Wabash National Corp (WNC) 2005 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Wabash National Corporation fourth quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. William Greubel, Chief Executive Officer. Thank you. Mr. Greubel, you may begin.

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

Welcome to Wabash National's fourth-quarter earnings call. I'm Bill Greubel, our 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, and our newly-appointed President of the Company. I'd like to welcome all of the listeners on today's telephone conference call as well as those listening live via the Wabash National Internet site 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.

Results for 2005 were solid, and in many categories record setting. Yet we had the opportunity, I believe, to do better. We continue to be very successful in shifting an increasing number of fleets to the value derived from our DuraPlate products. In 2005, we also demonstrated the value of our reefer product as a premiere trailer for the long haul and food service fleets. Our scorecard for new closures for 2005 was 659 accounts contributing approximately 166 million in new business. Significant opportunity remains to harvest more of the dry and reefer market in the coming years.

Operationally, we have learned much and improved our processes to offer the finest quality vans in the market, not only from a functionality, but from a fit and finish perspective. It was a time-consuming and costly endeavor, but necessary as we must offer the best products in the market we serve. Commercialization of our new Alpha line in the first quarter, and three additional lines over the next two years, will change the face of trailer manufacturing and will raise the quality bar to an entirely new level.

Our major disappointment has been and continues to be margin compression. In 2005 second and third quarters, we suffered from cancellation of a major order which disrupted our production schedule, solving a number of challenges in manufacturing related to the use of temporary people and fit and finish quality, and more recently, the impact of competitive pricing and continuing raw material increases. This pricing pressure has been playing out over the last two quarters of 2005 and will have a tailing effect, of sorts, into 2006.

We have been less aggressive with costs through passing, as we believe the market pricing was at an inflection point. However, in the fourth quarter we announced pass-through pricing for tires and intend to reopen our backlog to pass through recent aluminum price increases. We have already heard that pricing for basic sheet and post and reefer vans has started to trend up. This, if true, is very good news.

Dick will also discuss our challenges with our CargoMax commercialization in the fourth quarter. What really is at issue here is whether we should continue to pursue this particular segment, given recent competitive offerings from China and Korea. Over the course of the next quarter, we will make a decision whether to stay in this business or exit. Keep in mind this is our lowest margin business.

Dick will walk through the fourth quarter sales and operations review, and Bob will comment on the financials and our working capital success in the fourth quarter. I will focus my comments on the industry and our thoughts for the coming year. Looking at the industry in 2005 and going forward, factory shipments for vans were approximately 6% better in 2005 versus 2004, at 181,000 units versus 171,000 units in '04. ACT is forecasting 187,000 vans for this year, 2006. Our estimate is for a relatively flat year, with a mix of volume customers more weighted to our customer focus in the medium and larger fleets. For the second year in a row, we will see limited growth as the vast majority of equipment purchases continue to be for replacement. The overall fleet, however, continues to age.

Going forward, replacement of this fleet -- excuse me, this aging fleet, will become a more critical issue as newer equipment offers distinctive lower maintenance cost advantage. In addition, Wabash National's customers are now in the initial phase of replacing the original DuraPlate fleet, which will present incremental ongoing business opportunity.

In our van-only segment, we should see our market share growing year-over-year by about 2%. Although we've had great success in building our customer base, we have yet to really make a significant dent in the mid market accounts that we've identified. In 2006, I expect to see the total number of new accounts to be less than 2005, however, we should close a significant number of identified mid market fleets with the intent of matching our 2005 record in unit volume.

We have just completed our first-ever national sales meeting where representatives from all sales channels -- factory direct, retail and independent dealers -- attended. We are moving from three basically disparate groups into a common organization focused on servicing and growing our customer base. The leadership is in place to make this an exceptional group and we're very pleased and excited about what we'll see going forward.

Quote activity is consistent with the seasonal buying pattern of the industry. We are currently at 6% of our 2006 sales goal. Industry cancellation and churn remain calm. However, depending upon our future in intermodal containers, there may be some cancellations noted in this area going forward. The ATA truck tonnage index has bounced around in recent months, yet remains at a strong 113.3 in December, showing a 2% gain for the year. 2006 may be a bit bumpy, but overall, expect some marginal gain year-over-year. Freight capacity continues to be tight with most of our customers expected freight demand and pricing to be strong through the year. We continue to see an orderly business process with no major fleets competing for share.

Given the continued shortage of drivers, expect so see a continuing focus, mostly on equipment replacement. Given the continuing increases in driver pay scales, when there is a slackening in the freight demand, we should really begin to witness consolidation as weaker fleets contend with relatively high fixed driver costs. Our focus on the larger players will again benefit our efforts.

Looking forward, what does all this mean? We expect to sell approximately 60,000 vans in 2006. Our DuraPlate will lead the way and reefer products will become a more significant entry. Commodity sheet and post trailers and containers will be de-emphasized. As I have previously stated, our core accounts and mid market effort will drive this growth. DuraPlate replacement by our historic customers represents a very significant and potential upside. I would expect to see more of this kick in the next few years.

On average, we expect to see raw material and component price increases through the year. We believe that we will be able to partially offset these increases with established cost savings and alternative supplier programs. We intend, but at this time cannot be assured, to pass these increases through. We will be very active in this approach, especially over the next one to two months. We have significant exposure to the current aluminum market pricing, and as such would expect to see some margin compression in the first part of the year. Over the ensuing quarters, as these programs kick in, we should see margin expansion. Bob will offer some of the other puts and takes in his discussions.

