Wabash National Corp (WNC) 2011 Q3 法說會逐字稿

Greetings and welcome to the Wabash National Corp. third-quarter 2011 financial results conference call and webcast. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, the President and Chief Executive Officer, Dick Giromini. Thank you. Mr. Giromini, you may begin.

Thank you, Lewis, and 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 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 third-quarter 2011 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 a great deal to cover today and we'll try to provide as much information as possible.

I will first comment on several key highlights for the quarter, discuss the broader operating environment, and provide our expectations for the coming quarter and fiscal year. Then I'll ask Mark to provide a detailed description of our financial results. At the conclusion of the prepared portion of our presentation, we will open the call for questions from the listening audience. With that, let's talk about third-quarter results.

The momentum experienced in our business during the first-half 2011 accelerated further in the third quarter as shipments doubled over the prior-year period to 13,600 units, our highest shipment quarter since 2006. This exceeded our guidance of 13,000 and led to strong topline results as we achieved revenue of $336 million, or 97% higher as compared to the third quarter of 2010, and generated positive net income of $1.1 million, or $0.02 per share, during the quarter.

Operating EBITDA also improved, increasing more than tenfold to $6.6 million compared to the prior-year period.

However, this unprecedented ramp in demand has not come without some growing pains. Gross margin during the quarter was 4.0%, slightly higher than the 3.8% achieved in the third quarter of 2010, but lower than the 5.7% recorded last quarter. While it may seem that progress has stalled, that is not the case. As discussed on previous calls, we've been working through temporary cost and operating challenges to meet the rapid demand recovery that has taken place in our industry over the past 15 months.

More specifically, we anticipated gross margin would be impacted by three factors -- fixed-price lower-margin orders accepted early in the cycle, laboring efficiencies related to production ramp-up, and escalation of raw material costs. Let me take a few moments to again address each of these factors.

First, the quality of our longer-term backlog continues to improve as we work through the larger quantity fixed-price lower-margin orders that were accepted early in the cycle when limited demand would not support higher pricing. Despite the fact that some of these orders will carry to 2012, they'll represent a much smaller percentage of our total order volume than what we have experienced this year.

Second, we completed the necessary ramp-up of production capacity in July with deployment of additional shifts, and with it began the next round of training for the new workforce. While these necessary growing pains persisted in the third quarter, we did see progress and remain confident that productivity will reach expected performance levels as we enter 2012.

And third, we continue to manage through raw material and commodity cost increases experienced during the first half of the year with peak impact to our costs during this past quarter, as expected. With commodities and material costs having moderated since mid-year, we enter the fourth quarter in a much more favorable position and expect to realize some benefit from this softening as we continue through the quarter and into 2012.

As a result of the excessively large quantity of orders that were received during a very short period of time in first quarter, combined with rapidly rising commodity and material cost, we became aware that we would be facing these headwinds during the second and third quarters, and hopefully communicated this during our first-quarter call and again in the second quarter. So none of this should come as a surprise, although we may have miscalculated the magnitude.

Both our associates and suppliers have responded exceptionally well to keep pace with the unprecedented rise in customer demand and are to be commended for these efforts.

The bottom line is much of these headwinds are behind us, and we are now well positioned to finish the year on a stronger note with gross margin expansion that will carry into 2012. Additionally, we've continued our efforts on all new quotes to recapture costs related to commodities inflation, along with recapture of lost pricing margin experienced during the downturn.

Early results of recent orders received for the fourth quarter and 2012 are very encouraging.

In addition to these efforts, we continue to position our business for long-term growth and enhanced profitability beyond that of our core trailer business. In particular, our diversification efforts gained further momentum during the quarter as our DuraPlate products initiative delivered another quarter of strong sales performance with over $12 million of revenue. These products are now on track to achieve the high end of our previously-stated $40 million to $50 million in sales for the year, a pace that would more than double their revenue as (technical difficulty) compared to 2010.

The DuraPlate technology continues to gain traction on current products and in new markets as conversations with new customers for new applications remain ongoing, providing strong confidence in our previously communicated projections of achieving annual revenues of $70 million to $90 million by 2013.

