply put, most have lost focus on the broad product lines we offer. Used inventory reduction and conversion to cash was the rule of the day. Today, our level of used equipment is significantly more manageable and as such we can have focus on the entire product lines we offer. Thirdly, we made appropriate decisions to close two of our facilities that manufactured flats and sheet and post trailers due to the general economic climate and our financial position. The net results [Inaudible] a product that could be sold to small and mid sized markets. In addition, the retail network accumulated product in the factory that was not salable or too costly in the specific market served. The result was an accumulation of aged inventory that sat on the lot with little or no new production to sell. Today, we are focused on turning this inventory and providing our retail operations a broad range of DuraPlate sheet and post and branded product from other manufacturers. That meets a specific needs of the location. All branch sales and management personnel will go through a retraining process on product, customer service and goal alignment. This is being implemented in the fourth quarter.

Finally, we have not taken full advantage of our relationship with our partners in terms of parts and service. We have not shown consistency in our quality of service throughout our network and as such our business [Inaudible], and we are in the process of bolstering our service to create uniformity and have the gun to survey our customer base to ascertain their needs so we can create service solutions. I anticipate closing a number of service contracts prior to the end of the first quarter. We are addressing people, products and product availability, training and service. These are keys to our future success. And inherent in all of this will be my expectations of growth, profitability and a very focused management on working capital. Finally, number six is safety, both Wabash National and its associates need to improve safety. Our awareness is improved. However, our numbers are still not where we want them to be. There's substantial hidden cost related to safety that we intend to investigate, and as we derive focus and goal attainment on this issue.

In closing on my part of the discussion, I have asked Dick Giromini to follow with a discussion on our operations and continuous improvement initiatives. Dick and his group have worked successfully throughout the third quarter to create cost, quality and process improvement. The numbers for the third quarter hardly reflect the initiative undertaken as work involved on lines one and two, our key DuraPlate line, was undertaken over the July/August time frame. However, as you will hear from Dick, substantial change has occurred and was noticeable in September and will continue to improve throughout the foreseeable future. After Dick's discussion, Mark will follow with a review of our financials.

Thanks, Bill. I'm really excited to have the opportunity to share with you a quick overview with the improvement initiatives that we have in place. As Bill has shared with you in the past, we have four overriding corporate goals that we use to drive our daily decisions and business focus. And these include achieve the numbers, operational excellence, focus on the customer, and finally, grow the business. In support of these goals, the manufacturing segment which falls under my direction has identified five key areas of focus to guide our efforts. These are simple and direct, and include the achievement of excellence in the following areas. Safety, quality, delivery, productivity, and cost reduction. All of these areas are driven under the principles of continuous improvement. This is a quote that I use often and regularly. "to be better today than we were yesterday and better tomorrow than we are today." We are aggressively implementing lean manufacturing principles based on the Toyota production system throughout our operations. We are employing a cross functional approach with involvement of both hourly and salary associates, participating in the CI events or [blitzes]. Our focus is the elimination of waste, throughout the system in all forms.

Additionally, while conducting these events, we focus on specific improvements in our workplace safety and our product quality enhancement. Our initial efforts focused on our high-volume DuraPlate assembly line which we referred to as our line one. During the months of July through September time frame. With the first phase of implementation complete on that assembly line, we are now reaping the benefits with record productivity and throughput. We have taken the successes of line one and we have expanded our efforts since September to our other assembly lines and support areas now conducting multiple CI events on a daily basis. An aggressive schedule has been laid out throughout the balance of the year with the intent of completing a full phase one effort by year end. Then the process will begin again on all lines to further optimize our processes.

I'll now take some time to briefly share with you some of the achievements in each of the five focus areas. In the area of safety, our number one priority, we have established a long-term objective of becoming the benchmark for the industry in terms of both performance and safety practices. In addition, we've targeted a short term goal of achieving a 70% improvement in our recordable incident rate by the first quarter of next year. Although we still have a long ways to go, I'm quite pleased to say that we have seen rather dramatic improvement in both our recordable incident and severity rates, each month since July with a 44% improvement in incident rate and 54% improvement in severity rate. These improvements are translating into higher labor productivity and lower costs as a result of less time missed due to injuries, less labor pool required to back fill for the associates and the obvious benefit of lower workers' compensation costs which we will realize next year.

In our second area of quality, again, we have established a goal of the positioning Wabash as the benchmark for product quality in the industry. To achieve this, we must improve the robustness and consistency of our manufacturing process and techniques, especially relative to our fit and finish. We have instituted 100% in-line inspection process in July that's yielding good results to date. Customer feedback has been extremely encouraging with a number of very positive comments concerning the quality of our recent trailer builds. Our efforts are also having a positive effect on the number and seriousness of warranty concerns being received as we continue to address and eliminate the root cause of previous field concerns for our product re-engineering efforts and improvements in our manufacturing methods and processes. We shall see substantial reductions in our warranty claims and costs during 2003.

Our third area of focus relates to timely delivery to of our products to our customers. While it's true that we continue to suffer with delays on some of our trailer products, we have made significant improvement overall in meeting our plan timely. In fact, after achieving only a 78% scheduled compliance during the first quarter, we registered continual improvement to 81% in the second quarter, and over 86% in the recently closed third quarter. These improvements become even more impressive, realizing that we have continually adjusted the throughput expectation as we have completed phases of our lean manufacturing implementation. On our line one DuraPlate line, for example, where we have advanced most with our lean manufacturing improvement initiatives, we achieved 97% this past month against the higher expectations imposed for that line. Or 101% when comparing to previous capacity performance levels. This trend continues with further improvements being realized almost daily on our way to our objective of achieving 100% scheduled compliance overall by year end.

Moving on to our fourth area of focus, our efforts in improving productivity really stand out on our line one. With throughput improvements of 21% as compared to all of 2001, along with less waiver hours required per trailer. We expect to realize similar levels of productivity gains on our other assembly lines and support areas as we complete the first phase of lean implementation in those areas throughout the balance of the year.

Our fifth focus area, cost reduction, really helps to quantify the results of our efforts to date. Through our intense focus on implementing lean we have identified nearly $16 million in annualized savings for labor costs alone that we will realize throughout 2003. In addition our purchasing team has also generated $10.8 million in purchased material savings this year through the negotiation of new long-term supply agreements, outsourcing and some re-sourcing efforts. Of course, we realize that continuous improvements is not limited to the factory floor, but also must be pursued in other areas of the business. We're doing just that with a number of business process reengineering efforts being aggressively pursued. One in particular, product standardization is an effort that we kicked into gear back in late July. Through a select cross functional team of many of our most knowledgeable experienced associates, we have reviewed our complete list of designs and options, established standard specifications for each product family, developed application packages based on customer end use, and eliminated seldom requested options, while still providing the flexibility of design our customers need. One quick statistic -- over 53% of options have been eliminated through this team's efforts.

