Wabash National Corp (WNC) 2007 Q1 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Wabash National Corporation's First Quarter 2007 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. Dick Giromini, President and Chief Executive Officer. Thank you Mr. Giromini. You may begin.

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

Welcome to Wabash National's first quarter earnings call. I'm Dick Giromini, Chief Executive Officer. In the conference room with me this morning is Bob Smith, Chief Financial Officer who will discuss the company's financials. I'd like to welcome all of the listeners on today's telephone conference call as well as those listening via live the Wabash National internet site webcast.

We have much to cover today and we'll try to provide as much information as possible. At the conclusion of the prepared portion of our presentation, we will open the call for questions from the listening audience.

Well this past quarter came in just about where we expected. While we would have liked a stronger start to the year, we basically did what we said we would do. As in all periods, there were some very positive results as well as some challenges that we faced. Of significant impact was a mid-February blizzard that grounded the Midwest for several days, restricting total shipments to some 11,000 units.

While slightly exceeding our mid-quarter update of a projected 10,800, this was mostly fueled by a solid ship quarter at our Transcraft flatbed business. Additionally, we continue to be plagued by legacy warranty costs associated with container product that we manufactured back in 2002, 2003 and have since exited.

On the positive side, our manufacturing operations both in Lafayette and in our other sites are performing very well, providing a high level of confidence going forward.

We still have plenty of work remaining in front of us. Gross margins still need to be improved. Overhead costs need to be optimized. Gross margin enhancement will come through continued focus on effective price management in the face of a slowing marketplace combined with our efforts in the area of strategic sourcing.

Thus far, our customers have in large part been supporting us, recognizing the added value that Wabash and our products bring to their business. The operations team is doing their part with safety performance at all-time levels, quality or process yield at best levels to date and productivity or hours per unit running at very acceptable levels. But we'll be asking them for even more.

The Alpha line is running much more consistently, now yielding the highest quality, lowest cost product in our arsenal. Currently running a single shift in Alpha, we're now positioned to be more aggressive in going after orders to fill the other open shifts.

ERP implementation issues are now behind us with focus having shifted to optimization and utilization.

The overall economy, while still in expansion, is clearly softening. Freight demand is relatively flat and housing starts continue to be depressed. While our backlog remains strong at this time, in fact increased almost 10% from the Q4 level, we remain cautious and are monitoring current quote and order activity very closely to assure that we can sustain this momentum.

We're seeing some customers pushing out their needs to later quarters or even into early next year. Thus far cancellations have remained modest indicating cautiousness rather than deep concern on the part of our customers as well. New quote activity has continued at a very active pace, actually higher than last year at this time. Certainly mixed signals.

We have heard recently of problems at some of our competitors with announced layoffs, reduced shifts, even idled plants likely indicating soft backlogs. So there is no denying that the market is soft.

ACT has again lowered their projections for the year. Now at 239,000 total trailer units versus our 243,000 projection, basically the same. Van units alone are now projected at 165,000 by ACT versus our 170,000 units. At this point, based on our current backlog combined with some nice opportunities that are being worked on, we remain confident that we can and will achieve our forecasted total shipments of some 52,000 units for 2007.

This current quarter will tell us a lot about the prospects for the balance of the year and next year. Key factors we are watching internally include quote activity, contract award activity, order cancellations and deferrals and relative size of orders versus projections among others. Externally in addition to the broad economic indicators, we'll be looking for a rebound in housing starts, improved truck tonnage levels, carrier profitability, continued low order cancellation rates and continued solid backlog for trailer OEMs. We are managing our operations in line with demand (inaudible) as may be necessary in the future. In the meantime, we remain focused on the current improvement initiatives as previously outlined in recent calls.

I'll stop here at this point and let Bob Smith, our CFO fill you in on the details behind the numbers. Bob?

Thanks Dick. Good morning out there. Just a quick rundown of the first quarter results. Sales were $259 million for Q1 on 11,000 units; 9,700 van units, 1,300 flatbed units. For the quarter we had net income of approximately $1 million or $0.03 a share diluted. For the quarter Transcraft added approximately $27 million to sales on 1,300 units.

