Wabash National Corp (WNC) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Wabash National Third Quarter Financial Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and 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 Thursday, October 23rd, 2003. I would now like to turn the conference over to William Greubel, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Kelly. Good morning. Before we begin, I'd like to make an important announcement. As with all of these types of presentations, this morning's contains certain forward-looking information, including statements about the company's prospects, the industry outlook, backlog 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's Third Quarter Earnings Call. I am Bill Greubel, CEO. In the conference with me this morning are Mark Holden, our CFO, and Dick Giromini, our COO of Wabash National Corporation. I'd like to welcome all of 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'll try to provide as much information as possible. At the conclusion of the prepared portion of our presentation, we will open the call for questions from the listening audience.

We have many great achievements to discuss with you today, which I believe concludes phase I of a very remarkable turnaround story. However, our sales came in short of our expectations in the third quarter. We had given indications during our second quarter earnings call that our sales would be flat for the third quarter. That turned out not to be the case. We had every belief that a major customer would award us with approximately 1,000 trailer order in the third quarter. This did not materialize. As such, our top lines and profitability fell short.

Our reported results for the third quarter was a loss of $29.6M, which included charges of 27.9M associated with various actions which Mark will discuss in more detail later. Make no mistake, this was a stellar quarter in our history. During the quarter, a number of accomplishments critical to our company were successfully completed. We had been successful in the sale of our major non-core assets, including the rental-leasing business, our wholesale parts business, and the pending sale of our finance portfolio. Other than some of our closed branch properties, which should be converted into cash over the next few quarters, we are not actively pursuing other asset sales. Mark Holden and his crew were extremely successful in recapitalizing our company. In addition to significantly reducing our debt burden, we have also significantly reduced our interest burden. We can now envision a day when we will be debt-free. We have bitten the bullet and made the necessary structural changes to our retail branch operations. This is a business segment that has historically done well in the top of the cycle but has underperformed during downturns in the cycle. I cannot allow that to happen and as such, this downsizing is necessary.

We have initiated a highly focused effort on the mid-size fleet segment of our industry. Although we intend to maintain and grow our relationships with our partners, I believe the mid-size fleet segment is ripe for our DuraPlate product, as the fleets have identified-- understood the total cost of ownership and will recognize and value the technology that Wabash brings to the market. We are pleased in our efforts to date, and we once again were reminded in the quarter of the advantages and disadvantages of being heavily dependent on a limited number of large fleets.

We have committed to further working capital reduction in 2003. In the third quarter, we made excellent progress in our trailer inventory management, with a reduction of 17M, quarter over quarter, net of the asset sales. We expect to further reduce this position in the fourth quarter.

Dick Giromini and his crew have successfully achieved our line-rate goals that will enable our Lafayette production operations to achieve five-day capacity of roughly 70,000 trailers. We have prepared ourselves well, with minimal capital, to meet the demand of the coming cycle.

In view of where we have been in recent memory, all of the associates are extremely pleased and proud with our progress and are excited to continue the momentum going forward.

As is typical of our earnings discussion, Mark Holden, our CFO, and Dick Giromini, our Chief Operating Officer, will discuss their areas of responsibility following the remainder of my comments, associated with the state of the industry, further comment on the retail branch operations, status of our efforts in the mid-market, and our first view of the business in 2004.

From an industry perspective, a long-awaited breakout in our industry did not occur as forecasted in the third quarter. Orders in July fell to their lowest levels in 2003, followed by lower orders in August, which were the lowest in the last 18 months. September rebounded, with an annualized net order rate of approximately 260,000 units. I would characterize this as a reflection of an economy with mixed signals. Please continue to remain cautiously optimistic about the economic recovery. As ton miles continue a positive trend, which is forecasted in the fourth quarter, we should see increasing trailer requirements going forward. There are other factors which I will discuss in my 2004 forecast comments later on.

Backlog to build ratio is currently 4.6 months. We will continue to see many of the trailer OEMs bidding to fill capacity. In addition, some of the OEMs build stock to time the cycle and are now forced to convert this inventory into cash. Going forward, if orders do not pick up, I would expect to see a general reduction in trailer production.

Year over year third quarter net orders for Wabash were up 32%. Year over year industry net orders were up 20%, for the third quarter. Third quarter production for Wabash was down 9.6% versus second quarter, at 9,100 units, as we flexed our labor force, which we discussed on the last quarter's call. Quoting activity has picked up over the last 30 days. We see this in all segments of the industry. Most of these requirements are for 2004. Our core customers continue to experience share gains, while at the same time they are trying to control capacity. Their fleet utilization levels continue to improve, closer to available capacity. For the fourth quarter, we expect to see flattish revenues versus the third quarter. Production on a daily average will be up somewhat, but will be tempered by seasonal shutdowns for Thanksgiving and Christmas. We still have slots available for December production.

Retail brand operations -- as reported in our second quarter earnings call, we stated that we would close 10 retail branch operations, which would cost between $2M and $3M. In the third quarter, we actually closed 12 branches and took a charge of approximately $2.9M. We have one remaining support facility to be closed in November. At this point, we will have exceeded our workforce reduction of 20% with annual cost reductions estimated over $5M. Our focus going forward is on enhancing our service reps to both national and regional fleets. As we have stated, we intend to augment our service capability with Wabash National Independent Service Centers. By year end, we intend to add a minimum of 10 licensed service centers and complete this effort by the end of the second quarter, 2004. Our focus on used trailers is also changing. Our mindset has been on the conversion of inventory into cash. I am pleased to report that our used trailer overhang is largely behind us. We are now approaching optimal branch inventory levels and have begun actively improving our mix and buying trailers for immediate resale. As a key market maker in this segment, we will test price increases on selected late model trailers in the fourth quarter.

Finally, we have begun a process to better manage our onsite inventory of new trailers, with greater emphasis on standard stock trailers. Beginning in the fourth quarter, each retail location will be allocated a minimum amount of stock DuraPlate, [TradePro], and [Reefer trailers]. The stock will be from a standard spec. We will inventory delivery-ready stock at Lafayette with the intent of same-day shipment. The plant will manage this inventory in a full system format. The net effect will be significant reduction in freight and inventory costs, product and production simplification, and the ability to meet our customer's timely requirements. As the cycle improves or wanes, we'll have the ability to make real-time corrections to inventory levels.

