Wabash National Corp (WNC) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the fourth quarter 2011 Wabash National Earnings Conference Call. My name is Chris and I will be your conference moderator for today. (Operator Instructions). At this time I would now like to turn the conference over to your presenter for today, Mr. Dick Giromini,Chief Executive Officer. Sir, you may proceed.

Thank you, Chris. Good morning. Before 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 Corporation's fourth quarter and full year 2011 earnings call. I'm Dick Giromini, Chief Executive Officer. Here with me this morning is Mark Weber, our Chief Financial Officer. We have a great deal to share today and 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 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.

While it's certainly an understatement to say that 2011 was a frustrating year full of both challenge and success, as back drop, our business had never experienced such a dramatic drop in demand as that experienced during the downturn of 2007 to 2009. Nor did we ever face such a sustained rapid increase in demand as seen during these past two years. While this unprecedented rise in demand created temporary headwinds in some performance areas, we are nonetheless pleased and encouraged with the overall progress and momentum we were able to generate throughout 2011.

Full year 2011 operating income of $19.8 million reflects an improvement of $35.2 million versus the prior year and represents our first profitable year since 2007. Full-year new trailer shipments of 47,600 units were nearly double the level of 2010,following two quarters in which we faced temporary headwinds that eroded our results including the combined effect of new hire on-boarding and materials inflation, we were pleased to be able to deliver on our promise of improved results in Q4.

With those temporary challenges mostly abated we were able to deliver net income of $7.5 million, or six fold improvement, versus the prior period. Likewise, operating income of $8.4 million in Q4 was nearly four fold that of the previous quarter.

Of note, our operating income as a percent of sales was 2.5% reflecting the best perform since the third quarter of 2007 as we continue to leverage the more optimized overhead structure that we put in place over these past three years. And we did, indeed, see improvement in gross margins as expected with 6.0% for the quarter versus the sub par 4.0% experienced in the third quarter for a solid $20.7 million in gross profit dollars, our best performance since third quarter of 2007.

That being said while encouraged by the progress we made we certainly are not satisfied with this level of performance. The difference now versus last quarter is that we have momentum on our side. The new labor force is greatly stabilized with notable productivity improvements made during the quarter, material costs moderated in the third quarter and we began to realize some benefit from this as we moved through the fourth quarter, and we began to see the effects of a more favorable margin mix in our [builds].

Looking forward we expect those elements to further strengthen in our favor as we progress through the year. The new workforce will continue to gain more and more proficiency yielding higher and higher productivity and we will see continued strengthening in the margins making up our backlog and builds. Early returns on new orders certainly indicate that we are having success in our focus to not only recover margin compression related to last year's material cost inflation but also in recapture of lost margin that occurred through the downturn related to top line pricing pressures.

Our backlog has begun to build nicely, growing to $587 million at year-end from the $513 million level reported at the end of September of last year. A $74 million increase despite strong shipment levels during the quarter of 13,600 units. And many fleet orders at that time remain to be placed as we were still in the early stages of the, quote, order cycle for this year.

As we proceed through the current quarter and the year, we are focused on making 2012 a year of execution and results. We remain committed to improve profitable through pricing, so that we can continue to deliver exceptional value to our customers and provide transportation solutions which meet their increasingly rigorous industry operating environment. At the same we remain focused on our decade long journey to further optimize our manufacturing operations through continuous improvement and lean manufacturing principles. In addition, the recent success of our non trailer initiatives has provided critical mass, additional growth opportunities and a proven repeatable model to follow as we move to further diversify our business and ensure the organizations long-term growth and success.

On that front, our DuraPlate products diversification efforts continue to yield outstanding results with that business generating record sales of $18 million for the quarter and $56 million for the year, more than double that of 2010. This business initiative continues to gain traction in new markets and in expanding it's customer base and we now expect it to exceed $70 million in revenue for this year further supporting our overall strategic objectives of top line growth, margin enhancement and business diversification.

