Wabash National Corp (WNC) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Wabash National first-quarter 2004 financial results conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to William Greubel, Chief Executive Officer. Please go ahead, sir.

Thanks, Paul. Good morning. Before we begin, I would like to make an important announcement. As with all 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 first-quarter earning call. I am William Greubel, the Chief Executive Officer. In the conference room with me this morning are Mark Holden, our Chief Financial Officer, and Dick Giromini, our Chief Operating Officer of Wabash National Corporation. I would like to welcome all the listeners on today's telephone conference call, as well as those listening live via the Wabash National Internet site webcast.

We have much to cover today, and we will try to provide as much information as possible. At the conclusion of the prepared portion of our presentation, we will open the call for questions from the listening audience.

The first quarter demonstrates we are out of the turnaround business and into the business of delivering a return to our shareholders. I am very pleased to report a net income of $6.9 million or 23 cents per share diluted earnings on sales of $222 million. We are pleased with our results in the first quarter. We saw many new and exciting challenges ahead of us, but we have a clear workable roadmap to achieve the results we desire.

Although we are currently being challenged by raw material increases, I feel that we have an excellent opportunity to meet or exceed our plan. Since our last conference call, we continue to close new orders and now have approximately 68 percent of our plan booked. We should be very successful with the majority of orders where we can raise prices to recuperate all or part of these raw materials increases.

We have not seen any major cancellations, other than a mutually agreed-upon order shift by a major core account. We do not anticipate the potential -- we do anticipate the potential for further movement of orders.

Quote and order activity slowed somewhat immediately after our pricing announcement in early March, but recently seems to have rebounded to very satisfactory levels. It is very important to note that this pricing issue is both a trailer and truck industry issue and not just a Wabash National issue. It seems that all trailer OEMs have increased prices, some of which are higher than our announcement of 4.5 to 6 percent. As has been the case, we will continue to pass these increases through with the constraints of our terms and conditions. Although steel pricing seems to have leveled somewhat, I am not at all convinced that we shall have any appreciable fallback in the future -- in the near future, excuse me.

Our first-quarter results reflect improvement throughout all aspects of our business. We continue to drive improvement throughout the organization. In the first quarter we did an excellent job of adding additional shifts to our DuraPlate and Reefer lines. We have created a good process to use as we anticipate more capacity later this year in response to increasing demand.

As is typical of earnings discussion, Dick and Mark will discuss their areas of responsibility following the remainder of my comments associated with the state of the industry and our success in the mid-market, some comments on the retail branch operation, and our sales going forward in 2004 given the recent raw materials increases.

Looking at the industry update. The recovery we have been waiting for in the trailer industry has arrived. The past four months have been the best net order months in the past four years. Trailer-only net orders for January and February improved year-over-year by 55 percent from 31 percent respectively. On a unit basis, trailer only net orders were 24,650 in January and 22,903 for February. For Wabash National, net orders for the first quarter were up 45 percent compared to the first quarter of 2003.

Through February, year-to-date trailer-only industry production was 32,517 units, a 16 percent increase over the same period in 2003. For the first quarter, Wabash National built 10,646 trailer-only units, an improvement of 13 percent over 2003. The American Trucking Association's truck tonnage index came in at 154.9 in February, the second highest level ever. The high was just recently set in December of 2003 at 155.8.

Over the past six months, trailer production backlog has grown by over 45,000 units. At the end of February, backlog had grown to 119,241 units or 6.9 months. Over the past six months, Wabash National's backlog has grown by over 6000 units. At this point in time, given available five-day capacity, we will add production shifts to manage customer requirements and backlog. First-quarter daily production rates for Wabash National was up 14 percent versus the fourth quarter of 2003 and up 23 percent versus the third quarter of 2003.

As we saw in the fourth quarter, quoting activity continues at a very strong rate. The number of quotes and re-quotes is a good indicator that our customers continue to be serious about purchasing trailers.

Our core customers continue to show impressive results. Most are having successful rates in freight rates. The majority of orders we have seen we believe were for replacement of equipment. The effect of the hours of service rules are not still clear, although it appears that some carriers are holding on to used equipment rather than trading them in to offset the effects of the hours of service requirements. We also believe that utilization of their respective fleets is very high, suggesting eventual growth purchases going forward.

Due to the steady stream of cost increases associated with raw materials, Wabash National announced a price increase of 4.5 to 6 percent. As commodity prices continue to increase, we factor them into our quote process. As such, pricing over the next few months will probably increase further. We are hearing that industry pricing as a whole is moving up as manufactures pass-through cost increases.

