Wabash National Corp (WNC) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Wabash National fourth-quarter and year-end earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, February 10, 2005. I would now like to turn the conference over to over to William Greubel, President and Chief Executive Officer, Wabash National. Please go ahead, sir.

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 prospect, 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 fourth-quarter earnings call. I'm Bill Greubel, the President and CEO. In the conference room with me this morning are Bob Smith, our Chief Financial Officer, and Dick Giromini, our Chief Operating Officer of Wabash National Corporation. I'd like to welcome all of the listeners on today's telephone conference call, as well as those listening live via the Wabash National Internet site webcast. We have much to cover today and we 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.

Our fourth-quarter sales and earnings continued a very acceptable trend, especially in light of continued raw material increases incurred by the industry over the last four quarters. I'm very pleased to report net income of $13 million, or 39 cents diluted earnings per share, on sales of 287 million. Results were impacted by some unexpected onetime items that Bob will cover later in the presentation.

Increasing raw materials costs remain a drag on earnings, and we expect our margins may be affected somewhat through the first half of 2005. Pushing these increases through to our customers and maintaining DuraPlate's price premium vis-a-vis commodity trailers is our principal objective. Our future success, especially with first quarter increases, will be limited as our customers have begun to push back. We're the price leader and we will continue to stay out in front of this issue. During the fourth quarter, selling price increases offset raw material increases. For the full-year our selling price increases offset almost 90 percent of raw material increases. We're one of the few OEMs in our broad peer group who was able to offset increased raw material costs in 2004 with pricing.

For the fiscal-year 2004, sales were 1.041 billion, a 17 percent increase over 2003 sales of $888 million. Earnings for 2004 were $58 million versus a loss of 57 million for 2003. We're also very pleased to state that we have paid down all of our bank debt and ended the year with $42 million in cash.

For 2004, we met or exceeded all of our major operational objectives, including safety, quality, productivity and working capital initiatives. We exceeded our mid-market sales goals. We added over 225 new accounts representing 6,000 units, with the majority of the product being DuraPlate. We continue to have great momentum going into 2005 and anticipate another great year of new customer growth.

During the second-quarter conference call, we intimated a significant breakthrough in our assembly process. This month we will take to the Board a three-year capital plan that will allow us to significantly improve our process capability, product quality, and greatly enhance our assembly productivity. We anticipate obtaining Board approval by year end commissioning a new replacement line with projected annual cost savings of $7 million on a $10 million investment. We intend to install an additional three replacement lines over the following three years with similar costs and similar savings, including one that will relocate our refurb (ph) assembly into our North plant, allowing us to have all production under one roof. All lines replaced will be decommissioned.

There continues to be significant pent-up demand for trailers, as we confirmed in a broad-based survey of the market undertaken over the last 45 days. This demand is being tempered somewhat by year-over-year equipment cost increases of over 15 percent, a continuing driver shortage, and contrarian belief among some fleets that raw material prices will abate over 2005. I don't believe, however, that we will see any meaningful cost reductions during this year. For the first time in months we have the ability to quote pricing over extended periods as most of our key component suppliers have locked in supply and pricing from the raw material suppliers over an extended time frame. In most cases these locked-in prices are at a discount to spot. I do expect to see spot pricing fluctuate over the next months, but I don't believe this will be meaningful to our contracted pricing.

Our customers read the same reports and some feel differently. As such, we expect to encounter some choppiness in the market as typical customer orders may be rationed out over the year versus a single blanket order. With that said, as of January 31st we have booked approximately half of our budgeted sales for 2005, which is consistent with our success rate last year. Over the next few months we may have to reconfigure production schedules to meet challenges in product mix and deliver expectations. As such, we have added an additional shift to our FreightPro and container lines this month. These additional shifts will continue through 2005.

Our supply chain group has done an excellent job at managing raw materials and component on-time delivery. We have had relatively few problems since last summer. We have also proactively prepurchased approximately $6 million worth of components in the fourth quarter to take advantage of old pricing. Going forward we continue to receive assurances from our major component suppliers that they will be able to cover forecasted increases in demand.

The operations side of the business continues to perform excellently. Dick will discuss this in addition to further rationalization of our retail branch business, more detail on our new CapEx for assembly operations, and our continuing initiative to reduce raw materials and components as a percentage of sales going forward. Bob will follow with a review of the financials for the quarter and 2004, followed by our view of 2005.

Before moving on I would like to update you further on the industry, the mid-market and our view of 2005.

The truck trailer industry continued its recovery in 2004. Last year it was the best shipment year in the last four years. While orders experienced strong swings from month-to-month, total trailer shipments ended 29 percent higher than 2003 at 236,000 units. Vans only production ended with 170,000 units, a 26 percent increase over 2003. Wabash National's market share in the van segment improved from 27 to 28 percent, a good improvement, especially considering that overall sales to core customers dropped from 50 percent in 2003 to approximately 33 percent of trailer sales in 2004.

Despite fleet concerns about equipment pricing, net trailer only and van orders for November were 26,700 and 20,000 units and for December were 31,100 and 24,100 units respectively, a very significant increase year-over-year. Quote and order activities continues to remain at very strong rates, slightly higher than last year. Recently we have been seeing more fleets quote full-year requirements compared to the rationing we were seeing earlier. The American Trucking Association's Truck Tonnage Index remained at a strong 158 in December. For 2004, truck tonnage increased 6.1 percent compared to 2003, making it the best year since 1999. Industry trailer only and van backlog ended the year at approximately six months.