On that same topic our allied products business initiative also continues to gain momentum. The group shipped 262 frac tanks in 2011 while completing the second phase of the production line installation which included in-line [shop] glass and paint facilities.

For 2012, while our supply agreement calls for approximately 550 units to be built, our customer has strongly indicated that industry demand may dictate that we could see as much as double that or more this year. If true, the business could deliver in excess of $35 million in incremental revenue in just the second year of this effort.

Additionally, we continue to evaluate other product opportunities within the energy and environmental sectors that would leverage and complement the success we are having with the frac tanks and further grow this business initiative. At this juncture we see the environmental and energy sectors as having almost unlimited potential within our strategic growth and diversification platform.

Let me shift gears and take a few moments to provide some perspective on expectations for 2012. All of the key economic and industry specific indicators we track appear to be trending in the right direction including the conference board leading indicators index, total industrial production, GDP and overall strength in the manufacturing retail sectors. At the industry level ATA's Truck Tonnage Index for December came in at a record of 124.4 or a 6.6% increase versus November, reflecting the largest month over month increase since January of 2005. An impressive 10.5% increase as compared to December of 2010.

For the year truck tonnage rose a strong 5.9%, represented the largest year-over-year percent increase since 1998. As well, FTR's truck loadings index advanced strong 1.1% in December and 5.3% year-over-year. As you can imagine all of this bodes well for continued growth and demand for new equipment and overall trailer shipments going forward.

Industry wide, net trailer orders in December exceeded 28,000 units for the second consecutive month pushing industry backlog to 103,000 units, further reaffirming our belief that we are in the early stages of a cycle that could turn out to be one of the longest and possibly strongest in the history of our industry. Industry forecasters remain similarly optimistic in pointing towards strong demand in 2012 and 2013.

The latest report from ACT estimates 2012 trailer shipments at 245,700 units, up 18% year-over-year and just over 267,000 trailers in 2013, up an additional 9% year-over-year. As well, FTR now estimates trailer production for 2012 at 251,000 trailers, an increase of 19% year-over-year and 250,000 in 2013.

A couple quick updates on the regulatory front. The Federal Motor Carrier Safety Administration released its final ruling on December 22 regarding hours of service that retains the 11 hour driving day, but adjusts the previous 34 hour restart period that effectively reduces driving time for a week from 82 hours available to 70 hours in a seven day week. So there will be some impact productivity for certain fleets.

And early this past month, Anne Ferro who heads up the FMCSA stated her clear preference to move to a ten hour per day driving limit, and will continue to pursue data to support that desire. So it certainly appears that final is not really final.

Second note the House Transportation and Infrastructure Committee has introduced a five year $260 billion reauthorization bill named the American Energy and Infrastructure Act. This follows a Senate bill introduced recently that would stand two years at $109 billion. The House bill challenges the new hours of service rule, specifically it's 34 hour restart provision, and initially included provisions providing for longer, heavier trucks.

However, that piece of the bill did not make it out of the first hearing this past week, but rather was modified to call for an impact study to be conducted. As a result I wouldn't expect anything soon regarding approvals to go to the 97,000 pound gross vehicle weight allowances.

So taking all of this into consideration, when we look at prospects for the current year and factoring in our willingness to potentially sacrifice some market share opportunity in exchange for a higher margin mix of orders, we expect 2012 trailer shipments to range between 50,000 units to 56,000 units for the full year with approximately 11,000 units being shipped during the seasonally slower first quarter. We currently have staff production capacity in place to produce 55,000 units in our core trailer business, so any favorably priced opportunities exceeding that would necessitate minimal hiring needs, if any.

In summary, let me say again we are encouraged by our progress in the fourth quarter and 2011, and look forward to building on this throughout the year. Our core trailer business is well positioned with a solid and growing backlog, an improving mix of more favorably priced orders and a stable and maturing work force. With the demand environment that is at a much more favorable level and continued to strengthen further, we can now focus on the task to recapture lost margin experienced during the downturn, and in turn, generating the returns that we all expect and desire. Additionally, our diversification strategy is picking up steam with outstanding results delivered by our DuraPlate products team along with an excellent startup in our frac tank effort.

