Wabash National Corp (WNC) 2009 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Wabash National Corporation Third Quarter 2009 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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, Dick Giromini, President and Chief Executive Officer for Wabash National Corporation. Thank you, Mr. Giromini, you may begin.

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

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's Third Quarter Earnings Call. I am Dick Giromini, Chief Executive Officer. In the conference room with me this morning is Mark Weber, our Chief Financial Officer. And for those of you who have not met Mark, let me take a moment to introduce him.

Mark was appointed CFO at the end of August. He's been with the Company since 2005, serving as Director of Internal Audit, Director of Finance, and most recently as Vice President and Corporate Controller. We're pleased to have him join the executive team.

We have much to cover today and we'll try to provide as much information as possible. I will first comment on several key highlights for the quarter, discuss the broader operating environment, and provide our expectations for the upcoming quarters. Then I'll ask Mark to provide a detailed description of our financial results. At the conclusion of the prepared portion of our presentation, we'll open the call for questions from the listening audience.

Our results for the third quarter are encouraging given the current economic climate. We met our primary objectives for the quarter by significantly reducing our cash burn and improving our liquidity. But I'm especially proud of our associates and their efforts to drive permanent improvements in the cost structure and efficiency of our business, which provides us with significant operating leverage when demand levels improve.

Importantly, we are starting to see some early indications that the industry is stabilizing and potentially poised for a recovery. Several leading economic indicators we closely follow are trending more favorably. Forecasts from industry sources are predicting a return to growth next year and we have seen a noticeable shift in the attitudes of our customers with respect to future purchasing decisions. While the operating environment will likely remain challenging in the near term, we believe the worst is now behind us.

During the third quarter we shipped 3,600 units, bringing our year-to-date total to 9,500 units. These results are in-line with our previous estimates and indicative of a demand environment that remains at depressed levels. However, despite roughly flat shipments compared to last quarter, our cost and efficiency actions helped us deliver significant operational improvements over the period including -- an increase of over 6 percentage points in gross margin to roughly break-even level; a 57% improvement in operating EBITDA to a loss of $4.6 million; and our third consecutive quarter of improvement in operating loss to $10.2 million.

As a result of our success to date and ongoing efforts to optimize our cost structure, we are focused on achieving operating EBITDA break-even by the second half of next year. During the third quarter, we further reduced salary headcount by 25 associates, representing a cumulative 40% reduction in salary staffing since early 2007 when our industry downturn began.

Additionally, per our release on Tuesday, we announced our initiative to consolidate our Transcraft manufacturing operations. As part of this, we sold our Anna, Illinois manufacturing plant and will be moving all operations to our Cadiz, Kentucky facility. On an annualized basis, savings are projected to exceed $1 million with annual additional upside as volumes recover. Platform trailer production at our Anna, Illinois plant is expected to cease by mid 2010, at which time the new production lines at the Cadiz facility are expected to be fully operational.

While not yet complete in our efforts to achieve break-even operating EBITDA, collectively our cost optimization efforts, including those just mentioned, are expected to generate annualized cost savings in excess of $35 million. Moreover, the efficiency gains from our Lafayette transformation initiative and those expected from our recently announced Transcraft consolidations will provide incremental operating leverage at higher demand levels.

Switching gears, let me take a moment to provide an overview of some of the key economic indicators we monitor closely. While some have shown improvement recently, most have at least demonstrated some measure of stability compared to earlier this year. For example, the ISM Manufacturing Index has improved for eight consecutive months, closing at 55.7 for October, the highest level since April of 2006 when it was at a reading of 56.0. This index, representing supply chain manager sentiments about the demand environment, has now been above 50 for three consecutive months, indicating strong support for expansion.

The Conference Board Leading Indicators Index has increased for six consecutive months, with July up 1.1%, August up 0.4%, and September up another 1%. Movements by this index of more than 0.5% for three consecutive months historically signal not only the bottom of recession, but also the start of an acceleration stage of recovery.