I'd like to have just some comments concerning the announcement of the potential Transcraft acquisition. We decided to alert you to the possible transaction because there's a lot of chatter in the channel, and we're fending off a number of inquiries. We're excited with the potential to add the great brand, Transcraft, to our product portfolio. With sales of approximately 120 million representing a market share of 22%, Transcraft is the largest North American manufacturer of flatbed and dropdeck trailers. As with Wabash National, it is recognized as a leader in innovative product design. The company offers a broad selection of high-quality products and options that are favored by owner operators and fleets alike. It markets its products through an extensive dealer network. Wabash National has been one of Transcraft's largest dealers over the past two years, and as such, we are comfortable with the product and the folks that design, manufacture and market this product.

Transcraft has two production locations in Anna, Illinois, and Mount Sterling, Kentucky. Demand for Transcraft flatbed and dropdeck trailers remains strong with excellent backlog and continuing favorable industry conditions. Flatbeds have a very similar cycle to the vans and reefers sold by Wabash National. Typical applications requiring flatbeds include capital equipment, construction and building materials, oil and gas, steel, and heavy manufacturing. Our intent is to maintain Transcraft as a separate business unit, with little change to the current business model. We believe there are opportunities to leverage the strengths of both companies to further increase market share and gain supply chain synergies. We also believe there will be opportunities to broaden the Transcraft product line going forward. While we are not at liberty to discuss transaction terms and conditions, we believe you will see the value when we are. We hope to close within the quarter.

At this time, Dick will further discuss the full operation side of the business, and Bob will follow with a financial review and further update you on our expectations going forward in 2006. Dick?

Thanks, Bill. Just a quick look at some of the key performance areas. Net sales for the quarter exceeded our planned expectations. We shifted some 16,200 units during the quarter versus our original expectation of between 15,000 and 16,000, which represents the highest level of shipments for a quarter from Lafayette in our history. Our backlog is solid, expanding to 516 million this past quarter comparing to 490 million at the end of the third quarter.

Continued replacement demand by our partners and our efforts in the mid market continue to be driving force. Our sales organization is probably the strongest it's ever been now and totally focused on the customer.

Production build was in line with expectations with 13,400 units finished during the quarter. Our manufacturing productivity was consistent with expectations overall, however impacted to an extent by the launch of the new CargoMax product line, which I'll speak to later in my comments. We achieved our target for full-time to temp ratio of 80/20 during the quarter. Additionally, our wood products division achieved record performance during the quarter delivering positive results through the whole year. Also, the retail business also excelled, exceeding plan during both the quarter and the year, delivering four consecutive quarters of profitable performance and contributing full-year operating income of some 2.6 million.

Some of the challenges faced included, as Bill had mentioned, margin compression challenges occurred during the quarter and much of the second half as a result of aggressive competitive pricing combined with the continued rise of commodity prices. While our backlog is solid, some competitors seem to be faced with excess open capacity and are struggling to fill their backlogs, leading to some undisciplined pricing actions on their parts.

While not a large impact on us in the fourth quarter, aluminum pricing is on the rise with the LME rising some $0.19 per pound during the fourth quarter and an additional $0.17 a pound since the beginning of the year. We have taken actions to partially protect against any further rise, but the impact will be felt most notably on commodity sheet and post and reefer products that depend heavily on aluminum content. Conversely, our DuraPlate product is less influenced by this, and as such our customers should realize additional cost benefits versus competitive products. Again, as Bill stated earlier, we intend to aggressively go into our backlog to try to true up these increases. This, I will note, is an industry issue very similar to what we all faced in 2004.

The developing ramp up of the CargoMax container manufacturing system has proven to be more challenging than initially anticipated with some significant inefficiencies in both productivity and throughput resulting in a negative impact to our fourth quarter results of approximately $2 million versus our experience in the third quarter. While working to address these inefficiencies, we continue to be faced with less than acceptable performance. We expect our performance to improve throughout the quarter, however, there will continue to be some drag on first quarter that I would expect to be in the $1 million range. Over the course of the next few months, we will determine how or whether to continue to pursue this product on a go forward basis.

Our automated and fully integrated Alpha line is currently installed and going through system debug. Much more complex and incorporating more automation than any line ever before created for the manufacturer of van trailers. Debug of the line is taking longer than initially hoped, probably more realistic for this type of product. Most of the individual stations have been successfully operated with fine tuning of those stations currently underway. We remain confident that the line will complete the debug and we will yet commission the line yet this quarter. Our estimated annual savings are still in line with previous discussions.

I do want to note that the Alpha line is much different than the CargoMax operation. The CargoMax was a lower investment, dedicated to just building the container line, and Alpha is really our line of the future for van production.

Some of the initiatives and opportunities to enhance overall performance include the standardization efforts that we have been undergoing through our design optimization efforts, and they continue steady progress. Our latest internal review showing complexity reductions ranging from some 67% for rear frame combinations, up to as high as 97% and more for nose, electrical, roof, coupler and floor couplers. These reductions are now beginning to show in our production capabilities and efficiencies. Our direct materials cost savings and alternative sourcing efforts continue in earnest with three key supplier resourcing contracts expected to be executed during this quarter, amounting to an annualized savings of some $4 million.

