Wabash National Corp (WNC) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2012 Wabash National earnings conference call. (Operator Instructions).

I would like to turn the presentation over to your host for today's call, Mr. Dick Giromini, Chief Executive Officer. Please proceed.

Thank you, Erica. Good morning. Before we begin, I would like to make an important announcement. As with all of these types of presentations, this morning's call contains certain forward-looking information including statements about the Company's prospects,the industry outlook, backlog information, financial condition, and other matters. As you know actual results could differ materially from those projected in forward-looking statements. These statements should be viewed in light of the cautionary statements and risk factors set forth from time to time in the Company's filings with the Securities and Exchange Commission.

Welcome to Wabash National Corporation's first quarter 2012 earnings call. I'm Dick Giromini, Chief Executive Officer. With me this morning is Mark Weber, our Chief Financial Officer. We have a great deal to share today and we'll try to provide as much information as possible. I'll first comment on several key highlights for the quarter, discuss the broader operating environment, and provide expectations for the coming quarter and fiscal year. Then I'll ask Mark to give 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 discuss the first quarter results. While just getting started and with a lot yet to get done, we are nonetheless pleased with the momentum and ongoing progress that we're making in the business both in our financial results and in our company's overall performance during the quarter. Excluding acquisition-related expenses we generated net income of $6.7 million, representing over 100% improvement as compared to first quarter 2011 income of $3.2 million.

Margin performance showed progress in the quarter with improved gross margins of 7.1%, up from the 6.0% attained in the prior quarter, as we continue to make gains in the mix of higher margin shipments along with continued work force maturity offset partially by the decreased absorption related to lower first quarter seasonal production levels.

Operating EBITDA totalled $12.3 million, which represents an increase of $3.5 million or 40% improvement when compared with the first quarter of 2011 on approximately 1,400 new trailer shipments. Again, excluding acquisition-related expenses, operating income for the first quarter of 2012 was $7.1 million. An improvement of $3.1 million or 78% as compared to the previous year period resulting from new trailer shipments of 10,300, just off original guidance of 11,000 units.

While modestly below our original estimate, it's important to stress that this is simply a timing event as new trailer deliveries increased month over month throughout the quarter, as customers once again slowly adjusted to our increasing bill rates following the holiday period. Year-over-year consolidated revenues for the first quarter increased by approximately $56 million, or 25%. In addition, as production builds for the first quarter yielded approximately 11,000 trailers, we anticipate the vast majority if not all of the shipment shortfall to be made up during the course of the second quarter.

Most importantly, when excluding the impact of acquisition-related expenses, we were able to deliver operating income of $7.1 million or 2.6%, the best performance since third quarter of 2007 reflecting the improved overhead cost structure of our business. Quote and order activity throughout first quarter remained healthy and in line with seasonal and cyclical demand trends.

While first quarter orders moderated somewhat from what was experienced during the fourth quarter. Over all order patterns this past quarter remain above historical averages and consistent with the stage of the industry recover that we are in.

To put this in perspective, we must recognize that industry orders for six month period of October 2011 through March 2012 totally nearly 142,000 units as compared to the same six month period in 2010 to 2011 of 131,000 units, or 8% higher, despite the fact that February and march were off from the unsustainable November through January levelsin which 82,000 units were ordered or an unrealistic 329,000 units annualized. There had to be a pause.

Customers, especially large fleets, were earlier in placing orders for this year than they were for last year's needs as the comfort level with the overall economy and the level of trucking demand has continued to grow. This was especially true of large truckload dry van orders.

Remember the late 2010 early 2011 order season was at the backend of the longest and deepest downturn in demand that our industry had seen in over 30 years. Customers were only beginning to get comfortable with their decisions to once again place orders and begin addressing their ageing fleets, leading to slower placement at the outset. Recently we have not seen a slow down in quota activity as we enter the current quarter and remain confident of strong demand going forward.

That said,our backlog as of March 31, 2012 remained relatively consistent with the December 31, 2011 level of $587 million, at $583 million. Despite the impact of our previously stated intent to be more selective in order acceptance as we work to recapture margin compression experience during the recent downturn and the rapid production ramp up coming out of holiday season.

We're encouraged by the overall progress made so far and continue to see positive improvements in workforce productivity, a strong backlog containing a growing mix of higher margin orders, while also effectively managing for fluctuating commodity prices, which all combined contribute to our improving profitability in overall operating performance. We will see continued gains in gross margins and at the operating income line as we proceed forward through the quarter and beyond.

These trends coupled with our successful and focused efforts to diversify the business position us well for continued improved profitability and long term growth. For example, the diversified products segment, consisting of Wabash Composites, Wabash Energy and Environmental Solutions, and Wabash Wood Products generated sales of approximately $32 million for the first quarter 2012 representing a 57% increase from the prior year period. More importantly, diversified products achieved gross margins in excess of 20% for the quarter meeting one of the key criteria of our strategic growth efforts. Mark will provide more color regarding the individual reporting segments a little later.

As you know on March 27, 2012 we announced that we entered into a definitive agreement to acquire Walker Group Holdings, a leading manufacturer of liquid transportation systems and engineered products. Joining forces with Walker further advances on our strategic plan to diversify and profitably grow the business. We look forward to adding Walker to the Wabash National family, a clear leader and a complimentary and growing market sectorwith a leading position in nearly all its product categories, well known brands,strong customer relationships that span over decades, and high margin product portfolio supported by industry innovation, and low cost manufacturing.

As I noted in March when we made the initial announcement I emphasized how eager we were to add a deep and talented team under the leadership of Doug Chapple who currently serves as CEO of Walker. Our two companies share a strong cultural fit, and we look forward to completing the transaction soon, to then begin to integrate best practices, leverage individual talents and accelerate strategic growth initiatives across the combined entity. Again, the strategic rationale for this transaction is broken down to three main areas, industry leadership, diversification and an attractive financial profile. Walker has a leading market position and strong brand recognition in all of the markets it serves.

