Wabash National Corp (WNC) 2003 Q2 法說會逐字稿

Ladies and Gentleman thank you for standing by. Welcome to the Wabash National 2nd Quarter Financial Results conference call. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a questions on answer session. At that time if you have a question, please press the one followed by the four on your telephone. As a reminder this conference is being recorded, Wednesday, July 23, 2003. I would now like to turn the conference over to William Greubel, President and CEO for Wabash National. Please go ahead sir.

Good morning. Before we being I would like to make an important announcement. As with all these types of presentations, this mornings contains certain forward looking information including statements about the companies prospects, the industry outlook, backlog information, financial condition in 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 the cautiounary statements and risk factors set forth from time to time in the companies filings with the securities and exchange commission.

Welcome to Wabash National 2nd Quarter Earnings call. I am Bill Greubel, President and CEO. In the conference room with me this morning are Mark Holden, Chief Financial Officer and Dick Giromini our Chief Operating Officer. I would like to welcome all the listeners on today's telephone conference call as well as those listening live via the Wabash National internet site webcast. We have much to cover today and we will try to provide as much information as possible. I will comment on the status of the industry condition in our business. Dick will discuss our Critical Operation initiatives, after which Mark will review and discuss the 2nd quarter 2003 financial results and the financial condition of the company. At the conclusion of the prepared portion of the presentation we will open the call up for questions from the listening audience.

Let's start with the industry update. Industry production for trailers only through May was 72,400 up approximately 61% compared to the same period in 2002. Wabash National production for trailers only was up 96% through June year over year. The majority of this production is supporting fleet replacement demand versus growth. Year to date through May the annualized billed rate for trailer only products was 174,000 units versus 146,000 trailer only units billed in 2002. A 19% increase. Quarter over quarter production was relatively flat. Net orders for trailers only year to date were approximately 82,200 units. A 24% improvement over the same period in 2002. Please keep in mind that these orders may represent requirements over a broad time line and should be viewed as a trend only. Our billed rates are still below rates that we believe are replacement level. The trend is non-the-less very encouraging to us. Wabash market share production remain consistent at 20%. The majority of our partners on a replacement only mode maintaining tight supply in the industry. We continue to earn a greater share in our non-partner fleets. Also, our new line four sheet and post line is now up and running which will allow us to participate selectively in a market segment which we have historically constrained by capacity and cost structure.

Industry pricing continues to fluctuate we continue to see our competition bid to fill plant capacity. Yet there are signs that pricing is beginning to firm. We continue to see a combination of sporadic economic activity and a trucking industry that is more disciplined in adding capacity. Most of our partners respected business' continue to improve, Wabash National continues to enjoy excellent relationships with the key freight providers in North America. Industry forecast for trailer only per ACT's July 2003 outlook are as follows. For 2003 they have revised down from 188,000 units to 183,000 units. For 2004 they have revised upward their estimate from 220,000 units to 246,000 units. For 2005, they have again revised upward their estimate from 270,000 units to 297,000 units. In a brief conversation with them yesterday for 2006, their continuing their estimate at 297,000 units. As a reference in 2002, 146,000 units were built.

These estimates represent a substantial improvement versus earlier forecast. We stated on the last conference call our estimates for trailer only builds in 2003 was 175,000 for the industry. We believe that this forecast is consistent with what the industry statistics have indicated year to date and what expectations are for the remainder of the year. Let's look at the 2nd quarter. Excluding the charge associated with planned sale of the rental leasing and wholesale parts business we continue to see the fruits of our labor turning around this business. Given the relatively flat sales during the quarter, we achieved a significant uptick in our income from operation.

All significant business segments show quarter over quarter improvement. We continue to work our continuous improvement efforts with very positive results on cost and productivity improvement as Dick will discuss. We successfully focused on cleaning out the majority of our aged used trailer legacy and now have a very manageable level of product with strong internal controls to never let this happen again. We intend to do the same with our finished inventory over the next few quarters, which will result in a significant down turn in our finished goods inventory by year-end. As I will shortly discuss, we continue to work to optimize their retail branch model and our ability to service the entire trailer market. This will be our key focus going forward. Also during this quarter a significant amount of time and energy was spent on our efforts to recapitalize our company. We believe the window of opportunity is excellent to acquire low interest capital and trade out our existing bank debt. In addition, we are pleased to announce the pending sale of our rental leasing business and the wholesale parts operation. These were planned events in our goal to reduce $100 million in debt in 2003.

