Wabash National Corp (WNC) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thanks for standing by. Welcome to the Wabash National fourth quarter and year-end conference call. As a reminder, this conference is being recorded Tuesday, February 10th, 2004.

I'd now like to turn the conference over to Mr. William Greubel, President and CEO. Please go ahead, sir.

Good morning.

Before we begin, I would 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, 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 fourth quarter earnings call. I'm Bill Greubel, CEO. In the conference room with me this morning are Mark Holden, our CFO and Dick Giromini. 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 web cast.

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'll open the call for questions from the listening audience.

During 2003, we successfully completed a very dramatic turnaround of our business. Operationally, we have completely reengineered the way we make trailers. As you know, our focus has been on safety, quality, process, and capacity improvement with constant cost reduction. The improvement has been tremendous.

We have steadily improved our cost position throughout the year, and we are pleased to say that there are still some more improvement to come. Today, we have significant capacity in excess of previously stated production.

We can now produce approximately 60,000 DuraPlate trailers per year, which allows us to participate in the company growth cycle with minimal capital expense. Our total capacity is well over 75,000 trailers on three shifts for five days.

We have identified and are now actively involved in mid-market, which represents an excellent growth vehicle for our company going forward. We have recently successfully closed fleet applications within this segment.

We believe this market segment will eventually contribute to our business over 10,000 units of additional demand, principally to our annual production. We have made the necessary structural changes to our retail branch business unit.

Although this business did not achieve our planned profitability in 2003, it is in a good position to achieve positive income in 2004.

We have recently made management changes in this unit. Dick Giromini will now lead this group.

We have exceeded our working capital goal as it relates to inventory reduction.

During the past 12 months, our inventory dropped almost $50 million. We're in pretty good shape in the whole inventory categories. We were able to reduce our total debt by over $100 million during 2003, and over the last two years, we have reduced total debt by $202 million, or 45%.

Finally, the critical event we all worked for was the recapitalization of the company in the third quarter. Given the new capital structure we now have in place, we believe we have an excellent opportunity to be debt-free prior to the peak of this cycle.

The fourth quarter was better than forecast due to increased shipments in both dry vans and reefers. Adding back the loss of the sale of our finance contracts, we made $2.4 million, our 8 cents a share in the quarter. We have seen continued month over month sales with two of our higher sales modes in October and December.

During the quarter, quota activity was significantly higher than prior quarters. This activity has continued into 2004. We're now seeing growing backlogs in DuraPlate and Reefer products.

Again, this activity has continued into 2004. We continue to close sales with new mid-market fleets. In the fourth quarter, we added over a dozen new customers.

As mentioned previously, our focus in the fourth quarter was on inventory management. We did a great job in surpassing our goals.

Operationally, it was another great quarter. Retail branch operations continued at a loss. However, showed signs of improvement.

Our improvement in working capital, earnings and sales of core assets, a lot of the significantly paid down debt. As is typical of our earnings discussion, Mark and Dick 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, and our focus going forward in 2004.

As to an industry update, I wanted to say this during the last two years, and I think it's finally time to announce that the long-awaited breakout in our industry seems to be taking place.

For the fourth quarter, trailer only came in at 75,312 units, which was 79% better than the third quarter and 75% than Q4 '02. For Wabash National, net orders for the fourth quarter were up 71% year over year. Which continues to be better than the industry rate.

Cancellations during the quarter remain quite small. For 2003, industry net orders were 212,295 units versus 162,216 units in 2002. An increase of 32%. For 2003, trailer-only production was 182,666 units, 31% increase over 2002 and surpassing our forecast of 175,000 units.

In addition, the truck tonnage index came in at an all-time high of 164.2 in December. The previous high was 157.2 in December of 1999, our previous peak. Industry backlog has again begun to grow.

At year end, the backlog has grown to 108,000 units or approximately 6.8 months. I believe this is a general trend for all trailer manufacturers.

Fourth quarter production for Wabash National was up 23% versus the third quarter, and up 43% versus the second quarter on a daily rate. Even with the reduction of a shift on line one during the third quarter.

Quoting activity has increased considerably in the fourth quarter. We have also seen a significant amount of requoting activity, which we consider to be a good indicator that our customer base is moving towards acquisition of equipment versus just shopping.

Our core customers continue to show impressive results. The majority of our orders that we have seen are generally for replacement of equipment. Hours of service and growth requirements are still not well identified.

We believe less than 10% of our order activity has hours of service related to during the fourth quarter of '03. We are seeing a steady stream of cost increases associated with raw materials. As these increases are announced, we factor them into our quote process.

Over the next few quarters, I would expect industry pricing to move up as manufacturers pay us through these cost increases. I think again this is a general trend that we'll see in the industry.

Retail branch operations, we focused on performance. We have beat up and reshaped this unit throughout 2003 with the most recent change out at the top. We are behind our plan for profitability in this line of business. This is what we intend to accomplish during 2004 by-product line.

New retail trailer sales should increase by roughly 20% over 2003 with fewer outlooks. This is good performance, especially in most mid-market accounts have been assumed by factory direct sales and not by the branch.

Used trailer sales are assumed to be flat year over year. This assumption is based on local branch purchases and fleet trades coming in.

Our inventory has been significantly depleted over the last few quarters. Fleet trades are slow to come in as most fleets are keeping their equipment as a hedge per hours of service.

