Wabash National Corp (WNC) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for holding. Welcome to the Wabash National Corporation’s second quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce your host, Mr. William Greubel, President and Chief Executive Officer. Thank you sir, you may begin.

Thanks Ken. Good morning. Before we begin I would like to make an important announcement. As with all these types of presentations, this morning’s contains certain forward-looking information, including statements about the company’s prospects, the industry outlook, backlog information, financial condition and the like. As you know, actual results could differ materially from those projected in the forward-looking statements. These statements should be viewed in light of cautionary statements and risk factors set forth from time to time in the company’s filings with the Securities and Exchange Commission.

Welcome to Wabash National’s second quarter earnings call. I am Bill Greubel, the Chief Executive Officer. In the conference room with me this morning are Bob Smith, our Chief Financial Officer; and Dick Giromini, our Chief Operating Officer. 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 web cast. We have much to cover today and we’ll try to provide as much information as possible. At the conclusion of the prepared portion of our presentation we will open the call for questions from the listening audience.

It was a good quarter, but not what we’re capable of, nor what we expected. Net sales for the quarter were $323m, compared to $255m for the same period last year. Net income for the quarter was $49m, or $1.33 diluted earnings per share, compared to $18m or 56 cents per share for the same period last year. For the six months ended June 30 net sales were $579m, compared to $476m for the same period in 2004. Net income for the first six months of 2005 totaled $68m, or $1.85 per share compared to $25m or 80 cents per share for last year.

Included in the results in the second quarter and the year-to-date period was a reversal of evaluation allowance against a realization of deferred tax assets amounting to $29m or 77 cents per share. Netting out this reversal, for the quarter net income was $20m or 56 cents per share.

Our expectations of 16,000 units shipped for the quarter was achievable, but not fulfilled. A variety of correctable issues confronted us. We had staffed up additional shifts, as we had noted in our first quarter conference call, on our container and pup line, with a disproportionate number of temporary to full time associates, resulting in higher volume of whip related rework, and a reduction of throughput and productivity. We have since implemented initiatives that improve our hiring, training, and utilization of our temporary associates.

During the quarter we absorbed cancellations of 2,000 units for the balance of 2005. The major cancellation was from Schneider National, reflecting equipment productivity improvements and a rebalancing of their trailer and intermodal fleet. These cancellations had profound negative impact on Q2 and will into Q3. These cancellations necessitated replacing long runs of uniform spec trailers with an unwieldy variety of short run, high spec units that significantly reduced throughput, and quite honestly, should probably not have been run on those lines.

By the end of July we should be in good shape in this respect. In the quarter we examined and learned many lessons associated with the balance of high productivity and quality excellence, and the relative impacts associated with each. My goal is to make Wabash National the industry quality leader, because it distinguishes us from our competitors and totally supports our commitment to supply trailers that last longer, and continuously reduce our customers’ OR. Being in the pack is just not acceptable.

As such, we again notched up our acceptance criteria. In order to achieve a long term desired effect, we increased pre-shipment inspections. This challenge resulted in higher whip and temporary slower line speeds, which adversely impacted unit shipments. Culturally [ph], and on the floor, we are making progress. July will be better than June when we begin this process. We expect each month in Q3 to sequentially be better than the prior month. It’s got to be done, and to break past legacies we can’t continue to just nudge it forward.

Also affecting our margins in the second quarter was a sizable change in the mix of partner related business, as well as chronic mix associated with higher production of lower margin products. During the quarter our core customers represented approximately 36% of our business, versus 15% in the first quarter. The net effect was lower average selling price, and somewhat lower margins versus the smaller volume, non-partner accounts. We see this mix continuing through the third quarter as these customers typically come in stronger during the second and third quarters.

We should also see our product mix remain somewhat constant, as we have increased shifts on commodity grade production as a means of entry into some mid-market accounts. We should begin to see some materials and component price relief in the third quarter as we press suppliers for steel related savings. We do not expect to see any significant savings in 2005, as most of our suppliers are still tied to firm contracts. We have begun our initiatives to reduce raw material and component cost through product standardization and alternative sourcing. At this time we fully expect to see a minimum of 3% - 5% in component cost savings, ex raw materials, over the next three years.

Industry pricing is generally holding, there are some smaller OEMs that do not have a significant backlog to support the seasonality of this business, and we have seen some bidding for readily available capacity. This has been sporadic, and only in the commodity sheet in post segment at this time. All major producers seem to have good sustainable backlogs of approximately six months.

