Wabash National Corp (WNC) 2011 Q2 法說會逐字稿

Greetings and welcome to the Wabash National Corporation second quarter 2011 financial results conference call and webcast. 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 Corporation. Thank you, sir. You may begin.

Thank you, Kristine, and good morning, everyone. Before we begin, I would like to make an important announcement. As with all of these types of presentation, this morning's call contains forward-looking information, including statements about the Company's prospects, the industry outlook, backlog information, financial conditions, 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 second quarter 2011 earnings call. I'm 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, discuss 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 up for questions from the listening audience.

With that, let's discuss the second quarter results. To begin, let me provide you with some historical context of the current industry cycle. By any measure, our industry is truly in uncharted waters with the rate of demand growth we've all absorbed over the last 12 to 18 months. Never before has our industry experienced such a rapid recovery and demand following a deep trough period.

The closest comparison would be the 1982 to 1984 period when industry shipments grew by some 213% during that timeframe. However, even that period pales in comparison to the cumulative 268% increase in demand for trailer equipment for the current period. And if we look at industry-wide dry van growth alone, we see an even more dramatic five-fold rise in daily build rates since the beginning of 2010.

Although we have faced some temporary costs and operating challenges in meeting this growing demand, which I will discuss in just a moment, we strongly believe that our associates and suppliers did a commendable job of keeping pace in this unprecedented environment in responding to the needs of our customers. This type of response is not only expected, but typically rewarded as we move through the cycle.

For the second quarter, shipments came in at 11,400 units, which represents the highest shipment quarter since the third quarter of 2007, but shy of our expectation of between 11,500 and 12,500 units, while representing a strong 28% quarter-over-quarter increase in shipments and we feel good about this achievement. That said, some customers again had difficulty adjusting their pace of pick ups to match our significantly increased build rate.

Additionally, one large customer delayed the pick up of over 1,000 units late in the quarter to be able to effectively reposition its fleet during the third quarter. Absent that, it is clear that our initial projections were sound. And as this is simply a timing issue, we fully expect to realize those shipments in the current quarter.

On an absolute basis, we generated positive net income of $3.3 million or $0.05 per share during the quarter with operating EBITDA of $9.7 million. Additionally, we were able to deliver significant year-over-year improvement in both financial and operational metrics with a near doubling of revenue, a 63% improvement in gross profit margin, and a nearly $11 million improvement in operating income as compared to last year.

On the downside, we are clearly disappointed that we could not deliver quarter-over-quarter progress in our gross profit margin performance coming in at 5.7% or $16.2 million, compared to a gross profit margin of 7.4% or $16.5 million achieved in the first quarter.

Gross margin was primarily impacted by three specific factors. First, fixed price, low margin orders accepted early in the cycle; two, labor and efficiencies related to the production ramp up; and three, continued escalation of raw material input costs. As we discussed last quarter, we anticipated these headwinds, but they presented more of a challenge than we expected.

Let me now address each of these in more detail. First, we are still working off some of the larger quantity, lower priced, lower margin orders that were accepted early in the cycle when overall demand would not support higher pricing. Additionally, some of these orders contain fixed price options per additional units, all of which remaining were subsequently exercised during the quarter, thereby exacerbating this headwind for now.

Although the build out of these remaining lower priced orders will carry on into the fourth quarter, we effectively start the 2012 calendar year with a much cleaner slate. Second, the pace of productivity improvement for the new workforce during the quarter proved to be slower than originally anticipated. In the past two quarters, we've on-boarded some 1,200 new associates, which represents almost a 50% increase in hourly staffing.

In contrast to last year when we hired a similar number of associates, of which a high percentage had previous Wabash experience, the vast majority of this year's new hires had no previous work experience with Wabash. With such a large group, we misjudged how much more this would extend the learning curve. While this did impact productivity during the quarter and continues to present growing pains, progress is being made with expectations to be at full proficiency performance levels by year-end.

And third, raw material and commodity cost increases impacted the results sooner than expected as the accelerated build rate consumed lower cost materials earlier in the quarter than initially expected. While we have taken actions to partially offset this impact, such as capturing tire price increases and implementing price increases on non-fixed price orders, the impact of those actions won't be seen until late in the year.

