Wabash National Corp (WNC) 2006 Q1 法說會逐字稿

Greetings ladies and gentleman and welcome to the Wabash National Corporation First Quarter 2006 Earnings Conference Call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If you would like to be placed in the question queue, please press *1 on your telephone keypad. A confirmation will indicate your line is in queue. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. William Greubel, CEO. Thank you Mr. Greubel, you may begin.

Thanks Operator. Good morning. Before we begin I would like to make an important announcement. As with all these types of presentations, this morning’s contains certain forward-looking information, including statements about he company’s prospects, industry outlook, backlog information, financial condition and the like. And as you know actual results could differ materially from those projected in the forward-looking statement. The statement 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’s First Quarter Earnings Call. I’m Bill Greubel, CEO. In the conference room with me this morning are Bob Smith, our CFO, who will discuss the company’s financial, and Dick Giromini, President and COO, who will discuss the industry and our business. I’d like to welcome all the listeners on today’s telephone conference call, as well as those listening live via the Wabash National internet site webcast. We have much to cover today and will try to provide as much information as possible. At the conclusion of the prepared portion of our presentation, we’ll open the call for questions from the listening audience. I’d to have Dick Giromini start his presentation.

Thanks Bill. This quarter’s results were not up to our expectations. However, we believe that we bottomed out and look forward to an about face in the following quarters. Our manufacture and operations continue to perform well. And we’ve had no reoccurrences for the issues we experienced last year. I’ll cover some key factors influencing the quarter’s results, and Bob will fill in the details.

We’ve faced an anomaly of sorts this past quarter, as five accounts representing a large percentage of our orders chose to pick up their equipment versus having us arrange delivery. Not having the direct control over delivery process had a very significant adverse affect on meeting our sales estimates. This will be less of an issue going forward as the seasonality of the freight business kicks in, but will always prove to be a challenge to some extent. Core partner accounts represented approximately 30% of our first quarter sales on a unit basis, and somewhat less than that on a dollar basis. Versus approximately 15% in both categories in the 2005 first quarter. For the year we expect sales to core accounts to represent approximately a third of our [band] unit sales.

As we reported in both the third and fourth quarter calls, all of our competitors had used pricing as a means to load their operations due to eroding backlogs. And at times we chose to meet those competitive situations. This will have a tailing effect that will pay out over the next few quarters. We’ve noted that industry pricing is firm, as overall order rates remain strong, and the sharp increase of aluminum prices since late December has caused trailer producers to increase trailer selling prices. This can actually play out in our favor, since our DuraPlate product has one-half the aluminum content, as compared to a traditional sheet and post.

Production in the quarter was at a typical seasonal low. And in the following quarters we plan to increase production by approximately 20% to meet our projections. This will be accomplished by bringing our alkaline fully on stream across three shifts and holding up production on our DuraPlate lines. We fully intend to meet or exceed our volume forecast for the year. Although there’s been considerable amount of press associated with weaker steel pricing, we have yet to experience it. As the truck industry is at peak rates, and the trailer industry continues to expand, we’re seeing a sellers market on components and raw materials. Add to this the aforementioned run up in aluminum pricing. Although we have purchased forward, we remain uncomfortable given recent volatility of aluminum. Again, as we go forward, both of these issues will tend to lessen somewhat as we gain traction with our alternative sourcing initiative.

As we advised you earlier, we decided to exit the CargoMax container business. And by the end of the end of the quarter we completed the build and shipment of the last of these units. On the positive side, we feel comfortable that margins will begin to move forward due to a number of in-house initiatives and positive market indicators. We fully intend to meet or exceed our volume forecast for the year of some 50,000 units, excluding flatbed shipments. From the order perspective, we currently have approximately 85% of this goal in hand. Our backlog continues to expand across all product lines, with continued penetration expected in the mid market. As of March 31st our backlog amounted to approximately $610m, including about $42m related to Transcraft. This compares to $516m at the end of the year.

From a production and shipment perspective, we need to produce and sell approximately 49,000 trailers over the next three quarters. Volume will be up significantly quarter-over-quarter, as is typical for our business. Our target for the second quarter is 16,000 units shipped, a 38% increase over first quarter. We see the [inaudible] extending beyond 2007, as we believe we are still on phase mainly of replacement, versus growth. We’re also seeing appreciable number of DuraPlate trailers now beginning to turnover because of both timing considerations and the ability of the fleet to recognize premium used trailer pricing. This represents a significant upside to both our volume and share forecasts going forward.

Our mid market focus continues with success. We were recently awarded a significant contract from CFI, a premiere truck load carrier. In the first quarter we added 40 new accounts, including 13 mid market accounts, yielding orders for over 1100 new units. I expect to see pricing firming across all product lines, especially if the competitive response is worked through the system, as well as more aggressive pricing on part of response to raw materials.

Our initiative on alternative sourcing is beginning to show some success, which will continue to build throughout the year. We’re still too early in the process to see any material change at this point in the year. Our other products operation is on track for a records setting year. And the retail business continues a profitable trend, we’ve established over the last year and a half. All be it at lower levels due to the December sale of locations in Eastern Canada.

The Transcraft integration is going smoothly. We have retained the key management team who have built this great business. The forecast for the flatbed market and for Transcraft continues to be bullish.

