Wabash National Corp (WNC) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Wabash National second quarter 2004 financial results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time if you have a question please press the one followed by the four on your telephone. As a reminder, this conference call is being recorded Wednesday July 21, 2004. I would now like to turn the conference over to William Greubel, President and Chief Executive Officer of Wabash National. Please go ahead sir.

Thank you Wayne. 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 the cautionary statements and risk factors set forth from time-to-time in the company's filings with Securities and Exchange Commission.

Welcome to Wabash National's second quarter earnings call. I am Bill Greubel, CEO and President. In the conference room with me this morning are Bob Smith, our Acting CFO and Dick Giromini, our Chief Operating Officer of Wabash National Corporation. I'd like to welcome all the listeners on today's telephone conference call as well as those listening live via the Wabash National internet site webcast. We have much to cover today. We'll try to provide as much information as possible. At the conclusion of the prepared portion of our presentation, we will open the call for questions from the listening audience.

The second quarter of 2004 was a great quarter for Wabash National, especially in light of the significant raw material increases incurred by our industry over the last six months. I am very pleased to report net income of $18m or 56 cents diluted earnings per share on sales of $255m. As you will see over the course of our discussion, there were many key contributors in this quarter. Our book-to-orders have increased from 68% as reported on our last conference call to over 90%. Our backlog for all lines now extends through October. As we had previously announced we have added shifts to two smaller lines. We are evaluating other additional shifts in lieu of continued interest in our sheet and post and high-hour DuraPlatet product line.

Pricing on raw materials continues to move upward, although at a lesser pace. Surcharges have been replaced by generic price increases. Although aluminum raw ingot pricing remains relatively level, convergent costs of this material into finished product is moving up steadily. Wood flooring is also seeing continued prices increases as raw wood pricing and availability tightens. It is our view that raw material pricing will continue to increase over the foreseeable future, certainly well into 2005. As such we will continue to pass on price increases. As we have discussed in our last conference call, we intended to go back aggressively into our backlog to recoup pricing. Although our competition did not pursue this tactic, we were very successful in mitigating the cost effect in the second quarter. Through the reminder of the year an increasingly larger percentage of our business will reflect costs passed through. As a point of reference, pricing quoted to our customers is generally in the range of 6% to 12% higher than prices quoted over the last 6 to 12 months.

The operations side of the business continues to perform excellently. We are now achieving productivity, quality, safety, labor and overhead improvements that have never been before seen at Wabash National. The good news is that there is more to come. We continue to maintain our focus and high expectations of improvement. Dick and his crew have done a great job.

The industry has experienced cyclical softness as most major orders are generally placed in the fourth and first quarters of the year. The new orders published by ACT in the March through May timeframe should be averaged. But numbers are still good. Quote and order activity has tailed off slightly, but still continues to be much stronger than last year. Although the next few months may be slightly lower, overall the industry should produce approximately 230,000 units or roughly 26% better than 2003. Although we would appreciate a higher level of growth, I am not sure the supply side could manage it all in one fell swoop. Our next big challenge will be cooperative efforts with our supply chain to ensure timely and cost-effective product availability as the industry sees similar growth in 2005.

As is typical of our earnings discussion, Dick and Bob will discuss their areas of responsibility following the remainder of my comments associated with the state of the industry, our success in the mid market and our sales outlook going forward.

Industry Update. The recovery in the trucking industry continues to progress. The first five months of 2004 have been the best trailer net order months since 1999. May was only the second time in nine months that net orders fell below year-ago levels. Unit-wise trailer net orders were 107,000 through May. Through May year-to-date trailer industry production was 91,000 units, a 26% increase over the same period in 2003 and a high since 2000. For the first half of 2004, Wabash National production of trailer units improved 24% over the same period in 2003. The American Trucking Association truck tonnage index came in at a strong 159.5 in May, second highest level ever. The indicator high was recently set in April of 2004 at 162. Year-to-date through May, the index is up 6.4% compared to the same period in 2003. While industry trailer backlogs dipped by 3,700 units in May, backlogs have grown 61% or approximately 45,000 units over the past 10 months. At the end of May, backlogs were 119,000 units, a healthy 6.2 months worth of production.

Second quarter production for Wabash National was up 17% versus the first quarter of 2004 and up 32% versus the second quarter of 2003. Production through the end of June is up 24% compared to the second half of 2003. Although down slightly from the first quarter, our quoting activity continues at a strong rate. Even with price increases, the trucking industry continues to have a need to replace aging trailers as well as growth within certain fleets. For the most part, our customers continue to show impressive results. With the economy growing and freight capacity constrained mostly for having success at raising freight rates and profitability. Given the fact that driver shortages remain a major issue for truck fleets, we continue to believe that the majority of new orders are for replacement of aging existing equipment. While not as pronounced as we experienced in Q1 or Q2, the industry continues to see a cost increase-or excuse me, cost increases associated with raw materials. We believe that industry trailer pricing as a whole is moving up as manufacturers pass through cost increases.

I am sure I'll get this question, so I thought I would throw it out now. Recently the US Court of Appeals issued a decision throwing out the new hours-of-service rules put in place in January 2004. At this time the rules will remain in effect for 45 days pending a rehearing by the government. What will be the effect to the trailer industry if the law is voided? To date there has been limited new business associated with the new rule, certainly in the dry freight market. I would expect some cancellations in the reefer side and probably some acceleration in used equipment trades, which may affect short-term used trailer pricing. It remains to be seen if the industry can maintain pricing levels achieved since the rules took affect. It is important to note that fleet utilization is extremely high with limited growth so far this year. This may be enough to maintain current pricing. I personally don't believe, however, that the law will be voided, but possibly enhanced to reduce driver hours, thus creating further potential productivity loss for the industry.