Our focus is on turns and gross profit. As there is a shortage in the sun types and model age, we have been successful in moving pricing up.

This will be tempered somewhat as large fleet trades start moving throughout the system. We've encountered significant cost associated with our service operation.

During the fourth quarter, a lot of good effort was placed in turning this product line around. This product line should show quarter over quarter improvement but will tend to weigh down retail performance into the second quarter.

Part sales are somewhat dependent on service and will generally flex with increased service hours. We continue to maintain the course.

Our progress is not mirrored what we were able to achieve in manufacturing, but it has improved. There are no plans to further reduce our retail effort. It is integral to our success in this market, especially in the mid-market.

Looking at a view of 2004, ACT continues to be bullish with trailer-only forecasts for 2004 at 240,000 units. This is based on incremental requirements of hours of service improving economy, and a strong equipment replacement cycle. We expect to build approximately 50,000 trailers in 2004, or 25% increase.

Our mid-market and product line goals look good at this point in time. We are starting to see protracted lead times with certain equipment. There seems to be less pressure on the industry to bid for capacity.

As to our goals for 2004, we have again raised the bar on the manufacturing operations. There is still much to improve relative to safety, quality, standardization, process improvement, and cost containment.

Our big challenge will be the immediate integration of additional shifts to the DuraPlate and Reefer lines, which will occur this month. Should demand continue to accelerate, we could find ourselves adding a third shift to certain lines later in the year.

I've already discussed retail branch side of the business. We've been working the mid-market for less than a quarter, and we've seen some great progress so far. This segment will get a lot of attention this year. We should see continued share improvement quarter over quarter.

As I have discussed over the past conference calls, DuraPlate and its total cost of ownership will play a lead role in our success. We will stretch our technology leadership as well.

We have a box that will last over ten years with minimum maintenance. That's not enough for our customers who still must maintain the other components on the trailer. We've been working with our engineers and suppliers to extend the life of all components associated with the trailer.

We are confident we can produce improved maintenance for our customers, who associate value with these improvements. We are currently at less than 10% penetration rate with the DuraPlate trailer of the drive and trailer market.

Finally, we will continue to pay down debt. We anticipate another great year for debt repayment. We can now see the day when we owe zero bank debt.

Mark will discuss in greater detail our fourth quarter results and financial additions after some comments by Dick relative to 2003 and 2004 operations.

Dick?

Thanks, Bill. In our drive toward operational excellence, we consistently remained focus in five key areas -- safety improvement, quality enhancement, delivery of our products on time, optimizing productivity levels, and driving cost reduction throughout all operations.

When we talk about safety, we're speaking of our number one value and number one priority. For 2003, we completed the year with our best quarterly performance in our history. This marks the fifth consecutive quarter of improved performance relative to the previous period.

I'm extremely pleased and proud to report December ended at a total recordable incident rate less than half of the industry norm.

We've expanded our focus throughout all functional areas in the business, including our branches, with the formation of environmental health and safety leadership council that reports to the environmental health and safety executive council. This council, consisting of key individuals representing all operational areas, has the responsibility to identify key initiatives and drive continual improvement in our safety performance across all plants and our branches.

Again, as I always state, we firmly believe that no level of incident rate is acceptable, and we will continue to remain focused in our quest to eliminate all injuries from our workplace.

In the area of quality, our progress continues. We are clearly producing a better product today than we were a year and a half ago. In fact, each successive month we see improvements. These are not my words, but those of our direct customers, our dealers, and our branches.

The implementation of pre-control on our lines has provided the authority to our associates to stop the line whenever they detect defects on the line during assembly.

As a direct result, internal first pass yield performance has showed marked improvement and recently peaked at 88%. This is being realized in spite of much tougher outgoing quality acceptance criteria than we had in place early in the year.

As expected, these improvements are also having a positive impact on our work in process inventory by reducing the number of units that require any kind of rework prior to shipment.

Our work in process inventory is now less than one third of what it was back in mid-2002. This translates into lower costs and quicker availability of our products to our customers. Much like our focus relative to safety performance, we will never be satisfied with the level of quality of the products we produce.

We will continue to conduct CI events focused on variation reduction, continue to refine our new product commercialization process, and continue to solicit feedback from our customers on how to further improve our products.

With all the improvements in quality and in the consistency of our manufacturing process, we gained a high level of predictability in our ability to accurately schedule our production lines. This is resulted in consistent schedule attainment of nearly 100% month to month. For the total year of 2003, we achieved an overall schedule attainment of 99.1%.

As discussed in our previous call, as a direct result of the improvements we've realized in first pass yield, work in process management and line productivity, we've now been able to launch our advance planning process through our transportation group. This latest process improvement will provide improved delivery times for those customers who elect to utilize our transportation services for their trailers.

Moving on, we experienced a tremendously successful year in our efforts to continually improve productivity and through put. In 2003 alone, we achieved a 27% improvement throughout the year from the previous year-end levels. This was achieved in spite of the fact that we shifted much of our CI event focus from productivity improvement to product quality improvement early in 2003.

All told, since we began our lean journey in July of 2002, we have amassed a cumulative productivity improvement of just under 50%. When combined with the cycle time or line speed improvements that were also generated through our CI events, we now have available capacity to produce in excess of 60,000 trailers on two shifts five days per week.

We continue to accumulate cost reduction savings through our focused CI efforts. Over 250 formal events have now been completed with over $45 million generated in annualized direct labor cost savings alone.