This product standardization effort will help to streamline our manufacturing processes, eliminate costly low-volume options, optimize our new order processing system, decrease complexity for our suppliers and add leverage to our purchasing efforts. At the same time, it will provide more consistent products for our customers, with greater value, improved quality and more predictable delivery. Just to sum things up, I'm extremely pleased with the progress we have made to date. The total work force, both hourly and salaried alike have been tremendously supportive of our improvement initiatives aiding to make them a success that they have been to date. With their continued support, I'm confident that Wabash will achieve the level of performance we need. With that, I'll now turn it over to Mark to discuss our recent results.

Thank you, Dick. Hopefully, by now you have a sense of our mission, to build operational excellence and financial strength. Turning to the third quarter results, third quarter results were in line with our goal of quarter over quarter improvement. Revenues were up 15% compared to the second quarter of this year. The reported loss was $8.3 million, compared to a reported loss of $21.7 million in the second quarter. Third quarter results include $4.1 million in charges. And as discussed in last quarter's call, we have forecasted a number of these charges to occur. I will review the $4.1 million charges later in more detail. Turning to the revenues first, revenues for the quarter of $241 million or 11,400 units in the quarter compared to $210 million in revenue in the second quarter or 9100 units. This compares to $242 million and 10,400 units in the third quarter of last year. Manufacturing revenue was $166 million or 10,800 units versus $131 million or 8600 units in the third quarter. A 25% increase in production.

We stated on the last conference call we expected a 20% increase in our build. Retail distribution revenues was $82.5 million or with including a thousand new units versus $89.3 million or again a thousand units in the second quarter. The third quarter of '02 ramp up and build rates, we built 10,900 units represented of earnings to a schedule of 12,700 units. A $30 million shortfall is scheduled. This is our opportunity when we talk about schedule attainment. The shortfall in the second quarter was $50 million. Obviously, quite a bit of progress achieved, a 40% improvement in our schedule attainment. Gross margin for the third quarter was 9.0%. Our highest gross margin in over eight quarters. This includes $1 million of the $4.1 million in charges. The million dollars represented $700,000 for legacy used trailer dealers and $300,000 for the closure of our St. Louis office location.

Our manufacturing margins are benefiting from the ramp up in production and the elimination of the Scott county and Ft. Madison facility drag. Partially offset by these improvements were $700,000 trade hangover on new production. Continuous improvement initiatives that Dick reviewed with you that were kicked off during the third quarter had little if any benefit on Q3 results as Dick mentioned. The efforts were kicked off during July and August, and into September and we expect to see full quarter benefits from the these efforts in the fourth quarter. One quick statistic. From a labor standpoint, the number of associates we had at the end of the third quarter was 3700, and 1200 temps that compares to 4100 associates and 15 hundred temps at the end of the second quarter, despite a 25% increase in build rates. Temps have been further reduced through today and represent 900 head count. From restructuring standpoint, you'll notice that we incurred a charge of $1.7 million during the third quarter for closed facilities based on recent offers for these properties. The properties included the Scott county facility and the Sheraton, Arkansas, property.

Looking at SG&A for the quarter, it was reported as $17.9 million, which included $1.4 million of charges. $1.4 million of charges include an $800,000 write down of the corporate aircraft, and an additional $600,000 charge for SG&A related to the St. Louis close down. Manufacturing SG&A was $7.9 million versus $9.0 million in the second quarter and our retail and distribution SG&A was $10 million versus $11.8 million in the second quarter.

The largest components of our SG&A continue to be bad debts, professional fees and salaries. From bad debts standpoint, we continue to focus on our risk management and credit and collection with all of our sales, marketing and treasury associates. No doubt we will recognize a substantially reduced bad debt expense and cost next year. We are no longer doing residual guarantees or finance contracts. We're simply a cash and carry business and we're not a bank. We will not use our balance sheet to subsidize a deal. A deal must stand on its own from profit and cash flow perspective. Opportunities to further reduce SG&A exist, but are precluded at this time because of our EBITDA covenants. And I will discuss in more detail later what the covenants and significance of those are.

Interest and other costs for the quarter, interest expense was $8.5 million versus $7.8 million in second quarter. And includes a full effect of the rate increase that was put into place during the second quarter. Cost associated with our AR facility was $200,000 versus $1.7 million in the second quarter. The second quarter included approximately $1.7 million of refinancing costs. Between debt and our AR costs, the annual impact of our debt rate increase is approximately $10 million. Other expenses in the third quarter included $1.8 million of exchange losses related to our Canadian operations. Q2 included approximately a $2 million exchange gain. Thus, we incurred approximately a $4 million unfavorable swing quarter over quarter related to translation losses.

Net income summarizing our results, we have made much progress in turning around the business, as evidenced by our quarterly results. Q3 reported loss of $8.3 million, Q2 reported loss was $21.7 million, Q1 of '02 reported loss was $26.5 million and a year ago reported loss was $61.4 million. Much of our efforts during the third quarter are just beginning to benefit our financial results. Turning now to the EBITDA, our operating loss was $8.3 million for the third quarter. Adding back interest of $8.5 million. Depreciation and amortization of $6.7 million, and other expenses of $1.9 million results in an EBITDA of $8.8 million. Adding back the charges recorded reflected in the third quarter of $4.1 million yield an EBITDA of $12.9 million. Under the covenant the $8.8 million is included in our EBITDA covenant. I will discuss our covenants in more detail later.

I would like to summarize for you the charges that we’re taking during the quarter. I have been asked many times about our charges. In the third quarter, we took $0.7 million or $700,000 dollars associated with used trailer legacy deals. As discussed in last quarter's call, we projected -- forecasted approximately $3 to $4 million of costs associated with these deals. St. Louis closed down, we incurred and recorded approximately $900,000 charge and as discussed in last quarter's call we expected a cost associated with this close down of less than a $1 million. Finally, we recorded approximately $2.5 million of charges in the third quarter associated with various asset write downs. The airplane in Scott county, Tennessee, and the Sheraton property. And these charges simply reflect recent offers received to purchase these assets and an adjustment from the current value that we had down to the offers we received. We will continue to pursue the divestiture of idle assets as quickly as possible. Total charges again in the third quarter were $4.1 million.