Looking at 2004, ACT has dropped their trailer-only forecast for 2004 to 244,000 units. This is down 3,000 units from the April forecast. Wabash National's forecast for the industry remains at 230,000 units for the year. Longer-term we continue to believe that a growing economy, a resurgent equipment replacement cycle, and higher fleet utilization will all bode well for the trailer market for the next few years. Reviewing the ACT forecast and then giving some indication where we think the numbers should be for the next couple years is as follows. For 2004 ACT is saying 244,000. We've said 230. For 2005 ACT is forecasting 292,000. We're believing more in the 260 range. For 2006 we do have a broad range discrepancy. That is due to the potential of a truck pre-buy. ACT is saying 309,000. We have a range at this point-and believe me, it is just a range - of roughly 245,000 to 260,000 trailers. Understand as we go forward, we will be picking up additional share in the mid market. You need to keep that in your mind.

Currently we have over 90% of our plan for 2004 booked, which is significantly better than last year at this time. We continue to expect to sell a little over 50,000 trailers in 2004 with production run-rates in the fourth quarter exceeding this level. Our mid market focus is bringing in new customers to Wabash National. So far we have added 120 new customers to our customer base this year. We have made good progress in developing our future customers. I am very, very pleased with our progress so far. Our intent is to be a key piece of their equation in the 2005 requirements. The majority of our customers, both chart and perspective, expect 2005 to be a better year than 2004. We continue to diversify our customer base. Our key partner accounts customers accounted for 34% of sales in the first quarter and 27% of sales in the second quarter. This compares to 49% of sales for partners for the total year 2003 and 61% for the total year of 2002.

I would like to also talk briefly about a change in industry statistics. Let me go into a little detail. In order to focus on the trailer market segment in which Wabash National specifically participates going forward, we are going to change slightly the way we look at the overall market. Since Wabash National no longer manufacturer flatbed trailers, we think it more accurate to focus on the van-only market rather than the overall trailers-only market. A van market is made up of dry vans and refrigerated vans whereas the trailer market also includes flatbeds, tanks, dumps, and specialty trailers that Wabash National does not manufacture. By focusing on vans we can provide our investors with specific detail as to our performance within the specific trailer segments that we participate in. Through May year-to-date van net orders are running at roughly 180,000-unit annual rate, 23% better than the same period in 2003. Of those vans net orders, Wabash National saw an improvement in share from 2003 of roughly 2%. Year-to-date May van industry shipments were 66,000 units, a 23% increase over the same period for 2003. For the same period Wabash National's share was 34%, which is five percentage points higher than 2003. Van backlogs are better than the overall trailer market. The van backlog at the end of May were 94,600 units or 6.8 months of production. This is a 26% improvement over the same period of 2003. For the industry as a whole, Wabash National is forecasting approximately 171,000 van units to be made in 2004 and over 200,000 units in 2005.

I think our customers are beginning to see the raw material cost increases are not going to be a short anomaly, but something that may continue well into the future. As such, we have seen recent inquiries that suggest a broader customer base now considering purchasing options, especially as they relate to their requirements for truck pre-buy in 2006. In addition, we continue to see higher fleet utilization that suggests the need to augment replacement with growth. The driver issue and the fleets' need to manage capacity and pricing are obvious offsets. Given a steady economic environment, the trailer industry should see an excellent year in 2005 with trailer demands possibly equaling gains of 2004. For the third quarter of this year, we expect production to ramp up a bit given the recent increase shifts on two lines announced earlier. In addition we should see a decrease in inventory as our retail branch levels become more optimized and our mix of factory-produced trailer shifts to customers who pick up their trailers in a more timely manner, thus allowing us to recognize revenue in a much more orderly fashion. For the year our estimate of 50,000 units sales should be achieved with some upside as we move forward.

Bob will discuss in greater detail our second quarter results and financial condition after some comments made by Dick relative to our quarterly operations. Dick.

Thanks Bill. As always, I'll bring you up-to-date on our progress in the following key areas of focus in our manufacturing segment - safety, quality, delivery, productivity, and cost. I'll then outline our progress in the retail and distribution segment. Let's get started.

I'll begin my discussion in the area of environmental health and safety. While no new records were set for total recordable incident rate this past quarter, progress in providing a safe workplace for our associates continues in earnest. We achieved a 50% reduction in days-away-from-work incidents versus our previous best quarter ever, which was the fourth quarter of 2003. In our ongoing efforts to ever improve our performance and practices, we have initiated a formal ergonomics improvement process initiative directed specifically at educating our associates in proper work techniques to minimize ergonomic-related injuries and in identifying and then eliminating ergonomically poor workplace designs and processes. Our progress towards achieving ISO 14,000 registration is right on target having completed a pre-assessment during the second quarter with full registration targeted during the latter part of the fourth quarter.

Likewise, our quality improvement efforts continue unabated. The most recent quarter proved to be the best quarter we've ever had for first-pass yield performance, achieving 88% first-pass yield for the month of June. External initial quality measured in warranty claims during the first 90 days of service per 100 trailers sold has improved by nearly 50% during the past 12 months. To accelerate that improvement even further, we have added a full-time warranty improvement engineer, whose one-and-only role is to analyze claims, identify permanent fixes, work with all influencing parties, and drive permanent corrective action. Additionally our progress in preparation for ISO 9001 registration is progressing nicely with full readiness now targeted by year end and registration in 2005.

Delivery performance, as measured by schedule attainment, continues at a solid level at 98.2% for this past quarter. We are continuing to enhance our overall delivery performance with a transportation advanced planning process gaining maturity, allowing for even more timely response to our customers' needs.

Productivity continues to see quarter-after-quarter improvement with this past quarter being the best ever. These continued improvements have helped to increase our net effective installed capacity to a mix-dependent level of 63,000 units annually as measured on a five-day two-shift basis right here in Lafayette. If needed to support future market demand, we can now have the available capacity to produce upwards of 90,000-plus units annually on a full three-shift basis. While tremendous progress has already been achieved in driving productivity to record levels, there remain many further opportunities to take our trailer manufacturing to even higher levels. One example is that we are currently developing plans to reengineer our side-building operation for a number of our lines, building on the success we have had with a process that we have developed for our line-four FreightPro operation. This approach will conservatively reduce required labor content to produce a sidewall by nearly 50%. At this current stage of development, we would anticipate that we would be in a position to begin rollout of this new process during the first quarter of '05 and complete all lines during that year. All told, additional direct labor savings of some $4m annually should be realized through these efforts.