Planning for the second of our next generation trailer lines, the Beta line, is underway with design and installation planned for later this year. Our WE-2-ERP implementation, which is a complete overhaul and installation of new enterprise resource planning systems, is right on track with go live planned for mid second quarter. At this stage, the dedicated team is into the testing and training phase in preparation for the go live date.

With that I'll now turn the discussion over the to Bob Smith, our Chief Financial Officer, to provide more insight into our numbers. Bob?

Thanks, Dick. Good morning, to you all. Let me try to recap the quarter for you. Sales, as we've mentioned, 341 million in the fourth quarter. 16,200 new units. Net income for the quarter was $20 million or $0.55 a share on a fully diluted basis. Year to date sales and net income were $1.2 billion on 56,000 units, and 111 million respectively.

As we've talked about the last couple of quarters, included in the results were the reversal of tax reserves amounting to roughly $37 million for the year, or $0.98, just about 1.5 million for the fourth quarter, about $0.04 a share. These reserves, as we've mentioned, relate to the deferred taxes that will be turning after 2005. Equivalent shares, 38 million, used in the determination of the fully diluted earnings. It includes the effect of options on our convertible notes. The press release contains the particulars.

During the fourth quarter, we repurchased approximately 189,000 shares at a cost of about $3.4 million or $17.81 a share. The repurchase was under the 2 million share authorization we talked about in the third quarter. The authorization represents roughly 6.4% of the 31 million shares outstanding. Because of the acquisition, the potential acquisition, we stayed out of the market for most of the quarter.

Sales, as I mentioned, 341,016,200 units. This compares to 294 million or 13,600 units in the third quarter of '05, and 287 million on 13,700 units in the fourth quarter of last year.

By segment, manufacturing sales were $294 million on 15,400 units. Retail and distribution sales were $59 million on 1,300 units, and eliminations amounted to $12 million on 550 units. When we look at the cut of revenue by product line, overall, new trailer sales, 308 million. We shipped 16,200, production finishes were 13,400. As Dick mentioned, this was a record compared to what we have ever done out of Lafayette, and substantially above the 13,600 units shipped in the third quarter of this year. Remember that the third quarter shipments were impacted by the impact of Katrina on drivers and the cost of fuel.

Core partner accounts accounted for approximately 45% of the units sold in this quarter, and that's up about three points from the 42% that the partners represented in the third quarter. For the year, overall, core accounts will represent roughly 36% of the units that we will have sold. And that's up a couple of points from the 34% that the partners represented in the previous year.

On the used trailer front, sales amounted to $17 million on 1,800 units. We had an ASP for the used trailers of about $9,200 per unit. This is an improvement of approximately 400 units from what we had done in the third quarter, as a matter of fact, over the last several quarters. It's been in that 1,400 unit range. Pricing for used trailers remains firm, and the overall used equipment market continues to be tight, which is a good thing. As we've talked about previously, we've had some additional availability of equipment because of some fleet trade deals, and this should bode well for the used trailer people going into next year.

Part sales were down a little bit from the third quarter. They represented $12 million in the fourth quarter, down from the $15 million that we did in the third quarter. The third quarter included about $1 million of rail bogie parts that didn't repeat. And the fourth quarter is usually the slow season for parts and service revenues. Other, which is basically our leasing revenues, steady at $4 million per quarter.

Gross margin for the fourth quarter was 10%. It's down two basis points from what we did in the third quarter. When we look at on a relative basis, what changed, we had improved pricing relative to material costs, maybe about $700,000. We had good volume, which added about $3 million to our gross profit. Labor and overhead was a negative of about $1.5 million. Retail was down a tick. Other, including the intercompany, because we moved a lot of trailers out of the retail business, was a net positive of approximately $1.7 million.

Just as we talked, the ASP is a little bit of a function of what's going on with the partner business. As we talked about raw material prices, particularly as it relates to tires and also some fabricated parts, because we had to do a little bit more outsourcing than normal, due to lack of internal capacity, moved that up. Labor and overhead, negatively impacted due to the shutdown periods, and again, the intercompany was a function of how well the retail business did in terms of moving product.

Now, I know that the 10% margin is a little bit of a disappointment versus the expectation, and when we look at it, we have two items that really contributed to us not getting where we wanted to be. As Dick mentioned, CargoMax was a net negative force in the quarter and probably accounts for between 0.5 and 0.7 of margin. The other item was legacy and warranty issues that cost us roughly -- we provided for roughly $1.5 million in the quarter. This accounts for another half a point. So, between the two of them, it's about a 1.2 of negative news that we had to deal with during the course of the quarter.

Let me touch on SG&A for a minute, it was 13.3 million in the quarter or approximately 3.9% of sales. This was down a little bit from the 13,900 in Q3 and, as a percentage of sales, down significantly because of the good increase in sales that we have. Year-over-year, fourth quarter to fourth quarter, we're down about $1 million and again, the percentage is better than what we had a year ago. We obviously will continue to stay on keeping our SG&As under control. But in 2006, we'll face some increases related to stock award accounting, amortization of the new ERP project when that comes onstream, and some incentive compensation issues.

For the fourth quarter interest expense continued to run at about 1.6 million, as the only debt we have outstanding is the convertible notes. Foreign exchange, we had basically a nonevent in the quarter, and that was compared to gains in both the third quarter of this year and the four quarter of last year. Other income, we registered a loss of approximately $700,000, representing a loss on the sale of branches and our inability to recover the goodwill related to those branch operations.