I will now discuss in more detail our retail branch reorganization and changes in our sales efforts to unlock the mid to large-sized fleets. Effective today we will begin the process of closing 10 retail locations in our Lafayette mod center. The majority of our branch closings are for sales only locations throughout the U.S. and Canada. Going forward, Wabash National will have 21 full-service and four retail-only branches, roughly half the size we were a year ago. We expect to see annualized cost savings of approximately $5 million. The vast majority of the savings will be in head count as we reduce our salary and work force in the branch operations by approximately 20%. We'll take a one-time charge in the third quarter of $2 million. The majority of the closures will be completed by this September. Cash from real estate sales will go toward debt paydown.

Our business model, which focused on broad-based geographic coverage to service our customers is costly and cannot provide a profitable return throughout the market cycle. It's imperative that we maintain a reasonable presence for service, parts and trailer sales. We will augment our gaps with independent dealers and newly-formed Wabash National independent service centers. As we move further into the mid-market, our branches and dealers will play a greater role in our overall success. We have completed a vigorous review of our retail branch sales organization and its abilities to sell new trailers to the mid-market fleets. We found we spent an inordinate amount of time focused on chasing and closing orders in the 1 to 10 trailer range. Interestingly, it takes our sales and operation associates roughly the same amount of time to work an order of one trailer through our process as it does 100 or 500. In addition, our sales staff is more focussed on the immediate branch territory as opposed to selling the attributes of Wabash National branch network.

Wabash National has historically focused on the large partner accounts and through the retail branch network the smaller fleets. Together these segments of the business represent less than 40% of our market. Our product basket, service network and used trailer remarketing capability are well-matched in mid-sized fleets. These are the companies can appreciate the total cost of ownership that we market. We have just never spent the time and efforts to earn these fleets' business. During the third quarter we will augment our factory direct sales force to focus on this mid-sized fleet market. We will begin active and in-depth focus on roughly 500 North American fleets with trailer usage greater than 250 units. We did not intend to price ourselves into this market but do intend to sell the total cost of ownership of Duraplate in addition to the full product and service benefits of Wabash National. Our investment will be minimal as we reduce our retail branch sales network. We will be trading out single digit orders for larger economic orders. We will augment the retail branch sales network with outside services to pull in small-sized customers. Our target initially will be a 25% market share in two years. Today our market share is less than 10%. Dick will now follow with a discussion on our operations. Dick?

Thanks, Bill. Let me get right into updating all of you on the progress in our manufacturing segment. As you may remember, as we continue our drive toward operational excellence, we have consistently remained focused in five key areas: safety improvement, quality enhancement, delivery of our products on time, optimizing productivity levels and driving cost reduction throughout all operations. I'm very pleased to report the significant gains we continue to make in our overall safety performance. The focused efforts of all of our associates have helped to deliver our best quarter yet, representing an improvement on our total recordable incident rate of 30% versus the previous quarter. In fact, the efforts to date have resulted in the nearly 70% reduction in total recorded incident rate when compared to the levels we experienced in July of last year. But I must repeat again this quarter that our ultimate goal is to achieve zero recordables and zero loss time incidents.

Every individual understands this mission and is committed to help achieve it. In the area of quality, our second key area of focus, our efforts to enhance our overall product quality continue. In the last call I shared that we had introduced a new 18-point final inspection process and that we continue to raise the acceptance criteria regularly to assure that our outgoing quality is at a higher standard each successive month. Incorporating feedback from our customers. Today I'd like to share that we recently began leveraging the success of the continuous improvement event formula by increasing the emphasis on process variation reduction as the primary focus of the events. This activity will supplement the work being done by our cost of quality variation reduction teams and will serve to accelerate the rate of improvement that we desire in our drive to achieve best in class status for quality in our industry. Our performance relative to on-time delivery has become very stable with schedule attainment at or near 100 percent every month.