All told, we've generated in excess of $60 million in annualized savings in the areas of direct labor reduction, through put improvements and purchase material savings. We know there is more out there.

In summary, we had a good quarter and a good year. All of our associates are to be commended for their efforts in helping to bring about the successes that we enjoyed throughout this past year. There's certainly more to come in 2004.

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

Thanks. As Bill mentioned, we finished the year on a very strong note. Our balance sheet at the end of the year we still have too much debt is extremely clean from both an operational and financial perspective. We do not expect any surprises in 2004.

I would like to review with you our fourth quarter results and our financial position at the ends of the year. First, our fourth quarter overall perspective, sales were 220 million in the fourth quarter on 11,300 new units.

The company had a loss for the quarter of 1.7 million, or 8 cents a share, which included losses on the sale of a majority of our remaining finance portfolio of 4.1 million, or 16 cents a share. Of the 4.1 million, 900,000 is classified as debt extinguishment costs in our P&L and 3.2 million of the 4 million loss, or charge, is classified as other on the income statement.

Fourth quarter results before this loss is a profit of 2.4 million, or profit of 8 cents a share.

In addition to the loss on the sale of finance contracts, the fourth quarter results included four other items which net out, and they were, number one, 2003 incentive compensation provision of 5.9 million.

Number two, Indiana property tax reduction realized in the fourth quarter of 2.4 million favorable.

Property gains on the sale of branch properties during the quarter of 2.5 million favorable. And gains on our European settlement tings associated with our old BTZ company of $900,000 favorable.

Those four items net out for the fourth quarter so that from an earnings per share standpoint, the only item affecting the results is our loss on the finance contracts. The incentive compensation costs of 5.9 million charged in that quarter were charged to cost of sales of 4.1 million and the SG&A of 1.8 million.

The incentive compensation is for all salaried associates of Wabash, or approximately 650 people. It's the first incentive comp paid in three years. The accrual is based on a strong finish to the year and the success in recapitalizing the company and improving our operations.

It's worth noting that the company's 2004 incentive targets are greater than the street estimates for '04.

Property and other tax reductions total 2.4 million. This is primarily related to the state of Indiana reassessment during 2003, which was finalized in the fourth quarter. Again, this item, which was a favorable item to the quarter, was recognized, or classified in cost of sales.

Thirdly, the gain on the sale of branch properties total 2.5 million. The 2.5 million was classified in other income and expense and represented approximately locations that were sold during the fourth quarter. These locations have previously been closed within our retail branch network.

Finally, the settlement of our contingent liabilities on our European operations was $900,000 better than what we had accrued for, and therefore favorable to income. And the $900,000 is classified as other income in our P&L.

Turning now to sales for the quarter. Sales were 220 million on 11,300 units in the fourth quarter versus 215 million, or 99,9,900 units in the fourth quarter. The fourth quarter contained the two best months of the year as bill mentioned. Reflecting improving demand and the benefit of cost takeout during the last two years.

Revenues for the year were 888 million on 41,000 units. Slightly better than our forecast of 39 to 40,000 units. Excluding our rental and leasing business and our former wholesale after market parts distribution business, which we sold in the third quarter, revenues on a comparable basis were 220 million in the fourth quarter and 197 million in the third quarter.

Retail distribution sales in the fourth quarter were $46 million on 1,000 new units. Manufacturing sales for the fourth quarter were 186 million on 10,900 units. And there is an illumination of approximately 600 units, or $12 million in the quarter.

Turning to our product line revenue mix, new trailers in the fourth quarter were $192 million on 11,300 units shift. We built 10,400 units in the fourth quarter. Used trailer revenues in the fourth quarter were $12 million on 1,800 used units.

Parts and service revenues for the fourth quarter were $13 million. This compares to $27 million in the third quarter. The decline reflects the sale of our wholesale after-market parts business in the third quarter.

It should be noted that we will still continue to sell after-market parts in our branches on a bill forward basis at the retail level. We no longer sell at the wholesale level.

Other revenues, including leasing revenues, were $3 million in the fourth quarter versus 9 million in the third quarter. Again, the decline reflects the sale of our rental and leasing business in the third quarter.

Turning to gross margin after the fourth quarter, comparisons are difficult in '03 because of all the noise in our numbers. But those margins of 6.9% for the fourth quarter compares to 6.5% in the third quarter and 4.5% in the fourth quarter a year ago. Excluding the contribution of our rental and leasing business and our wholesale parts business.

The gross profit in the fourth quarter '03 includes $1.5 million of net charges, as I previously discussed. The gross profit in the third quarter of '03 included $2.9 million of net charges.

Adjusting for these charges, gross margins in the fourth quarter were 7.4% and 8.7% the third quarter of '03. Q4 and Q3 comparisons are historically difficult because of the fourth quarter shutdown.

Revenues were higher in the fourth quarter versus the third quarter because of shipment, not production. We recognize revenue based on shipment. Therefore, there is normally a gap between units shipped and units produced.

We had six year production days in the fourth quarter versus the third quarter, or approximately 10% fewer production days. Margins in the fourth quarter were lower, which is historically the pattern because of production being lower versus shipments. Our overhead is spread over fewer units.

Finished goods and work in process decreased $24 million during the fourth quarter versus the third quarter. Going on to SG&A. In the fourth quarter, SG&A was 12.8 million versus 14.2 million in the third quarter.

