Wabash National Corp (WNC) 2005 Q3 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the Wabash National Corporation third 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, Mr. Greubel. You may begin.

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

Welcome to Wabash National third quarter earnings call. I'm Bill Greubel, CEO. In the conference room with me this morning are Bob Smith, our CFO, 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 site Web cast. We have much to cover today and 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.

In the quarter we focused on and accomplished much related to the issues noted in the second quarter. The month of September was a good operations month. And October continues that trend with improvement expected throughout the whole fourth quarter. We believe these issues and costs associated with them are mostly behind us now.

Net sales for the quarter were $294 million compared to 277 million for the same period last year. Net income for the quarter was 24 million or $0.66 diluted earnings per share compared to 20 million or $0.62 per share for the same period last year. Included in the results of the third quarter and the year-to-date periods was a reversal of the valuation allowance against the realization of deferred tax assets amounting to 6 million or $0.17 per share.

We shipped 13,600 units, the low end of our expectations, due to product timing, fuel pricing, and a shortage of drivers as we competed with FEMA for hurricane aid. Going into the fourth quarter we are starting to see the driver bottlenecks ease, but will need to see how -- excuse me how it will play out over the course of quarter. We're managing production to be in line with expected customer shipments which will result in moving some orders into the first quarter of 2006 and assist in reducing inventories. We expect to ship trailers in the 15,000 to 16,000 range depending upon the availability of drivers. We will have product available to ship over 16,000 trailers. Dick will discuss our efforts and success relative to the issues noted in the second quarter. Again, we believe the problems and associated costs are mostly behind us now.

During the third quarter our backlog extended by over $100 million to 490 million. This increase was due to strong orders from truckload fleets and continuing success at market. Most of these orders were for 2006 which bodes well as we enter the pre-buy truck period. Compared to last year, our orders for the following year are running at over double the rate, due to major players moving back towards more historical buying patterns. A note: In the recent ACT update suggests that in the drive van and reefer market some OEMs are seeing disproportionate amount of business.

For Wabash National the third quarter was another good period for business. We closed over 130 new accounts bringing year-to-date total to 525 new accounts. The first nine months of 2005 we have more an doubled our closures versus all of last year. We have received orders to date of more than 8,000 units representing approximately $200 million in new business.

Since we began this effort just two years ago, we have closed over 800 new accounts and over $280 million in new business. Our goal is to reach a 30% share in the mid-market which could result in $500 million per year in new business by end of 2008. With continued shares shipped to DuraPlate, stronger emphasis on the excellent reefer business, and growth in our Dura Plate container, this is achievable.

Referring back to the resent ACT note, it's also very evident that some of the OEMs have available production slots and are actively pricing their trailers to fill them. This has had a dampening affect on both pricing and margin industry-wide. In addition, we are seeing some small to mid-size fleets tending to delay their 2006 capital requirements as they wade through the new equipment data pricing, higher priced fuel, and the future direction of the economy. This segment is more closely aligned with our competition.

To try and get a better handle on these recent events we initiated a survey in August similar to the one done at the end of 2004 to gauge the future buying habits of our market. Much the data suggests that 2006 will be similar to 2005 with the majority of the fleets in our focus expected to purchase equipment. At this time, we anticipate a flat market in 2006 with continuing share gain as we capture more of the mid-market segment we have identified. We see some modest material and component price relief in the third quarter as we pressed suppliers from material-related savings. This might be short lived if there is concerted effort by steel companies to raise pricing.

As we have previously stated, we do not expect to see any significant savings in 2005. Our initiative to reduce raw material component costs through product standardization and alternative sourcing is continuing.We have identified our material and component targets. At this time we fully expect a minimum of 3% to 5% in component cost savings X raw materials over the next three years.

Looking at the industry in 2005 and going forward, factory shipment for vans will marginally--excuse me will be marginally better in 2005 versus 2004. our revised estimate is approximately 173,000 vans versus 171,000 in 2004. For Wabash National we expect to see approximately 10% growth versus 2004. At this time we would expect the industry to see flat to marginal improvement again in 2006.