We continue to have success in closing new accounts. In the first six months of 2005 we have added over 340 new accounts, far exceedingly our total for all of 2004. Year-to-date in 2005 we have received new orders of approximately 6700 units, representing over $100m of new business. Since we began this program in October of 2003 we have added well over 500 new accounts and over $200m in additional new business. We fully expect to see continued success in this segment to reach our goal of over $400m in new business by the end of 2007.

Interesting to note, given the current industry metrics, DuraPlate now holds over a 30% market share of new orders for the dry band market. Wabash National’s market share, as measured by new orders in the trailer only segment, has also grown by 200 basis points through the first five months of 2005. We continue to be bullish about meeting our share goals also.

The trailer industry is seeing more traditional seasonality related to new orders. Most of the major fleets have submitted their orders for 2005. In April and May orders were lower for van trailers versus prior months, both in the related month in 2004 and the prior month in 2005. There are many factors affecting this year-over-year change. We saw very strong orders in the first quarter, far superior to any other quarter in recent history. I think you will see flat quarterly earnings reports showing a soft freight environment during the second quarter with large spikes in diesel fuel. This had a dampening affect. To some degree the pricing and availability of production slots for Class A trucks also affected our business, as fleets generally balance the ratio of trucks to trailers, and we’re still waiting for those slots to begin to open up.

Finally, our customers believe the worst of the industry raw material related prices increases are behind us, and as such, some of our customers are again willing to wait to see what further changes in raw materials may have on the industry going forward.

I’d like to take this time in my summary, before Dick comes up, to really talk about our business and where we think we’re going. Don’t mistake our issues of this quarter as a sign that the industry has peaked. The fundamentals for continued growth are the same, and as sound as they were at the end of the first quarter. Our customers continue to see very positive results. The trailer fleet as a whole continues to age. The economy seems to be moving past recent softness. Our backlogs and quoting remain strong in this seasonal slow period. Our capture rate continues to be quite good. Industry forecasters continue to move their estimates up, not down.

In addition, our past comments and focus on improving margin have not changed. We will continuously improve, and sometimes it hurts a bit to do that. At this time Dick will further discuss the operations side of the business, and Bob will follow with the financial review and update you on our expectations going forward in 2005. Dick.

Thanks Bill. As always, I’ll share with you some highlights of this past quarter within both our manufacturing operations and our retail distribution business.

In the area of environmental health and safety we continue to perform well and continue to drive further improvement. Both our total recordable incident rate and our days away from work case rates performed at a level well below the industry norm for our sick code. Product quality improvement continues as a key area of focus. While we have made nice strides during the past three years, and have received many favorable comments from customers, we’re still not satisfied with our current product quality levels, and have again further tightened our in process and outgoing quality acceptance criteria.

We began this process during the month of June, and while admittedly having a dampening impact short term on our production throughput, we are already seeing the benefits of this more aggressive approach to quality control and enhancement. As I’ve stated to our associates within Wabash National, and publicly, we strive to become the benchmark for quality within the trailer industry, and this is just the next step toward achieving that status.

Our direct labor productivity suffered during this past quarter as a result of a number of root causes. First of all we experienced continued hangover and ramp up effects of the additional shift staffing efforts that were begun during the first quarter while initially bringing on too high a percentage of temp associates. Secondly, customer cancellations of significant volume resulted in extensive schedule shuffling; and third, we experienced an unusually challenging product mix.

Finally our increased focus on improving the level of outgoing product quality did result in decreased line speeds and throughput. The net effect on productivity for the quarter was a loss of some 1,100 units. As a result, we have taken actions to address and improve performance, including establishing targeted ratios of full time to temp associates for all current and future staffing needs by department and by shift, and closely managed by our human resources group.

Additionally we implemented a pre-hire temp candidate assessment center, to reduce temp turnover. These actions were initiated in May with a much better balance already in place today, and improving daily. Extensive on floor training with our associates was also implemented to the new, higher, tighter quality acceptance criteria. This action continues and will be ongoing to insure the results we desire. Results are already being realized with daily throughput within some three units per line of our target levels.

Longer term initiatives that will further enhance our safety, quality, productivity and cost, include our Alpha line projects, our raw materials cost reduction efforts, and our product rationalization and standardization initiatives. As discussed during a previous call, the Alpha line project is the first phase of our next generation initiative, which includes the replacement and upgrade of four of our manufacturing assembly lines during this year and through 2007. This first phase, the Alpha line, has now moved from the detailed process specification to detailed design, construction, and finally, installation, which will be occurring throughout the balance of this year. As a reminder, we expect nearly $7m of annualized savings once completed and fully staffed.

