Wabash National Corp (WNC) 2007 Q2 法說會逐字稿

Greetings, and welcome to the Wabash National Corporation Second Quarter 2007 Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Dick Giromini. Thank you, sir. You may begin.

Good morning. Before we begin, I would like to make an important announcement. As with all of these types of presentations, this morning's contains certain forward-looking information including statements about the Company's prospects, the industry outlook, backlog information, financial condition and the like.

As you know, actual results could differ materially from those projected in the forward-looking statements. These statements should be viewed in light of the cautionary statements and risk factors set forth from time to time in the Company's filings with the Securities and Exchange Commission.

Welcome to Wabash National Second Quarter 2007 Earnings Call. I am Dick Giromini, Chief Executive Officer. In the conference room with me this morning is Bob Smith, our Chief Financial Officer, who will discuss the Company's financials. I would like to welcome all the listeners on today's telephone conference call, as well as those listening via the webcast.

We have much to cover today and we will try to provide as much information as possible. At the conclusion of the prepared portion of our presentation, we will open the call to your questions. Overall, the second quarter performance met most of the expectations that we had set for the period. Despite a lower shipment level, we were successful in achieving incremental improvement on our gross margin, posting a 9.4% margin this quarter, compared to 8.2% in the second quarter of 2006.

This was accomplished as a result of the continued focus and successful execution of our manufacturing process improvements and margin expansion initiatives. Another bright spot this quarter was the performance of our flooring operations, Wabash Wood Products, and our flatbed business, Transcraft, both of which reported high productivity and strong overall performance levels.

However, macro-economic and industry-related headwinds continue to get stronger as the overall freight demand environment remains sluggish showing minimal signs of recovery for the balance of the year. Despite this overhang, we view the current environment as an opportunity to build a stronger, more profitable foundation from which to grow longer-term.

We are taking steps to size our business to reflect the current demand environment, but we are doing so with a longer-term view to ensure that we continue to benefit from our efforts beyond the current cycle. We are committed to maintaining the momentum that we have worked so hard to generate over these past several months.

I would like spend just a few minutes discussing the current environment affecting the industry and our outlook for orders through the balance of the year. There is no question that the overall economy has slowed significantly, particularly in housing starts, which is a strong forward indicator for trailer demand. This is despite the improvement in the second quarter of the GDP of some 3.4%.

Even the seasonally stronger housing starts for this past quarter are off some 30% from the same period two years ago. Current freight demand levels reflect this slowdown and appear to be tracking the ATA Truck Tonnage Index at a level still 8% lower than the high point of two-and-a-half years ago.

As most of you know, ACT Research has again lowered its trailer market projections for the year, now at 234,000 total trailer units, which represents a 16% year-over-year decrease. Vans-only units are now projected at 161,000 for the year, which represents a 17% year-over-year decrease. And at this point, ACT expects a slow recovery into 2008, with a 4% total trailer market increase next year.

I had previously stated that we were remaining cautiously optimistic about a second half recovery, while closely monitoring quote and order activity among other key indicators, which Bob will cover in his section. Unfortunately, it has become evident that the market is not going to recover in the second half of the year as many customers take a wait-and-see attitude and push out their requirements into next year.

Based on our backlog and some specific opportunities, we have been optimistic about reaching our forecast for the year. While we did close a number of those opportunities with additional awards coming in after the quarter closed, the actual volumes have come in lower than initially expected. As customers' requirements change due to the slower freight environment, the number of trailers ordered has decreased accordingly.

That all said, our current expectation is for third quarter shipments of approximately 12,500 units, and we are adjusting our full-year expectation from our previous plan total of 52,000 units to our new expectation of 48,000 units. While we have reduced our expectations for 2007, we remain optimistic that 2008 will see a return to growth in the trailer market.

Let me shift gears now and talk about some of the initiatives we continue to work out to build a stronger, more profitable foundation from which to grow longer-term. I will start with the highlights of our manufacturing process improvements. First, the safety performance in our factories and branches continue to show incremental improvement, with our main manufacturing operations in Lafayette running at [incident] rates less than half of the industry standard.

