Wabash National Corp (WNC) 2010 Q3 法說會逐字稿

Greetings and welcome to the Wabash National Corporation third 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, Chief Executive Officer of Wabash National Corp. Thank you, Mr. Giromini. You may begin.

Thank you, Christine. 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, 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 third quarter 2010 earnings call. I am Dick Giromini, Chief Executive Officer. In the conference room with me this morning is Mark Weber, our Chief Financial Officer. We have much to cover today, and we will try to provide as much information as possible. I will first comment on several key highlights for the quarter, discussing the broader operating environment, and provide our expectations for the coming quarter and fiscal year. Then I will ask Mark to provide a detailed description of our financial results. At the conclusion of the prepared portion of our presentation, we will open the call for questions from the listening audience.

So with that, let's discuss this past quarter's results. We continued to be pleased with the progress that we are making with the business, and in our Company's overall performance during the quarter. Most notably, we achieved positive operating EBITDA results for the first time in two years, consistent with our previously stated goal. We were able to achieve this level of performance as a result of our previously enacted cost actions, and ongoing operational enhancement initiatives.

Importantly, we achieved this milestone at notably lower trailer volumes than those enjoyed two years ago highlighting the structural changes we have made to our operating model since that time. To give you some perspective, just two years ago our operating EBITDA breakeven point required almost 50% more trailer volume. Our $600,000 positive operating EBITDA compares favorably to the $4.6 million loss generated during the third quarter of 2009, and the roughly $500,000 loss in the second quarter of 2010.

Given the continuing strong quote and order conversion activity we are experiencing and ongoing improvements in our manufacturing processes, we firmly believe that we are on the up cycle and well-positioned for an extended period of improving financial performance. Although the pace of the broader economic recovery has slowed recently, our industry continues to experience strength after a prolonged period of deterioration. During the third quarter, we shipped 6,800 trailers, slightly below the low end of our previous guidance of 7,000 to 8,000 units, but representing a year-over-year improvement of 89%, and a sequential improvement of 26%. The slight shortfall to our projections for shipments was due exclusively to a continued lag between production of the units, and pickups by some customers as they struggled to free up drivers to make the pickups, at a pace that could keep up with our rapid increase in daily build rate.

So let me make clear on this point. The shortfall is not indicative of any cancellations or slowing of orders. It is simply a timing issue between build and shipment, and will correct itself as we proceed through the balance of the year. More recently, since we reached and stabilized our daily build rate levels during this past quarter, that lag is narrowing, and customers are now catching up with their pickups, and we are seeing a nice increase in shipment activity. In fact, during the month of October, we achieved our highest ship month of the year, with nearly 3,000 units representing a great start to the quarter.

That being said, I would like to provide an update on our manufacturing restructuring initiatives. While the continued integration of our Transcraft business into the Cadiz Kentucky facility is progressing, there remains a lot to accomplish to reach the level of performance that we expect. Much remains to be done, however, with the new leadership in place that we announced during the past quarter. We remain confident that the team will continue to make the progress necessary through the balance of the year, and get us in better position as we enter 2011.

Despite what would typically be viewed as the seasonally low quarter for customer orders, our backlog at the end of the quarter remains strong at $334 million. This is noteworthy as we have nearly tripled our build rate since the first quarter, adding over 1,200 factory associates since the beginning of the year, and now have staffing in place to support a 35,000 unit annualized run rate. Recognizing that we are now in the traditionally strong order placement period of Q4 and Q1, we are well-positioned to again see growth in our backlog going forward. In fact, if we were to account for the swift and prime 2011 volumes that are now defined, that had not previously been included in our reported backlog, along with firm orders just signed during the past month, our backlog would reflect some $460 million. So we are well on our way to getting off to a nice start for 2011, and well ahead of last year's order pace.

As we noted last quarter, our DuraPlate products group continues to gain traction, and is notably contributing to our business overall with higher growth and margins. This group underscores our continued strategy to diversify our revenue and customer base, as well as expand the markets we serve. Taking into consideration the group's strong performance this year, we are on pace for full year revenues of between $23 million and $24 million coming out of that group.

Likewise our retail business continues to impress us having completed the second consecutive quarter of positive EBITDA and operating income. This despite consistently challenging retail market conditions. It is a tribute to the group's effort in optimizing the cost structure, to be effective in any market and operating environment. Now they can leverage those past efforts going forward.

All-in with the increased build and shipment levels, continued progress on our Lafayette operations and our retail units, offset by some headwinds remaining at our Transcraft unit, gross margins advanced during the quarter improving from 3.5% to 3.8% in third quarter, but remain far from where we believe they can be. With the current order season now under way, we are taking steps to address the margin compression that occurred during the downturn through pricing actions on new quotes. I have stated many times this is not a one-time event. It will be a gradual recapture as we proceed through 2011 and into 2012, and as we see overall demand continue to improve.