Purchasing efforts to reduce the cost of raw materials and components continues in earnest. The supply chain team has programs underway that will meet our 2005 cost reduction goals. Now the new challenge is to find even more savings through alternative supplier sourcing, as required to take advantage of better pricing either here or offshore. For example, the team has identified opportunities to yield significant savings on a number of components. Obviously, we will continue to work closely with our current suppliers to achieve our cost objectives, but we’ll make the decisions necessary to meet our goals. Targeted components and systems include the full gamut of components and accessories, including lighting and wiring harnesses, landing gear, Bogie components and other accessories.

Finally, our product standardization efforts continue with a high level of focus in energy. During the past quarter we completed our rationalization evaluations of the following; box sizes for our standard frame, dry van products including lane pipe and width considerations, drop frame products, refrigerated trailers including height and width, with evaluation continuing this quarter on that product line. These are in addition to our previous implementation of a standard rear frame design, landing gear, upper coupler, and floor systems, which were all implemented during the earlier part of the year.

As these changes take hold through our quoting and sales process and our already committed backlog clears throughout the balance of the year, we will then be able to begin leveraging these efforts by further streamlining our manufacturing processes, simplifying our tooling and fixturing and further enhancing our ability to build consistently high quality and cost effective products.

On the retail side, that business continues the progress it’s being shown during the past few quarters, with each month, during this past quarter being profitable, resulting in a second quarter being the most profitable quarter for the retail side of our business since the third quarter of 2000. Former continuous improvement events continue monthly in the parts of service operations with excellent results.

In summary, this past quarter presented some unique challenges in product mix, customer cancellations and opportunities for performance improvement. We have our new executive leadership team fully on board and the retail restructuring is mostly behind us. I fully expect strong operational performance going forward. With that, I’ll turn the discussion over to Bob Smith, our Chief Financial Officer. Bob?

Thanks, Dick. Good morning, All. Here’s a quick summary of the financial results and our financial conditions as of June 30th.

Sales were $323m for the second quarter, on 15,100 new units; net income, $49m, or $1.33 per share, fully diluted; year-to-date, $579m in sales, $68m in profits. Included in the results, as Bill mentioned, with the reversal of tax valuation reserves, $29m, or 77 cents per share, fully diluted.

These reversals relate to taxes in 2006 and forward. They don’t have a consequence on our tax rate for the remainder of 2005. We expect that to be essentially zero for the remaining two quarters of the year. One bad guy in the results that I’ll call out is a warranty positional provision of $1m.

Equivalent shares were just under 38m shares and the detail is laid out in the press release.

Looking at sales on a segment basis, we had $288m in the manufacturing segment on 15,000 units. Retail and distribution was $61m sales with 1,300 units of new. Eliminations amounted to $26m, 1,200 units. If we look at it on a product line basis, new trailer sales were $290m. We [inaudible] 15,100 units. We built 14,600 units. In the first quarter, that was $225m of sales, 11,200 units built of 12,600. Compared to the first quarter, units were up 35% while selling prices decreased approximately 5%.

As we had told you in the last call, core customers of partners were expected to come in big. They amounted to approximately 36% of the units sold in the quarter, and that’s up from just under 15% in the first quarter of this year. Product mix was a contributor also to the decline in sales. We had sales per unit, or average selling price per unit, we had a significant increase in lower price, pups, containers and converter dollies, approximately a three percentage-point increase from the first quarter.

Used trailer sales totaled $13m in the quarter, on 1,400 units. On a dollar basis, this was similar to the first quarter. Units were up slightly from the first quarter. The story in used trailers remains tight availability of equipment. This is the first quarter where we’ve seen the average selling price decline a little bit on used trailers, but that’s really a function of the type of trailer we were selling, as opposed to the strength of the market.

Parts and service, $16m in the quarter; that’s up from $14m in the first quarter. It’s a seasonal up tick that is normally seen in the second and third quarters. Other revenues continue to be steady at about $4m. This is predominantly leasing type revenues.

Gross margin for the quarter was 11.2%. This compares to 13.4% in Q1. Missing the production was a major contributor to not achieving the mid-12% that was suggested in the Q1 call. When we look at it, on a dollar basis, we had about $1.7m increase in gross profit, Q1, vs. Q2. Material costs exceeded the increase in selling prices, and that was a negative of $11m.

Volume increases added $9m in improvement. Labor and overhead was better than the first quarter. That’s approximately $2.8m. Retail was a net positive of $700,000 from the first quarter. Other costs netted out to a $600,000 negative. The net freight costs that we incurred to get the trailers delivered was a negative of approximately $900,000 from the preceding quarter. The selling price decline reflects the mix of business, the lower priced pups and containers and the increase of partner business.