We have taken a number of charges in the past several quarters as we aggressively responded to aggressive historic decline in the trailer industry and as we turn the business around. The U.S. trailer industry has gone from a peek of 314,000 trailers in 1999 to a low of 88,000 trailers on an annualized basis in the first quarter of this year. A 72% decline in a little over two years. Needless to say, it has been a very challenging environment for any business. At this point, we believe most, but not all, of the charges are behind us.

And I would like to summarize for you some of the areas where the company could be subject to charges in the future. First, based on simply changing market conditions. As required, under our generally accounting principals, we are required to adjust our inventories based on fair market value. We certainly have taken the fair number of charges historically to mark our inventories of to market of used trailers and new trailers to market and at this point we do not anticipate any further significant charges.

Secondly, divestitures of certain non-core assets. We'll continue to pursue the de-leveraging of our balance sheet through the sell of the non core assets which may include selling below book value. At this time, we do not believe this will take place, but then again, it is certainly possible. Cost reductions through the rationalization of our distribution channels including branch closures and further reductions in our SG&A. These actions will obviously benefit our future, but could result in some form of restructuring charges. Amending and refinancing recapitalizing the company. We are in the process of discussing with our lenders various approvals and amendment to our credit facilities that could include some one-time costs. In addition, we expect to initiate the refinancing and recapitalization of the companies some time during the course of 2003. This will also include some one-time cost associated with our existing credit facility. Should we refinance some or all of our existing debt, approximately $10 to $15 million of prepayment charges would be associated with this action.

While we have every reason to believe most of the heavy lifting is behind us, we still have work to do to turn the company around to ensure the future. As a result, I believe we will continue to see some charges in the future. Turning to the back log, our reported back log was $95 million at the end of the third quarter versus $198 million at the end of the second quarter. We added approximately $120 million in back log during the first quarter of October, as one of our larger partners placed a large order for 5,000 DuraPlate trailers, and we also had carry over orders from September, which were not completely papered by tend of the quarter. We have discussed in the past about changing the way we do business. This includes better managing our customers. We will no longer accept verbal orders. All orders and specifications must be confirmed by the customers before we include them in the back log. As a result, we pulled approximately $30 million dollars from the back log because not all of the order information had been finalized with the customer. We will continue to stress discipline within our operations.

Turning now to the balance sheet and should be noted and I highlighted it that we have filed our 10 Q last night and I would refer the listeners to our form 10-Q. First, on a cash standpoint, our cash balance at the end of September was $13.4 million. Our total liquidity position was approximately $80 million at the end of September. Including the availability of borrowings under our credit facilities. This increased to $95 million as of today, including $25 million of cash. And it should be noted that we have increased our liquidity position, despite a 20% increase in our volumes. Receivables ended the quarter at $105 million, net at September, compared to $97 million at the end of the second quarter and simply represent the increase in build rates. Inventories were $137 million at September, versus $142 million at June. Again, can we continue to focus on better working capital management. .

We basically saw reductions in all of our inventory categories including in process, finished trailers, used trailers and parts inventories with one exception. That was raw material, as we take up our production rates. I might talk about used trailers. Used trailers totaled at the end of the third quarter totaled $28 million or 7,000 units. Compared to $36 million and 8,000 units at the end of June. We sold 4300 used trailers during the third quarter and we took in trade 3100 used trailers. Versus sales of 4900 used trailers in the second quarter and trade received at 3300. Our used trailer margins approached 10% during the third quarter. Compared to 2.5% in the second quarter. We have begun to increase our pricing on our used trailers inventory. Our inventory today is much more in balance, and the market has improved. However, there is still much infrastructure cost to take out. Also, should be noted that our open trade commitments for used trailers on future and new trailer production approximate $12 million today that is down from a high of approximately $90 million, a little over a year ago. More importantly, we believe that the prices that we have committed to take these trades represent market values today.

Our total balance sheet debt at September 30th on balance sheet was $363 million versus $369 million at the end of the second quarter. Equity at the end of the third quarter was $85 million. Turning now to our liquidity and financial condition, while Dick shared with you the significant amount of progress achieved in operations, substantial progress has been achieved also on the balance sheet. We have increased our liquidity from approximately $24 million at the beginning of the year, to $95 million today, despite the most severe industry conditions in 25 years, and more than a doubling of our production rates during 2002. We have significantly exceeded projected liquidity targets discussed with our lenders earlier this year. We have improved our cash conversion cycle, we are invoicing as soon as the trailer is finished. We are managing how we do business with our customers much better. However there is still much opportunity to reduce our working capital investment. We believe there is another $25 million of additional working capital to take out. From a debt standpoint, our debt outstanding at end of September was $363 million of on-balance sheet debt and approximately another $37 million of off balance sheet debt for a total leverage position of approximately $400 million. Through September, we repaid $63.4 million in total debt. This consists of $56 million of repayment of on balance sheet debt and $7 million of off balance sheet debt. In addition, we have paid another $15 million since the end of the third quarter, and should be noted we have begun to accelerate our debt repayment schedules based on cash flow. Bringing -- if we look at it as of today, our total debt repayment totals approximately $78 million. From a covenant standpoint, our covenants on our debt at the end of September were a maximum leverage ratio of 0.95. Our actual was 0.81. Our amendment EBITDA is a negative $20 million, and our EBITDA through September 30th was $21.5 million for the nine-month period. Beginning in January, of '03, our rolling 12-month EBITDA requirement is $36 million. We are in the process of discussing with our lenders and amending this covenant and I will explain further in a minute.

We continue to pursue all opportunities to de-leverage the balance sheet, including the divestiture of non-core assets. We believe opportunities to divest non-core assets total approximately $150 to $200 million. We will not conduct a fire sale, though we believe we can achieve $100 millions in divestitures and debt pay down. All proceeds will be used to pay down debt. We have retained various investment bankers to assist us on the large opportunities. We are in the final stages of the divestiture of our rental and leasing operation. Which includes 11,000 trailers with a net book value of approximately $71 million. We have received a great amount of interest from a number of final -- with a number of final bids received this week from various party, both strategic buyers and financial buyers. We expect to close the transaction by year end with proceeds at or near book value. Obviously, this is a large component of our goal of $100 million in de-leveraging activities. Assuming a sale of the rental fleet of book value, our total debt repayments during 2002 will be approximately $150 million. Taking our total debt on balance sheet and off balance sheet from approximately $460 million at the start of the year to approximately $310 million. A 33% decline in one year. I would expect another $75 to $100 million in debt repayments next year. Through cash flow from operations, additional working capital reductions, and additional non-core asset divestitures. We are in the discussions with our lenders for the approval of the sale of the rental fleet and expect to receive such approval before year end.