Before discussing our outlook for the fourth quarter and initial thoughts for 2011, I would like to briefly discuss the exit of Lincolnshire during the quarter. Following last year's capital infusion from Lincolnshire management, the firm recently opted to exercise the remainder of its warrants, and successfully executed a secondary offering for all of the equivalent shares effective September 17th with all of the sitting Board members having resigned their positions directly following the completion of the offering. The strategic deal with Lincolnshire provided Wabash with the necessarily liquidity to weather the tumultuous 2009 period. We have emerged a stronger Company, and are excited to have put that period behind us. Mark will comment later on the impact of their exit on this quarter's financial results.

Now I would like to present our outlook, starting first with an overview of some of the key economic indicators we monitor closely, that provide a broader context for our expectations. The Conference Board Leading Indicators Index remains strong at 110.4, which represents a high for the year, and is the highest level in over five years. The ISM manufacturing index remains above 50 for the 15th consecutive month advancing in October to 56.9. For the third quarter as a whole, total industrial production rose at an annualized rate of 4.8%. GDP advanced by 2% during the third quarter following the second quarter at 1.7% and reflecting the fifth consecutive quarter of growth.

Within the freight industry, the FTR truckloading index was at 111.9 for September, reflecting relatively flat quarter-over-quarter performance, and a 0.1% increase and 4.8% higher year-over-year. The ATA truck tonnage index for September ended at 108.7 up 1.7% month-over-month, and a 5.1% improvement year-over-year.

Finally, within the trailer industry, net trailer orders for September rose by 19% sequentially, ending at 13,148 units, and a strong 153% year-over-year improvement. Industry sources continue to expect that demand will increase through the remainder of 2010, and accelerate quite rapidly in 2011 and 2012. In fact, ACT now expects growth in factory shipments of 46% year-over-year to 115,000 units for 2010, with a further increase of 49% to 171,000 trailers in 2011, and 32% to 226,000 trailers for 2012.

Similarly, FTR has just this past week taken an uncharacteristically more bullish view of 2010, increasing their previous projection for trailer production from 116,000 units, to a now 129,000 units in 2010, or reflecting a 66% increase over 2009. Production of 149,000 trailers in 2011, and a further growth of 40% in 2012 to 210,000 units. Related to these industry projections, we expect to continue to improve market share, as the mix of dry vans relative to total trailer shipments continues to improve. Recall dry vans were particularly hard hit over the past two years, and therefore are projected to grow even faster in the intermediate term. Our leadership position in dry vans driven by our DuraPlate trailers positions us well to take advantage of this expected growth.

Other factors that support our belief that future demand will be strong, include both structural and regulatory issues that either have impacted or will impact demand for trailers in the coming years. While freight itself is the most obvious demand driver and as we discuss looks favorable, some others may actually have greater impact over the long run, and could support the basis for even higher peak demand during the cycle than what is currently projected. I will touch on just a few of these. Much has been discussed about the dampening impact that trailer tracking has had on demand for trailers since the technology began being installed on trailers early in the last decade. Since that time, it is estimated that over 600,000 trailers have been equipped with these devices. Benefits of the technology have been reported to have increased utilization by 5% or more.

A second trend was the shift from trailer on flat car to domestic container transport on the rails. As reported by ACT, TOFC loads have decreased by some 1.8 million loads per year, resulting in dampened demand for trailers of an estimated 3,700 units per year. Of course there is no question that trailer quality and durability was greatly improved with the introduction of Wabash DuraPlate composite trailer in the late 1990s from what was prevalent in the market place previously, allowing adopting fleets to lower their maintenance and operating costs while extending their trade cycle. However, that is all mostly history now, and built into forecasts.

Trailer tracking is now well established especially with the large truckload fleets that make up our core customer base. So any future downside impact to demand should be insignificant. Likewise, the major shift away from TOFC appears to be slowing. In fact FedEx recently announced plans to ship the portion of their business over to TOFC, and our flagship DuraPlate has now been in the market for some 14 years, with composites now making up over 40% of all trailers built each year.

The most significant factor that supports strong future demand is the overall age of the trailer fleet itself. With an average age that now exceeds eight years, representing the highest average fleet age on record, that alone would suggest that replacement demand must increase and soon. And when you examine the actual age related makeup of the fleet, we find that there are significant inconsistencies in the age profile. With over 850,000 trailers having been built during the period 1998 to 2000, followed by only 450,000 trailers built during 2001 to 2003, there are far more 11, 12, and 13-year-old units than the younger group following them. Combine those factors with the most recent past three years of demand that was well below historic replacement levels, and a strong case can be made for significant increased orders in the years ahead.