Mid-market status -- we are pleased with our efforts to date. We have augmented our sales staff with five new sales representatives who will focus on this segment. We intend to add another three later in the fourth or first quarter. Our goal as to obtain sales representatives that can sell value as opposed to price. Each will undergo extensive training in our Total Cost of Ownership model. Brent Larsen, our Vice President of Sales, Rod Ehrlich, our Vice President of Technology, and I will facilitate new customer entry and closure.

We have already seen some successes to date. We have initiated business with several mid-market companies that have not done business with Wabash before, such as [Celedon], Covenant, Boise Cascade, Jacobsen Transportation, amongst others. In addition, we have begun to gain more active lease participation in DuraPlate from such companies at TIP, Wells Fargo, and Extra. This is excellent as the lease and rental applications will draw more fleets into DuraPlate going forward. Our focus list is over 500 fleets with approximately a half million trailers in their inventory.

Looking at 2004, at this point in time, we remain optimistic about the industry in 2004. There are a number of positive influences that should greatly enhance the numbers going forward. The biggest is the continued positive growth in the North American economy. It appears that we will see positive-- continued positive GDP growth going forward. This will trigger a catch-up in the replacement cycle, as well as fleet growth.

Secondly, there might be a compression in the trailer replacement cycle over the next two to three years, as fleets manage their next pre-buy of trucks associated with the 2007 emission standards. Finally, I believe driver hours of service will add a positive tilt to trailer requirements, as fleets compete for drivers who currently only get paid for drive hours. In some segments, fleets will have to utilize greater drop-and-hook options. It will be interesting in a period of growing driver shortages how the fleets will manage this federal mandate.

ACT has continued to fine-tune their forecast for trailer-only builds as follows. In 2003, they are forecasting 181,000 units versus our forecast of 175,000. In 2004, they have improved their forecast somewhat, to 254,000 units, which is a 40% gain over 2003. And in '05, they've come down slightly, to 289,000 units, which is still a 14% gain over 2004. At this time, we are comfortable with 2004 trailer-only volumes in the range of 215,000 to 225,000 units. At these levels, we would expect to sell approximately 48,000 to 52,000 trailers. I would anticipate steady improvement in orders throughout 2004. Our success in the mid-market could favorably be affected and affect this growth estimate for 2004. Please note that these are preliminary numbers only.

I will now ask Dick Giromini to discuss our progress in operations. Dick?

Thanks, Bill. As you may remember from our past discussions, as we continue our drive toward operational excellence, we've 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.

In the area of safety, improvements we've realized are impressive and continuous. With the focused efforts and commitment from all our associates, the third quarter was the best in our history, with a recordable incident rate ending the quarter at a level fully 35% below the trailer industry norm. This marks the fourth consecutive quarter over quarter improvement. All told, we have achieved an 80% reduction in incidents over the past 15-month period, or a 400% improvement. I fully expect this trend to continue.

In the quality arena, we continue to make good progress. Our efforts are focused on three distinct fronts -- containment, control, and prevention. We've discussed in the past the measures we have implemented to contain, or in other words, identify and repair, issues prior to shipment to assure that our customers receive product to their expectations. In addition, we continue to focus our continuous improvement team efforts on conducting process variation reduction events, process control stations have been established in all manufacturing areas, and we recently applied continuous improvement pre-control practices in some of our operations to further support our First Pass Yield improvement initiative. Early results are extremely encouraging, with recent First Pass Yield performance exceeding 85%.

Finally, to enhance the overall effectiveness of new product introductions, we've introduced a structured new product commercialization process, in conjunction with a new Office of Program Management. Under the direction and guidance of the Commercialization Council, consisting of top, key leadership across all functional disciplines, the Office of Program Management will oversee dedicated program managers and the introduction of new products and technology to the marketplace. This will assure that we are expending our resources and efforts in the right areas, with the proper results. We will use the voice of the customer to help guide our decision-making to assure that we are answering their needs, relative to new technology and product enhancements.

The area of delivery, we continue to operate or near 100% schedule attainment on a consistent basis. We are now taking the next steps to further enhance our customer satisfaction levels, through a complete re-engineering of our transportation planning process. Employing continuous improvement techniques, upon full implementation, before the end of the current quarter, we will be able to improve the response time for trailer deliveries to our customers by up to three weeks.

Productivity enhancement has continued to be a shining aspect of our turn-around efforts. Records continue to be established, broken, and then re-broken again and again. For September, the manufacturing team achieved an overall 14% productivity gain from the record levels that had been established during the second quarter. On a cumulative basis, since July of last year, we have now realized a nearly 50% improvement in productivity throughput when measured on an hours-per-unit basis. We're today producing 16% greater volume per day at higher quality levels, and on time, with 1,200 less associates than last year.

While September produced record particularly levels, we did realize some challenges during July and August, as we completed the ramp-ups of our new Freight Pro and container lines. Additionally, the lower than expected volumes during July and August introduced some short-term inefficiency, as we flexed our lines down, and then up again.

Our cost reduction efforts continue to impress. Since we began our mission in mid-2002, the team has successfully generated cumulative savings exceeding $50M on an annualized basis. Should volumes improve in the coming quarters, we will see the impact of our efforts increase even more. We have now completed well over 200 formal, continuous improvement events and continue these weekly.

To wrap up, I continue to be very pleased with our progress to date. The manufacturing team remains focused and committed to achieving benchmark status in all our areas of focus. I believe we're already there in a couple of areas, and are closing in quickly on the others. We will continue to stay the course.

Now I'll turn the discussion over to our Chief Financial Officer, Mark Holden. Mark?