Looking at the midmarket. In the first quarter, we closed 83 new accounts with 15 midmarket identified targeted accounts being included in that number. We continue to optimize our focus fleet opportunities where we believe we have the best opportunity for conversion. We work hard to bring these to closure, principally with the DuraPlate product. We are actively calling on over 750 midsize fleets today through both our focused sales and dealer groups. Later in the year we should have some good metrics to discuss.

Interestingly a large portion of orders in this category would be considered as growth versus our partners who mostly continue to replace existing equipment. We continue to be optimistic about our future in this category.

Looking at the retail branch operations. As I have stated in the last conference call, the focus going forward is performance. We have beat up and reshaped this unit throughout 2003 with the most recent change added to top. We are behind our plan for profitability in this line of business. In the first quarter, however, we have made some good progress.

Our focus on key accounts is paying off. In addition, we saw a good uptick on our sales of our aged new trailer inventory at the end of the quarter as new pricing kicked in. Backlogs are looking better, and we have now begun to restock our branches with new model year product. As the industry takes off, we should see continued sales growth at our branch operations.

We have a new problem of sorts in our used trailer business -- we are out of stock. As a comparison, same-store sales declined 23 percent versus prior year. Inventories are at extremely low levels. Used product is very hard to come by. Pricing is moving up as equipment availability is scarce. We are actively involved in the market buying used equipment, most of which is already presold. Fleet trades are slow to come in as most fleets continue to extend their commitments on trades. We see this continuing for the foreseeable future.

This should help the sales of new products going forward. To me this is another indication that most fleets are running at very high equipment utilization. We will put more effort into the procurement and sales in this current market.

Our challenge continues to be in the service and parts side of the business. They are interconnected. Although same-store sales showed a marginal improvement versus prior year, we have a long way to go.

Dick will speak to recent accomplishments and our opportunities going forward. All-in we will achieve a level of profitability later this year.

Looking at 2004 going forward, ACT continues to be very bullish with trailer-only forecasts for 2004 increased to 247,000 units. We continue to believe trailer sales will come in between 220,000 and 230,000 this year. As a point of interest, ACT has now issued their forecast through 2008, and I will give you an update.

In 2005 the forecast is for 288,000 units. 2006 the forecast is for 318,000 units. 2007 forecast is for 330,000 units. And 2008, the forecast is for 349,000 units. And as a point of interest in 2003, I believe we were roughly about 182,000 units. Clearly they are a little more bullish than we are. The trend is important, however. Given the continued strength in the economy and our share growth in the midmarket, we should see fairly decent numbers going forward.

Now to ground our enthusiasm a bit. Recent raw materials price increases could tend to slow both economic and industry growth. As I have stated before, I believe we will see elevated raw material pricing versus prior years continuing into the second quarter. Our customers have options as long as they have available capacity as measured in the utilization of their fleet. I believe that as economic growth continues, these options will contract.

We continue to see relatively strong buyer interest in the market. We expect the second quarter production to be in the 13,000 to 14,000 unit range, and we are still comfortable with our 50,000 unit target for all of 2004.

Mark will discuss in greater detail our first-quarter results and financial condition after some comments by Dick relative to the quarterly operations. Dick?

In our drive to operational excellence within our manufacturing segment, we have consistently remained focused in five key areas -- safety improvement, quality enhancement, delivery of our products on time, optimizing productivity levels, and driving cost reduction throughout all our operations. Following your tremendous achievement in the area of safety improvement, our total recordable incident rate for the first quarter ended at the second-best in our history, only slightly surpassed by the fourth quarter of 2003.

Nonetheless, we are proud to be operating at a level that is 60 percent of the national average for our industry sector and actually set an all-time best for the month of February. While disappointed that our string of consecutive quarters of improvement ended at five, we truly believe that no accident is unavoidable and remain committed to eliminating all incidents from the workplace.

Quality improvement remains a key area of focus for us. Our entire first-pass yield performance during this past quarter reached our highest levels to date at 83 percent with February and March both coming in at 86 percent. We continue to maintain very strict outgoing quality acceptance standards as we drive to further improve this performance.

Again, as I stated last quarter, 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. While we have made good progress in reducing warranty-related problems, we want to progress even faster. To this end, we have added a warranty improvement engineering position to focus 100 percent energy in analyzing root cause of field failures, working internally with product and process engineering and driving the needed changes throughout our system. This position will work closely with and complement the efforts of Rod Ehrlich and his drive to develop the ten-year trailer.

As reported last quarter, with all the improvements in quality and in the consistency of our manufacturing process, we have gained a high-level of predictability in our ability to accurately schedule our production lines. This has resulted in consistent schedule attainment of nearly 100 percent month-to-month with the first quarter this year coming in at 101.8 percent, which actually reflects a slight ahead of schedule position.

