Wabash National Corp (WNC) 2010 Q1 法說會逐字稿

Greetings, and welcome to the Wabash National Corporation First Quarter 2010 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, Dick Giromini, President and Chief Executive Officer for Wabash National Corporation. Thank you. Mr. Giromini, you may begin.

Thanks, Melissa. Good morning. Before we begin, I would 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, the actual results could differ materially from those projected in 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 First Quarter 2010 Earnings Call. I'm Dick Giromini, Chief Executive Officer. In the conference room with me this morning is Mark Weber, our Chief Financial Officer.

As always, we have much to cover today. And we'll try to provide as much information as possible. I'll first comment on several key highlights for the quarter, discuss the broader operating environment and provide our expectations for the coming 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.

Overall, we're very pleased with our first quarter. We delivered results that were in line with our previously stated expectations. More importantly, order capture rates and backlog continued to improve. And the broader economic landscape began to show signs of stabilization. This further confirms our belief that the worst is now behind us and that our industry is coming off the bottom of the cycle.

Despite the seasonally slower demand and higher production costs associated with our first quarter, we continue to benefit from the operational efficiency and cost actions taken over the past two years. Specifically, we benefited significantly from the Lafayette facility transformation and warehouse consolidation efforts that helped streamline our production processes and further improve our manufacturing efficiency.

Additionally, we completed the rationalization of our Transcraft manufacturing operations and finalized the sale of our Anna, Illinois manufacturing plant during the quarter. Our Cadiz, Kentucky facility is now fully operational. And production will continue to ramp up during the second quarter.

I'm extremely proud of the collective effort of our associates as we work to reduce and optimize our cost footprint. That said, consistent with our culture, we will continue to look for more ways to further optimize our expenses and improve productivity to ensure operating leverage as demand levels continue to improve.

During the first quarter, we shipped 2,600 trailers, which is roughly in line with our guidance of 2,700. However, builds for the quarter totaled some 3,300 units as production ramped up throughout the quarter, resulting in late March builds rolling over into April for shipment.

One important trend I'd like to highlight this quarter is the growth of our DuraPlate products group, which is now gaining nice momentum. Back in early 2008, when we formally established the business unit, we recognized that there would be growth challenges along the way. What we didn't plan for was a global economic meltdown that effectively put the skids on most all buying intentions of target customers, including our early foundational win, PODS Corporation.

We knew that growing a new business unit was a multi-year effort, and spent the first year working on classifying the various market opportunities, identifying potential leads and starting to make some prospective visits with customers.

During the course of last year, we focused on getting customers to test products, develop prototypes and sign commitments to begin production. And now that we're in the third year, and with the economy improving, we're starting to see the effort of the spade work develop into real business opportunities, with this past quarter setting internal records for sales, profits and bookings. Portable storage container orders are the highest on record, with improvement in truck body panel orders and nice progress with our AeroSkirt offering.

The growth potential that we envisioned when we started the business is becoming a reality, even though we are still early in the process. Needless to say, we remain excited about the long-term prospects for this business.

Our retail business also made great strides this past quarter, realizing significant improvement in new trailer sales, used trailer sales and parts sales, leading to the best quarterly performance since the second quarter of 2008. With expanded product offerings and new national service contracts, I'm looking forward for continued quarter-over-quarter progress from that unit.

Now let's switch gears to our outlook, starting first with an overview of some of the key economic indicators that we monitor closely and that provide a broader context for our expectations.

First of all, as we now know, GDP increased at a strong 3.2% annualized rate during the quarter. The Institute for Supply Management Manufacturing Index also improved to its highest level since July 2004, coming in at 60.4 for April, up from 59.6 in March. US factory orders rose 1.3% in March, far exceeding the 0.1% decline that analysts had expected. Demand for durable goods, when adjusted for a large drop in commercial aircraft orders, posted a 3.1% gain, representing the largest move since August of 2005.