Again, the comparative quarters are adjusted for the fact that selling our wholesale parts business and the rental and leasing business.

The Q4 '03 results SG&A included the charge of 2 million, as previously discussed. The third quarter of '03 SG&A included a charge of 1.7 million related to branch closings.

Moving on to interest and other, interest expense for the fourth quarter of 2003 amounted to 3.6 million, or approximately $5 million less than what was incurred in both the third quarter and the fourth quarter a year ago. Benefiting from both a lower effective borrowing cost of approximately 4% and lower borrowing.

Other income and expense for the fourth quarter '03 includes losses of 4.1 million associated with the sale or finance portfolio offset in part by the gains in our branch properties totaling 2.5 million and the favoring settlement of $900,000 on our contingent liabilities guarantees of our European operations.

Moving on to income taxes, we did not tax effect our earnings for the quarter. As a result of our losses in 2003, the company's end load is now approximately 250 million. As a result of our prior past losses, we have fully reserved for this tax benefit on our balance sheet with an approximate $90 million tax reserve.

To the extent the company is profitable, this reserve will be reversed to income as the probability of utilizing this tax benefit becomes greater.

Looking at it on a segment basis, I will just note the retail and distribution segment results for the fourth quarter were for the $4.2 million operating loss. This compares to the third quarter operating loss of 1.8 million. Adding back the operating contribution of the Apex, or our rental and leasing business and our wholesale parts business of 2.8 million, our retail distribution business with a $4.6 million loss on an operating basis.

Depreciation amortization was 4.7 million in the fourth quarter, bringing the year to date total to 23.8 million. Cap ex in the quarter was 2.8 million.

In the fourth quarter, we purchased certain land and building in Lafayette that we had been leasing at a cost of 1.8 million annually. We expect our 2004 capital expenditure needs to approximately $10 million.

Moving on to backlog. At the end of the year, our backlog was approximately $200 million compared to 192 million at September 30th.

As we previously announced and as Bill discussed, our order activity in the fourth quarter, particularly in December, was quite strong. Not all orders received were included in the backlog number of 200 million.

There is typically a lag between order base and backlog due to our internal processes. Over 2,000 units, or approximately $35 million, were received in orders at 12/31, but not included in the 12/31/03 backlog because we did not have all the documentation completed on the orders at 12/31, including the $35 million into the backlog would have been an increase of approximately 20% quarter over quarter increasing backlog.

Turning now to the balance sheet cash, we finished with $11 million at the end of the year. Our liquidity position was approximately $44 million. Including cash plus availability under our lines of credit.

Accounts receivable were $67 million at 12/31/03 compared to 34 million a year ago. This increase results from exceptionally strong December sales.

Our sales outstanding continues to remain quite strong at 32 days. Inventories were approximately $85 million at the end of the year.

It's interesting to note this is the lowest level since 1994 on approximately 20% more in revenue.

The inventory breakdown in raw material at the end of the year is $24 million. Our work in process came down dramatically, as Dick talked about, at $4 million. Our finished goods of new trailers was approximately $38 million, again, a decline of $17 million quarter over quarter, reflecting the strong shipment that Bill previously discussed.

Parts inventories were 6 million and our used trailer inventory was $12 million, bringing the total inventories to $85 million.

Total inventory turns during 2003 were nine times. This compares to six times turns in 2002 respectively. Both excluding our rental on leasing units and our parts wholesale. It represents a 50% improvement year over year in our inventory terms.

As I mentioned, used trailer inventory was 12 million at the end of the year, and we had approximately 1,700 units in inventory as compared to $15.8 million of use trailers, or 2,800 units at the end of the third quarter. The sale of our trade commitments in $7 million at the end of '03.

Our total debt on and off balance sheet was 239 million versus 367 million at the end of '02. $128 million debt reduction in 2003, bringing our two-year total of debt reduction to approximately $202 million. In addition, we paid $15 million of premiums during '03, bringing our total debt and debt-related payments to $143 million in '03. We were compliant with all three of our financial covenants as of 12/31/03.

Our maximum debt to EBITDA covenant was less than is required to be no more than 4.5 times. Our actual maximum debt to EBITDA, as defined by our banker agreement at the end of '03, was 2.49. Our minimum fix charge covenant requirement is greater than one times. Our actual was 1.29.

CAPEX covenant is $1.9 million. In '03 we spent 3.9. These are the only financial covenants we live under today. The EBITDA covenant, as defined by our loan agreement, which include non-cash charges and refinancing charges, EBITDA is defined by our loan agreement for 2003 was 41.7 million.

With that, I'll turn it back to Bill.

Thanks, Mark. We're all kind of nursing some colds here, so we apologize for the coughing and so forth. In summary, I believe we really have accomplished very much in turning around this business. The associates continue to stay focused and have done a great job.

We all know we still incurred a large loss in 2003. However, most of the heavy lifting is behind us. We have worked hard to prepare ourselves for the change in the cycle, and with that said, it's really kind of exciting to see the cycle finally make this change.

As most of you have put your dollars and confidence in us, we know it's now time to achieve the results that we extended. Nothing has changed as far as where we think we can go.

Don, we're open for questions.

Thank you. Our first question comes from the line of John Barnes from Deutsche Bank Securities.