Our MIS team has just recently rolled out the beta version of our new comprehensive customer on time delivery module, which will provide realtime status of our performance on a customer by customer, order by order basis. I'm anxious to get this new tool fully implemented. From a productivity standpoint, I'll simply say that we've successfully sustained all the enhancements that were introduced during the past year. Nearly 200 CI events have now been completed yielding nearly a 40% gain in overall through put of our lines while realizing nearly 30% reduction of staffing requirements. We're now at a stage in which we are implementing even greater line speed improvements on our two high volume Duraplate trailer assembly lines as a result of the completion of the latest series of CI events. These latest enhancements will improve line speed from our original 14.5-minute cycle to the current 11.5-minute cycle and now down to 9 minutes, and from 18 minutes down to 11.5 minutes on our lines 1 and 2 respectively for standard duty products.

As a basis of comparison, these productivity enhancements will now provide the capability to produce on one shift alone 75% of the volume that was being produced using three shifts one year ago on-line 1. When we consider both line 1 and line 2, we will now actually be producing 15% more Duraplate trailers each day on one shift today than what we were producing one year ago. Additionally, our new freight pro assembly line continues to improve in both efficiency and product quality consistency, providing us new, dependable capacity to support the inevitable market upswing. The ultimate measure of the success of all the efforts that I've discussed is how they translate to cost reduction, our fifth key area. Now that we have completed a full year of improvement efforts, I'm pleased to share that we've saved a cumulative $43 million in annualized savings for the manufacturing segment.

These savings are a culmination of improvements realized through a combination of labor cost savings through the elimination of non-value added activities, through put increases as a result of productivity improvements and purchased material savings, among others. In closing, I'll just add that I'm extremely pleased with the progress we've made to date. I extend my appreciation and sincere thanks to all of our 2500-plus associates who have provided tremendous effort and support throughout the past year to get us to where we are today. They all truly understand that we must be better today than we were yesterday and better tomorrow than we are today. It is with this understanding that we continue to make gains each month. I look forward with great confidence. That said, I'll now turn the discussion over to our Chief Financial Officer, Mark Holden. Mark?

Thanks, Dick. Our mission continues to be centered around building operational excellence and financial strength. There are currently pending a significant number of events which will have a dramatic effect on the company's financial condition. I will review the following events: first, second quarter results; secondly, asset sales; third, our current bank refinancing efforts; and fourth, the convertible note issuance that we announced last night. From a second quarter standpoint, as we announced last night, revenues were up 3% compared to the first quarter of '03 on a 7% increase in units. Compared to year to date '02, our revenues increased 22% on a 36% increase in units.

The unit increase is being partially offset by decline in our used trailer sales as one year ago in the first half we were still liquidating and selling off excess used trailers. On an operating income basis, second quarter result, our operating income was up 48% quarter over quarter before the charge of $28.5 million for the asset impairment. Q2 results include costs associated with the new debt refinancing efforts that are currently underway as well as the amendment costs that we incurred in April of '03 in the second quarter, totaling 1.4 million. Also, the second quarter results include a $2.7 million foreign currency exchange gain related to our Canadian operations.

A $1.3 million charge associated with resolution of our road letter legacy transaction in France and $1.7 million of additional costs related to acceleration of amortization of prepaid interest. Summarizing these four charges in the quarter, the $1.3 million road [inaudible] legacy transaction, $1.4 million in debt refinancing costs, 1.7 million in accelerated interest amortization and then a $2.7 million favorable exchange gain result in a net $1.7 million P&L charge for our results in the second quarter based on a reported net income of $1.2 million before the charge of 28.5 million. On a segment basis, retail and distribution revenues was 75.4 million based on a thousand new units. Operating income at a loss was 29.6 million. That includes the charge of 28.5 million. Manufacturing revenue was 167 million based on approximately 10,000 units. Operating income was 10.6 million, which results in a 6.3% operating margin and is based on a 10.6% gross margin versus 10.1 in the first quarter. Product line mix, new trailer revenues were up 5% quarter over quarter at 172.8 million. Used trailer revenues were down 13% quarter over quarter at 17.1 million.