As of September 30th, the company was in compliance with all of its covenants under its credit facilities. However, based upon our 2002 financial results, and the potential divestiture of the rental and leasing operations and the corresponding EBITDA law, we anticipate that the company will not be in compliance with one or more of its financial covenants as of January of 2003. Accordingly, we are currently in discussions with our lenders to amend certain financial covenants to take into account these conditions. If the company is unsuccessful in amending its financial covenants and is determined to be in default on the credit agreement, it may have difficulty meeting working capital needs. Capital expenditure requirements and interest and principal requirements during the next 12 months. Further, a default under the terms of the credit agreements would give the lenders certain rights with respect to the encumbered assets of the business, as well as the ability to accelerate principal payments. We anticipate that we will favorably amend our financial covenants prior to year end. Obviously, there can be no assurances that this will be accomplished successfully. We have been in constant dialogue with our lenders, and as a result I believe the following factors will lead to a successful resolution of our discussions. Number one, we've increased our liquidity to $95 million dollars today, far exceeding our target we set with our lenders. Second, year to date debt repayments of $78 million including now accelerated payments. Expected debt repayments of approximately $150 million by year end, including the sale of the rental business. Or approximately $80 million ahead of schedule. Number three, operations are now cash flow positive and we are using the cash to prepay debt. Number four, we have significant operational changes taking place which have not yet been reflected in our EBITDA at 9/30. Number five, our management team is now in place. Bill came on board in May of '02 Dick and Jerry heading up our managing and production process came on board in June and July of '02. We continue to build our bench strength. And number six, we have simply done what we said we were going to do, and our goal continues to be to pay down debt as soon as possible.

In summary, we previously stated we expect quarter over quarter improvement in our operating results and we are now achieving. This will be one of our measures of operational excellence. In addition, we expected to significantly de-leverage the balance sheet and increase our liquidity. This will continue to be one of our measures of financial strength. At this time, I'd like to open the call up for questions.

)) Operator: At this time, I would like to remind everyone that if you would if you would like to ask a question, you may press star one on your telephone keypad now. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Tom Albert of BBT.

Good morning, guys. Excellent progress that you're making there. I had a number of questions. You know, given the fact that the DuraPlate production line changes really didn't finish until early to mid September, can you give us more of a sense of maybe how profitable from a gross profit perspective that line might have been in September and/or October? Obviously, the consolidated gross profit margin was 9%, but I'm sensing with the changes that you're probably operating better than that right now.

Yeah, Tom this is Mark, and I think that's a fair assumption. I think for a number of reasons there's a lot of ears on this call, both from an industry standpoint and probably a customer standpoint. So I'm not sure we want to get into specifics, but needless to say, our gross margin for the quarter was 9% from a corporate standpoint. And keep in mind, the retail margins would have been significantly lower than that. So -- I think as you know line someone one is the high speed line, so we have taken as Dick mentioned a fair amount of labor costs out. So hopefully that gives you some data points to work with. I think it certainly wouldn't be in our best interests or the stockholder's best interest for us to get into too much detail.

Okay. And then I wanted to clarify one thing. I think in the 10-Q it mentions you sold 10,400 trailers and Mark did you say you produced 10,900? I just want to make sure the production and sales numbers --–

Yes. That is correct, Tom.

How many of the trailers sold approximately were containers? Because that did bring down the average selling price.

Yeah. I think we talked about that in the Q, and I believe, Tom, that number was approximately 2000 working off memory.

We finished in September. We can get you those numbers, Tom.

Okay. That's fine. Bill, I know last quarter you talked about your desire was to improve the gross profit margin by 200 basis points relative to the second quarter. And you did a fantastic job on everything else and that was probably one thing that came up a little bit short. Was that mostly because of all the changes that were occurring and the potential disruptions?

We were kind of hoping that we could speed along some of the lean events, unfortunately, doing them in three to five days is very fast, as a lot of people would recognize. So we really didn't see the fruits of our labor until basically almost the second week of September. I certainly believe we're going to achieve those numbers, and we certainly see those in the fourth quarter.

And actually, Tom, I would add keep in mind, that in July and August, we probably sold the net, be unfavorable. For example, when we instituted the 100% inspection program in July --–

Went the wrong way.

Went the other way. I think Bill shared a story before that on the first day of July, we inspected every trailer going out the door and on line one I believe that was 75 units, and we had 74 red tagged. So there's a fair amount I would say inefficiency associated with the introduction of lean events during July and August.

Right now then, what would be kind of your batting average of red tag versus production on any given day or week? I realize there's still a lot of variation in that number, but where are you right now?

Well, certainly we're better than one. We've gone up -- I would say our first pass yield is around 75%.

Okay. And then in the 10-Q, you talked about the $1.7 million write down related to Scott county and Sheraton, Arkansas, and that adjustment was made because you've received offers there, but the language in the Q basically said you're in the final stages on the trailer rental, fleet sale, but in various stages on other such assets. If you've received offers on those plants, why would those not be closer to a final stage at this point?

On Scott county, Tom?

Yeah, it's hard to know which is which from the wording in the Q. It was reflective $1.7 million on Scott county and Sheraton, Arkansas.

Right.

I'm assuming that because of the wording that perhaps both received an offer. I'm just wondering why they wouldn't be closer to a final sale category as opposed to an earlier stage if they've already gotten an offer and you have taken a write down.

Yeah. I would say there are various circumstances. For example, Scott county as you might imagine is a very large operation. We put in the [Inaudible] line in that operation. There are certain environmental I would say issues that were still resolving and so before we can -- I would say move to closure we simply are trying to, you know, wrap up everything necessary to allow us to close. The Sheraton property, we had --we have recently received that offer and we're simply in the stages of pursuing either closure with that party or potentially other interested parties. The rental fleet as I talked previously, we have received a number, a final bid this week. And we expect to evaluate --continue to evaluate the final bid and pursue discussions and obviously close that before the end of the year. But as you might imagine that's a fairly larger transaction. And I would say we're quite pleased with the results of the final bid.

Okay. And then on the operating profit at the manufacturing division in the Q, it shows $5.3 million dollars of operating income. Does that include that $1.7 million dollar charge? Is that in that $5.3 million or is that before it?

No, that would be in there, Tom.

Okay. And there's a lot of questions here. I'll tell you what, I'll hop off and let somebody else ask and come back in a little bit.

Your next question is comes from Mike Harris, Robert Baird.