Regarding our productivity improvement efforts, I will simply say that all of the improvements that have been made and reported on in the past have been sustained, with the first quarter of this year being our best ever surpassing even our own internal expectations. This was accomplished even with the added ramp-up costs and inefficiencies associated with adding shift on our line one DuraPlate and our line eight Reefer product. Our effective available capacity is at an all-time high with capabilities to meet our current demand on basically 1.5 shift alignment as a result of the nearly 50 percent productivity gains realized over the past year and a half. Plenty of open capacity remains to meet whatever the market needs may be over the next couple of years.

Cost reductions savings continue to grow through our focused continuous improvement efforts. Now over 270 formal events have been conducted with over $44 million generated in direct labor cost savings alone. When combining direct labor cost reductions, productivity and throughput improvements, along with purchase material savings, our total annualize savings exceeds $70 million and growing.

Now let's turn our attention to our branch operations. Following the significant restructuring with the closing of some 13 branches and numerous staff changes, the branch business is now on the way to a successful turnaround.

New trailer sales are strong and increasing with new opportunities being brought forward almost daily. While used trailer availability remains limited, margins are strong and increasing. Our areas of heavy focus are increasing our service and parts sales volumes. The growing new trailer sales will ultimately service a natural pull-through for both service and parts sales, but there is a lag affect while waiting for newly sold units to reach their required maintenance periods. In the meantime, we have increased our service salesforce with an emphasis on acquiring more national accounts that have increased our mobile service fleet.

On the operational effectiveness side, we are making nice progress at many of our branches as we implement 5S and conduct focused improvement events. Leveraging our successful experience on the manufacturing side of our business, our emphasis at the branches is now in optimizing the highly repetitive activities that occur almost daily. For example, through a recent CI event, we have identified that nearly 20 percent of work performed was door replacements and that there was 55 percent non value-added waste that was built into the existing process. Similar to what we have successfully accomplished in manufacturing, reduction of this waste will yield greater efficiency, lower-cost and higher profitability for these activities. All these efforts have helped bring about a first-quarter performance that reflects a nearly $3 million improvement versus the fourth quarter of 2003. While certainly not where we need or want to be, we are certainly encouraged by the recent improved performance and look forward to continued progress.

Overall in summary, I was extremely pleased with the excellent performance of our manufacturing segment and am proud of the work that the whole team is doing. A true never-be-satisfied attitude exists that will continue to drive more and more improvement as the year progresses. Likewise, I see a new level of enthusiasm from the retail distribution group that is becoming contagious throughout the organization and look forward to continued progress throughout this quarter and the rest of the year.

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

Thanks, Dick. As Bill mentioned, we are starting the year on a very strong note. Our balance sheet is extremely clean from both an operational and financial perspective.

I would like to review with you our first-quarter results and our financial condition as of March 31st, 2004. First, our first-quarter '04 results. Sales were 222 million on 11,200 new units. Income for the quarter was 6.9 million or 23 cents per share fully diluted.

As most of you are aware, the Company is in a net operating loss carryforward position, and as a consequence, our results are not currently tax effect. In addition, equivalent shares on our convertible notes are now included in the fully diluted EPS number as the conditions necessary to convert into common stock of the Company were met on January 1st, 2004.

Results for the first quarter are not subject to the level of noise that has been in most of our quarters for the last several years. But the first quarter still need some explanation as we have sold certain assets in the third quarter last year which impacts comparisons. In addition, we made certain reclassifications to our prior year information to provide better clarity to our business.

Turning for the moment looking at sales. Consolidated sales as I mentioned were 222 million on 11,200 units. This compares to 220 million in the fourth quarter last year on 11,300 units and 223 million on 9,600 units in the first quarter a year ago. The first-quarter a year ago results includes approximately $20 million of revenue from assets that we sold in the third quarter last year. Manufacturing sales were 188 million on 11,100 units, retail sales were 57 million on 1,500 units, and $24 million of revenue was eliminated from consolidation or 1,400 units.

Turning now to productline mix. New trailer revenues in the fourth quarter were 192 million on 11,200 units shipped. That compares to 11,100 units built. Used trailer revenues for the first quarter were 13 million on 2,000 units, virtually flat with the fourth quarter last year of $12 million in revenue and 1,800 units. Parts and service revenues in the first quarter were 13 million, flat with the fourth quarter of last year and down compared to a year ago of 28 million, again because of the assets that were sold in the third quarter.

Other revenues including finance and leasing revenues for the first quarter of this year were 4 million compared to 2 million of a year ago, again reflecting the sale of our rental and leasing assets. Gross margins for the first quarter were 10.4 percent. This compares to 7.1 percent in the fourth quarter and 10.4 percent in the first quarter a year ago. Gross profit from the assets that were sold in the first quarter of '03 was $4 million. The gross margins in the first quarter this year primarily reflect the improvement throughout the business which Dick spoke of with some offsets due to increasing material costs.