Taxes, I think we've beaten this up pretty well the last couple of quarters. No cash taxes in '05 save a little bit of AMT. The effective tax rate that we're looking at for next year, again, is going to be approximately 40%. We're going into next year carrying approximately $96 million of available tax net operating losses. So, from a cash perspective next year, we should not be a cash tax payer. However, from a reporting perspective, we will be reporting income tax expense.

The EPS calculation is laid out in the press release for you. Depreciation and amortization continued to track at roughly $4 million a quarter, $16 million for the year. CapEx right about on what we've been telling you, $31 million for the year, primarily related to Alpha line, roughly $10 million. The systems implementation, again, roughly $10 million with the balance spent on maintenance-type capital. At the end of the year, we had 3,600 full-time associates, and as Dick mentioned, the ratio of full-time to part-times was running about 80/20, which is down from --or up from -- the 75/25 we had in Q3.

Again, the backlog looks very strong at 516 million as of the end of the year, up from where we were at September 30th, and way up from where we were a year ago this December, when the backlog was 280 million. Again, remember we had a fairly late developing order pattern for the 2005 year, and what we've seen this season is early order activity by a number of the larger accounts.

The balance sheet, we ended the year with $67 million in cash. We had a few delays in terms of collections. Since the first of the year, we've been running somewhere between $75 million and $80 million on average in terms of cash balances. Liquidity, which is cash plus available borrowing, stands at $186 million at the end of the year. Receivables at $131 million at 12/31, up a little bit from the $119 million that we had at September 30th. And again, it's up quite a bit from the $88 million we ended last year with.

DSO at 35 days is good. And we had, again, a little bit of timing in terms of when people decided to pay up. Inventory, I think we did very much what we told you we were going to do. We reduced the inventories down to $108 million at 12/31. This is a fairly -- this is a huge decrease compared to the $165 million that we had at the end of the September month. Not as low as last year, but you have a fair amount of price increase that has crept into the cost of materials, which is what's driving that.

We ended the year with about 2,000 units in finished goods and work in process, which was well down from the 4800 units we had as September 30th. And what we thought was a fantastic performance at 2004 year end, we were 300 units lower than that at the end of this year. Turns remained roughly at about 11 times per year for both of the years. Trailer, used trailer inventories are up a little bit, again, because of the fleet trade deals we told you about. We have approximately or had approximately $22 million worth of used trailers, representing 2,500 units in the inventory.

I think in summary, it was a solid performance for us, not quite as good as we would have liked, but again, we had two items that we had to deal with. At this time, I'd like to turn it back to the operator, and we're willing to take whatever questions you have.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Peter Nesvold of Bear Stearns. Please proceed with your question.

Hey, guys. You said in your comments that you are 60% booked so far for '06. What do cancellations look like recently if some of your competitors have open production slots? How has that been trending?

It hasn't affected us on cancellations. We're actually doing quite well on that. As I said, whether we decide to stay in the container business or not, we'll see some cancellations or when you look at ACT, you’re going to see some in that particular column. But on the vans and the reefers, we're good to go. We have not had any appreciable cancellations at all.

Theoretically, if you were to leave the intermodal part of that business, what percent would your '06 bookings go from? If 60% is where you are booked today, where would that go?

It would move down a bit, Peter. But remember when we said we're looking at 60,000 trailers, not intermodal equipment for this year. So, pretty much we've already discounted what potentially could happen in the next couple quarters.

So, the booking number that you cited is just trailers?

It's just trailers.

Okay. Bill, you also mentioned some potential margin compressions in the first half of '06. Is that year-over-year or sequentially? Because, clearly, first quarter '05 you had a huge 13.3 gross margin number.

We can tell you right now, with great assurety, that we're not going to hit the 13%. But what we really think we'll see is, in the first quarter, we're going to have to work through some price increases on aluminum. Before we even started raising our prices, it looks like the industry is already addressing that issue. So, I think we're going to see the tide start to move up on pricing of all types of trailers. So, if we can be successful, and we're going to be very aggressive at it, we should be able to offset that.

The issues with the CargoMax are going to have a little bit of a tailing effect, and at this point we're just not sure, depending upon where we are in the next couple weeks or months, what we're going to do. But there will be some tailing there. But as far as Dick and his folks at their operations, they're going real well right now. My guess is we'll be marginally above the numbers that we reported in the fourth quarter.

Okay. So, modestly up sequentially?

Right.

Okay. Bill, maybe a question on your acquisition criteria. Because I know I can't ask you about this particular deal. But in your mind, in your criteria, how soon does the deal typically have to be accretive before you’d say it's a good deal?

This is a good deal and it will be accretive. It will be accretive very quickly. Certainly within this year. This is not a turnaround, as something that we've talked about in the past. This is a lot like Wabash National. It's got great technology. Their equipment is some of the best in the industry, they've got a great dealer base that allows them to both draw from owner-operators, which is a large high-priced group of people that buy equipment, and they also have the capability with some flexibility within their plants, to go after the fleet side, which is more like our partners in that the ASP is a little bit lower. So, we're very excited about this. We don't think that this is one of those slash and burns at all. This is -- this business can run on its own. And it's got great people in it to do that and it's got great dealers to continue to grow.