Good morning, gentlemen.

Hi, Mike.

A lot of information in the call.

Hopefully, it's helpful.

Yes, it is. Just want to be a little pushy here. Considering that you're halfway through your December quarter already and you've got good visibility into your production back log through the end of the year, is it safe to say that we can be looking for sequential increase in revenues in Q4 over Q3?

No. Mike, by way of background, Q4 is always probably seasonally the lightest quarter for us. One, we have a plant shutdown during the holidays. And so if we look at the fourth quarter from a production day basis, it has the fewest number of production days in it.

Okay. Great. And then there were some preferred shares that were converted to common recently. I wanted to verify that this happened at the end of September.

Yes. It happened I believe September 16th.

So we should be looking at about approximately $2.6 million shares to the share account for Q4?

Yeah.

And then the last quarter you talked about uncertainty regarding receivables outstanding with Amtrak or approximately $17 million. Can you give us an update on this?

Yeah. They continue to pay on schedule. There's no delinquency, and they continue to be after good performing customer, paying their bill on time. You know, we've disclosed that simply a concentration risk for the customer, given the highly specialized equipment. But at this time, all indications are the -- they will continue to pay their bills.

Okay. Then last question here, I didn't see this in the Q. Did you disclose what net orders were for Wabash for the third quarter?

No. We did not. Mike, and again, I don't have that number in front of me, but you can back into it in terms of on a dollar basis. But I don't have the number of orders in front of me.

Okay. Great. That's all I have for now. Thanks.

Your next question comes from Andrew Kerns of Clipper Capital.

Hi. Could you please explain how you got to the EBITDA number again? I got net income of negative $8.3 million. Interest of $8.5 million. And DNA of $6.7 million as you said and I got EBITDA of $6.8 million.

And you need to add back other expense which is below the operating line. And that was I believe $1.8 or $1.9 million.

Okay.

Okay? And that's how under our credit agreement EBITDA is calculated.

Okay.

And most of that, just so you know, other expense is the exchange loss which was really a non-cash charge anyway.

But that's the EBITDA that counts for the definition of your covenants?

Yeah. That's how we get to $8.8 million.

Okay. And the -- and I guess could you talk about the EBITDA that you need to do before January 30th? It sounds like you're planning on renegotiating the covenant at this time.

Yes. Because, again, in connection with the divestiture of our rental and leasing operation, we one, need lender approval to sell those assets. Secondly there is EBITDA associated with those assets that would come out of that calculation. So we are in discussions with our lenders and we'll continue those discussions and hopefully we expect to resolve and amend that covenant by the end of the year.

I just wanted to go over the back log number again. I'm sorry I didn't quite catch that either. From the Q it looks like back log at June 30th was $198 million and September 30th was $95 million, but then you said there were some additions in October.

Yes. I believe actually in October 4th, we received an order for 5,000 DuraPlate trailers from one of our larger partners, and we also booked approximately another $30 million that represented orders that were carried over from the last week of September. That simply we did not have all the paperwork in -- in house to include in back log.

Okay. So that added about $100 million to back log?

Yeah. $100 to $120 million.

Okay. And on the $40 million in intangibles on your balance sheet, is that mostly goodwill from the retail arm acquisitions still?

It's mostly goodwill associated with two transactions. Our acquisition of the retail operations in Canada and the acquisition of the flooring operations in Arkansas.

Okay. And is there -- it looks like there’s also a requirement in the covenants I guess for the end of Q1 you have to have $87 million in equity? Is that -- is that correct?

Well, again, that will also be amended in connection with the divestiture of our rental and leasing operation. And we're simply including our discussions with all -- with the lenders regarding all of our covenants at once.

Okay.

That too will change.

Okay. Again on the back log, so then what will the back log be at the end of October?

We don't publish monthly back log numbers.

Okay.

But, again, I think the reference point is simply, it was $95 million at the end of September with an addition of approximately $100 to $120 million in first week of October.

Okay. I guess if we're looking at the common stock in the face of renegotiating the covenants for a second time, I guess what are the assurances that we can take I guess the -- as shareholders we wouldn't face significant dilution if you had to rework these again under duress?

Well, one, there was no dilution earlier this year when we refinanced, and as I mentioned from our perspective we're in a much stronger position today to amend our covenants. We have $95 million liquidity position. We expect to pay down approximately $80 million ahead of schedule with our lenders. And more importantly, our lenders know our results every month. We are in discussions with them every month. And so based on those discussions we have every reason to believe that we won't have a problem. And especially without dilution to the shareholder.

Okay. Could you give us sort of what you look at as a normalized EBITDA number? Maybe going forward for '03.

Well, to answer that, again, I would look at the third quarter, the most recent history. $8.8 million EBITDA which included $4.1 million of charges, adding the $4.1 million if you assume that those are non-recurring gets you to approximately $13 million quarterly run rate or a little over $50 million annualized.

So the strategy at this point is just sort of to show significant operating improvements enough to use that as leverage in negotiation with the lenders?

Well, again the lenders, we have invited them in. They have seen what we have done on the plant floor. Their inside partners, they see what's happening on a monthly basis. We have been very open as far as our challenges and what we believe are critical issues are and how we're addressing them. We have pretty much met all the promises that we've done. You know, it's my intent as the CEO to pay down debt as quickly as possible. We've recognized the issues and we are basically minting money right now from our working capital. We're using that to pay things down. We certainly have to visit the banks again because of the change in some of our assets. I agree with what Mark is saying that I think the banks would view this favorably. This is not a liquidity issue. We are not going back and asking for money. As a matter of fact, we're telling them we're going to pay them more no knee and we need to adjust. So do I think it will be easy? No. Nothing ever is, but I do think that we'll resolve this. We're going to try to resolve it in a very quick and orderly manner, so that as far as the stock is concerned people will know certainly before the end of the year where we stand. But I'm somewhat positive about the discussions that we will be undertaking and their outcome.

Thanks. Last question, what are you looking at for CAPEX next year?

We'll be below our basket of $6 million and that's something that will be no problem.

Thanks very much.

Your next question comes from Dan Moore of Stevens.

Good morning, gentlemen.

Good morning, Dan.

You know, again, congratulations on the improvement. Really quite amazing. Just a couple of quick questions here. I was actually disconnected from the call earlier, so I apologize if you've covered this. I was wanting to focus a little bit on the networking capital though. More specifically, accounts receivable. I know this is, -- you know, these figures on a sequential basis have been affected by build. But can you give me a sense on a go-forward basis when we might see that $105 million figure that you recorded here at the end of the quarter for accounts receivable come down and what we might expect on kind of a normalized basis going forward?