In our van-only segment we would expect to see the market share growing year-over-year by about 2% and again in 2006. Productivity has picked up roughly 22% in October versus a stronger than anticipated third quarter for us. Industry cancellations in churn remain relatively calm. The ATA truck tonnage index has fallen in recent months yet remains at a strong 113.5 in August. Current activity has picked up greatly in the last 6 weeks to 8 weeks. Most of our customers seem to be very busy. Rental leasing companies have temporarily filled the equipment void for post-hurricane relief. We would expect to see some incremental volume going forward as the Gulf Coast is rebuilt.

Looking forward what does this all mean? Our ability to run the business has improved greatly. We have excellent plans in place to continually improve our operations, to reduce costs and enhance our position and we don't believe we need to do any changes. Although our sales in the industry were lower than expected, we continue to see a business and industry with positive growth over the next two to three years. We have built a strong, sustainable book of new business,and with our industry-leading products, we intend to grow this a lot more. We have earned this new business as we continuously be--to continue to be extremely focused on our customer's transportation and product needs.

Product and customer mix in addition to competitive positioning will temper margins somewhat in the near term. We have programs and capital in place to achieve our higher margin goals. Over the past six months we have substantially improved our vendor strength, one of our key priorities, giving me greater confidence that we will indeed meet our objectives and expectations. 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. I'll hopefully bring you up to date on the progress we've made during the last quarter and since our last update on September 8th. From the operations perspective overall, all areas of business are running better today than any time during the past few months. The actions put into place during the second and third quarter have all proven to have had positive results.

First of all, we continue to remain focused on providing the safest work environment for our associates to be able to perform their jobs. Those efforts continue with most recent performance as measured in total [inaudible] rate, and recorded days away from work at case levels well below industry norms for our SAC code. Our fit to finish quality improvement initiative, which began in earnest in June, is yielding good results. While costly getting going, visual fit to finish is now clearly improved on all products.

From a total work-in-process perspective, and that includes all the in process plus all finished goods that may be unshippable for some reason, were reduced to approximately 600 units at quarter end, versus the level of 1100 that we reported in our mid-quarter update in September. Actions are in place to be at a work-in-process, levels slightly less than 400 total units by year end.

Additionally even under the scrutiny of our much more stringent outgoing quality acceptance criteria that we implemented in June, the end of line first pass yield levels are now hovering between 75% and 80%. The new hire preassessment center implemented during May has allowed us to see temp associate retention rates improve to near 75%. Not only is turnover improved but the center has yielded the added benefit of improved quality of work being performed by these new hires, further aiding our quality initiatives.

Full-time to temp ratios has improved 78.22 within 2 points of our new target. We are now at our lowest level of temp associates this year. We have continued to expand our process training center adding new hands-on training modules, providing additional offline training opportunities designed to further enhance our full-time associates's ability to sharpen their skills without the pressures of meeting cycle time demands that exist on the lines. As a result of these efforts, overall productivity has now returned to early-second quarter levels. This has been achieved in spite of the ramp up impact of our new cargo mix container cell, which is currently underway.

The improvements yielded from all the efforts together have allowed net reduction of 220 associates -- all temps -- from the workforce during the past 30 days. These reductions will yield almost $500,000 savings per month in labor costs while still maintaining the same level of daily trooper volume. Furthermore, the overall improvement, have provided for a significant reduction in required overtime ,further yielding a projected savings of some $700,000 during the fourth quarter versus our experience in the third quarter.

Before anyone questions why we did not see all of the improvements that I commented on reflected in the financial results for this past quarter I must remind you we recognize our revenue and cost when a trailer is shipped not when it is produced. Therefore as a result of lag affect of the date of manufacturer and the date of shipment latter part of the second quarter are not for a large part reflected or recognized in the third quarter, and so on.

Moving on to the retail side of our business, I'm pleased to report another quarter of profitable performance, reflecting the third consecutive profitable quarter and fourth of last five. Especially noteworthy is the tremendous improvements that have been realized through the service side of our branches, as a direct result of the successful implementation of lean manufacturing goals. With these improvements now well entrenched, we all expect the favorable performance to continue.

Additionally, our branch restructuring efforts which were announced earlier this year, are now completed with the drag effect of those locations now behind us. Longer term initiatives that will further enhance safety quality, productivity, and costs, include our Alpha line project, our raw materials cost reduction efforts, and our product rationalization standardization efforts. The new Alpha line installation is progressing, with pre-production prove outs to begin during December with full commissioning targeted for the new model year roll out beginning February 1st.