Comparing manufacturing margins in the first quarter this year compared to the first quarter last year, first-quarter gross margin last year included charges totaling approximately 3.4 million related to new and used trailer inventories. Adjusting for this, gross margins in the first quarter a year ago were 11.9 percent. Material costs per trailer, including the effects of both product and customer mix, increased approximately 3.7 percent over the first quarter of a year ago. Offsetting these increases were improved productivity year-over-year and incremental contribution margins.

On an overall basis, the comparison to Q4 '03 is difficult because of the fourth-quarter holiday shutdowns and because the quarter included 1.7 million of net charges, 4.1 million in incentive compensation offsets in part by a $2.4 million charge in property tax reductions. Adjusted for the charges, Q4 '03 gross margins were 7.9 percent.

Comparing our manufacturing margins for Q1 '04 versus Q4 '03, we believe the impact from rising material costs in the first quarter this year was 1 to 2 percentage points in the quarter as we began to experience marked increases beginning in March, most notably with steel and lumber. As we have discussed in the past, there is generally a 45 to 90 day lag effect between when we incur the cost of increase and when we can pass it on to customers. As Bill discussed, we have been successful in recovering a fair amount from our customers for future orders. However, there still will be some impact on Q2 because of the lag affect. Right now our best estimate is a 2 to 4 percent impact in Q2.

Offsetting this impact during the second quarter will be one, continued improvements, productivity in both our manufacturing and retail businesses, and secondly, incremental contribution margins from increased production during the second quarter. As Bill previously mentioned, during the second quarter, we estimate a 13,000 to 14,000 unit quarter and are still comfortable with 50,000 units for 2004. As a result, we would expect gross margins to be somewhat flattish in the second quarter versus the first quarter on a consolidated basis.

In addition, during the first quarter this year, we have accrued 1.5 million for incentive compensation compared to zero in the first quarter a year ago. A million of the 1.5 is classified in cost of sales with 500,000 classified in SG&A. We anticipate this level of incentive compensation accruals each quarter over the balance of the year.

Now turning to SG&A. SG&A in the quarter was 14.2 million compared to 12.2 million in the fourth quarter. The increase principally is a function of timing both from a professional fee standpoint, as well as certain information technology costs. Prior period information has been reclassed to conform to 2004 presentations. During the first quarter of '03, we have reclassified approximately $800,000 from cost of sales down into SG&A. And for the fourth quarter last year, there will be almost $450,000 reclassed out of cost of sales down to SG&A. The reclassifications were made to better match costs with activities, principally in our retail business.

Looking at interest expense and other, interest expense decreased 5.2 million due to both reduced interests and reduced amounts of borrowings as a result of our recapitalization efforts last year. Foreign exchange primarily related to the Canadian dollar versus the U.S. dollar was a loss of $100,000 in the first quarter this year. That compares to a gain of 2.9 million in the first quarter last year. Other for the first quarter this year includes gains related to assets sales.

Looking at taxes. As you well know, we did not tax effect our earnings for the quarter. Our NOLs amount to approximately $250 million. As a result of our past losses, we have fully reserved for this tax benefit on our balance sheet with approximately $87 million in tax reserves. We continue to evaluate the need for this reserve and will adjust it when reliability of our NOL is more assured.

For the year, we expect we will be subject to alternative minimum taxes, which will amount to approximately 2 percent of pre-tax. Most of the AMT will be recoverable in future periods. Other than the AMT, we do not expect tax to affect second-quarter results.

Looking at our earnings per share calculation. Earnings for the quarter are up 5.4 million versus the first quarter a year ago. The first quarter a year ago included $1.9 million of the earnings associated with our wholesale parts business and our rental and leasing businesses, which were sold in the third quarter last year. Adjusting for the earnings from these businesses, our earnings for the first quarter this year are up over $7 million. Adjusting for the assets sales in the first quarter of last year, our earnings improvements for the first quarter this year were driven one, by income from operations of $4 million increase year-over-year, a $5 million increase year-over-year in our interest expense, which is offset by other net of $2 million, again net interest $7 million increase or improvement year-over-year in our earnings.

We included our EPS calculation in our press release due to the convertible notes being included in the fully diluted calculation. The interest on the convertible notes gets added back to the income number at 3.25 percent, plus the amortized debt issuance cost of approximately $200,000 in the quarter. Depreciation and amortization for the first quarter was approximately $5 million, and we spent approximately $1.6 million in the first quarter on CapEx, and we continue to believe that CapEx for this year will approximate $10 million.