When we look at our raw materials costs and components, they went up in the first quarter and they have remained constant through the second quarter. The step up from where we ended the year is in that 4% to 5% type range. Again, as I mentioned, had we achieved the 1,100 units additional that Dick mentioned, we estimate that’s worth a percentage point in the gross margin. We had the bad guy from the warranty provision, and those were the principal events during the quarter.

Looking forward, as Bill said, we think the year looks to be in the 58,000 unit range. As we go forward, that would say 15,000 to 16,000 per quarter, with the fourth quarter likely to be a bit stronger than the third quarter.

Selling prices, there’s a little bit of modest competitive pressure, because of available capacity out there. Partner business was 36% in the second quarter. We expect, on the full year, that they will be about one-third of our total units, which is where we were a year ago.

ASP over the balance of the year will probably decline a little bit more, with mix the major factor.

Raw material cost, as I mentioned, is fairly constant between Q1 and Q2. We expect to see some modest decreases over the balance of the year, but certainly not enough to get us back to where we began where the year ended last year. DuraPlate steel is again tied to the scrap steel index, and we expect this will help the third quarter a bit.

The supply chain performance has been very acceptable and we are looking for opportunities to take the raw material inventories down. We have, since the end of last year, built those inventories up a bit, and, at this point, we’re looking to take them down.

SG&A was $14.2m in Q2, approximately 4.5% of sales, compared to $13.2m in the first quarter, or 5.2% of sales. That’s good improvement in terms of percentage. We lost a little ground in dollar terms, as we incurred some severance, recruiting and relocation types of expenses in the quarter.

Interest was essentially unchanged from the first quarter. We had a little bit of negative foreign exchange on the Canadian dollar and the other was $200,000. The EPS calculation is in the release and you can see that.

Depreciation and amortization in the quarter is at the $4m run rate, $8m for the year, and we’ll be in the $16m or $17m range for the full year. Capital spending, roughly $14m. Again, we expect to see this come in somewhere between $25m and $35m, split up between our maintenance requirements, the plants, the automation initiatives that Dick has mentioned, and our ERP implementation project.

From a headcount basis, we were running about 3,400 full-time associates this quarter, compared to about 3,300 full-time associates at the end of last quarter. Our temporary headcount is up in the third to a half over where it was at the end of the first quarter. We were running about 1,000 people at that point in time.

The backlog is $380m, compared to $500m at the end of March. This is the normal pattern that we would expect.

From a balance sheet perspective, cash was pretty constant at $40m. Liquidity, cash plus the availability under our line of credit is $158m, compared to $160m at December 31st. Our receivables were up a little bit. We’re $110m, compared to where we were at the end of March. DSO showed an improvement. We’re running approximately 31 days, and that’s about six days better than we were experiencing in the first quarter.

Inventories are at $140m. Those are up a bit from the March period. The scheduling issues that we encountered at the tail end of the second quarter contributed to that increase. From a turns standpoint, they’ve improved. We were running about six-and-a-half times at the end of March, and eight times a year in the June period.

Used trailer inventory is approximately $15m, or 1,600 units. Dollars are down slightly. They were $16m at the end of the first quarter and units are up 200 units from where they were at the end of the first quarter.

At this point, I’ll turn it back over to Bill for some concluding remarks.

Thanks Bob. In summary, we’ve really endured a bit of a speed bump in our progress. Corrective actions will right us operationally over the next few months. This work and effort is necessary to insure that we maintain our position as the premium trailer supplier in this industry.

We will maintain our course and continue to focus on the great initiatives that are already under way. Volume will improve, as will margins. Progress is being made on all fronts and will continue well into the future. The industry and our ability to prosper in it are still very strong. Our associates are well aware of our miss in the second quarter and its potential effects, not only on our stock price, but on other things that we hold dear here. We all intend to execute better going forward.

At this time, I’ll take questions. Ken?

[OPERATOR INSTRUCTIONS] Our first question comes from Peter Nesvold, with Bear Stearns.

Hey guys, a question for Dick. You talked a little bit about some quality issues that you encountered in the second quarter. Can you give us some more color on that? Are they cosmetic issues? You know, fit and finish type stuff, or is this manufacturing oriented quality issues?

Yes, Peter, just to clarify, we didn’t run into quality issues as such. What we’re trying to do is, we’re trying to in effect up the ante on what our in process and outgoing acceptance criteria is. We have – as we have continued to add additional customers, especially through the mid-market efforts, we’re getting a lot of customers who have a much higher level of scrutiny on what their expectations are for fit and finish on our products. We’re trying to take that feedback from the field and incorporate that into enhancing what the acceptance criteria is in the product we build. So it’s not that we have experienced quality issues as much as us increasing the internal acceptance criteria that we’re putting out on the factory floor.