I will repeat some of what I said last quarter relative to our purchasing efforts to further reduce the cost of raw materials and components. The supply chain team has already achieved the previously targeted challenge of 14 million in annualized cost savings for the year, thereby softening the impact of the commodities cost run that occurred through 2004 and early into this year. Now their new challenge is to find even more savings through an alternative supplier sourcing as required to take advantage of better pricing either here or offshore. We've recently added key resources to the supply chain team to aid in this effort.

Obviously, we'll continue to work closely with our current suppliers to achieve our cost objectives but will make the decisions necessary to meet our goals. The team has been tasked with identifying key opportunities and has targeted certain component systems including lighting and wiring harnesses, wheels, landing gear, bogie components, and other accessories.

Finally, our product standardization efforts continue at a high level focus of energy. Last quarter I shared progress relative to standardization of box sizes, drop ring [ph] products, and refrigerated product. Now we are nearing completion of all formal drawings and supporting documentations for rear doors, bogie assemblies, side and door track protectors, and even grab handles. These are in addition to the previous implementations of standard rear frame design, landing gear, upper, top, and floor systems, which were all implemented during the early part of year.

Early next year we'll begin attacking other standardization opportunities, including lift gates and tire carriers, among others. As these changes take hold through our recording and sales processes, and our already committed backlog clears throughout the balance of the year and into next year, we'll then -- and only then -- be able to begin leveraging these efforts by further streamlining our manufacturing processes, simplifying toilet fixturing and further enhancing our ability to build consistently high quality, cost effective products.

In summary, our branch operations have now achieved a level of consistent profitable performance, and should continue to do so. In manufacturing, excellent progress was made during this past quarter in addressing the opportunities that were identified during the second quarter, now allowing current manufacturing performance to return to levels enjoyed during the first quarter. I fully expect that trend to continue throughout the current quarter and beyond. With that I'll turn the discussion over to Bob Smith, our Chief Financial Officer. Bob?

Thanks, Dick. Good morning. I'll take a few minutes and look at the results for the quarter and our financial position as of September 30th. Sales: 294 million in the quarter on 13, 600 units. Net income for the quarter was $24 million or $0.66 a share on a fully-diluted basis. Year to date sales and net income were 873 million and $91 million respectively. Included in the quarter and year-to-date results, the reversal of tax benefits related to the valuation allowance of deferred taxes amounted to 6.4 million in the quarter, or $0.17, almost $36 million year-to-date or $0.94 a share.

The valuation reserve relates to the assets expected to turn after fiscal 2005. Equivalent shares: roughly 38 million. The details are in the press release. During the quarter, we didn't repurchase any shares under the 2 million share authorization that we announced very late in the third quarter. Principally, we didn't move on it because we were so late in the quarter.

As I mentioned, sales for the quarter were 294 million on 13,600 units. This compares with 323 million or 15,000 units in the second quarter of this year, and 277 million on 13,700 units in the prior-year period. By segment: manufacturing sales were 258 million, 13500 units. Retail and distribution: 63 million in sales, 1,400 new units, and we had inner company eliminations amounting to $27 million or roughly 1,300 units.

When we look at sales by product lines, new trailer revenues for the quarter: 262 million on 13,600 units shipped and 14,500 units built during the quarter. In the second quarter we had sales of 290 million on 15,100 units shipped. In that quarter we built 14,600 units. Compared to the second quarter of this year units declined approximately 10% and selling prices declined slightly due to a combination of product and customer mix.

During the second quarter, our core customers' partners accounted for approximately 42% of the units sold. This was up from approximately 36% in the second quarter. Product mix during the quarter included a significant increase of lower-priced type products such as pups and containers in this quarter.

Used trailers: For the last three quarters sales have run at approximately $13 million in each of those quarters. Units have run between 1,300 and 1,400 units for the quarters. Selling prices have been relatively stable. The only change that affects selling price is the type of unit and the age of the unit being sold. Recently, we've had taken in some more fleet trades which will increase the available inventories that we can sell in the used market.

Parts and service business: $15 million in the third quarter, down just slightly from the $16 million we did in the second quarter of this year and comparable to the third quarter of last year. We have fewer units, so on a first-store basis this is up. Other, which includes leasing revenues remain steady at roughly $4 million over the last several quarters.