In addition to more structural trends just discussed, the regulatory arena presents a number of current or pending rules or legislation that will impact the industry that we serve. The extent of this impact remains to be fully understood, but also will likely result in increased trailer demand over time. One of these is the soon to be implemented overhaul of truck safety standards under Federal Motor Carrier Safety Administration, or FMCSA. Known as CSA 2010, a comprehensive driver and fleet rating system will take effect in December. By most industry estimates, this could affect between 5% and 10% of drivers or more that would be ruled ineligible when the new rules take effect. Many fleets have already taken action to disqualify drivers who could not meet the tighter rating standards.

A second development includes expected revisions to the federal truck driver hours of service rule, anticipated to be released shortly. In addition to seeing a lengthening of the so-called driver restart requirement from the current 34 hours to as long as 48 hours, industry insiders expect to see a tightening of hours that a driver can drive each day being reduced from the current 11 hours down to 10 hours. In response, we are being told, and we agree, that if implemented as suggested, many truckload fleets would likely need to increase their drop and hook activities, in an effort to minimize the amount of driver downtime during the 10-hour active period each day. This increase in drop and hook practice would require additional trailers to be available within a fleet system to accommodate this practice, and could lead to greater demand for new trailers by truckload carriers.

Finally there is the issue of the Highway Bill that expired earlier this year. Earlier this summer both the House and the Senate put forth bills that would increase the allowable gross vehicle weight, or GVW of a semi/trailer combo from the current 80,000 pounds to 97,000 pounds. This increase in allowable GVW has been supported by the ATA, while the TCA has recently put their support behind an increase of 88,000 pounds. An increase to 97,000 pounds would at the minimum, require the addition of a third axle to existing equipment, with the likelihood that many fleets may elect to replace older trailers for a number of reasons. First, to avoid spending money to upgrade these older units with a third axle. Secondly, to reset the ten-year rule imposed by some shippers. And third, to take advantage of today's lighter weight trailer designs, and truly maximize their load capability.

There are other issues related to the bridge laws that complicate matters for increasing gross vehicle weight but that is for another day. As you can see, in addition to previously discussed [CARB] legislation, and recently announced intentions to establish cafe like standards for heavy truck, there is a lot going on from a legislative standpoint that could impact the industry we serve. Time will tell what the true extent of the impact will be, but we will keep you informed as we learn more over the coming months and years.

Looking ahead near term, we expect our fourth quarter shipments to be in the range of 8,000 to 10,000 units, consistent with our previously stated guidance of volume shipments for the full year 2010 of approximately 23,000 to 25,000 units. The mid-point of this annual estimate represents a nearly 88% increase in orders compared to 2009. Looking forward into 2011, we are pleased with current quote and order conversion activity related to customer demand for the coming year, and are well-positioned to take further advantage of numerous cost restructuring initiatives and optimization efforts that we have implemented over the past two years. We expect to have our Transcraft integration well behind us early in the year, and look to gain further pricing leverage as demand continues to improve.

With current industry forecasts ranging from 149,000 to 171,000 units for next year, of which we agree, we believe that we are currently well staffed to support this increasing demand. At least for the first part of the year, and we will adjust build rates and required staffing as necessary. In summary, let me again say that we are pleased with the progress we have made during the third quarter and year-to-date. We are clearly on the right path. Our operational efficiency and cost actions are taking hold and have helped propel us to a positive operating EBITDA for the first time in two years. Our backlog and order activity remains strong, and we are very much looking forward to our fourth quarter and fiscal 2011. With that, let me turn the call over to Mark.

Thanks Dick. Good morning. In addition to our earnings release, we did file our 10-Q yesterday, so I will direct my comments to the key drivers during the quarter. Sales for the quarter were slightly behind expectations coming in at $171 million, including new trailer sales of $149 million on 6,800 new trailer units, which is just under the low end of our guidance of 7,000 to 8,000 for the quarter. Still more than a 25% increase from Q2. As Dick discussed, the orders and production in the quarter supported or exceeded the high end of our guidance range, and the missed shipments are now expected to occur in the fourth quarter.

The ASP for Q3 was down from the first half of the year by approximately $900, coming in at $21,800 per unit. The decrease in ASP roughly breaks down as follows. Two-thirds is due to customer and product mix, and one-third is attributable to lower pricing on large volume customer orders that were priced early in the year, but shipped during this quarter. Used trailer revenue was down slightly this quarter as compared to the prior yearquarter coming in at approximately $5 million on approximately 100 fewer units and higher mix of dry van sales.