Some other items of interest include the fact that this past quarter we initiated build of our proprietary RoadRailer product. Through a collaborative cross-functional team effort we successfully launched the program with great success. All told, we will build a total of 800 RoadRailer units this year.

Moving on to the area of raw material pricing, as previously discussed and well publicized, raw material pricing has skyrocketed over the past several months. Almost all of the major commodities we use including steel, aluminum, wood - have all been affected. However, our purchasing team has done an especially outstanding job of mitigating the full impact of these increases through effective negotiations in delaying many of the proposed increases, hedging some positions, and finding alternate supply sources in some cases. Increased demand is beginning to squeeze some of our suppliers. They are now being challenged to increase their capacities to meet our growing needs. Additionally, availability of raw materials is becoming a growing issue for our total industry. While we have heard that a number of our competitors have actually had extended plant stoppages due to material shortages, our supply chain team has done a great job in keeping any material supply issues to an absolute minimum.

Let me now shift gears and talk about our retail and distribution business, the Wabash National Trailer Centers. While challenges still abound, we continue to make steady progress in moving the retail and distribution business toward the black. This past quarter proved to be the best performing quarter for the branches that we have realized since the fourth quarter of 2000. In addition June ended as the best individual month since July of 2002. Despite these positive gains, much remains to be done. We've not reached the level of profitability yet, but have certainly stopped the major bleed. New trailer sales fell short of our expectations during the second quarter, slowed temporarily as a result of the price increase we implemented in March and lack of readily available stock inventory. However, we now see quote and order activity again on the rise. New trailer inventories grew during the past quarter as we continue to establish our central stocking program and as a result of some freight delivery issues most notably in Canada, all of which have been addressed and resolved. Used trailer availability remained in short supply during the past quarter, but margins have remained strong.

New trailer inventories have increased somewhat as we are beginning to receive selected fleet trades, a high percentage of which were higher-valued reefers. In addition we elected to bring the Canadian rental fleet into our inventory representing some 130 units.

We continue to make progress in growing the service and parts piece of our branch network. Part sales during June were the highest we have seen all year. Notable also is that we've been able to offset parts procurement price increases with cost pass-throughs to maintain and actually slightly enhance our parts margins. [A year of] operational effectiveness at our branches focus remains on improving our ability to provide cost-effective service to customers. In an effort to accelerate further our rate of improvement, we shifted our focus to a single branch approach in order to complete the job at one location and then replicate the successes across the network. Additionally our draw from the resources residing in the Lafayette Manufacturing continuous improvement team to leverage the great success that that team has realized over the past two years. As an example, a recent event focused on trailer roof replacements resulting in reducing the time to complete a full roof replacement by 47%. Formal focused events will now continue until the job is completed.

In summary, I am especially pleased and proud of the exceptional performance that the manufacturing team was able to deliver during this past quarter and year-to-date. Quite honestly, I expected nothing less from this team and will expect continued progress throughout this year and next.

On the retail side, we are making steady progress as evidenced by this past quarter performance and are on target to reach a breakeven level sometime during the third quarter. The whole team is working very hard to make this happen. I expect they will be successful. The future is truly bright for the operations teams of Wabash. With that, I will turn things over to Bob Smith, our Acting Chief Financial Officer. Bob.

Thank you Dick. Good morning everyone. I will now review with you the second quarter results and our financial condition as of June 30. In summary, sales amounted to $255m for the quarter on 12,700 new trailer units. Income for the quarter was $18m or $0.56 a share on a fully diluted basis. Remember our results are only tax-affected at the alternative minimum rate, which approximates 2% of our pre-tax income. This again is due to the net operating loss carry-forwards that we have. Our share calculation includes options, restricted awards, and convertible notes. The computation information is included as part of our press release. Comparability to the prior year is impacted by the asset sales that occurred during the third quarter of last year. I will pull out the significant items as we go through this discussion, although there is a little bit of comparability because in 2004, we reclassified certain accounts on our income statement. In essence we moved about $900,000 from the second quarter's cost-of-sales-the second quarter of '03 into SG&A. The impact of that has been reflected in the financials that you have.

OK. Looking specifically at sales, $255m in the first quarter-in the second quarter of this year on 12,700 units. This compares to $222m on 11,200 units in the first quarter of the year and $230m of sales on 10,200 units in the prior year period. The prior year period includes approximately $21 million in sales related to the wholesale part of the business and trailer rental/leasing operations that we sold in September of last year. On a segment basis, the manufacturing segment had sales of $228m, 12,900 units. This is against about $167m last year. The retail and distribution segment sales were $61m, 1,600 new trailer units. If I put the last-year results on a comparable basis, i.e., exclude wholesale, parts, and leasing - the comparable number is $54m. Corporate eliminations - $34m, 1,800 units. This represents units sold by our manufacturing segment to our retail segment. The number is substantially higher than we've seen in previous quarters. Remember retail sales are growing and we had the stocking up of some of the branches late in the quarter.

By product line, new trailer revenues in the second quarter of this year -- $224m. We shipped 12,700 units. We sold slightly more than that. In the first quarter $192m. We shipped 11,200 units and our build rate was approximately the same. In the prior-year quarter our sales were $173m - 10,200 units shipped, 9,800 sold. Used trailer revenues - this year's quarter $13m, 1,900 units. First quarter of this year, $13m, 2,000 units. Second quarter of last year - $17m, 3,300 units. We're seeing the effects of the tight availability of used trailers.

The parts and service business did $15m worth of sales this year in the second quarter, $13m worth of sales in the first quarter of this year and $26m last year as reported-more like 15 million on a pro forma basis when we pull out the effect of selling the PDC wholesale parts business. Also we had four full service branches that were closed during 2003, which impacts comparability.