Our mid-market focus continues to bring in new customers to Wabash National at an ever-increasing rate. In 2004 we added 225 new customers, including an additional 55 in the fourth quarter alone. Although we believe our van market share grew only by 1 percent year-over-year, the percentage improvement in the mid-market was significant, again given the reduction in the core sales versus 2003. We continue to exceed our expectations in the mid-market. And as I have said before, we've been at this now for over a year. We have a much clearer view of the market and what it takes to be successful. In 2005 we intend to better leverage our retail branch sales force to expand their focus in the mid-market. To date we have 35 retail sales reps that primarily focus on owner-operators and small fleets, which represent only 12 percent of sales. Over the next two quarters we will upgrade and broaden this group's geographic and fleet coverage.

Looking at 2005 and beyond, recently our marketing group surveyed a number of our current perspective accounts to better understand their buying intentions for 2005. We received responses from 204 fleets, representing a total fleet size of 720,000 units, with an average size of 3,800 trailers. 76 percent of those fleets intend to purchase equipment in 2005. Of those, approximately 74 percent plan to add capacity, typically in the 10 percent range. We believe there is a clear indication that demand is there. In addition, the large Ford (ph) fleets generally continue to focus on replacement versus growth as was the case in 2004. Although some fleets have determined to hold out and continue to use existing equipment, it is evident given the high quote interest rate and order patterns that business should continue at a strong pace given a continuation of the current economic conditions.

ACT's latest total trailer forecast for 2005 is 260,000 units, a 14 percent improvement over 2004. ACT vans-only forecast for 2005 is 194,000 units, a 13 percent improvement over 2004. This compares to our 2005 forecast of 247,000 total trailers and 178,000 vans. Given the breadth and the number of inquiries coming in over the last five weeks, our forecast may be a bit conservative.

For the first quarter we anticipate shipments in the range of 12 to 13,000 units. The total numbers will be somewhat affected by seasonality issues associated with model year change outs and reduced shipper requirements and a broadening customer mix. For the year we're forecasting new trailer sales of approximately 60,000 units versus 51,000 in 2004, an 18 percent increase year-over-year. In addition, we see growth in our DuraPlate container business as we add more customers. Our degree of success in the mid-market and participation by core customers may positively affect this forecast. We plan to also improve our used trailer sales year-over-year by approximately 30 percent with minimal margin loss as fleet trade-ins start to come in. For 2006 through 2008 ACT's trailer-only forecast averages 280,000 units. Van-only forecast averaged over 200,000 during this period. Wabash National's preliminary expectations are essentially in line with these estimates.

Bob will discuss in greater detail our fourth-quarter results and add a little more detail on 2005 after some comments by Dick relative to operations.

It is my pleasure again to have the opportunity to update everyone on the continuing progress that has been made within the operations at Wabash National. As always I'll begin my comments with the manufacturing segment, and then move on to our retail branches.

Maintaining our consistent focus, the manufacturing team has remained intent in driving improvement in five key areas -- safety, quality, delivery, productivity, and cost reduction. 2004 was truly a breakthrough year for our manufacturing segments.

We made outstanding progress in our number one value, safety, during the fourth quarter and throughout 2004. Without question this was the best year in safety performance that the Company has ever had. Significant improvement in all performance metrics was realized. For the full-year the team achieved a 40 percent improvement in total recordable incident rate year-over-year, which represents performance at a level that is less than 60 percent of the industry norm for the SIC Code that we're measured in. Our days away from work case rate is even more impressive, completing the year with 7 consecutive months at less than 1, reflecting a performance level that is less than 25 percent of the industry norm for our SIC Code. Additionally, our efforts are being translated into workers comp cost reductions with our current incurred cost per exposure hour dropping by over 50 percent since 2002.

Product quality improvements were also significant. Manufacturing first pass yield improved from a level of 54 percent at the end of 2002 to our goal level of 95 percent by the end of 2004, with the fourth quarter being our best ever. We intend to maintain that level of performance throughout 2005, even while further tightening our outgoing quality expectations. Our warranty (indiscernible) mortality rate improved by 50 percent during the course of 2004.

Our delivery performance as measured by schedule attainment continues the consistency that has now become the norm, achieving 100 percent throughout this past quarter and for the full year.

In the area of direct labor productivity we continue to conduct formal continuous improvement events, now at over 300 formal events realizing an incremental 22 percent productivity gain during 2004 alone while still sustaining all improvements that have been made during the prior 1.5 years.

As Bill stated, later this month we will present to our Board a three-year capital expenditure proposal for a revolutionary overhaul of our trailer assembly operations. Using proven technology that has been extensively utilized throughout the automotive industry, these changes will provide for significant improvements in our manufacturing techniques and practices that will provide for lower assembly costs, improved safety, much enhanced product quality and fit and finish and productivity never before seen in the trailer industry.

This effort will be implemented in four phases during the next three years, with the first phase being targeted for completion during the fourth quarter of this year. At that time we will begin realizing the benefits of this initial $10 million investment at an annualized savings rate of $7 million. Once completed in 2008 with an investment of approximately $40 million in total, all of our trailer manufacturing will be consolidated into our North campus, thereby further reducing overheads, facilitating communications, and allowing the leveraging of our common resources here. The new systems will introduce new automated techniques for trailer assembly, reducing labor cost per unit and improving productivity and quality. All told we anticipate annual cost savings in excess of $28 million per year once all lines and relocations are completed by 2008.