For the quarter, parts, service and other revenue was approximately $17 million, an improvement of more than $5 million from a year ago, let down $3 million from the second quarter due to some seasonality. Again this quarter the majority of the year-over-year improvement was attributable to sales related to our DuraPlate products group, which is included in our manufacturing segment. Year-to-date sales of DuraPlate related products are approximately $19 million, a $12 million increase over the same period of 2009.

In terms of operating results, the third quarter showed sequential improvement in most areas based on the continued improvement in volume, which has increased steady since the beginning of the year. Gross margin for the quarter was 3.8%, an improvement from the second quarter's 3.5% due to increased shipments of approximately 1,400 new trailers. The Q3 operating loss of $4.2 million, reflects an improvement of $6 million from last year and an improvement of $1.5 million over the second quarter results. The significant year-over-year improvement in operating loss highlights the overall market improvement in our industry, and reflects production levels of approximately 8,800 units in the quarter, higher than last year's production by 5,400 units.

During the quarter, material costs trended up slightly. Material costs as a percent of selling price remains at a historically high level, and was 75.9% of sales in the quarter, an increase of 1.9% from the first half of the year. This increase as a percent of selling price is attributable to both the competitive pricing environment, particularly for large orders placed early in the year, increases in key commodities, particularly steel and wood, and a build rate which exceeded shipments by approximately 30%.

Based on our current contracts and commodity forecast, we anticipate material inflation generally to be stable during the fourth quarter. During the quarter we continued our efforts to improve manufacturing productivity as part of our consolidation efforts at our Transcraft flatbed facility in Cadiz, Kentucky. In addition, during Q3 we staffed up a second production shift on one of our drive van lines, and made continued progress on the integration of new workers brought in early this year. Similar to the second quarter these activities impacted gross margin in the quarter by approximately 100 basis points. However, we believe we will be positioned well for 2011.

At this point we are operating our van production lines on a two shift basis, four 10-hour days per week, and have manned capacity in place for the production of approximately 35,000 units annually. While we have the ability to add production lines and shifts, at this point we do not have any plans to increase capacity further unless market conditions improve. While incremental gross margins of 5.5%were less than both the 8.8% achieved in the second quarter, and off our target for this quarter, we anticipate an improvement in the fourth quarter back to the Q2 levels, due to improving production and shipment levels, and a more seasoned and efficient work force.

SG&A for the quarter was approximately $10.7 million, and down slightly from the second quarter's rate of $11 million. For the fourth quarter we expect SG&A to basically remain in this range. In terms of other income and expense, 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 a benefit of $3.3 million. However, as you are aware, of Lincolnshire fully exercised and sold the remaining warrants in the third quarter, a total of approximately 9.3 million shares. As a result, there are now approximately 68.3 million shares outstanding.

Lastly, interest expense primarily related to our revolving credit facility for the quarter was $1 million. Interest expenses remained at approximately $1 million for quarter, as the revolver has been used to fund the working capital requirements associated with the higher production level in the third quarter. At September 30th we had a US federal NOL carry-forward of approximately $180 million. However, we have a full valuation allowance recorded against our net deferred tax asset. The federal NOL carry-forwards begin to expire in 2022, please take a look at our 10-Q for details on the annual limitations for our NOLs.

The balance sheet details are obviously included in the 10-Q, and as we have discussed, the largest item of note is the increase in inventory. Finished goods inventory is up approximately $36 million related to finished trailers awaiting customer pickup at quarter end. We continue to manage capital spending to only require the maintenance projects and cost reduction initiatives, with year-to-date spending of about $1.2 million. And anticipated full year 2010 spending expected to be below $2 million.

Our liquidity or cash plus available borrowings at September 30th was $56.1 million, a reduction of approximately $12 million from the second quarter, the decrease is attributable to funding higher working capital requirements associated with the increased production of shipments during the quarter. As Dick discussed, the backlog has remained strong, despite increasing shipments during the quarter, and as of September 30th was $334 million. As described in prior quarters the backlog excludes any quantities for the second year volumes associated with Swift and Prime long term agreements, as those qualities have not been scheduled by month. Assuming similar volumes for those long term agreements and recognizing other orders received subsequent to quarter end, the backlog would increase by approximately $140 million.

For the full year, we continue to expect volumes to be in the range of 23,000 to 25,000 units, resulting in Q4 range of 8,000 to 10,000 units. We expect a similar improvement in results from the additional volume as we have done throughout the year, and as a result, we are looking forward to generating higher levels of operating EBITDA, with the potential to achieve positive net income if we are successful in reaching the higher end of our volume range estimates in the fourth quarter.