Parts and service revenues were up 7% quarter over quarter at 25.8 million and other, including rental and leasing revenues, were up 2% at 14.5 million in the second quarter. On a gross margin basis, gross margin for the second quarter was 10.3% compared to 10% in the first quarter and 3% in the second quarter of last year. Labor, our labor headcount at the end of the 2nd quarter was 2,900 full time associates and 700 temps. This compares to 2,900 full-time at the end of the first quarter and 500 temps at the end of the first quarter. SG&A for the 2nd quarter was 13.9 million versus 15.8 million in Q1 and 18.8 million in Q4 of '02. Included in the second quarter SG&A is the 1.4 million of refinancing costs for both the new and old debt. Our SG&A should continue to benefit from our resolution of legacy issues and better control over our spending. Interest expense for the second quarter was 10.4 million versus 7.9 in the first quarter.

The 10.4 includes accelerated amortization of prepaid interest of 1.7 million and increased borrowings associated with seasonal working capital needs. As you can see from our earnings release taxes, we did not tax effect our earnings. The company currently has approximately 150 million in net operating loss carry forwards. As a result, we have fully reserved for this tax benefit on our balance sheet with an approximately $70 million tax reserve. On an EBITDA basis, adjusted EBITDA for the second quarter was 18.2 million before the 28.5 million dollar charge on the asset impairments. Adjusted EBITDA for the year at the end of June was 34.3 million. Depreciation and amortization of 6.6 million in the second quarter. Year to date is 13.3 million.

Our capital spending in the second quarter was 1.2 million, bringing our year to date cap ex to 3.5 million. Backlog at the end of the second quarter is approximately 225 million, which is up over 195 million at the end of first quarter. And it's important to note as we announced just the other day, we recently received an order from U.S. Express in excess of $120 million. Over $100 million of this order was not included in the backlog at the end of June, which would bring currently our total backlog now in excess of $300 million. Balance sheet at the end of June, our total liquidity position is approximately 50 million. As defined, that includes availability under existing lines of credit. From an inventory perspective, inventories are slightly up. Most of the increase is in used trailers. At the end of -- late in the seconds quarter we had one large fleet trade package come in.

Again, as Bill alluded to, our controls around used trailers today have been dramatically improved and we are working this inventory constantly. Our total debt position at the end of the second quarter is 354 million, including both on balance sheet and off balance sheet debt. That compares to 357 million at the end of March, bringing our net debt reduction so far this year through the first six months to $13 million, including both on and off balance sheet. As stated many times, our goal is $100 million of debt reduction for 2003, including asset sales. We announced yesterday morning that we had signed a definitive agreement to sell our rental, leasing and parts wholesale business. This transaction will include $55 million in cash at closing and approximately 10 to 15 million dollars of assets carved out and left behind.

The assets that have been carved out include receivables, trailers and lease contracts. We expect to monetize the 10 to 15 million dollars of assets over the course of the next 60 to 90 days. In addition, as a part of the asset agreements, both companies entered into a long-term parts supply agreement for five years where the parts wholesale business will supply our branches after market parts. Our branches will provide trailer maintenance services for a five-year period for their rental fleet, and we've also entered into a five-year trailer purchase agreement for both new and used trailers to supply their rental fleet needs. We've accounted for the asset sale as an impairment charge in the second quarter based on our plan to sell these assets. We expect to close in the third quarter.

The transaction is subject, however, to our lender approval, buyer financing and Hart-Scott-Rodino approval. All proceeds will go to pay down debt, which will bring our total debt retirements to approximately $90 million. From a refinancing standpoint, as we previously announced, we have mandated fleet capital to lead and fully underwrite a new $250 million syndicated bank financing package. This is currently subject to fleet credit approval. There will be a three-year asset based revolver and term loan. We expect to close on a new facility in the third quarter. It will result in substantial reductions in our costs of debt. Chris Black and his team have done an outstanding job of putting together our new bank group and facility.

