Wabash National Corp (WNC) 2006 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Wabash National Corporation second-quarter 2006 earnings results conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. William Greubel, Chairman and Chief Executive Officer.

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

Welcome to Wabash National's second-quarter earnings call. I am Bill Greubel, Chairman and CEO. In the conference room with me today are Bob Smith, our Chief Financial Officer who will discuss the Company's financials, and Dick Giromini, the President and Chief Operating Officer.

I would 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. At the conclusion of the prepared portion of our presentation we will open the call for questions from the listening audience.

The second quarter was adversely affected by implementation of our new ERP system. The system was turned on May 1 after over a year of intensive blueprinting and coordinated work with our ERP partner and an outside implementation team. We encountered systemic challenges that created ongoing issues with MRP, production, shipping and working capital. In addition during the quarter we were in the process of staffing oppositional shifts to support higher demand levels.

Issues associated with bill of materials and MRP resulted in ongoing material shortages and line outages, with significant increases in in-process work and labor expense. While material costs, particular aluminum, impacted profitability, the majority of our volume and margin issues were confined to ERP.

Our associates have worked extremely long hours to right the ship and we feel going into the fourth month of implementation that most of the critical systemic issues are behind us. However, there will be a tailing effect associated with our MRP process as we work through supplier lead times which will inhibit our ability to optimize our production system for the better part of the third quarter.

July was a difficult month. However we are seeing improvement in August which has allowed us to ratchet up build schedules on some lines. We anticipate continuing improvement going forward. As we stated in our prior conference call, we believe that our margin erosion was behind us. We did not anticipate all of the challenges associated with this startup. We absolutely believe this change was necessary and will eventually unlock process and cost savings as we go forward.

As for our business, our customers are for the most part understanding of this undertaking. However, from a modeling standpoint, we feel, given our current situation, advanced shipments for the third and fourth quarter should be estimated at 15,000 and 16,000 units respectively for a total of 55,000 units. Production shifts are in place and, although working at a slower pace, are ready to gear up as our supply chain comes up to speed.

Before passing on the remainder of the discussion to Bob, I would like to discuss a change in plan relative to raw material costs and customer pricing. It is our belief that the raw material and component increases that the industry has seen over the last two years are not an anomaly, but a realistic view of global supply and demand. Simply stated, we believe this trend will continue into the foreseeable future and as such, we need to factor this into our pricing models.

We will continue to aggressively work to reduce all costs associated with labor and materials through capital spending, alternative sourcing and ongoing product and process standardization. I have expressed many times that I believe trailer pricing has reached an inflection point and that our customers have the option to simply wait out pricing spikes by holding and maintaining their trailers for a longer period.

However, as the 2007 buying season approaches, we fully intend to true-up prior and future component increases in a similar fashion that our customers haven't been able to do over prior years. We recognize that some of our long-standing customers may have a problem with this. We will both have tough decisions ahead. As DuraPlate continues to win marketshare due to total cost of ownership, there will be increased opportunities to allow Wabash National to focus more on margin. Bob will now cover the financials followed by your questions. Bob?

Thanks, Bill. Good afternoon everyone. I will spend a few minutes on trying to provide a little color on the financial results that were put out on the wire this morning. Sales $334 million for Q2. We shipped 15,800 units. Income was $5 million or roughly $0.15 a share on a fully diluted basis. Included in the second quarter results was in the impact of Transcraft. They added approximately $36 million to sales on 1800 units and from an operating income perspective contributed slightly over $2 million.

Purchase accounting and revenue recognition conformance constrained what Transcraft was able to do in the quarter. For reporting purposes, income is fully taxed, affected roughly a 40% rate. However due to the NOL carryforward, no cash of consequence. Equivalent shares, 38 million used in the determination of fully diluted. EPS, this includes the effect of options and the convertible notes. The details are in the release.

During the quarter, no shares were repurchased under our share repurchase authorization which, up until recently, was capped at 2 million shares. That has been removed in the last several weeks. Let me just give you a little bit more. On sales, again, $334 million, consolidated sales 15,800 units. This is up from $262 million on 11,700 units in the first quarter of this year. And it is up $11 million from what we recorded in the second quarter of 2005.