Sure. Obviously, Dan, it will fluctuate during the year. Because of seasonality. The first quarter and the last quarter of the year tends to be the slowest quarters, the second and third tend to be the strongest. So you'll -- you will see receivables fluctuate as our production bodies fluctuate. Having said that, it would be my expectation that we'll see our receivables decline in the fourth quarter. And then begin to ramp up in the Q2 '03 and Q3 '03.

Mark, you talked about $25 million worth of potential improvement in the network capital lines. Can you give me a sense where that is that going to come from?

Mark Holden You bet. I'd be glad to. Dick referenced lean events and process re-engineering throughout the organization. Not just on the plant floor. This is a perfect example and simply how we do business with our customers. Historically, no question our customers tended to leave their equipment parked at our facility and simply picked up the equipment when it was convenient for them. And we would invoice upon pickup. And the equipment the trailers that we would build could sit here from anywhere to 30 to 450 days on average. Again, that simply is based on how we managed a business with our customers. We have now beginning October 1 gone to our customers and said -- and basically agree with the customer, that we will build their equipment for them, based on their specs and when they want them. But we also expect to get paid when we build them. We're not a bank. So we are now invoicing our production based on the completion of the trailer as opposed to on shipment. So that as you might guess, there's anywhere from a 20 to 30 days of float or more that we hope to take out of the cash conversion cycle. So our expectation is that the $25 million is very, very doable. And a fair amount of that should come out of receivables. If we look at our inventories as Bill talked about, we don't have the right mix of finished trailer, new trailers within our branch system. And so we expect to again clean up the inventory that we have and reposition the -- the level, but also the type of Inventory that we have in our branches. So in terms of where the reduction and working capital will come, it will probably come from receivables and finished goods.

As we go forward, we're going to focus on turns that's something that this company hasn't done, and as such we've really used our inventory to cover our inability to really push up the turns. As product goes out to the branches, those branch management will be basically measured and [insented] on turns. So that you will not see a product sitting out there for, you know, extended periods of times. And if they are, there's a punitive agreement that we're going to have with them. Simply put, also, as you can increase your turns and from a supply standpoint, we'll be able to reduce just about all aspects of the buckets that we have in our inventory. And I think over the course of 2003, there's probably an additional $25 million that's just sitting there that we need to harvest also.

If you were to quantify inventory turnover, you know, a goal, if you will, can you give me a sense of what that ratio might be?

I can at the next conference. We're still putting together some of these metrics which we haven't had in the past. And so you'll just have to bear with me. But going forward, we'll start talking turns and you will start seeing that in the inventory numbers.

Last question, guys. You talked a little bit about demand in '03 and expectation for improvement in demand given the, you know, given what's taking place in the class 8 market, i.e. that a lot of the large premium carriers as well as a lot of mid-sized carriers aren't taking delivery of this, aren't placing orders for this new engine. Consequently, you would expect that some of that CAPEX that would normally go to tractors would go to trailers. Can you give me a sense for what kind of volumes you're thinking about? And I understand it may be a little too early. If it is, then that's fine. But I was just hoping you can give us a little bit more color on your outlook here on '03.

If you listen to [ACT], they're roughly 185, 187. I would be real happy if that actually occurred. I do believe that there's going to be more money available in our customers’ capital pool for trailers next year. But the bottom line is the economy has got to drive that. And I just at this point, I guess I'm not as bullish at the 187. Certainly we're going to have a significant ramp up versus where we are today in 2002. I just don't know if we will achieve those numbers. Being highly leveraged and focused on the cycle, we're certainly not building in our budget and in our bank covenants anything close to 187.

I lied, I have one more question. Presuming there is a significant build as we have seen certainly in history, you might -- one might conclude there'd be a significant opportunity to improve gross margin just from the standpoint of demand exceeding supply. I know you've got a lot of contracts out, and, you know that limits your ability in some ways to improve gross margin. Certainly on a per unit basis. But where -- you know, is there an opportunity for you to affect margin if demand does exceed supply here, I'll call it in the second half of '03?

Oh, yeah. There's two points here. One by the end of '03, Dick and his folks will have enough five-day capacity that we could have almost supported 1999 under a five-day scenario. So first off, understand if, you know if things go great and we would wish that would happen, we're not going to be pushed as far as our capacity. And that's given the fact that we have closed two facilities also. So there's some great work being done there. Secondly, as the volume increases, we'll -- you're looking at top line margin enhancement through price increases. We'll get some of those as we go forward. But where you're going to see the brunt of the enhancement is in two areas. First, it's going to be on the plant floor. And we should see some very significant improvements, especially as volume increases our average cost per trailer will go down again significantly. Secondly, we do intend to go to our partners and look for some marginal improvement in margins. Our biggest initiative with our partners right now is we have significant costs that we're coming up as far as steel, aluminum and wood flooring. And we fully intend to pass that along, as well as having some discussions on the basis of the ability and the fact that DuraPlate has withstood the test of time, that there's probably a win/win relationship there that we can still move forward. Also, we're going into the mid-sized and small-size fleets where just being competitive will advance our margins significantly over the high volume purchases that our partners come into. There's probably a delta there of roughly $1,000, $1,500 a trailer.

I might also add from a margin standpoint, if I look at 01 and '02 keep in mind the margin impact of our legacy used trailer deals in '01 cost us $80 million at the gross margin line. In 2002, that number will probably be around $10 million. I might add we have recently now resolved all remaining used trailer legacy deals. So we are no longer operating under the cloud of some of these legacy deals. So our expectation in '03 is that we'll actually now begin to make money on a used trailer business. So the swing at the re-margin line should be very nice. So you begin to add up these things, all the accomplishments we're doing on the shop floor. The price indexing that we expect to do with our customers and simply the better discipline that we have now on the acquisition side of trade commitment, and I certainly get pretty excited about the opportunity.

You and me both. Guys, appreciate the time and congratulations on some pretty steady performance here.

Your next question comes from Lawrence cam of sonic capital.

Good morning, guys.

Good morning.

You said that, you know, despite what you say about the EBITDA, I'm looking at cash flow from operations here for the past nine months and what was that, $62 million. And $54 million comes from inventory liquidation and $24 million comes from tax refund. Those aren't recurring so where do you see that going forward?

Well, again, I look at -- I would look at third quarter as probably as evidence of the recent run rate. And EBITDA in the third quarter is $8.8 million. And including $4.1 million of non-cash charges. From a go look forward basis, I say our EBITDA run rate is $13 million. That gets me to a little over $50 million based on third quarter's results, which did not include -- really did not have the benefit of any of the lean manufacturing or the continuous improvement efforts that we are seeing now.