While challenging for now, the commodities and materials cost impact will improve as we get into the fourth quarter due to recent commodity cost moderation and timing of impacts. And the opportunity returns to acceptable margins as we re-price new orders for 2012.

Finally, with demand reaching pre-recession levels and further strength projected in the coming years, we are not only in a much better position as we enter the 2012 calendar year quoting season to secure improved pricing on new orders, but also to gain more agreeable cost recovery terms, thereby protecting margins from deterioration as a result of future commodity inflation.

Let me pause here for just a moment and make a few things very clear for everyone. None of these near-term headwinds are structural issues with our business. They are temporary and will be corrected or significantly abated as we progress through the year and into early next year. I have complete confidence in our business model and the team's ability to execute and improve our operating leverage.

As it relates to shipments, I want to clarify again that we are predominantly a build-to-order business and do not build speculative product that would not end up being recognized. As such, nearly all trailers produced and not yet picked up by customers will be picked up by the end of the current year. In addition to the normal improvement in trailer shipments typically seen in third and fourth quarter, this year has the added incentive of the 100% bonus depreciation to further encourage our customers to replace equipment in service by year-end.

Let me now turn to some of the successes we had in the quarter. In addition to shipping 11,400 units, our largest number of shipments since the third quarter 2007, we achieved top line revenue of $287 million, the highest since 2007. Our backlog not only remained healthy, but grew to $736 million as of June 30th this year, which partially reflects customer execution of all outstanding fixed-price options for additional units along with closure of several large open quotes from the first quarter.

In addition, with limited slots available, mainly in the fourth quarter, we have had success in securing more favorably priced orders reflective of the current demand environment amounting to approximately one-third of the planned build for the fourth quarter. As a result, at this point, slots for 2011 dry van business are essentially sold out and new dry van quota activity is being directed to next year.

Our efforts to diversify the business continue to gain traction. DuraPlate products achieved another record sales level generating over $15 million for the quarter and the group remains on track to achieve $40 million to $50 million for the year. We are seeing continued growth in the major markets DuraPlate product serves and with significant growth in the DuraPlate AeroSkirt product line in particular.

Although demand has additionally been driven by (inaudible) regulations, we see continued strong growth for sales of the AeroSkirt product as fleets begin to realize the return of investment on the product. As well, Allied Products has continued to execute nicely as a second part of our business diversification strategy. Start up of the new frac tank fabrication and assembly line is underway at our south campus and shipment of the first 27 frac tanks occurred in the quarter.

Similar to the successful evolution is taking shape with our DuraPlate products line, we view the frac tank as an entry point within the energy and environmental services sector to expand our Allied Products line around, leveraging our expertise in fabrication, forming, and assembly. So while only representing a small portion of our revenue at this time, we expect this to be just the beginning of a very rapid and exciting growth business for us.

Finally, through organizational cost controls and disciplined spending, we are realizing improved leverage in our overhead cost structure thereby providing for reduced SG&A percentage to 3.9%, our lowest since the fourth quarter of 2005. Reducing SG&A to this level enabled us to achieve an operating income margin for the quarter equal to the 1.8% delivered in Q1, overcoming some of the cost challenges that impacted gross profit margin this past quarter. This SG&A leverage further supports our longer term objective and commitment to deliver strong operating income performance during the current cycle.

Before I review our outlook for the third quarter, I would like to first take a few moments to provide an overview of some of the key economic indicators and industry dynamics that we monitor closely that provide a broader context for our expectations. The Conference Board Leading Economic Index rose in June to 115.3 following a .8% increase in May. The index indicates economic growth near-term, although slowing.

The ISM manufacturing index decreased from 55.3 in June to 50.9 in July, indicating slower but still expanding activity in the manufacturing sector. For the second quarter 2011, total industrial production increased an annual rate of 0.8%. GDP advanced by 1.3% during the second quarter, following a first quarter at a now adjusted 0.4% as consumer spending slowed, but still reflecting the eighth consecutive quarter of growth.