On a segment basis, manufacturing sales were approximately $292 million. Retail and distribution, $48 million, and eliminations amounted to $6 million. When we look at the sales on a product line basis, new trailer sales all in $304 million, 15,800 units. That includes Transcraft. When I look vans, van sales amounted to $268 million for the second quarter of this year. We shipped and we finished approximately 14,000 units in the second quarter. This is up from the first quarter where we did $229 million in sales, shipped 11,700 and finished just about 14,000 units.

Overall again unit shipments were up. Transcraft was a positive contributor to it. Coming out of the mix from the first quarter was approximately 800 container units, a net increase of roughly 3100 units first quarter to second quarter. When we look at van trailers, the ASP from the second quarter compared to the first quarter was down a bit. While we didn't have containers, we did have more Pups and converter dollies which gives you a kind of a push in terms of the impact on average selling price.

On a units basis, sales to our core customers, our partners accounted for approximately 32% of the total units sold which was just a little bit more than they took in the first quarter of this year. In sort of a nutshell, we faced a competitive price situation and a customer mix that is skewed towards lower-priced customers.

Used trailer revenues, $14 million in the quarter. Units amounted to 1500 units. Dollars and units were down compared to where they were in the first quarter of this year. Availability for used units is tight. In the first quarter we had some trade packages we were working down and we don't have those currently.

The parts and service revenues constant at about $14 million in this quarter compared to the first quarter. Also, our other revenues basically leasing and freight, roughly $4 million a quarter. From a gross margin perspective, we were at 8.2% in the second quarter of this year, down from 8.7% in the first quarter.

Margins are suffering from the competitive pricing as I mentioned. Increased raw material cost, particularly aluminum which was up over 10% from what it was in the first quarter of this year. We did have a negative impact from the loss then or inefficient production related to issues with respect to our ERP and at the MRP piece of that. On a directional basis, hours per trailer increased approximately 5% in the second quarter, compared to what they were in the first quarter. And this cost us something like $2 million to $2.5 million in margin. Transcraft margins, even considering the impact of the purchase accounting, were better than the average for the Corporation as a whole.

Looking forward, as Bill mentioned, we are expecting to do 55,000 units for the year. We believe that the ASP will be stable to improving somewhat. Material costs, the trend has been generally increasing quarter-over-quarter. We expect that to continue as we go through the balance of the year. The initiatives that we have been working and continue to work on Alpha, CI, standardization, alternative sourcing will help, but it is a lot to overcome.

We are, as Bill mentioned, stabilizing our ERP system, but in the third quarter we will again be challenged. Production efficiency in July was off from what we saw in June and, while we take steps forward in August, it is a little bit of two steps forward, one back at the moment.

Transcraft again, they are hitting their expectations, and they will be positive for the year. The bulk of the one-off purchase accounting should be behind us, is behind us. SG&A was $17.7 million for the quarter and this compared to $14 million in the first quarter of the year. Transcraft quarter-over-quarter was $2.2 million higher than the first quarter. Amortization in that number was approximately $1.7 million. The SAP cost we incurred in the quarter primarily related to the implication activities that aren't capitalizable, approximately $1.2 million. All told, though, the SAP and the startup of the system was a $1.7 million impact in the second quarter.

We also had the impact of stock rewards which was about $600,000 and incentive compensation was a benefit compared to the first quarter of approximately $2 million. I want to point out that on an ongoing basis that the run rate for Transcraft amortization will be about $0.75 million a quarter and their SG&As would run just around $1 million a quarter. Again, the SAP startup cost should largely behind us so that -- should be behind us, so that we won't experience that $1.2 million cost in the subsequent quarters.

Interest expense approximately $1.5 million. The bulk of it was related obviously to the convertible notes. We did have borrowings on the revolving credit during the period. They averaged approximately $9 million for the quarter and interest incurred on that was just about $300,000. Foreign exchange and other were de minimis in the quarter.