Equivalent shares for the quarter were approximately 30,500,000 shares. We included the effect of options but excluded the impact of the convertible notes because they would have been anti-dilutive.

During the quarter, we repurchased 218,000 shares at a cost of $3.3 million or approximately $15.01 per share. Through today, we have repurchased approximately 1.1 million shares at a cost of $17.2 million or $15.17 a share. This is all under a $50 million repurchase program that expires in September of this year.

Looking at some of the details on the sales side, sales for the quarter again $259 million on 11,000 units. This compares with $354 million on 15,400 units in Q4 of last year and $262 million on 11,700 units in Q1 of '06. And making the Q1 to Q1, year-over-year comparison, recall that Transcraft wasn't in the mix until the beginning of March. And in reality because of the need to conform their practices to our revenue recognition practices, their sales were under $3 million and less than 200 units.

By segment, manufacturing sales were $239 million. Retail and distribution sales were $42 million and eliminations amounted to $22 million.

To recap by product line, new trailer revenues $233 million in this quarter on the 11,000 units. Again, compared to the fourth quarter $325 million on 15,400 and compared to the year ago $229 million on 11,700 units.

On a positive note, the ASP for the first quarter of this year was just over $21,000 per unit per trailer unit. And this is up from the $19,600 we were doing in the first quarter of last year.

Mix plays a significant factor in the ASP improvement when you look quarter over quarter. Last year as you might remember, we were in the last of the container business. And those are at substantially lower prices than a normal trailer unit. And in the first quarter of this year we had a higher percentage of refrigerated units which improves the ASP.

I think most importantly though the point (inaudible) like to have seen improving prices as we continue to push to recoup cost increases that have come through.

On the used trailer side, we've done approximately $9 million in the first quarter of this year on 1,100 units. Again this is compared to Q4 of '06 where we did $11 million on 1,500 units, but down quite a bit from Q1 of '06 where we did almost $18 million on 2,000 units. The ASP has declined from almost $9,000 a year ago to about $8,000 in this quarter, primarily a mix issue as we are selling a substantial amount of pup trailers currently.

Inventory is low in this business and it constricts our ability. We don't have the same number of trade packages that were available to us in late '05 and early '06.

The parts business has been running about $14 million a quarter over the last four to five quarters. What we've seen though is a bit of a decline in the retail side of the parts business and an improvement in-- on the manufacturing side.

Other revenues are primarily related to freight and have been running in the $3 to $4 million range.

Gross margin for the period was 7.8%. This is down from the 8% we registered in the fourth quarter of '06 and (inaudible) from the 8.7% that we did in the first quarter a year ago. As Dick mentioned, work to do on the gross margin area but compared to where we were at times last year, a lot better situation.

Again prices have been helping us in keeping the gross margin up. For-- certainly in the quarter we were negatively impacted by the impact of volume. Production was down as was sales. And this causes less absorption of burden.

Again remember in the first quarter of this year we had the additional week of shutdown at the beginning of January. And then the plant was down here for about three days in February due to the blizzard. We continued to see improvement in hours per trailer and substantial improvements in the process yield, but again overall production units are down.

We did take a $1 million hit in the quarter related to legacy problems as Dick mentioned.

Transcraft margins continue to be well above the averages of the company.

As we look out over the balance of this year, we continue to expect to achieve a 47,000 van unit total for the year and about 5,000 flatbed units.

ASP is expected to be stable to improving. Material costs so far have been reasonable. However, we expect to see some upward bias over the course of the year. And again we will be pursuing price increases to contain that.

The initiatives we've been working and will continue to work going forward are automation, standardization and strategic sourcing. As Dick mentioned, we continue to make good progress with the ERP system. We are working mainly on improving the efficiency of the process. We're still a bit in the investment mode and we're just starting to tap into the available benefits.

Transcraft again a positive contributor and as they get more fully integrated into Wabash, we think we have some upside opportunities there.