And even the housing industry is showing some signs of life, with the National Association of Realtors reporting that its seasonally adjusted index of sales agreements for existing homes rose 5.3% in March to 102.9, representing a 21% increase from a year ago. Of course, with the first-time homebuyer's tax credit program having ended in April, we'll need to see how that industry performs when May results are released.

Even so, new home starts in March increased to seasonally adjusted annual pace of 626,000 units, reflecting a month-over-month gain of 1.6% and a year-over-year increase of 47%, which are both good signs. Additionally, new home permits increased by 7% month-over-month, suggesting that starts will hold up during the next few months.

And more specific to the trucking industry that we serve, the FDR truck loadings index continues improving, with a 1.7% month-over-month gain in March, reflecting the third consecutive month of gains and a 4.1% year-over-year improvement.

Total trailer backlogs for the industry have now grown to 4.9 months. And trailer cancellations came in at the third lowest level on record at just 1.4%, all good indicators.

Industry forecasters are slowly converging on their projections for trailer builds, with expectations that demand will strengthen further in the second half of 2010 and accelerate quite rapidly in 2011 and 2012. In fact, ACT expects year-over-year growth in unit shipments of 29% in 2010 at 103,000 units, 64% in 2011 at 169,000 units and another 30% up for 2012 at 220,000.

Similarly, FTR now expects year-over-year trailer production increases of 24% in 2010 at 100,000 units, up from 97,000, 48% in 2011 at 144,000 and a further 46% year-over-year improvement for 2012 at 210,000 units.

Our internal expectations, consistent with industry forecasters, continue to be that demand in 2010 will significantly outpace 2009 levels, with the second half of the year stronger than the first. Moreover, our confidence for the year continues to improve as each month passes.

The fleets are seeing more favorable trends regarding truck tonnage and loadings, and have seen demand improving since the third quarter of 2009. In fact, the combined effect of tightened capacity as a result of equipment reductions and improving demand is now allowing many major carriers the ability to be more selective in load acceptance, and even providing some opportunities to raise rates. This, in turn, is providing greater profit potential for the carriers, and should support a larger appetite to invest in new equipment as time goes on, with Wabash National being well positioned to capitalize on this, recognizing our strong relationships with these larger haulers.

Reflective of this are the two large orders we recently received from Swift Transportation and Prime, Incorporated. Earlier this year, we signed a three-year agreement with Swift that calls for building 3,100 new DuraPlate HD dry vans during the initial 12-month period of the contract. Additionally, in April we secured an order with Prime that calls for 4,000 Artic Lite refrigerated van trailers over the next 34 months.

As a result of orders like these and many others, our backlog continues to expand. As of March 31st, our backlog was at 295 million, which is up nicely from the 137 million that we reported at the end of 2009, and reflects our largest backlog since the second quarter of 2008, which was at 394 million.

So, when taking into consideration key economic indicators, industry projections and customer quote and order activity, we now expect volume shipments to be in excess of 5,000 units for the second quarter, and in the range of 18,000 to 22,000 units for the full year of 2010. Just achieving the mid point level of this annual estimate will represent a year-over-year increase in shipments of some 56%.

Given the healthy backlog, higher quote and order activity and our expectations for the second quarter and full year, our production staffing needs to support our build requirements are growing. Recall that earlier this year, we began adding temporary status hourly associates to support our growing production demand, with early projections for 190 hires by the end of first quarter. Since that time, with the backlog growth that we have realized and the need to add lines and/or shifts, we are now in the process of filling additional staffing needs of approximately 300 associates, which will bring our total hires since the beginning of the year to around 500 temps by the end of May. As demand levels improve and are clearly sustainable, we will examine the opportunity to convert some temp positions to full-time status.

Moreover, with the backlog in place and staffing on the way, we now expect to reach our goal of achieving break-even EBITDA during the second quarter of the year, one quarter ahead of our previous expectation. Of course, to achieve this, we must still execute effectively on our core values of safety, quality, delivery, productivity and cost effectiveness. And it goes without saying that we'll need to count on our customers to do their part in accepting delivery or picking up their finished units so that we can recognize the full value of our efforts. I'm confident in our team and in our customers that we will be successful.