Again the tax rate is roughly 40% for book purposes. Cash taxes because of the NOL carryforward, very de minimis. The EPS calculation is provided in the earnings release. Depreciation and amortization, $6.5 million in Q2 year-to-date, approximately $11 million, and we would expect the full year to be $20 million, $21 million. CapEx, $10 million year-to-date, again primarily related to ERP, the automated systems and maintenance capital.

For the full year we are expecting that CapEx will be in the $15 million to $20 million range. Headcount is running at approximately 2600 full-time associates as of June 30. For manufacturing, our -- looking at it on a full-time equivalent basis, our ratio is roughly 70/30 full-time to temporary associates in Q2. And that is a little bit more in terms of temporaries than in Q2 versus Q1. The ratio at that point was 75/25.

We ended June with a backlog of $594 million. That is down a little bit from the $610 million we reported at March 31, just reflecting the normal seasonal variations. Cancellations are obviously netted out of the backlog. When we look at it, vans account for approximately $540 million of the total, with flats just a little over $50 million.

Looking at the balance sheet, we ended up with $17 million in cash at June 30. Our liquidity, which is cash plus available borrowings under our revolving line of credit, $119 million. Accounts receivable was $128 million. And the days sales outstanding was approximately 35 days. We did experience some billing delays as part of the implementation of our ERP system. We believe that those are behind us, but it is probably added some number of days to our receivable at the moment.

Inventories amounted to $180 million at June 30, up from the $154 million we reported at the end of March. When we break down the inventories, raw materials amounted to $66 million, which is $17 million more than we had in March. Work-in-process, $19 million, $2 million dollars more than we had at March. Finished goods, $75 million, which again $10 million more than we had at the end of March. Parts was even at $5 million in both periods and used trailers $15 million, down $2 million dollars from March. Of the total inventory, Transcraft accounts for roughly $11 million of the total.

We built raw materials against cushion against raw material increases. The increase in work-in-process is a function of some of the issues we have been dealing with in terms of material MRP system. Finished goods are up, in part due to the delivery issues that we have -- that we've been having with customers. All told, we have approximately 5300 units in finished goods and work-in-process at June 30. And that is up from 4400 units at March 31. So those numbers are van only units. By the end of the year, we would expect our inventory levels to be comparable to what we had at the end of 2005, give or take the impact of Transcraft. Other assets, basically the good will related to Transcraft.

Before I turn this back over to Bill, I wanted to advise you that because of the difficulties we have had with implementing the system and getting our processes under the type of control we want to have, that we are looking at reporting a material weakness related to this. In order to ensure that we were in conformance with GAAP and fairly stating our results for the periods, we did perform extensive analysis and recalculations and reviews, particularly related to inventories and cost of sales and made the appropriate adjustments to those accounts to have the appropriate reporting. We have a remediation plan in place, and we are expecting to have these issues resolved over the balance of the year. With that, I'll turn it back over to Bill.

Thanks, Bob. As you know, the Board has voted to amend our stock repurchase program. In addition, as our window opens, certain key executives, including myself, expressed desire to purchase additional shares. In our quest to improve our quality and our process, we have stumbled. I have never pointed or shifted the blame. These are internal, controllable issues which I accept responsibility for. Be advised that we have and continue to work excellent initiatives that have already improved our business with significant momentum going forward. Our focus for today and the immediate future is on our transition to the new ERP system and moving this Company profitably forward. We still have positive wind in this cycle and intend to take every advantage of it. We will now open the call to questions. Operator?

(OPERATOR INSTRUCTIONS). Peter Nesvold, Bear Stearns.

Let's see, early on you talked about revisiting pricing in the backlog. But then later in a call you also talk about how pricing right now is pretty competitive in the industry. So how you reconcile those two things? How do you go back and ask the customer to make you whole on the raw material increases if the guy down the road is willing to do it cheaper?

Well, I think, Peter, in some instances especially with some of our partners, I think the guy down the road should probably do it and let them see what the industry looks like and manage that process.