Related to the focus on safety are the improvements in workers' compensation costs at our Transcraft operations, which have reduced significantly over the past year. In addition, the quality fit and finish of our products as they come off our assembly lines continue to set high standards and recently reached all-time highs for process yield. Productivity, as measured in labor hours per unit, continues to show month-over-month improvement and at rates far superior than prior to our ERP launch last year.

Lastly, the Alpha line continues to perform well with both unit costs and quality now the best of all assembly lines, albeit at reduced staffing and throughput levels reflective of the lower demand for Alpha line product at this time. While we haven't yet realized the full financial impact that we originally anticipated from this, it is clearly now our lower cost line, and we expect this to marginally improve going forward as Alpha line product volume picks up.

In addition to our successful execution on the manufacturing process improvement side, we continue to make meaningful progress on our margin expansion initiatives. The aggressive strategic pricing initiative that we set in place late last year geared to attain pricing levels that capture all previous commodity and components parts cost increases has been effective despite a very challenging pricing environment.

While we have had to manage our expectations as the market has continued to soften, I am pleased that the progress we have made as ASPs have outpaced materials by over 200 basis points thus far this year.

Our strategic sourcing initiative that we instituted last year to offset the impact of rising raw materials costs through effective pricing negotiations, resourcing, and offshoring are paying off with year-to-date savings exceeding $8 million. We still have some runway available for additional gains in this area and are projecting full-year savings of $16 million in 2007.

Lastly, our ERP system is operating very well and has been since last October. While we had some issues on the front end, they have been worked out and the system is running smoothly. We continue to gain more and more leverage with the system as we learn to extract information that allows us to gain better understanding of our business than ever before. While difficult to quantify, these benefits will continue to grow over the coming months and years.

While these initiatives I just highlighted have yielded substantial improvements in our business, there is certainly more work to be done to ensure that we are able to profitably manage business through this slowdown in the market, and build a stronger foundation from which to grow longer-term. I have asked for and received the commitment of the senior management team to pursue this goal.

Together, we have the opportunity to successfully navigate the challenging current environment, while positioning the Company for long-term success. While we have a number of initiatives underway within the organization, following are a few of the key decisions we have made to help in these efforts.

An immediate freeze on all new hiring, only mission critical openings will be filled; elimination of all temp salary positions; reduction in overall staffing levels, both hourly, associate and office positions; and lastly, we will be closely evaluating and limiting all discretionary expenditures for the total Company.

All told, we have targeted indirect spending reductions of some $10 million net of any related costs for the balance of the year over and above the reductions that have already been made throughout the first half. These are never easy decisions to make and I certainly understand the impact that this will have on our workforce, both directly and indirectly. I appreciate all of our associates' efforts and assure that we will handle this with the utmost of professionalism.

Beyond our efforts to improve our manufacturing process and reduce our cost footprint, we remain focused on assembling the finishing touches to our long-term strategic plan. This plan will be focused on value creation and will serve as the roadmap we will follow to enable profitable growth of our business during the next five years and beyond. I look forward to sharing the highlights of this plan with you later this year.

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

Thanks, Dick. Good morning. We will take a walk through some of the details as Dick suggested, and try to provide a little bit of color on the quarter. Sales were $295 million in Q2, 12,500 new units. That was 11,200 vans and roughly 1,300 flatbeds for the quarter. We had net income of $5.9 million or $0.18 a share on a fully diluted basis. Equivalent shares used in the calculation, 37.2 million shares. The details, as usual, are in the press release.

During the quarter, we purchased 273,000 shares at a cost of roughly $4 million or approximately $14.70 a share. So under the repurchase program that had a $50 million target, we've bought back about 1.6 million shares, $24 million at a cost of $14.95 a share. And as you most probably noticed, the Board extended the authorization for an additional year, so it will run through September of 2008.

Let me just go through some of the sales details. Sales, $295 million on 12,500 new units and this compares to $259 million on 11,000 new units in the first quarter of '07, and it is down from the $334 million on 15,800 units we did in the second quarter of '06.

When we look at it by segment, manufacturing sales were $269 million on 12,400 new units, predominantly manufacturing, $240 million, and Transcraft was just a tad under $30 million in sales before intercompany eliminations. The retail and distribution business did $41 million in sales on 700 new units, and eliminations amounted to $14 million, which represents roughly 600 trailer units.