The key to all of this will be our ability to execute and build upon the operational improvements achieved these past several months. I'm confident that our team will remain focused on the task at hand and driving continuous improvement through out all of our operations which will further aid us in enhancing margins and profitability, all of which providing additional support to our industry-leading product development innovation initiatives and to further fuel our growth and diversification efforts across our business.

I would like to thank our associates, suppliers and customers for their support throughout 2011 as we significantly ramped up operations to meet the new demand levels. 2011 was a transition year for our business in which we finally put the challenges of the great recession behind us and were able to reach sustainable financial performance levels that we haven't experienced since 2007. We look forward to delivering much greater returns in 2012. With that let me turn the call over to Mark.

Thanks, Dick, and good morning. Let's begin.

Revenue for the quarter improved year-over-year by more than 40% to $342 million bringing the full year to approximately $1.2 billion. In the quarter new trailer sales totalled $302 million on 13,600 new trailers, an increase of 37% from the fourth quarter of last year. ASP for Q4 decreased slightly from the third quarter by approximately $200 coming in at $22,100 per unit. The decrease in trailer ASP is due to product mix, primarily a higher ratio of pup trailers. However, adjusted for the impact of mix, pricing was up just over 1%.

Looking at our other product lines, used trailer revenue came in at approximately $7 million on 1,100 units and was up $3 million from the same quarter a year ago as the used trailer market continues demonstrates healthy demand and pricing. Parts, service and other revenue was approximately $33 million in the quarter, an improvement of approximately $16 million from a year ago.

DuraPlate products continue to lead this growth as revenue from these products achieved approximately $18 million in revenue for the quarter. In addition, sales of allied products, primarily frac tanks, sold approximately $8 million. For the year, sales from DuraPlate and allied products exceeded our target coming in at $71 million for 2011 and reaffirming the long-term value of our strategic initiatives to leverage our process capabilities and technologies into new growth areas.

In terms of operating results, gross profit for the quarter was $20.7 million or 6% and represents an improvement from 2010's fourth quarter gross margin of $17.3 million due mainly to increased shipments of approximately 3,500 new trailers. As expected the fourth quarter's gross margin began to recover from the third quarter's gross margin of 4% as several factors began to trend favorably.

First, the mix of legacy, lower priced backlog produced in Q4, improved as it represented approximately two-thirds of the build with the balance representing more recently priced higher margin orders. The impact of this improving backlog mix was realized in the improving pricing I discussed previously of over 100 basis.

Second, the workforce which went through a significant ramp up during the second and third quarters adding approximately 1,300 employees and impacting productivity by roughly 170 basis points in each of those quarters, began to stabilize and demonstrated an improvement of approximately 50 basis points. We anticipate being in position to recapture the remaining productivity as we progress through the first quarter and the workforce has the opportunity to mature further.

And lastly, the significant headwinds from component and commodity costs, which increased significantly, impacting the prior two quarters began to plateau and in a few areas subsided; primarily steel. The benefits while small at approximately 20 basis points, countered the unfavorable trends which began early in the year.

As a result of the improved trailer backlog, a higher mix of non trailer revenues and easing of some raw materials, manufacturing material costs as a percent of selling price improved during the quarter from 79.6% of sales in Q3 to 76.9% of sales in Q4. However, fourth quarter manufacturing material costs remains up 360 basis points relative to the first quarter of 2012. But as we progress through the current quarter, we will continue to work through the majority of our lower margin backlog and be positioned to enter Q2 with a fresh backlog carrying higher prices which are more reflective of the current demand environment.