We have a significant backlog. We are not necessarily intending to go back. We're going to fulfill a lot of the promises that we made to most of our customers, but as you know we are beginning to 2007 buying, season. That really is beginning in earnest right now. The numbers are -- let me put it this way. The quotations are coming in quite heavy. And we intend to true up on '07, so some of the folks that we have been dealing with will see a very significant increase. If they choose to go to the guys down the road, then maybe that is what is necessary. And I think once the guys down the road start doing their business and understanding what it means to sell composite trailer to a very large fleet, maybe they will reconsider some of their actions.

But at this point in time we think it is very important for us to tend to true-up on some of these costs. They are not going away. If anything, we're seeing indications that pricing is going to go up. So where we can, we will harvest a backlog like we have done and going into the next buying season, there will be some substantial price increases in the industry.

I think that view is probably more realistic than a lot of guys are talking about right now, with the expectations had been that steel would roll over. I tend to agree with you; I don't really see it happening yet. But I guess just to clarify what you're saying, does that mean that it is more going to be true-ups on order intake as they come in now for '07, or do you have orders in the backlog currently that you anticipate you'll have to go back and revisit the pricing?

This isn't something that we just started today. Dick Giromini and Bruce Ewald have been working this process probably for the last three months. And so I would say for the immediate backlog that we are looking at in terms of days and weeks, we are probably going to hold for the backlog that goes a little bit further than that. There have already been price increases that have been put into that.

Maybe switching gears for a second. You mentioned that July started off weakish in terms of production. But I guess when I look at just the drive-in numbers you're talking about, you produced and shipped 14,000 in 2Q. You are talking about producing 15 and delivering 15 in 3Q and then 16 in 4Q. So if you have gotten off to a weak start to the quarter, what gives you the confidence that for the quarter, the production will be up 1000?

I'll let Dick answer that.

We have been seeing over the last couple of weeks and the comments that Bill had made earlier about August showing some improvement. We have been seeing the last couple of weeks improvements in what we're -- the visibility we have with the ERP system and the integrity of the information in the MRP and the supply of components as a result of that. So we're starting to see some improvement. We are not out of the woods yet on that. We are not at the levels that we had expected to be at this time last quarter, but it is improving.

The other thing that I should point out in Bob's comments, he shared that inventory is up some $10 million over previous quarter on finished goods. We also have an increase on the work-in-process. Those additional units will be helping to support the shipment projections as we go forward through this quarter and next quarter also. We picked up almost 1000 units quarter-over-quarter.

And we have -- you know, the workforce is in place. It is not going out and hiring anybody. They are just running slower. And so as MRP comes on and we have reliability and product coming in, we can start to boost the numbers, the production numbers rather quickly. So I think that it is all dependent upon MRP and the lead times that we have. As that product becomes more reliable, then we'll start boosting up the production.

So if your inventories, finished goods inventories ticked up 1000 at the end of 2Q, but when I look up the ACT numbers, they show drive-in inventories coming down pretty solid. I think it was like 22% sequentially from May into June. It's telling me that your competitors are probably delivering on more timely.

If you are pushing out some production, have you started seeing any cancellations yet? Your customers, there has got to be some frustration right now. If someone wants a trailer, they are not getting it when they originally thought they were going to. I mean what's the double risk of the backlog here that you get some frustrated customers on the timing front?

Well, there is no doubt that we have frustrated some of our customers. We talk to them on a daily basis to advise them of what we are doing. As far as lost orders are concerned, I think they are very minimal, probably less than 100.

And I guess a question for Dick because this has been a little bit of your baby. On the automation side, at what point do you say, you know what, this has never been done in this industry before and it has proven to be harder than we thought, and do you pull the plug on it? It doesn't sound like you are there yet. But is there a point at which you just decide that automation really isn't for this industry?

No, absolutely not, Peter. I'm as confident today as I was a year and a half ago when we first announced our decision and desire to pursue this. Anybody who is the pioneer in any kind of an effort like this is taking on the added risk and challenge to work through the issues. And we are going to get through those. There is no question in my mind that the decision was a good decision to put the Alpha line in. We have had some good success with it.