In summary, let me again say that we are pleased with the progress we've made during the first quarter. The full effect of our operational efficiency and cost actions are taking hold. Our financial results are improving. And we are experiencing momentum in our backlog and order activity, which bodes well for our future. We have taken significant permanent costs out of our business, ultimately positioning Wabash National for improved profitability when demand levels improve. Importantly, we're building a strong platform for long-term growth and shareholder value creation.

With that, I'll turn the call over to Mark for a review of our financial results. Mark?

Thanks, Dick, and good morning. As you're probably aware, in addition to our earnings release, we filed our 10-Q yesterday as well, which contains a detail of our results for the quarter. So I'll focus my comments on the key performance drivers during the quarter and some highlights for the year.

Sales for the quarter were in line with expectations, coming in at $78 million. New trailer revenue was $60 million on 2,600 new trailer units, versus our guidance for the quarter of 2,700 units, with an average ASP of 22,800. This is higher than the Q4 ASP of 21,200, primarily due to trailer mix. Used trailer revenue was consistent with recent quarters, coming in at approximately $5 million for the quarter.

More encouraging, however, was the improvement realized during the quarter in parts and service revenue. For the quarter, parts, service and other revenue was approximately $14 million, an improvement of $3 million from the quarterly run rate in 2009. While traditionally parts and service revenue has been driven by the performance of our retail and distribution network, the majority of the improvement in the quarter was attributable to sales related to our continued diversification efforts through the formation of our DuraPlate products group in 2008. Revenue for this group reflects the sales of portable storage containers to our primary customer PODS, penetration of our DuraPlate composite into the truck body market and DuraPlate panel sales for other industrial applications. While it's still early for these products, we are happy to see the results of our efforts begin to translate into revenue streams, which provide the opportunity for higher margins than our core trailer business.

In terms of operating results, the first quarter was generally in line with our expectations, based on the seasonally low volumes for the period. The Q1 operating loss of $11.2 million was similar to the prior two quarters, despite lower volumes, and significantly improved from the first quarter of 2009. The year-over-year improvement in operating loss of $16.1 million was primarily driven by decreased raw material and component costs throughout the year, savings in labor and overhead costs achieved from cost actions implemented early in 2009 and improvements made to operations through our productivity efforts that Dick touched on previously. All told, our direct labor burden and SG&A relative to the first quarter of last year represented savings in excess of $10 million.

During the quarter, material costs were generally stable, but began to show upward pressure late in the quarter, with material costs as a percentage of selling price representing 73.9% of sales, or 1% higher than the fourth quarter. This increase is also attributable to the continued competitive pricing environment, which has kept ASP under pressure.

Our aluminum hedge position versus the stock market continued to impact results in the quarter, but to a much smaller extent as the stock market for aluminum increased during the quarter to $1.10 per pound by the end of March. The aluminum hedge impact in the quarter was just under $1 million. We will utilize the remainder of our 2008 aluminum hedges here in the second quarter. As we move forward, we will place new aluminum hedges as required to secure margins on confirmed customer orders.

SG&A for the quarter was approximately $10.3 million, which is up slightly from the fourth quarter of $10 million, but primarily due to timing, but reflects a $1.6 million improvement from the year ago period, again reflecting the benefit of cost reductions implemented in 2009.

The fair value accounting for the warrants is the primary item impacting other income and expense. This quarter, the non-cash change in the fair value of the warrant resulted in an expense item of $126.8 million, reflecting the increase in our share price during the quarter of $5.12 per share.

At March 31st, we have a US Federal NOL carry-forward of approximately $177 million. However, we have a full valuation allowance recorded against our net deferred tax asset. The Federal NOL carry-forward begins to expire in 2022. Please refer to our 10-Q filing for more details, as well as the potential impact to our NOL carry-forwards in the case of an ownership change.

The preferred dividends, again, of approximately $2 million this quarter were accrued and unpaid. Our current plan for 2010 will be to continue to accrue the dividends unpaid, as well.