So, we're very pleased. And we were somewhat excited when this piece came on the market. We believe also that we probably had the inside track since we also represent such a large portion of their business. So, we knew it. We've been working with these guys over the last two years, and we feel very comfortable not only with their management, but just about everything they put out. So, this is a good deal for us.

And I don't want to dwell on this deal so much because I'm sure it's sensitive at this stage. But I guess I'm curious on the dealers, how much overlap there between dealers that sell Transcraft products and dealers that sell your products?

There's quite a lot. In fact there's significantly greater number of dealers in the Transcraft organization than ours, it's probably five to one. Again, when you're selling this type of equipment to an owner-operator it's more where you are and what you have on your lot than selling a van or a reefer.

Switch gears for a minute. For Dick. Dick, how do you quantify that the drive van production is back to where you want it to be? What metrics do you look at? Where is it today? Where was it back in May?

We measure the productivity of the lines, and we do it in both on an individual line basis and an accumulative across all lines, and we're producing at levels on a daily basis in total units and in a productivity measure, which is hours per unit produced. Effectively in line with where we were in the first half of the year. So we're very, very comfortable with where we're at.

Peter, it's also important, one of the things I look at is whip [ph]. As you know, listening to our second and third quarter conference calls, we were driving whip up quite a lot. And that was, I think, very representative of some of the issues we had. Our whip actually very, very good right now. We ended the year a little bit higher because we had one customer that did not have some of the equipment that we needed to put in their customer supply. But overall, we have great management of this whip, and we should be able to monitor and manage this very well going forward. That, to me, is very important because it means we can get our trailers out the door a heck of a lot quicker. So, I'll add that to Dick's comments.

At what point does that improved production start to show up in gross margins again? Or is there some kind of manufacturing process change that you've done that’s made it somewhat less profitable to produce at this point?

Well, the most significant impact that we saw in the fourth quarter was related to this CargoMax product, in my comments earlier. We had some ramp-up difficulties, there was some new equipment installation and it was a completely new designed product that presented some challenges. And I think we've outlined that.

In the prior two quarters, it was related mostly to the full-time to temp ratios. We had to make some adjustments throughout the latter part of the second quarter, and through a good portion of the third quarter. We worked through that. That's all behind us. The productivity return to the levels that we expected to be at. And also we had a lot of shuffling. If you recall, at the latter part of the second quarter, and into the beginning of the third quarter, we had the cancellations of some rather large volume, which caused a lot of schedule reshuffling. That caused inefficiencies that were temporary and we worked through those also.

From an overall productivity and throughput standpoint, we're very pleased with where we're at. And it should translate in the numbers. We will have a little bit of overhang as I shared in my comments in this quarter, relative to the CargoMax. It's improved over where we were in fourth quarter, but I would anticipate that we'll probably see about a $1 million or so impact in our numbers for the first quarter relative to that product.

But, Peter, each line has a very specific goal as far as improved productivity. In addition, our guys have done such a good job now at understanding our temporary workforce. We're now going to start focusing on taking that 80/20 back down to the 75/25 and there's some savings associated with that.

So, I think again, the real issue is we are seeing some improvement in our manufacturing program; if we were to net out that CargoMax it would have been a relatively good quarter for us. So, going forward, we should see some improvement. But underlining that Dick and his guys have done a great job in the plant side of the business. A lot of the fuss that we had in the second quarter and third quarter is well behind us. Now we're starting again to refocus on pushing more product out the door with equal or less people in the plant. So, we're very pleased about where we're going to be going over the course of this year.

Okay. Just one last quick one, and I'll get back in queue. What are your cash flow expectations for the year? Clearly, this was a blow-up quarter. But it's understandable, you had some reversals. What are you looking for for '06, prior to any buyback or an acquisition?

You're going to see a similar kind of pattern that we saw in '05, Peter. Again, what we saw in '04. During the course of the year, that we will invest in working capital through the second and third quarter, and in the fourth quarter, we will reap that working capital, and if we do what we think we should be able to do, we're going to hang onto the balances that we started out the year with, and add to it. And again, we expect capital spending to be something in the $30 million, $35 million range because of the additional automation investments, finish up the ERP implementation and the normal capital for maintenance-type items, ten-ish million dollars. So, I think we'll see a pattern that looks pretty much like this year.

Okay. Thanks for the time, guys.

Thanks, Peter.

Our next question comes from the line of Kevin Maxstead [ph] of BB&T Capital Markets. Please proceed with your question.

Good morning.

Good morning.

Just to touch on that CapEx question again that you just commented on. The CapEx roughly doubled this year to about 31 million. You just threw out the number of about 30 to 35 million for '06 as your expectation?

Right, which is pretty much in line with what we've been saying. [multiple speakers]

Yes. You commented earlier on what's going on, 10 million for the Alpha line, 10 for systems and about 11 for maintenance. At what point should that taper back off and trend back towards just a maintenance level?

You're going to see it taper down not -- obviously not -- in '06. You'll see it tick down a bit in '07 as we go from -- less in terms of capital being spent [indiscernible] and still have a line that we're going to be working on. We should have wrapped up the ERP project as least as it's defined at the moment during the course of this year, and then we will be looking at the -- finish up the rest in the automation and then 10 to $12 million in maintenance-type capital. So, we probably have -- just a rough number-- $25 million in the second year out. Then it will taper off.