Another opportunity that was mentioned by Bill is the initiative being taken on by our supply chain management team. We have thrown the challenge out to the team to take aggressive steps to offset the significant cost impact of this past year's run-up in commodity related pricing on our procured materials and components. Their go-get for this year is to achieve $14 million in material savings through actions such as, but certainly not limited to, aluminum purchasing, negotiated savings with current suppliers, supplier productivity improvements, alternative supplier sourcing, outsourcing or even in-sourcing as appropriate, and design changes resulting in lower costs. Similar actions generated some $12 million of savings during 2004, partially offsetting the significant run-up in the commodity market.

Let me now move on for a discussion about our retail branches. As you know, we were successful in the third quarter of this past year in achieving a profit for the first time since the fourth quarter of 2000. With seasonally lower volumes in the fourth quarter, along with some one-time charges related to growing branch closures, the branch portion of our retail business generated an approximate $1 million loss for the fourth quarter. While disappointing on the surface, this performance reflects a $3.9 million improvement year-over-year.

Some key highlights. We sold 6,100 units through our branches, representing an all-time record for annual sales units. Even more impressive is that this was achieved with less than half the branch locations that existed back in 1997. We acquired 86 new customers, the most of any of our sales channels, and accounting for some 1,700 units. We grew our service sales volume by 12 percent year-over-year. And we completed 32 formal continuous improvement events at our branch locations, resulting in some promising productivity gains in service performance.

Looking forward to further improve the business and achieve a more consistent level of performance, we've recently announced internally that we will be transitioning a number of our branch locations from full-service to trailer sales only, or in select cases selling certain branches to interested parties who will then become authorized Wabash dealers, as was the case with our Jeffersonville location which we sold recently. This decision was based on an assessment of numerous criteria, including past and current performance, local markets and competition, and future growth and performance prospects, among others. Once completed, our branch network should consist of 10 full-service locations, along with 7 trailer sales only locations.

Each of the affected locations has been notified of this plan, and we are working to provide for smooth orderly transitions. This restructuring greatly reduces the overhead costs to support the branch network, and allows us to provide better presence and support in driving improvement through the remaining branches to assure success and profitability. We would expect that this transition will be completed sometime during the first half of this year. Furthermore, with this restructuring, my expectation is that 2005 will prove to be the first profitable year in total for the branch networks since 1999.

In summary, this past quarter, and more notably this past year, proved to be very successful for all our operations with even more opportunities for further improvement lying ahead. I certainly thank each and every one of our associates for their hard work and dedication during this past year to help get us to where we stand today. Without them we don't deliver the results that we're all becoming accustomed to. With that I will stop now and let Bob Smith, our Chief Financial Officer, review the financials with you.

Good morning all. I would like to take a few minutes and review with you the results of the fourth quarter and our financial condition as of December 31st.

For the fourth quarter, as Bill mentioned, $287 million in sales on 13,700 new units. Income for the quarter was 13 million or 39 cents per share fully diluted.

Let me just recap quickly some of the one-offs and you will notice that the numbers are much smaller that have been in the past and the number of items are fewer. We had some workers compensation claims of about 600,000. Those are in the cost of sales. In G&A we have some charges related to branch closures and some litigation costs that approximated $1 million. And down in other, we have the debt extinguishment costs of roughly $600,000. Those were all onetime type items that we've been affected by.

Taxes for the quarter, we are affecting our taxes at a 2 percent alternative minimum tax rate that we've been doing all year, the quarter benefit from the recovery of an old NOL item, and we also had several losses that were reported for financial purposes in back years become realizable for tax purposes, thus reducing the amount of income subject to the minimum tax.

Equivalent shares totaled 36.8 million. The details are set out in the press release. The effective options and notes are the principal items in there.

As noted in prior calls, we've reclassified certain items in 2004 to give you a better view of the operations, and 2003 data has been conformed accordingly.

Going into the sales, as I mentioned, sales for the quarter, $287 million, 13,700 units. This compares with 277 million on the same number of units in the third quarter. And this is up significantly from where we were in the year-ago quarter.

By segment, manufacturing sales were 269 million, retail and distribution sales were 56 million. They sold 1,400 units in the quarter. The inter-company elimination is $38 million; roughly 1,400 new trailer units.

Let me just go through each of our product lines and give you a view of how those sales looked. In the fourth quarter, new trailer sales amounted to $257 million. We shipped 13,700 units. We built 12,300 units. In the third quarter we sold $243 million; again, shipped 13,700 units. The build was 13,600 units. As you can glean from that, price increases were the principal reason for the increase in sales. Production was down a bit from the third quarter due to the normal shutdowns that we have over the Thanksgiving and Christmas time periods.

In the used trailer business sales amounted to $12 million on 1,400 units. That's down about $2 million and 300 units from the previous quarter, the third quarter of this year. In each of the quarters we've seen a fair amount of good volume and a steady increase in our average selling price on used trailer. The market continues to be tight.

The product and service business did $14 million in the quarter. This is down about $2 million from the previous quarter. Fourth quarter is generally a seasonally slow period for this business.

Other income, including some remaining lease revenue, remained unchanged at about $4 million.

Gross profit. Margin for the quarter, 10.1 percent. This is down from the 13.3 percent we reported in the third quarter of this year. Let me try to walk you through the change from 13.3 down to 10.1 so you can get an appreciation for what's in there.