From a gross margin perspective, we did a gross margin percentage of 10.2% in the third quarter this year compared to 11.2% in the second quarter. The 1%--the one percentage point drop effectively could be split between the decrease in volume that we saw, and the labor and overhead costs being higher than what they were previously. All the other items were essentially a push, very, very small percentage changes there.

Performance: Manufacturing performance in the two months of the quarter basically remained at the reduced levels that were experienced in June. We started to gain a lot of traction in the month of September and we continue to see that traction taking hold as we go into October and we expect it to continue through the balance of the fourth quarter.

One other item to note, we held freight expenses down during the course of the quarter. We didn't incentivize customers to come in and pick up units and we plan to be very judicious with that in the fourth quarter, also. When we look at that in the quarter the third quarter compared to the prior-year quarter, the margin percentage is down 3 points, from roughly 13.3 a year ago third quarter to 10.2 this quarter. The bulk 95% of is attributable to the labor and overhead situation in the quarter.

Looking forward, as Bill mentioned, we expect ti see volume in the 15,000 to 16,000 unit range for the fourth quarter. We have the orders in hand to accomplish that. Selling prices: Again, as Bill mentioned, are coming under some competitive pressure. We expect the mix of partner business to decline slightly as we go into the fourth quarter. Selling prices should be relatively comparable to the fourth quarter as should material costs.

Supply chain performance has improved and we fully expect to reduce inventories by the end of this year. It's unlikely that we'll get as low as we were last year but there should be substantial down from where they are today. Okay. SG&A: We spent 13.9 million in the third quarter, or approximately 4.7% of sales compared to 14.2 million in Q2 of this year or approximately 4.4% of sales. Spending was virtually unchanged and the percentage came down due to the -- due to lower sales.

Interest and other: Interest experience remains consistent from period to period. In the quarter we had a small foreign exchange gain and we had a gain on the sale of a branch property that we got out of. Taxes: Again, we reversed some additional reserves predicated on our estimates of this year's expense--excuse me--this year's earnings and we continue to be in a non-cash tax paying position and when we go into next year, we will continue to be in that position although from a reporting standpoint. As we mentioned in the past, we will reporting taxes at roughly 40% rate. Depreciation and amortization in the quarter was roughly $12 million year-to-date and essentially be at $16 million for the full year.

Capital spending: $23 million year-to-date. Spending will be in the $30 million to $35 million range. The big ticket items in there, as we talked about in the past, is the plant automation and the ERP system. Full-time head count for the corporation as a whole was roughly 3,600 full-time associates as of September 30th. As Dick mentioned, we have done a lot to adjust the ratio of full-time to part-time people in the organization and it's almost at the goals that Dick has set. Bill mentioned the backlog --490 million as of September 30th -- that's up from roughly from 380 million as of June 30th.

The balance sheet: We ended the quarter with $29 million in cash. Our liquidity, which is cash plus the available borrowings under our line of credit, totaled $147 million at September 30th. Down a little bit from the $160 million at 12/31 of last year. Accounts receivable amounted to 119 million at September 30th up from 110 million at 6/30.

Days sales outstanding was approximately 37 days, and this is up just slightly from the 31 days we had at the mid-year point. Inventories were at 165 million September 30th. That's up roughly 25 million from the 140 million in June 30th of this year. The inventories are up for a couple of reasons: The increase in the finished goods inventory. We went from roughly 3300 units at the end of June up to 4300 units at the end of September, an increase of 1,000 units. We expect again--we expect the inventories to come down appreciably as we get through to the end of the year.

Raw materials inventories increased as we relaxed some of our just-in-time delivery targets to help manufacturing achieve first-pass yields during the course of quarter. Used trailers inventories were up to approximately $20 million compared to the $15 million at the end of June. This was primarily a function of the trade deals that we have been doing recently. With that, I will turn it back over to Bill.

Thanks, Bob. The last two quarters certainly haven't been what we consider our best. As a premier travel OEM we must have the best product and service to continue to support our pricing premium. We maintain that we still have much to lend to our sales over the next few years. We will maintain our course and continue to focus on the great initiatives already underway. Volume will improve this quarter as will margins. Progress is being made on all fronts and will continue into the future. The industry and our ability to prosper in it is still very strong as long as we maintain our focus on being the best and a valuable supplier to our customers. At this time we'll take questions. Operator?