Looking at our headcount totals at the end of the quarter, full-time associates number 3300 at the end of March. Our temporary workforce numbered 600 at the end of March for a total of 3900 associates at the end of the first quarter. This compares to approximately 3700 associates at the end of last year. Backlog was approximately $190 million at the end of March compared to 200 million at the end of December. The backlog is essentially unchanged from year-end even though we increased production about 7 percent quarter-over-quarter. The backlog number excludes approximately $100 million of orders affected by the price increases announced in early March, which are still being discussed and that have not been agreed to by the customers.

Turning now to our financial condition at the end of the first quarter and looking at our balance sheet. Cash at the end of March was 12 million. Liquidity at the end of the first quarter was approximately 35 million. Since the end of the first quarter, that has increased to $65 million of liquidity today. Accounts Receivable was 96 million as of the end of March compared to 67 million at the end of December. Day sales outstanding stands at 39 days and increased nine days from the end of the year. The increases in both dollars and days outstanding results from exceptionally strong sales in the latter part of the quarter. Inventories at the end of the first quarter were 88 million, essentially unchanged compared to year-end.

The slight over 85 million at the end of December is in line with our scheduled production to meet customer demand. Total inventory turns were nine times in the first quarter of '04 compared to six times in the first quarter a year ago. Used trailer inventory stands at $10 million or 1700 units. This compares to 12 million or 2100 units of the end of last year. Open trade commitments stood at $10 million at the end of the first quarter.

Looking at our debt. Our total debt, including both on and off-balance sheet debt, was $243 million, of which 231 million was on balance sheet. This compares to 239 million of total debt at the end of last year. As a result, our net debt increased approximately $4 million which went towards funding a $20 million increase in working capital requirement in the first quarter.

We were in compliance with all three of our financial covenants at the end of the first quarter. First, our maximum debt as defined to EBITDA covenant requirement is less than 4.25, and our actual debt to EBITDA was 2.41. Our minimum fixed charge covenant requirement is to be graded on 1.05 at the end of the first quarter, and our actual was 2.13. And thirdly, our CapEx covenant is no more than 10 million for the year, and again in the first quarter, we spent 1.6 million.

Finally I would just like to spend a minute on a CFRA report. Many of you have seen the Center for Financial Research and Analysis, i.e. CFRA, report on Wabash's 2003 financial statements. First, let me say that they CFRA did not discuss any of their findings with the Company prior to the issuance of the report. The following provides an update on the two principal items raised by CFRA as they relate to our first-quarter results.

First, CFRA commented on our bad debt provisions, and let me say in the first quarter of this year we essentially had zero provision for bad debt for first quarter of 2004. This compares to approximately over $1 million in the first quarter last year. The $1 million provision last year one, principally related to our finance and leasing business, which we sold in the third quarter last year. And also if we look at our aging at the end of the first quarter, receivables over 30 days pass due at the end of the first quarter totaled $25 million. Receivables over 30 days at the end of the year totaled $40 million. So we have seen a considerable improvement in our aging receivables, hence no little provision for bad debt.

Secondly, CRRA also noted a decline in our warranty costs, and I will simply repeat really what Dick talked about. In our first-quarter results this year, our warranty provision was 1.1 million, which was a $300,000 decline from the first quarter of last year despite increasing production. The decline is attributable simply to improved quality. As we have discussed in the past, we expect our warranty costs to decline by 60 to 70 percent over time as we improve our processes and the quality of the trailers we build.

With that, I will now turn it over to Bill.

Obviously we are very pleased with our progress but much more remains to be accomplished. It is very frustrating especially as the industry is turning to now be faced with these raw materials increases. But from a timing stance, I would rather see it now than later. We are actively engaged in continuing to recuperate these cost increases allowed by our terms and conditions. In addition, we will continue to challenge our suppliers to share this burden.

Going forward, it is my belief that raw materials price fluctuations will allow the industry to recoup some lost margin. We are going to continue the course we laid out and focus on only those opportunities that lead to increased share value.

At this time, we would like to open the call up to questions.

(OPERATOR INSTRUCTIONS). Chip Miller, Bear Stearns.

This is Chip Miller on behalf of Peter Nesbolt (ph). I would like to try to quantify the material cost impact a little bit more. You said the material cost per trailer was up 3.7 percent year-over-year, and the 2 to 4 percent in Q2 was that quarter-over-quarter or year-over-year?