We reported 13.3 in the third quarter. And as you may remember, we pointed out two good guys that impacted that quarter -- sale of used bogeys and some rebates coming in from our supplier base. That would have taken the 13.3 down to 12.7. So that leaves us a decrease of 2.6 percentage points. The claims related to workers comp that I talked about earlier cost us about 3/10. The decline in the retail business cost us about 6/10. And the math, looking at the selling price increases that produced no margin, cost us about another 6/10. So that leaves us with manufacturing-related margin compression of about 1.1 percentage points. As I mentioned, selling prices offset materials in the quarter, so that's not an event. Overheads, and because of the limited number of days in unit production being down, that cost us about a percentage point. Labor was good, and we had some other puts and takes. So that really takes us from where we were in the third quarter to this quarter.

I think what you should remember is for the year we got about 90 percent of our selling price -- or excuse me, we got 90 percent of our cost increases from raw materials covered by increases in selling prices. That probably left us about $6 million short overall for the year.

If I take a look at the change from the third quarter to the fourth quarter in terms of dollars of gross profit, we were down about $8 million compared to the third quarter. Increased volume, additional units, we ended up with about -- from a manufacturing perspective, sales were up about $700,000. Material cost increases were a push with both fewer labor days cost us about $2 million. And then we had the puts and takes of branches, inter-company eliminations, workers compensation, some increase in freight charges, some increase in commission, about $6 million.

Looking forward into '05, as Bill said, we expect volume to be up moving towards the 60,000 unit range for the year with quarterly distribution following the same patterns that we've seen in 2004. Selling prices, we will continue to pass through raw material increases. However, as Bill mentioned, given the increases that we have passed through already, it's getting to be a little difficult. Raw material costs, as expected we've already seen some increases hitting us in '05. We anticipate future increases to be limited, and that overall raw material costs should be much more stable than we saw in '04, but at a slightly higher level. Supply chain performance has been very good, and this may give us a few opportunities to reduce the amount of raw materials that we're carrying in inventories. In the production side, we continue to see productivity improvement. Customer mix will continue to change as we make additional gains in the mid-market. On a margin perspective, it's probably going to be a little constrained in the first quarter or two of the year.

SG&A for the quarter was $14.5 million or approximately 5 percent of sales. Sequentially we didn't make some of the progress that we were anticipating. We did, again, incur some costs associated with litigation settlements. SOX was a challenge for us. And so that we're looking to do better in this as we move forward into 2005.

Interest and other. Interest costs were down, mainly because debt is down. Foreign exchange, we made a small gain on the Canadian dollar. Again, we incurred the $600,000 loss on the early extinguishment of debt and we paid off our term loan. Other small gains, about 400,000 of several puts and takes.

Taxes, as I mentioned, we're working at the 2 percent AMT on an overall basis, and we did benefit from a couple of items in the second quarter. At end of the year, our NOL totals about $175 million. As a result of the losses, we've had this fully reserved on our balance sheet, and that amounts to about $60 million. We continue to evaluate the need for this reserve, and we will be adjusting it when the realization is assured. We expect this to occur sometime in 2005.

Three points, I think, for your model for 2005. We won't be paying any taxes next year. The effective tax rate will be approximately 2 percent for 2005, and the effective tax rate for 2006 and after will be in the 40 percent range.

Let me touch on depreciation and amortization. It amounted to $5 million in the quarter and approximately $20 million for the year. We expect the depreciation and amortization will decrease in 2005, as spending levels have been below depreciation and amortization for the last several years.

Capital spending for the year amounted to $15 million. This includes a $7 million purchase of buyout of leases that we had on DuraPlate equipment. It was off-balance sheet debt. We expect that next year our spending will be in the 25 to $35 million range, and this will be divided up among three principal areas -- normal plant maintenance, 5 to $7 million; the replacement of the line that Dick talked about, $10 million; and as we've mentioned previously, we're working to move forward on an ERP system, and we're anticipating that this spending will run about $12 million next year.

Just quickly, this is an 18 month project that will focus on really three areas. One is the, if you will, traditional ERP. The second will be a configurator that will assist us greatly in our quoting activities, our engineering activities, procurement, bill of materials and manufacturing. This is really the heart of the project, and this is where the payoff will come from. And the third piece will be an improvement in the management of the parts and service business at the branch office.

Headcount at the end of the year totaled 4,000 associates, including 700 temporaries. It's just down a tad from where we were at the end of the third quarter.

Backlog at year end amounted to 280 million. This is essentially unchanged from where we ended at September 30th. I think part of the backlog is what Bill referred to; we've been seeing customers coming in and placing partial year orders as opposed to what they have done previously.

Taking a look at the balance sheet, we ended with $42 million in cash. Our liquidity position, which is borrowings plus -- excuse me, cash plus available borrowings under our revolving credit, $160 million. Accounts receivable at $88 million, was well down from the $134 million we had at September 30th. DSO is about 28 days, which is an improvement from the 17 -- excuse me, an improvement of 17 days from where we were at September 30th.

Our inventories came down from the $113 million in September to just about $95 million at December. The principal item here to note is that cost of inventories has gone up over the course of the year. That accounts for why we were up against the year ago December 31st. But on a unit basis, our total new trailer inventory was down to just about 2,100 units at the end of the year compared to 3,300 units in September; work in process, down at the 200 unit level; and the used trailer inventory is down about 1,300 units. Inventory turns have been very good. And we continue to look for that going forward. We expect as we go through 2005 we will see the same seasonal pattern of building up during the course of the year. Our open trade commitments were just over $4 million at September 30th.