As we announced, if we close in the third quarter, we will take a charge of approximately $24 million related to prepayment penalties of approximately 20 million and a non-cash charge of approximately 4 million for the write-off of previously deferred debt cost. The debt extinguishment charge will be recognized when the existing debt is repaid, which as I mentioned we expect in the third quarter. As we announced yesterday after the close of the market, we have launched a $100 million convertible debt note offering. All proceeds will be used to pay down debt. Merrill Lynch and BB&T are managing the deal, and we expect to close and fund during the third quarter. Upon the closing of our bank refinancing, our convertible note issuance and our asset sales, our capital structure will have the following attributes: substantially reduced cost of debt by more than half.

I expects our cost of debt to be below 4% versus 10.5% today. Total debt service cost reductions will go from $120 million of annual service cost requirements to 30 million, a $90 million reduction in our total debt service. Interest expense will go from 36 million down to an estimated 14 million, and our principal amortization will be reduced annually from 84 million down to 16 million. Also, our new capital structure, we expect to have a limited number of covenants. We expect to syndicate the bank facility with premier financial institutions, and we will have significant flexibility from a prepayment standpoint. With that, I'll turn it over to Bill for a wrap-up.

It's been a very hectic but fruitful quarter. We set out some very difficult tasks, and have pretty much hit them all. As we work there all the refinancing, sale of assets, more CI events and changes to the branch and sales organization, our business will be fundamentally different than it was just a few months ago. Going forward we are in an excellent position to take full advantage of the trailer market cycle. And given the organizational changes that are in process, we should expect to see an ongoing improvement in our market share. As always we will continue to pay down debt as quickly as possible and focus on profitability. Thanks for your time at this time we would like to open up the call for questions. Operator?

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speaker phone, please lift your handset before entering your request. One moment, please, for the first question. Your first question will come from the line of Tom Albrecht with BB&T Capital Markets. Please proceed with your question.

Hey guys, congratulations on a good quarter and really where you have come from a debt of debts a year ago. I had some questions I wanted to ask you. First off, Mark, what's the approximate number of used trailers in the fleet and the dollar value you've got at the end of the quarter?

In our rental fleet, Tom?

No, just used trailers.

In inventory?

In inventory, correct.

It's approximately 4,000. And the value is, I believe, roughly 24 million.

Okay. And then, Bill, you talked about you wanted to capture 25% of the market. Is that of the market for fleets with more than 250 trailers? I was trying to write so fast there.

Yeah. Tom, thats uh, incidentally on those trades, that's U.S. Express that we brought in, those are Duraplates. And we're kind of excited on that because these are the first trades coming in on Duraplate, and we're going to get to test the market to see how much of a premium we can sell the Duraplate trades over standard sheet and post of similar time. On the market share that we're trying to do, you've seen our presentation, Tom, where we focus -- you know, the top 10 suppliers represent about 11% of the market.

And when you look at the smaller fleets, and let's say fleet size of less than a hundred, that represents probably, you know, a guess would be 25 to 30% of the market. Really what we're trying to do is improve our share in that middle section there that is certainly over 50% of the trailer market. We're not a big player there. For whatever reason, that's past. But this is just a great opportunity for us to go in. And you're aware of our total cost of ownership. These fleets can use our Duraplate and be able to support their needs in a much more cost effective manner, even though the Duraplate is going to cost more. So, we're really excited about that. But that's the market we're trying to go after.

Bill, what's the top end of that market before you really get into the megafleets? Is that 2,000 trailers?

Its's probably 2,500 to 3,500 trailers. Of the 500 that we've identified, we have some that are over 5,000 that we've never really spent a lot of time with. But I'd say the majority of them are in the 800 to 1,700 limit.

Okay. That's helpful. In terms of the Freight Pro, can you talk about, first of all, how much volume you were able to actually experience during the quarter, how much that might have been a cost negative element during the quarter and what your production expectations are for the second half of the year?

Well, we're doing roughly 20 a day. That is our goal at this point. And that's roughly a shift. We'd like to certainly boost that up. I think that we probably have had some start-up costs associated with Freight Pro, but going forward I think we're pretty optimistic that we'll meet that requirement. We certainly intend in 2004 to raise that number significantly.

The start-up costs, Tom, naturally are pretty difficult to quantify.

Mm-hmm. And then in terms of the Duraplate container line being redone, is that pretty much behind you, as well? You alluded to that in the press release.