Basically in summary, 2007 has started slow but pretty much where we expected. And we're looking to see some improvement over the balance of the year.

SG&A amounted to approximately $17 million in the first quarter of this year or approximately 6.5% of sales. And this is down from the $18.7 million that we had in the fourth quarter but on a percentage basis, the fourth quarter only represented 5.3% of sales.

A lot of containment in some of the professional and other fees that were being incurred during the fourth quarter as we came out of some of the issues associated with the ERP implementation.

Compared to a year ago, SG&A is up from $14 million. Major causes for the increase relate to the increased spend on IT that I mentioned and some timing related to legal and other outside services.

Again, in the quarter Transcraft added about $700,000 to G&A. They didn't have much in the year ago quarter.

Interest and other expenses amounted to approximately $1.5 million. Borrowings under the revolving credit line have averaged about $3 million in the quarter. Foreign exchange mainly related to the Canadian dollar and other income were a non event.

Taxes represented about $900,000 of expense. The rate looks pretty high for the quarter but that's more of a function of income was kind of low and the components of the rate are not terribly dissimilar from what we've seen.

Cash taxes will be very little this year as we have NOLs available going into the year. We were carrying about $70 million in the federal NOL.

Depreciation and amortization $4.7 million in Q1 and probably will be in that range throughout the balance of 2007.

Cap Ex in the quarter amounted to $1.8 million, primarily related to maintenance capital. We're expecting low to mid-teens Cap Ex for the full year.

Headcount was approximately 3,800 full-time people as of March 31st.

And again as Dick mentioned, the backlog today stands at $558 million, up from where we were at 12/31, but down from the $610 million that we had at 3/31 a year ago.

Cash we closed out the quarter with $17 million. Liquidity which we define as cash plus available borrowings under our line of credit was slightly over $150 million at the end of March.

Receivables at $109 million were more or less comparable to where they were at December 31st. DSOs stood at 38 days.

Inventories, we've seen the normal buildup in the first quarter due to the seasonality of the business. Raw materials up a little bit from the end of the year. Again the normal creep offset in part as we work through some of the tires that we stockpiled at the end of last year because of the Goodyear strike.

Intangibles and other assets primarily relate to the Transcraft acquisition.

So with that I'll turn it back to Dick for his remarks.

Thanks Bob. Well in summary it's no question. It's a challenging market out there right now but we're holding our own. In fact, we're gaining some traction as evidenced by our strong backlog. Our efforts during the past several months are paying off. I'm pleased with where we are operationally in our manufacturing segment, as smooth and consistent as we've been in a long time, maybe ever.

We also recognize that if we were to create the kind of value that we all desire and expect, then we must grow our business in areas other than our core product of van trailers and platforms. Some examples that I can share include that we've extended and expanded our relationship with a body builder in the use of our DuraPlate panels in their manufacture of truck bodies. We're also working closely with our parts distributor, Aurora, to find ways to greatly expand the sales of our proprietary products in the aftermarket segment. The penetration of DuraPlate rear swing doors is at all-time highs with more and more customers, even of our competitors now requesting our DuraPlate door on their products.

And to address a subject that seems to come up frequently on these calls regarding our steel composite know-how license agreement with Alcoa, we're currently in discussions with our partner to address and even enhance this relationship for further growth. I'll update you all on these opportunities as they unfold and take form.

As I stated earlier, we still have plenty of work to do, but I remain confident that we are on the right path. In a nutshell, the future remains bright for Wabash National. We will continue to face challenges as any business does that we must be able to effectively deal with and we will. We have the-- many of the best in the business here at Wabash and they don't intend to let us down.

At this time, we'll take questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Peter Nesvold with Bear Stearns. Please state your question.

Hi gentlemen. It's actually Waymond for Peter. First question I was just wondering if you could go a little more in-depth into order intake. You said the 70-- that you booked 75% of your booking for the year. Can you compare that to recent years? And also I was wondering if you could kind of give us more clarity on how that's spread out among dry vans, [refers] and platforms.