Let's understand maintenance-type capital. As we've gone through our five-year plan, the true maintenance side of the maintenance-type capital is far less than the $10 to $12 million, in that we also have a portion of that is for programs that is will derive a very serious positive margin or cost improvement. So, when we talk about maintenance, true maintenance CapEx, we're probably in the $8 million range. And then the additional $5 million that we would put in for what we call CI, continuous improvement programs. So, we would get a very positive return from it.

Okay. Just shifting gears over to the CargoMax business, you've been talking about this decision process you'll be going through in the next couple of weeks, and if you want to stay in that business or not. Just to refresh my memory, is that the business that you launched in November of '05? And if so, what changed so much in the competitive landscape in the past couple months that you so quickly be thinking about exiting it?

We've been in the CargoMax, or the intermodal business, for years. When I came to the business in May of '02, we were doing some serious container business for J.B. Hunt. So, this is something that -- what we were looking at is with our designs for J.B. Hunt is, how could we improve those designs and actually offer more interior space? And that's when we came with the CargoMax. We didn't have a trade name for our containers prior to that. It was just DuraPlate container.

But what had happened in the interim is there's been some serious introduction of pretty good stuff, from Korea and China. It's not a DuraPlate container. It's sheet and post. But it's presented in such a way to a lot of the fleets that they're looking at a cost reduction that's measured in thousands of dollars. We, at this point in time, we just don't feel we can compete in that arena. And although the DuraPlate is a premium better product, I don't think there's enough total cost of ownership, if you followed us from a series of years, that presents the opportunity for those people buying that product from us to reap any kind of return.

And so, I think, you know, we're viewing it negatively right now, and I think that going forward, the models from Korea and China will probably meet the requirements. And, as such, we're probably going to have to make a decision on a more serious nature probably in the next three weeks to four weeks, to a month and a half to decide whether we stay here with a different design, or we just get out of this. Again, it's very important to understand if you were to look at our container business over the past year or so, I can assure you that our margins have been very poor to the negative side. And getting out of this business is a unit issue to us, but not necessarily a -- gross profit would probably try to sidle up on the positive side, not negative side.

Okay, got it. And if I could just ask a question on the gross margin side. You talked a little bit about that. You said it was disappointing in the quarter. There's some things like materials and competitive pricing that are, of course, kind of beyond your control. Of the things that are in your control, the productivity issues, the quality issues, things of that nature, how much better can that 10% gross margin get? Just considering the things that are directly within your control?

Well, I think we're probably talking between 1.5 points and 2.5 points. That's as we go forward with some of the CapEx we are bringing in, some of the productivity programs that Dick has on board. We have other initiatives in the alternative sourcing. Dick started talking about that. We're getting more aggressive. We got a brand-new management group in that has done this before. We're starting to align ourselves with other people who are already located in China and in India. So, you know, certainly when I say near term, I'm talking probably in the next, you know, nine months to 18 months. We can do that on that side. The CargoMax is going to go away in one way or the other. We're either going to make money on this silly thing or we're going to get out of it. The legacy issue with -- with our older trailers is now on the decline. We just finally faced up and said, here's what we've got to do, and we're going to work that process over the next couple quarters to get that out. So, really looking forward, I think there's some positive aspect to margin enhancement on what we can control.

Let me just go a little bit further. We didn't start price increases that have come through, and if what we see in the industry is any indication of where it's going, instead of being a leader this time, we're probably going to be a follower in raising prices and we're excited about that. Also, as aluminum starts to tick up, and we think that over the course of the year, it's going to be a heck of a lot higher than where it was last year, the DuraPlate product starts to look a little bit more -- as far as customers are concerned, because we have a steel skin on it versus aluminum skin on a normal sheet and post. And there's a delta there, anywhere from a couple hundred dollars to $500 depending upon what you're looking at. An all-plate aluminum trailer right now is just priced out of the market. And again, DuraPlate competes with that. So, I think there's a lot of opportunity on those things that we can control. And I think as I talked about this rising tide, I think that we may be in an advantageous position to take advantage of that, also.

Okay. And just one quick clarification, if I could. You said the 13.3 gross margin from a couple quarters ago was out of the question. Was that for the first quarter '06 or for the full year?

Good question. As you know, in the first quarter of '05 we had some very high margins. We do not think that we will achieve those margins in our first quarter of '06. Really, what we would be looking at is a quarter-over-quarter margin enhancement. Certainly once we get the CargoMax out of the way, and I don't think we'll have this legacy issue this quarter. That's why I think our margins will go up on a fourth quarter -- first quarter '06 versus fourth quarter '05. And then as we go forward and a lot of the other things start to click in, those things which we control, we should see our margin go up on a quarter-to-quarter basis.

Okay. Thanks for the time, guys.

All right, Kevin.

Our next question comes from the line of Dan Shedivy of Basswood Partners. Please proceed with your question.

If we could spend some time, first of all, on your gross margin. I know a lot of questions have already been asked. But on the last quarter call, there were quite a few things that led us to believe that [indiscernible] would improve, the overhead was lagging in terms of what products were actually going to be sold, what's supposed to run off. The products that were being sold were supposed to be higher value in nature. And then lastly, I believe that there was roughly $2.2 million in savings from fewer FTEs. So, for the things to be off versus last quarter is obviously disappointing. And it sounds like there are three things that led to that. If we could talk a little bit more each of them in turn. First, CargoMax, you said 50 to 70 bips. How long will that overhang stick along? Will it be the same order of magnitude? More importantly, if you do decide to get out of business, what are the implications of that? What's the order of magnitude in terms of shutdown costs or restructuring or something like that? Why don't we start there?