In addition, while production levels were relatively flat this quarter at approximately 13,400 units, fourth quarter operating income showed noteworthy improvement. Q4 generated positive operating income for the fifth consecutive quarter and represents the ninth consecutive quarter of year-over-year improvement. Q4 generated positive operating income of $8.4 million and reflects an improvement of $2.7 million from last year and $6.1 million sequentially.

Similar to last year Q4 benefited from the reversal of warranty reserves of approximately $2 million related to expiring trailer warranties. Bringing this all together we generated operating income margin of 2.5%, which was the best quarter of the year and the highest level since 2007, demonstrating continued leverage from SG&A costs.

SG&A for the quarter increased from the prior quarter to approximately $12.3 million, but at 3.6% of revenue continues to demonstrate some of the Company's best performance. As we enter 2012 we are now in position to reinstate the remaining benefits which remained suspended during the downturn, primarily 401(k) match and education assistance programs. However, we anticipate being able to continue to manage SG&A costs at historic lows targeting 4% of revenue or better for the year.

Net other expenses of approximately $1 million relates primarily to borrowing costs associated with our revolving credit facility consistent with prior quarters.

In terms of taxes, at December 31 we have a US federal NOL carry forward of approximately $166 million. However, we have a full valuation allowance recorded against our net deferred tax assets. The federal NOL carry forward begins to expire in 2022. Please refer to our 10-K once it's filed later this month for more details on the annual limitations for NOLs. However, we estimate approximately $107 million of NOLs available for utilization in 2012 subject to pre-tax earnings.

Finally, for the quarter net income was $7.5 million or $0.11 per share, the best performance of the year. 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 of the specifics. Total inventory decreased approximately $10 million driven by reduced raw materials in the quarter as the shipment rate generally matched the production rate during the quarter. As of December 31, inventories of $190 million consisted of the following; raw materials of $54 million, work in process $2 million, finished goods $115 million, parts of $6 million and used trailers of $13 million.

Networking capital increased by approximately $8 million this quarter. However, as a percent of revenue we closed the year at 10%, a historically low level. With a significant ramp up of production over the past two years now complete, Q4 was able to generate cash from operations of approximately $21 million.

Full year capital spending of $7.3 million came in as expected, increasing to support higher production levels and implementation of the business' strategic growth plans. Looking to next year we anticipate full year 2012 spending to be approximately $10 million to $15 million dependent on overall trailer demand and continued execution of our strategic growth initiatives. Our liquidity or cash plus available borrowings as of December 31 was $126 million, an increase of approximately $18 million from September, driven by the significant improvement in cash generation this quarter.

In summary, Q4 was an inflection point on several fronts pricing, productivity and raw material costs resulting in the best operating income performance of the year. Entering 2012, the Company is well positioned to continue the momentum generated last quarter.

Net orders for the fourth quarter were approximately $376 million increasing our backlog as of December 31 to approximately $587 million, a net increase of $74 million in the quarter and $107 million year-over-year. This increase is consistent with normal order seasonality and bolstered by the demand environment which continues to improve as demonstrated by Q4 industry orders which increased 12% over the prior year.

In addition and as we have discussed previously, the order contents within the backlog for Q1 continues to improve as approximately 60% of the scheduled backlog represents more recent orders carrying higher prices. At this point Q1 slots are sold out and Q2 has limited slot availability. Boiling this all down, we are pleased to have a strong backlog that gives us visibility for the next couple of quarters, but still provides us slot availability to take advantage of strengthening industry dynamics and to support our key customers and dealer network.

In regards to the current quarter and consistent with typical seasonality, we estimate Q1 shipments to be approximately 11,000 trailers, or more than 23% higher than last year. And as Dick discussed, we currently estimate the full year new trailer volumes to be in the range of 50,000 to 56,000. Finally, we continue to see upside to the growth opportunities in our non trailer product lines of DuraPlate products and allied products which we anticipate will demonstrate higher top line increases next year than the core trailer business in excess of 30%.