While we will not provide 2011 new trailer guidance until after our fourth quarter call at the earliest, we are pleased with the direction the Company is heading as we close out 2010. Our views for 2011 are similar to ACT's forecast and our visibility to next year improving as our backlog begins to fill in during what is typically a stronger order period. At this point the first half of 2011 has already built to over 50% of our manned capacity, while pricing on large quotes and orders have remained competitive early in the fourth quarter, we have a strong base in place as we work to fill remaining open slots with higher margin opportunities.

With that I will turn the call back over to the operator, and Dick and I will take any questions you may have. Thanks.

Thank you. We will now be conducting a question and answer session. (Operator Instructions). Our first question is from Robert Wertheimer with Morgan Stanley.

It is Joe O'Dea for Rob. First question is just with yesterday's increase in Class 8 orders, do you see fleets making sort of truck and trailer purchase decisions completely independent of one another? And is there any risk that if CapEx is allocated to trucks, that that could delay trailer purchases?

Certainly the decisions on buying tractors or buying trailers tend to be made independently by the fleets. They will be turning their tractors over on a more frequent basis, based on mileage and warranty coverage. On trailers they make the decisions mostly based on the increased maintenance costs as the trailers age, and some other factors like we have talked about in the past, with the so-called 10-year rule that some shippers impose on the fleets. So they will be separate decisions that are made.

As far as decisions within the individual fleets on whether or not they elect to buy tractors or buy trailers, those are their decisions. What we have seen is very strong activity from the fleets that we tend to serve. So we have not seen any pull back. In fact, we have been very pleased with the amount of the quantities that are actually being requested for quote, and placed and orders that have converted.

Okay, great. Just a second question on the price actions that you discussed. How are those being received? And then even on some of the high volume discounts are you still able to pass through some of these price actions?

Yes. How are they being received? Well, no one likes taking a price increase. So I think that is standard. That hasn't changed at all. The pricing environment is still very competitive. It will always be competitive. But we are seeing some success in passing along pricing. We are reflecting it in our cost models. And they are moving in the right direction.

The challenge is offsetting the price increases with material cost increases that may occur in the market place. That is always the balancing act that you face as the economy improves, commodity costs, material costs tend to move with them. So we are trying to do as much as we can, to reflect projections and material costs in our costing model, so that we can capture that in the pricing. It is always more difficult with the largest orders, and as Mark stated in his comments, we certainly try and make up as much as we can with some of the smaller orders that we get.

Okay. And then just one last question. On indications of interest you get from customers. Are you seeing any concern that customers have of extended lead times, and that that could potentially accelerate some of the order activity in the next few months?

The only issues that some customers may have faced now is, as we are starting to ramp up, would be year end capacity restrictions, where some customers may have to wait for 2011 build, because 2010 slots have been filled. But no at this point in time, I think that lead times are still pretty available with all of the open capacity that is remaining in the industry. I don't think lead times for customers is an issue yet. That will become an issue. We are seeing a lot of activity. The larger fleets tend to understand the dynamics of that. They try to get in early, both to try and get better pricing, which is obviously one reason for them wanting to get in early, but also to get the slots locked in that they want in the process. I think that is what is driving a lot of the early quote and order activity

Okay. Thank you.

Our next question comes from Jeff Kauffman with Sterne Agee. Please proceed with your question

Thank you very much. Just a couple quick detail questions. Dick, in your earlier comments you had alluded to some costs related to the refinancing of the equity shares that were borne in the quarter. I think you made mention to about 100 basis points in gross margin from the staffing of the employment, I was unclear whether that included the costs associated with the move from Anna to Cadiz?So could you just talk about kind of some of these shorter term expenses that are running through the P&L that say 12 months out may not be running through the P&L?

Yes, those were included in Mark's comments, I will let him reply to that.

The 100 basis point impact is similar to what we talked about in the second quarter. It is the combination of staff shift ramp-up here in Lafayette associated with the higher production levels and bringing in new work force that we are continuing to train and move up the productivity curve, as well as the impact of the client consolidation of the flatbed business. So for the past couple quarters, there has been a percentage point's worth of noise there. The transaction cost, there were some costs associated with the Lincolnshire transaction. It was probably $300,000 type of number that is in there that wouldn't repeat itself going forward.

Okay. Yes. I saw the legal expenses were up about $700,000 so I was curious about how much the offering was. Second question, you build 8,800, you ship 6,800. Now a majority of the costs associated with that would be finished goods, work in process inventory. Can you talk about the costs that may have been occurred with the excess of production over shipments that didn't end up in inventory, and might have run through the P&L, whether it was G&A related, whether it was non-materials related, cost of manufacturing?