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

Hey, guys.

Hey, Peter.

I kind of want to break it down a little bit here. I guess there were four things that impacted the gross margin second and third quarter. You had mix, which is both product and customer. You had labor costs which were related to cycle times and deliveries. You talked a little bit about the labor cost improvement. Sounds like overtime improvement of $700,000 in fourth quarter and then staffing down 220 temps, that will save you $500,000 a month or about 1.5 million quarter--to-quarter--

That's correct, Peter.

Okay. Can you talk a little about mix? Maybe one thing might be helpful -- what's the mix in the second quarter versus third quarter and then what you expected it to be in the fourth quarter both in terms of customer big accounts versus small accounts? And then however you might categorize product mix, favorable or unfavorable, that type of look.

I can tell you at the top in terms of the customer mix Peter, that as we progress through the year, the key accounts represented the core partner accounts represented from the units perspective 15% or a little less in the first quarter of this year. They more than doubled to about 36% in Q2 and then came up to about 42% in the third quarter sales.

The expectation for Q4 is that they would come down a bit. As you recall, we had a mix of partner to other business of roughly 1/3 to 2/3 last year. It will be up from that 1/3 this year. I don't think will get up to 40% but 35%, 36% something like that. From a product mix standpoint, we probably had something in the neighborhood of a 5% relative to the units sold -- 5% more pups, containers, freight pro, converter dolly-type units in the third quarter than we did in the second quarter, and we were probably, compared to--I don't have the first quarter information--but it was a higher mix.

Yes. Remember Peter, we added lines on the freight pro. We added on Line 3 and on Line 5 on the pups. We added some capacity during the end of the first quarter into the second quarter. What we'll see a little bit on those going into the fourth quarter container business, will improve as we bring on our new line for the cargo max so we will be supporting JB Hunt and Schneider during this quarter.

In addition to that, a little bit of a change will be on Line 5, the pup line. We will take that from three shifts down to two shifts in the next -- probably -- month. And move those people to Line 2. So we will be running -- temporarily -- probably for a month or two three shifts on Line 2, the DuraPlate line, the high volume line. We have customer orders that are more time dependent that require us to do that and it just so happens with the LTL business the pup business kind of dies in and January -- December and January. We are very fortunate to have that to move that over.

That will be a significant can't change in our average selling price, our margins, and associated with that change. But at this point, we are not sure whether we can maintain an additional shift on Line 2 especially as the Alpha line starts to come on. It will get a bit confusing. So, we're taking advantage of what we have right now. But that's it as far as mix is concerned. Going into the new year, we would probably tend to see less freight pros and more DuraPlate-type product going down the line.

All right, so -- all right. If I'm playing this back right, then, you get a 8 percentage point improvement sequentially in customer mix, maybe roughly a 5 percentage point improvement in product mix. You have about 2.2 million in improved labor costs in the fourth quarter versus third quarter. I guess I'll just have to do some work offline to try to figure out the margin impact from that. What are the first pass yields gone from? Where are they currently and where are they going into the fourth quarter?

We're going--the end of the line is where we're measuring that first-pass yield. So as the trail has come off the end of line we're running between 75% and 80%. And then those units go off line for either a -- whether it's a workmanship issue that needs to be addressed or awaiting component that come in sometimes it's customer supply components to finish the trailer just to be able to ship it. The costs associated with it at this point, I think, is mostly insignificant overall, because that product is flowing through the system. We are I guess back to more of normal flow.

We cut a lot of that out, Peter, because we used to address that with overtime. What is very important to note, in the past what we would do is we would work the work in progress down towards the end of quarter, and then speed up the equipment and unfortunately build it during the course of the quarter. That's been the case at least in the last two, and then bring it down. Right now going in if we were to look at September,r what we've been able to do to reduce it and into -- we're almost through the month of October -- our width is pretty steady. We have programs in place now to bring it down further. I don't think we're going to have issues associated with delivery nor issues associated with an inordinate amount of extra time to get this whip into shippable shape. So that's a lot of what Dick has already said, and what we're trying to do is improve upon that as we go forward.