Quarter-over-quarter. I think it is important to understand a little bit that some of the increase that we saw in the raw materials was really due to mix. We just completed a brief study and looked at just specifically some of our partner accounts and really found out that we have had a significant shift in the first quarter of mix versus -- as you know, last year we were very heavy into Snyder in the first quarter. In this quarter, we saw very small amounts. Snyder's order just began basically in March. Their trailer is a significantly cheaper trailer to produce as far as raw material is concerned versus some of the others. So when Mark said, we saw this increase year-over-year, a portion of that is just the mix of the type of product we are making.

The first quarter we saw about 3.7 percent material cost increase in total, and to Bill's point, we believe probably about half of that is due to customer mix, 1 to 2 percent points is due to true material cost increases. But the 2 to 4 percentage percentage increase immaterial that we believe we will see in the second quarter, again keep in mind we will continue to benefit from incremental contribution margins from build and production rates, and that is why we believe net our second-quarter gross margins will be flattest quarter-over-quarter.

Okay. That is great. Thanks.

Mark Degenhurt (ph), Oppenheimer Capital.

I have a couple of questions about backlog. I just want to confirm I heard you correctly that the first-quarter number was 190, and I think you said it was relatively flat from 200 at the end of the year?

That is correct, and we have approximately 100 million orders that are pending resolution of our price increases.

Okay. That point is actually what I wanted to follow-up on. Is that 100 million pending price resolution, is there any of that that was in the year-end number that was taken out because of the price resolution issue?

Yes. Certainly some of it would have been, no question. So it is a little fungible, but nonetheless there is about $100 million of orders not included in the 190 that some of which would have been included in our year-end number.

But you do not know that number?

No, we don't.

Similarly do you have a sense of the mix at year-end versus this quarter between Tier 1 accounts and middle market accounts in the backlog?

I would think that we are probably seeing -- in the backlog, we are probably seeing a higher mix of noncore accounts than core accounts than we have seen in the past. As you know, we believe that the percentage of core accounts as a percentage of total revenue will decrease year-over-year, and I think you can pretty much put that in your new model that that is happening now.

We expect this year our mix, our core accounts to be roughly a third of our business this year. That compares to 50 percent last year.

So that should have margin implications as we proceed towards the middle of the year?

Yes.

Adam Zelheimer (ph), BB&T Capital Markets.

It is Tom Albrecht actually. A couple of different questions here. You had a huge increase in Accounts Receivables versus December 31st. What is going on there? I know you gave us some insight into the aging of the receivables, but it is still a big increase nonetheless.

Well, as you know, in the first two months of the year, you typically see -- we have got a model change coming up. We had bad weather. We were very concerned going into March that we are able to get the production that we have that was ordered out. And March was an exceptional month. So a lot of the receivables were really on the basis of products that were shipped in the last 30 days. But this was product that was ordered and produced over the first quarter.

I would say, Tom, that is pretty typical from a timing standpoint. If you go back to the first quarter last year and look at the receivable balance compared to the previous year-end balance, you will see a marked increase.

In the fourth quarter in December, we have a plant shutdown the last two weeks of every year, and so therefore we are not generating any new receivables in the fourth quarter for that period. We are simply collecting on receivables. So fourth quarter tends to be our historical low point for receivables. So I would just really attribute it to nothing other than seasonality.

Okay. That is helpful to hear. Also, just looking at the really I guess the G&A line, I think you said there were some professional fees in there. I guess auditing and stuff like that. Was there anything else in there? Not including the selling but just the G&A, it was 4.7 percent of revenues versus 3.8 in the fourth quarter.

Right. And professional fees is probably roughly .5 million in terms of timing quarter-over-quarter, and then we also have some consulting fees if you will with IT that again is timing.

Okay. I have got questions all over. Mark, you were giving numbers pretty quick. I am sorry to ask a couple of these again, but I just want to make sure I understand. Bill, in the beginning, you mentioned you built 10,646 trailer-onlys. But then later on, I think I heard 11,200 units that were built. Is that right?

11,200 was shipped, and 11,100 were built.

So that would include containers?

Yes. (multiple speakers).

Okay. And retail sold 1500 trailers?

Correct.

New trailers? Okay. And what was the dollar amount of that?

Total revenue for the retail was 57 million. Their parts and service revenue was 13 million, and their other revenues were 4 million. So then -- and their used trailer revenues were 13 million. So in effect, you can back into it.

Right. Okay. I guess, too, you talked a little bit more -- you talked about 83 new accounts in the quarter, 15 of which you characterize midmarket. What is the difference on the rest? There is not that many national fleets that would make up 68 accounts, or are you penetrating the private fleet market as well? Help us get a sense of what is in that 83?

Of that 83, we had two which we would consider key accounts that the factory-direct guys work on. These are even bigger than midmarket. These would be considered our mega accounts that we have targeted, and the rest were fairly good fleets at the branch level, some of which, Tom, just aren't own our identified list, but they carry a lot of weight.