Within the freight industry, despite weaker than reported GDP, FTR's June truckloading index was up 0.2% month-over-month and 3.4% year-over-year. Looking forward, FTR expects demand to push the monthly index rate upward by an average 0.2% for the remainder of 2011. And the ATA truck tonnage index for June increased to 115.8, up 2.8% up month-over-month and a strong 6.8% year-over-year. The largest year-over-year increase since January of this year. For the first half of 2011, total tonnage improved 5.5%.

Within the trailer segment first half 2011, net trailer orders rose by 65% from first half 2010 levels to 119,000 units leading to an industry backlog of over 97,000 units. Also ACT reported first half 2011 factory shipments of just under 97,000 units, up 93% year-over-year. With strong demand evident both ACT and FTR recently increased their projections for 2011, with ACT now at 209,000 units shipped and FTR at a projection of 221,000 units produced for the full year.

Longer term, ACT is projecting trailer shipments of 260,000 and 266,000 units for 2012 and 2013, respectively, while FTR is now forecasting production builds of 256,000 and 285,000 units for 2012 and 2013, respectively. Strong numbers.

On the regulatory front, there is little new to report since our last call other than the pending legislation pertaining to potential changes to the hours of service rules. With a significant push back from ATA and others, the Federal Motor Carrier Safety Administration opted to open a second public comment period with the new date established of October 28th for publishing of its revised rules.

Expectations continue that significant changes are likely to be made to current hours of service rules with the high ranking ATA official placing odds at around 60% that allowable driving hours would be reduced from 11 to 10 hours per day. If enacted, this change alone will likely fuel increased trailer demand over time as fleets work to overcome productivity losses resulting from this change by increasing drop in hook activities.

Now, let's discuss expectations for the third quarter and the full year. We expect third quarter shipments to reach or exceed 13,000 units, as customers continue to adjust their pick ups to our higher output levels. Recent shipments indicate that customers are making progress in this regard as pick up of their equipment is reflecting an improved rate. This reflected in the shipment rate for July of just under 4,000 units.

In addition, with our strong backlog in hand, we're increasing full-year shipment projections to be between 46,000 and 48,000 units, up from our previous estimate of between 45,000 and 47,000 units. As we move forward at these higher levels and with improved productivity, we expect to demonstrate improving gross margins and operating leverage late in the year. Mark will respond on that in a moment.

So, in summary, the second quarter turned out to be one of both success and disappointment for Wabash National. We are in a period of unprecedented demand growth in our core trailer business that exacerbated the normal challenges of ramping up following a downturn. While frustrating in the near-term, it is just that. Near-term and temporary. There is no structural break down of our model. It is sound, and we will be successful.

Our industry is still in the early innings of this cycle with factors including CSA 2010, hours of service, and an accessibly age industry fleet that should sustain strong demand for several years. We are increasing our tension to the longer term positioning of the Company to ensure efficient production capacity is in place along with a strong sales strategy to fully capitalize on the upcoming strong 2012 order season and beyond.

Our diversification growth initiatives are doing well with DuraPlate product sales setting all-time records and fulfilling the vision that we had when initiated this focused effort in 2008. Likewise, our Allied Products initiative is following a similar path with the successful start up of our frac tank product. And our retail trailer centers are continuing to gain more and more traction operating in the black and beginning efforts to expand their footprint. Overall, progress is being made, and we will remain focused.

With that I will turn the call over to Mark for a detailed overview of our financial performance. Mark?

Thanks, Dick, and good morning. In addition to the earnings release, we also plan to file our 10-Q at the end of the day, so I will focus my prepared comments on the key performance drivers in the quarter and on our outlook for volumes and other related factors for 2011.

At the top line, sales for the quarter grew to $287 million, the highest level since 2007. New trailer sales represented $252 million of the total on 11,400 new trailer units which, as Dick mentioned, was just shy of our guidance for the quarter of 11,500 to 12,500 trailers, and represents more than a 200% increase from the second quarter of last year. The ASP for Q2 increased slightly from the first quarter by approximately $400 coming in at 22,100 per unit. The increase in trailer ASP is largely due to customer and trailer (inaudible) during the quarter.