Other revenues, including our lease revenues - this year second quarter $3m, this year's first quarter $4m, a year ago $9m. This included the lease revenue from the business that we sold September of last year.

Gross margins. Gross margins for the quarter - 14.3%. The margin includes about $3m of good guys, which I'll discuss as we go along, on a more adjusted basis, this 13%. The first quarter's gross margin was 10.4%. There were a few small bad guys in there. If adjusted, it would be a little closer to 11%, but still an appreciable improvement in the quarter. Last year's margins with or without the impact of the pro forma and specifically excluding the asset impairment charge, reported 10.7, adjusted 10.3%. The gross profit at the leasing and wholesale parts business contributed in the second quarter of last year was approximately $3m.

I am going to compare the gross profit that we had in this quarter to the year-ago quarter. The increase is approximately $15m. That excludes the aforementioned asset sales and related impairment charge. The increase reflects the following items, but please be aware as I go through them, the numbers are impacted by customer and product mix, some of which we don't have as good a visibility as we'd like. So these are reasonable and directional and will give you an idea of what has driven our improvement. Volume is up 2,900 units. That is worth between $6.5m and $7m in gross profit improvement. Raw material costs increased in excess of selling prices by approximately $1m. As we've talked about, pricing for raw materials was stable for essentially the entire year of 2003. Right out of the box in January we saw prices move up. We got another wave in March followed again by another wave in April. May and June's rate of increases slowed, but we are still seeing the increases. We weren't able to move prices as quickly as costs moved up. But we managed to obtain price increases going into the second quarter. Mix impacts this analysis. Improved labor and overhead utilization contributed about $6m to our improvement. As Dick mentioned, we see continued improvement in cycle time. Dick and his guys are keeping spending under control. We do have a one-off in here. We reduced our warranty provision in the quarter by $1.4m. The reduction represents several items one of which is that certain things were being taken care of at better-than-expected costs. Other items - the number of units out there are less than we anticipated. Third, we were probably being a little bit too lenient in terms of reacting to requests for warranty repairs. I think, as Dick mentioned, we're doing a lot better job in producing quality products. We anticipated that warranty would come down. Another one-off in the quarter is that we were able to sell certain previously written-down parts and equipment. That provided about $700,000 worth of pickup. Additionally we were able to reduce our residual reserve. This is a reserve that we provide against commitments that we have to take back trailers from customers. The customer came in, told us that they were going to continue to use the trailers well past the date of the agreement. We were released from our commitment, which freed up about $700,000. All other items, including the improvement of the retail business is about $2m to $2.5m.

Looking at the results sequentially, the second quarter compared to the first quarter of this year, we see an improvement of about $13m. We had increased volume of about 1,800 units. That contributed roughly $4m. In the second quarter we were able to have our price increase cover our cost increase. The difference is about $1m. We are slightly ahead of the curve on getting price over cost increases that we've seen. We've also-this is a little bit difficult to separate out. We've seen our business go more towards mid market and other customers and dealers. As a consequence, the percentage of partner business declined relative to the total sales. Dollar-value wise it's roughly the same as it was in the first quarter. The sale of the previously-written-down equipment and the residual values come into play - $700,000 for each in the quarter compare. There are a few other odds and ends that amount to virtually nothing.

So I suppose the question is, what does all this mean for the third quarter and the balance of the year? The first thing I'd have to say is we are in uncharted territory. It's very nice to be here. We need to prove to ourselves and others that we can stay here. Volume, as Bill mentioned we're pretty comfortable looking at 50,000 units for the full year. We need to move our sales up a bit in each of the two quarters in order to make that target. That will add value. Selling prices - we're working hard to stay ahead of material price increases. At present we believe we're OK. There is a little bit of upside potential in the next two quarters. This is a real challenge for Bill and the sales team to deliver on. Raw material costs - we continue to expect to see the increases, but the rates should be more moderate than we had in the first half. As Dick mentioned, managing availability may become the more critical issue as we go forward.

Manufacturing performance. In the second quarter, the manufacturing team needed to contend with starting up RoadRailer production, producing fewer partner units, which causes the runs to be shorter. They judged that second quarter could be fairly difficult. Their view is that the third quarter should be a little less challenging. So that provides some potential.

Customer Mix. This is always the tough one to call. There are two givens. The partners made Wabash and Wabash will continue to support the partners' needs. We expect to see greater trailer requests going forward to support their growth and replacement cycle. Second, the DuraPlatet proposition is compelling. We're getting the message to the market in that area. All sales channels have and will continue to benefit from this DuraPlatet technology. We will benefit in the third quarter by about $700,000 because we have the previously-written-down parts to sell. The balance of the one-offs that I mentioned, 2.3 million will not repeat into the next quarter. Also, an improving trend in retail and distribution should help us.

One other item when we are looking at it and comparing last year to this year. It is important to remember the phasing of our incentive compensation provisions. Last year the bulk of the provision hit in the third quarter and primarily in the fourth quarter. This year we loaded it across the year. In the third quarter we have about 1.1 million in incentive comps. This will continue the next two quarters.

SG&A. SG&A was 14.1 in the quarter, about 5.5% of sales. Looking ahead we think there are some organizational changes that will be made, which will save us about $1m on an annualized basis. In the first quarter of this year, SG&A was 14.2 and 6.4% of sales. Last year in the quarter, 13.2 after pulling out the leasing and wholesale parts business. As I mentioned, there was a reclassification in there of about 900,000 to last year if you are looking at an old report.

Interest decreased $8m in the quarter. This is due both to reduced debt loads and to the lower rates we're carrying because of our recapitalization last year. Foreign exchange, primarily the Canadian dollar versus the US dollar, was a loss of $400,000. A year ago it was a gain of 2.7 million.