As I stated earlier, Dan, the overhang that we'll see in the first quarter will probably be about half of what we experienced in the fourth quarter from a negative impact. And on a go-forward basis, we have only accepted orders through the first half of the year. So, regardless of the decision that we may make in the next two or three weeks or month and a half on where we go from the CargoMax, at this point in time, we're not accepting any orders in the second half anyway. So, certainly through the first half of the year, on a go-forward, there would be no impact, no negative impact related to CargoMax. And obviously we're going to make every effort we can to minimize any impact, even through the first quarter and into the second quarter.

The equipment that was used and dedicated to the CargoMax product is mostly reusable. There are robots and there are operating cells that were dedicated to it. The impact to the business is minimal, because we can reuse a lot of those robots, a lot of the fencing and equipment and pumps motors, all those things. The equipment that would not be reusable would be dedicated fixtures that were designed specifically for manufacturing the modules themselves that go into this CargoMax.

So I should not anticipate any significant charge in the future in the event you do decide to exit that business?

There should not be. There won't be significant -- it's not that we have to completely revamp the whole manufacturing area or anything. It's not a very large area that was dedicated to it. And there will be some equipment or tooling, mostly, that won't be reusable, but it should not be very significant.

Okay. That's good to hear. And then second, on the legacy warranty costs, I know, Bill, you said that that should go in next quarter. Can you just talk about what the visibility is on those types of items? Obviously, I assume, you didn't expect to have those last quarter. How should we think about the risk of those ever popping up again?

Well, we actually, we've come to -- at the end of certain model years, our -- the warranty on certain products starts to fade away, and then you get this big rush to say, hey, we need to do this. A lot of the warranty that we are working on right now, I mean, truly can be classified as more of a sales policy than warranty. And these are with some large customers that we feel it's necessary to give them a little bit extended, as far as timing is concerned. It's also as a little bit of a preamble to some of our competitors that are coming in the DuraPlate type of competition, that it better be sure that the panels can last 10 years. Because that's -- that is an expectation by anyone who is going to be buying a composite trailer.

But I think that what we're looking at, we have a much better control or better visualization, as you said, of what we've done. We did have an area or time frame many, many years back, when we did buy some composite material because of capacity outside, and that's what's haunting us right now. And we're pretty much running out of trailers to fix.

So, I would tend to believe that we've got a much better handle on what we have to do going forward and really what we're going to try to do, Dan, is we're going to go in and purchase those trailers, and basically replace them. Then the type of fix that we have to do on those trailers is a lot cheaper under our control versus someone else's. So, it's going to be -- overall, it will be good for our customers, they'll get some new trailers, get some good pricing, and we'll be able to get some of these DuraPlate trailers back, fix them, and in today's market, be able to sell them. So, we're trying to make this a win/win for all of us.

Is there any possibility they'll leverage that competitive further in terms of offering even more favorable terms such that you would be bearing a higher cost on the back end, but also insist on somewhat more of a premium up front?

I know what you're saying. I don't think so. I really just don't see that happening.

Okay. And then, on the labor and overhead, can you help me bridge the gap in terms of the negative 1.5 million from this quarter versus the 2.2 million in reduced overhead that I was anticipating from the last quarter's call? Or am I thinking about two different buckets of cost?

I think you're getting buckets combined together. Because in the fourth quarter, it's usually a negative for us because of shutdown periods and things like that. We're down around Thanksgiving. We're down around the December, New Year's holidays. So, when you look third to fourth, you have that kind of a negative event going on. You get the impact of the CargoMax into that mishmash of what's in labor and overhead, and it starts to chew up a lot of those dollars.

Okay. And Bill, I think you mentioned that you might have the ability to improve GP by, you know, 1% to 2.5% over the next nine to 18 months. Did that include or exclude the potential positive impact from automation?

That's really, I guess the way that I understood the question that was asked to me is what can you do that's under your direct control, to improve your GP? And that's it. The upside to that naturally, Dan, is if we start seeing pricing starting to move up and we address that aggressively, which we will, there's probably some additional gross profit margin that we'll see because we're actively working to take some of this, these raw materials down, especially, some of these components, down. And then it's just like in any industry, as you try to maintain some of that savings that you've had versus giving it away, it's a timing aspect. So, I think that what we can control is probably what I had said.

But I think there could be potentially, you know, 50 basis points to a full percentage point if we're successful in doing some of the other thing that is we want to do. We're not stepping back. When we --Dick and I and Bob -- have talked about this, we really think that in the peak of a cycle, we can get into the mid teens. Nothing has changed there, we're very, very aggressively going after that. And in a lot of what we can do is under our own control.

So, instead of getting waylaid on customer cancellations and trying to improve quality because it's very important, we still have another 300 million to $400 million in new business we want to achieve. Those people are a little bit more picky about fit and finish. We had to do these things. So, going forward, we're still very, very excited about what we've been saying. We're not backing off on that at all. We think this is a great business. We're back to what we originally intended to do.

Okay. That helps a bit. But in terms of what's in and out of your control, you're ability to automate and execute and reap the benefits there are factors that are in your control. Would that be part of that potential 1% to 2.5%?