Before I come back to specific prior initiatives, I want to update you on the overall market. As we all now the emissions Cree buy is in full swing. And we should see tractor orders trend significantly lower, as most of the 2006 lots are filled. The average estimate for 2007 main plate truck sales is roughly 25-30% less than 2006. There seems to be growing speculation that for trailers, 2007 will be a much better year than 2006, as some of the CAPEX currently being directed to trucks will then shift to trailers. From our vantage point, we see larger fleets continuing to pursue trailer replacements in 2006. The increase anticipated for 2007 will come from the smaller fleets and an accelerated replacement rate from the big fleets.

Even with continued bulkiness and truck tonnages, it is expected that ongoing driver shortages will allow fleets to maintain and improve pricing over the foreseeable future. Business continues to be good for them. Across the industry backlogs are now increasing, even as the volume season tails off. Backlog in the vans only segment is 124,000 units, or approximately 7-1/2 months. Similar statistics can be seen in the flatbed market, with sustained growth forecasted over the next two years.

Potential [Unintelligible] outlook for the balance of the year is the potential for a major supplier of aluminum and extrusions to be unsuccessful in its collective bargaining negotiations with its Union. Any work stoppage could materially affect our industry within a very short period of time, as most, if not all OEMs use these extrusions. Because of capacity limitations and recent equipment issues, we do not believe there is much inventory built up to cover any protracted work stoppage. Additionally, because of tooling considerations and competitive capacity, alternative sourcing is somewhat limited. While we have assurances that supply will not be compromised, there is not absolute guarantee.

Now, let’s look at progress on our initiatives. Our new semi automated Alpha line was commissioned April 1st. But our systems [Inaudible] remain, as is typical with this level of sophistication, with current production limited to a one-shift operation this month as we continue to work out the bugs. Hiring is currently underway for the addition of a second shift for May, with a third shift in June. Trailer quality of the units coming off the lines is exceptional, meeting all of our [Inaudible] expectations. As discussed last fall, we will begin realizing the cost benefits of Alpha impacted our bottom line during the second half of the year.

Planning and evaluation continues for Beta, the second of our next generation trailer lines. With final decisions to be made relative to time and design during the latter part of the current quarter. We intentionally delayed moving forward with Beta until we obtain all the important learnings from Alpha. While w still intend to proceed with the project yet this year, it is unlikely that Beta will provide any benefit to current year results.

Our standardization efforts through design optimization are reflecting good results. The reuse of custom engineered designs is increased to nearly 70% for our drive and products. All drive and designs are on schedule to be completed the end of the second quarter. Planning is now underway to begin the same approach for our refrigerated product designs.

Our procured material cost savings and alternative sourcing efforts continue on track. With cumulative book savings to be realized this year of some $11.8m for new sourcing contracts, well on our way to our combined goal of $24m for the full year for direct and indirect material purchases. The consulting team will be traveling offshore next month in pursuit of additional opportunities to help meet and exceed our goals. Realize that these savings can be offset by increases that may occur on commodities. Our ERP implementation will go live May 1st. As will all ERP system implementations of this nature, we expect a period of adjustment in which the system will need to be stabilized.

With that, I will now turn the discussion over to Bob Smith, our CFO, to provide more insight into our number. Bob.

Thanks Dick. Good morning. Let me give you a rundown on the financials for the first quarter. As Dick mentioned, sales $262m on 11,700 units. Net income for the quarter was $4.3m or $.13 a share on a fully diluted basis. We included Transcraft beginning on March 3rd, which was the date of the acquisition. Sales amounted to approximately $2.7m. And there was only a minor impact on net income from the acquisition in the quarter.

We needed to include purchase accounting, and that included conforming some of the Transcraft revenue recognition practices to what we do at Wabash, which is recognize revenue on shipment to the customer, or pickup by the customer. Conforming Transcraft will constrain results over the next quarter. And probably in third quarter they will be on a more consistent run rate.

Again, for reporting purposes, income was fully taxed in the first quarter of this year. And that is at roughly a 39% rate. Last year taxes were applied at the alternative minimum tax rate. Again, because of the carry forwards [Inaudible] for tax purposes, cash taxes are [deminimous].

Equivalent shares amounted to $37.9m, to calculate the full diluted earnings per share. And that includes the effect of options and convertible notes. The details are in the press release. We purchased or repurchased no shares during the quarter. This is something we will revisit in future quarters once we get settled in with the Transcraft transaction.

Again, let me go back over some of the details. Sales for the quarter $262m, 11,700 units. This compares to the $341m on roughly 16,200 units in the fourth quarter. And approximately $256m in the first quarter of last year when we shipped 11,200 units. When I split sales by segments for the quarter, the manufacturing organization, which includes Transcraft, $242m, 12,300 units. Retail sales were approximately $45m on approximately 700 units. Elimination amounted to $28m, roughly 1200 units. Our first quarter is a time when we restock the branch retail organization.

Looking at sales from a product line perspective, in the quarter we sold new trailers with a dollar value of $229m. We shipped 11,700. And we produced just over 14,000 units. That is down from what we did in the fourth quarter when we shipped 16,200 units, equal to $308m in sales revenue, and produced roughly 13,400 units. Not terribly dissimilar to what we did in the first quarter of last year, when sales amounted to $225m on 11,200 units.