Taxes. We're providing at the 2% alternative minimum tax rate. Our NOL stands at about $250m. We're carrying about an $80m tax reserve. As we continue to show improvement, the realization of the reserve will become more assured. Our expectation is that this will occur in early 2005.

Just a quick recap of the earnings of $18m. Compared to last year we-on a comparable basis last year we lost about 1.1 million. The improvement comes from $14m worth of operating income, $8m of interest expense offset by $3m, which is primarily foreign exchange. The [India] calculation is shown in the release. It's available for your look there. Depreciation and amortization - $5m in the quarter, approximately $10m in the six months. Capital spending - $4m to date. We plan to be at about $10m for the full year. This includes whatever Dick requires to do the side building operation he described earlier.

Headcount stands at 4,200 at June 30, which is up about 300 from March - 100 new associates, 200 new temporaries in part seasonal due to summer vacations, in part due to some hiring that was done late in the second quarter in anticipation of third quarter production. The backlog at June 30 is 330 million. This compares to 190 million at March 30. But remember we pulled a fair amount of the backlog out because of the price increase that we implemented in the middle of that month and we hadn't finished the process of reconfirming these orders with the customer. On an apples-to-apples basis, the increase would be more in the $30m range.

A quick look at the balance sheet. Cash - $6m, liquidity as we define it, cash plus available borrowings under our line of credit - $72m at the end of June, which is more than double where we were at March 31. Accounts receivable stand at $95m. They were at $96m at the end of March and just under $70m at the end of December of '03. Day sales outstanding - 35 days, down from where we were at March, but up from December. The quarter had very strong sales in the latter part of it. Inventories - $108m, which are up from $90m in March and $85m in December. By category, June compared to December - raw materials, 34 million versus $25m in March. Work in process - 5.5 million in June, 7.5 million in March. Finished goods - 49 million in June, 39 million in March. Parts - $6m in both periods. Used trailers $13m to date, $10m in March. Our raw materials inventory has built in anticipation of the production that we've got scheduled. Also, remember the price impact of raw materials is included in that number. Finished goods are up, but all but a couple hundred units are spoken for. Those are ones that restock the branch operations. We expect the inventories to be around $100m by the end of the year.

From a liquidity and financial condition, total debt both on and off the balance sheet, is $223m to date versus $239m at 12/31. We've reduced the total debt outstanding by approximately $16m to date. We are in compliance with all our financial covenants. The three that we have - maximum debt to EBITDA, both as defined by the agreement, is required to be at less than 4.0. The actual is a 1.6. The minimum fixed charge ratio greater than 1.1. Our actual is 3.1. Capital spending is a $10m annual target. We're running at $4m and plan to stay under that $10m threshold. Just one comment on the STUFRA [ph] reporting, I expect we'll get dinged on reducing the warranty provision, but otherwise I am not aware of anything that should come out of there.

At this point I'll turn it back to Bill for his closing comments.

Thanks. We're sorry to keep you on the line so long. We wanted to make sure that we had good coverage. Obviously we're pleased with our progress. As I almost always state, much more remains to be accomplished. So far we have deftly managed massive raw material increases. The second quarter was the toughest in our quest to pass these costs through. We will pass through costs in the fastest manner possible. We do not intend to manage pricing through our own margin. We intend to pass this onto our customers as they are doing it to their customers. We continue to work successfully the mid market as evidenced by the high closure rate during the first half of the year. We're in an excellent position to become a larger player in 2005 in this market - I'm sure of that. More work needs to be accomplished. Operations continue to perform very well. As Dick noted, there are still some great programs to be accomplished, which will significantly improve our overall performance. The retail branch side is continuing at a slow, but steady rate. We still intend to see a breakeven event later this year, erasing years of negative performance. The industry we serve has the potential to see some of its best years going forward. We're positioned very nicely to benefit not only from our hard work in operations, retail, and in the mid market share growth, but to participate in excellent industry-related growth going forward. Things are looking good. We're very excited about where we're going. We have got a lot of hard work ahead of us. As Bob said, we're in some uncharted territory. This is a nice place to be and we intend to stay here.

At this time, we'd like to open up the call to questions. Wayne.

Thank you. Ladies and gentlemen if you would like to register a question press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge you request. If your question has been answered and you would like to withdraw your request, press the one followed by the three. If you are using a speakerphone, please pick up your handset before entering your request. One moment and we'll take the first question. The first question comes from the line of Peter Nesvault [ph] from Bear Sterns. Please go ahead with your question.

Bob, what did you say the backlog was in dollar terms at the end of the quarter.

[$330m.]

The customer that cancelled the thousand orders or so in late first quarter, that came back in?

No. We had about $30m in cancellations from two of the large accounts that we normally deal with. We would expect that a portion, maybe going half of that will come back in. It has yet to be resolved. We tend to believe that one of our customers will come in for the order they cancelled.

OK. Question on the cost of sales bridge. I think I can follow it. There is one small portion of it. The used trailer - the higher prices on used trailers. I estimate the benefit might have been $650,000 in the quarter. Is that included in that residual reserve adjustment of 700,000? Or would that be in addition to that 700,000?

The residual is exclusive of anything relating to used trailer margins. Off the top of my head, the margins sound a little high - that you have.

OK. Let me rework the numbers on that and take another look at that. On the incentive comp - where did that show up on the P&L?

The incentive comp is split between cost of sales and SG&A. In the quarter it would roughly be 800,000 in the cost of sales area, 300,000 or so in the SG&A.

OK, great. Assuming you start to book a tax rate in first quarter '05, what would be the tax rate in this case?

I don't think you are going to see a tax rate in '05 in the first quarter.

That is probably right. The hypothetical would be somewhere in the high 30s.

OK. Last question and then I'll hand it off to someone else. Shouldn't we expect the industry to give back some of this high-end pricing when steel starts to come down in the second half of the year? How much conviction do you have that these high-end price increases can stick?