Thanks, Dick. I believe the story for the third quarter is perhaps the balance sheet as much as it is the income statement. There were a lot of moving parts and pieces in the third quarter. I will try to give as much clarity as possible as to what are the results from operations, and what represents charges taken during the quarter. More importantly, we can say that Wabash is no longer a distressed company, financially, and that our focus has turned to running the business, building trailers, and making money.

I'd like to review the following -- first, the third quarter results. Secondly, our recapitalization of the company. And thirdly, our earnings model, as we look going forward.

First, from a third quarter results standpoint, sales were 215M on 9,900 units invoiced. Bill discussed our branch restructuring and closing of 12 locations. These 12 locations accounted for approximately $1M of revenue during the third quarter and $150,000 of operating loss. Looking at it for the same period a year ago, sales from these 12 locations were $7.1M in the third quarter of '02, operating loss was 600,000. Year-to-date, revenues from the 12 locations were $4.9M, and just under $1M operating loss. The same time a year ago, the nine months ending, revenues for the 12 locations were 23.9M, and an operating loss of 2.5M.

Our reported results included $27.9M of charges associated with refinancing, asset sales, branch closures, et cetera. Trust me, it's a real challenge to explain for you our Q3 results, given all that took place in the third quarter, but nonetheless, here it goes.

First of all, from a refinancing standpoint, we incurred debt extinguishment cost of 18.9M. It related to our [make-good] premiums on our senior debt. We also wrote off approximately $2M of deferred costs related to our old debt cost. The $2M is in our interest expense line item, and obviously the $18.9M is referred to as debt extinguishment costs on the P&L, totaling $21M for our refinancing efforts.

Secondly, from an asset sales standpoint, we had closing charges of $1M, related to the sale of Apex and our wholesale parts business. The $1M is in ``Other.'' Also, we had an $800,000 loss on the sale of the retained assets from this business; the $800,000 is in our gross profit -- totaling $1.8M of charges associated with our asset sales.

Thirdly, the branch closings -- severance out-of-pockets costs for our branch closings totaled $1.9M, $200,000 of which is in the gross margin, $1.7M of which is in SG&A. We also incurred roughly $900,000 in cleaning up associated branch inventory; $900,000 is in our gross profits -- totaling $2.8M of charges and costs related to our branch closings.

In the third quarter, we also incurred $1M of developmental costs related to our high base rail trailer, and a developmental agreement we entered into. The $1M flows through our gross profit margin, within our manufacturing segment.

From there, other miscellaneous charges in the third quarter related to principally write downs on assets held for sale. Our Scott County facility, which is held for sale and has been idled, was $500,000. McAllen, Texas, property which was sold was $225,000, and other miscellaneous cost of $600,000, totaling $1.3M of other charges in our P&L statement for the quarter.

To summarize all these charges, $2.9M of the charges flows through our gross profit, 1.7M flows through our SG&A, 2.4M is in ``Other,'' 2M is in the interest expense line, and 18.9M is referred to as debt extinguishment costs. Again, totaling $27.9M of charges associated with the various activities that we had previously talked or previously announced.

On as as-adjusted basis, our loss for the quarter would have been $1.7M, the $29.6M loss reported, less the $27.9M of charges taken, or approximately eight cents a share. Our $10M shortfall in the top line would have accounted for roughly four cents a share.

Turning now our top line sales, were $215M, as I mentioned, on 9,900 units. Containers and chassis accounted for roughly 10% of our unit sales in the third quarter, or 5% of our revenue, so we saw a fair amount of effect on our top line from a product mix standpoint. Retail and distribution sales were $69M, and included 1,000 units. Manufacturing sales were 153M, and announced for 9,200 units, with 300 units being eliminated in consolidation, or $6M.

From a product line standpoint, new trailer revenues were $162M, versus 173M last quarter, a slight decline in the average price per trailer, again reflecting the mix change. Used trailers for the quarter, revenues, were 16.5M on 3,100 units, versus 17M in Q2 on 3,300 units. Our parts and service revenues were 27.1M, versus 30.3M in the second quarter. Other revenues, including our leasing and finance businesses, were 9.5M versus 10M in the second quarter.

Turning now to our gross margins in the quarter, gross margin was 7.4% for the third quarter, compared to 10% in the second quarter. Again, as a reminder, gross profit includes 2.9M of charges in the quarter. On an as-adjusted basis, our gross profits would have been 8.7%, below-- again, below second quarter margins. As a result of the effect of flexing our labor force, that Dick talked about, and our revenues shortfall, we realized a gross profit margin on an as-adjusted basis of 8.7%.

SG&A totaled 15.3M in the quarter versus 13.9M in the second quarter. Included in the SG&A, again, is 1.7M related to the branch closings. We expect our SG&A to continue to benefit from the resolution of various legacy issues as well as a reduction of professional fees associated with the improved capital structure.

Interest expense and other was 8.7M in Q3. Within interest and other is, again, the write off of the old deferred debt cost of 2M. Also classified below the line is our debt extinguishment cost of 18.9M, totaling $21M related to the refinancing. In addition, below the line, classified as ``other,'' is the $1M loss on the closing of Apex. Property write downs on assets held for sale of 1.4M, and foreign currency losses of $300,000.

As you can see from the earnings release, we did not tax-effect our earnings for the quarter. The company currently has approximately $150M NOL. As a result of the amount of our past losses, we have fully reserved for this tax benefit on our balance sheet with approximately $70M tax reserve. To the extent that the company is profitable in the future, this reserve will be reversed to income as the probability of utilizing this tax benefit becomes greater.

Turning now to an EBITDA basis, adjusted EBITDA for the third quarter is $3.4M. We have the 15.5M of EBITDA as stated in the earnings release. The 15.5M includes the 18.9M of debt extinguishment cost, which then gets you to an adjusted EBITDA of 3.4M for the quarter. And included in the 3.4, however, is still approximately $7M of the other charges I spoke of related to branch closings, asset sales and so on, of 7M.

Depreciation and amortization totaled 5.8M in the quarter. Our capex for the third quarter was $200,000, bringing our year-to-date capex to 3.6M. Backlog at the end of the third quarter was 192M; compares to 220M at the end of the second quarter, and 190M at the end of the first quarter.