The point to remember here is that the first quarter is generally the seasonally low point of the year. Also, the fourth quarter of last year was unusually high because of the delays we incurred in the third quarter when we weren’t able to ship because of hurricane related issues.

Average selling price in the quarter increased primarily due to product mix when I compare it to the fourth quarter of last year. When we compare it to the first quarter of ’05, we had a significant ship in the customer base. As you will recall, the first quarter of last year was very low in terms of core partner account business when they represented only about 15% of sales. And as Dick mentioned, in this first quarter he mentioned they accounted for approximately 30% of sales.

Used trailers had a good quarter, $18m in revenue, 2,000 units. That’s up from where they were in the fourth quarter of last year, and up significantly from where they were a year ago first quarter. The increase is primarily attributable to the availability of equipment to us. As you may recall, we signed complete trade agreements in the latter part of 2005. And we are moving this equipment through the system.

Parts and service revenues, we’re about $14m in the first quarter. That’s up a little bit from the fourth quarter, and similar to what we had in the first quarter of last year. Gross margins came in at 8.7% for the quarter. This is down from fourth quarter. And, again, down quite a bit from the first quarter of last year.

If we look at the quarter a couple of items that impacted it, as Dick mentioned, we finished up CargoMax. We had about $10m or $11m of container sales in the quarter. And they produced a negative $1.1m when you consider the operating results and the write-off of some inventories that will not be able to be consumed in the rest of the operation. We also, again, suffered from historic legacy type warranty costs to the amount of approximately $1m.

Some other items that created a little bit of noise in the quarter is the fact that we’re, as Dick mentioned, just on the growth of turning on the SAT system and the Alpha like startup. Looking at it, if I try to bridge to the first quarter from the fourth quarter, volume was down about $5m and the impact on gross profit. Selling prices compared to material costs was a slight negative. We got mostly it’s a mixed event. We got price, but we also suffered increased costs. When you, again, look at the relationship between the fourth quarter and the first quarter, intra company eliminations were negative of $5m because, again, the restocking in the first quarter compared to selling out the inventory in the fourth quarter. And the retail business was down due to the sale of branches in Eastern Canada.

When we look ahead, as Dick mentioned, van units are expecting to be about 60,000 for the full year. We see the average selling price being stable to improving slightly. We’re looking at material costs to increase somewhat as we go forward. We will be aggressive in pushing selling price and running, you know, working our cost reduction initiatives to reduce material costs. But, again, as Dick mentioned, the ability to gain these is not assured. We will be working the initiatives, continuous improvements, standardization, alternative sourcing and the Alpha line coming on stream. All will be positive contributors as we go forward.

On an overall basis we see the full year with a gross margin in the 10%-11% range. Again, this says we need to run our production system efficiently. The whole supply chain needs to work. And an execution of the initiatives will be key. As I said earlier, Transcraft will be a positive contributive for the year. Their sales and their production levels are running where we expected to be. Purchased accounting is masking some of the positives in the first quarter and we’ll mask them again in the second quarter. We are seeing opportunities out there to capitalize on our supply base and bring those benefits to Transcraft.

SG&A in the first quarter amounted to roughly $14m, or approximately 5.4% of sales, up from previous quarters. Included in the quarter is approximately $700,000 related to Transcraft. It’s primarily the amortization of some of the purchase accounting adjustments related to intangibles. For the full year this amortization will run approximately $4m for the 10 months. As we go forward into 2006 SG&A will also pay some increases related to the stock accounting, the start of amortization on the ERP project, and incentive compensation.

Interest and other expense, interest ran at $1.6m for the quarter, which is consistent with previous quarters. The only debt outstanding during the quarter was the convertible note. Foreign exchange, the Canadian Dollar versus the US Dollar was nonevent in the quarter. Also included in other expense was approximately a half million dollars related to the writing off of some fixed assets that were used in the production of CargoMax.

I had mentioned the taxes and the tax rate. Again, the NOL, we went into the year with an NOL of roughly $96m. And cash taxes this year will be very little. The EPS calculation is included in the release. Depreciation and amortization for the quarter was approximately $4m, which is approximately the same as what we had a year ago.

Capital expenditures were $5.7m so far this year. Spending on the ERP system and finishing off the Alpha line were the principal items outside the normal maintenance capital that we spend. For the full year we’ll be in the $30m range for CAPEX.

Head count, we had 3200 full-time employees at the end of March. We’re running a ratio of full-time, on a full-time equivalent basis of roughly 75 to 25 full-time temporary associates. That’s a little different than the 80/20 we were running at the fourth quarter of last year.

From a balance sheet perspective we ended the quarter with $40m in cash. We had a great selection quarter. And we’re very happy considering the fact that we spent $71m on the acquisition during the quarter. Our liquidity stands at $158m. This represents the cash on the balance sheet. And the following is available to us under our lines of credit. Accounts receive, again, as I mentioned, we were down at $73m at the end of the quarter, and that’s compared to $131m at the end of the year. DSO roughly 25 days down, approximately 10 days from December.

Inventories, we finished at $154m at March 31st, versus $108m. Consistent with the fact that December is the low point of the year, we’ve been building up some inventories during the first quarter. Finished builts and work in process units, we have approximately 4900 units in the inventories, including approximately 500 at Transcraft. And this is up from the 2,000 units we had at the end of the year. As I mentioned, I think used trailer inventory was roughly $18m on 2300 units. Down a little bit on a dollar basis from where we ended the year.