All right. One last question and then I'll get back in queue. I look at the backlog, and the backlog is probably the biggest surprise you had this entire quarter. I look at the industry backlog in terms of units. It was down 10 percentage. I guess, arguably, you outperformed by 40 percentage points. Is there some risk to that backlog? Have you -- because of the slowed production cycle times in second quarter and maybe some degree early this third quarter, is any of that backlog arguably at risk?

No. I don't think so. We went through some pretty unfortunate gyrations to make sure our customers got product or product at least in a deliverable time frame. We have not lost any business as a result of that. At this point we're pretty much on schedule with our customer requirements. A lot of that backlog is with the larger fleets. I think clearly over the last one months to three months, they have been more active in determining what the requirements are in ordering the requirements for 2006.

I really feel that some of the smaller companies and I think it applies the same to trucks. They are just trying to figure out what the heck is going on right now with higher fuel costs. They haven't been able to see enough of their equipment to know whether they need to buy now or later. I think the economy is in a state of flux right now, especially with the hurricanes, and so forth that these guys are kind of sitting back. I fully believe them to come in but it's really created you know what our friends at ACT said, a very disproportion in the amount of ordering from just a few people versus the industry as a whole. And that has created more of short-term flux for us than something we're going see going forward.

Has any of the units sitting in the finished good inventories, have you received and cancellation for any units you've made?

Not a [expletive]one.

What's that?

None.

Does the customers have a right to cancel that?

It's their trailer, so no and we haven't seen that. When I talk about churn what we're not seeing is people pushing things around. It isn't necessarily cancellation it's just , "We aren't going to need our trailers in July can you reschedule them or move them to schedule in August or September"? We're not seeing that.

There's a real requirement for the equipment we have in stock right now. The issue is one we're having troubles getting to them in a cost effective manner or two they're so busy they can't pick them up.

Peter, just one other point of the work in process and finished goods. The churning that we refer to it's not same units that are staying for weeks and weeks at a time. Most of the product that goes into a hold or work in process category are only there for one days, two days, three days and then they are released. The potential for having them sit there for weeks at a time it's not the same 600. We're producing well over 200 trailers a day 1,200 trailers, 1300 trailers a week. So that number churns continually.

Okay. thanks.

Your next question comes from John Barnes, with BB&T Capital Markets.

Good morning, guys.

Hey John.

First of all on the availability of drivers whether, you know, to come and get this equipment, whether from your customers or what have you. You indicated that you weren't doing anything to incentivize them to come get the equipment. Is there anything you can do to penalize them for not coming to get the equipment?

John, that's when we will start having some cancellations . You know these guys as well as I do. That's a real difficult thing to do. What we have done in the past and we just decided that one, we can't afford to continue to do that, is someone needed something run up to Chicago, we would do it. With the cost of fuel and the availability of drivers now, we really just can't do that and what we're trying to do is preschedule with our customers if the order comes in and 30 days before we're producing it, we're on the phone with our customers trying to find out where their requirements are. In some cases, they just want a simple load out that we can manage and we can do it in a much more timely manner if we know a couple weeks beforehand that we can set this up. But it's -- I don't think there's a way of penalizing people. We have tried that in the recent past and it really has not been successful.

The reason I asked is, when those guys don't hesitate to charge their customers detention charges and this type of thing when equipment is not released. I don't know if you maybe had the same opportunity. Let's see in terms of the pricing pressure that you mentioned in the industry. Could you just give us an idea -- is this showing up in your own pricing? Is this showing up in your order numbers? The backlog numbers certainly don't suggest it but what are you seeing exactly that has you concerned on that front?

That's a good question. Really what we're seeing as we have always said the dura plate which is our premium product is priced at a premium to a normal sheet and post trailer. It basically fluxes with the price of that sheet and post trailer. If we're getting between $1,200 to $2,000 premium over an $18,000 sheet and post trailer we would be priced at $20,000. As that starts to trend down in some cases we have to trend our pricing down. Where we've really been seeing it more so is where we're trying to get in on some entry level in the sheet and post business with our Line 4 product. We really found at this point we chose not to be as competitive as the market is currently. And so, we're giving up some business and we're giving up some potential new accounts. We're being a little bit more choosey where we enter in and that's why we've taken in the last quarter our Line 4 has run at basically half shift as we've moved people around and it is just moving up to one full shift in this quarter. But that's the most critical area. I think it's more short term. I think, especially, as raw materials start to firm a little bit this quarter, that some of this crazy pricing action that's going on -- I think, saner minds will prevail.