Yes. Part of the reason why materials as a percent of revenue jumped up a couple percentage points is because you do have some period related costs that aren't capitalized in inventory, such as scrap. That was probably less than half a percentage point of that increase.

Okay. 50 basis points. Very, very good. Actually, that is all the questions I have right now. Thank you.

Our next question comes from Tom Albrecht with BB&T. Please proceed with your question.

Hey, guys, good morning. Can you hear me?

Hi Tom.

I was looking a little bit at your 10-Q and the inventories, and things like that. It just looks to me like there are some fascinating developments. I wanted to run these by you a little bit. For example I am just using an ASP of roughly $22,000 in your inventory, finished goods $79.8 million. But it looks like if I do that, you have got an inventory of little over 3,600 units. That is a market share of about 39%. If I kind of go back in the envelope using your ASP and your backlog, it looks like you have got a market share that is about 41%. You built 8,800 trailers in the quarter. It looks like you had about 33%. I know those are a lot of numbers.

My point is that historically, you have kind of been a 22% to 25% market share company. It looks like you are gaining market share pretty aggressively. Can you comment on that? Is that what you are perceiving the be the case in the market? And I have a follow-on to that once you address that.

I have said a number of times in the past this is a lumpy business, the way orders tend to come in big chucks. You can go through periods of time where you don't have any, and then you have periods where you get some big chunks of them. We never know what the final numbers turn out until the year is completed, and everyone formally reports their numbers. We certainly feel good about the progress we have made throughout the year with the order and build rates that we have had relative to what we believe is going on in the market place. So from that standpoint, we do feel good. But we won't know the numbers until the end of the year.

So I guess the question is, I mean because pricing remains competitive, as you would expect at this point in the cycle. You are not doing anything necessarily to artificially drive your market share higher, are you, at this juncture?

No, absolutely not. We don't chase market share. We try and identify the customers that we want to serve. And have tried to maintain relationships with our core customers. I think the surge you are seeing in the backlogs and the build rates for us are really tied to the actions of mainly the core customer base that we have, who are getting back into the game after sitting out of the game for one or two years.

And so with that, their trailer fleets have gotten older and as they are getting back in, they are tending to look at volumes that are much more like what we would have seen three years ago, certainly far above what we saw in the last couple of years, if any. That lumpiness that we talk about

The makeup of the backlog, I talked about this in the past, is still predominantly truckload, the large carrier guys, and it is the customers that we have historically had. There is no new big nameplate that we have gone out and bought the business on it. So have we grown market share? If we hit the high end of our range and ACT has the market at 115, we are going to be at 22%, and that is going to show that we recovered from the mix effect that we had last year which had us at 15% or 16%. So in that regard absolutely. Going after other business outside of what we have historically had, that is not the case

And then I want to make sure I heard something. You said October you did ship 3,000 plus trailers?

Yes. We were in that neighborhood

Okay. And the build rate for Q3 was 8,800?

Yes

Okay. And so the percentage of your backlog coming from dry vans and reefers, I assume is 90%+ is from those two segments that the flatbed is going to be maybe not even 5% of your backlog. Would that be a correct assumption?

That is correct

And then lastly, then I will get back in the queue. Dick, one of the things we get asked a lot about is your incremental margins. Haven't followed you a long time. I know sometimes it can be a little slower as you ramp back up. But where do you believe that real break through moment will be, whether it is tied to a certain production level, where all of a sudden we start thinking about much higher gross margins? I think you know the essence of the question that I am asking. But I would like to hear your thoughts right now, because it has been a year with a lot of progress. But next year you are going to be measured a little bit differently?

I think that is certainly an appropriate question. We have tried to be as clear as we could over the last couple of quarters, that a lot of the volume that we are producing this year is really tied to, as Mark continues to say, the big truckload guys that priced a lot of their equipment early in the year, and took advantage of very low demand period to get in the queue. We are building through those through this year. We have tried to reflect some level of pricing recovery or margin recovery on quotes as we are going forward. So 2011 should start to reflect early in the year, should start to reflect some of that leverage or incremental margin improvement that we are all waiting for. It is not just all of you on the phone. We are looking for it ourselves.

The other factors that we need to get through is the effects of the ramp-up that we have had to go through. It was such a rapid ramp-up that we experienced through the second and through the third quarter with the additional staffing and the consolidation integration activities that have gone on at Transcraft, that has created some headwinds for us that we need to work through. That is why we believe that once we get into 2011 and start getting some of the volume play, and get these things behind us, we will be much better positioned to start delivering the incremental margins that we would like to be seeing today.