Looking at the other main product lines, used trailer revenue coming in at approximately $6 million on 800 units was up slightly compared with prior quarters. In general, the used trailer market continues to demonstrate healthy demand and pricing, but availability of late model equipment is sparse. Parts, service, and other revenue was approximately $29 million in the quarter, an improvement of approximately $10 million from a year ago and $6 million from the first quarter.

This record-setting performance was again led by sales of our DuraPlate products, which achieved over $15 million in revenue in the quarter. Year-to-date sales from DuraPlate products of approximately $26 million have now surpassed 2010's full-year performance. The success demonstrated by this product line reaffirms our strategy and longer term goal of reaching sales of $70 million to $90 million by 2013. In addition, as Dick mentioned, we had our initial Allied Product sale of frac tanks in the quarter and expect that product to add approximately $9 million in revenue in the second half of the year and more than double that as we enter 2012.

Let me quickly recap again the break down of the $287 million in sales by major product category for the quarter. New trailers were $251.7 million on 11,400 units, with an ASP of 22,100 per unit. Used trailer was $6.1 million on 800 units, and parts and service revenue, which includes the DuraPlate product line was $29.3 million.

In terms of operating results, gross profit for the quarter was $16.2 million or 5.7% and represents an improvement from 2010's second quarter gross margin of 3.5% due to increased shipments of approximately 6,000 new trailers. As we discussed leading into the quarter and as Dick just covered, the second quarter faced the significant challenge of on-boarding approximately 1,200 employees to meet increasing demand of backlog.

We also noted the potential for headwinds from component and commodity costs which has seen significant increases since the start of the year. Now, having closed out Q2, total employment increased to approximately 4,300 corporate-wide or 1,300 higher than at year-end. And trailer production volumes reached 12,800 in the quarter or approximately a four-fold increase from the production rates just over a year ago.

The training cost and manufacturing productivity impact from this rapid increase in production primarily accounted for the 1.7% gross margin reduction from the first quarter. Additional production ramp up occurred again in July, but we expect to see labor productivity improvements late this quarter as the workforce begins to stabilize and mature. Again, we believe we will be well-positioned by year-end with staff capacity in excess of 52,000 annually.

In addition, while production volumes increased 35% in the quarter, the benefit from the higher liquidation of fixed plan overhead was mitigated by higher raw material and component costs. During the quarter, material costs experience continued inflationary pressure, although some areas appear to have hit a plateau recently.

As a result, manufacturing material costs as a percent of selling price trended up during the quarter from 73.3% of sales in Q1 to 75.6% of sales in Q2. The 2.3% increase in material costs is reflective of the shipment of trailer orders which were booked and priced in a softer demand environment either late last year or early this year and prior to the large run up of material costs. In fact, approximately two-thirds of the shipments this quarter were priced in 2010.

We will continue to work through the lower margin backlog as we close out the back half of the year with some relief in the fourth quarter as more recently priced higher margin orders are produced. Combined, the unfavorable impact from the manufacturing productivity and raw material escalation, impacted gross margins in the quarter by approximately 400 basis points.

However, for the third consecutive quarter, Q2 generated positive operating income of $5.1 million and reflects an improvement of $10.8 million from last year. Operating income improved from the first quarter by $1.1 million as the business successfully leveraged its approved cost structure to deliver O/I margin consistent with the first quarter coming in at 1.8%.

SG&A for the quarter was approximately $11.1 million, down $1.4 million from the prior quarter reflecting lower professional fees and compensation costs, even as revenues increased 30% in the quarter. The business realized reduced SG&A costs and at 3.9% of revenue reflected one of the Company's best performances.

Net other expense of approximately $1.8 million relates to borrowing and financing costs associated with our revolving credit facility. As previously announced, we entered into a new five-year $150 million revolving credit facility during the quarter. As a result, the second quarter reflects a noncash loss on debt distinguishment of approximately $700,000, or $0.01 cent per diluted share.

The new revolver is expected to benefit the Company to improve liquidity, as well as reduce borrowing costs. As an example, if the new revolver had been in place throughout the entire second quarter, pro forma interest expense would have been lower by approximately $400,000.