We're going to make them stick. It's going to be whether our competition wants to make them stick. From our standpoint we don't see steel pricing coming down. It will level. It's going to fluctuate back and forth. I think if you start looking at the scrap market right now, it is starting to tighten up again. From our standpoint, I think that's a bit premature. We will continue to pass along price increases as we see our customers doing to their shippers. At this point in time, my guess is pricing is going to continue to go up.

Got you. Thanks for the time.

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

Thank you and good morning. With all that information given in your prepared comments, I don't believe you gave a specific forecasted build rate on a unit basis for Q3.

We are going to be roughly between 13,000 and 14,000.

OK-13,000 or 14,000. OK. And then just talking about the delay in shipping that you saw again in the Q2 quarter, the revenue recognition issues that you saw. At the end of Q2, you commented on the amount of inventory and finished goods on a dollar basis. My question is, how many units were unfinished goods that are waiting for pickup by customers?

We probably had in excess of probably 1,000 units. As we go into this fire drill every quarter-end-and believe me, it's something that when you're a company that is focused on continuous improvement, this is a major frustration for all of us. We look at the mix of people that were producing in that month. The luck of the draw was that we had some rental/leasing people that don't typically pick up their trailers in a very timely manner. We didn't have Schneider that will pick them up in the same day that you produce them. What we are doing as a company-it's not that we're going to create an issue with our customers. But for those customers that typically are slow to pick up, we are going to try to schedule them at the beginning of the quarter. Since you seem only to be concerned with four months of the year, we're going to start to work that process. Some of the guys that are slow, we will produce early in the quarter and then harangue them to take the trailers. The amount of man hours that we put in-and that I put in calling these people in March, December, and June is ridiculous. We are training them. This was a cultural issue. We've had customers, as I've said-I remember the first call that-and Werner being the big one. We would make trailers for them and they would sit on our lot for a year. I can't understand why we ever did that. We certainly trained our customers the wrong way. We are now retraining them. Our expectations are-we make a quality trailer. We can make it within two to three days of their notification of their need. They have 45 to 60 days prior from a backlog. They should be able to take the trailers as quick as we make them. That is going to be our expectation going forward.

OK. That's helpful. Bill, just to stay on this topic. I thought you made the comment earlier that your expectations were, for the Q3 quarter, that this timing issue-or this revenue recognition issue will be less of an impact for Q3.

Yes, I think so. I think we've got a little bit of an upside. It could have been a real gang-buster quarter in the second if we would have got out trailers out. We have a better mix coming up in September. We would anticipate that some of that laggards will have taken their trailers prior to the end of September.

That brings up an interesting issue because in your prepared comments you spent a lot of time talking about some items in the quarter that are not expected to continue. You are trying to be conservative with your outlook and rightfully so. If you are successful in reducing this revenue recognition issue in the Q3 quarter, you could see a big benefit in the Q3 quarter to your shipments. Any idea-can you give us a range of the shipments that you are targeting for the Q3 quarter?

Generally what we produce we try to ship. If you look at our history, we've been pretty much one-off on that. We would be looking at shipments in the range of 13,000 or 14,000. If we are successful with some of our customers, we would probably be on the upper side of that range-maybe top it a bit. At this point in time, another issue in the second quarter is, when the price increase went through, we had a run on the branch of all our existing products. The branch is the customer-the corporation. They didn't get any preferential treatment. Most of the product that we restock the branches - we also did that at the end of June, being that that was a 60-day lead time. We should be a little bit better off as far as how we manage that. There is some upside associated with both those.

OK. That's helpful. On the RoadRailer product startup, remind me of the ASPs for this product-or the range of ASPs. How do the margins compare to the overall average of the manufacturing segment?

They are 20,000-plus. The margins are about the same.

OK, so they are about the same. So maybe in Q2 because you were ramping up production, margins for that product line were perhaps were a little bit below average. Then you are looking for that to get back to the segment average in Q3? Is that a fair statement?

I think that's a fair statement. We had a bit of a rough time with the first week's production. We have seen-every week we've improved our ability to produce those trailers. We don't at them in awe. It's just another product we're producing.

OK. Just the last couple questions. Obviously in May you saw industry trailer orders fall off sequentially by a meaningful amount. That is well publicized. I want to get more clarity on how Bob Ash's [ph] orders in June compared to May. Did you see a notable rebound off of May levels? Also, I'd be interested in finding out about how orders are tracking thus far in July versus June.

Remember we went from 68% to-we're over 90% booked now. We had some good numbers. Where we had a bit of a burp was that we were the first to announce publicly a price increase in March. That shook the industry a bit. The March numbers were somewhat down. April rebounded. Everyone was excited about that. If you were to factor in March and April and do the averaging, I think you would find that the numbers started to soften a bit as prices went up. I think what we're going to see in the next couple of months - I would say June and July and August numbers - that they would be roughly comparable maybe a little bit lower. We're not upset about that for a couple reasons. We're in a cyclical time of our season. Most of the big orders by the big guys have been placed in the fourth quarter and the first quarter of the years. What we're seeing right now from our own perspective is greater share closures with customers that we've never dealt with before. Our numbers are going to be relatively-from our standpoint-would be very good in this period even though they will be lower versus prior months. Then going into September, October, November I think it will heat up rather dramatically - not only for the industry, but also for us because our endeavor in the mid market started at the beginning of a quote period last year. We didn't get enough belly-to-belly time with our customers. We have that now. We think we'll be a bigger player in those bids going forward, especially in DuraPlatet.

Alright. That's helpful as well. Just to Bill, last question. I know I've asked this in past conference calls. Obviously a very solid quarter this quarter - you're at solid profitability. The outlook is bright. Any thoughts on the timeframe that you or the board will feel comfortable in giving formal EPS guidance for either the upcoming quarter or full year?

We're a little bit uncharted right now in some of the areas. I know the board, as I've said in the past, is very conservative. I will punt on that. I don't see that happening certainly in the next couple quarters. I know that as we gain more profitability - all the closets supposedly have been cleaned now - I think we'll be in a position, as we formulate our 2005 plan, to help you. We have tried in this conference call to give you a little bit more understanding of our thoughts and where we think we're going. With pricing where it is and some of the things we're doing, I just have to punt on that.