While we are not at the levels of throughput that we want because of nagging downtime-related issues, the cycle rates are at about 85% of what our original target rates are. We just have these nagging downtime issues because of the complexity. We are working through those. We are working very closely. Our team is working closely with our engineering design partner to work through those issues. And sometimes you do take a few steps back as you are going forward if you have some pieces of equipment that need some level of redesign or increase the robustness of the designs.

But I will say this. The product that's coming off that line is the highest quality, highest precision best fit and finished product in the industry. And that is the feedback we are getting from customers who have taken on the risk of being some of the first in the industry to have the Alpha trailer. So we are very proud of the product that is coming off the line. We just need to work through the nagging downtime issues to get the consistency of the line on a day-to-day basis. But, no, we are not anywhere close to being at a point of cutting bait on this line.

Can you -- I guess, you know, I don't want to get into an engineering discussion because you'll lose me very quickly, but are you able to dumb this down to a finance guide level) And just help me understand why -- I mean it's going to be a year late. And I completely respect and I do believe that the quality is going to be great. And I have seen some of the videos and when the thing is operating, it is pretty impressive. But at the dumb finance guy's level, what has been the primary handful of issues that resulted in so much downtime?

One of the issues that you get into is that since it is a fully integrated system, that if you have any single station in the system that has a downtime issue that takes an extended amount to fix, the line is down. So you have situations where there may be three and a half or four hours on a single station. During that four-hour time period in a shift, you are getting no other advancement of the line. And those are some of the issues that during early startups that you end up facing when you have new equipment.

We can't just take the trailer offline and finished it. It is a fully integrated system. So we are working through that. But we are producing trailers every day. It is not like the line isn't producing product. It is out there. It's just not at the throughput levels that we need to get to.

I will ask one quick question and then I'll jump back in the 2Q. It sounded like you produced and shipped 1800 flatbeds in the quarter. Bob, what are you assuming in 3Q and 4Q?

I think they're going to be in a similar range, Peter. I think what we have said to you guys in the past is that Transcraft will do something in the neighborhood of about 6000 units. They are certainly on track to do that. They have a backlog that generally supports that total amount and in all of the gloom, they are a bright spot.

Great. Thanks for the time.

Kevin Maczka, BB&T Capital Markets.

A question on the gross margin line. Some of the things you talked about that drove it down again sequentially pricing, raw materials, the ERP issue, of course. Most of that will bleed over into the second half. Maybe you talked a little bit about the pricing and revisiting the backlog there, but my question is can gross margin be better in the second half than it was in the second quarter?

I think the answer to that is, Kevin, yes, it can be better. I think the key to it will be, as Dick and Bill mentioned, is how quickly can we get the stability going in the MRP system and move the line speeds up to what we would like to see.

The issue that we faced a little bit of is that we do see improved productivity coming off the line, and we will see four good days and one bad day. We are just not at a point where you can say, well, we are going to have a good week after a good week after a good week. We're still suffering from that. We don't know exactly when something will crap out on us a little bit. So we are fighting through that.

We should and I think we are seeing better efficiency on the line. We have total focus on what needs to be done to get the MRP -- the ERP system stabilized. And that is being worked very diligently (technical difficulty) aluminum if we could catch a little break on that, that would be a nice positive. The last two quarters has been basically up 10% or 12% in Q1, up another 10% or 12% in Q2. And finally we have seen the darn thing down about a nickel or so into this quarter.

A production that we have, the opportunity that we've foregone because we haven't been able to run the lines, plus the impact of the inefficiency on the lines would go a long way to make an improvement in Q3 and Q4, even if prices don't move at all.

Mark Bishop, (indiscernible) Company.

I have got a few things. First of all, I guess you're hoping to make or to sell 16,000 trailers in the fourth quarter. Does that mean that you could -- could you sell that on like every quarter next year or more than that, or -- which would mean you could kind of get back what you planned to make this year and lost and then continue on your share gain from that higher level, or is that kind of optimistic thinking?