Yes, that's what we said.

I just wanted to be clear. And I guess, at what point should we actually expect to hear on a call that there's some sort of positive impact from automation?

Well, I think in the first quarter conference call, we will be able to be able to give you a more detailed update on Alpha. At that point, we'll certainly have a much better understanding of whether our estimated savings are correct because we'll have finished the debugging of the line. So, we can tell you that. And, Dick, and his group are also now working on the second line and how to look at that. So, we should be able to, as we go forward, certainly at the end of this quarter, give you a much better understanding than at the end of the second quarter we'll probably tell you what we saved.

Okay, and if I can ask -- and I know you can't talk much about the acquisition, but can you give me a sense for how this will potentially fit in with your operations, in terms of -- you currently have your own flatbed line, but you aren't manufacturing that, correct?

Right. Actually, we're buying our flatbeds from Transcraft.

Oh, okay.

So, how does it fit in? It's really like a glove. We make trailers very similar to the way they make their trailers. I mean, it isn't something that is uniquely different. In addition to that, about five years ago, we made flatbeds. We just didn't make flatbeds that were of the quality and innovative type that Transcraft is. So, we actually have some of our people here who remember and were participating in that.

This is, if you're looking at an acquisition from an integration standpoint and from a commonality standpoint, this is about as best we can get. Okay? This should fit in pretty easily. As I said, this is not a turnaround situation. We can add to this business, because we're dealing with a lot of customers that Transcraft currently isn't. And vice versa, Transcraft is dealing with a lot of customers that we aren't. We're really kind of excited about this. So, there's great synergies that we think we can take advantage of.

And I have to assume that you'll use debt to finance the acquisition. I don't know if you can comment on that consideration or not. Because I guess using stock would obviously, in my opinion, not be the best of things in the world, given how cheap your stock is. But in the event that you do lever up for this acquisition, can you help me understand what happens in 2007 after the convert gets executed? So, technically, that debt will flow off your balance sheet by the end of '07, and you'll have some residual debt from this acquisition under my hypothetical scenario. You don't have to confirm that or not. But, in the event that I'm right as to making that assumption, you have some debt--

Hey, Dan?

Yes.

You're delving into a lot of areas that a lot of supposition and the converts are out in '08 when they convert. You know, this is something that if we execute properly is going to be additive to what we've been talking about and net will be positive, and you can layer that on top of any other assumption that you have in your model.

Okay. Let me ask a point-blank question then.

Hey, Dan? Don't you think we ought to let a couple other people have a chance at the line?

Okay. I'll jump back in queue.

All right. Thank you.

Our next question comes from the line of Greg Cullen [ph], of Metropolitan Capital. Please proceed with your question.

Hi, guys. I just have two questions, and if you've addressed this, I'm sorry. I just wanted to know setting Transcraft to one side, just to get an idea of across the various product lines, are the dropdeck trailers and flatbeds generally higher margin products for you, if you're manufacturing and selling them? Versus your other products?

Yes. We really can't comment on that. I can certainly say they're far north of containers .

They are? Okay. Question: You've said in the past publicly and you sort of mentioned it on the call, that your view in the future, without getting to peak prior peak volumes, gross margin targets sort of mid teens and EBITDA margins between, like, 10% and 15%. To get there, do you think -- you say that's sort of mid cycle-- Do you think sort of defining the cycle from what you can see here as an '07, '08 kind of time frame? Just what are your views on that?

I think if you look at ACT, they typically have been the cycle of this type of forecaster. Once they get going up, they never seem to want to come down. I think what you're really looking at here, Greg, is the fact that this is going to be a cycle that really doesn't have a peak. We're in a replacement cycle.

If you just were to look at replacement and I think we've shown it around 220,000 total trailers, if you look at '01, '02, '03, we were far under replacements. And now you look at '04, '05 and '06, where we are, we're slightly over replacement. I think really we're going to see a cycle that probably is going to extend again assuming the economy kind of holds where we are right now, you know, we'll be talking about the same numbers in 2008. That's great news for us.

Right. Okay. Good, that's fair enough. In terms of the Alpha line, I know it's just quite simply you said it's about $10 million per line. You view the cost savings, unit savings about $7 million per line. You plan to do, I recall, all four lines. If that's incorrect, let me just interrupt. And how long will sort of is the gestation period from the point in which you bring the lines on until you realize those savings? And sort of related to that, when do you think you'll have all four lines done? By the end of '07? What sort of timing is best as you can see from here?

Yes. I'll try and answer the series of questions as best I can recall them in the order you asked them. From the time the line gets installed, and we go through the debug and ramp-up, it's three months to six months following that as we ramp up through and start gaining the savings. We have to ramp up a shift at a time. This is not something you just flip a light switch and you've got three shifts of people running equipment. So, it takes three months to six months going through that process and then you see full impact of it. The subsequent lines that we'll be building over the next couple years will actually run us out into 2008. So, I would expect expect that the last of the lines, we won't see realizing full impact until the end of that time frame.

Until the end of '08?

Yes.

When you finally can start counting on the benefits from the installations? Okay. So, the simple question is if all goes according to plan, by the end of '08 you'll see the 7 million times four full impact on an annualized basis flowing through?

Right.

Okay. Great. Thank you guys. Good quarter.

Operator, I think we're pretty much done. We'd like to end it now if we can.

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