Right. But the cash flow for the third quarter was $7.3 million and five of that came from an inventory liquidation.

Well, I look at my income statement, and on an EBITDA basis, I had $8.8 million on EBITDA. And, again that EBITDA is after $4.1 million charge for non-cash items.

Okay. And secondly, how does -- once you sell the leasing operation, does that change and pay down the debt with that, does that change the repayment schedule for the remainder? I mean, in other words, does that come off of the debt that comes through immediately or does that go somewhere else?

It goes 100% goes to debt pay down.

Right. But to going forward debt repayment change significantly?

Not in the near term, no. As I mentioned though in addition to the sale of the rental fleet, we are beginning to prepay our debt schedule based on cash flow. And this is something that I would like to see us work with our lenders to what I call get credit for. In other words, to the extent that we prepay out of operation, then I believe it should come out of near term requirements. But that obviously is to be discussed and resolved with our lenders. But to your question, the sale of the rental fleet would not come out of near term schedule requirement.

Okay. That's very interesting. Thank you very much.

You have a follow-up from Tom Albert of BBT.

Hey, guys, I had couple of other questions. Bear with me just a second. On your -- on the effort to reduce your cost, Mark, in the past you have talked about on professional fees, especially for accounting and legal, you were in the midst of outsourcing that. Have you finished that and can you share savings annually --–

Yes. I can talk about savings. I'm not sure we talked about outsourcing. But we did talk about looking at all of our costs. As we have previously announced, we have now retained Ernst and young, for example, as our outside auditor. We went through a very comprehensive bid process. And that certainly resulted in some pretty nice savings to the company. We've also bid out, for example, our risk management insurance. We also have gone through a period of looking at our legal fees. And so if I were to quantity on a go-forward basis what our savings might be on just professional fees, it would probably be a million dollars plus.

Okay. And then, Bill, in terms of Q4 production, you mentioned that you sold out all of your production slots, but it is a seasonally slower quarter. First of all, how many weeks are we talking about are lost to the holidays? Is it just one week at Christmas or is it like some manufacturing companies closer to two weeks? So it's kind of part one. And then secondly, last quarter, you did sort of give a production goal for us to track. You said you'd produce about 20% more than in Q2, which you attained. Without getting down to the nitty-gritty numbers, can you give us kind of a percentage of what Q4 production might be relative to Q3?

Yeah. As far as the time out, we'll have roughly 2 1/2 weeks of production out. And as far as the percentage going forward in the fourth quarter, we'll be down roughly 10 to 15%. Because of that. I think our daily order base is still very strong, and as far as the production is concerned, that's strong. But as you know this is a weak quarter, and we just filled our production slots about two weeks ago. And now our focus is on the first quarter.

I might also add, Tom, in our fourth quarter production will be some production for our branches as Bill mentioned. We are in the process of really replenishing to some extent our branch inventory from a financial standpoint. That production would not get recognized until the branch sells that inventory. So there may be some inter company eliminations if you will during the fourth quarter if you will, because of our build for the branches. That build is probably between $5 and $10 million of production in the fourth quarter.

Okay. Good. Thank you for that. And then in terms of working --or workmen's compensation, you guys talked about your efforts to improve safety there. But can you give us a little bit more of a feel? In other words, how much might you spend on workmen's compensation in '02 and what do you think as you get your hand around -- your hands around your various initiatives workmen's compensation might be going forward, realizing that, you know, safety is only as good as you are today.

We're putting -- looking at the numbers while they're doing that. Certainly we believe that safety is -- it's not only workmen's compensation. I think Dick would also state the fact that we don't have to keep a pool of people around who keep on moving people in and out of jobs. The saving there is probably comparable or even more. We're expecting a savings of $1 million year over year, but I'll get you the -- we're looking at the numbers right now on workmen's compensation.

So that figure would be like a fourth quarter figure, year over year? You're not talking about an annual $1 million savings, right?

No, it's annual.

Okay.

Just bear with us, Tom. If you have any more questions, I can come back to you. You stumped me on that one. I don't know that one off the top of my head.

Can you give us an update on the [road course] situation? Of course they're being bought out of chapter 11, mostly as an asset sale by Prime. You guys had about -- I think it was about 800 some old trailer exposure there. My understanding Prime agreed to basically take the trailers, but had 30 days to inspect, see what they actually wanted to keep. Can you bring us up to speed there?

Yeah, Tom, we are going to get the majority of the trailers back. And we should be age able to resell those. I think at this point our charge is still okay.

Okay.

I would say, Tom, on just workers' compensation, that annual run rate today is probably $3 million plus. Secondly, from a group insurance standpoint, which we should also expect to see some benefit, that number is running more like $13 to $14 million. So, you know, in total, you could say our health care cost, if you would, is running annually somewhere between $15, $20 million.

So the $1 million hoped for savings would be off that $15 to $20 million or just off the workmen's compensation line?

Just off the workmen's compensation line. You know, at this time, it's too premature to quantify off the $15 to $20 million, Tom, but I guess I want to just simply reference what the potential size of the opportunity is

Sure. Well if you get an insurance discount, I'm sure a lot of people would be happy to hear how you get that in this environment.

Yeah.

Lastly, the -- can you give us a sense of maybe the magnitude of such potential contracts in the service and parts arena? Either by total dollar figures or by how many carriers might you be pursuing that you may have neglected before? Is it mostly --–

We have a relationship with probably three of our nine partners. And we believe that we can probably expand that into roughly six to seven of those partners and we're certainly going to try all. Dollar wise, it's probably in the range of maybe $400,000 to $500,000 a month.

Okay.

And we equally can get this. The margins we're not going to discuss, but they're pretty good.

And that would be like per carrier or just if you were like to add another three?

We added another three that would basically be in that range. J.B. Hunt is a very large user right now is roughly in that area alone.

Okay. Good. And I think that's it. Thanks, guys.

All right, Tom.

Your next question comes from Jim Wiggins [Inaudible].

Yes. I'm wondering if you can talk about whether you have seen any competitive response to the changes that you've made? Responses by your competitors to the improvements you've made at the company?