As Bill talked about, we saw quite a bit of nice improvement in the balance sheet from a working capital standpoint. Inventories at the end of the third quarter were 113M. Again, some of the decrease is attributed to the sale of the assets -- our wholesale parts business. We saw a related $9M reduction in inventory from that sale. However, we also experienced reduction in most of our other-- all other inventory categories -- Raw material, in-process, finished, and used trailers.

Used trailer inventory stood at 15.8M at the end of the third quarter, or 3,000 units. This compares to 24M, or 4,000 units, as the end of the second quarter.

From a liquidity and financial condition, our total debt at the end of September was 293M; that includes both on and off balance sheet. This compares to 367M at the end of '02. As you may recall, we have set the goal of over $100M debt reduction in 2003. Year-to-date, through September, our total debt reduction is approximately 74M, including off balance sheet debt. Pending the $12M finance portfolio sale, we have another approximately $8M in assets held for sale, principally branches, along with Q4, which is seasonally our strongest collections quarter, we clearly expect to achieve our goal of $100M reduction in debt.

Now I'd like to turn to our recapitalization efforts during the quarter. During the third quarter, we completed the refinancing of substantially all of the company's outstanding indebtedness. This consisted of principally three transactions. One, the issuance of convertible notes. Two, asset sales. And three, our new bank credit facility.

As follows, we closed on August the 1st, 2003, on a $125M, 3 1/4% convertible senior unsecured note offering. The notes are convertible at $21.20, with a no-put, no-call. Five-year notes, which we marketed to a targeted investor base of fundamental institutions. The notes would be equivalent to 6.3 million shares of the company's common stock if converted. Ultimately, we believe these will be converted into equity, which will serve as a source of permanent capital for the company.

On September 23rd, we completed the sale of substantially all the assets of the rental and leasing and wholesale aftermarket parts business for $55M in cash and approximately $5M to $10M in retained assets. Those proceeds from the sale were used to pay down debt. The retained assets are now being monetized. Also, on September 23, we closed on a new, $222M, three-year bank credit facility, led by Fleet Capital, with National City as syndication agent. As a $222M facility, 47M is a three-year term loan, priced at LIBOR plus 275, and the other 175M is a revolver, priced at LIBOR plus 250. At closing, we drew down approximately $88M on the $175M revolver. We were able to put together a bank group of 80 institutions that we believe have the ability to accommodate any of our future capital needs over the course of the next three years. Under our new bank credit agreement, no covenant testing is required for the third quarter financial reporting period. Testing will begin with the fourth quarter results.

The new covenants will be tested on a quarterly basis and consist of the following three requirements. One, maximum leverage ratio of no greater than 4.5 times on a trailing 12-month basis, ramping down to three times by June 30th, 2005. For purposes of this covenant, leverage is defined as the total senior secured debt to EBITDA. Senior secured debt, however, does not include the convertible bonds, as these bonds are unsecured. EBITDA does not include the historical performance of our rental, leasing, and wholesale parts business. Also, EBITDA for the purposes of the bank agreement adds back all non-cash charges, including all charges related to the refinancing, any asset sales, and the retail branch realignment.

Second covenant is a minimum fixed-charge coverage ratio of greater than 1.0 times, ramping up on a quarterly basis to 1.25 by September 30th, 2004. Fixed charges are defined as the scheduled and required principal and interest payments during the period. Maximum capital expenditures, which is the third covenant, cannot be greater than $10M during '04, and then $15M thereafter. Obviously, we are quite comfortable with the level of these covenants.

The combination of the convertible notes, asset sales, and new bank credit facility allowed the company to refinance over $300M of debt during- or maturing in March of '04, with an average interest cost of over 10% to an average cost of less than 4%, with a maturity of three to five years out. We estimate the interest savings to be over $28M annually, with a reduction in the total debt service cost -- i.e., principal and interest, approximating $90M annually, from $120M previously down to $30M annually currently.

We recently announced plans to sell substantially all of our remaining finance portfolio, which was built up during the 1990s and peaked at approximately $100M. With our focus on earnings and cash flow, these assets simply are not necessary to our operations. In addition, the equipment that was financed with these contracts was highly specialized RoadRailer equipment, which Wabash has an approximate $4.5M residual guarantee position on at the end of the term. The underlying debt that was used by Wabash to finance this paper was costing 8.5%. Monetizing these non-core assets will eliminate future P&L exposure and eliminate interest expense that is 500 basis points higher than our current cost of debt. Proceeds will be used to pay down debt.

Obviously, we are quite pleased with our ability to complete our refinancing efforts six months ahead of schedule and at a rate and structure few thought possible. More importantly, while we are encouraged by the results of our first phase of the turn-around story, we have become more confident as to the opportunities that lie ahead. As we look to the future, I would like to briefly give you a perspective on what we believe is possible from an earnings and cash flow standpoint, based on our improved operations, the asset sales, and our refinancing, coupled with an improved demand environment.

As Bill mentioned, we believe 2004 will indeed be better than 2003 for the industry and for Wabash. Currently we estimate our incremental contribution margins on any trailers over 40,000 units, which is our current run rate, is 20% plus. At 50,000 units, the company would be at approximately $1B in revenue, including our used trailer revenues and parts and service revenue, and would have capital expenditure requirements of no more than $10M for the foreseeable future. We believe this would result in approximately $80M to $90M in free cash flow, with no taxes being paid in '04 and most of '05, as we have $150M NOL. We will continue to aggressively pay down debt with free cash flow. If the convertible notes were to convert, we believe the company could be debt-free sometime in '05.

Thank you, and I will turn it back over to Bill for closing.

Thanks, Mark. As we seem to say each quarter, and I'll quote, ``It's been a very hectic but fruitful quarter. We've set out some very difficult tasks and have pretty much hit all of them.'' End quote.