Yes, Waymond the relative size of the bookings is not inconsistent with where we were a year ago, probably just a little bit, a little bit less than that. And from that standpoint it looks pretty good. Now the bulk of it is obviously tied to the dry van business because ours has a longer backlog most-- for the most part than the Transcraft business because there are more dealer-oriented, one-quarter-a-time type business.

Thanks. And I was just wondering, you mentioned gross margins, as you look forward kind of as we're trying to model this, are we-- can we expect it to stay in the 7 to 8% range for a long time or almost indefinitely? Or what's-- I guess what's the catalyst that's going to really get them moving?

Waymond, we would expect-- we would expect improvement as we go forward. I just-- I will remind everyone that the first quarter was challenged due to the extra week out that we took at the beginning of the year and also the blizzard which impacted the total volume levels that we were able to produce and ship. Second quarter and going forward we expect improvement as we work toward achieving the 52,000 total unit shipment level that we talked about earlier.

We don't have this year the challenges of the ERP implementation and we've come a long way in refining and improving the operation of the Alpha line So those were two challenges that were faced last year that don't exist for us this year.

Additionally, the work that our supply chain team has been doing with some of our strategic sourcing efforts are taking hold. So we should see some benefits reflected this year from that that we didn't last year. And all the work that was done over the past several months in driving pricing should have a net benefit to the business.

So there's a lot of things, a lot of good initiatives that have been underway for some time and a lot of issues that were addressed last year and behind us that should translate into improved margins as we go forward.

And kind of cause you mentioned the Alpha line, really just two things on it. You've always mentioned before that once-- it sounds like you're going to start adding other shifts as volume demands to be met on the Alpha line. You've mentioned that you would consider going forward with other lines. Where are we kind of in that process or in that decision? And then kind of how-- what type-- can you guide us on like what type of margin improvement we should expect to see as the Alpha line ramps up further?

Yes I wouldn't put-- I'll answer your second question first. I wouldn't put any appreciable margin tied to Alpha. It allows us to provide a higher quality product. We do gain some efficiencies but there's a-- there is a cost to the investment. So I'd just leave it at that. And it's from a volume standpoint, it's small relative to the total volume of the business.

But it is a very good product for us, very high quality and has created some wow factor with customers that they now want to get the product. We need it to work through some of the inherent downtime issues associated with new and-- new type technology like that. And we've gotten that behind us and are now ready to be more aggressive in filling that capacity.

So and that's where we stand on that. As far as going forward with other lines, what we talked about in previous calls is that we're trying to take the best features that we've learned from our Alpha effort and translate those to other lines as we either upgrade or add lines. So we're in that process. We're going through the evaluation phase. And that's all I can report at this time.

Okay thank you and then just one last question. We've heard differing reports on commercial tire prices. I think I spoke to your briefly on this Bob. I was just wondering have you seen and appreciable in the-- either the availability or has there been a significant increase or decrease in tire prices that you've seen out there?

Yes there's been announced increases by most of the majors of-- in the 4 and 5% area. We have been-- we have done a good job in keeping those increases from affecting us. But I know there was talk someone saying upwards of 10% price decreases. We don't see that. We don't know of anyone who's realizing that. It's on the contrary. The raw material costs are continuing to increase for the tire manufacturers, combined with the increasing energy costs. And they're pretty much consistent in saying that there's increases upwards of 4, 5% rather than decreases that are on the horizon.

Okay, I'll jump back in queue. Thank you.

Our next question comes from John Barnes with BB&T. Please state your question.

Hey, good morning guys.

Hi John.

Can you just give us an idea, you know we talk to a lot of people about what the demand outlook looks like. And I recognize that it's a little slow right now. I guess I was a little surprised at how well pricing held up. Just give me your ideas on how long do you think pricing can hold up if this demand picture were to weaken further? I mean if this freight volume doesn't recover or there's just no follow through on the Cap Ex side by the, you know by your customers, how long can pricing hold up at these levels or do you think pricing's really an issue right now?