The other assets on the balance sheet, the intangibles and the good will all relate to the Transcraft acquisition.

Let me now turn it back over to Bill and he can give you closing remarks.

Thank you Bob. You know, in summary we have a lot on our plate. And all of our associates have done a great job moving this business forward, especially in view of the mass of undertaking and the rollout of our new ERP process and the Alpha business. We have the best products, the best quality, the best service and an excellent cost position in the industry. We continue to focus on value, both to our customers and to our shareholders.

After four quarters of less than stellar news, I admit this could be considered [opat], yet our or in process initiatives, and a very solid backlog will provide incremental margin improvement going forward. There’s a lot of life left in this cycle. And I sincerely believe we have bottomed out and margins will go up.

At this time we’ll take questions. Operator.

Thank you. Ladies and gentleman, at this time we’ll be conducting your question and answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Peter Nesvold with Bear Stearns.

Good morning guys.

Hi Peter.

I guess I’ll start with the gross margin. You know, if I add back the entire CaroMax, $1.1m, less the $1m warranty, I still only get a gross margin of 9.5%. And in the opening comments, I believe Dick said that there were no recurring issues from last year. So something is still not reconciling here. I mean I guess what I’m drawing out of this, because [Inaudible] the quality was very high in the Alpha line. So it must be that the throughput on that line, or maybe the other lines is exceptionally low right now. There may be a lot of stopping and starting, but the final product is still of high quality. Is that a fair characterization, or is there something else happening? Because, I mean, this is yet a sequential downtick from a bad quarter to fourth quarter.

No, Peter. The Alpha line is going through a ramp up. So there’s always going to be some cost associated with any ramp up as you work through bugs. And the people are going to be less efficient than they would in a stable operating mode. But remember, there’s a lot less quirks associated with that line. So the impact is very minimal as they go through their training and they go through the ramp up phase. The most significant issue is really the carryover tailing effect of some of the competitive pressures that we’ve had in pricing in the marketplace, combined with the commodity challenges, commodity price challenges we’ve faced.

We’ve shared in recent past calls that, you know, we’ve gotten to such point in our industry where it’s very difficult to continue to pass along or force through cost increases that we may be facing. And that’s really what the challenge has been over the past few months. And we’re seeing some of that. We believe that a lot of that is passing, as we are gaining traction on some of our alternative sourcing, our cost reduction initiatives on the supply side of the business, combined with a little bit more disciplined competitive activity out there. As we’ve seen some parallel pricing go up in the marketplace has helped stabilize it a little bit. But that’s where some of the challenges have come in. But I can assure you that from an operational standpoint on the manufacturing floor, it’s operating quite well.

So the throughput at the end of first quarter is where you think it will be at the end of the year, putting aside the 20% production increase?

No.

I think there will be some incremental improvement as we gain more and more traction and consistency with the Alpha line. There is going to be some incremental improvement. So, no, I think that from the operation side, where we are today will be the baseline of where we’ll be all year. Each [Inaudible] from a quarter I full expect we’ll make some gains. But relative to last year, we have not taken any steps backward. And that’s what I was trying to respond to your concern.

Well, let me [Inaudible]. You said that competitive pricing is one of the overhangs on margins in the quarter. But I think also in a [Inaudible] to March you said you expect ASP to be up as the year progresses. I mean is that the [Inaudible] per charge going through or is it mixed towards more DuraPlate? I mean how do you get the ESPs up if your competitors are not taking prices up as fast as you?

Well, we’re all going up in prices. That’s the good news, Peter. But I think the advent of aluminum increasing in the fourth quarter and continuing to move up in the first quarter has been a very strong catalyst for everyone. And, you know, it’s very difficult if you’re trying to raise prices. And let’s put it this way, it’s very difficult if six companies are trying to raise prices and one isn’t. Even though they may not have the capacity or the type of product, they tend to be the market leader. I think right now much of the industry is all in lock step in trying to recover aluminum pricing. And that’s why we think that will go up.

We also had an inordinate amount of what we call partner business in the first quarter, versus what we saw in the fourth or in the first quarter of last year. And that has adversely affected us. We also have with some of our accounts an index that we will revise based on raw materials. That will allow us to pass through some of this raw material increases in the second quarter.

What we’re not saying, and I don’t want you to take this, is that we’re not raising prices. We’re aggressively raising prices. And, as you know, as we quote very product we put in where we think the date of that manufacturer will be, and what we think those costs will be. This is a business that does not have a pricelist of sorts. Every quote that we do we quote based on where we think the raw materials and the labor is going to be at that time. And so we will continue to raise prices.

The challenge that we have, Peter, as you know, it’s simple math. If the price of raw materials go up $2,000, and I feel comfortable in saying if we can get that the margin that you see actually goes down, because we have a bigger number that we have to measure off of. So in some respect I don’t think our margins per trailer are actually going down. And I think on basis of the cost or the total price of the trailer is going up faster then, and we’re able to push the margin. But at this point the real critical aspect for us is to cover the cost of raw materials. And then to work on alternative sources so that we can take the savings and not necessarily have to pass them onto our customers.