Total debt. At the moment really the only debt is the $125 million in convertible notes and about $3 million of other minor items. I think as most of you are aware we renegotiated our bank line in December. We removed some of the covenants such as restrictions on capital spending and dividends.

At this point let me turn it over to Bill so he can summarize it up.

In summary, we continue to be bullish about our prospects over an extended period. We should see gradual industry and healthy share growth over the next three to four years. We continue to work all aspects of our business that we control -- safety, quality, technology, cost and operational excellence. Given our recent success over the past two years and future capital plans, we will be in an enviable position to profitably grow our market share throughout the trailer industry cycle by creating value for our customers and investors alike. Our current challenge with raw material pricing will pass. We have labored long hours to mitigate this issue, and using this as a catalyst have become a much stronger Company and industry leader.

I will now open the session for questions.

(OPERATOR INSTRUCTIONS) Peter Nesvold, Bear Stearns.

Can you talk a little bit about the net pricing per trailer in fourth quarter? It sounded like it ended up being a wash as far as your price increases versus commodity cost. Is that correct?

Yes, but one thing that's real important to note is where it was at the end of the third quarter and where it was at the end of the fourth quarter was a significant price increase. And we're still seeing that on a mix basis go up in 2005.

At the end of the third quarter I think it was negative $70 per trailer.

Right. That was in September.

So where did we end up at the end of fourth quarter?

We're flush. We're matching the price increases that came in over the course of the first nine months with the cost increases with pricing.

We're basically back to 0 it sounds like at the end of the fourth quarter. Is that right?

Yes.

How do you anticipate the next two quarters, let's say, to unfold because it sounds like that's where the toughest comps are? So how do you expect that to look during first quarter and towards the end of first quarter?

I'm speaking now just from the first month or so. As we said in our discussion, we are getting some push back. It's not that the customers -- all customers are saying we can't afford it. We still are getting most of our price increases through. But we're seeing some folks that basically believe that pricing is going to go down as far as raw materials over the course of the year, and they're putting up a pretty good front at this point. We're also seeing, though just recently, some very large fleets come in for full-year orders. And I think it's a mixed bag. And I think unfortunately that's the way the quarter is going to look.

We're going to continue to see our average selling price go up. We're going to continue to see our costs go up. And most of those came in right at January 1. We've been working this process with our customers probably since November. These are our price increases that we had envisioned would come through, and they did. So when we were quoting back in the fourth quarter we were already working this side of the business. So I think from a margin standpoint, we're going to see some compression certainly in the first quarter. I feel relatively comfortable in saying that. And I think that will abate some in the second quarter and probably will not be an issue as we go out further.

So I guess if I just kind of want to recap it, it sounds like you're getting push back but you're still getting price increases that offset your cost increases. Is that fair to say?

We are offsetting a good portion of those price increases, yes.

A good portion? But that still suggests that maybe it's slightly negative.

Yes.

Is that net negative, is that more timing issue in your view? Are you still getting enough price increases where that becomes a net 0 at some point in the first half of '05?

Yes, I think we will be able to recover -- we will get to a net 0. I'm not sure we will be able to recover what we are not getting at this point.

Just a follow-up question on the comment you just made about margin compression in the first quarter. Is that sequential margin compression? Is it year-over-year? I guess you did about 10.4 in the first quarter '04. Are you talking margin compression from that, number one? And number two, I know you don't normally give guidance beyond production, but what should we be thinking about in terms of incremental gross margins for the full year?

I think our vision and what's out there right now is a little bit too murky to really give something like that. But I think where our focus is, everyone's clued in on the third quarter of '04. And what we're concerned about is can we get back in the first quarter where we were in the third quarter, and I think the answer to that is probably not.

When you say not back to where you were in the third quarter, would that be the sort of effective rate that Bob was talking about?

About 12.6 percent.

So is the comment that you don't think you can get to 12.6 in the first quarter '05 or is that by third quarter '05?

No, I think we will eventually get back and probably surpass those numbers as we go through the year. Remember, a lot of the margin was associated -- or a loss that Bob was talking about was associated with a loss at the branch level, and also because we didn't really manufacture all the days that we had available because of shutdowns. So (indiscernible) of those one-offs will go away. The branch business in the first quarter is going to have some healthy sales and actually do very well, but as we continue with our rationalization we're probably going to see either breakeven or below as far as the small loss is concerned. So versus again the third quarter where we had a profit there will be a delta. But it's hard to say. I just think that everyone is clued in on the third, and that seems to be the number. I think we will be certainly equal to or better than the fourth quarter. But we will be somewhere between that and the third quarter.

I'm sorry to drag to this out, but one final follow-up and I will get back in queue. I guess what I'm looking at is we had about 18 percent incremental gross margins in fourth quarter. They were the weakest of the year. But it's coming off of as those material costs are bubbling up. So 18 percent in fourth quarter '04. I guess directionally I'm looking at sort of 13 percent in first quarter '05. Is that -- do you think that's sort of a floor? Is that fair? How do you -- what should I be thinking about for first quarter '05?

In terms an of incremental amount? Or are you just talking in terms of the gross profit contribution percentage?