Thanks. Good afternoon, guys. Real quick, can you give us an idea that, as you look at your building backlog, you said cancellation continues to be pretty modest, the cancellation rate continues to be pretty modest at this point. Is there a dollar number in the backlog we should be looking at?

Is there a unit number in the backlog we should be looking at before you, you know, think about seeing that cancellation rate begin to creep up? I know it's a good problem to have after a couple of years here, but I was just trying to get some clarification on when we should see that number begin to inch up some.

That's really a hard one to come up with, John. Certainly, we haven't got to the point yet where, with our specific business, that our customers are trying to reserve slots. At this point in time, I think our cancellation rate will be relatively low probably versus the industry.

We do know that some of our competitors are doing a little bit better than us, especially on the Reefer side of the business, and they have a backlog that probably extends out six to eight months.

In some cases there, because of the preference for that particular type of manufacturer, I think you have some people reserving slots. But at this point in time, our backlog is very manageable.

We also have the ability to add more shifts if necessary. We like where we're at. We'd certainly like to get another month or two under our belt as far as an extension of the backlog, and that would give us the opportunity to look at that fifth shift on one or two.

But at this point in time, I think it's manageable, and I don't think you'll see much change.

Okay. And then in terms of your shifts I mean, this recent announcement on opening, I guess, the second shift on, you know, your DuraPlate line and your Reefer line, kind of the first people you've hired in, I guess, what, three or four years now.

I'm just curious as to -- you've got a $200 million backlog now, so you add another shift. Are we looking for another 200, $250 million in backlog before we add a third shift?

Or at what juncture do you start trying to anticipate what your backlog could get to and go ahead and kind of more proactively open that shift before, you know, versus being kind of reactive to what the backlog is doing?

Right. I think right now what we're doing is we've got a nice increment of business so that it justified making the big move from one to two shifts on line one and the same on our line eight, our Reefer line.

Going forward, unless a big partner comes in in a big way, I don't think you'll see us make that change like we're doing in February. I think what you'll see is just extended overtime, and we'll work that until we feel very comfortable that, when we bring the people in, we can keep them in.

I do believe, though, that we will see another shift on line one or line two later this year.

Okay. Very good. And then last question real quick, on the balance sheet, you indicated you had lowered inventory levels, I think, roughly 50 million.

I'm just curious, is there more clean-up opportunity on the balance sheet beyond just your debt repayment. Is there some more working capital opportunity out there that maybe helps you with the cash flow a little bit more than we're forecasting in '04 and potentially allows for a little greater debt reduction in '04 than maybe what we currently have forecasted or what you're reading into even anticipating in this juncture?

I don't think there's much, especially when you consider our business is going to start picking up on working capital. We have some mix issues in the used side of the business, probably 400 or 500 trailers that need to go, and they're the ones that are still sitting by the fence.

That doesn't really come out to a lot of dollars, though, because they've been pretty much written down.

On the new side of the business, we still have some opportunity both in product that's at the branches and our ability to get product out the door quicker to our customers.

So over the course of 2004, if you follow a new trailer numbers, you'll see those numbers go down. We certainly don't have 50 million in the buck oat here, but we might have another 5 to $7.5 million.

Very good, guys. Thanks for your time.

Our next question comes from the line of Mike Harris from Robert W. Baird.

I just want to explore the cost that negatively impacted the cost of sales in Q4. I believe you said 4.1 million. The property tax reversal, you also talked about, did that get classified within cost of sales?

Yes. The total incentive comp cost in the quarter were 5.9, 4.1 of which was in cost of sales. The property, Indiana property tax reductions of 2.4 were also on cost of sales.

Okay. So those two items are really the unusual items in the quarter. There was nothing else?

Yes. As it relates to cost of sales, Mike, that is correct. We also had a gain on the sales of branch properties of 2.5 million, and that was in other income.

I realize that. Okay. And then this incentive comp cost, is it safe to say you weren't accruing for this throughout 2003, and then Q4 was like a true up for you, and that's why you had the dramatic impact this quarter?

That's somewhat true, Mike. We had accrued some level of incentive comp throughout the year, but based on the last two, three months' performance as well as, like I said, completing the recapitalization of the company, 5.9 million got booked in the fourth quarter.

Going forward, obviously, depending on performance, this cost would be more evenly spread over the four quarters.

Okay. And then I just want to make sure I heard you right. I thought you made the comment that, when you're looking at the possibility targets for this incentive comp plans in 2004, you're thinking is greater than 2004 street consensus right now?

For purposes of incentive compensation, yes.

Okay. Interesting. Switching over to the retail segment here, you said you're targeting to return of profitability in 2004. Bill, from your commentary, it seems this is more likely to happen in the second half of the year. Is that a reasonable statement?

Yes. A lot of things that we've done, as we were doing our budget -- and I might add this is the second year we've done a budget -- we really worked at the branch level. Instead of saying this is your goal, we went to the branches and said, what are you going to achieve? And here's some expectations.

What we really found out is we weren't treating the branches like we treat our independent dealers. We were setting proscribed pricing to the branches. One, they were not able to compete because they couldn't sell at cost.

Yet, we would send a trailer down the road to one of our independent dealers and they could very readily compete in the market because of the intercompany transfer, or to the dealer was a lot better.

So we kind of got a lot of the clutter out of the numbers, and I think, going forward, that's one thing that will certainly help the branches because they are now competitive throughout the industry. And it's up to them at this point now to make a profit on the trailers that they're producing.