Our Allied products initiative also continued to gain traction and excel as the second prong of our business diversification strategy with 100 frac tanks shipped in the quarter, as compared to 27 in the second quarter, as ramp-up of fabrication and assembly lines continues to accelerate. We anticipate shipments of approximately 275 total units yet this year -- or in total for 2011, with volumes more than double that for next year.

As well, our rebuild business continues to make nice progress, delivering $6.7 million year-over-year growth in revenue for the quarter, along with a 150% improvement in operating income. Additionally during the quarter, they opened a new parts store located near our Cadiz, Kentucky, platform operations. This location provides and expanded footprint and critical mass to our retail growth efforts.

Finally, it is key to point out that we continue to realize the benefits of our optimized overhead cost structure, which has helped to offset some of the cost challenges that impacted our results for the quarter. With SG&A coming in at 3.3%, our lowest since 1999, the impact on operating-income performance was somewhat mitigated despite depressed gross margins for the quarter, and bodes well for future bottom-line performance as we put the near-term temporary gross margin challenges behind us and enter 2012.

Before I review our outlook for the third quarter, I'd like to take just a few moments to provide an overview of some of the key economic indicators and industry dynamics we monitor closely that provide a broader context for our expectations. The Conference Board Leading Economic Index rose in September to 116.4 following a 0.3% increase in August, indicating continued growth near term. The Institute for Supply Management's manufacturing index decreased slightly to 50.8 in October, following levels of 51.6 and 50.6 in September and August, respectively.

For the third-quarter 2011, total industrial production increased at an annual rate of 5.1%. And GDP advanced by 2.5% during the third quarter, following the second quarter at a now-adjusted 1.3%. Growth was boosted by consumer and government spending, as well as exports, and represents the ninth consecutive quarter of growth.

While none of these key indicators can be viewed as defining a robust economic environment, it is becoming clear that our industry demand is, for the time being, driven by factors that are not directly related or tied to the general economy. While we all would like to see stronger GDP growth, for example, the current level of economic activity provides sufficient demand for new trailer replacement needs. Demand drivers, such as acceptably-aged fleet leading to low reliability and high maintenance costs, along with regulations such as CSA, are more than enough to support strong forecasts for continued growth going forward.

Within the freight industry, FTR's August Truck Loading Index was up 0.1% month over month and 3.2% year over year. Looking forward, FTR expects demand to push the monthly index rate upward by an average of 0.2% for the remainder of 2011. And the ATA Truck Tonnage Index for September increased to 115.8, up 1.6% month over month and a strong 5.9% year over year, the 22nd consecutive monthly year-over-year increase.

Within the trailer segment, in the first three quarters of 2011, net trailer orders rose to 161,000 units, leading to an industry backlog of over 83,000 units, representing a year-over-year increase of 50%. Also, ACT recorded first three quarters 2011 factory shipments of just over 154,000 units, up 82% year over year.

However, mostly in response to economists' continued concerns for the overall health of the U.S. economy and in Europe, both ACT and FTR recently adjusted their projections slightly for 2011, with ACT now at 208,000 units shipped and FTR at a projection of 215,000 units produced for the full year. Despite the near-term adjustments, longer term ACT is now projecting strong shipments of 241,000 and 269,000 units for 2012 and 2013, respectively, while FTR is forecasting production builds of 230,000 and 240,000 units for 2012 and 2013, respectively.

Supporting these industry projections, our customers continue to remain upbeat on prospects for their businesses going forward, and buying intentions remain strong for the coming year. Conversations with industry leaders at the recent American Trucking Association conference echoed the sentiment.

On the regulatory front, there were new developments in two key industry regulations, hours of service and electronic onboard recorders. As a result of growing opposition to the proposed revisions to the hours-of-service rules, tied to concerns submitted by ATA regarding cost and productivity impacts, the Federal Motor Carrier Safety Administration has again delayed issuance of the final ruling for 30 days, until November 28, 2011, at which time the next status update will be provided.