When we look at the business by products, the new trailers revenues, $265 million on 12,500 units. The average selling price was about $21,200 per unit. This compares with $233 million on 11,000 units for an ASP of $21,200 during the first quarter of this year. And compared to the second quarter of last year, we were at $302 million in sales, 15,800 units with an ASP of $19,200. So we have appreciably improved the ASP per unit since a year ago.

We are seeing the push to improve prices show up in our ASP, and we also show a little bit better because we have increased the percentage of reefer units that are in our sales mix. Partner business, our core accounts, were just over 30% in the second quarter of this year and that is up about almost 10% from where it was in the first quarter of this year.

Used trailer business, we did $13 million of sales in the second quarter on 1,500 units. This is up from $9 million in the first quarter of this year, when we did 1,100 units. We continue to be constrained in terms of our used trailer sales because of availability of units. We haven't been taking any particularly large trade packages since the latter part of '05 and early '06. The ASP change from the prior quarter is primarily a consequence of the type and age of the trailers that we are selling.

Parts and service revenue in the quarter was $15 million. This is approximately $1 million better than it was in the first quarter of this year. Manufacturing parts sales account for the majority of the increase. Other revenues, which includes what little bit remains of our leasing business, amounted to $2 million in the quarter. We are not seeing the demand on us to make product deliveries, therefore the revenues from the transportation is down. And again, as most of you are aware, we have pretty much wrapped up our leasing business in the latter part of last year.

Gross margins, as Dick mentioned, 9.4% in the quarter. This is obviously the best we have done in a good number of quarters, and it is up from the 7.8% we registered in the first quarter of this year. The margin improvement compared to Q1 reflects the fact that ASP, our selling prices, have maintained parity with raw material costs.

We have had improvements in our labor and burden which come in the form of volume, cost control activities and improved manufacturing performance. When we look at hours per trailer and process yield, I think most of you are familiar with the charts that we have been showing since last year that show how we have done compared to pre the SAP implementation. We continue to show an improving trend in that regard.

From a production standpoint, units in the second quarter were up roughly about 2,000 units over the first quarter of this year. We did again incur some legacy warranty costs in the quarter, approximately $600,000, but this was down from $1 million that we incurred in the first quarter of this year. And as Dick said, Transcraft continues to be a very good performer for us.

For the SG&A, we were at $16.4 million in the quarter, approximately 5.6% of sales. This is just down a little bit on a dollar perspective when we did $16.9 million in the first quarter of this year, and on a percentage it is down against the 6.5% we did in the first quarter of this year. And again, compared to the second quarter of last year, we have eliminated an amount of the Transcraft amortization and in the second quarter of last year we were paying a fair amount for the start-up cost of the ERP system.

Interest and other expense amounted to approximately $1.4 million for the quarter. We have borrowed on average about $1 million during the quarter under our revolving credit. And we had some foreign exchange gain as the Canadian dollar strengthened versus the U.S. dollar, and we incurred some other costs, a number of various odds and ins, nothing of great significance.

Taxes amounted to $3.9 million in expense. For the Q2, the effective rate is approximately 40%. We are expecting the rate to be about 39% for the full year. Again, recall that our cash taxes are very little because we've carried approximately $70 million of federal NOLs into 2007.

Press release contains the EPS calculation detail. Hit a few of the cash flow and balance sheet items, depreciation amounted to just under $5 million for the quarter and we are expecting in the $19 million to $20 million range for the full year. Capital expenditures, [is] approximately $2.2 million for the quarter and a likely estimate for the year is roughly $10 million. It is mostly maintenance type capital that we are spending on.

Headcount, we ended up the quarter with 3,600 full-time employees. Our FTE full-time to part-time ratio in the quarter was roughly 85 to 15 and this is a little higher than the 90/10 that we incurred -- had in the first quarter of the year. The backlog, as noted in the press release, amounts to $515 million, which is down a bit from where we were at March 31st when we had $558 million and down from the $594 million a year ago, mirroring the economic conditions that Dick talked about.

From a balance sheet perspective, $19 million in cash at the end of the quarter. Our liquidity, which we define as cash plus available borrowing capacity under the line of credit, totals about $162 million. Receivables amounted to $92 million at the -- at June 30th and that is a little bit down from the $109 million we had at the end of March.