In January, the sales numbers, preliminary coming in, were very good. They were at our a little bit above plan, and that was mostly due to new units and not any of the other product lines. Service is still going to be a problem.

We really haven't focused hard on that, and I think we have 19 full service branches. We're now going to spend a lot more time.

We're also, as we get into the mid-market, we're pushing from all levels, even including myself, meeting with some of our partners -- that we have the service capability. We do find work, and we back up our work.

I think, as you said, we agree with you, that going into the second quarter, service is going to keep us probably below where we want to be. But as we go forward, we think we'll be good.

The other thing -- and I hate to say this because it's not giving up, but it's just the God's honest truth, is this industry starts to take off, our branches are going to perform better only because they represent an avenue our an outlet for people to come in and make point of purchase decisions instead of coming to the plant and waiting four to six months for product.

Okay. Well, that update is helpful. Bill, I can appreciate the seasonality Q1 versus Q4 regarding build rates. Can you give us a forecast of where you see Q1 build versus Q4?

Well, I think what we're on now, is if you were to look at the average day rate of what we were doing in the fourth quarter, and then probably by the first week of March, add in another 45 to 50, that may be a bit optimistic. But say 45 trailers for line one and line eight. That would probably be the numbers.

Okay. And then, Mark, obviously, you even said it in your prepared comments, a lot of noise to the results in 2003. Once again, some unexpected items below the line. How do you see Q1 results shaking out? Are you anticipating any meaningful items?

No, Mike, we're not. I think, as we talked about, the added strong desire to dispose of non-core assets. The branch locations that were sold in the fourth quarter, bad timing -- that timing, obviously was uncertain. And we are very fortunate to actually be able to close on four of them at the amount that we were on.

On a go-forward basis, I believe we may still have a few branch properties that we have not sold. When and how much those get sold for, it's very difficult right now for us to say. I don't expect to see any of the first quarter.

Other than that, our balance sheet is extremely clean. We do not expect to see any surprises in 2004.

Okay. Just a couple more questions here. Bill, you guys issued a press release, I don't know, two, three weeks ago, talking about December orders exceeding 8,000 units. You've also said the demand environment is accelerating.

Just wanted to get your impression of how January orders compared with December. And if you're able to quantify That?

Well, I can't. Our numbers are up. I don't think we did as well in December as -- in January as we did in December, however, the numbers were very good. I think one of my fears going into the new year was, as you know in the fourth quarter there's a lot of orders coming in for 2004 requirements.

We were pleased to see two things happen. One, if you look at ACT's truck sales continued to stay strong, which is a good reflection on trailers. And, two, our numbers in January continue to be strong, and we've heard the industry as a whole was very, very strong in that time frame.

So it wasn't as good as December, but it was a heck of a lot better than, I think, what we had expected.

Okay. That's fair. This last question, any thoughts on the potential time frame on when you'll get formal EPS guidance either for an upcoming quarter or the full year? What really needs to happen before you feel comfortable doing that?

I don't see that happening in the next couple of quarters. The board is very conservative about doing that. I think at this point we feel comfortable with 50,000 builds for 2004. There's probably some up side to that.

As we go forward, we'll keep you advised. I think, from Dick's perspective, he's going to see continuous improvement in the operations side of the business.

Going forward, we should also see continuous improvement in the branch side. So we feel pretty good.

Okay. Great. That's all I had for you. Thank you.

Our next question comes from the line of Tom Albrecht from BB&T.

Good morning, guys. Nice quarter here, quite a year that you've had. Let me just clean up a couple questions and then get to some bigger questions.

Mark, the backlog, you said, was 200 million excluding that 35 million, or was it something else? The phone was cracking.

Either my phone or my voice. It was 200 million without the 35 million.

Okay. All right. And then, Bill, on that production answer you gave Michael a moment ago there, I don't really know what you're producing on line one or line eight on a per-day basis. Can you give us maybe a little bit more of a full quarter feel.

I mean, I'm thinking about maybe 11 to 11,500 for the first quarter. If you talk around that sort of a number instead of, you know, add 45 per day to line one or line eight, that might help me a little bit.

If we built 10,400 in the fourth quarter, we'll probably -- let me just get out the old calculator here.

We're going to be right around the 11,000 mark. And, again, I would only remind people, though, we recognize revenue off of shipments as opposed to production.

Again, historically, there's always a gap how our customers coming in and picking up their equipment or how we're building them. That can influence the revenue number. But from a build standpoint, we expect to probably be around 11,000.

And, Tom, we'll probably only put in stock there about 100 to 150 trailers, most of which have already been pre-sold. So this is production for orders.

Okay. And then what are you going to do with this Reefer line? I know it's not been a money maker. Where do you stand with that? Dick, were you able to work some of your magic there the last six months of 2003?

Au contraire, I think we've now done a lot of work with that. I'll let Dick get on the stage and tell you what happened in the fourth quarter. It's no longer a money loser for us.

Tom, what we were able to accomplish during the course of the fourth quarter is we were in a series of formal CI improvement events, and had a plan to focus on the Reefer line actually consisted of 17 formal CI events over a five-week period. Significantly overhauled the whole process of assembling, producing the refrigerated

Reefers -- or refrigerated products, and we saw a significant reduction in the number of hours that it takes to produce refrigerated product. Now, in addition to cycle time improvements on the lines. So we're expecting now, as we've completed all of the action items -- and we have just a handful of open action items from those events being completed -- we are expecting significant improvement in the line that will reduce our cost basis for that product, make us that much more competitive.