It's extremely difficult for me to convey to you what a breakthrough quarter and year this has been. Please understand as we close out the first phase of this turnaround we have focused our energy on structure, process, working capital, and the complete recapitalization of the company. We needed to make this excellent progress to ensure our long-term viability as a leader in the trailer industry. I take full responsibility for the top line miss in third quarter. As we move into phase II, our focus moves to top line growth and earnings. Much of this effort has been planned, laid out, and is already in process. This becomes a natural transition for our associates, and allows them to continue the momentum already in place. We stand ready to take advantage of this cycle; the investment of time, energy, and capital has been very manageable. We are very excited about our future going forward. Thank you for listening, and now I'd like to open it up, Kelly, for questions.

Thank you. [Operator Instructions] The first question is from the line of Tom Albrecht with BB&T. Please go ahead.

Hey, guys. You know how to throw out some numbers there, I'll tell you what!

We didn't want you being bored, Tom.

Well, that's right. I guess in some of this, you probably said, but in writing so fast, I just want to clarify some points -- first of all, on the production during the third quarter, I thought I heard two different numbers. I thought I heard 9,100, but then 9,900? What's the difference in those sets of numbers?

The difference, Tom, is production, which is the number of units built, was 9,100.

OK.

The number of units invoiced, or quote ``sold or shipped,'' equated to 9,900. So in essence, we drew down the difference, or 800 units, out of inventory.

OK. And then the retail number of 1,000, that's above and beyond that 9,100, or is that a--

No, that's a sales number.

And that's sale of new trailers and so that would be part of that production number, or part of the sold number, or part of the-- or would I need to add the 1,000 to the 9,900?

It's in the 9,900. You know, we-- after elimination, again, I'll just give you the exact numbers. New manufacturing had 9,200 in terms of invoiced, Tom, retail distribution had 1,000. That totaled 10,200, and then we eliminated in consolidation 300 units, so that's how you get down to the 9,900.

OK, OK. Bill, what kind of production rate are you running at in October? I know you stated that Q4 sales are likely to be comparable to Q3 at the manufacturing level, but between what sounded like was outstanding September recent orders, of which, again, I acknowledge many are '04, but what sort of a production number-- I guess is October really going to be really strong, and November strong, and then December a big falloff?

Yeah, I think that's pretty much it. We're having a fairly good October right now. And two things are happening. You know, Dick and his crew have got some pretty good numbers coming up, as far as production with lines that are currently up. Secondly, as Dick said, we're really focused on turning some of the-- at this point, we're producing for sales, we're not producing any stock, but at any given time during the month, and this goes back for quite a few month, we have roughly in inventory 3,000 trailers that are sold but not shipped, so we haven't been able to recognize revenue.

What we're doing, and Dick is leading this effort, instead of producing a trailer, and in the past, when we really haven't been that wary of when it's actually come out, you know, it then goes into stock and then gets set up to ship. Now what we're doing is we are alerting our shippers up to three weeks in advance that this particular trailer will be coming out and we're scheduling it for delivery or for shipment. What you will see probably in the fourth quarter is we will reduce our inventories basically by bringing that roughly 3,000 trailers that we have in sold stock down. But to answer your question also, you're correct -- we'll have a relatively, I believe, good October. We'll have a few days of production out in November, with Thanksgiving, and then in December, we have roughly five to seven days at the end of the month that we will be down also. At this time, we're not scheduling production during that time, so you know, on a daily average, our production quarter over quarter, will be up, but there will be fewer days.

And also, Tom, I would remind everybody that in the fourth quarter, we will no longer have our wholesale parts business and our rental and leasing business, so from a top line standpoint, that's roughly $20M of revenue that won't be there in the fourth quarter.

Uh-huh, right, yeah. It was helpful to have those pro forma numbers, so I appreciate that.

On the Freight Pro, how much, roughly, did you produce during the quarter? I think this is the first meaningful production; Q2, the line was built, people were trained, but you actually built some Freight Pro trailers in Q3. What was that approximate number?

Yeah, we're roughly doing 14 to 15 a day, and we're up to 16 to 17 a day right now.

Where do you see that going? I mean, I think you've talked about it being a potential 15,000 unit product, but that's not necessarily next year, I don't think, you're referring to.

No, but that is just one shift, and what we're doing now is Freight Pro is selling well at one shift. The challenge for us is, as you know, Tom, is, I don't want to commit a second shift until I have enough backlog to do that, and we're working on that, as well as line one.

So do you-- what do you view as semi-realistic for '04 for Freight Pro? Would it be 8,000 units? Would it be something significantly different?

I think we'll eventually get to a second shift, and if the industry continues more towards the ACT numbers, we'll get into probably overtime on two shifts, but not into a third shift.

Now, the customer you referred to, you thought would order 1,000 trailers for third quarter production, didn't come through -- have they come through for a later time, and/or why did they hesitate in placing the order?

Well, I'm not going to say the customer; I'm sure you know it, but we have 300 that came in on a order in the fourth quarter. That customer continues to have issues associated with, our estimation, of the value of their fleet for trade-in, and you know, I think what they're doing is making a decision now how they want to handle that.

Right. I think west on that. A couple of other things here. The advantage of going-- the disadvantage of going first here, when there's so many numbers. I guess I wanted to clarify -- $2M of deferred financing cost, why was that lower? At the end of last quarter, you had suggested that it would be more like $4M, was in your press release. It seems to be that would be a fairly set amount. You know, you've got these finance costs that have been deferred, and they really shouldn't change.

Yeah, it really-- it gets down, a little bit, Tom, how we split out for the deferred amortization cost and the [make-hold] premium.

OK.

OK? Between the $21M-- you know, we put an announcement that we-- at the end of the day, we thought it would be 22M. It actually came-- ended up, by the time we cut the check, being 21M, so right there is $1M.

OK.

OK? And then-- I'll just tell you, this really gets down to how ended allocating between-- under GAAP what's considered interest expense versus debt extinguishment, so--

OK. And then on the sale of the last parts of the finance portfolio, will there be a Q4 charge for that, because I think it was worth about 15M, and you're selling it for 12M. Will that be a Q4 impact?

Yes, Tom. Thank you for reminding me -- that will be-- in our press release earlier, we said it would be about a 3.5M charge, that we believe will close here in the very near future, and upon closing, we will recognize a $3.5M charge.