I know you haven't given any guidance for 2011 yet, but I am going to give you a hypothetical. If you go from shipping let's say 24,000 trailers in 2010, to let's say 35,000 next year, would you need any more staffing to go from 24,000 to 35,000?

No. We are currently staffed at a 35,000 annualized rate. Our build rates today would support that.

Okay. That is all I have. Thank you guys.

Our next question is from Robert Stottman with Bentley Capital. Please proceed with your question.

Good morning. I am a little bit confused about the comments you made about backlog. Early on you mentioned the backlog was $334 million, and then said if you take into account strong orders and one other factor it would be more like $460 million. And then later on you said long-term orders and orders since the end of the quarter would add about $140 million, which would take it to about $475 million. Can you tell us, give us a sense of what has happened to the backlog from orders alone, and then since September 30th, and then what the impact of these long-term orders are?

I think we are going to talk about them combined, Robert. We are trying to triangulate. I think we said it two different ways, but it is triangulating around north of $460 million slightly.

My comments, Robert, were referring to specifically the long-term contracts that we had agreed to with Swift and Prime, and if we were to incorporate the volumes that we will build for Swift and Prime in our backlog, that had not previously been reflected, and including one other large one that we signed right at the beginning of October, it would reflect the $460 million. Mark's number that came out closer to $475 million was picking up a few other orders that came in during the course of October.

Okay.

That is the only difference.

Okay. Second question is, what level, if we compare the orders you're booking now even for large fleet orders, the pricing on that versus what it was with the orders that you referred to at the beginning of 2010, what would the price difference be? Is it 1% or 2%, or is it something more significant than that?

Yes. We need to be careful. Pricing is going up next year. But the majority of that is because materials have gone up throughout the year. So just to keep it on an apples-to-apples basis, there are a couple of percentage points in some cases, depending on the spec, of higher pricing because of material costs.

So that if pricing in steel and wood remain where they are now, would margins in 2011 benefit versus 2010? Or are the increased prices just going to offset raw material costs?

Yes. I think the answer is based on where the prices are now, plus our forecasts for where pricing is going to be on key commodities next year, the pricing would be from a margin perspective essentially flat on the larger orders.

Okay. One last thing. In terms of the industry operating rates and the ability to add back capacity, what level of industry orders do you think would be needed to restore somewhat better pricing?

I think we are on the edge of that. We, as an industry, are kind of on that level. The industry run rates, kind of in the third and fourth quarter are around 150,000, ACT has next year getting to 171,000, which is just below kind of replacement at 175,000. So we are little bit of a chicken and an egg in terms of pricing power one way or the other for the OEMs. But I think we are in that middle spot, and getting close to it shifting but it hasn't quite gotten there.

Okay. Thank you.

Our next question is from Steve Dyer with Craig-Hallum. Please proceed with your question.

Thank you. Good morning, guys

Morning, Steve.

Most of mine have been answered. Real quickly though just to verify, I think you had indicated you would expect backlog to be up in Q4, even after the higher sales quarter. Is that right?

Yes. Seasonally there is a seasonality to the order cycle. We didn't see it last year in Q4 because everybody remained hunkered down. But typically Q4 and Q1 is the order season for the carriers to be making those decisions. We have seen good activity early in the quarter. We think it is returning back to that normal buying pattern, where customers will be trying to get into the queue for slots, figuring that out and take trailers on more of a planned basis for next year, to deal with their aging fleet. So we do expect Q4 to remain healthy from a quote and order activity which would force it to trend up.

Okay. And then I think you had mentioned you have next year, the first half of next year about half filled to your current capacity. How does that compare, I guess, historically at this point in the cycle, or relative to your expectations? Is that something you are pretty excited about, or is that about par for the course?

We are real pleased at this point on how it is unfolding. The last three years we would not have seen this kind of activity. So it is getting back to certainly what the upside of a recovery looks like.

Okay. And then final question just with respect to the driver shortages that the carriers have been talking about, and you had kind of alluded to as a reason for maybe the push in the quarter. Is there anything being done to your knowledge to sort of make that, to take care of that problem? It doesn't seem like a one quarter issue, hiring enough people back. What is being done in the industry or how you think about that going forward?

Yes. Are you referring to the CSA 2010? And the driver rating systems, safety rating? Or just the overall shortage?

Just the overall shortage? It doesn't seem like necessarily a problem that is going to, despite our unemployment rate vanish overnight. So I am just wondering if anybody is from an incentive standpoint, or what is being done in the industry, or how you think about that over the next quarter or two?

I don't know what the fleets will do. I know that there has been some talk about how some of this is going to change the way driver pay is arranged. We don't know what that will mean. But currently they are paid on a so many cents per mile that they drive. And some of the legislation and some of the shortages of drivers are going to make good drivers a much higher premium, and there are going to be adjustments in how they pay those. We will have to see how that unfolds within the industry.