All told, continued strong industry fundamentals, the outlook for a healthy top line shaping up and staff capacity in place to meet these production levels, our focus increases further to margin enhancement opportunities including pricing recovery, continuous improvement, workforce productivity and diversification growth initiatives. We now have a solid foundation in place and we anticipate expanding margins throughout the year as industry demand improves and these initiatives take hold. While it's still early, this successful we anticipate the potential for margin expansion of between 200 to 400 basis points versus 2011 .

With that I'll turn the call back to Chris and we'll take any questions you may have.

Thank you. (Operator Instructions). Our first question comes from the line of Jeff Kauffman with Sterne, Agee. You may proceed.

Thank you. Sterne, Agee. Hey, guys. How are you.

Hey Jeff. Morning.

Well, congratulations. As we look forward, Mark, I just wanted to ask a couple questions. First with respect to cash flow. As you begin to recapture these raw materials costs even though you will be producing more trailers in 2012, is it possible that working capital as a net source of cash next year, as we recapture some of these raw material costs, or is it still going to be use of cash in 2012?

Overall from a quarterly production rate, as we closed out the year at [13,600 units], we're pretty close to an annualized rate within the range that we talked about of 50,000 units to 56,000 units. So I see it more of a neutral scenario than a drag, or a benefit, as we go throughout the year. There will certainly be some peaks and valleys depending on the quarter we're in, but overall it should be a pretty level load for us.

Okay. So based on the limited guidance that you gave, it would appear that there should be a fair amount of cash generated in 2012. Could you walk us through your priorities in term of use of that cash as we work our way toward higher profits?

Yes. One of our first goals, obviously, is we are going to pay down our revolver as far as we can. At the end the quarter we had $65 million outstanding on that. There will be some ebb and flow throughout the year, but we certainly would prefer to have that available to fund through working capital and ultimate back stop. So we will continue to pay down cash for that.

Gave you some guidance on CapEx of $10 million to $15 million as we look to optimize the manufacturing floor which is part of our standard protocol as well as evaluate continued growth initiatives. So in the next 12 months, I think those are the top two priorities. Obviously if we get [healthier], the Board will evaluate some the other areas that we had prior to the recession in terms of share buybacks and repurchases, both programs that we had at least at a modest level up to 2008.

Okay. And then two quick questions and I will turn it over. Could you talk a little bit about -- you mentioned your customer is interested in increasing the frac tank deliveries. There's been a lot of speculation in terms of what's going on in some of these fracking operations with some companies moving from gas to oil production in areas like Marcellus. Can you talk about whether or not this affects your business and do people still need frac tanks regardless of whether they're fracking for gas or fracking for oil?

Yes. It's a mix out there and what the requirements are depending on the type of drilling activity that's going on, but the mix of whether it's straight gas or oil drilling does require the use of water reservoirs and that's really what the frac tank is. It is an above grounds reservoir for holding fresh water that's used in the fracking.

We don't anticipate a significant shift in demand environment because right now the demand far outstrips what the supply of equipment is. So even if there is a shift to some straight oil drilling activities in areas where fracking would not be used, the demand still is far in excess of that.

So at this point we're waiting to see what ends up coming out. Our customer who is much closer to the demand side than we are at this point, still continues to believe that the demand could far exceed what our contractual arrangement dictates. And we got the capacity to be able to handle it, so we're still very optimistic that could be a very strong demand for us this year.

Okay. Thank you, Dick. One final question, Mark. You mentioned the mix of legacy which I'm assuming is more fixed price contracts to other production being about two-thirds legacy, one-third none legacy contracts. As we work our way toward the margins you should be generating on full contracts that recover costs and price to margin, could you give us an idea of what that mix might look like over the next two, three quarters just based on your production schedule?

Yes. So the legacy just to be clear, in the fourth quarter it was about two-thirds legacy, one-third more recent newer priced orders. In the first quarter that ratio flips the other way and the legacy is about 40% and the newer order content is about 60%. By the time we get to the second quarter most of the legacy stuff is behind us and it's over 90% relatively new orders.