The details of the balance sheet are included in the 10-Q. In addition to controlling costs and spending closely, we continue to manage capital spending to required maintenance projects and cost-reduction initiatives, with Q1 spending of approximately $0.3 million and anticipated full-year 2010 spending of approximately $2 million.

On liquidity, we're cash plus available borrowings. As of March 31st, liquidity was $29 million, an improvement of $8 million from year end. In addition to increasing working capital from our seasonal low point at year end, we also updated inventory appraisal during the quarter and completed the sale of our Anna, Illinois facility, which all told improved liquidity by $4.5 million. Not included in our liquidity as of March 31st are proceeds of approximately $3 million, related to our tax refund claim discussed last quarter. Approximately half of this refund was received subsequent to quarter end. And we anticipate receiving the balance later this quarter.

As Dick discussed, the backlog has improved significantly since year end, as well as last year at this time. As a reminder, we define our backlog as orders which have been confirmed in writing by our customers and can be produced during the next 18 months, or, in this case, through September 2011. The backlog of 295 million includes the significant long-term agreements signed with Swift on dry vans and with Prime in regards to refrigerated trailers. Specifically, related to the Swift order, only the first year's volume of 3,100 units have been placed at this time, with approximately 2,500 of these units scheduled to be built this year. As it relates to the prime order of 4,000 units over the next 34 months, 750 units have been scheduled to be built in 2010. However, the balance of 3,250 units has not yet been scheduled by month.

As a result, only 600 units from the combined Swift and Prime long-term agreements have been included beyond 2010 in the backlog. If levels of production similar to 2010 were assumed for both Swift and Prime in 2011, the backlog would be approximately 360 million at March 31st.

Looking forward to next quarter, we anticipate second quarter new trailer sales in excess of 5,000 units for the quarter. We expect -- and for the full year, we expect volumes to be in the range of 18,000 to 22,000 units. This level of volume is in line with industry estimates from both ACT and FTR, and is consistent with our previously stated objective of achieving break-even operating EBITDA in the second half of the year. In fact, as Dick mentioned, we're optimistic that with the projected Q2 volumes, we'll reach this objective earlier than expected.

Finally, on April 29th, we filed a shelf registration statement on Form S-3. Due to applicable SEC rules, we cannot take any questions or comment further on the filing.

At this point, I will turn it back over to the operator and open up the call for any questions that you might have. Melissa?

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions.) One moment while we pool for questions. Gentlemen, our first question is from Jeff Kauffman with Sterne, Agee & Leach, Inc. Please proceed with your comment.

Thank you very much. Hey, Dick. Hey, Mark. Congratulations. That's just fantastic news on the backlog.

Thanks, Jeff.

Just for our benefit here, to the extent you're comfortable, can you give us a little bit better visibility on the backlog? I think, Mark, you did a great job of explaining what is and isn't in the backlog in terms of the orders we know about. But you do more reefer, more dump, more flatbed this cycle. When we look in the backlog, should we just assume it's in the same proportion of dry van to your business? Or, for example, is reefer or dump a little bit more representative of the backlog than your average mix? And just for investors and ourselves, can you remind us the difference in the selling price at market rates of a reefer trailer versus a DuraPlate dry van versus, say, a dump or a flat?

Okay.

I think the first point, Jeff -- and we talked about this, I think, even on the fourth quarter call -- is that where we've seen the strength in the backlog is primarily in our large customer base, so the guys that have the capability to finance these, or access to finance it. It's primarily been in the dry van segment greater than the refrigerated segment. But Prime obviously is a good example of some momentum that we're seeing in there. And it's primarily been in the TL space. So it's primarily large, dry van and the TL space where we're seeing the momentum.

On the flat side, there has been a little bit of a momentum shift. But it's really been really early days on that. And it's been in the last month or so where we've started to see the quote and order activity pick up on that.

So potentially there's some other things to evolve. One is credit expands and some of the smaller and mid market guys can start to have access to financing and make buys. And, certainly, there's some expansion as it goes out beyond the TL sector into the LTL or as reefers potentially rebound.