Okay. From a component standpoint that's a--you know something that you addressed in your mid-quarter comments. I missed part of your comment earlier about some of the component things you're doing. Could you just update us on what are the biggest shortages your facing right now? I'm hearing it regardless of the supplier -- even in the rail side -- talking about wheel sets and things like that what's your largest component shortage right now?

We really honestly don't have any major issues as long as we give our component manufacturers enough lead time. And what has been our achilles heel as we've gone through the better part of second quarter and into the third quarter is we've made a lot of production changes to try to right the ship. Some of the actions we did actually caused us more problems because our supply base could not support on either an expedited or a quick manner. We continue to be concerned about wheels.

Goodyear has announced a force -- and I'm not sure whether that's still in effect or not because they're concerned about their ability to get some of their raw components. We know that Michelin has jumped through hoops to supply their customers. But at this time, as as long as we continue to give enough lead time, we haven't really seen any major issues. When the production schedule tends to flip a little bit, we have some problems. That's why on Line 2 when we went to a third shift,t we're still waiting another three weeks to four weeks because we want to make sure our components are ready. So, we have put our orders in if you kind of get my gist.

Sure. Absolutely. You mentioned the new box line. Are there any start-up costs that you're incurring right now that should dissipate over the next couple of quarters that help you improve the margins?

Yes,l I'll let Dick talk about the cargo mix.

The cargo mix container is the new entry into the intermodal domestic container business. We're going through the ramp up now and there's some costs associated with any ramp up. I don't believe that it is material in nature to make a significant difference. We're running at a slower ramp up but it's a small part of business. We're producing about eight a day. So it's not significant in the overall realm of things.

Okay, and lastly, you know if I go back and I look at my notes from your mid-quarter update you even at that point were talking about gross margin being flat sequentially. I'm just curious. Do you feel like you're getting all the information in as a timely fashion as possible? Because I would argue six weeks left in the quarter you were still looking for flat. It came in a full percentage point lower than that. Is there something missing in terms the information flow or this is just you're not quite sure what you're going to sell at the end of the quarter. Like you said you don't know what costs and expenses you're going to recognize until all that stuff is delivered?

I think the important part and that's a really good question. When we went in the quarter we were expected to ship 13, 500 units. We shipped 15,000 units. The mix associated with that was what led us to believe in our modeling that we were going to be sequentially flat in margin. What really happened is that a significant more amount of the lower margin product did leave the door and a significant amount of higher margin product is still sitting on the lot. So and the other thing, John that's important to know is the majority of our quarter is generally shipped the way it has been historically in the last month. So when we were giving you the numbers we were anticipating something a lot higher. We quite honestly, were a little bit surprised at the issues we had in getting some of this product out the door.

Okay, very good guys. Thanks for your time.

Thank you John.

[ OPERATOR INSTRUCTIONS ] Our next question is from Dan Shedivy, with Basswood Partners.

Hi. Thanks. Good morning. My first question deals with a comment that Dick made in terms of gross margin of the inventory units and the fact that there is a lag in terms of the cost improvements. Can you help us understand had you been able to book those day sales, what would the GP have been if you actually had been able to achieve those operational improvement in the units sold?

Look at this this way Dan, when we go through the quarter, we generally see a progression of units going out the door -- I forget exactly what the percentages are. But the units don't stick around all that long, but the last month are the ones most likely to be on the lot at the end of a given quarter then any other one.

Is it as simple as me just adding the 70 bits from the roughly 700,000 and the 1.5 million that you talked about?

You could almost get to that point. Because what I was going to say is July and August were the two down months of the quarter and then September was an improved month from a production productivity standpoint therefore, the higher or the better product was produced in the month of September and that -- a lot of that product will end up sitting on the lot at the end of September 30th.

So it sounds like there's almost three potential benefits in terms of when that inventory actually gets recognized in the fourth quarter. One is the fact that overhead had not been spread out as effectively in those units. The second is the true operational improvements, and third it sounded like Bill was saying it's actually higher-margin business that's locked in the inventory as well. Is that all fair?

It's certainly higher than the pups, yes.