I'll let Dick discuss that.

Yes. That ramp-up has gone nicely, and we're running that mini sell, as I refer to it, quite efficiently now.

Okay. What is your sense of production for the third quarter? Obviously you got the big U.S. Express order. That is multi-year. Should we look for comparable volumes here in the third quarter that you experienced in the second quarter?

Well, I think we've got a pretty good view certainly of the next couple months, and I would say at this point I think we see the next couple months pretty much flat. But we are starting to see some pretty good signs. Let's say September through the end of the year. Some of the partners are starting to bump up their orders. And as we start to move out into the mid-sized area, I don't expect a significant upswing in share immediately. You've got to earn your way in. But we have some beta accounts that we've been calling on, and we expect to close a pretty good number of those as our trial effort into that area in this period. So, I guess from my perspective, I would see sales flat to slightly improving as we go through the quarter, and then I'm a little bit more bullish now on the fourth quarter.

Okay. Good. What about actual production or sales numbers during the second quarter? Normally that's in the press release. I didn't see that in there. Usually you have a breakdown of manufacturing, retail. Mark, do you have those numbers available, how many new trailers manufacturing either produced or sold, and retail, as well?

Just the manufacturing was, Tom, in the quarter, was right at 10,000 units. And retail was right at a thousand.

Okay. So, then, of that 10,000 that manufacturing produced, did they produce more than a thousand for Retail?

Yeah, we produced 700 for Retail. So, we eliminated in consolidation revenue associated with 700 units. So, for the quarter on a consolidated basis we recognized right at 10,200 units.

Okay. And then, let's see. I had a bunch of other questions. The -- Dick, you talked about the productivity in the different work stations. You were give a bunch of numbers pretty quickly there. It sounded like lines 1 and 2, correct me if I'm wrong, you've gone from 18 minutes to 11 minutes on those now. But then you were also describing from 14.5 to 11 minutes to 9. I just wants to make sure I understand which line is which.

Let me clarify for you, Tom. When we go back a year ago on our line 1, our high-volume Duraplate line, that line was running at about 14.5-minute cycle time. Our first wave of improvement took that line to 11.5 minutes, and our most recent implementation that we're going through right now takes it to a 9-minute cycle time indexing. Line 2, which is the other Duraplate line, when we first brought that on-line last September, we brought it in at an 18-minute cycle. We are currently taking that line to an 11.5-minute cycle with the improvement initiatives. So, both of those -- both lines are now going through the ramp-up under the new cycle times.

Tom, on a five-day basis, you know, if we were hit with that wonderful 1999 again and that went to almost Duraplate, we could provide almost '99 numbers on line 1 and 2 now. That just gives you an indication of the raw power that those two lines have. Certainly over 60,000 trailers could come off those lines.

Amazing, line 2 is basically the more customized Duraplate, Dick, is that correct?

No, actually we have been running on-line 2 the HD, our heavy duty version on-line 2 and actually have shifted some of the more flexible over to line 1 because of the HD product on-line 2.

Okay. Good. I understand it seems like at the beginning of the last quarter you may have added a second shift on one of the lines, but it was operating at a fraction of what a full shift would be operating at. But thanks to your improved cycle times, you may have eliminated all second shifts right now with the flattish volumes, is that correct?

Yeah, that's what I was trying to share with all those numbers I was throwing at you. On our lines 1 and 2, because of the significant strides that we've made in overall throughput efficiencies, we've actually been able to reduce both lines 1 and 2 to a single shift of operation. And when you look at what we were producing in total Duraplate product a year ago at this time, running all out three shifts on-line 1, we're actually producing today on a single shift between the combined throughput of lines 1 and 2 about 115%, or 15% more product, Duraplate product being produced today than we could do on three shifts line 1 last year.

Tom, we've taken out probably 450 to 500 temps in doing that. So, we've just moved our full-time associates around. I do think going forward, though, we are going to have to shortly restaff at least one shift on one of those lines, not only for the U.S. Express order, but there are other orders pending that will probably bump that back up again. But we're trying to run as efficiently as we can.