What we’ve done is, we’ve pulled quality control inspectors much more into the process, working with the associates on line, identifying fit and finish, and appearance related issues and trying to address those as they’re going down the line. What that has created was a slowdown, if you will, on the throughput. The line speed decreased temporarily as folks were being adjusted, lines would stop to understand better what the acceptance criteria requirements were, and that affected us during the latter part of June. Now the folks have worked through that for the most part. We’re still not to where we want to by on cycle time, but throughputs are improving dramatically over the past couple of weeks, and we expect that to continue throughout this quarter. By the end of this quarter we should certainly be at the levels we fully expect to be at.

How do you quantify throughput?

It’s the net good product produced on a per day basis. We have standard throughput for each line based on the product type that’s going down the line. If it’s going down one of our high volume DuraPlate lines we have certain daily throughput expectations on those based on specification; likewise with our sheet and post Freight Pro lines and our refrigerated line. So each line has a certain expected throughput based on what the trailer specification is, and we measure against that ability to meet that throughput level.

Is there any kind of like corporate wide average throughput level that you target, and can you tell us where you were at the end of the second quarter, and where you think you might be at the end of the third quarter? What I’m trying to do is get a sense for the rate of relative change here.

I can’t share the exact number of throughput. What I can share is where we are relative to where we need to be. We are within, on average, about 20 a day right now shy of where we need to be and where I expect to be. Most of the deterioration was in the last two weeks of June, where we really throttled back where we were actually down 50 – 60 units a day and more, as folks were adjusting and learning what the expectations were. But as I just stated, this past week we were within 20. We have seven manufacturing lines, so we were within about 3 per line, units per day, on average, across each of the lines, of where we need to be to meet the throughput expectations we have for the business.

Improvements are occurring almost daily as we’re going forward. So it will take – it’s not like we’ll pick up one a day, but over the next month and a half or two we should certainly get back to the level that I expect us to be at.

Peter, if you look at what Bob has said, and what Dick has said, we made roughly 14,600 trailers. We missed 1,100, it’s about an 8% hit on a quarter basis. But the majority of that hit hit us in June. So it’s a little bit more difficult at that point, because everything was kind of under scrutiny at that point. But what Dick has said, and I agree, is that we are moving forward, we’re having a lot better sense of what we have to do. What’s really important is I think the people on the floor are finally getting it. But it’s important for us to build a very good quality trailer. It’s not just how fast you put them out, it’s how good you put them out the first time, and I think we’re much more focused there, and we are seeing results.

OK. A question on the cancellation, the 2,000 unit cancellation. Is that gone for good, or does that come back into the book at some point? Can you give us more color on that?

The big one was Schneider; that represented certainly over 50% of that 2,000 and we’ll probably see business coming back in a different form. They’re making a bigger push now into the container side of the business, the TOFC, trailer on flat car, freight car business that they really owned; they were the big one in that is kind of moving into the container side, so they’re making that move themselves.

We have approximately 300 boxes that they are going to see between the second quarter and the fourth quarter of this year that they will be testing, and we fully anticipate being a big provider of intermodal boxes to them in the future.

The other cancellations that come in, all companies have them. There was only one that we could really say that the customer told us that their business was slow, and we’re a bit surprised, because it was in the LTL type side of the business. We believe that that order will come back to us. There was nothing associated with quality or pricing there. Everything else was dribs and drabs, but it was mostly in the DuraPlate side of the business.

It’s normal, Schneider is a one time thing, we don’t particularly see any other big ones coming in; no one’s talking about it at least. Our job is to recapture that lost business with someone else and make our plan.

One last question and I’ll get back in queue. I think you mentioned that raw materials were negative $11m hit in the quarter, was that correct?

Yes.

What happened that you got caught off guard there, and does that reverse out at some point?

Well we really didn’t get caught off guard. Really what it was and we go back to the first quarter where we show those great margins, we priced in for raw materials that did not show up at that time, and they really started showing up at the end of the first quarter and we got the full blunt of them in the second quarter. as Bob said, we’re not sure whether we’ll be able to recapture from our component suppliers the increases that we have seen in 2005 by the end of the year, to have them reverse out, not have us price out. We continue to raise prices where we can with our customers on the basis of year-over-year differences in price, and our customers continue to buy on that basis.

But I think at this point it’s just premature to say how much we’re going to get out of these guys, because everyone’s living still on firm contracts. We’re also starting to see, if you look at it, it looks like steel has now started to stop the slide and we’re actually expecting through some of our suppliers to see steel starting to move up. So they’re a little bit resistant to passing along a price decrease and then having to come back and flow it back. But we’re doing a lot; this isn’t the best time to give you that type of information because it’s still premature in our discussions with our suppliers.