We're already starting to see the benefits of that in some of the more recent quotes that we've been putting together or our customers. So going forward, the Reefer line will be profit contributor to the business, and we're very excited about the improvements that the group's been able to make there.

The new thing that we have, Tom, as you know where it is in the south plant, we do everything on an activity base cost. So we're not using DuraPlate to make other lines profitable. They've got to stand on their own two feet.

That line has a tremendous amount of overhead, and that's been the big bugaboo other than the labor and the slowness of the line. Dick's taken care of labor. We've sped the line up. And as we go to a second shift -- and we think there is a potential of going to a third shift -- we take it very, very expensive line and really make it a nice little profit maker for us.

It's also interesting to note that some of our competitors -- remember, we're number three in this particular market segment -- have done quite well in the market and have significant backlog.

I don't want to say this, but you could almost say by default we're the product of choice if someone needs a Reefer in a very short period of time. With that, we're also seeing our competition raise prices. It makes sense on that basis, on the basis of the lead time.

So there are a lot of neat things happening in the Reefer side of the business not only for us, but for the whole industry.

Okay. So you've tackled the labor problem, overhead will hopefully be tackled just through better volumes. But have you permanently ruled out moving that to the other plant?

I think at this point in time we have, yes. I think we've got a formula for success there. The Reefer line is not going to make what DuraPlate makes, but it's going to make probably a little bit better than what the FreightPro is doing.

What's the timing on that second line, March 1st or earlier?

We're hiring people now, and training begins in the next weeks.

And what's a typical shift production per day on the Reefer line?

About 15.

Okay. All right. And then I'm just kind of jumping around here. Mark, you offered some various financial goals for 2004. You said, in the retail network, new trailers, hopefully sell 20% more used flat. Parts and services, I didn't hear exactly what -- is that flat as well, or that's going to mirror new sales or what?

Parts and service should go up about 25%. And parts -- it's hard to make a year over year because of the issue with the PDC being sold.

Right.

But it will improve versus what we've seen in the fourth quarter.

Okay. And then, on the retail loss, Bill, if I heard you correctly, you hope to turn profitable in the second half of '04, but that doesn't necessarily mean you expect the whole year to be profitable. What's Dick's mandate now? You've had a change in management there. What's going on?

Well, I think we're going to stop farting around with the process and structure and just focus on results. We have the capability of producing and selling a great product. We're in a great locations to do that. We've got good service.

I think it's time now just to focus on the very few basic things that are important to us. And we're going to do that, and

I think Dick's the right type of guy. He did excellently on the operations side. We tried to, you know, basically feed world hunger and that didn't work. There were just so many things wrong with the business, we did a good job at helping them.

Now, all we're going to do is focus on a few, and we're going to do those excellently.

Okay. And then I'll ask this question. I think it's the same as one of the other guys, but it's a different way. If you could give us a backlog number for the end of January, setting aside what January's orders were, what would the approximate backlog be as of January 31st?

That's a tough one, Tom. Most likely you would expect it to continue to increase. A dollar amount would be, we don't know. I would just as soon avoid having to report our monthly backlog because, ultimately, there's a lot of dynamics that go into it. But having said all that, I'm sure it's up.

And then on the DuraPlate, for your mass production line, how many is in a typical shift right now?

I think a good target is 35 on a shift. That's when they ramped up. It's very mixed dependent on you know, Tom.

Right.

So 35 is probably a good target number based on the amount of mix.

And then I want to clarify this wording on the incentive comp for '04. Obviously, we would expect you and hope that you all make more money, you and all your various associates, which would mean that you had a good year, but when you said that it's greater than the '04 estimates, are you talking about the earnings per share estimates, where the incentive comp could be 35, $40 million, or are you just talking about the '04 incentive pay could be bigger than that 5.9 million?

No. That's based off of earnings, Tom. The target is higher than -- our targeted earnings number.

That brings up another question because there's a fair variance in the earnings outlook. And I guess it's twofold. If you come in lower than your private target there, can you receive some sort of incentive pay and be -- I mean, what do you sort of view the consensus number at for 2004?

Well, you have a great way of trying to wiggle this one out of us, Tom. First off, I would guess right now that incentive next year, or in 2004, will probably not be as great as 2003 in total dollars.

We were given a clear mandate by the Board. They recognized what we did as far as turning the business around and creating wealth, and they rewarded a whole bunch of people.

As Mark said, over 600 folks are going to receive a check today. One of the things that the board also mandated during the discussion is, if you have any arbitrary charges, don't expect to come to us or any kind of relief. The numbers will be what the numbers are going to be.

I think right now I agree that you and the other guys are a little bit diverse as far as your numbers are concerned. We have a profit plan that we believe falls probably somewhere in the middle.

From a board perspective for us to achieve a bonus, we have to achieve something a little bit higher than that. We would be given a bonus if we were off by about 15%. If we're off 16%, we get nothing.

Okay.

So we as an organization are totally focused on achieving our numbers, as you know. That's the number one thing:

All right. And how do you see Q1? I mean, again, there's probably the biggest variance. I think the rest of the year starts to cluster a little bit more closely some of the quarterly estimates. But I think they range from 15 to 27 cents for the March quarter.