Housing permits, a leading indicator for new home starts, moderated somewhat to a reading of 51.1 from its recent high of 59.5. However, pending home sales rose for a record eighth consecutive month, reaching the highest level since December 2006 and 21% higher than a year ago. In addition, actual sales of existing homes saw the largest increase in two years at 9.4% from August and up 9.2% year-over-year.

GDP growth returned during the third quarter, increasing 3.5%, driven in some extent by the Cash for Clunkers Program. However, this remains as a positive sign as GDP growth of greater than 3% also signals growth in the freight sector.

Finally, business inventories decreased by 1.5% in August and have now dropped for 13 consecutive months. While overall demand is still not at levels to provide sustained replenishment demand, this is nonetheless encouraging as some replenishment activity is driving moderate amounts of freight demand.

We are encouraged to see signs of improvement in this broader economic environment, which will help pave the way for increased demand levels in our industry. In fact, recent estimates from ACT and FTR forecast rising levels of shipments in each of the next three years with 2010 levels forecast at 108,000 units and 89,000 units, respectively.

At this point, we also believe overall demand in 2010 will outpace 2009 levels and, in particular, the second half of the year will be stronger than the first. However, we will proceed with caution as we do expect a few challenging quarters in front of us as we now are faced with the seasonally most challenging periods of the year for our industry. The current fourth quarter and the upcoming first quarter of this coming year are annually our weakest periods with less production days to absorb costs along with higher seasonal costs related to holidays and utilities.

Also in the current low demand environment, pricing competition will continue to adversely impact our margins as most manufacturers compete for limited opportunities and attempt to fill significant underutilized capacity. 2010 will remain a very price-competitive environment, but we expect that we will begin to see pricing power improve as trailer order demand and confidence increases in the latter part of the year and into 2011.

Taking into consideration economic indicators, industry projections, and customer quote and order activity, we now expect volume shipments for the full year 2009 to be in the range of 12,000 to 13,000 units. While customer sentiment overall is more favorable and quote and order activity in particular is improving, we do not anticipate a meaningful ramp in volumes until the second half of 2010.

Given the ongoing benefits of our cost and efficiency actions, coupled with recent actions to address our liquidity, our financial health is significantly improved. At the end of the third quarter, our liquidity stood at $36 million. While the cash demands of fourth quarter and first quarter 2010 will require diligent oversight, we feel confident that we've taken the appropriate actions to manage through this period of uncertainty.

In conclusion, I'm pleased with our progress for the quarter. We significantly reduced our cash burn, improved our liquidity, and drove permanent improvements in the cost structure and efficiency of our business. While demand headwinds remain in the near-term, we are confident in our ability to continue to execute and improve the business through the current economic climate. We are encouraged to see signs that the worst is now behind us and believe we'll have significant leverage to drive profitability when the demand environment improves. With that, I'll turn the call over to Mark for review of our financial results. Mark?

Thanks, Dick, and good morning. As you're probably aware, we filed our 10-Q last night, which contains the detail of our results for the quarter, so I'll focus my comments on the progress made this year and try to hit the highlights.

The third quarter continued the progress made in Q2 with gross margin improving by $5 million. Similar to the second quarter, the improvement this quarter was primarily driven by a decrease in raw material and component costs of approximately $1 million and reduced labor and overhead costs of $3 million. In addition, this quarter saw a small improvement in new trailer shipment of 400 units and more than double that in terms of production, which accounted for $1 million of the improvement.

As we discussed on previous calls, while we have seen material cost improvements across most major commodities and components, we continue to suffer from unfavorable aluminum hedges that were entered into over a year ago. These aluminum hedges versus the spot market have impacted results in the third quarter by an estimated $1.2 million and almost $5.8 million year-to-date. At this point, while subject to production rates, we estimate that it will take us through the first half of 2010 to fully utilize the balance of these hedges.