Well, I mean I guess, you know, what I’m really digging at here is I want to understand how quickly and how much these things improve. And if I hear you right, I mean I can understand that aluminum prices are a bigger pinch point for your competitors because there’s more aluminum content the sheet and post. So that makes sense. But, you know, your also saying that the market doesn’t want to accept anymore price increases. And that my sense would be that the trucker is probably less aware of aluminum prices going up maybe than tire prices.

Also you said the mix of partner [Inaudible] was very high in the first quarter. I think you said it was 30% and you’re targeting one-third for the full year. So that actually increases as you progress through the year. So I don’t, I mean I guess I don’t really see where you get a big benefit from that.

Maybe I could just switch gears for a second here and just ask you a quick question on the deliveries for second quarter. I think you’re targeting 16,000 shipments. You know, if you make 60 for the year, you know, I know it’s not smooth, but that would apply 15,000 per quarter. Usually second or third quarter are bigger production quarters. You have about 4,000 on the balance. That would imply that you’re only making like 12 or 13,000 in second quarter, which would be a big downtick from the 14,000 plus that you actually built into first quarter. Is it a conservative delivery shipment number, technical order, or is there some other reason why the shipment provided by the build number would be lower?

Yeah, well, I can assure you the build number will be significantly higher. We’re having, as we discussed, that this is an interesting anomaly of sorts that we’re going through right now. Last year in the first quarter we were basically doing the shipping for most of our accounts. The predominant number of buyers were having us basically plan and deliver their equipment to them. In the first quarter it’s almost flipped around. And we’re really finding out that a lot of our customers, whether they have drivers or -- it’s not for us to, you know, tap it on this particular phone conversation. But what we’re seeing is that a lot of the major customers that we typically had arranged for their delivery of their equipment, they are now picking it up. And when they do that they pick it more on their timetable because of their driver availability, than how we typically do it. We push out as quickly as we can.

The end of the first quarter we probably had five customers that represented certainly well over 750 trailers, that if we were managing that deliver would’ve been out. And so our miss as far as the 12,500 was simply because the customer said that they wanted to pick up. They are picking up. They’re just picking up at their timeframe.

Now, going into the second quarter, as far as production is concerned, we would like to say that we’re only going to produce 14,000 trailers and we’re going to ship 15,000. That’s just never been the case with us. We will probably have a total inventory, with production and inventory going in probably in the range of 18 to 19,000 trailers and ship 16,000. And again, Peter, what we’re encountering right now is as we go further into the second and third quarter, we’re not building inventory for the branch anymore. These are all orders.

And as you, you know, because you’ve followed us for some time, it is a bit of problem sometimes getting these trailers out in a timely manner. What makes it a little bit worse right now is most of our customers are still saying they’ll pick up. What we think is going to happen is that they’re going to get a heck of a lot busier. They’re going to say, you guys handle it. Our problem right now is a lot of the drivers that we have that have been managing this business for us have had no work for the past quarter and have gone on to greener pastures. We will be forced at some point in time to bring them back on. And that’s a timing aspect, again, to us.

So what we’re looking at in the second quarter, and I’ll hopefully make this long story short, is we’re going to be producing a heck of a lot more trailers. We’re probably going to end with a lot more inventory, or similar to what we have. And you’ll see the numbers of shipments increase as we go through the quarter as we increase production. But those five accounts that were slow to pick up at the end of the quarter, that pretty much covered the requirements in the first three weeks of this month.

One other quick question then I’ll jump off. You left the guidance for 60,000 shipments unchanged for the year. It looks like the backlogs are filling up faster than last year. Also, your increase in production 20% as the year progresses. You have 60,00, is that more or less -- is the swing factor there the same issue that we just talked about here with just the customers picking up the number of trailers? Or is there, do you think there’s upside to that 60,000 number otherwise?

We certainly can produce more than 60,000. We’ll have more than 60,000 probably in orders. I’m just not sure whether we’ll be able to ship more than 60,000. And it’ll all come down, again, to probably the fourth quarter. We are expecting, just on the basis of a 60,000 build that we would take some production out in the fourth quarter. If the orders continue to increase, as we kind of believe they will. And the fact that we like to keep our backlog a little bit shorter than most, there is a potential that we’ll continue to produce at a level similar to the third quarter into the fourth quarter.

Okay, great. All right, thanks for the time.

All right Peter.

Our next question is from John Barnes at BB&T Capital Markets.

Hey, good morning guys.

Hey John.

Let’s talk about, I want to go back to this deliver issue for a second. Why are you allowing the carriers to dictate if they’re going to pick them up or not? Because if they’re partners and you get five customers representing 750 trailers, you know, my question is are they going to be willing to make up the $40m of market cap that got lost today, you know, because of another shortfall. I mean I just don’t understand why we’re continuing to leave this in the hands of a third party which, you know, may or may not have a vested interest in coming and taking delivery of that. And then second of all, what are you doing to incent them? Is there, you know, are you charging them a demurrage? Because, you know, from when I cover the truckers they don’t have a problem charging demurrage to their customers. You know, what are you doing? And should you be thinking about getting more aggressive about charging them if these things sit on the lot and stay in your inventory for a longer period time?

Well, those are all good questions. And I’m sure that our competition is sitting here just waiting for us to answer that in an appropriate manner. I really can’t. First off, we’re the only public company in the sphere here. And how we manage our revenue recognition is significantly different than how some of our competitors do. And a prime example of that is when we purchased Transcraft. They have different revenue recognition than we do.