And in response to a petition by the Owner-Operator Independent Drivers Association, on August 26 a federal appeals court has rejected the FMCSA's 2010 electronic onboard recorder rule, saying it does not prevent harassment of drivers, and sent it back to the FMCSA for review. The rule had been scheduled to take effect in June 2012 and would have required past violators of the hours-of-service rules, which, at an estimated 5,700 fleets, to install the OBRs. The FMCSA officials remain silent about whether they'll restart the regulatory process with a new proposed rule or issue a supplementary rule, so we'll just have to see what the outcome is.

Now let's discuss expectations for the fourth quarter and the full year. As customers have adjusted to our higher output levels, we estimate fourth-quarter shipments to be between 13,000 to 14,000 units, bringing the full-year total to 47,000 to 48,000 units. As we move forward at these higher levels with improved productivity, we expect to demonstrate improved gross margins and operating leverage in the current quarter and coming year.

In summary, while the third quarter had its challenges as we worked to respond to an unprecedented increase in demand, the good news is that it's now behind us. We can now move forward with a more stable workforce, a much improved pricing environment and a more favorably priced backlog, and strong commitment and expectation to deliver improving margins in the fourth quarter and in 2012.

We are encouraged with the progress we've made this year to position our business for long-term growth and record profitability through our numerous diversification efforts and remain committed to expanding these initiatives and others as we move into 2012 and beyond.

With that, I'll 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 filed our 10-Q yesterday, so I'll focus my prepared comments on the key performance drivers in the quarter and our outlook for volumes and other related factors for 2011 and 2012.

Revenue for the quarter grew sequentially over 17% to $336 million, the highest level since 2006. New trailer sales totaled $303 million on 13,600 new trailer units, representing a near doubling from the third quarter of last year.

The ASP for Q3 increased slightly from the second quarter by approximately $200, coming in at $22,300 per unit. The increase in trailer ASP is primarily due to customer mix, as well as price adjustments achieved in the quarter related to tire price increases where contract allowed.

Looking at our other product lines, used trailer revenue came in at approximately $8 million on 1,100 units and was up approximately $3 million from the same quarter a year ago as the use trailer market continues to demonstrate healthy demand and pricing.

Part, service, and other revenue was approximately $25 million in the quarter, an improvement of approximately $8 million from a year ago. DuraPlate products continue to lead this growth as revenue from these products achieved over $12 million in revenue in the quarter. And in addition, sales of Allied products, primarily frac tanks, totaled approximately $4 million. Combined, we now expect sales of these products to exceed $50 million this year.

In terms of operating results, gross margin for the quarter was $13.3 million, or 4%, and represents an improvement from 2010 third-quarter gross margin of $6.5 million, or 3.8%, due to increased shipments of approximately 6,800 new trailers.

As expected and discussed earlier this year, the third quarter faced the toughest challenges of the year, including a significant ramp in production with a largely new workforce; a production backlog, which represented a high percentage of lower-margin orders received early in the recovery; and significant headwinds from component and commodity costs, which increased significantly during the first half of the year.

Productivity this quarter was essentially flat with the second quarter, which reflected a 170 basis-point reduction from the first quarter of the year, prior to the significant increase in headcount of approximately 1,400 this year. Our production environment is now stable with all production lines and planned shifts in place, and we are starting to see operating improvements as we increase our focus on optimization of the manufacturing processes. We believe we are well positioned for 2012, and no significant capacity additions are planned.

In addition, while production volumes increased approximately 800 units, or 6%, in the quarter, this was below our expectations. As a result, the limited benefit from the higher liquidation of fixed plant overheads was unable to fully mitigate the impact of higher raw material and component costs experienced in the quarter.

During the quarter, material costs escalated further as many contract prices reset. As a result, manufacturing material costs as a percent of selling price trended up during the quarter, from 75.6% of sales in Q2 to 79.6% of sales in Q3. Third-quarter manufacturing material cost is now up 630 basis points relative to the first quarter this year, and reflects the high proportion of builds this quarter which were booked and priced early in the demand recovery. We will continue to work through the majority of our lower-margin backlog as we close out the year.

Despite the unfavorable impact from manufacturing productivity and raw materials, the third quarter generated positive operating income for the fourth consecutive quarter and represents the eighth consecutive quarter of year-over-year improvement.