In terms of taxes at June 30th, we have a U.S. federal NOL carryforward of approximately $174 million. However, we have a full valuation allowance recorded against our net deferred tax asset. The federal NOL carryforward begins to expire in 2022. Please refer to our 10-K for more details on the annual limitations for our NOLs.

Finally, for the quarter, net income was $3.3 million or $0.05 per share. Excluding the early distinguishment impact from the refinancing and revolving credit facility, adjusted EPS for the quarter was $0.06 per share. The details of EPS and share count are included in the press release.

In regards to the balance sheet and cash flow statement, let me provide a little more detail on some specifics. Total inventory increased approximately $50 million in the quarter related to increases in raw materials of approximately $14 million and finished goods of approximately $22 million, as production ramp up increased from an annualized rate of approximately $36,000 to an annualized rate of approximately $50,000.

As of June 30th, inventories of $195 million consists of the following. Raw materials were $65 million, WIP of $16 million, finished goods $101 million, parts of $5 million, and used trailers of $8 million. Year-to-date capital spending of $1.5 million remains relatively low, but is projected to increase throughout the second half as the year's production increase and the business continues to execute its strategic growth plan.

We currently anticipate full year 2011 spending to be approximately $6 million to $8 million. Our of liquidity or cash plus available borrowings as of June 30th was $91.7 million, an increase of approximately $35 million from March, reflective of the expanded availability achieved through our new revolving credit facility.

In summary, Q2, as expected, had its challenges going into the quarter and, as previously discussed, these challenges do not subside in Q3 as we continue to work through volumes from earlier priced backlogged orders and continue the installation and stabilization of production capacity to meet the higher demand environment. However, as we move into the fourth quarter, we expect to benefit from increasing shipments, improved manufacturing productivity, a richer mix of more recently priced orders, and potentially moderating commodity costs, which we expect to translate into our best margin opportunity of the year.

Nevertheless, I think it is worth repeating we believe Wabash will be well-positioned for 2012, a year where the industry is expected to grow by over 20%. Closing out 2011, we will have staff capacity in place for over 52,000 trailers annually and a more seasoned workforce. As we enter the 2012 trailer order season later this year, it will be the first time this cycle where the trailer industry has been operating at above replacement levels, a key determinant, we believe, in order for industry pricing and margins to improve.

Finally, we expect our nontrailer diversification industries represented by our DuraPlate and Allied Product lines to deliver incremental growth and margins and opportunity which did not exist during past cycles.

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

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). One moment while we poll for questions. Thank you. Our first question is from Brad Delco with Stephens. Please proceed with your question.

Good morning, Dick. Good morning, mark.

Hey, Brad.

On the backlog, and I understand the headwinds on the margin, but is there anyway to sort of break out into two buckets what falls in the category of kind of what you have been experiencing the last two quarters versus what has been newly priced, and then maybe any commentary on what the margin profile difference is between those two buckets?

I will take a stab, Brad. The first part, I think the first part of Dick's comments kind of indicated that when we came into the quarter one, the only slots we really had available were in the fourth quarter, and we have essentially, at least from a dry van perspective, we have filled those slots within this current demand environment, and that equates to a third of the build that is planned for Q4 at this point.

So if you look at our backlog, it remained flat, so in a sense we placed about $250 million of new backlog given that our new trailer revenue was $250 million in the quarter. If you look at that, about 60% of that was related to either execution of existing options that we had given at fixed prices or some carryover of outstanding quotes from the first quarter, and then the balance of that about 40% of it relates to the more recently priced orders in this demand environment.

In terms of margin, I think it obviously recovers all of the raw material inflation that we have, so you saw that compression happen in the second quarter, which was the 2.3%. The margins are better by at least that, plus in a lot of case there's incremental margin achieved on those orders above that.

Got you. So I guess the way I think about it then in terms of gross margin expectations Q3 is still challenging probably more challenging than in Q2 and then Q4 you should start seeing some relief?

Yeah, I think Q3, realistically, has the same challenges that we talked about a quarter ago and that we experienced in Q2 of working through the ramp up in productivity and the stabilization on the plant floor for that. (inaudible) headwind on raw materials, but a little more volume from a production capacity to help mitigate some of those.