Okay. Hey, guys. Congratulations and thank you.

Thanks, Jeff.

Thanks, Jeff.

Our next question comes from the line of Brad Delco with Stephens. You may proceed.

Morning, Dick. Morning, Mark. How are you?

Morning, Brad.

Hey Brad. Great.

I wanted follow-up on I guess that last comment. We thought about the way you described that mix of the third -- or the fourth quarter the two-thirds, one-third it was implied, right, that the two-thirds would be around the 4% margin you saw in the fourth -- or the third quarter and the other one-third would be I think you said 400 to 600 basis points better. That's basically where you shook out on your gross margins for the fourth quarter. Do we use those same numbers for first quarter, which would imply gross margins just slightly north of 7%? Is that what you're guiding us to for the first quarter?

I think in general from a mix perspective you're right. I think you've got to adjust for probably the warranty item which was 50 basis points on margin in Q4 and the other one is volume. Obviously, at 11,000 we're about 2,500 units lower than where we were at in Q4. A little bit more than that. But all told, I think the mix benefit and continued benefit out of the labor efficiency, we expect to see margin growth sequentially from Q4 to Q1 as we talked about, and expect to see growth throughout the year.

So we should have margins improving each quarter throughout 2012 as the other guidance you have given us?

Yes. I mean subject to how the industry demand shapes up, but right now when we look at it we see good fundamentals on the demand side.

The next couple of quarters the mix on the backlog is certainly going to improve. And the next couple of quarters we're going to continue to see productivity, so we have got pretty good visibility over the first half of the year. And we will see how the demand and pricing holds up in the back half of the year.

Got you. And then, Mark, I guess the 1% price you said -- looks like there was some mix issues in the fourth quarter, but is that year-over-year or is that sequentially?

Sequentially.

Sequentially. And then how much do we think about putting in SG&A before the 401(k) and the education expense?

Yes. On a full year basis we're targeting, 4% or better total SG&A as a percent of revenue.

Okay. Well, that's all I had. Thanks guys for the time and congratulations.

Thanks, Brad.

Thanks, Brad.

Our next question comes from the line of Steve Dyer with Craig-Hallum. You may proceed.

Thank you, good morning, guys.

Morning, Steve.

Morning, Steve.

How should we think about -- you gave the unit number guidance this year for shipments. How should we think about pricing, I guess in general terms, which is obviously the other piece of getting to some sort of a revenue number going forward? Is it up 5%, 10%? How should we think about that from a modeling perspective?

I think on average we've got a lot of quotes and we have talked about this the past couple of quarters on the year-over-year basis, you have seen things that are 10% or higher in terms of pricing going up. Certainly you have got some at the high single-digit. The other aspect that we have out there, though, is content, and we see customers continually looking at their spec and what they can do mitigate some of the inflation they are seeing on their base. So we will see how the average comes out, but it's in that 5% to 10% inflation net range, I believe.

Okay. And then as I look at what ACT and [FCR] are estimating for this year and then your guidance would imply that maybe the mix goes back a little bit away from dry vans this year. Is that consistent with what you are seeing, or is that a decision you guys are making to do some other higher margin stuff?

It's the range that we've given for total units is more reflective of our focus on improving our margins through recapture of lost margin during the downturn. So we're being much more aggressive with passing through price increases to accomplish that, and in doing so, we have an expressed willingness to walk away from some deals that don't meet criteria that we have established internally. So we're trying to be -- maybe it's a little more conservative on the unit side rather than just looking at straight year-over-year projections of increase that the industry has of 18%, 19% year-over-year.

We had a strong year in volume in 2011. We will be very prudent on the opportunities that we actually accept in 2012 to meet that objective to significantly improve the margins. So I wouldn't read anything into it other than that.

Okay.