Q3 generated positive operating income of $2.3 million and reflects an improvement of $6.5 million from last year, demonstrating continued leverage from SG&A costs. SG&A for the quarter was flat with the prior quarter at approximately $11.1 million, and at 3.3% of revenue, it was the Company's best performance in over a decade. While the quarter benefited from reduced professional fees and employee benefit expenses, it demonstrated the leverage of our cost-restructuring activities undertaken during the industry downturn.

Net other expense of approximately $1.1 million relates primarily to borrowing costs associated with our revolving credit facility.

In terms of taxes at September 30, we have a U.S. federal NOL carryforward of approximately $170 million; however, we have a full valuation allowance recorded against our net deferred tax assets. 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 $1.1 million, or $0.02 a share. The details of EPS and the share count are included in the press release and the 10-Q.

In regards to the balance sheet and cash flow statement, let me provide a little more detail on some of the specifics. Total inventory increased approximately $5 million in the quarter as production generally leveled off during the quarter and the shipment rate matched the production rate during the quarter.

As of September 30, inventories of $200 million consist of the following -- raw materials of $66 million, work in process of $12 million, finished goods of $106 million, parts of $6 million, and used trailers of $10 million.

In total, while net working capital increased approximately $12 million this quarter, we remain focused on effective working capital management, as demonstrated by our ability to maintain a net working capital metric as a percent of revenue at below 10%, a historically low level. With the significant ramp up in production over the past two years now complete, we also expect net working capital needs to moderate as well.

Year-to-date capital spending of $3.4 million ramped up as expected to support increased production levels and the business's strategic growth plan. We currently anticipate full-year 2011 spending to be approximately $7 million to $8 million.

Our liquidity, or cash plus available borrowings, as of September 30 was $107.3 million, an increase of approximately $16 million from June as we exercised the $25 million expansion feature under our new revolving credit facility to increase its capacity to $175 million in total.

In summary, Q3 as expected had its challenges, and we are excited as we move forward into the fourth quarter to improve margin as we focused on improving productivity; production of a backlog, which contains a richer mix of higher-margin orders; and a commodity market, which appears to have reached a plateau in most areas and a slight decrease in others.

Backlog as of September 30 came in at approximately $513 million. The decrease in backlog from Q2's $736 million was in line with normal seasonality, in addition to the continued ramp-up in our production. At over $500 million, this is still a healthy level of backlog, and at current production rates represents approximately five months of backlog, which compares to the industry's current average of approximately 4.4 months as of September 30.

In addition, as we have discussed previously, the order content within the backlog for Q4 begins to improve as approximately one-third of the backlog represents orders placed more recently, reflecting higher pricing. And as we move into the first quarter of 2012, we expect this to improve further to approximately two-thirds of the builds.

As we look toward 2012 in total, we expect to see a continuing strengthening in the overall demand for new trailer equipment not dissimilar to ACT's estimates of approximately 241,000 shipments for next year. The capacity to meet this demand is now in place, and we expect to be hitting our targeted productivity rates early in the year.

We are actively increasing ASPs on new quotes to recover both inflationary costs, as well as provide a level where we can continue to invest in research and manufacturing process improvements to enhance the transportation solutions we provide and the value we create our customers. In many cases, this has resulted in current quotes requiring double-digit price increases versus the pricing levels from last year at this time. And while we are still at the beginning stages of the orders season, early indications of new trailer requirements and pricing are encouraging.

Finally, we continue to see upside to the growth opportunities in our non-trailer product lines and DuraPlate products and Allied products, which increases our confidence in delivering over $100 million collectively in revenue from these initiatives by 2013.

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

(Operator Instructions). Steve Dyer, Craig-Hallum Capital Group.

Thank you. Good morning, guys. Mark, could you give some indication as to how much of the raw-material impact hit you guys in the quarter? How many bps that was to the gross margin line?

If you look at it sequentially relative to Q2, you saw material costs go up 400 basis points from Q2 to Q3. And in total this year, since the first quarter, it's gone up over 600 basis points.

Okay, so from a simplistic math standpoint, if you were able to recover your raw materials, would it be as simple as adding 600 bps back to that line. Am I thinking about that correctly?