As we try to get into the metrics, we have determined a fixed amount of midmarket accounts. And so when I say that these are the closures in midmarket, those are identified accounts. However, at the branch level, there were about at least a half-dozen to a dozen accounts that would have met our definition of midmarket, meaning that they had a fleet size over 250. But they are being called on by the branch side of the business.

So it is a definitional issue, but if you guys are asking for metrics later on, we have to draw the line somewhere.

Sure. Okay. I just want to make sure, Mark, you shared a number of a gross profit margin I think of 11.9 in Q1 '03, excluding $3.4 million of charges. Was that Q1 '03 or Q4 '03?

Q1 '03 included the 3.4 million, and yes, it was 11.9 adjusted for that charge. Again, keep in mind, that gross margin number includes gross margin from the businesses that were sold or the assets that were sold.

Was that $4 million; is that right?

Yes.

All right. I guess it would be helpful I think for everyone to hear a little bit more about what a "typical" discussion is like on pricing with let's say your core accounts versus -- I think so many of the others are new that it is not a price increase. It is just this our price in the marketplace. Could you talk about what goes on and how much give-and-take there is on the 4.5 to 6 percent? I think people we are all just trying to make sure that the backlog is not only reasonably firm into Q2 ,but hopefully a little bit beyond that.

I think first you need to understand we gave two numbers for backlog. We gave $190 million of firm backlog, and then we gave another $100 million that is accretive to that.

The discussion, as you can imagine, these are fleets that have never seen a price increase forever. So to say that these are sit down, have lunch, a drink and resolve it, I guess I have not been in one of those yet. They get downright nasty.

The issue that really is important here, Tom and everyone else, is that this is not an issue just associated with us. This is an industry issue. In a sense, we are being somewhat supported by our competition in that in some cases we believe that some of our competition is even raising prices higher.

This is more of a timing issue for the fleet. They have to make a decision. If they decide not to pull the trigger now, they get back in line again because, as you have heard, leadtimes are way out. I think that a lot of the fleets are at a very high utilization of their equipment. And as such, we may be moving into more of a growth-oriented phase of equipment purchasing versus a replacement phase.

But their equipment is aging. The total cost of ownership of the DuraPlate is still very good, very attractive even given the increase in prices. And we are going in there. We are asking for the full boat. We are standing firm. We have walked away from some business. We have asked some of our partners to hold because they had some problems with it and they have agreed. But I think when it is all said and done and because it is an industry issue, what we have in backlog will come back. We are in discussions on a daily basis and doing a lot of road trips to try to help our customers understand that, and I feel pretty comfortable that we will see people falling in line.

It is interesting to note, Tom, that from our standpoint, our capsulation rate is relatively small. And the big issues that we have are in the next two to three months, which we are already in one month right now. Where this is a shock and awe period that we are trying to get through these times. But going forward the price is what it is, and if they want to go out and quote out in the midmarket, I think what we are generally seeing is that those differences in prices that existed four or five months ago are the same, it is just elevated by 1000 bucks.

I also want to make sure everybody understands the point that Bill made in the prepared material, and that is we will probably be more keen on managing leadtime or backlog. In other words, we will take production rates up as demand comes, but also we will manage. We would just as soon manage or operate with a shorter or less backlog principally because of rising material costs. The more we can manage that exposure through build rates, the better off we will be. So I think this cycle for the industry, as it relates to Wabash backlog, will probably be a little different than what people have seen for Wabash backlogs in the past cycles.

Okay and then lastly, typically in my model at least I used an average trailer price, and I know there are a lot of mix issues, but in the neighborhood of 17,000. Any thoughts on what we might want to plug into the model?

I think it is probably a function of how you model the material cost increases, Tom. You know I think we were chatting about that internally the other day that we could actually recover 100 percent of our cost increase, but yet see our gross margin percentage drop slightly only because of it is not accretive. But, again, how you model material cost increases into your model I think affects what you build into your price increase.

Okay. All right. I appreciate the thoughts, guys.

Mike Harris, Robert W. Baird.

Just really a couple of questions here probably directed for Mark. When you look at Q1 versus Q4, external shipments were down slightly, yet you had a sequential increase in build. Mark, I just wanted to get an appreciation. When you look at the amount of finish new trailers waiting to be picked up by customers at the end of Q1, how does that compare with the dollar level for Q4?

In that sense, our finished goods inventory would be relatively flat. I think it might have been -- well, in essence flat -- I think in process. If we look at our total trailer count, which would include in process trailers, it is up maybe a couple of million dollars.

I think one of things you might also want to think about is the mix of that inventory is much better, meaning there is more in that inventory that is being sold or waiting for shipment to our customer than sitting on our lots waiting for a customer to come in and buy it.