Demand is strong, customers are -- the quotes, in total volume of quotes, is higher than it was at the same time last year, the number of units within the quotes on average is higher than it was in the prior year. So the demand environment does remain strong and is consistent with what ACT and FTR have been saying. We are just looking at it a little differently than what we may have been faced with a year ago when the future wasn't quite as clear on the demand side.

It's much more stable now. We can take a little bit more structured approach in going after the business that we want to have. And in doing so, we may end up walking away from some business to assure that we deliver the margin results that we all want.

Okay. That's helpful, Dick. Thanks. And then one last question. Just as you put all the pieces together and assuming the new businesses is 8% to 10% gross margin, I think if I'm doing the math right, and assuming that's essentially 100% of your mix by for sure mid-year, is that-- I mean are those good numbers to be thinking about for an overall gross margin in the back half of the year?

Yes. I think the 200 to 400 basis point improvement is something that we expect to make progress through throughout the year. Certainly, we expect to be at the higher end of that if the demand continues to play out.

Okay. That's all I have. Guys. Thank you.

Thank you.

Thanks, Steve.

Our next question comes from the line of Kristine Kubacki with Avondale Partners. You may proceed.

Good morning.

Hi Kristine.

Goods morning, Kristine.

I was just wondering if you could talk a little bit about -- you said the major fleets are still coming in and maybe a little bit later. Can you talk a little bit about what your mix on the smaller fleets and how it is compared to last year and what the availability for credit is for those fleets and how they're financing those?

We're certainly seeing a more favorable environment for smaller fleets to access credit. I certainly wouldn't suggest or imply that it's as good as the environment was during the last cycle, pre downturn. But we're seeing a lot more activity through our dealer networks and through our retail organization on the amount of quote activity and quotes that are actually being converted to orders.

So those smaller fleets are having success in getting financing and they're getting healthier, too, with the demand environment. The whole tide rises as a result. So we're seeing an improving mix of that. I mean coming out of the downturn it was predominantly the big truckload guys carrying it at a very, very high percentage. Now we're seeing smaller players getting more engaged in the recovery.

Okay. Perfect. And then you've talked previously about specific example, decoupling on the costs of say tires. Can you talk a little bit about how you are protecting yourself on input cost variability on new orders for this year?

Yes. We continue with our practice with aluminum. As soon as an order is placed and we will go out and lock up those pounds, so we protect ourselves against any change in aluminum pricing in the market. Our cost model is very flexible and allows us to input costs for not only current costs, but we project out the next three quarters. So we're actually out for the full year -- second, third and fourth quarter -- on all cost projections relative to all the input costs that go into the trailer, whether it's projections on aluminum, steel, wood and other components that go into trailer. And then all of the converted components.

So as we know of any pending increases or dynamics in the marketplace that would imply that costs would increase, we have those already built into our cost models throughout the year. And as we quote new opportunities, we're reflecting those adjusted cost projections in those quotes. We have seen some changes since last year, -- since fourth quarter -- but we have not seen anything in projected increases that we had not already reflected in our costs.

So feel we've done a good job this year of providing good protection for what we see. Tires being the exception. We do separate those out as you commented, and that gives us that added level of protection on something that we didn't have previously because it was difficult to project the increases that all of us as manufacturers have seen -- and in the fleets -- in tighter price inflation. So we feel that that's given us that added layer of protection.

Okay. Very good. Thank you very much for your time and congratulations.

Thanks, Kristine.

(Operator Instructions). Our next question comes from the line of Rob Wertheimer with Vertical Research Partners. You may proceed.

Hi. Good morning. It's Joe O'Dea on for Rob. First question is just on mix due to the large versus small customers. If you could give a sense of what that split at a mid cycle level, where it is today. And then if there are any structural changes to consider that would influence a return to getting back to that level.

Yes. I think the way we have historically operated is -- the best way to look at it is the large guys we're doing on a direct basis, so that as a place holder is an order of 500 or more is generally a direct order. And historically that runs 40% to 60% of our business.

Last year we were above that. We were closer to 70%, so we were certainly at the extreme edge of that.