Fair enough. Sorry. One more quick question. What is the status of the new CFO search?

First off, Bob is going a great job at this point. We have hired Harcourt and Struggles [ph]. We will be talking with-they are interviewing-which will include Bob - over the next probably three to four weeks. We believe that that search will take us between five to nine weeks to get to a point where we feel comfortable with a candidate.

OK, great. Thank you. Very good quarter.

The next question comes from line of Tom Albrecht from BB&T. Please go ahead with your question.

Good quarter. A lot of my questions have been answered. I had to step away for a moment, so maybe this was asked by Mike a moment ago. Did you talk about potential gross profit margin during the third quarter? I know you gave us a description of both positive and negative events affecting both Q2, but what is going to carry through in Q3. Did you talk about some sort of target gross profit margin?

No, we didn't. I think Mike was trying hard to get that out of us. I think there are more positives than negatives. If you look at the one-offs and you take those out, let's say we're at roughly 13%. I think there is a better potential for us to be at 13 and above than to be at 13 and below. We're working hard with customers. The mix is good. We're hammering pricing like it's never been done before. The DuraPlatet product mix is looking good. I think without jumping up on the table and doing a little dance, we're certainly cautiously optimistic that we should continue the progress that we've seen in the past.

OK. The two smaller shifts that you're adding relate to the production of what?

We announced that we were going to fill the second shift of line eight, which is the reefer line. We have very good order backlog. Also line three, which is a line that we call high-hour does both DuraPlatet and sheet and post. When we put the second shift on one, we moved the folks from our second shift in line three over there so we could get a quick transition, which worked fine. Now we're finding that we're going to have to replace that shift. We also think, potentially going forward, we might have to take that to a third shift on line three and possibly a second shift on line four, which is the FreightPro line. We're still seeing, as we get into the mid market, that everyone is enamored with DuraPlatet at this time. We still are seeing continued interest in the products that we have.

OK, so really then what you alluded to is basically the same thing as what you announced about a month ago when you upped your production targets modestly?

Right. I think if we were to put those other two shifts on it would probably be another 25 to 35 trailers per day.

Per each line or in total?

Total.

OK, alright.

Incidentally, with raw materials, we're looking at-it's probably a first quarter endeavor.

OK. Dick, let me push you a little bit on retail. You're close to breakeven now. It felt like breakeven, despite the fact that you lost $141,000. Your comment was-I am picking at your words. You said you hope to be at a breakeven point some time in the third quarter. You could be breakeven in one month. Are you saying you hope to be breakeven for the whole quarter? That is the way I'm interpreting it.

I'm not about to take that leap at this point. Certainly we're getting much closer. There was some noise in that 100,000-and something figure that you just quoted. When I look at the comments that I'm making, they are relative specifically to the branch operations in and of themselves. When I break those out of the whole picture, there is still some work to be done-but making nice progress getting closer toward the breakeven. That is where my comments are directed. At some time this third quarter, I would expect that the branch portion of the retail distribution business would achieve a breakeven level.

The 1,600 new trailers you sold through retail, what was that versus? Do you believe you will top 2,000 this quarter?

It won't be quite 2,000 based on the latest projections that I'm looking at-that I have been looking at. It will be somewhat probably shy of that, probably more in the 1,800 neighborhood.

OK. It was 1,600 versus a year ago?

1,600 versus a year ago. A year ago was just under 1,000 units. We had more branches.

Right, right. In SG&A you talked about the hope to save $1m or so annually with some initiatives in the second half of the year. Should we get aggressive on that figure immediately or wait and see what you actually do?

That is a no-brainer. That is some organizational changes that I think Bob is putting through in his area. I think that we have some other options with the branch. My guess is by the end of the year on an annualized basis we'll be close to probably 1.5 or $2m in savings.

OK. I am thinking out loud on pricing. Pricing-you obviously weathered the steel challenge extremely well. Pricing was something that evolved all quarter. You had to work at it, push and shove, pull teeth-whatever cliché you want to use. I am sensing you are starting the quarter already with strong pricing. You are going to bring on board some more converts. Shouldn't we-if the pricing range was 6% to 12 % and maybe on the low end as a average for Q2, shouldn't we think a little more aggressively for an average trailer price in Q3?

I think you're correct. I am just not sure, nor do I want to sign up what that should be. Yes, we're pushing it. We get a sense that Arvin Meritor [ph] or Hathco [ph] or someone else is going up, we immediately put it into our pricing formula. We are not necessarily going back into the backlog at that point in time. It's a matter of timing and our terms and conditions and how we can do that. I think at that point in time we have fully priced in just about everything that we think is coming.

OK. Dick, how much-I know it varies by trailer type and size of production. Maybe just a ballpark discussion on the difference in the gross profit margin for a modest production run of 300 trailers for ABC company versus 5,000 for a partner. Can you talk about how much variance there is in those gross profit margins?

It's difficult to separate that all out for you. When you are running higher volume repetitive product, certainly the efficiencies are better than they are if you are building one-offs. We try to price that in, in our cost model. We try and target similar levels when we cost out the product for all the lines taking into account those variables. It's difficult. Our expectation is that each product should be able to yield a similar level of margin if we do our jobs correctly in the way we cost them out and sell them to our customers.

Given the fact that Don Schneider may be listening into this, we're giving the best price we possibly can.

Make sure they know that. I think-I am looking at my notes real quickly. I want to make sure I haven't overlooked anything. Dick, I guess-I have been meaning to ask you this for awhile. You are doing retail and still overseeing a lot of the plant. Are you as effective as you were earlier. Obviously you are doing good things in retail.