As Dick mentioned, all told these improvements translated into gross profit percentage improving to essentially break-even, from a -20% in the first quarter and -6% in the second quarter. Looking forward, the three quarter trend of improvement will come under pressure in Q4 as we enter a seasonally low production period as well as a higher cost quarter with holidays, our annual shutdown, and other seasonally higher operating costs.

SG&A for the quarter was approximately $9.9 million, which is down $1.5 million from the second quarter, reflecting cost reductions across multiple categories including salaries and benefits, allowance for doubtful accounts, and stock compensation costs. 2009 in total is now averaging quarterly SG&A costs at approximately $3.5 million below the 2008 quarterly average.

The single largest item, though, impacting the results this quarter was the $54 million non-cash change in the fair value of the warrant issued to Trailer Investments as part of the Securities Purchase Agreement entered into on July 17. The warrant contained certain provisions which under GAAP accounting rules caused them to be classified as a liability rather than as equity.

As a result, given that there is slightly less than 25 million warrants outstanding, every dollar movement in our stock price results in nearly a $25 million impact to the warrant's fair value, which can be either favorable or unfavorable depending on how our stock price performs. During the third quarter, our stock price increased over $2 from the $0.54 per share on July 17th to $2.72 on September 30th. For comparison purposes only using yesterday's closing price of $1.84 per share, the $54 million charge would have been adjusted down to approximately $32 million.

In addition, the Company did record a charge of just over $1 million between the loss on extinguishment of debt associated with our new amended credit facility entered into this quarter as well and the termination of our interest rate swaps.

The preferred dividends of approximately $1 million this quarter were accrued and unpaid as is our option under the stock purchase agreement for the first two years. In the current economic environment, we plan to continue to accrue these dividends.

You will have noticed in our press release this time that we have added the non-GAAP disclosure operating EBITDA. This excludes the change in the fair value of the warrant, among other items. We believe operating EBITDA is a useful metric reflecting the performance of our Company and is used by management to evaluate our results as well. For the third quarter, operating EBITDA was a loss of $4.6 million. While we have not reached our target of attaining break-even operating EBITDA in this depressed market environment, we have made significant sequential improvement since the first quarter's operating EBITDA loss of $21.6 million, despite relatively flat volumes.

While an increase in new trailer volumes would go a long way by leveraging our current cost structure and we do expect that 2009 is the bottom of the cycle, we are not relying solely on volume recovery to improve profitability. We continue to optimize our cost and production structure to improve results, including additional salary headcount reductions taken early in the third quarter, the announcement earlier this week of the consolidation of our flatbed manufacturing facilities, and, as I noted earlier, we will benefit next year as our aluminum hedges are completed.

Looking at our liquidity, or cash plus available borrowings, we finished the quarter at $36 million, reflecting the improvements from our preferred stock sale and our amended revolving facility entered during the quarter. As discussed, over the next two quarters we face the seasonal challenge of typically low production periods, but we remain focused on improving our costs and production structure and being well positioned to take advantage of improved volumes as the trailer industry recovers. At this point, I'll turn the call back over to the operator and open the call up for any questions that you might have.

Thank you. We will now be conduction a question-and-answer session.

(Operator Instructions)

Our first question is coming from Rhem Wood with BB&T Capital Markets. Please state your question.

Hey, good morning, guys.

Good morning, Rhem.

Good morning, Rhem.

Can I start with the $35 million in annualized cost savings? What exactly is in that? Is the $1 million from the new facility at Cadiz in that as well as the 25 additional headcount reduction you took in the beginning of the third quarter?

Yes, that's really comprehensive, Rhem, of all the actions we've taken this year up to date. So the headcount that we've taken throughout the year, it's the compensation reductions, and it's the strategic items that we've recently implemented with the platform consolidation.

Okay. And how much further can you go on the labor side?

On the hourly side, Rhem, we're constantly flexing that as a variable cost to match whatever the scheduled demand is. On the salary side, we continue to look at opportunities, either through leveraging our ERP system, leveraging shared services, or continuing to evaluate ways of consolidation on the production side that would allow us to do that. Don't know that I can quantify a headcount for you, but we're going to continue to look at it through this environment and take the actions necessary.