Yes. I mean, I think in general, depending on the spec of trailer that we have out there, we've seen commodities and components go up 4% to 6%, maybe even a little higher in a few cases, but that is probably a reasonable place to be in terms of the challenge we have on current quotes. And that's what we're going after.

Okay. And then, you guys did a good job on the G&A line this quarter. Is that percentage, kind of in the mid-3% range, is that a good percentage to use going forward?

It's going to be a little bit higher than that. We still have some restoration items that we're going to be evaluating as we go into 2012 that we continue to have suspended throughout the downturn and even this year. So, it's probably closer to a 4% longer-term average.

Okay. And with the recent reduction in next year's forecast from FTR, and in particular in ATC, does that change sort of your thinking as to what inning we are in, so to speak, or the slope of the curve of this cycle going forward? I mean, is it a shorter cycle; is it a longer, flatter cycle? How do you think about what you're seeing going forward?

Well, projections generally don't go out past about 2015 from either of the forecasters, but we look at it as we're still in the early innings. I'd said in the past the second inning; maybe we're entering into the third inning, but I think that this is a very long, sustainable, strong period of demand for our industry, just based on the factors that we have discussed in the past. A very, very aged fleet overall and a disproportionately weighted aging toward very old equipment within the fleets will continue to drive necessary replacement over the next several years.

Okay. Mark, how should we think about CapEx for 2012? Ballpark?

With volumes going up, we would expect to normalize the maintenance, [eh&s], and a little bit of growth to be in that $10 million range. If anything pops on a strategic initiative, if we get some good traction on our diversification activities with DuraPlate and Allied, that may move the needle a little bit more, but in general I think it's a from a base case of $10 million range.

Okay. And then, last question, from a cash flow perspective in Q4, would you expect that's the quarter where you start to generate some positive free cash flow, either by inventory sort of flattening out, receivables, et cetera?

Yes, it is. We have seen the working capital ramp to kind of peak out and level off. The full-year guidance range is 47 to 48. I think there is some good impetus for people to pick up their equipment and hopefully be at the higher end of that as we close out the quarter with bonus depreciation incentives and the like. So we expect to see certainly much better working capital flowthrough in Q4 than what we've seen thus far the past several quarters.

Okay. I'll hop back in the queue. Thanks.

Jeff Kauffman, Sterne, Agee.

Okay, Sterne, Agee. Thank you. Hey, guys. Behind us now, huh?

Mark, Dick, I want to follow up on some of your commentary. You mentioned labor about 170 basis points, flat with Q2. Raw materials, almost 600 basis points, where you were versus 1Q. As we start to get into fourth quarter and 2012, Dick, you mentioned that we're going to start to ramp back up on the gross-margin side. Is it possible, just to get an idea of perspective, that the fourth-quarter gross margin could be similar to the first quarter's or even better, or is that a little bit of a stretch?

I think the -- from a gross margin -- let me answer in two pieces. From a gross margin, I think that is probably the bigger challenge with over a 600 basis-point impact from raws today. It will get a little bit better in Q4, but probably not enough to get us to that level.

I'd say from an operating income margin perspective, getting back to the Q1 level, which was 1.8%, getting there or better, I think, we certainly have a much higher probability of doing that as we leverage the SG&A forward.

Based on what you're seeing on the pricing so far, with the contracts that you've signed, am I stretching too far to think that you could be looking at kind of 8%-plus, 9%-plus gross margins if you're able to recapture these raw materials in your new contracts?

Yes, that's not unrealistic.

All right. Mark, along those lines, and I think the previous caller mentioned, your working capital needs incrementally are going to flatten out. You mentioned about $10 million of CapEx. You could be in a position where you're throwing off free cash in 2012. To the extent that you do throw off free cash, kind of what is on the laundry list for uses if there is nothing strategic, acquisition-wise, to do?

Our primary leverage point has been our revolving credit facility, and we continue to work on getting a better capital structure. I think certainly with the refi we did in the second quarter, we're much closer to where we'd like to be.