But I think, in general, Q3 feels a lot like Q2, and then in Q4, you start to get some movement in terms of better mix of orders that are recently priced in this demand environment. A stabilized workforce where we aren't adding any additional shifts and the workforce that is there will have had a couple months, if not more, on the job. And potentially, we'll see where raw materials go, but potentially, that will help as well.

And then one final question, if you don't mind. I guess I remember you guys were altering the contracts where you had mentioned passing on the cost of tires directly, as well as having some options to renegotiate price 60-days prior to production. Can you give us any sense of what the success rate is on that on the more recent orders, and is that something that helps us get confidence that the margins come back toward your expectations beginning next year?

We did go out and have a high level of success in passing through tire price increases. We have established a standard practice now on all new quotes to separate tire pricing from the trailer quoted price because of the volatility of what's happening with tire pricing in the market. And it had surprisingly good receptance around that. So that has been very successful, but the impact that we will see, of course, all 2012 quotes are being treated that way, all new quotes, but the recovery on those that we have the ability to go out 60-days prior to the build, we had a very high success on it.

But the impact of that will mostly be reflected in the fourth quarter. And that's where our comments have been around. There is some delay on that. We have also had some success as we have gone forward and adjusted pricing for a number of those quotes that Mark referred to in the fourth quarter, and those look much more favorable. In that, we tried not only to capture full recovery of any of the commodity cost impacts that we have seen through the year, but recovery of margin that we lost during the downturn. So we look -- we are very hopeful and have high expectations for the fourth quarter.

Great, thanks, guys, for the time.

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

Hi, guys. Can you hear me?

Yes.

Hey, Dick and Mark. All right, I just want to piggyback on Brad's question a little bit. So we know with roughly a third of the backlog was one in the second quarter presumably at much better gross margins. I think, Mark, you indicated that the slippage in the material costs would be at least recovered from Q1 to Q2 and then hopefully some -- I guess what I'm unclear about is how much -- so I guess third quarter is still overwhelmingly production of poorly priced fixed price trailers. How much could fourth quarter production be of trailers that are under the new pricing umbrella.

I think it is that same one-third. The slots that we had available coming into the second quarter really were all Q4, and we filled those from a dry van perspective, and that's the one-third we were talking about earlier.

So one-third of Q4 production or one-third of the backlog? I guess that's where I'm getting -- if the fourth quarter production is 14,000, it would seem to me that overwhelmingly 14,000 or so units should be at much better pricing.

No, it's one-third of the production in Q4. In your scenario, the 14,000, one-third would be 4,600 trailers approximately.

Are you exiting 2011 and looking into 2012 with slots that are going to be filled solely with money makers? I think that's what the street's trying to figure out here is -- I mean, otherwise, why hire people, why fill these slots with orders if they are not going to be 100% money makers?

The simple answer to that, Tom, is yes with the one small caveat that we do have a small group of orders that carry over into 2012 that were either multi-year or based on a customer's own fiscal year in the way they place orders, they would span over into 2012. But the predominant volume of orders and units that will be taken in 2012 will be under new pricing. And a portion of the already existing orders that I just referred to in 2012, do have some price recovery mechanisms. So basically, it's 80%, 90% of them are going to be much more favorably priced.

So let's say production next year is 55,000 to 58,000 units, so up from 46,000 to 48,000. Let's just assume shipments and production are the same term right now. Can your 4,300 people produce 55,000 to 58,000? Or are you going to have another batch of hiring?

No, we have the opportunity to -- we will have staff capacity to do in excess of 52,000 units. Depending on the level of productivity improvement that we get from the lines, we could extract even more with that, or we do have opportunity to fill in with some level of overtime before we would have the need to add any shifts. We also have capability to increase line speeds, which would be minimal addition of labor. So we are pretty well-positioned. If it gets to that 55,000, 56,000 or so that you are referring to, minimal impact that we see from a productivity and labor standpoint.

And let me just ask one other question and I will get back in the queue. I understand you had these fixed price contracts and customers exercise their options, but this is a very interesting year where you are sold out, the market is sold out, there is a lot of tier one and two supplier issues, you've got depreciation tax credit, people want these trailers this year so they can get that, was there ever a point where you could have just said, "we're not going to build them, guys, unless the price is X"?