Okay. Can you talk a little bit about the pricing environment, where you're seeing the most pressure? Is it in dry? And I think what [reefer] is holding up a little bit better, is that right?

Directionally, yes. The whole pricing environment is very, very competitive out there as there's an excess of capacity and just about everybody is well underutilized on their capacity. But if any area is holding up better than others, it would be in the refrigerated products side of things, with dry vans and all of the platform products under heavy pricing pressure.

So that's kind of the -- I guess the dry van, is that the reason for the loss in the market share, given the disproportionate amount of industry dry vans have come down?

Yes, Rhem. I think what you're saying is our biggest position is in dry vans and that's the biggest segment of the market and it has taken the most significant decrease year-over-year in terms of absolute volume.

Okay. And you expect that to kind of recover as industry volumes recover?

Yes. You're going to see some pricing power return as the demand profile improves; it's just very typical. As all of the manufacturers start seeing a little more plentiful opportunities to fill their shops, then it return to a little bit more normalized type of a pricing environment. But when you're running at levels that are 20% and 25% of what the volume levels were three years ago, you can imagine that everyone is scrambling to at least fill enough of their underutilized capacity to keep the lights on.

Okay. And last, can you just give a little color on what you're hearing from your customer base? Are you hearing that people are -- are you hearing more that from the opportunistic buyers looking to buy additional units or is it more from replacing equipment that has been put off for a long time? What are you hearing from those guys?

Yes, it's all over the map. It certainly is a mixed bag. You've got some players who want to be ready and may be looking at some opportunities to pick up some market share and want to be prepared. You don't have a lot of replacement activity going on right now. There's far too many trailers remaining underutilized or sitting idle, sitting against the fences, if you will, waiting for some increased demand. In most part, the demand that you see is really for dedicated contracts that the carriers have opportunities to secure. But it's a mixed bag; it's all over the map.

Okay. Thanks for the time.

(Operator Instructions)

Our next question is coming from Kristine Kubacki with Avondale Partners.

Good morning, gentlemen. This is actually Tom Finan sitting in for Kristine.

Hi, Tom.

First question, as far as the competitive landscape is concerned, you noticed any changes, good or otherwise?

I'm not sure how to answer that question. There haven't been any significant changes since early this year when Trailmobile ceased operations back in January. There have been some idlings of facilities by some competitors much like we've idled lines within our own factories as demands have remained very low. But no one else has left the industry and I think everyone has held up as well as they can considering the low demand environment.

Right. Then, we talked about this a month or two ago, but you see any trends in parts and services and do you see any new opportunities as the customers are overhauling their trailers to extend the useful lives?

Well, yes, we certainly do see opportunities; we just haven't seen the level of activity just yet. There's signs of some increase, but very minor at this point. As I stated earlier, that a lot of fleets still have far too many trailers sitting idle. And part of the strategy in this environment is to keep the fleet running by as a trailer breaks down and needs repair, in a lot of cases just sitting that trailer idle and pulling another one that's been sitting against the fences and putting it back into service.

So the level of repair activity has not hit yet, although we're starting to hear signs by some customers and comments from customers that they need to start getting trailers repaired again. So that may be right around the corner and that's usually a first indicator that demand is improving or at least that they've run out of trailers that they can just trade out and swap out.

Right. And then the last was just a clarification. You said that total shipments for 2009 as far as units go was going to be 12,000 to 13,000, right?

That's correct.

Okay. Thanks for the time, guys.

No problem.

(Operator Instructions)

Gentlemen, we have no further questions. I'll turn the floor back over to management for any closing comments.

Thank you. We believe our best days are still ahead of us and we remain committed to the future of Wabash National. I want to thank everyone for your participation today. Mark and I both look forward to speaking with you again on our next call. Thanks, everyone.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.