In incremental gross margin. It sounds like -- I don't want to put words in your mouth, but it sounds like you're looking at a gross margin in first quarter '05 that's higher than it was in first quarter '04.

I think that is a fair statement.

We're not seeing year-to-year margin contraction. And it's sort of mid-teens incremental gross margins, is that a fair number to think about for first quarter '05?

It's somewhere in there if you're looking with a comparison to the year-ago quarter.

Thanks. I'll get back in queue.

John Beal (ph), Standard Pacific Capital.

You mentioned that you had amended your bank agreement to allow for dividends. What are your kind of plans on excess cash other than the CapEx program that you mentioned?

I can tell you we're not going to buy back stock. I said that, and I will continue to say that as long as I'm here, that I just don't think that's the way to go.

When we did our secondary offering a lot of questions were asked. One, "why the heck are you doing this? and then two, "what are you going to do with all this money when you get it?" We would look potentially at a dividend, but that is something that the Board of Directors has got to approve. I can't specifically state that, but I know that's something that potentially will be discussed as we go on.

Secondly, we are in the midst of a six-month program to really review our bench strength just make sure that if we were to look at potentially an acquisition going forward, we make sure that people are running the shop in the way that we've set our goals and expectations for. So probably by our May Board meeting, we will go to our Board and say we're ready, fit and able to look at potentially moving on. But in that timeframe, we're totally focused on doing that, working the mid-market and other asides. (multiple speakers) question, but we may dividend, but that's something the Board has to decide.

What type of acquisition might you in theory be looking for, like a larger one, some in a different line of business or a tuck-in?

I don't think we can really answer that question at this point. We're still trying to put together our strategy on that, and that will be discussed with our Board of Directors in two weeks when we have our next meeting.

Can you just one more time review the CapEx? You said it was going to be -- it sounds like it's going to be 20 million --

I said roughly between 25 and 35 million. And just the rough pieces of that, our normal maintenance capital runs in that 5, 6, $7 million range. We're going to look at a $10 million program in the plant to revitalize one of the production lines. And then we're going to spend some money on ERP. That's pending Board approval. We estimate that would run us about $12 million this year, something additional next year. It's an 18 month kind of program. And again, it's pending Board approval.

The plant revitalization, that's an additional $10 million over the next three years, did you say?

No, those are -- the way we look at it at the moment, there are four lines that we'd like to revamp. And we'd like to do that over roughly the next three years -- put one line in this year and be a $10 million increment of costs this year; look at two lines next year, assuming we have a very successful implementation on the first one; and then the third year out we'd spend another 10 million, and that would give us the opportunity to bring everything under one roof and free up our South plant for whatever.

Thanks very much.

Jeff Kauffman (ph), George Weiss (ph).

Bill, Bob, everybody, congratulations on just a terrific 2004. I would like to follow up a little bit on the cash question, because your stock is trading at $25, and yet you're going to throw off $3 a share in free cash it looks like in 2005, which it's a 12 percent yield on the stock, which tells me the market is under-appreciating, or if you'll pardon the expression, not respecting your ability to use this free cash. So one of the things I'd like to get at, clearly you did the offering at a price below the current price. Arguably it does not make sense to buy back shares today at this price. That offering freed up your ability to pay dividends, freed up your ability to chase acquisitions and other things like this. But it sounds almost like you're a little recalcitrant on the dividend. So I guess my question is give us some degree of confidence that to the extent you go out there and make acquisitions -- I mean buying your stock back today is arguably a 12 percent return because you're saving -- you've got a $25 stock, and you're going to throw out $3 in free cash. It sounds almost like if you're going to make an acquisition, it's got to be an acquisition of a business that would be a higher return on investment than your current business. Help me think through this.

No, I agree with you. And I just -- I think you and I have talked about this in the past. But it's just something that I believe that we can reinvest the money, which granted you're saying that we're going to have money. We don't have money just yet. It's coming. So the idea of doing that right away would only put us back in the hole.

I could talk a lot about this, but to be honest I really need to go to our Board. I owe them my first thoughts. And as I said, we will be doing that in the next couple weeks. And at that point there might be some other things coming out of that. This is something that is relatively new. If you remember, not even months ago we were still talking about a turnaround. And we're very pleased where we are. We also understand that we have to continue to grow shareholder value. And we will. It just won't be through a stock buy back, unless the Board has a different opinion than I do. So give me a chance to sit down with them. But this is basically all we will be discussing over the next couple of Board meetings, and trying to understand where we're going to go forward. So just bear with me on that.

I understand what you're saying. I guess my question is as a CEO your shares were $30 a year ago. They're $25 today, yet your Company has beat the earnings expectations that were put into place over that period. So you have executed as well as you can, yet the stock market is valuing your stock 20 percent lower and your free cash has done nothing but improve. I think what it's saying is your shareholders want to see some of that cash come back to them. You've made your statement about share repurchase. Clearly dividend is on the table. But there seems to be some anxiety over how you would use the cash in an acquisition, and I guess -- if I take away what you're saying, is if you made an acquisition, it would have to be in a business that would give you higher returns.

I think that's a safe assumption.

We will look forward to that Board meeting.

Mark Degenhart, Oppenheimer Capital.

Congratulations on especially the working capital side of things. Bill, I always tend to focus on this whole middle market initiative, because it increases the addressable market for the Company by at least a factor of two or three. Could you -- I want to address that from sort of two different angles. Number one, if I think about your core accounts, the Warners of the world, four years ago they were 70 to 80 percent of sales, and now they're only down to about 30 percent of sales. If I run the numbers just back of the envelope, it almost implies to me that in absolute terms their sales are down from four years ago. Is that right?