OK, thanks. I’ll get back in queue.

Ezra Gardner with UBS.

Hi guys, good morning. I have three questions. The first one is, you guys say you’re 90% booked on the 58,000 trailer goal we now have. Is that behind, in line, or ahead of where we would normally be at this time of year?

We’re comparable to a little bit ahead.

OK, great. I wanted to get into the talk you had of redoing your line with the $7m of annual savings and look beyond the rest of 2005 into 2006. Is the refitting of that line, along with the other programs that you’ve undertaken, still on track to produce all time peak margins again in 2006?

Nothing has changed as far as the initiatives we’re working on. I’ll just go through them all. On the Alpha line we call it, we’re there, we’re going to start up, we’ll be running it sometime in the fourth quarter. The savings that we project from that are going to be there. On the mid-market side we’re well ahead of where our initial expectation was. We continue to hammer that market and work it very hard. As I said in my comments we’re halfway to a goal that we may have to change that goal a bit.

On the raw materials side, a lot of what we’re doing, as I said in the first quarter conference call, is really laying the groundwork this year for the savings to really come in, in ’06 and ’07. A lot of the programs in raw material changes, we’re going to have to get more leverage on our current supply base. The best way of doing that is to really go offshore or at least outside of the US border. We have begun that, some examples of which we are not ready to discuss, but we are picking up leverage in order to really work these guys down. There’s no reason that they should have any different margins than we should.

Got it. When you say you’re halfway to that one goal, that you may have to change, you may have to change that to the upside, or adjust it down?

No, we only look up.

Got it. The final question is, you talked about the build in some of the working capital, the accounts receivable and the inventory, is most of that going to convert to cash by year end? I mean still that’s going to be quite a bit of cash, what’s the plan for the cash?

Ezra, the cycle that we’re seeing in terms of working capital is pretty much the pattern that we saw last year, where we build it up during the course of the first couple of quarters and then it will come back into cash in the fourth quarter. As you’ve seen, we managed to stay essentially at the same place on a cash position as we ended the year. So we think we’re going to be very positive from a cash flow perspective, even dealing with the amount of project work that we’ve undertaken. What we’re going to do with the cash, that’s a question for Mr. Bill and for the board of directors.

This is our quarterly question and the board is becoming more and more concerned about what we should do with it, whether it involves and acquisition or some other form of repatriation. We continue to discuss that, so at this point there really is no other update, other than the fact that the board is becoming more and more aware of the fact that we will now have excess cash, and it’s up to myself and Bob and Dick to provide some options for them to look at.

OK, thanks a lot guys.

Jeff Gossett [ph] with George Weiss.

Hey guys, how you doing?

Hey Jeff, how are you doing?

Well I guess there’s no need to question that this might theoretically affect the stock price, you’re down about 20% so far. It seems like a very, very big hit, considering you’re really saying ’06 is pretty much in tact and these are short term problems. So I guess my question is you’re still throwing off $2 a share plus some free cash flow given the expectations you’re outlining. Is there any better investment for you right now than improving your operations and possibly your stock price here?

I appreciate that comment, we just aren’t at a position to – I certainly am not at a position to tell you what we intend to do at this point. We continue, as I said, this is one of the primary discussions that we have at our board meetings; it’s all from a strategic side. We’re not looking at ourselves as “Oh golly, we just made another quarter”, this is an ongoing concern. We now have submitted our proposal as far as strategic planning to the board; it’s got some good buy in. We have started to look at some other options. Just from my perspective, what I’m trying to do, we have a relatively new board, quite a few new members on it. We’re really focusing, within the board right now; on what is the process, and how do we go forward. I know that might be frustrating to a lot of people listening in, but it’s a lot simpler that once we come to that understanding we should be able to move rather quickly then going forward.

My guess is we probably have one more board meeting, which is in September, to get to that point, and hopefully at that time the board will give us some freedom to move within certain limits. So it’s one of those ‘bear with me’.

OK. A question of a different sort, I guess if I step back from 10,000 feet, I think clearly a lot of us, including yourselves, are disappointed with the three month outlook here. But taking the longer view, what you’re saying is these were largely temporal timing/staffing issues that we should get beyond in the next quarter or so. We haven’t really had a lot of cancellations, we have some customers that are probably trying to gain the order cycle, given what’s going on with raw materials, and the hope that prices come down. But the reality is your customer base is healthy. The orders that you lost, some of them you’re going to get back, you know, either later this year or early next year. There’s no reason to believe that the outlook for ’06 and ’07, which should really be your big years--once this Class 8 pre-buy gets out of the way, there’s no reason to believe that the margins we thought you were going to do a few months ago aren’t still obtainable. There’s no reason to believe the volumes we thought you might do are still obtainable.