In terms of pricing, this is -- these are very rough averages. You're talking about a dry van at $20,000. You're talking about a reefer at close to $30,000, excluding the refrigeration unit itself. A flat bed can kind of be in that range. If it's steel, it's around $20,000. If it's aluminum, it could be $30,000. And dumps, which we primarily do all aluminum, are in excess of $30,000.

Okay. No, that was great. Thank you. And then, one other question. You mentioned hiring now up to 500 temp workers this year by May. Can you give us an idea, if you decide to add a shift, approximately how many workers are required to add a shift? And with the other facilities coming on line and ramping up, what do you believe the productive capacity of the system is, say as it will be by the second or third quarter of this year?

Well, it's -- Jeff, we -- when we add a shift, we don't add a full staff. What we'll do is, we'll adjust the line speed based on what the demand requires. So we may bring in half staff or two-thirds staff and adjust the line speed. On a full line makeup, we may have, at full volume full line speed production, 180 folks manning one of our high-speed lines. But we may only bring half of those in, based on what the demand is at the time. And then ramp up as backlog fills even more.

Okay. And productive capacity, once the factories are all up and running?

Well, we've got -- we've got plenty of capacity to handle anything the cycle will throw at us. Even with the transformation initiative that we completed last year, we can produce -- I think our numbers are north of 70,000 units when we combine the capacity that we have in dry van manufacturing, refrigerated manufacturing and our flat bed and dump manufacturing.

Okay. Well, guys, thanks so much. And again, congratulations.

Thanks, Jeff.

Thank you. Our next question is from Tom Albrecht with BB&T. Please proceed with your question.

Hey, guys, can you hear me?

Yeah. Hi, Tom.

Hi, Tom.

Hey, guys. Can you talk a little bit more about the aluminum cost? Mark, you made some comments about your '08 hedges will, I think, be running out by the end of the second quarter. Maybe just talk about the cost of hedging going forward. And you basically, I think, tied that to future orders, your ability to get hedges. But can you explore that a little bit more?

Yeah, I think the two key takeaways -- we're going to be out of the long-term -- ended up being longer term hedges that we had back in 2008 that were set at the peak of that environment back then. So, A, we'll be back to the market in terms of that by the middle of this quarter, potentially. Our process going forward is really going to be kind of piggyback new hedges out in the future, based on our backlog. So we're securing the quoted margins or the order margins that we have with our customer at the time the order is consummated.

Okay, that makes sense. Any thoughts on -- obviously, you're talking about getting the EBITDA neutral, maybe even slightly positive by the end of the second quarter. How about net income positive? Any thoughts there? And just by the end of this year?

I'd prefer -- I mean, I think we -- we're not providing that guidance. I think it's really going to depend on the momentum that we see in the back half of this year. And there's certainly a potential, as we certainly are going into 2011 that we achieve that. But at this point, we're really focused on the EBITDA turn.

Okay. No, I totally hear you. And I think that's it. I appreciate the color. And a lot of my questions were questions that Jeff asked. So I appreciate it.

Thanks, Tom.

Thanks, Tom.

Thank you. Our next question is from Kristine Kubacki with Avondale Partners. Please proceed with your question.

Good morning.

Hey, Kristine.

Hi, Kristine.

My question -- my first question is on the cost structure a little bit. You made some significant structural changes. But I was kind of wondering if you could elaborate a little bit on looking at the fourth quarter into the first quarter. We saw volumes drop off, but the gross margin improvement. I'm wondering how much we could leverage into an upturn? And I know you talked about some of the parts and services business and the DuraPlate products group. I'm wondering if that was margin enhancing, so the incrementals may not be as good as it pretends in the fourth quarter? But seeing some of the structural changes you have made, I guess I'm trying to get -- can you give us a little bit of color on what kind of leverage you see into the upswing? And can we expect what we saw fourth quarter to first quarter kind of going forward?

I think -- well, I think one of the keys between fourth quarter into first quarter is that while shipments were down, the underlying production was pretty flat between fourth quarter and first quarter. So that's probably worth noting. I think our shipments and production in the fourth quarter were pretty consistent. In the first quarter of this year, we only shipped 2,600. But the build, as Dick mentioned, was about 3,300. So the underlying production, which when gross margin is as close to break-even as we are, is at this point one of the primary drivers of what we're able to do.