Definitely. They are down year-over-year.

But order of magnitude, what are those large accounts doing from four years ago? It seems like they're just sort of sitting on their hands, and if it weren't for this middle market initiative your overall sales would have been down quite a bit. So when do those large accounts actually step back into the market?

I think they're thinking about that right now. A lot of what they've done in the past -- we have a significant portion of our product is in their fleet, and it's DuraPlate. As you know, that lasts forever.

What we're really looking at is a lot of these fleets now are still going through and recycling out their DuraPlate trailers. We're seeing that pretty much across the board. We are not seeing them grow their fleets significantly. There are one or two of our partners that have basically stated that they see growth options and are moving forward, and as they do that they're using DuraPlate to do it.

But I think right now it goes back to the fact that they're running at high utilizations. They're able to manage the market a little better through capacity. They are seeing continual price increases to their customers. And life is good at this point. And I think that they will continue that process certainly through 2005.

When we get into late 2006 and 2007, we will actually start replacing some of the DuraPlates that are in the fleet. Some of these core accounts are not going to keep the DuraPlate trailers for 12, 14 years. After 8 to 10 or 11 years they will start moving them out. As a matter of fact, some of those customers have already started sooner than that.

So I think from a core perspective, they've got different thoughts on their minds. They're managing their bottom line very, very well. I'm envious. And I think they will continue to do that. I don't believe that they think that the smaller guys are going to impact them any this year, even though I think the smaller guys are growing. There's a lot of hand me downs that are coming out. And the problem that the big guys are going to see is that some of these smaller fleets are going to do just as good a job as they are. I think that will open up somewhat probably in '06 and then we will see these high utilization rates. They're walking away from some business that I think in the future they won't want to do and they might add capacity for that.

But certainly through 2005 we would consider that our core accounts probably will drop to less than 25 percent of our business. We will have some big buys from them. But where we're looking at 60,000 trailers, I would suspect that they would be less than 25 percent.

So the core accounts in actual dollars are down what percent from three years ago?

In actual dollars? We have to get back to you on that.

I think from a unit perspective, roundly we did 40,000 in '03; total units this year we did roundly 50,000 units. Last year they represented about 50 percent of the sales, so say 20,000 units. This year they are a third of the sales; say 16, 17,000 units. So on a unit basis you're down roughly 3,000 units to that segment of the customer base.

There's no doubt if we didn't focus on the mid-market, this would be a real different call today. The neat stuff about this is that we are focused on the mid-market. Everyone wants to be like the big guys. They try to emulate them. DuraPlate is a great product to sell into this market. And we've surprised ourselves with the success that we've had.

We also make a great sheet post (ph) which is our entree. In some of these accounts they still can't see the difference. You're talking price premiums of a year ago versus now in DuraPlate over sheet post 4 to $5,000. So in some accounts we're going in with our FreightPro line, which is a great product, and then we're working them up to the DuraPlate.

When raw material prices go down, and as you see the DuraPlate net-net maintaining its premium over sheet and post but coming down as a whole, we should see some pretty solid growth going forward. We're very bullish on the mid-market. We're doing everything we can as far as supporting that. I'm out on calls almost every week.

And the other thing that is really helping us, our competitors don't necessarily agree with us, but this ten-year trailer idea that we're trying to pass through, we're very specific about what we try to do to our customers. It's just not we've got a trailer we want to sell you. We want to sell you service; we want to sell you the utility of a trailer that is not going to have to go into maintenance and the duration of that. So we're pretty pleased with where we're going and very pleased with the mid-market success to date and where we will be in '05.

Last question just on the middle market. Can you flush out how many salespeople you have there now versus a year ago, how many total accounts you have versus a year ago, things of that sort?

Totally we've done about 225 accounts that are new. In the mid-market it's probably half of that, which is very significant. We have -- the people that are focused on it, we used to call them mid-market account salespeople. We're not. What we are really saying is that our job is to sell our customers. So even the big guys who are handling the Schneiders are now working on mid-market accounts. With the dealer base, and with the advent of bringing in the guys from the branch retail area, I would say by midyear all told we probably have over 100 folks working that market.

Versus how many a year ago?

You would really have to take out the retail side, so maybe 60. We're adding new dealers. We're pretty focused on those accounts now and we have very high expectations. I tell my folks what we have to have that the other guys don't is a passion for our customers, and I think we've done very well in that. And I honestly believe, Mark -- and you guys can chuckle; I'm sure you have in the past. But I honestly believe there's no reason why every fleet in the country shouldn't own our product, and our job is to prove to them that we can earn that process.

Thank you.

(OPERATOR INSTRUCTIONS) Peter Nesvold, Bear Stearns.

Just a couple of quick follow-ups. Dick mentioned the order of magnitude of some of the cost saves from the refurbishing the lines. What's the timing of those cost saves?

We anticipate that the first line will be completed early in the fourth quarter this year and then we will ramp it up. So I would expect that we will start to see some impact late in the fourth quarter of this year relative to the first line. That's the initial $10 million investment. And on an annualized basis we would expect $7 million plus of annualized savings, and we will see a somewhat small portion of it in the later part of the year, and then we should see the full benefit of it in '06.