OK, I'll tell you what, I'll hop off and let somebody ask while I gather my thoughts a little bit more, but thanks for the update.

OK, Tom.

The next question is from the line of Mike Harris with Robert W. Baird. Please go ahead.

Bill, I was wondering, you mentioned in your prepared comments, the new hours of service rule, scheduled to take effect in January of '04, and mentioned the potential for an increase in drop and hook activity. Just for the benefit of everyone on the call, if you can just walk through your logic as to how that could be a positive impact on trailer demand during this next cycle here?

Yeah, I actually think there could be some big, fundamental change within the industry if this law continues, and certainly it's going to go into effect. I think the story isn't over just yet on that, but really, my thinking is this -- I was talking with some folks from Schneider, and they said roughly 50,000 to 75,000 drivers have left the industry since 1999, and when you really look at the driver population, I really believe if drivers could get a better job, they would. You know, certainly a good portion of them would move to manufacturing or other source of employment, mainly because they can get home on a very timely basis.

What you're going to see in my mind is that the fleets are going to be competing for drivers, and one of the ways of doing that is either you increase their revenue, and their wages, or two, you give them more hours to drive, because they only get paid for moving the equipment, they don't get paid for sitting with it. And so, as you see these fleets go into that, some of them that we've talked to, and we've talked to all the major fleets that we deal with, every one-- I just at the ATA, and that was a pretty good source of conversation. I think what you're going to see is some fleets are going to expand their fleet and in order to maintain their drivers and grow as they grow this economy, they're going to have to drop more trailers off at some of their shippers and then they'll drop them off unloaded, or loaded, and then they'll pick up, loaded or unloaded, trailers and then proceed. I don't think that the shippers are going to stand by and let the fleets charge extra money for the time incurred of just parking a trailer and waiting for it to be loaded and unloaded. I think that would be premature right now, to assume that those type of increases would go through, so therefore, you know, that would be paid to the driver for basically sitting.

OK, well that's very clear and very helpful and I appreciate that. Another thing regarding the issues that could impact you either positively or negatively, trailer demand during next cycle, you know, we've been hearing a lot about improved trailer tracking technology and more carriers adopting this and becoming more efficient in managing their fleet. Just wanted to get your thoughts on that as well.

Well, I think they've got to do it. I think there's some pretty good successes out there. J.B. Hunt certainly has had an exceptional success with trailer tracking. You're seeing Schneider now making a big move with Qualcomm. I think U.S. Express has done well also. And there's a variety of other big fleets that are using that.

From our standpoint, I think it's-- the technology is needed, it's going to happen. Again, from my standpoint, in the big guys, this is great. We'll be part of that change. But in the mid-market, where we don't have much business right now, we'll bring that technology to them, in any manner or form that they would like, but I don't think it's-- it may affect total industry requirements that I think, net net, with the driver shortages and driver hours, I don't think you'll see much of a change on an industry basis in the next couple of years. But from our perspective, there's a lot of good customers out there that haven't used DuraPlate and also haven't put in trailer tracking devices, that will look for our product.

Also, Mike, this is Mark -- one could argue that most likely the more sophisticated carriers will be the ones to make full utilization of the technology. They're our partners, the large carriers, and to the extent that they are able to continue to drive down their cost and become more-- higher service level, they'll gain share. So even their trailer to tractor ratio may dip, their share gains will require them to buy new equipment, so net, on that, just that core group, I would, in my opinion, is probably neutral.

Yeah, I think when you look at hours of service, that's going to more than offset the potential for trailer tracking.

That's insightful. I appreciate that.

Just switching gears here a little bit here, Bill, you made the comment that Wabash is essentially complete with phase I of the turnaround, and my question is, what needs to happen, going forward, in order for you to give formal earnings guidance? And you did give some guidance for '04 regarding, you know, industry demand and contribution margins and free cash flow, but you know, when are you going to stick your neck out and give a formal EPS range for either an upcoming quarter or full year?

Generally when I do that, Mike, you tend to snip it off, but what we will do is we will be going in front of the board in December with our budget for 2004. We will also go in front of the board and discuss with them what type of earnings guidance that we'd like to give, and I will wait for a board decision to either to change that, or give us approval to go out and do that. But we would certainly believe that now we are focused on earnings, a lot of the legacy and skeletons in the closet-- I mean, we're running out of closets, thank goodness, should be in a position next year to offer certainly something more than we just offered today.

OK, that's reasonable. Regarding the retail segment, obviously, a lot of activity this past quarter, and you closed 12 branches, you divested a pretty meaningful amount of revenues. You gave us good pro forma information. But you know, I just wanted to ask -- when do you expect that segment to turn back to profitability again, assuming that demand continues to improve gradually here?

Yeah, probably the majority of our branches now are making money. We have probably five or six that we have on a hit list to really focus on, to either turn them around or potentially close them in the future. But I would think certainly in '04, we are going to have profitability coming out of those branches. What we have done with the cost savings that we've just incurred by closing some of the branches that have been underperforming, we will get close there very shortly in 2004.

OK. OK, great. I had just a couple more questions here. Mark, you already alluded to, based on Tom's question, that there should be a charge of about 3.5M in the Q4 quarter. Considering all the other charges this quarter, is there anything else that you can think of that would be classified as as non-recurring item that we should anticipate for Q4?

Great question, Mike, and obviously businesses are dynamic. At this time, certainly, I think we've done the structural changes or the completion of phase I, as Bill has discussed, so from our perspective, the answer is no -- not that we can foresee at this point. But again, you know, farther out, there's still work to be done, and I think what you'll see us do is rather than manage our business quarter to quarter, from a EPS standpoint, I think you'll continue to see us make decisions for the long term good of the business.

And then last question here -- obviously, when we get off the call, have more time to analyze all the items, to try to get a normalized margins for the quarter, but can you-- do you have handy what you view as the normalized gross margin in the manufacturing segment for Q3?