So with that note aside, I think generally, while we have, to your point, done a lot on the shop floor to optimize operations, both on the vans and on the flat bed side, we're excited about testing what we're capable of doing in a real-life scenario as volumes grow. And the target -- from a Company perspective, our best margins kind of go back to '04 or '05, where they were low double-digit gross margin percentages. And that was really kind of peak cycle volumes in that 50,000 to 60,000 unit range. Our target is to be able to do those types of margins versus -- at the mid point of the cycle versus the peak of the cycle, based on the improvements we've made to the production.

Very good. That's helpful. And then, my question is -- hopefully, I didn't miss this, but on used inventories out there industry-wide and pricing, we hear a lot about it on the tractor side, but not so much on the trailer side at this point on the idle capacity. Kind of what are your contacts out there telling you on the used -- level of used equipment out there?

Yeah, we're starting to hear some improvement on what the used equipment is bringing in the market. So there is some improving trend. We don't have very many in our system now. We're down to the lowest level we've been at in a long, long time. So we're not participating quite as much. But we are seeing some improvement. And that just supports what we're hearing on the demand side from customers. So, hopefully, that continues. One of our dealers was sharing with me earlier this -- just yesterday, in fact, that he's seeing a lot better pricing in the used equipment that he's been selling.

Very good. Thank you very much for your time.

Thank you. Our next question is from David Garrity with GVA Research. Please proceed with your question.

Yes, hi. Good morning. And congratulations on a good quarter.

Thanks, Dave.

Thanks, Dave.

Let's see, I understand from your comments previously that some of the gains that you're seeing in terms of -- they appear to be somewhat mixed. But based upon your response to earlier questions, you think mixed may show some signs of improving as you go forward through the year. So, assuming that you can have the same type of price-per-unit levels that you've seen in the first quarter, very encouraging what you're saying about the second quarter in terms of shipments being in excess of 5,000 units. Given sort of the performance you're realizing, just doing the math, it would seem to indicate you'd probably do something in terms of revenues just off those shipments of about $125 million. And then, if my numbers are right, you'd probably do parts and used trailer sales of about $20 million. Is that unreasonable?

I think you're generally using the right numbers to get to that point.

Okay. So we're sort of in a situation where if you kind of put these two numbers together, it says second quarter revenue is probably about $145 million. And I think the streak going into the quarter was about $97 million. Is that right?

I'd have to look. But I think you're probably close.

Okay. I know that the analyst from Avondale was going through and trying to take a longer term perspective in terms of -- and your answer was responsive -- just a longer term perspective on the type of operating leverage you might see in the business. But do you think that there is anything that would lead us to not expect to see a nice lift in operating leverage as we go from the shipments that you had during the March quarter, which were roughly 2,600, up to this almost doubling volume in the June quarter?

There's probably two components to that. And we've talked about the cost outs that we've taken. And we've got a pretty good ability to control what comes back in to the Corporation. There're some things that structurally will never come back in. So what we've talked about in the past is, there's about $35 million worth of annualized costs that we took out in 2009. And we -- half of that is permanent savings going forward. And that's -- that stuff is pretty well within our control, or is a non-event.

The piece that's out there is really pricing leverage and -- as it relates to material costs. So we're still in a -- while 2010 is going to be better than '09 was, the bottom ACT forecasters are just around 100,000 -- just over 100,00 for the total trailer industry. That is not -- that's still below replacement level. That's still below the prior trough that this industry had in 2001 and '02 of 140,000 units. So it's still pretty competitive. And being able to pass those along in this environment's challenging. Certainly, as the demand profile grows and as it's forecasted to grow into 2011, that'll become easier. But that's probably the biggest challenge we face right now is the material margin on trailers.