Well, mostly what they're doing right now is, you know, for the next three months they're going to say we lost $8 million bucks. Their response has been more of the negative press than anything else. And I guess that's pretty typical in this industry, but I think what we're seeing right now is, one, there has been some business that we have lost with a major partner. We just felt that with the objective of making money it didn't make sense to bid in one of those annual quotes. One of our competitors certainly picked it up, and that will be their challenge to make money. I think going forward though, what we are focused on is the partners that we have. The new partners that we'd like to add, and we have -- we are also very focused now on the mid-sized and small-sized fleets. We have completed the identification of those fleets that we want to go after. We're putting together the type of response that is necessary to one, introduce ourselves and show that the merits of both our products and our branch and service locations, and quite honestly, I don't care what the other guys are doing. I'm only focused on what I want to do.

Great. I wonder -- just to follow up on that a little bit, you mentioned the business that you lost with one of your partners. Had that been something where they elected to go with the competing product in preference to a DuraPlate trailer from you or was that a more sheet and post?

No, that was sheet and post.

An then the --anything you can say regarding the impact of the sale of the rental fleet should it occur on the EBITDA, what would the annualized effect be there?

Annually, our rental fleet is running about $9 million in EBITDA.

Great. With respect to the preferred stock, you alluded in your Q to the some arrearage on the class B preferred. I was wondering if there's anything you can say with regard to the conversion terms that may exist with respect to the class B preferred?

Sure. There are no mandatory conversion features in the series B.

Great. So there's not a risk of dilution from that then?

No.

Great. The -- let's see. I understood that you are no longer under water with respect to your open trade commitments, is that correct?

Yes.

That's great. Let's see. With respect to warranty expense is there anything you can do to characterize how much of an issue that has been for you, either in '01 or '02?

Well, it's roughly $10 to $15 million per year. And what we want to do is certainly -- we've derived two forms of measure. One is after July 1st when we started to do 100% inspection, we're trying to reduce the warranty there roughly about 80%. A lot of the other legacy warranty issues probably by the middle of next year will be resolved. We're actively working on those, we want to get them behind us, and so do our customers. I think we'll see some significant improvement in our warranty costs going forward. And that includes the year 2003.

Thank you. Final thing. How much of the 1 -- well the total back log as of October --first weekend of October was for DuraPlate?

Well, certainly the 5,000 was all DuraPlate. The additional $30 million that was added, I really don't know. you know --

I mean, at least a historical percentage, something over 65% would be

Yes. Yes. That's close.

Thank you. That's it.

Thanks.

Your next question comes from Mark Haffel of Sonic Capital.

My question was answered. Thank you.

Thanks, Mark.

Your next question is a follow-up from Andrew Kerns of Clipper Capital.

Thanks. My question was answered too.

Thank you.

Your next question is a follow-up from Tom Albert of BBT.

Hey, one more question, guys. With the new line that you recently put a press release out about can you talk about the difference in that line versus your existing DuraPlate line which I believe is more the mass production line and how might this new line be a little bit different in terms of whether it's more customized, target market, etc…?

Tom the new line is really going to start off as sheet and post. And this is basically the old line that was at port Madison. We have reengineered that line. One, to reduce cost, and two, to have it fit within the facility that we have. The idea there is to offer a more standardized sheet and post to a very specific market area. Within the general dry freight community. We are going to do some different things to that particular product that we believe will offer some of the advantages of the Wabash technology. So that this will be a little bit more durable than what's currently out there. It will also be priced competitive to what's currently out there. So we think that as our customers view this and make some comparisons, they'll favorably react to this particular product versus what's out on the market right now. Again, in the sheet and post area, it's a big market. We're looking at a niche of roughly 10 to 12,000 trailers. We think that we can achieve that success in that niche relatively quickly, especially with what we've got to order. But we're really not looking at this particular niche to be anything that's tremendously special ordered. We're really doing a lot of work to understand what's there, what our customers want and what we --since we [Warrentise] our trailers, we want to offer them the best solution to their issues and also have that fit within our production capability. So at this point, it's not a DuraPlate. It does have the capability to being pressed into DuraPlate production if we want to. And it's what we would call a short hour or versus a long hour sheet and post. That will continue to run on line three and five.

Okay. Thanks, then lastly, did you make progress in your overtime? During the third quarter and just maybe talk about that a little bit because that's a potential large source of savings.

I think we've done some overtime on the weaker side and we ran line one I believe last weekend. But if you were to look at September and October, that's pretty much it. We have five day capacity now. Certainly on DuraPlate and on the sheet and post, if we fall behind we would use one weekend to catch up. But that weekend would mostly just be a Saturday. So, you know, overtime is not much of an issue, if any.

Thanks, again, guys.

Your final question comes from Jim Wiggins of [Inaudible].

Just a very small thing. Can you characterize the response to the change in trade policies? My understanding is that they --there is no significant push back from customers that -- is that accurate?

Well, there was some pushback. That's for sure. But I think our customers especially these were our partners, understand the situation that we're in. We're trying to offer some other forms of solutions for them that still give them a trade in that makes sense at the values they believe their product's at. But not necessarily put us in a -- in Dutch for it. I think -- I commend them for working with us, and going forward. You know, certainly trades are a very big -- very big part of the purchase obligation, and we do view trades as an obligation on our side, especially with our partners. What we're trying to do right now is to both tactically and strategically work with our folks to understand what's the best way of garnering a win/win relationship on that side. And I think what we're really going to see going forward is that a change in both our philosophy on used trade, and also a better relationship with our customers and understanding what their valuations are and how we can comply, you know, with their needs.

Thank you.

There are no further questions at this time. Sir, would you like to have closing remarks?

Well, thank you again. I hope that we were thorough in review of our business, you know from my perspective I think we will be able to get through the negotiations with the banks. We're also very bullish on the asset sales that we're doing. As I have said to a lot of people, over the past six months, a lot of things that have happened to Wabash were self-inflicted, and it's our obligation and our responsibility to correct them and I think we are. We're not trying to put a trailer on the moon here. You know, this is something that's within our capable. We're not doing anything that's new. This is standard manufacturing 101. A lot of the work with the partners is going well. They understand this situation. We have every belief that we can continue to offer solutions to them. So going forward, you know, I remain very bullish on this business. We've dug out a lot, we've still got a lot more digging to go. But we know the dirty laundry now and I think we have spent a lot of time with you folks in revealing it. And so it's pretty open. This is a very visible company right now. And you know what we know, and as we go forward I really feel we'll be very successful in implementing our lean manufacturing, in improving our margins, reducing our debt is number one. And we will do that both through working capital and asset liquidation. So it was a very positive quarter in some of the things that we said we were going to do and we did. We're into the midst of the fourth quarter, we're still on track. And as we go forward, I expect us to pick up some steam now and start moving a little bit faster. Thank you very much. Appreciate your time.

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