The DSO was at 29 days which is better than what we have seen in the last couple of quarters, and I think it is probably more related to the fact that the second quarter didn't have that last month of the quarter surge that we have experienced in a number of quarters. Inventories at the end of June, $180 million which is basically where we were a year ago in June.

We have made nice improvement in bringing our raw materials inventories down, and our work-in-process inventories are well down from where they were a year ago. Finished goods, obviously, is up. Of the $180 million we have in inventory, a 112 of it relates to finished goods. Our plan, as we have talked about in the past, is to bring these inventories back down to prior 12/31 level.

So our objective is to take the inventories down roughly $50 million between now and the end of the year. I think you are all aware that the intangibles that we have on the balance sheet relate to the goodwill that we acquired as part of the Transcraft acquisition. As we look forward for the balance of the year, as Dick mentioned, we expect the total sales of new units to be roughly 48,000 units.

We expect the vans to be about 43,000 and the flatbeds to be about 5,000 units. What we see is a continuing slowness in terms of some of the quote and order activity, some of it seasonal, some of it tied to the conditions that Dick mentioned. On the positive side, we don't see anything unusual in terms of cancellations. People are generally slow to place the order, and therefore they are unlikely in our view to do anything in terms of cancellations.

We do expect ASPs to be stable for the balance of the year, although there will be pressure on them going forward. Material costs have remained relatively flat. We see potential for some upward bias going forward. We expect Transcraft to be a positive contributor in the second half of the year, albeit at slightly lower levels than we have seen in the first half of the year.

All said, given the volume expectations and what we see out there, there will be pressure on gross profit through the balance of the year, and we are thinking that something in a half a basis point -- 0.5 point is likely what we will come off in Q3.

With that said, I will turn it back over to Dick for some closing remarks before we open it up for questions.

Operator, at this time, we will take questions and then I will summarize at the end.

Thank you.

(OPERATOR INSTRUCTIONS)

We will take our first question from the line of John Barnes at BB&T Capital Markets.

Hi. Good morning, guys. Thanks for your time.

Good morning, John.

Hey, thanks. A couple of questions. First, congratulations on the performance in the quarter. I guess the thing I am most concerned about though is just industry inventory build kind of mirrors what you all have seen in terms of an increase in finished goods. It looks like inventories for the industry are up like 76% or something like that through the first half of the year, year-over-year.

I am just kind of curious as to how do you balance that uptick in inventory with what looks like it is going to be a little bit more subdued order environment, and the strength you have seen in pricing, are you going to be able to maintain that level of pricing? Or, I am just -- I am trying gauge sustainability of some of the pricing initiatives you have put in place thus far.

Yes, John. You asked a few questions that I'll sort of try and respond. The uptick in inventory out there certainly presents some pricing pressures in the marketplace. As competitors try to move some of their inventory, they are going to be more aggressive in trying to move that, and that will just display some other opportunities in the market to sell products. So you will have some downward bias on pricing.

We are doing our best and holding our own quite successfully with the pricing initiatives we have had, and we are going to do our best to maintain it. We have had to manage our expectations somewhat from what our earlier expectations were, or our results probably could have been even better. But we recognize what is happening in the industry and our folks are all committed to -- our sales force, I am speaking of, committed to going out and selling the value of product versus competitors.

So to answer that part of the question, we are going to do our best to hold our pricing. We don't expect any deterioration of any significance. We will be selective as order opportunities become available going forward. We are not going to be foolish in either regard, on having prices that are too high or having prices that damage our ability to sustain the momentum that we have been able to generate over the past several months.

Okay. Have you seen competitors already being somewhat irrational in the marketplace, or do you think that is still more -- there is still more to come there?

Yes. That is all over the map. You have got some who tend to more disciplined, and you have got other players who have traditionally been rather undisciplined in their pricing strategy. So we deal with it on an opportunity-by-opportunity basis. We sell the value of our product versus our competitors.

We always expect to get better pricing for our product than what our competitors offer, and that is the challenge and task of our sales force to articulate clearly to our customers the higher value proposition of our product versus theirs.

Okay. In terms of your initiatives on holding cost in check and especially with regards to labor, can you give us a feel for -- where do you think kind of full-time or part-time equivalents trend for the balance of the year? Are we going to be kind of flat with where we are today, or do you see those numbers actually coming in couple of hundred bodies?