I think we'd certainly pay down debt in the short term, as we have against the revolver, because we'd like that really to be available for seasonality needs and a true backstop for the Company versus our primary leverage item. So in the short term, we'll do that.

Over the longer term, depending on what other debt items are available for us to use in the future, to have some level of debt in the capital structure would allow was to look at the things that we had in the past, which were modest dividends and modest share repurchase programs, and obviously we're excited about the diversification activities that we've been able to do organically. We'll continue to look at those as good investment opportunities.

A final question, then I'll get back in queue. You did mention the APG and the frac tank business really start to ramp up at this point. I think you also kind of hinted that there could be more to do in that space. Can you talk about what the receptivity has been to your frac tank operations and what kinds of other opportunities there are? How much could you expand that business without having to invest a lot of incremental capital?

Yes, we're completing the installation of all the assembly and soon to be paint capabilities for that, which will give us capacity to do about three times what we have talked about in the past that is in our contract.

We are contracted for 2,500 units over five years, so effectively about 500 a year. So we will have the facilities in place as we exit this year to be able to actually manufacture three times that.

But we're looking at other products in this space. There is all types of product. The frac tank product is for storage of the freshwater that's used for the fracking operation, but there is also products that then have to either bring water in or take the used water out. So we're looking at those kind of products. So there's a whole line of opportunities that fall into the space, and directly adjacent to those products used within the energy sector are those that are used within of environmental sector also. So we're in that process now of determining which ones make most sense.

But we've had great receptiveness from the frac tank product. It's viewed as a very high-quality product, and that is giving us some support for getting into some of these other products.

Okay, guys. Thanks so much and congratulations.

(Operator Instructions). Brad Delco, Stephens.

I appreciate the color you guys gave in terms of the mix of the orders that are going into production in the first quarter and the fourth quarter. But Mark, could you maybe explain to us what the difference is or the implied margin difference is between the one-third of the orders that are going in in the fourth quarter versus the two-thirds that are based on that fixed legacy pricing, just so we can get an idea of how good margin improved sequentially?

Yes. We've been sold out for the full year really since the end of June. So those orders that we filled in to that, that are higher margin, were placed in the second quarter. And certainly during that time period, we had seen a lot of the inflation and were focused on recovering that on those new orders that we were sliding in, and that was anywhere from 4% to 6% improvement over what was built in the backlog, say, in the third quarter.

So I'm reading that as one-third of those orders are -- the implied gross margin is 4% to 6% better than what you've been (multiple speakers) relative to third quarter or second quarter?

Yes, relative to what you saw the third quarter.

Since those orders were placed, like you said, back in June, is it the same type of improvement in the first quarter on two-thirds or is it actually better?

Well, it's still early days for the first quarter. This is just the beginning of the order season. So it's a little -- it's hard for us to say what that whole backlog is going to look like because it's really, at this point, in the form of a lot of quotes that are outstanding, [stuff] that we're working to fill in.

But in terms of the quotes we are putting out there, it's probably, in some cases, better than that because we're not only trying to recapture raws, but also get reasonable margin on products. So, like I said in my comments, on a year-over-year basis, you're seeing some quotes that require double-digit price increases to get not only the raws, but a normalized level of margin baked in there.

Got you. And then, another question, you made it seem like there wasn't much productivity improvement from second quarter to third quarter. But the numbers you gave said 400 basis-point sequential headwind on raw materials, but gross margins were down 170 basis points sequentially. Is that just based on volume, or can you kind of explain the difference there as to why that didn't match up closer if you weren't getting much productivity improvement?

I'm sorry, Brad. I'm trying to -- there were two elements. One was productivity was flat Q2 to Q3, so we were continuing to deploy new shifts, work through the productivity curve, and net net, that looked about the same. The impact of that that Q2 saw was about the same in the third quarter.

That'll get a little bit better in the fourth quarter, although fourth quarter also has not necessarily a productivity impact, but it has available day impact in the fourth quarter. But from a pure productivity perspective, it ought to get better.

The 400 basis points was purely the raw material impact from Q2 to Q3.