No, I don't, Mike. I-- again, pulling out the charges, we get to 8.7. I will tell you, though, most of the charges are related to retail, but there was, as I mentioned, I believe about 1M of charges that flowed through the gross margin line for manufacturing division in the quarter, so there's roughly $1M of charges in that segment, if you will.

And so bottom line, if you-- when you strip out all these non-recurring items, and then you start with that base margin and then consider the 9% sequential decline in build, if you assume build is flat, Q3 versus Q2, does that get you back to the margins you reported in Q2, or do you even have better margins in Q3, if you have flat build sequentially?

Depending on the mix, to answer your question, we most likely would have better margin. But again, in the third quarter, we did have a much higher concentration of containers and chassis in the mix, and so I would tell you, if we kept that same mix, you probably wouldn't see us higher, but if we would have a more normal mix, we'd probably be higher.

I'm sorry, what was the average selling price for your trailers in this quarter, and I know there is mix issues. Do you have that?

Yeah, it's roughly 16,400.

OK, great. That's all I had. Thank you.

Mike, just on the containers, we've gone from-- what, Dick, 16 days--

We were doing 12 a day, and we're down to four a day now.

Did you hear that, Mike?

Yes. That's helpful. Thanks.

The next question is from the line of Jeffrey Kaufman with Fulcrum Global Partners. Please go ahead.

Thanks. Hey, guys. So, after those two, what's left to ask, I guess? Let me follow up on two questions I heard. If I attack it a different way and I pull all of the-- let's not call them extraordinary, let's call them ``unusual'' or ``restructuring'' related charges out, I'm tentatively getting an operating income figure for the total company of about $5M. Now, I think you kind of just answered it, but let me attack it a different way -- how should I think about that in terms of operating profits, driven by the manufacturing business versus the retail business, because you said roughly $6M in charges hit the retail operating profits. I know you think of it more in terms of gross margin, but this way, I incorporate the SG&A issues as well.

Right, actually, I was going to answer, Jeff, we actually think of it more in terms of an EBITDA margin.

OK.

As we look forward, when we-- internally, we've set our goal in a normalized build environment for the industry a target of an EBITDA margin of 10% to 12%. That, I can tell you-- we are very goal-oriented, and in fact, we, as management, will be compensated based on goals, and so, you know, I think as I look at-- you know, the quarter is one thing. There's a lot of noise in the quarter, and to try to make sense of it all, you know, I've tried to give you as much detail as possible without giving you my general ledger.

Right, I understand, a lot of detail. Thank you. OK, different question -- you know, previously, I think you've thought out loud that the company could do as much as 40,000 units this year, in total. Now you mention the 1,000 units that you hoped would come through; you've got 300 of them, there's still 700 out there. Is it fair to assume, then, that you're still thinking that we're in the 39,000 to 40,000 unit range for the year, or has that thinking changed?

Oh, that's still there.

OK, very well. That's all I have. The other two guys hit most of the rest of the questions. Thanks.

OK, Jeff, thank you.

[Operator Instructions] The next question is from the line of [Jeff Kutchel] with [Trafla & Company]. Please go ahead.

Hey, guys, congratulations on the progress you've made so far. I just have a quick question regarding some of the numbers Mark was going over at the end. He mentioned free cash flow of 80M to 90M on a 50,000 build rate -- is that correct?

That's right.

And that's after capex of 10M, so that implies operating cash flow of 90M to 100M. What kind of benefits do you guys think you could realize in working capital next year? Given the fact you've come so far, what more can we expect to see?

Yeah, I think next year, again, depending-- well, at 50,000, if we complete our working capital accomplishments for the remainder of this year, then I would say we might see a slight investment next year in working capital. Originally we foresaw some further improvements next year of, say, 10 to 15. I think those have been accelerated now and brought into this year, such that we-- you might see us invest another 10M to 15M in working capital next year.

OK, and what would be depreciation and amortization for next year?

The depreciation and amortization for next year is about 20-- I would say a range, I believe, of about 18 to 20.

OK. OK, great. Thank you.

Thank you.

The next question is from the line of Tom Albrecht with BB&T. Please go ahead with your follow-up.

Hey, a couple of things I wanted to clarify. You said, obviously, you closed 12 branches. Did I hear you've got eight branches for sale, and did that mean that you actually sold four of the 12, or four not even sellable?

No, I said we have eight-- I'm sorry, eight branches, properties, for sale. We did close on a few in the quarter, Tom. And I believe one or two of them were leased facilities that we exited.

Yeah, I think we have four or five properties left.

OK, OK. All right. And then do you have estimated proceeds? I mean, are they material?

Actually, the eight was 8M, in terms of estimated proceeds related to the assets held for sale, other than the Amtrak-- or the finance contract portfolio, which is 12M. So in total right now, of the assets held for sale, we're looking at about 20M in proceeds.

OK. And then, let's see -- you mentioned the shortfall in earnings and revenues. I wanted to get that figure again -- what would the revenues have been, and you know, profits would have been, had those 1,000 trailers-- was that about 15M on the revenue, and I didn't hear if there was a bottom line estimate?

Yeah, it'd be about $10M to 15M, perhaps, on the top line, and again, assuming incremental contribution margin would have put us over 10% contribution on those, so on an EPS basis, that's roughly four cents a share.

OK, all right. And then where did you finish Q3 at in terms of employees, full-time and temp and how does that compare with Q2?

I think you're going to have to call us on that one. We're sitting in a conference room outside of a suppliers conference that we're having right now, with all of our suppliers, so we don't have some of that information, Tom, but we'll get back to you on that.

OK, yeah, that's fair. That's it, then.

Thanks, Tom.

OK, thank you.

[Operator Instructions] The next question is a follow-up question from the line of Jeff Kutchel. Please go ahead.

Hi, just to continue on that previous question -- so with D&A of 20, working capital usage of 15, capex of 10, I mean, that implies a net income of number of like 90M, if I exclude any other kind of charges. Am I going about this the right way?

I'm sorry, what was your--

So, if I have free cash flow of 80M to 90M, capex of 10, that implies operating cash flow, let's just take the midpoint, 95M, but working capital usage of 15, and then D&A of $18M to $20M, so that-- you know, if I kind of work backwards, I'm getting a net income number, excluding some of the other little extraneous charges, or rather cash usages, of about $90M.