I've got-I am blessed with having a tremendous team in the manufacturing side of our business. Of course, that is led by Jerry Lindsey, [ph] our Vice-President of Manufacturing, C.I. and other key folks that are part of that team - Stan Sutton [ph] leading our supply chain management team and the other individuals that are part of the leadership team. There is no slowdown in the level of focus and level of driving continues to improve on the manufacturing segment. I am very comfortable with that. It has allowed my, because of the maturity of that organization and the strength of the organization and that leadership - it has allowed me to spend a lot more time in working with the retail distribution side of the business. I am very comfortable with that. I don't feel that we've lost anything. In fact, I think it has energized the leadership team on the manufacturing side even more. They are showing me how it should be done.

OK. Lastly, Bob, I want to make sure I understand the year-ago SG&A number. I think you said on a pro forma basis in Q2 '03 it was about 13.2 million. Is that right? That included about 900,000 in reclassified expenses from cost-of-goods into SG&A?

The last year number, pulling out the impact of Apex and PDC was 13.2 million. That number should include-does include roughly $900,000 of reclassified SG&A. When you look at it, the compares are reasonable.

OK, good. Alright, great quarter. Thanks much for your time.

The next question comes from the line of Jeff Kaufman [ph] from George Weiss. Please go ahead with your question.

Thank you very much. A lot of my questions have been asked. I just wanted to congratulate you on a very solid quarter. I do want to get at something. There have been some analysts who have been bringing up the bearish case under the idea that we should be focusing on month-to-month seasonality. I think your point that you have to average a three-month period is very valid, especially when you are up 60% one month and down 30% the next. A point I want to make is, isn't it normal for sequential orders to back off during the summertime and accelerate in the fall? Last year, didn't you have unusually weak month-to-month seasonality? Even though orders are slowing down on a year-to-year basis, isn't there still going to be 30 percent-ish growth as we go through the summer?

Yes. I think certainly when we start comparing year-over-year, especially when you look at August of '03, you are going to see some very significant improvement. We are seasonal. The big guys still do their trailer requirements in the fourth quarter and the first quarter of the year. Remember we are still in a replacement mode at this point in time. I will say-and all my comments constantly focus on the fact that we are replacing, replacing. I've spent a lot of time now in the field in the last couple months. I am starting to see the sense that the pricing that we're looking at right now, you're seeing a different type of purchase requirement. I think the purchase requirement is these folks have the option of keeping the trailers an extra year or so if they want to try and time the market. I think a lot of what we're seeing recently is not replacement demand, but actually growth. That bodes well for the industry because we still have to go back and replace those trailers coming up.

To get back to your point, the numbers are-I don't think they are going to be exceptional. From our standpoint, we'd like to see them a little bit better from an industry perspective. From a share perspective, we're picking up share. We're opening accounts we never have talked to, let alone anything else, a year-ago. We're very bullish about where we're going and where the industry is going. All the indicators that I'm seeing in the industry is that '05 is going to be an especially good year. It's going to involve both growth and further replacement of equipment.

OK. This is where I'm leading you. A bit of a thought cash-flow question. You are growing 30%-plus on just replacement demand alone. What is driving that are the market share gains. The point is the industry growth is still ahead and not really in your numbers at this point. Your margins are doing what they are supposed to be. Having said that, there is going to be tremendous cash generation at some point over the next 6 to 18 months. I know you've said your first priority is to pay down debt. Given where the stock is and the fact I think the market has been selling off on this the-cycle-is-over fear with interest rates rising. Does it make sense at any point for you maybe to carve out some of that debt repayment money toward share repurchase at these levels? Have you thought about that on the idea that here is an opportunity to acquire your shares in the mid $20 range?

No. As an organization we're looking at other means potentially to do something. At this point in time with Mark leaving and with things, I think, heating up so impressively coming up, I think our main focus still is going to remain debt repayment. I am surprised the question hasn't come up - why aren't you looking at acquisitions? I think that we have so much potential to secure a great next 18 to 24 months in the next four to six months that I can do more for the company-and I think Dick and everyone else can do more for the company that we focus on the market that is available to us and because we have capacity available for it. I know I am not answering your question as much as you would like. We probably will not look, at this point, at any kind of purchase back of shares. The total focus of the company and all the key individuals, which is everybody is focused on real, good closures coming up in the next four to six months.

Alright. Congratulations. It sounds like things are going really well.

The next question comes from the line of Anthony Lorenzo [ph] from John A. Levine [ph] & Company. Please go ahead with your question.

Nice quarter. I want to follow-up on that a little bit. Are you seeing at all any of these guys trying to prevent higher commodity costs and putting off orders or canceling existing orders?

We're still continuing to see that. We've got some real good price shockers out there. These are people who have never seen a price increase in years. It's not only our accounts. It's an industry issue. That is why I think a lot of the orders that are coming in are not necessarily replacement. People have the capability to add more maintenance costs to maintain your trailers for a longer period of time. It's easier to do with trailers that it is with trucks. I think we're seeing a lot more growth-oriented purchases now than we are seeing replacement.

So do you plan to extend the cycle?

I think it will. I think you are absolutely correct. I think that what we'll see is potentially not a great peak, but the great news for us is that we won't also see a great valley.

You also mentioned that people were buying options on the pre-buy in '06. Is that both trucks and trailers that you're seeing. Have you got any more color on that?

Say that again.

You said people are buying options on the pre-buy for '06.

No. I didn't say that-or I didn't mean to say that if I did say that. I assume options meaning slots. We don't have that. From the trucking side I can't comment on that. From our standpoint, that hasn't occurred.

OK, thanks.

Mr. Greubel there are no further questions at this time. I will turn the conference back to you.

Thank you very much Wayne. We appreciate it. We had a good quarter. We intend to grow on this. As always we're very focused on what we're doing. That hasn't changed. We see the next couple of months, certainly into the first quarter of next year, are very critical for us to fill out our plant, which we intend to do. As Dick said, we have [far greater] capacity. That sits at 90,000 trailers. At some point in time, that's our wishful thinking to get there. Thank you for your continued interest in the company. We've got to go back to work. 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.