I know that a lot of fleets during the downturn had reduced significantly the amount of recruiters that they had to recruit drivers. They have had to ramp those up. So they have had the same types of issues that we in the manufacturing sector have, in trying to bring on new people and ramp up. They have had the same thing in their recruiting ranks, trying to get drivers. And then flat out there are a lot less drivers available in the market.

Steve, I think the other thing you can look at are the comments coming out of the public guys, in terms of where they see their equipment being, and almost all of them are saying they don't expect to be growing trucks at this point. I think it is indicative of the tight labor force they already have, and the expectation that it could get tighter with some of the regulations coming in. So to your point, I don't think it is something that gets fixed in a quarter.

Okay. Alright. Thanks, guys.

Our next question comes from Tom Finan with Avondale Partners. Please proceed with your question.

Morning, guys. Just sitting in for Kristine this morning. Actually most of mine have been answered. Just had one question on the backlog. Does a trailer that has been produced but not shipped show up in backlog?

Yes, it does.

Okay. That was it. Thank you very much

You are welcome.

Our next question comes from Tom DiBella with Turner Investment Partners. Please proceed with your question.

You said you had one-half in the first half of next year you are already filled by 50%. Is that 50% of the total production for the year, the annual production, or is that 50% of the production you could produce in the first half?

It goes back to what we talked about in terms of our manned capacity is about 35,000 annually.

Okay. Thank you.

Our next question comes from Stefan Mykytiuk with Pike Place Capital Management. Please proceed with your question.

Good morning. Just in terms of the trailer to tractor ratio, we have heard some stories of truckers contemplating increasing that, and you guys brought it up. But have you actually had conversations with customers who really are planning on doing that, to kind of increase the velocity of their tractor usage?

I had one customer specifically tell me that that will be the action that is taken to increase their effectiveness. They flat out said that. And they said others will do the same thing, was their opinion.

Okay

We met with one, Stefan, at ATA that when we met with them a year ago, said that they were going to reduce their trailer to truck ratio, and asked how that had been. In fact, not only were they not able to reduce it, they had actually gone the other way and have increased it.

Okay Kind of along similar lines, earlier in the year it seemed like some of the trucking companies were willing to absorb higher maintenance costs, both on trucks and trailers, just because they didn't want to spend the capital. Are you seeing customers also fold on that issue, and realize that they're better off spending the capital instead of the maintenance costs?

We certainly have seen it with customers that we serve. One customer in particular that had intended to go forward with a refurbishment approach has completely reversed direction and ordered trailers instead. Ordered replacement trailers. Recognizing that the modeling, the cost modeling just didn't work out to their benefit, so they decided to go forward and replace the fleet instead of trying to extend it.

Great. Okay. Thanks very much.

Our next question is a follow-up question from Jeff Kauffman. Please proceed with your question.

Thank you very much. Guys, by the way, congratulations. Very solid quarter. The DuraPlate products group. Mark, when do you think we start breaking that out separately? Can you talk a little bit about that group? I get the impression the margins in that business are a little bit better than the core manufacturing margin, and it is a little tough to see because it is kind of buried in the manufacturing business?

Obviously, I will reiterate a couple of things. What is in that group are a few things. Obviously PODS is one, kind of the poster child for that business when we first kicked it off over two years ago. So that business is in there for the portable storage container.

We have also been moving the DuraPlate into the truck body business through sales of the panels to the top three truck body builders in that industry. And it also reflects another big product in that is our AeroSkirt, which was designed to meet the California Air Resource Board requirements out there. So that is the makeup of it. There are a lot of other things in the pipeline. It is very much a growth R&D oriented, so we have been working through a lot of startup and R&D related costs with that. But it does have a higher margin than the truck side of it, or the trailer side of it. Our target is for it to be double the margins of the trailer side.

And long-term we have given guidance that we think it is $75 million to $80 million business. Last year was kind of a lost year for us. This is the first year for us to make some significant progress. I think if we can get comfortable that we are on the right track as we head into next year, we will look at breaking that out in a meaningful way for you.

Hey, guys, again thank you. Congratulations.

There are no further questions in the queue at this time. I would now like to turn the floor back over to management for closing comments

Thank you, Cristine. We remain committed to our long-term strategy, which we believe will continue to transform Wabash National into a stronger, more consistent and more profitable business. I would like to express my thanks to our associates for their dedication and hard work during the third quarter, and over the last two years. Those efforts are beginning to pay off, and we are extremely excited about the prospects for our future. Thank you again for your participation today. Mark and I look forward to speaking with all of you again on our next call.

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