And then interest will run about 15M, roughly, 14M to 15M, and then obviously at some point we may-- we will begin to tax effect our earnings and if we're at those types of profitability levels, we would probably be tax-affecting that income.

OK. But I mean, that's the number I'm getting for next year.

Yeah, and although we'll be providing a tax provision, we wouldn't be paying it, so-- but anyway, you're missing interest and tax.

OK. Thank you.

The next question is from the line of [George Mellis] with Lord Abbott. Please go ahead.

Good morning. I understand line one is still operating at one shift.

That's right.

But what would it take-- how do you think about, and right now, you're drawing down inventory. What would it take for it to go back to two shifts?

We're currently working on that right now. Our guess is at this point, some time in the first quarter, we will start increasing overtime initially and then going to a second shift on line one. As we're more successful in the midsize market where we are pushing heavily in DuraPlate, I think, George, we'll get there sometime in the first quarter.

Also, as you said, we are drawing down inventory at the branch level right now. We have commitments on almost all our DuraPlate product, and in late November and in January, we will start to produce very small quantities of DuraPlate to support the pull system that we're trying to put together. So in November/December, we'll produce roughly 225 trailers and then start a process of pulling from that on a monthly basis. But as far as line one, second shift is concerned, it's probably about three months away.

The other thing that you need to understand is that line one and line two, effective in July of this year, we bumped them up as far as rates are concerned. So I've got a double whammy here -- I'm running faster on the three shifts that I currently have and when I bring that fourth shift up, we include the line one and two together, I've got to run-- I've got to get a significant amount of orders, so you know, where Tom Albrecht was saying ``Your production is up,'' it is up, because we're running faster in the fourth quarter then we did in the third.

OK, great. And one more question on the I think you said your sold stock inventory was roughly 3,000 units. Are those units that you've-- invoiced already?

Yes.

George, one point of clarification -- we have invoiced them for purposes of starting the meter on cash collections, but for financial statements, we have not recognized them. So in effect, in our reported results, they're still sitting in inventory and we do not recognize them until they are shipped.

OK.

It's where I try to convert them into cash.

OK. That number seems quite high, that 3,000. I'm sure it was higher before, so I'm sure you've brought it down. How low could that number-- because in a way, it means like it's almost a month of production that's basically in finished good-- in finished inventory, right?

Yeah, we've set some goals to reduce it, and we've been pretty good at getting to the incremental reduction we're looking at. We have a significant opportunity going forward, and it's something that we're very aware of now, because as we ramp up production, I don't want to ramp up this inventory that's sitting there, waiting to be shipped. And as I said, Dick has got a good handle on this right now. We're adding a production-- or actually a shipment, advanced planner, to our staff, to take advantage of this. One of the problems that you sometimes have, and we incurred this actually at the end of third quarter, is all of the shippers were quite busy, and sometimes where we have to drop, or plan to have our customers pick up their own trailers, they were just too busy to do it, and we didn't have enough independent companies to support the deliveries that they wanted. And that's why we needed Advance Planner and that's why we're really working hard on this, because we don't want this inventory to grow, and as you said, I think there's some good opportunity to reduce it, probably by 1/3 going forward.

OK, how much was it at the end of the-- how much did it change, quarter versus quarter, that number?

It would gone down about 800 units, George.

So it was roughly 3,800 at the end of Q2 and 3,000 at the end of 3Q?

Yeah, give or take 100.

Yeah.

Give or take. OK, thank you very much.

The next question is from the line of Jeffrey Kauffman from Fulcrum Global Partners. Please go ahead.

OK, thanks, and this call is getting kind of long, so I'll keep it brief, but I just wanted to double back here. Two questions -- let's talk about hours of service, just briefly. You comments echo what we're getting when we start talking to fleets and customers out there about what the impact is going to be. Do you get the sense that people are going to wait for January and see how the changes are affecting their utilization efficiency before they start to make a commitment to increasing trailer equipment, or is your sense talking to customers, talking to people in the industry, that this is clearly the goal they're going to have, to increase the pools of trailer equipment and we should start to see those orders coming in fairly soon, given the four- to five-month backlog?

Jeff, I'd say about two to three of our partners have already committed to increasing their trailer requirements and actually have orders in, in the fourth quarter, and early-- and first quarter to do that. We expect one or two more to enter orders, typically over what they nominally get, or normally get, in a year. But I think you're correct, that there's still some swap in their inventory of available trailers, and I think they're going to try to manage that with what they've got. But I just- you know, I want to be independent in this, but I firmly believe in the way that these guys are going to do business is going to change very dramatically versus what they've been doing, and that's why I think you're going to see a lot more of the trailer tracking and you're going to see a lot more folks with this drop and hook. I've talked all the guys and they all their opinions, and you have to respect it, because they all have-- you know, some of them are only shipping an average of 600 to 700 miles.

Some of them are going, you know, over 1,000, and with each one of those applications, there is a response or a requirement on their side in how they handle this federal mandate. So it's real difficult. I don't think we're going to get a consensus opinion, but I think to a person that I've talked to, it's not going to negatively affect our trailer sales next year.

And I guess my impression is, if it plays out as you're thinking and as I'm thinking, we might get more of a front-end loaded year next year in terms of order flow, maybe a little different than what we'd expect seasonally?

Yeah, I think what you're going to do is, a lot of people are just going to play it safe and order more trailers, and then manage their requirements later on in the year.

OK, thank you.

There are no further questions at this time. Please continue.

I'd like to thank everyone for listening to us. I apologize for the time. This has been a great quarter for us, and again, I also apologize to our good shareholders that we didn't hit the numbers. That's something that I take very seriously. However, I think to offset that a bit, we've undergone substantial changes and Wabash National is a heck of a lot different today than it was a quarter ago, and it has changed since then also. So, again, thank you very much. We'll continue to do our work and we think that that will help us certainly going forward. Thank you.

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.