Under our contractual agreements, we certainly felt obligated to honor those agreements. So the simple answer is no on those that were existing and yes on anything that did not have long-term contractual arrangements set up or firm agreements in place. We did go and force the issue with those. On the handful of them that we did have firm priced commitments, we honored those obligations.

So clearly the tone and the conversation that I described was something that you have displayed then regarding those 2012 orders? In other words, "Hey, guys, we are not going to add people, we're not going to build it unless the price is X."

Absolutely. I mean, that is the approach that's being taken. The negotiations are never simple and easy when you are trying to pass along cost increases in the form of higher pricing, but they are necessary and they do take place, so yes.

That's all I have. Thank you.

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

Thanks, good morning. I think just kind of piggybacking on Tom's question, I think what he was probably trying to say in a nicer way is for probably six to nine months now, you guys have held all the cards in this dynamic, and it is sort of not reflective at all sort of in most of the backlog or in anything that you've shipped thus far. So can we expect I guess when 2012 rolls around that there will be sort of a step function in margins given that that's almost entirely the new quotes?

Steve, yeah, I mean, absolutely. I think if we look at the -- while we haven't had a lot of slots to do that with and place orders with in 2011, for the ones that we have been able to place, we've seen that step level change in terms of recovering raws and improving the margin trend there, and we'll get the benefit of a stabilized workforce and get to pick up the 1.7% productivity hit that we saw here in the second and expect to see in the third quarter, as well.

So, yeah, you get some stability on the shop floor, you recapture raws, and in the price recovery, you do see a step up. And I think if you look at the on-the-fringe, the incremental ones that we have placed this year, that it's not as big of a step function change when you look at what's been placed recently.

It just seems like given the unprecedented speed and demand here, we should be hoping for more than recovering raws, so hopefully there is extra on top of that.

Absolutely, Steve, that is the case. We are going after recovering the lost margin during the previous downturn, so it's not just recovery of the raw materials increase.

In past calls, you've suggested that given some of the structural changes you guys have made in the business since the last peak, you would expect to be able to do sort of previous peak margins earlier in this cycle, and then sort of us leading to higher peak margins in this particular cycle. Is that still something you feel comfortable with?

Absolutely. There is nothing that has really changed our fact pattern from an execution perspective. Longer term, we've got the structural benefit, we've got the diversification activities. Our expectations are to do better than a previous cycle, and we think 2012 is really the first new bite of the apple in terms of demonstrating that with a demand environment that's above replacement level for the first time in the last four years in terms of a pricing environment that we're heading into.

So I think we'll start to see that demonstration next year, and then we will continue to build upon that as the cycle builds out. It is still early in the process. The age of the fleet hasn't gotten any young every. The regulatory environment hasn't got easier. So we're still very optimistic on demand for our industry being a strong and high volume demand environment for several years.

Nothing has changed in our expectations as we go forward to 2012 and beyond. So we have the same level of confidence that we exhibited before. The business model is sound. We are just going through a little rough patch here as we absorb this significant increase in demand and we get our bite at the apple as we get later into the year and get into the quoting season for 2012. And early returns would indicate that the environment is there with some of the orders that we have been able to accept for 2012 are much more favorably priced and will reflect that going forward.

And then kind of to that question, what have you seen, if any, sort of change in cancellation activity now with sort of the feeling that the economy is maybe turning south or a little rockier. I think the market's next fear is that the 2012 year isn't nearly as robust as it sort of maybe was shaping up or has been looking like it might be. Are you seeing any increase in cancellations or trepidation on the side of your customers?

No, by all recent accounts, there has been little negative reaction on the part of fleets. Some fleets are saying that there's enough business to keep them full. I have heard comments, "Well, it's flat out there, but it is strong enough to keep us busy." Those are both good signs that unless the economy truly goes into another recession by definition, negative growth, we certainly believe there is enough truck tonnage out there, enough loads out there for the fleets to continue to remain healthy.