There's some challenging pricing actions going on out in the marketplace. A lot of our competitors are solely dependent on dry van sheet and post business. Others who are better balanced with a refrigerated product have some balance in the market in what they serve. But there are some folks that are looking at ways to fill capacity.

We've been very successful, one is the relationship that we have with our customers. Secondly, is the value that our customers put not only on a relationship and what Wabash brings to the party, but also on the quality, durability, and performance of our product. And they've been supporting us through this.

It's difficult to say if there's a severe decline in demand then it can change dramatically. But with the type of backlogs we're seeing now and even though demand levels are somewhat soft, we're-- our-- we're able to keep the prices at the level they're at. So it's kind of a wild card question you're throwing out there. And it really has a lot to do with how deep the downturn would be.

At this point, we're-- we remain cautiously optimistic that there's a-- there's some softness but we're going to be monitoring all the indicators. And right now cancellations, which is a key indicator, remain in single digits, which is a good omen.

Very good. I recognize some of the challenges and in the first quarter especially on the weather side. I mean we've heard that from the carriers as well. But I'm curious, if demand were to weaken, I mean you almost hit your goal. I think your goal was what? 11,000 units, you came in at 10,800. You know you had-- we didn't see the margin quite improve the way we had hoped.

I'm just curious that, if you kind of got stuck at this level of production given the weakness in demand or that cancellation rate were to spike up a little bit and all of a sudden you were more in a 9,500 unit level. I'm not looking for the margin improvement question, but I'm just curious as to how much dollars-- how many dollars can you actually pull out of this business in terms of cost and protect what margin you currently have right now? And then at what level of production and delivery? Is it 12,000 units that we really start to see incremental margins kick in? Is it closer to 11,000? I'm trying to gauge where the level of production has to be to really kick in for margin improvement?

Yes, you're really-- you're breaking up significantly there. But just to correct your first statement, our projection was for 10,800 and we did end up shipping 11,000. But nonetheless those are-- that's a pretty complicated question that you asked there without going through some in-depth analysis.

Our team is cognizant of the responsibility that they have. And the leadership team is continually looking at contingency planning and what it would take in the event that there would be a significant downturn. I don't have any numbers that I have at my hand here to share with you nor would I share any of those types of details. But I can assure you that we would do everything in our power to make the necessary corrections to the infrastructure of our business so that we could remain viable and profitable.

I think it's important to remember John that there's an awful lot of variability or variable cost in our cost base as you've been through the facility. You know that it's not highly machine-intensive. So there is a fair amount of flexibility to adjust down. If you expect that a continuing level of production at-- of where we are today, we'd obviously be doing some things because we're staffed at a level that has the expectation of getting up to the 52,000 units for the full year. So--

We-- real key John is we do have a very solid backlog and we do have some very nice opportunities that our sales team is working on. And at this point, we have a high level of confidence that we will meet the projection for the 52,000. So it's certainly not a doom and gloom. And we're hearing a lot of mixed signals out there. And we talk to our customers all the time. And some are feeling very good about where they are with their own order levels. And some are feeling a little bit of pain. But overall it's not a doom and gloom situation. It's one of cautiousness and we're watching it and monitoring it very closely.

All right yes and I kind of feel the same way. I don't want to come across as being doom and gloom and thinking your business is going to come to a screeching halt. I just-- I'm also in the camp that doesn't believe we're in for this material second half rebound and freight volumes is going to lead everybody to be right out there. I just-- I'm not a believer in V-shaped recoveries I guess. I tend to think things take a little bit longer and there's no signs that I've seen yet that suggest that there's going to be this monster increase in freight out there that's going to just revitalize demand for equipment either on your side or the tractor side. And again I'm-- I just want to make sure that you guys have your arms around-- okay hey we know exactly where the dollars are to protect our margins. And I think you say you know where they are, the contingency plan's in place.

Yes that's (inaudible).

Last question I had for you was you mentioned as part of the gross margin discussion earlier, the benefits of some of your strategic sourcing. Could you just go into that a little bit? Give us just a couple of examples of where you've seen success so far in your sourcing efforts?