Certainly. The level of staffing will be lower going forward than it is today, partially related to the lower volume expectations for the total year, and then also complemented by the special actions and initiatives we are putting in place to address the cost side of the business. So there will be a net reduction in staffing across the business, both on the hourly side of it, and also on our indirect overhead side.

And again, can you give us an idea of magnitude?

No, not at this juncture. We are currently working through all the numbers. As I shared in my comments, we have targeted an incremental $10 million of additional savings on the indirect spending side of the business, and that would be a combination of discretionary spending and necessary headcount reductions. That is over and above the actions that we have been taking right along throughout the first half of the year.

Okay. Last question. On your authorization, your repurchase authorization, and just given a combination of where the stock is right now, your liquidity position of a 160 plus million, I am just curious, why do you feel like you need another year to complete $26 million worth of purchase -- share repurchases or something?

Is there -- are you concerned about this environment and are trying to keep your powder dry and therefore you are kind of slowing down on repurchases? Or, I am just trying to gauge -- we have seen companies do 26 million in a day, and I know that is not feasible, but I am just kind of curious why you think you need another 12 months to get this done.

Right. John, we just don't have the powder like IBM does to go out, and blow it out. It is just -- we have a conservative approach to it. We just do it on a measured basis when it seems appropriate. As you are full well aware, we have the need to refinance the convertible note between now and next August, and so all those things play into our thinking and we will continue to pick away at this share repurchase.

Okay. Very good, and nice quarter guys. Thanks for you time.

Thank you, John.

Thanks, John.

Our next question comes from the line of Peter Nesvold with Bear Stearns & Company.

Good morning guys. It is actually Waymond Harris in for Peter.

Hi, Waymond.

How are you doing? Actually, I just wanted to follow up on a question John asked on SG&A. I was wondering if you could quantify, of the cutbacks and everything you mentioned, did any of that hit in 2Q? And if so, can you give us a sense of how much?

None of that was -- that I commented on today was related to the second quarter. These are actions that will impact the second half of the year. We have throughout the year taken smaller steps as the years progress to adjust levels of support and staffing as necessary to support the volume levels.

As it became clear what the prospects were for the balance of the year, we made the decision to take action at this time so that we try and get out in front of it and do the best we can for the performance of the business overall for the balance of the year.

And then Bob, I think you have mentioned in your comments that in 3Q we could see gross margins pressured maybe 50 basis points. As you look further out, is this the point, or this and kind of 3Q the point where we should look it as a base and you could continue to nudge gross margins up from there as we do see industry demand come back? Or, just kind of further out how should we think about gross margin?

I think that's one of those flip-of-the-coin questions. It is hard to say what we will see. I would point out though that historical trends prevail in terms of production, and we generally see the fourth quarter as being the weakest quarter of the year from a production standpoint.

Comparable to the first quarter, you have lot of days out because of holidays that are in there, and you have a weak demand for trailers as you get into that latter part of the first quarter and people aren't really looking for trailers in January and February. So that is one of those things we have to work against.

And then my final question, I know it is a little further out, but I think on -- under your revolving facility, you have do something with your convertible notes by May of next year.

We have the need to work through the situation with refinancing the convertible note by May 1st of next year in order to maintain compliance with the revolving credit agreement.

I guess just to expect guidance on that later on what you will do because you have a couple of options. You can either pay it out or defease it I guess.

We have a number of different options that we are working on. And you are right, we can either pay it off, or we can defease it in some fashion, but our objective is to have the situation with the convertible note crystallized around the end of this year.

Okay. Thank you gentlemen.

(OPERATOR INSTRUCTIONS)

Well, Ryan, I guess if there is no more questions, I will wrap this up. While we are pleased with the progress we made during the past quarter in improving our gross margin, certainly our work is far from done as we continue to our efforts to return this business to double-digit margin levels. We are in a challenging market right now, and we intend to successfully through this period while building a stronger, more profitable foundation for the future.

We have a leading industry position, strong relationships with the major fleets, and an innovative product line that is unmatched in the industry. We are focused on the tasks at hand and I am confident that we will continue to generate improving shareholder value going forward. Thank you for your participation today. That ends our call. Ryan?

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.