So, at the end of the day, I mean, am I understanding this clearly? You got bit on the proverbial ass, basically, in the short-term, but longer-term, there’s just no reason to believe anything’s changed. Or, am I missing something?

No. You know, I think today, it’s going to be that the baby got thrown out with the bath water. But, I think that, as people start to really look at this and understand, we’re very committed. We’re not pleased, certainly, with our results.

We have a bonus situation right now in the organization that there isn’t one. So there will be a meeting tomorrow where we’ll discuss that with our folks. And, nothing, in my mind, as far as the industry is concerned, has affected me. Our performance in the mid-market has been excellent. We’re becoming more and more aggressive in how we approach certain customers. We’re being more successful in securing those.

I guess we, myself, however you want to look at it, feel that it was an operational issue internally. It wasn’t an industry issue, which we are very pleased to be in. So, we screwed up, or I screwed up, however you want to look at it. But that will not be something that is going to change where we’ll be in, in the future. This is a company that has built itself out of a ruin, but we are very focused in what we have to do.

I’m not here to say we have a plan B. The plan A works just fine and we’re going to continue on and go after it.

All right, well good luck. I think it needs to be said here that you guys have done a fantastic job. I think everybody runs into a quarter or two that surprises them. I mean it sounds like you’re still doing the right thing here, so good luck with everything.

Thanks, Jeff.

Our next question comes from Kevin Mazka, with DBT Capital Markets.

Good morning. Just another question for you on this cancellation. You just said that your problems in the quarter were operational and not industry specific, but can you give us some sense on this Class 8 pre-buy? You mentioned that you thought some of the issues in the quarter might carry over into the third quarter. What I’m wondering is, the Schneider issue might be a one-time thing that’s specific to them. But, can you give us a sense on the Class 8 pre buy? Do you expect that to impact, or maybe give us higher cancellations, going forward?

I don’t think people are going to come in and say “We’re going to cancel.” I think the question is, that I tried to state, is everyone is trying to find out where they’re going to fit in the slots, and I think you’re going to see a preponderance of the big guys, the large fleets, taking up a lot of those slots in 2006. They have the purchasing power and it will be somewhat similar to what we saw in ’02. but how that’s going to affect us, we’ve queried the large partners and some of the larger non-core accounts that we have, we have a pretty good idea of what they’re going to buy both in trucks and trailers next year. I think at this point we don’t see anything that would adversely affect us.

I think the real question is how does the smaller guy play in this market now for trucks going forward? I think that’s going to be a measure more of how much equipment the dealers can pick up, so that they can support that type of market. As I said, I don’t think, in my mind, ACT is moving up but in my mind next year will look a lot like this year. The build delta is we’ll continue to capture more share and those people who are currently buying partially this year will buy a little bit more next year. So from our standpoint year-over-year we should be a little bit better.

Then it’s my belief that in sub ’07 if the economy is still in the same nice shape that it is right now we should see a nice bump in a lot more replacement business as people have available funds to spend more exclusively on trailers versus trucks.

And of course some level of cancellations are a normal course of business, but of course the Schneider cancellation and some of the cancellations from others are abnormal here. Can you give us a sense on what’s a more normal level that you’ve experienced in recent quarters?

We’re probably around 500 – 600, something like that a quarter. We’re not fussed with what Schneider did, they’ve been a great customer and will continue to be a great customer, and they’ve got a great opportunity that they’re pursuing. They gave us as much notice as they could, we didn’t get caught with any inventory or anything like that and they were very good about it. I think honestly they continued an order in the early part of June that they really didn’t need to do, but they’re just top notch folks.

As far as other accounts coming in and saying, “We don’t need anything”, we don’t see that. We generally get some hint of that before that call comes forth, and we haven’t seen it.

OK, just one more question on the turnover. You mentioned, and I think I understand the issue with the quality and the new focus there; you’ve added some folks to the line and are doing some more work there. But you also mentioned associated turnover, and specifically as it related to your temps. Can you give us some more sense on what’s going on there?

I’ll let Dick take that one.

When we would traditionally bring temps into the business, they were assigned to an area, assigned to a supervisor, and they would work on the line. When the economy was a little weaker there were a lot more to choose from and as the economy has improved and the unemployment rate has dropped, in this area it’s about 4%, the quality of the available temps comes under question. What we found as we were trying to ramp up, we were finding that we were hiring temps, even though we did a pre-screening, we were hiring temps and we would have a high turnover. In some cases a temp would go out on the line and work one day, and not come back, or work three days and not come back, in some cases work less than a day and not come back.