Yes we've been able to yield some nice benefits. And it's not just on the direct material side but I've done a lot of work on our-- the indirect material, the MRO side of the business. And have generated multitude millions in savings that we should start seeing benefit.

Some of those took effect early in the year. And some are taking effect as the year progresses. And as you understand as you do these negotiations certain agreements and at different times throughout the year, and we'll start seeing those benefits.

We have some sourcing from China that is taking place. I choose not to get into too much detail on that at this point. But we've made some nice progress there and we'll be releasing a nice order to the folks over there for a piece of our business. And domestically we've done some nice work on steel contracts and making progress on getting some protection at least tracking to steel indexes so that we don't have the wide swings and completely dependent on spot market. And have done quite well at being able to actually be where the market is.

So without getting into a lot of details, there's some good work that is being done by that group. And we should start seeing some of the benefits as we're going forward.

I mean are you able yet to quantify what some of those savings could be? I mean are we talking-- are we talking low million dollar range or are we talking ten million dollars?

We would expect that we should be able to be a-- and there's a wild card out here. As I'm saying this, I'll throw the old caveat out. And that's, what happens with commodity costs in the broad market? And those are the-- when those things happen, we end up getting hit with surcharges and then there's always a lag effect even when we try and push those costs through in the form of price increases to customers, you have a lag effect. But assuming a more flattish environment then we would expect to be realizing upwards of a double digit savings for the full year timeframe.

But again, I'm hedging on that a little bit because I'm reading about aluminum expected to go up 11% this year, throughout the year and steel over the last couple of months has up ticked again.

All right. Thanks for your time guys.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Mark Bishop with the Boston Company. Please state your question.

A couple things. First on that last comment you said double digit, does that mean millions of dollars?

Yes our expectation is that we should see somewhere in that $10 million range of savings as a result of the efforts that we're trying to pursue. Now will they all impact this year? That's a matter of timing and volume etc. So it's difficult to translate that at this point.

Okay so $10 million, is that the total savings ever or within reason, I mean maybe get a little more over the long term but-- or is that just this year's and then you have another similar amount next year? And then I have my real question.

Mark it's really just-- it's a working number based on where we are today, what's in place, what we expect to be in place. And obviously it's something that we're going to be continuing to pursue year in and year out, day in and day out. So--

But the goal is the $10 million and then if you get something else, you'll continue to pursue it. But it's not $10 million this year and another $10 million next year? And-- is that a fair characterization?

We're 24 months down the road. So we're working-- we're working on the $10 million this year. And you know as Dick said, we're-- that's in a flattish commodity environment. Of course if the commodity environment starts to go up, that $10 million dissipates pretty quickly.

Yes, okay. And my real question is on your inventory seasonality--?

Yes.

Historically in the last-- it's about normal for the last two years maybe when things were going up or in a pretty good environment. In the prior two years, when you had first declining environment and then maybe bottoming environment, you had no growth inventories sequentially. And I was wondering if there's a point at which you will start to-- at which if the environment doesn't improve, you could start generating significant cash flow?

I think what you need to remember Mark was we're building trailers against customer orders. We build very few trailers on a speculative basis. We build trailers in the first quarter for our retail operations and we will also make those available to some of our dealers for their stock-type trailers as need arises. And these are, you know I think something in the 1,500-unit range during the course of the first quarter were produced on that type of a basis. So all other production is tied to specified customer order. And as we go through the balance of the year, the percentage of production dedicated to a customer is much higher than it is in Q1. And so one, we're not building on speculation. Two, we're building to customer orders. And if demand starts to come down, you'll see that inventory start to come down.

Okay. Thank you.

You're welcome.

And there are no further questions at this time. I will now turn the conference back over to Mr. Giromini to conclude.

Well I guess that concludes our session for today. I thank you all for your participation and again we remain confident. We have a very good team here. And we expect to be successful throughout the balance of the year. Thank you all.

Thank you. This concludes today's conference. Thank you for your participation.