Yeah, the wild -- just to expand on what Mark's saying, the real wild card in this whole thing is raw materials and what happens with commodities and the short-term impact. A lot of these jump up significantly in the short term. It's very difficult to pass those costs along in the short term, because you've already got firm contracts with customers on pricing. Over the longer term, it tends to settle out. And you recover as you re-price for new awards and new contracts. So if there was one thing that I would point to, it's the uncertainty of what happens in the raw materials side of the world.

Okay, certainly. One quick question with respect to the backlog. And I certainly appreciate your giving us the analysis of the full benefit of the Prime and the Swift orders. But I know in the last call that you had for the December quarter, you'd indicated, I think, at the time that you ended the year at 137 million. But if you looked at what you had on hand at that time, based upon how you put the backlog together, you would've had better than 200 million. If we kind of move that analysis forward to look at where we are now, how have order trends been for you since the end of March?

Continuing strong. We're seeing the same kind of quote and order activity. And we're seeing stronger conversion from quote to order conversion rates. We have not seen a let-up. And that's why, as Mark shared in his comments earlier, that if we were to do the same type of thing that Mark talked about in the last quarter in recognizing Prime and Swift and looking into 2011 and assuming similar volumes to what we would be building this year for both of those accounts, our backlog would be 360 million.

So we're feeling very good about the continued growth in the backlog. We're continuing to see good quote and order activity. As Mark stated earlier, even the flat bed market that had been very depressed for a long time, over the last 30 days or so we're starting to see a much greater quota activity in that space.

Last question -- pertaining to the Lincolnshire warrants, I know the strike price is very low. But I wasn't able to go through in reviewing the 10-K and the 10-Qs to get anything with respect to the mechanics on the exercise of those warrants. Is there any lockup provision on the exercise of those warrants? Or are they free to go in at any time?

Yeah, they were granted last year on August 3rd. And they're penny warrants and exercisable immediately. The Company had them registered. And the registration became effective December 8, 2009. So they can move those at their discretion.

Do you know if they've exercised any?

They have not. And as they -- as noted in the S-1 filing, typically they hold their investments for three years is how it's described.

Very good. Well, thank you very much.

Thanks, Dave.

Thanks, Dave.

Thank you. Our next question is from Tom Fogarty with Lion's Pass Capital. Please proceed with your question.

Yeah, hi. My question's on the inventory. You said that there were 700 units that were produced in first quarter that will be delivered in second quarter. I just wanted to, one, ask if you need to run a larger inventory going forward with demand ramping? Or if we -- that's kind of a one-time thing that'll reverse back out? And also, just to confirm that those are for firm orders.

Yeah. Yes, they're -- I'll answer the last question first. They are for firm orders. The vast majority of what we build is filled to order for specific customers. The only equipment that we'll build is some for stock purposes or for our branch business -- our retail business -- so they have some to sit on their -- at their lots for those -- for the quick sales.

We -- as just a matter of course, as volumes increase, there will be some increase in the finished good inventory. And it's just a timing issue from the time we complete the build and the time customers come in and pick up the trailers. Typically, that runs ten to 14 days. in some cases, we will make delivery of trailers for customers. So we manage the timing on that as the trailers are built and completed. So you will see some increase. But it is simply a timing issue. And they are, for the most part, built to order.

So, and then, you guys recently -- well, within the last couple of years -- implemented an ERP system. And is that going to allow you to sort of achieve lower inventory to sales than in previous cycles?

Yeah.

Yeah, absolutely. And I think we implemented SAP as our ERP in 2006, and really, kind of since that time frame have been leveraging that to bring down particularly what we have control over, which is the raw materials side of that, to significantly lower levels. And you can see what we were able to do during the even '08 and '09 time period in particular. And, in fact, the restructuring efforts that we did here in Lafayette, we've talked about taking out the three dry van lines. But what we also did was centralize a warehouse structure to where we consolidated ten warehouses into one. So we've got a significantly better operational footprint from that perspective. So we continue to leverage that. And I think you can get some good metrics by looking at what we did at pretty low levels last year.

Terrific. Thanks very much.

Yep.

Thanks, Tom.