Yeah, that's gonna be one of the things that's hopefully fun to watch, the management of the labor cycle. On the retail chains, and I don't mean to hog the whole call here, but you're gonna be left with 21 full service branches, four that are retail only. You're going to augment the network with a number of independent dealers as well as Wabash independent dealers? I wanted to make sure I got the words right there. Obviously an independent dealer can sell anything. Are you gonna have some exclusive Wabash only independents, as well?

Well, we're growing to maintain our dealer branch. We'll probably increase in certain areas the number of dealers that we have that will sell our new product as well as service our customers. Really, where we find the challenge to us is in the full service capability. If you're not always busy, this is a -- you know, from a cost perspective, you make it in great business cycles and you lose your shirt during these times. Our challenges going forward is, 1, not to really cover that risk singularly. What we want to do is we want to bring on other people potentially who could have been competitors in specific areas for us, competitors not meaning trailer OEM, but a service center.

And take a look at them and make sure that they can do the type of requirements and repairs and warranty that our service centers can do, and then put them in the loop so that when we talk to our customers we can say we -- you know, we have 25 branches. However, we have 50 service centers around the country that can meet your requirements. It's just a better way of doing it. You know, an observation on my part is that the branch system makes money about maybe a year and a half to two years out of a business cycle. And then everything else is, you know, is a struggle. We don't want that. And, you know, in two years I don't want to say, Eureka! We've done it! And then two years later when the industry starts turning down again having to go back to the same excuses. I want our service centers and I want our branches to make money every day of the year, every business day of the cycle. And that's really what we're focused on right now.

Okay. Makes sense. How many independent dealers are involved with you now and how big theoretically might that ends up becoming?

I think we'll be in the 20 range on trailer sales.

Okay. And -- okay. I'll let someone else take it. I'll probably get back on later. Thank you very much.

Thanks, Tom.

Thanks, Tom.

Our next question comes from the line of Mike Garris with Robert W. Baird. Please proceed with your question.

Good morning.

Good morning, Mike.

I think I'll start off here, Mark, with you mentioned during your prepared comments the 150 million NOLs and the company continues to reserve for its deferred tax asset balance of about 70 million. My question is what needs to happen from the company's perspective to reverse out that valuation allowance?

We have to demonstrate a consistent earnings record. In other words, we have to be able to demonstrate that we'll be able to utilize the 150 million from a probability standpoint. So, this now marks two quarters in a row where we've been profitable. And so, obviously at some point in time we look to begin reversing that reserve on our tax provisions. So, I would expect, Mike, that if the industry does indeed continue to improve as forecasted by ACT, you would see Wabash begin to tax effect its results in 2004.

As far as reversing out the valuation allowance, at the end of the day is that your auditor's call?

No. It's management's call, which obviously the auditor has to agree with. But it's our -- it's our call.

Okay. Regarding cost of goods sold in the quarter, you identified the 1.3 million non-recurring item related to Road Railer. Is there anything else that we can expect in the upcoming Q3 quarter that might surprise us?

I'm not aware of anything at this point, Mike. The 1.3 for the Road Railer charge is actually down in Other.

Oh, it is.

Other expense. It goes to cost of sales.

Okay.

But at this point, again we continue to evaluate our carrying value of all of our used trailers and value those at a lower cost of market on the quarterly basis. But all in all, we believe we're in pretty good shape.

Okay. So, the 1.3 million just to confirm, that was in Other expense?

That's correct.

Okay. As far as just looking at the performance of the manufacturing segment, you saw a nice sequential improvement on the operating margin there. Can we expect to continue to see the sequential improvements to continue in Q3?

I think it would be certainly, yes, our expectation that we'll continue through all of Dick's and his group's efforts to continue to realize cost savings. So, as Bill mentioned, if indeed we're successful in continuing to see demand ramp up and therefore take our production rates up, then I think that's a nice combination.

I mean, I know that you don't want to give formal guidance, but can you give us appreciation of what type of sequential improvement you're targeting for Q3?

No, I think you really have to look at Q2 versus Q1, Mike, as a guide, gross margin in Q2 for manufacturing was 10.6. Q1 was 10.1. And so, again, that's on a 3% overall increase. So, I think that gives you some insight as to what we were able to accomplish.