I got you. I guess I was focused more on the gross margin sequentially was down 170, but you were saying productivity was flat and raw material costs were up 400 basis points. So I was trying to (multiple speakers)

Yes, if we had -- you get a little bit better benefit from the higher production sequentially was up 6%. We were hoping to ramp up quicker than we were actually able to during the third quarter, as we were hoping to mitigate more of the raw materials impact in the third quarter by building more. But we were able to mitigate a portion of it.

And then, finally, you guys are seeing some good traction, as you mentioned, in DuraPlate and Allied products. Are you seeing the type of gross margins you expected to be contributed from those pieces of business? And if so, has that had any impact on the gross margin line and is it doing as well as you thought?

Yes. DuraPlate, I'd say, is a more mature business, so it has a broader bandwidth of products, customers, and a little bit more seasoning to it. So that's certainly meeting our expectations and targets, which are generally 2X of what you see in trailers. Our kind of hurdle rate for new investment in those areas is 20% gross margin.

I would say on the frac tanker Allied products, we're still in ramp-up mode of the new business segment for us. We're investing in the line. The good news is it's an area where we'd partnered with another manufacturer on a contract basis, so we've been able to enter it quickly, and it is profitable out of the gate. And we certainly think that it's going to be assets that target a threshold longer term, but because we're still in start-up mode, we're not there, but it is not a drag on the business at this point.

Thanks, guys, for the time. I appreciate it.

No problem.

Sims Lansing, Trafelet & Company, LLC.

So last quarter, you mentioned that low productivity contributed to a 170 basis-point decline in gross margin. So was it more or less than that this quarter?

About the same.

About the same? Okay. And then, how should we think about this in the fourth quarter as productivity ramps up?

From an absolute productivity, it does get better. Q4, from a number of days, has a little bit of a disadvantage because the number of holidays and shutdown, it is less, so it will be slightly better. But the bigger impact will be early, early next year as the workforce has a little bit more time under their belt and we get into a more standard operating schedule.

Okay, great. And given that the mix shift bias is towards drive ends going forward, how should we think about ASP sequentially?

Sequentially, you're going to have a higher proportion of drive ends, which nominally call it a $20,000 mix versus a refrigerated trailer at $30,000. So you're going to have some of that mix.

You're also going to have a customer mix. The one thing where I think there's definitely going to be a strengthening in demand on, significantly higher than it has been, is in the LTL segment. So I expect pup volume or 28-foot trailers to be significantly higher, so you'll get some mix there.

I think the important thing is really looking at the assumptions you're going to have on material margin, regardless of what the ASP is, assuming a recovery of raw materials and an expansion in the margins because of that.

Great. On new trailer production, will it be higher or lower than the 22,286 that we saw this quarter?

For fourth quarter, it's not going to be significantly different. For 2012, I think certainly volumes go higher in industry. We're more predisposed to drive ends; that could bring it down a little bit. So mix becomes more -- and LTL, that could bring it down a little bit.

The counter to that is there's significant inflation and margin recovery that has to happen in our industry, and that is going to push everything else as well. So there is a big mix element in there to play out.

Okay, great. That's all I have. Thanks, guys.

Rhem Wood, BB&T Capital Markets.

You guys, I thought -- correct me if I'm wrong, but I thought you'd said previously that the lower-margin fixed contract orders would be kind of finished by the end of this year, and now that is kind of getting pushed out into the first quarter of 2012. Can you maybe give us how many units are in the backlog, and then how many units are associated with those lower-margin fixed-price units?

I think you can get there generally, Rhem, if you take our $513 million backlog and divide it by our average ASP, $22,000 and change. That's going to put you around 23,000 total trailers.

Our guidance for Q4, based on the full year, implies a 13,000 to 14,000 shipment range in the fourth quarter. So if you take about one-third of that, you're going to get your mix. You've got 4,000 to 5,000 trailers of the higher margin and the balance is going to be the legacy backlog, if you will.

Okay, that's good color. Thank you. And can I get the same math for the new orders and get to the units and that?

The new orders? (Multiple speakers). For Q1 or for --

For the third quarter. I can back into the dollar amount if I want to get to units.

Yes, yes, yes. I think that you can do the same math.

Okay. And then, can you -- just a couple of housekeeping items. The tax rate going forward, what should we model for that?