Thank you. Our next question is from Garrett King with Truffle Hound Capital. Please proceed with your question.

Hi. As Trailer Investments exercises their warrants, can we expect the warrant liability to decline over time and shares outstanding to increase?

Yeah. Right now the warrant is treated as a liability. As it's exercised, that treatment for the warrant will move from liability to equity and become an outstanding share.

And the Company will be reporting a gain as a result?

No, it's really a balance -- it'll -- we're recording the expense or income as it may be through the P&L. Once it's converted from a warrant to a share, it's really a balance sheet move from the liability treatment that we have today down to equity.

Okay. And does the Company have any plans to issue shares in addition to any possible sales by Trailer Investments?

Garrett, we can't comment on that.

Oh, okay. Well, thank you.

Thanks, Garrett.

Thank you. Our next question is from Jim Larkins with Wasatch Advisors, Inc. Please proceed with your question.

Yes, I wanted to get some more color on the features of the preferred and warrants and review some of those right now. But is there on the -- is there a dilution covenant or an anti-dilution covenant on the warrants or on the preferred?

We'll start with the preferred. It's -- I would think of that -- the preferreds are not convertible. I would think of that more as a debt instrument than an equity instrument.

Okay.

The equity component that was issued is really the warrant. And Lincolnshire does have, or Trailer Investments does have some anti-dilution, or dilution I guess, protection currently. And they also have some rights as it relates to our NOL limitations that would increase the warrants outstanding.

Is there an easy way to describe those -- what those features are?

In terms of dilution protection, if equity -- there's a couple of things -- there's a couple different buckets. It's described in our SEC filing. I'll give you a couple of them. I won't cover them all. But to the extent that there were options that were outstanding at the time of the transaction that could get converted during their ownership, that could create a dilution event. And to the extent that we issue equity -- and there's a calculation that's in there -- but, essentially, if we were to issue equity below the strike price from last year, which was $0.54, or below the five-day weighted average, it would be a dilution event. And, basically, they would -- warrants would be issued to maintain their ownership percentage, which is approximately 44%. The other event is really an NOL limitation under the tax guidelines. If we had a change in control event, their warrant position would go from 44% to 49.9%.

Okay. All right, that's helpful. You mentioned that competition is still keeping your margins low and that pricing's still pretty difficult. Is there any other color you can give on competition in terms of importing of DuraPlate-like panels? And has that environment changed at all or the players changed their behavior at all?

Panels are still available that get imported out of Taiwan that competitors can access, those who choose to have a composite trailer offering. And that's -- it really hasn't changed a lot from that perspective.

Okay. And on the raw materials, is aluminum kind of the primary thing that you guys have to manage? Or is it just general steel and other commodities? Or what are the one that you really manage to?

Well, the only one that we can actually take a forward position on is the aluminum. But we also -- we're impacted by fluctuations in steel and plastic and tire prices relative to rubber and oil and what happens there. So we manage and monitor all of those. But those are the ones that can certainly affect us. If we have a short-term significant increase, we'll be impacted.

And with the multi --

Likewise, if they go down, we get a favorable impact. So --

With the multi-year contracts that you have out there -- maybe using those as an example -- how do you plan for the fluctuation in material pricing on those type of contracts?

We have some price protection language built into those multi-year agreements that we referred to earlier. So those are not -- while the current year may be fixed, as we move into the latter years of those agreements, there are price adjustment features in those.

Okay. Thank you very much.

Thank you. Mr. Giromini, that's all the time we have for question-and-answer. I'd like to turn the floor back over to you for closing comments.

Thanks, Melissa. We remain committed to our long-term strategic initiatives, which we believe will continue to transform Wabash National into a stronger and more profitable business.

I'd like to thank our associates for their dedication and hard work during the first quarter and over the last two years. We are confident your hard work is beginning to pay off. And we're extremely excited about the prospects of our future.

Thank you for your participation today. Mark and I look forward to speaking with all of you again on our next call. Also, we invite you to listen in on our annual shareholders' meeting, which will be broadcast live on May 13th. Please visit our website for more details.

Thank you.

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