Incentive wise, we do not offer incentives or do we take charges to most of our customers. And we probably will into be doing that. It’s important to understand, John, that as we look at the aging of our inventory, the majority of our -- as we were producing the first quarter, we continue to expand production well into the quarter. And if you were to look at the aging of our equipment, it really wasn’t too bad. A lot of production that happened at the end of the first quarter did not go out. But the aging of our inventory is actually pretty good.

And that’s the concern that I have for the second quarter as we start to ramp up. You might have the same conversation with us in our next conference call, simply because in the month of June I’m going to appreciably increase my production process, May. Those products that are generally made in the last three weeks tend to not go out as well as those that are just made today. So we are not probably going to charge our customers. We believe that we can get in their faith a little bit more, and we have been doing that. But if you look at year-over-year, and especially since I came in, we get this product out significantly faster than we have. It’s more a matter of timing than anything else.

The good news is these are orders. We’re not building for stock. And in some cases what we’re also doing is being paid for these before they even go out. But I don’t think at this point I want to go any further in how we’re going to try to improve these deliveries.

Okay. Does the market not allow you to charge? I mean, you know, and again, I recognize you’re public and most are private. And, you know, I guess the point I would make is, there might be some private carriers out there who are comfortable with a 3.5% operating margin on the business. I would imagine you’re not. And, you know, is the competitive environment against a bunch of private players? Is it just something you’re going to have to live with for a while? Or, you know, at some juncture do you have to just abandoned that strategy and say, hey, we’re public. We know we’re public, but this is what we’ve got to do, you know, for our business.

I think we’ve had pretty good success with most of our major customers, that includes partners and some of the larger fleets we deal with, and our dealers. And having them recognize our need for revenue recognition. And we have improved that very, very dramatically. At some point in time, you’re correct. And we have with a couple of our customers have actually put it into their contractual arrangement that the trailers have to be out of here, or they have to find someplace locally to move them out. That’s not our concern, it’s their concern. And we are trying to increase that capability as we go forward. But standard industry right now, John, is that I would think if you were to go to some of our competitors they’ve got some product on their lot that’s been there for quite some time.

Okay. Now, again, back on deliveries for just a second. Is there any situation you’re experiencing where you’ve had a quality or a warranty issue that is causing the carriers to show up, inspect the equipment and reject it until those changes are made, or are we largely past any of those issues?

I don’t think we’re having quality issues. We have a very large fleet called Tackstrip [ph]. I’m not sure I can say this, but they do come in and inspect. We probably made, you know, in excess of quite a few hundred trailers for them. We are the top dog in their fleet right now. And we seem to get that from just about everybody who comes in. So quality is not an issue, both in their inspection and our ability to put it out on the lot. So we’re feeling very comfortable there that we’ve created a leading position in the industry with that.

Where we do have some issues that continue to haunt us when we talk about whip [ph]. A lot of these, as you know first off, we measure whip if it’s our fault or if it’s the customer’s fault. And we have had an inordinate amount of decal issues where the customers have not gotten the full packages to us, or just simple license plates. You know, it’s just small oversights that at the end of the quarter probably represented about 500 trailers. Of that probably about 300 of those could have left if those packages were received. But, again, that counts in our whip.

Okay. If you have to, if you’re forced back into, you know, providing a delivery service, number one do you get paid for it? And number two, you know, what am I looking at in terms of margin impact, you know, in the back half of this year? Is it half point off the, you know, off the operating margin that I need to be thinking about, or, you know, is it far less than that? And it’s, you know, but again, are you getting paid for it?

Yeah, we are getting paid. And in most cases it’s not a hit to us, unless we, you know, at the quarter end decide to do something like that. In the past, the first and second quarter of last year, and the prior year, we would have some incentives to deliver to Chicago some of their equipment at an expense that we would share. We just don’t feel that’s the way to go. And I think, quite honestly, that the end of the fourth quarter and the end of this quarter, some of our customers were waiting for us to, you know, basically back down and say, we’ll delivery. We just don’t think that’s our responsibility. And we think that, you know, that type of cost is certainly behind us. So there should really be no margin hit associated with that. The real challenge, and I feel fairly comfortable that at the end of the second quarter, as we move into this quarter we’ll get more and more of our customers ask us to manage delivery and we’ll be able to get our drivers back.

Okay. Last question. You know, if I’m looking that the rest this year, you know, you’ve got the better part of I guess eight months left and, you know, my take is that the band cycle in ’07 is going to be fairly robust, do you feel like, looking at everything you’ve got on your plate, Alpha and Beta, the ERP system, the integration of Transcraft, you know, and a bunch of these other issues, alternative sourcing, you name, I mean I can kitchen sink it here, do you feel like -- or you tell me. What percentage of those things are going to be complete and fully up and running and operational by the time we hit the end of this year? And can you got into ’07 with a pretty good demand tailwind, you know, full prepared for that, or will these issues linger into next year?

Well, I think from an ERP system that we have worked this very hard. We’ve had two dry runs on this over the last two months. We’ll see what’s going to happen. This is a very [biennales] system. We are expecting, like anyone else, to have some follow up issues. But I think at this point in time, we had a meeting yesterday, which was a go no go meeting. And the team that we have that is comprised not only of our internal people, but of our outside consultants, feel fairly comfortable that we can get through this. Alpha will be behind us. And I think that’s probably within this quarter we’ll get ourselves up to a good running condition.