Okay. I guess my next question is the 14 million that you mention in annualized savings when would we have seen that start to flow through? Or is that kind of recent addition?

No, that's something that our guys work on. They have specific goals and we're actually seeing that as we've been going through the quarter or through the year.

How would you compare that offsetting higher raw material costs? Is that pure offset or?

No, it's an offset but it does not cover the increase in cost of raw materials.

Okay, fair enough. And, then can you give us an update just on the automation process in terms of timing and whether or not you still expect to achieve the 7 million annual run rate savings?

Yeah, from a timing standpoint, we will be running the preproduction debug on the line starting about mid-December and through the month of January we will be going through our final debug and commissioning the line with expectation to be fully commissioned effective February 1st. And then the process of ramping up on a volume basis will take place. At this juncture, it's too early to project what the total year savings will be. We still fully expect on an annualized basis to gain about $7 million of savings but for next year it's hard to say how much we will gain. Certainly we should be able to approach that number but I don't know what the exact number would be at this point.

Is that time line actually pushed back then a month or two versus some early comments you made? If so how does that affect timing on the other lines that you're trying to automate?

If you're looking at it from that perspective when we were earlier projecting we were expecting full year '06 in the conversations. This type of project is much more complex and to do it right we're taking time to make sure we have a effective start-up. So, if anything we may be one month or two months behind what was initially talked about several months ago but for the right reasons. The other lines we're still working through the mechanics of what it will take to implement the future lines.

So we -- it's too early to say what the timing is on those. We talked about certainly doing at least one more line in '06, which would be ready for latter part of '06, early '07, and a third line is a question in what direction we want to go.

Does that mean you will stop the two lines or even just three lines? I thought you were talking about try to automate all four lines?

No our plan is still to complete four, four lines as far as all the products.

One of the things we're looking at and it's as we're starting to see a bit of shift from some customers into more of an intermodal box type. We've really looked at the option of making a line that can do boxes or trailers and in doing that it's going to slow us a bit but I think it's a smart deal. Dick and his guys are coming up with some really good ideas to look at that. That way it's--for some of those people who don't follow the intermodal you generally have some great years and you have some very poor years. One of our lines initially was going to be an intermodal line. Our belief now is if we could spend a few extra bucks to have the ability to do either or we create a tremendous amount of flexibility in pore time than in keeping a line running instead of wanting for boxes.

That's one of the areas that we're looking at right now and we should have that. Probably it will delay us but it is a smart idea and it makes a heck of a lot of sense. That could mean though that we may only go to three lines. If we have the ability to do both, we'll see as the DuraPlate continues to increase it's market share.

Okay last question and then I'll jump back in the queue. You mentioned from from time to time that you're Board is reviewing strategic options. You have the ability to repurchase some shares. Can you talk about if there are any updates on that front and specifically address what's keeping your Board from simply having you lever up and buy back a substantial amount of your shares? Given these values and the fact that the Street is essentially treating you as if you have no debt with having to fully convert from a diluted share perspective. That and how much EBITDA you're able to spend up. It seems like you can lever up and buy back quite a number of shares if you wanted to. Can you just talk about that?

Yes. I think in the last two Board meetings -- we just finished one in September -- I think that certainly the vast majority of all of the discussions now are on strategic basis. And the options that we continue to look at are not only doing what you just said but you know what other options are out there as far as acquisitions or other things? You know the December Board meeting will be to discuss the budget and the strategic side of the business. We probably spend about 60% to 75% of our time now discussing what our strategic alternatives are. We had a very interesting and lively discussion on the most recent buy back and that will be again revisited as we go forward.

But all I can say is the Board is totally focused on where do we want to go and what do we want to do in the future? Instead of, Gee, we're really happy we're not bankrupt. So it's a--it's a building relationship that we have. We have set up certain ground rules. I think the last Board meeting in September was a real good one. And we'll continue to move forward and we do intend to work forwards our--towards our 2 million share buy back and we will address that and revisit that at the next Board meeting.

Great, it seems like you have a great acquisition opportunity in buying your own company. I hope you pursue that further. Thank you very much.

Thank you. And can we take one more question please?

There are no further questions in queue at this time sir. Okay, thank you very much. And that will be it. That concludes today's conference. Thank you for your participation. You may disconnect your line at this time.