At this point, we have a full reserve. We're pretty early in generating a profit. So generally, you would look for a three-year or 12-quarter run rate before we would consider reversal of that reserve. So, you're going to see a 0% effective tax rate for a while.

And then, if you go back to the raw materials, you mentioned that -- I guess steel and aluminum kind of peaked in the third quarter and should come down. Is that also for components as well?

You have -- for components that have a steel -- that are steel based, most of those have an escalator/de-escalator in them as well. So you would see some moderation in that, yes.

Tires, from a component, is probably one where the good news is we haven't seen a price increase yet this month, but there is no expectation that it's going down.

Okay, thanks for the time. I appreciate it.

Nidhi Narang, John Thomas Financial.

Hi, this is [Vivi]. My question is on last quarter's (inaudible) earnings and this quarter was (inaudible). What is the reason that you reduced (inaudible) earnings estimates?

I think your question is in regards to our -- the guidance versus the results for the past few quarters?

Correct, correct.

You know, I think we've been talking about this since our first quarter. But it's really three items that have been a challenge in Q2 and Q3. It's been a significant ramp-up in production. Really, this is the second year in a row where we have doubled capacity and had to bring in a significant number of workers. Year to date, it is about 1,400 heads that we've added, which has been turning on new lines and deploying additional shifts this year. That has been a headwind.

Secondly is we had our backlog filled up late last year. So in 2010 and early in the first part of 2011, there were lot of large volume quotes converted. The conversion rate jumped up, so our backlog jumped up, which were lower-priced products that we've been working to build out as we go throughout the year.

And then, the third thing has been the significant ramp-up in raw materials that we've been working through.

So the good news is Q2 and Q3 are now behind us. Q4 heading forward gives the benefit of a little bit better mix that we've talked about from a production perspective, some stability in the workforce without the need to add any significant heads aside from attrition, and the benefit of a little bit moderation in raw materials. So, we expect a recovery in gross margins and operating income for fourth quarter as we move forward.

Okay. The next question is on -- like, every (inaudible) revenues are going by approximately (inaudible) more than 100%. How do you [replenish] that?

I'm sorry. Would you ask that again?

Your revenues grew by 30% quarterly, right? And earnings much more [presently], like maybe 100% or something. How do you [recognize] earnings much more than the revenues?

There's been a significant recovery in volume in our industry because of the deep trough that we've had. So the issue has been putting in the capacity to meet the increasing demand, which is driving the topline growth.

The key for us is we've got the production and to continue to support demand at this level or slightly higher. And the best opportunity we have in front of us is the 2012 order season to reprice and requote business for next year at more reasonable margins. Thanks.

Okay. And then, last question is on (inaudible), you have [2,500] four to five years (inaudible), correct? So, is there any other opportunity in this factoring or just this one?

I think we can -- our organic diversification activities are focused on the DuraPlate product. That business has doubled this year. We expect it to continue on an accelerating growth curve.

The frac tank business is early. We just signed the contract in March. We've got the line in place. We're up and producing. But I think the answer is it gives us a good footprint to look and expand other products around that that are similar, and hopefully show a similar growth profile of what we've seen in DuraPlate.

Okay.

Thank you.

Thank you.

Since there are no more questions at this time, Mr. Giromini, I would now like to hand the floor back over to you.

Thank you, Lewis. Before we conclude today's call, we would like to take a moment to recognize some industry icons who have recently passed away.

These men have made a significant impact on the industry as a whole and on many of us as individuals. First of all, the former President of Utility Trailer, Walter Bennett, passed in September. He is the father of Utility's current president, Hal Bennett.

Secondly, Phil Pines, former President and Chief Operating Officer of Great Dane, who lost his life in September in a tragic private-plane crash; and Russ Gerdin, the Founder and former Chairman and CEO of Heartland Express, who bravely fought cancer for the past several years just passed this past month.

We again send our condolences to these companies and their families as they cope with loss, while at the same time celebrate the lives these men led. Each of them has left behind a significant legacy that helped shape and make our industry what it is today.

Thank you for your participation today. Mark and I look forward to speaking with all of you again on our next call.

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