On the other initiatives that we have, and I’m going to hold out Beta, we have been compartmentalized. And so we have specific people working on those projects that, in addition to doing their regular job, are able to do that. And we are bringing in some consultants to give us a little bit more help in the alternative sourcing. So I think we’re okay there. On the Beta side, I agree with Dick, we’re learning a lot about what we’re doing in Alpha that we want to put into Beta. We want to be correct in doing this. I do not think that we will have Beta up and running this year, as Dick had said.

I also think that we’re at a level, John, in the industry and in maybe just say where the industry is and the people in the industry, I think that as we go forward we may find some alternatives to going further with maybe instead of four lines, we might only be able to manage three and still do just quite as well. So at this point in time I’m slowing Dick down because I think there might be other alternatives that we need to look at going forward.

Okay, very good.

I know that’ll totally confuse you but--

No, problem, thanks for your time.

Thanks.

Our next question is from Chris McRae [ph] with Merrill Lynch.

Hi there.

Hi.

I wonder if you could give us a little bit more granularity on the Alpha line and the impacts that that had in the first quarter. It seems to me that you’ve recognized some impact there, but without quantifying it. Can you give us a sense, for starters, what kind of production percentage came off that line for the quarter?

First quarter was really going through a lot of the debug. So we really didn’t plan for Alpha this year in that first quarter. So a very, very negligible impact on the first quarter. Very little that came off that would be counted as production product.

Okay. But you’re booking a substantial cost I guess associated with getting that line up and running.

No, no. And this is what I stated earlier, that there’s far less people on the line. It’s a semi automated line. There’s less than half of the labor content associated with that line than there is with a comparable assembly line in the business. And we didn’t bring on all of the folks. Initially we brought a small crew on to get familiarized with it. And we have been ramping up as the weeks have gone by. Most of the cost is being borne by the automation firm that worked with us in designing and manufacturing and developing the equipment. So they’ve had their people working through debugging and making corrections to the equipment. So the cost impact to us, while there was some, is [diminimous].

Okay. So when you talked about the margin impacts, CargoMax and the legacy warranty, you really were in effect referring to that in order of magnitude?

Yes, that’s correct.

I think we said that, you know, Alpha and the ERP system is creating some noise, but it’s not enough to be a big register on the margin line.

All right. So we really are focused then on materials cost and pricing as the primary --

For our primary, you know, it’s probably an opportunity to get a little bit more throughput through the system. You know, the first quarter is a little loose in terms of what the requirements for the industry are. So you end up with some open slots, which, you know, were geared up to do one level. You had some open slots and you don’t get the efficiency out of the folks or the overheads that are in place.

Right. That was my next question. I mean is there a seasonal factor here? But what percentage of your production is in effect being built out of backlog? So you priced that six, eight, ten months ago, you know, last year with commodity prices starting to increase, versus trailers that you sold in the quarter that were sort of spot market.

We don’t do much spot market. The only spot market we really do is out of our retail branches.

Yeah.

So most of this product that we’re building today we took as an order either late in the third quarter, fourth quarter and the beginning of this year. What we try to do, Chris, is we try to really bring in the costs that we think we’re going to see during the time of production. And in some cases we’re really off, like we did with tires, and we’re trying to do with aluminum. We have the right to go back into our backlog and try to harvest some of that cost increase. And we have done that both with tires and with aluminum.

Okay. So the --

If your seasonality, from a production standpoint, we’re in a very heavy production mode right now and will continue to do this probably through October of this year. And if the backlog, which is very solid, it’s probably the best we ever had, which will allow us to hopefully not do as many changes, that will also help us going forward.

Okay. Is there any effort or intent to maybe increase the percentage of non-partner trailers, given that I guess you had some good orders in the most recent quarter? I mean is there a way you can balance that out going forward to try to loosen the margin a little bit?

Well, there’s no doubt that that’s been our intent for over two and a half years, is to take the partners down as a percentage of sales. Where they have basically remained level, we have brought in a significant number of what we call mid market, and it has helped us. Right now I think in the first quarter what you’re seeing is the partners have a great balance sheet. They can both purchase trucks and trailers in a replacement mode for trailers, and then just kind of manage their truck population for the new equipment that’s coming out.

As we move further into the year I think you’re going to see some of the smaller guys now understanding what’s available out there and where they think their needs are going to be from a truck perspective. And then I think they’ll start coming in a little bit more on the trailer side. Those sales we would recognize most likely in our dealer population of independent dealers, as well as our retail branch sales. Which we do indeed see as starting to pick up over the next couple months.

And finally, can you break out at all the sales by product, such as the refrigerated versus dry vans and that sort of thing, like the volume?

Well, when you look at our overall sales, somewhere in the nationhood of, you know, 75 to 80% of what we sell are DuraPlate dry van trailers. The balance is split. And let me just deal with the dry van side, because Transcraft is new to the operation. The balance has been split somewhat equally between the reefer trailers and the sheet and post, our freight pro branded trailer. And then containers and converter dollies and things like that make a small percentage of the total. So if you took it 80% say for dry van, you’d probably have somewhere between 6 and 8% depending on a period of freight pros, and a similar amount for reefers, and then the containers and the odds and the odds and ends made up the different.