So as we look at 2012, we do expect to be able to manage back within that range of 40% to 60%, and shift that forward as we go throughout the cycle. So a big part of that is balancing the channel mix.

I think Dick talked about that we are seeing good stocking and order demand through the dealer network here early in the year which supports that. So we are looking to manage that structure back into more of our historical profile below 60% this year.

Okay. And you don't see -- that going forward that would favor the higher end of the range? You haven't seen a disappearance of the smaller fleets that you don't expect to return?

No. At this point I think we have seen -- and we saw it pickup a year ago and I don't know whether it's the owner/operator. I think that's a little bit harder to gauge because the flat bed demand up until recently has been really below the normal where you see a lot of the owner/operators directly. The rest of it is what I would classify as the small to mid-market carrier and we have seen reasonable demand that really picked up beginning in the second quarter of last year and has continued to this point.

Okay. Great.

But the owner/operator there may be a piece there that we haven't quite gotten a handle on yet.

And then on the margin outlook I think it sounds like the pricing benefit from legacy will flow through in the first and second quarter of this year, but I think you also mentioned that there's still 100, 120 basis of margin upside from productivity. Can you give a sense of what that trajectory looks likes for when we will see that flow through?

Yes. Q4 was the first quarter of stability in terms of not adding shift or additional headcount. We're really only adding headcount at this point for normal attrition needs.

So we typically would expect to need about six months of stability to get back to productivity level, so the total -- if you were to think of it in -- around 150 basis points impact to 170 -- we took about a third of that out -- got a third of that back I guess in Q4. On average we would expect to do the same thing here in the first quarter, but really by the end of the first quarter have most of the workforce back to what we would consider our standard productivity levels, and actually be looking to improve beyond that as we go throughout the year.

Okay. And then last one is just you sort of hold the line on some of these negotiations, and looking to get some pricing back. Are you seeing that the industry is trending in that direction as well, are you seeing volumes coming back, that it's less of a competition on pricing? And just give a sense of the overall environment out there.

Yes. Absolutely. There's no question that as the demand environment improves you start seeing all manufacturers starting to raise prices because everyone was faced with the same challenges that we were faced with during the downturn. Costs going up, but the inability to effectively pass-through either any or certainly all of the cost increases that were realized.

As the market has improved everyone is in that recovery mode of going out to recapture and push through cost increases. Pricings are going up across the board. Everyone has increased pricing.

We're trying to take the lead role in driving that and we'll see what transpires as we progress through the year, but certainly we're seeing and hearing it through different media and different comments that manufacturers are making that everyone is in that same mode of raising prices to recapture and recover any lost margins that they experienced during the downturn. And it is typical of this industry -- being a cyclical industry -- that we see this over and over again. That manufacturers will recognize that they need to make solid profits during the good years --demand years of the cycle, so that they can make it through the difficult years. So it's a pattern that is repeating itself.

Okay. Thanks very much.

Our next question comes from the line of Jeff Kauffman with Sterne, Agee. You may proceed.

Thanks, guys. I just want to do a follow-up, Mark, on some details. Did you mention at all what the profitability or profit margins were on the manufacturing business versus the retail business?

I did not specifically cover that segmentation break out. It's in the press release. At least at operating income level.

Oh, I'm sorry. Yes. Operating income. And then lastly did you say 1,100 used units, $7 million in used revenues?

Yes, I did.

Okay. Good. Thanks.

Yep. Thanks, Jeff.

And we have no further questions at this time. I would now like to turn the conference back over to Mr. Giromini for any closing remarks.

Thanks, Chris. As previously stated, we're focused on making 2012 a year of execution and results. We remain committed to delivering exceptional value to our customers, while at the same time, improving margins and profitability to further advance our industry leading innovation and diversification efforts that will ensure our long-term growth and success and provide attractive returns to our shareholders. 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 that concludes today's conference. Thank you so much for your participation. You may now disconnect. Have a great day.