On the supply chain side, I guess one thing that was surprising was how strong the cash flow was out of the inventories. And then you mentioned on the call that you actually had prepurchased $6 million of components to lock in the pricing which would suggest the cash flow is even better on inventories. What are you seeing right now in supply chains? How did they perform during the quarter, and sort of where are they right now?

Everything seems to be pretty good. The next challenge to the supply chain will come probably in the next two months. I think we've announced that we brought the FreightPro line. We have one shift running. We are going up to two. We're going around the clock on containers. I think you'll see potentially in the second quarter ourselves, our competitors, and some of the truck OEMs starting to boost production again, the truck guys in preparation for the big final push in '06 and us just with I think the market is going to start to break free a little bit more going forward.

We all buy basically from the same guys. And I think the problem that we saw in the summer of '04 was due to this incremental step that happened in production where all of a sudden a lot of our suppliers had to put on new shifts. And their eyes were bigger than their capability, and it took them a while to kind of get themselves up to speed. And that's what's happening right now. We're running very well and I don't see any problems certainly in the first quarter. But if you start seeing some production advances from some of our competitors or ourselves, that will be a challenge to them. But we feel fairly comfortable that they're going to do a better job in '05 than they did in '04. At this point in time I think we're pretty optimistic that we will be okay.

On market share it sounded like you picked up a percentage point of market share in 2004. What are your expectations in '05 and going forward? Can you continue to take that much share each year?

I think we're going to take more than that. And I think it's going to be the mid-market. The big upside there is if the partners start coming in a bit bigger. But we've got some nice momentum in the mid-market and we're going to continue to work that. To be honest, I was a little bit disappointed that we only got 1 percent. In the mid-market it was a big share increase because, again, when you think the partners weren't in as strong as they have been. But I would be very disappointed if we didn't pick up at least 2 percentage points.

Last question then. It sounds like the big guys aren't in the market as active yet. Yet when I look at the ACT orders for the last couple of months, we had 31,000 in December, which I think it was the best month since some point in 1998. What's driving all that strength then if it's not the big guys ordering the trailers? Is it the small guys, the private fleets? Where are you seeing the strength?

Exactly. You're absolutely correct. In the December timeframe, I guess it's safe to say we're still talking with the partners. I mean, they're not coming in as strong as we had estimated. But they're talking, and I think they're trying to understand what their requirements are. They're more of the belief that raw materials are going to go down, and they have the capability to play that. And we're the ones who are saying that isn't going to happen. So we're in some interesting discussions right now with mostly the major players. I would say half our partners are in. And I also can tell you quite honestly we haven't produced a trailer for our partners yet this year. But we do have some in the quarter coming, and that will continue as we go forward.

So your business was up 25 percent year-over-year in 2004, yet you haven't really seen your 70 percent of your business customers really starting to order yet. So it seems like it leaves a fair amount of upside left.

I think there is. And I think what we have to do is we've got to get through this pricing issue. One of the things that everyone seems to forget is they all follow the spot. They say well, look at spot prices going down. And steel -- and it is. And it's going to fluctuate up also.

But most of our core suppliers of components and raw materials and steel have already locked in, and most of those locked in are contracted prices below spot. I think spot is going to vary all over the board in the next couple of months, but I don't think it's going to go down to the levels or below the levels that we have all contracted into. So on that basis, it's one of those things, he said, she said. We will continue to work the process. We're having very good discussions with a lot of our major suppliers. And I think they're coming to a realization that we're not out to screw them. We just want to get to the point where we can pass the increases through and keep them whole. And that's what we're trying to do.

Thanks for the time.

Donald Hasiotis (ph), Lockheart Capital (ph).

I just wanted some clarification on the cost savings from the four line improvements. Are you implying that you expect to get cost savings over the next three years of $7 million annually for each one of those lines as you make the improvements?

Yes, and that will happen year in and year out.

So a total of an $28 million in savings?

On an annual basis for all four, yes.

Another follow-up question to the core customers. At some point they're going to have to replace the trailers that are getting too old. Do you have any sense of the timing of that or (multiple speakers) are they going to competitors of yours?

I don't think they're going to competitors. The DuraPlate, the nice thing about it is it really is a 10 year plus trailer. And a lot of our key core accounts -- we started this process in late 1996, so 10 years is 2006. My guess is we're seeing some of the partners trade out, and they're doing it quite honestly because they're getting exceptional used trailer pricing on those trailers. In some respects, some of these are selling a five to six-year-old trailer at 1,500 to $2,000 less than they bought the damn thing for. So some of them are moving that, and they're taking advantage of that because they're well above water. But I don't think we will really see the majority of the accounts starting to trade out until in the '06, '07, '08 timeframe. That pretty much brings them into the 10 to 12 year frame.

Do you have an estimate of what percentage of the fleets of your core customers are DuraPlate trailers because I think a bunch of them still are sheet and post, right?

The majority of the trailers in their fleet are DuraPlate. But remember, these are very significant fleets as far as number is concerned. I think at one point we looked at it and we said there's probably 40,000 trailers sitting there that should be ours over the next foreseeable timeframe that are not DuraPlate. But that number is -- in my mind I think it's more between 30 and 40,000. So we feel we have every right to earn that business over the next couple years to bring that in.

Thank you.

I'm showing no further questions from the phones at this time.

We appreciate your time. We will continue to work the process. And again, thanks for listening to us for this whole hour and a half. Appreciate it. Thank you. Have a great day.

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