I think without looking at earnings per share, I think I'd give you this commentary. In January, we did fairly well as far as production is concerned. Because of inclement weather throughout, some of the shipments didn't get out, but they'll get out by the end of the quarter.

We see the model year changeover has occurred now, so a lot of people who were holding back were not doing that anymore. We continue to see very strong orders and quotes coming in from all areas, especially, I might add, at our independent dealers. They're having a great first quarter.

I think that will increase as we go forward, and I think, you know, your suggestion, if you look at ACT as far as their forecast is concerned, we may not be as high as them, but I think directionally, we're the same as they are.

Sorry I can't give you a number.

That's fine. And then, lastly, Mark, on the bank debt floating around with Libor. I haven't checked that lately, but what's your approximate debt now on the bank debt side?

In total, Tom, our average right now is right at 4%.

Okay.

That includes the convert.

That's all I had, guys. Keep up the good work. Thanks.

Our next question comes from the line of Jeff Kauffman from Fulcrum Global Partners.

Congratulations. Nice to hear good things. Let me dive into, I guess, some different questions because a lot of what I was going to ask has been asked. You commented on Reefer pricing. Can you comment on what's going on in DuraPlate pricing right now?

Yeah. At this point in time, I'm somewhat positive about it, but it's becoming a little bit of a pain for us. We are seeing cost of raw materials going up. There's -- as you know, in the industry that you guys follow, steel, aluminum, stainless, wood rubber, you name it, everything is going up.

Steel has tremendous surcharges. We have some price protection, but nothing in steel that's significant. And as such, we are raising prices.

An average trailer for a customer hasn't bought in a year has gone up between 350 and $1,000. It is a bit of a sticker shock in the industry.

It is also an opportunity for us to, you know, kind of amend certain things that we've done in the past couple years as far as reducing prices.

I would think, on pricing in general, you'll see anywhere from 2 to 4% over the course of this year and into 2005 as raw materials continue to go up. When steel goes up, everything goes up.

Your point is pricing's up are, but it's not all falling to the bottom line. Are you covering the increase in raw material cost with your price increases now?

We're covering them in most areas. We have some of our customers have an extended quote that may go through the second quarter. As they come into the third quarter for more product, those prices will go up.

Most of our partner base has escalators in there, which we've already have notified them that we will be taking those escalators up. On all of our quote orders right now, we change our model for holding on basically almost a daily basis as price changes come through.

Jeff, it's Mark. I would also say keep in mind our penetration in the mid-market. There we are less prone to bench marking off of last year's price. It's a new market for us.

So I will tell you not only are we covering the cost, we're also adding margin contribution there from a pricing standpoint.

Now, relative to the competition, lumber costs are up dramatically. There's not as much of that. You don't really have that in your trailer relative to a lot of other guys. Aluminum costs up dramatically. Relative to your competition, is it your sense that raw material costs are rising faster?

Relative to competition, we all buy from the same suppliers. At some given time, we're all going to be paying the piper. I think what we're seeing in the industry, as we go out and quote right now, we're seeing pretty much everybody go up.

I think it's an industry issue, and I think that it's being addressed by the industry right now.

The big issue is a lot of our folks have not seen price increases for three to five years. We have some partners who never saw a price increase. And so they're having a bit of gray hair going through some of these things, but we are going to get them through.

Another thing to note is on DuraPlate, where we do compete at some point in time with a straight aluminum plate trailer, the DuraPlate is because steel is so much cheaper still and aluminum has gone up, we become much more price competitive in that particular arena.

But pricing through, it's no easy task. But our customers are seeing this anyhow because they buy after-market parts. In the after-market, these prices have been going up for the last six months.

Okay, Mark, I apologize if I rehash something you said, but I'm dialing in from the west coast, and I couldn't get in the first 20 minutes of your call. When I look at the incremental margins you generated in manufacturing -- I mean, revenues up 35 million, if I adjust for the funny stuff.

Profit's up about 11 million. That's almost a 32% incremental margin, 30% incremental margin, much above, I think, what you had said you thought the company's incremental margin would be as volume increases.

In addition to that, we had talked about where your market share was around 19, 20% of the industry. You hope to grow it a little bit but in addition the middle market program. Yet it seems as if your market share of the new orders is even greater. Than we might have thought.

So if I look at these two in lock step, I guess, would it be fair to say that you're exceeding where you thought you'd be in terms of incremental change at this point in time? Both on the order side and the margin side.

Yeah, I'll let Bill speak to the market share from a contribution margin. We have stated that we believe production over 40,000 units will benefit in excess of 20% from an incremental contribution margin. And I think that's still a fair statement.

How much more above, Jeff, is right now -- is moving around a little bit as we bring on the first shift -- I'm sorry. An additional shift of people on lines one and eight. There's some start-up efficiencies there.

But nonetheless, you're right in that we've seen some actual performance greater than that. But I would just caution you from being too optimistic yet.

Fair enough.

Jeff, we just got, I think, trailer body builder magazine does basically a survey to find out who's got what as far as market share is concerned. In 2002, our market share was roughly 19%.

We are fully expecting our market share to go down in 2004. It actually went up to 21%. So we had some good growth in the market.

We're a bit perplexed on how that happened, but nonetheless, we're going to take those 200 basis points improvement.

Okay, guys. That's all for me. Sal may follow up with another question, but thanks a lot and good luck.

There are no further questions at this time.

Thank you very much. We'll talk to you in about three months. 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 lines.