So we had a high turnover in the sense that we had to continue to then replace those temps. What we have done since then, and we also our ratio of full time to temps got out of whack. We had too many temps on a couple of the lines as we were trying to ramp up. What we’ve done since then, and started the process in early May, is that we put in a pre-hire temp assessment center is what I’m calling it, where we bring the temps in and actually introduce them for a day to the actual type of work that they’re going to be doing, off line, so that they become accustomed. What it has done is reduce significantly the turnover. So before they get assigned to the line, if they can’t cut it they’re kind of finding out in the first day and then we move on to another so that we’re not affecting the line throughput and the line performance. So it’s working much better now, we’ve decreased significantly the turnover.

And there’s nothing going on out of the ordinary in regard to your full time staff?

No.

OK, thank you.

One other thing Kevin, as we get into the Alpha line we’re going to be taking some people out of the operations, and we fully intend to reduce our temp staff as we do that. So it won’t affect our full time associates, but we will take a little bit of this problem away with us as some new lines start coming in.

OK, thank you.

Sarah Bayridge [ph] with Artemis.

Hi. Most of my questions were answered, but I did hear your response on Schneider, and talk about being able to offer them intermodal trailers I guess.

Boxes.

Boxes. I just want to understand, is that a new business?

No, we’re one of the largest suppliers of intermodal boxes, our biggest account is JD Hunt, and we’re now moving into some of the rail accounts, and as Schneider moves into it we hope to move into it with them also.

OK, great. Thank you very much.

We’ll take one more question.

Mark Dagenhart [ph] with Oppenheimer Capital.

Hey guys, a couple of questions. Can you give us a sense of what the mix of full time versus temps, how it has varied in the last couple of quarters?

What we’ve tried to do now is target on a go forward basis that no line, no individual line will have any more than 50% temps in that line, and no shift will have any more than 1/3 of the population will be temps. Prior to that we had gotten out of whack, we were – and Bill had just mentioned about our Alpha line initiative and going forward, one of the mistakes that was made and we certainly have learned from and corrected, as we were staffing up we were attempting to hire just temps knowing that as we go forward we would be reducing temps and we wanted to assure that we were only affecting the temp organization and not full time as we transitioned over to our Alpha line.

It was premature to be taking that kind of a stance, because it’s going to be quite a period of time before we’re in a position where we would be affected that way. We got out of whack, we had a very, very high percentage of temps on a couple of the lines on the off shift, and that affected both the quality and the throughput. So we’ve corrected that going forward, and we’ve gone to this 2/3 to 1/3 ratio as a minimal acceptable level.

How high did those ratios get?

It’s on a line by line basis, so it’s difficult to give you numbers. We had one situation where we had actually in excess of 80% were temps for a short period of time on one line, and that was just way out of whack. We’ve moved to correct that.

Then just two quick follow ups. Used trailer prices, you said for the first time that they were down, but you attributed that more to the type of trailer rather than to weakening demand.

Yes.

Can you flesh that out a little bit?

Yes Mark. Used trailer pricing is still pretty hot in the industry; the problem is that the type of trailers everyone wants are not there. So what you’re seeing now is everyone selling off aged inventory, and the prices of those particular trailers are lower. If there were some used DuraPlates or Danes or other product that came in that were in the ’99 to 2003 range they would be gobbled up at premium prices. So it’s more a matter of what’s out there, not necessarily pricing yet.

And last question, just explain to us how you manage raw material costs, and especially steel. Do you have a hedging policy in place? What is your steel pricing tied to, things of that sort?

We don’t have, nor could we afford, hedging steel. We do have indexes, especially in the scrap related steel that we use in DuraPlate and in our cross members, and as such we have basically a 90 day continuous trailer change, so as scrap prices have been going down in this quarter we will start to see some improvement associated with that. Generally because we use so much steel through so many of our component suppliers, it’s their obligation to manage their pricing, and they have been certainly trying to do that. But over the course of the last year, as you know, steel has gone up substantially.

Most of these guys have fixed contracts now at fixed pricing, and those contracts would, probably, my guess Mark, in the next three months, will be renegotiated at different prices. Generally I would think would be lower prices, and we would probably start to see some of that improvement in a material way sometime in the first quarter.

OK, thank you.

Thanks. I appreciate the questions. As I said, we’re not pleased with what we did. Underlying though it was a good quarter as far as volume is concerned. The industry is still very, very strong. We fully intend to take full advantage of it, and going forward, as I said, we’ll probably have sequentially better margin, better volume quarters in the third and the fourth. Thank you for your time, we appreciate the opportunity.

Ladies and gentlemen, this concludes today’s teleconference, thank you for your participation. You may disconnect your lines at this time.