No. Certainly we can produce 16,000 trailers on a quarterly basis. As the MRP is up and running, we should have the capability and capacity to produce more. We haven't talked about what our estimate is for 2007, but I will tell you that some of the orders that we typically could have built in '06, we will build in '07. And then on the flip side of that, Mark, is just the issue that, as we raise prices, one would assume that some of the customer base we have now is not going to stay with us. We will also supplant that somewhat with another group of customers, but to answer, your question we can run 16,000 units quarter in, quarter out. And quite honestly have every intention of trying to do that.

Okay. And then, let's see, I was wondering also if you could quantify --you said you intend to raise some price to try to make up for some of the hits that you've been kind of eating, I guess, on the raw material front. I was wondering if you could kind of quantify what the hit has been or what it might be according to your projections for 2006 that you would hope to make up in pricing in the aggregate in 2007 from pricing.

I would love to answer that question, but there are just too many of our competitors listening at this period. So I think, if you don't mind, I will just pass on that.

Okay. In that case do you have any kind of target operating margin that you think if you got things running reasonably smoothly you would hope to get to sometime in the next couple of years?

Well, in the next couple of years there are a lot of things can happen to this business including a cycle. But we think that certainly looking at 2007, as the industry continues to move forward, we think that growth-wise for the industry, it is probably going to be either a push or a small increase. We still believe that we can achieve the margins in excess of 10% to 12% over the coming 2007 quarters.

10% to 12% on average for 2007, you think?

We're not -- we're just saying that that is where we believed all along. I am a little bit gun shy right now, considering my prior history, but we fully intend to try to exceed that if we can.

Okay. And then, let's see, also on your automation. First of all, are you the only ones doing similar type of automation? Like, are your major competitors similarly automated, or is this going to put you ahead of them if you ever get it working?

And then also you stated before that you're hoping to build another two of these lines at some point. I don't know if you're still planning to do that. And I think you have also mentioned that you might have some alternatives to building the fourth line you had talked about doing at one point. I was wondering what kind of alternatives you might have instead of building all these automated lines?

Okay. I will try and answer all those questions, maybe not in the same order you asked them. But first off, it is not if but when. We will get this line running effectively. No one else in the industry is trying to do the kinds of things we are doing. The majority of folks in the trailer building industry approach a very highly manual approach. And we strongly believe that there are a lot of the highly repetitive tasks that machines can do better than people can, consistent, over and over and over again.

So that is one of the reasons we embarked on this. There is a consistency and repeatability and dimensional accuracy issue associated with it so you get a higher quality, higher precision product off the line. It does take a challenge. But it will -- in fact, if you were to talk to other people in the industry, this line puts Wabash far ahead of the competition as far as the use of technology in the manufacturing process.

Talking to be future lines, we are continuing to gain our learnings from this first line, and we will take on the next line when we are ready to, when we feel we have gotten through the learnings that we need to on the alpha line, then we will take on the second line.

And then your final comment relative to that we had some other ideas on what to do on some other lines. I am not sure what that comment was referring to, but we had looked at converting existing lines rather than a completely start from scratch, like we did on Alpha and do upgrades where we get the biggest bang for the effort. And that may be what you are alluding to and we are looking at that on other lines. So it could be a combination of brand new starts or conversions of existing lines to upgrade and take advantage of the best of the technology.

Peter Nesvold, Bear Stearns.

Just wanted to ask briefly about the CapEx guidance. Let's see, I think you said 15 to 24 for the year. Previously it was north of 30. Is that some of the other automation projects getting pushed out?

It is just a push out, Peter. Just at the right at the moment we are in a holding pattern, as you might imagine.

Sure, it's understandable.

We have got CapEx for maintenance type activity.

And then last question. Do you expect you're going to get the 10-Q out shortly, within a few days or so, or is there some other reason why we won't --?

We would expect it to be filed the first part, first couple of days of next week, Peter.

Terrific.

I am showing we have no further questions. I will turn the floor back over to management for any closing comments.

Thank you. We appreciate your patience. We don't intend to do this next quarter, and we will be back to you. We have got a lot of work to do. Thank you very much.

Thank you. This does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.