Okay, good. I’ll leave it at that for now. Thank you.

Thanks.

Our next question is from Frank Fisk [ph] with Pilot.

Yes, hi. In regard to I guess when you sell the pups [ph], are those DuraPlate pups and that just goes in the 80%?

Yes, they are DuraPlate pups.

Okay.

We do not make sheet and post pups.

And in terms of Transcraft, I missed it, but you said for the year we expect to, I guess sell 60,000 --

Vans.

-- vans. That does not include Transcraft; right?

No, Transcraft would be roughly about 10% more of the total.

So another 6,000. Okay.

Right. That would be 10% on a full year basis.

Okay.

So, you know, we’ve only go the 10 months in for the year. So, you know, they run roughly below 20% of the market for flatbed platform trailers. And they should be in that same place this year.

And then could you just go over again, I guess you were trying to bridge the gross margin hit to the first, from the fourth to the first. You talked about volume 5m, selling prices was slightly negative. And then you talked about eliminations and restocking. Could you just explain that? I didn’t understand that.

Well, what you end up with, Frank, is the fact that in the first quarter we draws the inventories down as low as we can possibly draw them down. And at the end of the quarter in round numbers, the branch organization had something in say 500 units in their inventories. By the end of the first quarter they will have gone back up to say something in the neighborhood of 1,000 units. I’m not giving you, you know, absolutes. I’m giving you, you know, range of what happens. So we sold, you know, call it 700, 800 units to the branches during the quarter that went into stock at the branches. And that profit is not recognized until they sell that trailer to a third party. And so while the manufacturing business --

So the costs are there because you manufactured it, but you didn’t sell it.

Right.

Is that what it is?

Right. We just can’t recognize the revenue until it’s sold to a third party.

Okay, thank you.

Our next question is from Dan Shedivy with Basswood Partners.

Hi, good morning. I’ll keep to two brief questions. The first is still in the past you’ve commented that gross margin could be anywhere from 12 to 18% under the best of circumstances at the peak. What’s your outlook today? And maybe we can lock in one assumption and let’s say that raw materials kind of flatten out from here, never come down, but you are able to get the residual cost savings that you’re trying to go for, the full 24m I think Dick spelled out before. What’s your longer term kind of peak to trump gross margin outlook now?

Well, I guess I’m not really going to change as far as where we think we can be. The initiatives that we have, there’s no reason in my mind to change that range. I think Bob gave you the range for this year, mainly because we didn’t guaranty that the alternative sources would come all in in one year. We’ve been saying that it’s probably a two to three-year program. And Alpha, Beta and Gamma are coming down the stream. So, you know, I still feel pretty good about saying that we’ll be in that mid range of where we think we can be. And I think that if the cycle continues, and this is not a cycle that we’re going to see an appreciable peak, I think we’re pretty much in that level now possibly, with a little bit of a bump next year, you know, we’re going to start moving our margins up. We’re going to get into the low to mid teens, and we’re going to do it as fast as we can.

Okay. And then second question is, can you give any guidance on Transcraft profitability? And I guess adjusting for any other accounting changes in how you look at it, or how we should expect to see that come through versus how they may have accounted for things?

I think what you’ve got, Dan, is really on the latter question in terms of the accounting issues and the revenue recognition issues, the revenue recognition will work its way through the system primarily by the end of the second quarter. We’re going to have obviously a tail in terms of the amortization of intangibles. It will lessen next year, but this year I think it’s roughly about $4m worth of amortization that will track to the current year, partly because the evaluation attributable to the inventories on-hand and the backlogs in place when we purchased the business. So that will mask a little bit of the what the Transcraft business does. As Dick or Bill mentioned, business is very good for Transcraft. They’re producing very well. We believe that, and we’ve seen an ability to help Transcraft out, particularly from the supply chain side of the operation. We believe that there is also a good ability to help them out, as Dick and his continuous improvements troops help them work through some of the bottlenecks they have in the production and things like that. So those will be all positive.

Transcraft’s backlog is as positive as ours is. And I believe it’s a little better than where they were this time last year. Their margins are better than ours at present time. But some of that will get offset by the, you know, the non-cash charge associated with amortization. So we’re very upbeat on the outlook for Transcraft and what that’s going to do for Wabash going forward.

Sure. And I guess I don’t really care about the amortization impact. I was just trying to get a sense for, you know, on a GP or an EBITDA margin basis. It sounds like you don’t want to go there. I’m just trying --

I’d prefer not to go there. Because as small as this industry is, van trailers, theirs is smaller.

Yeah, okay. Fair enough. Can I ask one more brief question? And that’s your days receivable went down remarkably, which is, you know, fantastic.

That’s only a function of the --

It’s timing.

It’s timing. And, you know, we closed out the year higher than we thought we’d close it out. We saw a fair amount of cash come over the transom right in the first couple weeks of January. I think I mentioned that at the year call that we were north of $80m in the till. And collections were very good during the quarter. So that dragged it down.

Okay. Figured as much. Just wanted to ask. So, alright, thanks. I’ll jump bank.

Thanks Dan. Let’s just take one more questions, please.

Mr. Greubel, I show no further questions in queue at this time.

Well, that’s great. Okay. Thank you very much. You may disconnect your lines at this time.

This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time.