Okay. Fair enough. Bill, just looking at the demand environment from a macro perspective, obviously you have a large concentration with the large national carriers, and the order announcement from U.S. Express is definitely a positive. When you look at some of your other larger customers, such as J. B. Hunt or warner, let's say over the next quarter or two what really needs to happen in order for you to start seeing an incremental pickup and demand from some of these other key customers?

I think, you know, I've said this all along, and you guys follow the truckers as well as I do. They're managing their capacity really, really tightly. And they're doing that in order to maintain the pricing or improve the pricing they have in the market. As you know, in the last uptick everybody was interested in how to gain market share. And I think that philosophy fell flat on its face. And I think this idea that they have now where they're managing the market in a much better way makes a heck of a lot better sense for them, and I'm certain it's showing in their profitability and their stock price. Really, I think the catalyst going forward is the economy itself. And how that progresses. I think what we're seeing from some discussions with some of these fleets is that they're becoming a little bit more optimistic about the future.

And as such, they're starting to lock in some schedules in the -- late in the third quarter and the fourth quarter to make sure that they can build or have trailers built for them. So, you know, we're starting to see it. It's not certainly a the dam breaking or anything like that. And please, you know, don't think that. But we are seeing some orders increasing. We're seeing people who have already placed in the fourth quarter and they're starting to up it. And it's incremental, and I believe that the reason that they're doing that now is not for -- especially I know some of these fleets, it's not for replacement. It is for growth. And I think that bodes well going into 2004.

Interesting. That's very helpful. Mark, switching over to the divestiture announced yesterday, can you give us appreciation of the sales and operating income in Q2 for these divested businesses?

I don't have that information, Mike. I can tell you perhaps and give you some color on it, on a revenue basis these two businesses would be probably 80 to 90 million annualized, and on an EBITDA basis this year the two businesses we would expects to be around 13 million.

And that's an annualized number?

Yes.

And so, the 80 to 90 in revenue and 13 million EBITDA, both of those are annual numbers?

That's correct.

Okay. I just had a couple more questions here. Looking at the retail and distribution segment, obviously a lot of commentary was given regarding plan restructuring actions in the near term for that segment. It was still unprofitable in the quarter, but the loss was less than Q1. If you back out the anticipated charge to be taken in that segment in Q3, is it still reasonable to expect this segment to turn to profitability later in the year?

From my perspective, I don't believe so. I don't think it will be that dramatic. As Bill says, we'll earn our way into this market segment. And I think from our perspective, we look for it to be profitable in calendar '04.

Okay. I guess, just a clarification here. When Tom was asking about the breakout of the manufacturing versus retail, the number of units, I just wanted to confirm that what you gave was the number of unit shipments and not unit build.

That's correct.

And Mark, you know I always ask for the build numbers. Is that something that you happen to have handy, or should I follow up with you on that?

Yeah, you can follow up. I think it's approximately -- it's the same, Mike. I just -- I'm out of town, and I don't have the production numbers with me.

Mike, we haven't been building stock. We've got enough stock in the system right now. That's what we're trying to get rid of. So, most of what the plant built was for orders.

Fair enough. And then, just a minor question here. What was the official diluted share count for the quarter?

The official diluted. I would say it's virtually the same as the first quarter, Mike.

Same as Q1?

Yeah.

Okay. I guess that's all I had. Thank you.

Thanks, Mike.

Our next question comes from the line of Bob Goodman with CRT Capital. Please proceed with your question.

Hi, guys. What are your plans for the preferred dividends on the preferred going forward?

Well, under our existing debt, we are precluded and restricted from paying the dividends. They are cumulative, however. We expect to close on our refinancing efforts this quarter, and therefore, we would expect to resume the payment of that dividend on the preferred.

As well as meet the deferred dividends?

On the -- yes, we'll continue to -- we would expect to resume payment of the preferred dividend.

Okay. Thanks.

Gentlemen, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thanks a lot. We appreciate it. We've got a lot of work to do. We've got a good distance from where we started, and we think that the future's certainly looking a heck of a lot better going forward. Thanks for your time. Appreciate it.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.