They have taken a lot of capacity out of their system, they've been much more conservative, so it allows them to operate effectively in the current demand environment. Some of the comments that Mark shared earlier with the age of the fleets being at record high levels, the CSA 2010, the overhang of that and some of the pressure that that's causing, and then hours of service concerns going forward, we don't see demand softening. The equipment is in bad shape.

The oversight or watchdog that has been created by CSA 2010 is really forcing the carriers to really look at the equipment within their fleet and say we have to do something about it. They went the last three years significantly under-buying versus what normal replacement levels would be.

The equipment that is needing to be replaced was produced during the three strongest years of our industry back in 1998 through 2000, 850,000 trailers built during those three years and only 350,000 the last three years. So a significant shortfall of not only normal replacement, but in addressing the oldest equipment in their fleet. And the comments we have heard from a number of customers is they need to continue replacing the old equipment in their fleet.

So from that standpoint, we don't see it, we've not heard it, ACT and FTR likewise have just recently increased their projections for this year and next, so unless something dramatic occurs, we still feel very strong that we're in the early innings of this recovery, and it has several years to go. There is a heck of a lot of catch up to get their fleets to a reasonably aged fleet overall.

And then just last question, you guys have done a good job with the operating expenses, even bringing it down again this quarter. Is that a good level or was there some, you know, maybe some one-time benefit that we should expect more like $12 million and $12-and-change million level as opposed to $11 million?

Yes, I think I talked in the last quarter that we expected it to trend more like the Q1 number, which was about $12.5 million, so I think we'll still get to around a 4% as a percent of revenue, but you would expect it to be a little higher in the balance of the year as volumes go up

Thanks, guys.

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

Thanks. Hey, Dick and Mark.

Hey, Jeff.

Thanks for taking the time you did to explain in a lot of detail what was going on. I guess in the investors' minds, there are really two questions, and I think you did a reasonably good job of answering them. Question one is this year you basically were in business for free, and your customers reap the benefit of that. Is there a recognition by your customer base that you bore a lot of expenses on their behalf this year and you are entitled to a fair return next year? And are you going into these discussions, as you mentioned, not jus we need raw materials, but we need to be making operating margins somewhere in this range, and that's how we are pricing?

Those are very much the discussions that take place almost precisely the way you described it. We have open dialogues with our customers. We do share with them that it has stepped up and we do need to make a fair return on what we are doing. The strong environment allows us to become more selective in what business we end up taking. So it's a lot better environment to have those kind of discussions and dialogues than what we were facing nine months ago when a lot of these orders were being discussed in price.

Going forward and currently, as we start entering into the discussion, those are the discussions we have had. And the success we've had that we talked about for the fourth quarter, those are the types of discussions with some of the orders that were placed that will impact us in the fourth quarter.

And then final question, and, again, I think you eluded to this, do you think we're almost at the end of the mea culpa period where we're going to get these surprises like, okay, customers exercise more orders than we had out there? And I think, Mark, you were implying even though some of the issues persist a little bit in the fourth quarter, you know, by third quarter, we're through most of them and by year end, we're through almost all the them.

I think to answer the first question, there are no remaining options available. They have either been canceled or executed at this point, so there is none of that. Any new orders to be placed are just that, based on the current market conditions and to the extent we are placing them as of 2011, it is probably in the refrigerated area or platform area, with dry van into 2012.

And, yeah, I think you get -- Q3 still has the similar headwinds, but I think you get a little bit of improvement in Q4 on the workforce. You start building a richer mix that we talked about of the one we were able to slot into the fourth quarter, which are these higher margin opportunities, and things start to come together and we get well-positioned heading into 2012 with the workforce and a clean order book.

Thanks. Guys, one final one. What stops you from buying stock down here? The stock would seem to be a pretty big bargain if your comments proved to be accurate next year.

We have been working on the capital structure of the Company for over a year now, and we are taking it a step at a time. We just got a new AVL facility and we're in the midst of continuing our ramp up. So short-term, that's what we are focused on, Jeff.

All right, guys. Thanks and good luck.

Thanks.

Mr. Giromini, there are no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you, Kristine. It goes without saying that we all expect more. We understand that and have a game plan in place to make it happen. The whole Wabash team is committed to deliver strong results during the course of this cycle and we will. Thank you 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 and have a wonderful day.