So at the end of the quarter, we had some laggards, but we also sold a lot of aged inventory during that time frame. So the mix of the inventory is much better and the turns of that inventory should be significantly better.

To give you an appreciation to Bill's point, at the end of the year, we had almost $14 million in new trailer inventories, including both the manufacturing segment and retail segment, which was over 90 days in inventory. Again, that is $14 million of new trailers in inventory over 90 days. At the end of the first quarter, that same number is $4 million in terms of aged inventory of new trailers over 90 days. So to Bill's point, we have improved our aged inventory by almost $10 million in three months.

Okay. I think that adequately addresses my question. That is helpful. Really just one another question. The whole tax rate issue, I think we are all aware that Wabash won't be paying cash taxes in 2004, but when should we start applying a GAAP tax rate to your quarterly earnings? Would that happen in the Q3 quarter when you reverse out hopefully your NOL reserves?

I do not think it will happen in Q3, Mike. I think we need to demonstrate probably three-quarters of profitability for us to begin to look at bringing that reserve for the tax benefit back. And so realistically for modeling purposes, I know it is difficult, but I would tell you to look at calendar '05 as being the first period to put a tax provision in there.

Again, keep in mind, we will have an AMT tax of roughly 2 percent this year. But other than that, a full tax rate I would not model until the beginning of next year.

And that AMT tax rate of 2 percent, you expect that to hit starting in Q2?

Correct.

All right. Thanks very much.

Grange Johnson, Lagrange Capital.

My question has been asked and answered. Thanks.

Jeff Kauffman, George Weiss (ph).

After those last two guys, I do not know what is left to ask, but let me just ask one basic question. Eventually this backlog is going to sign on, eventually going to start collecting these receivables, and the reality of the future is going to be somewhere between what you are thinking and what ACT is thinking, and there is going to be a lot of free cash generation.

What I want to know is as you start to generate free cash, what are the cash priorities? To the extent you're paying down debt, what type of debt are we going to be taking off the books early? To the extent you're feeling in a position to be able to buy back some of the dilution from these convertibles, can you just give us a sense of the timing and when you think you might be getting into each different level?

Good question. Yes, priority number one will be our bank debt. The free cash flow we will generate this year will go 100 percent to bank debt. We think sometime next year, the first half of next year, we will be able to be out of our bank debt, and at that point, our converts will be the only debt remaining. And those are five-year notes. No call, no put. So we would be in a position of accumulating cash.

And as far as what we do with the cash behind that remains to be seen, whether it is a share repurchase or whenever. So that will be a great problem to have, and I think you will see us begin to talk more about that later this year. But right now I think the focus is one on execution, making money and getting out of our bank debt.

So it's a little early to start the letter writing campaign for the dividend to the board?

(multiple speakers). Yes, it is.

Okay. Well, things look terrific. Congratulations.

Jeff Miller, Bear Stearns.

It is Peter Nesbolt (ph). If you went over these two questions before, I apologize. It looks like selling expenses have been coming down sequentially for the last few quarters. Are there continued improvements that are going to be made there? Do you think it levels off, or does it start to ramp up as sales start to ramp up during the year?

I think it probably will ramp up just a bit. The selling expense that we are seeing that would go up would be at the branch level. However, I think on SG&A as Mark and I and Dick have had meetings on it, we think that the G&A we should be able to address, and over the course of the year, we would like to put into some programs that will reduce that going forward.

The decline that you are noting, Peter, is principally related to branches that we have closed throughout last year.

Okay. And then a question on the cash-flow statement for the year. Can you just walk through briefly what the major line items might look like -- D&A; what kind of working capital you think you have to absorb as you ramp up; what the impact from the tax benefits might be, and what your CapEx is looking like for the year?

First, from a D&A standpoint, it ran 5 million in the first quarter, and we said it will run 16 to 18 for the year. We still believe that. From a working capital standpoint, net investment was about 20 million in the first quarter. We have said previously that we believe throughout the course of the year, it will be 10 to 15. We still believe that.

Again, keep in mind seasonality plays a lot into this. The fourth quarter as previously noted our receivables come down dramatically. So net net on the calendar year basis, we still think we will be a net user of capital of 10 to 15 for working capital purposes. Obviously we will not be paying taxes, and CapEx you asked about, again we think it will come in below 10 million. So I think all free cash flow will be used then to pay down bank debt.

Great. Thanks.

(OPERATOR INSTRUCTIONS). There does not seem to be anymore questions. I will turn the conference back over to you.

Thanks, Paul. We appreciate the time. We are going to continue to focus on what we are doing. We are pretty excited about our business going forward, and let us get back to work. Thank you very much.

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.