This compliments our existing leadership position in van trailer manufacturing and related products and technologies, and provides a new platform for growth and value creation. Similar to the strong demand within Wabash National's van and platform businesses, the tank trailer industry also continues to demonstrate a healthy demand environment as Walker's backlog as of March 31, 2012 of $179 million represents an increase of 67% as compared to the previous year.

Walker and Wabash National share a common culture built on innovation and continuous improvement, with a distinguished track record of delivering the very best products and solutions in the market today. Efforts to close this transaction continue to move at rapid pace and we anticipate the Walker acquisition to close during the current quarter. Mark will discuss details of the transaction in his portion of today's call. Moving forward we expect to build on the success of the first quarter 2012. Throughout the balance of the year, we will continue to move forward as we continue our efforts to transform Wabash National into a diversified industrial manufacturer by leveraging our core competencies and new markets, like chemical and pharma, by continuing to improve profitability through operational excellence, and by capturing additional revenue streams by means of new product development. And, as we bring Walker into the fold, we will demonstrate our ability to make our broader vision and mission a reality to deliver long term shareholder value.

Now, before I reveal our outlook for the second quarter 2012 in the year. I will 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 March to 95.7 following a 0.7 percent increase in February and the highest level in 44 months.

The Institute for Supply Management Manufacturing Index advanced from 53.4 in March to 54.8 in April indicating continued strong expansion activity in the manufacturing sector. For the first quarter of 2012, total industrial production increased at an annual rate of 10.4%. In GDP advanced by 2.2% during the first quarterfollowing fourth quarter 2011 at 3%, as increased consumer spending was offset by government spending cuts but still reflects the 11th consecutive quarter of growth.

Within the trucking industry, the ATA's Truck Tonnage Index for March came at 119.5 or 0.2% increase vs. February, reflecting the 28th consecutive month of year-over-year improvement and the third strongest on record. For the year, truck tonnage rose 2.7%. The FTR Trucking Loadings Index moderated slightly in March by 0.5%, but still rose year-over-year by 0.9%.

Expectations by FTR is for this index to grow by 3.1% in 2012 and 4.1% in 2013. Industry wide net trailer orders in the first quarter totaled nearly 68,000 units following a fourth quarter of just under 74,000 units ordered, pushing industry backlog at quarter end to 115,000 units, some of the highest levels since 2006, further reaffirming our belief that we remain in the early stages of a cycle that could turn out to be one of the longest and possibly strongest that our industry has ever seen.

Industry forecasters remain similarly optimistic in pointing toward strong demand throughout the next several years, with annual trailer demand exceeding 2011 levels each of the next six years. Nearer term, the latest report from ACT estimates 2012 trailer shipments at 251,000 units, up 20% year-over-year, and 267,400 trailers in 2013, up an additional 7% over 2012. Plus FTR now estimates trailer production for 2012 at 249,000 trailers an increase 17% year-over-year and 250,000 units for 2013. So considering all of these factors current quarter expectations are now to ship approximately 13,000 units with full year shipments remaining within our previous guidance of 50,000 to 56,000 units.

In summary, let me underscore how pleased we are with progress achieved in the first quarter as we execute and build upon key operational improvements and move forward with our strategic plan to diversify our business. We do realize however that we have work to do to get our margins where they need to be. We are poised for continued top line and bottom line growth as we execute our organic diversification strategies and through the strategic integration of the Walker acquisition.

Combine that with an environment of strong industry demand and a favorable cycle that is expected to last longer than historical periods, and we have the ingredients for strong shareholder value creation in the months and years ahead. With that let me turn the call over to Mark.

Thanks Dick, and thanks to everyone for joining us this morning to review in more detail the first quarter earnings release that we issued on Monday. As you're likely aware we accelerated the release by a day to help facilitate our ongoing financing activities. All good news that I will certainly cover.

First, let me mention that in addition to the earnings release that went out on Monday we also filed our first quarter 10-Q that went out yesterday evening. Also I will provide specific commentary regarding the Walker acquisition at the end of my prepared comments on Wabash. Otherwise, unless specifically noted on my commentary on the quarter and outlook, pertains to the current Wabash business, pre-acquisition. With that let's begin.

Total revenue for the quarter improved year-over-year by more than 25% to $278 million. In the quarter, new trailer sales totaled 10,300 new trailers, or $235 million, an increase of 16% and 21% respectively from first quarter of last year. New trailer ASP for Q1 increased from the fourth quarter increased by approximately $800 and versus a year ago by approximately $1200, coming in at $22,900 per unit. The increase in trailer ASP is due primarily to price increases implemented to recover component and commodity cost inflation that was realized throughout last year.

Looking at other product lines, used trailer revenue came in at approximately $8 million on 1,000 units and was up approximately $3 million from the same quarter a year ago as the used trailer market continues to demonstrate healthy demand and pricing. Parts, service and other component revenue was approximately $27 million in the quarter an improvement of approximately $6 million from a year ago, led by increased sales of our non-trailer composite products. In addition, revenue from equipment and other sales of $8 millionincreased $6 million year-over-year, primarily from sales of frac tanksunder our agreement with Saber Manufacturing entered into in March of 2011.

In terms of operating results, gross profit for the quarter was $19.7 or7.1% and represents an improvement from 2011's fourth quarter gross margin of 6%. The quarter benefited from improved pricing, a stable workforce, moderate raw materials, and growth in our higher margined non-trailer products.

As a reminder Q4 of last year also benefited from a favorable warranty adjustment of approximately $2 million or 60 basis points, so net margin expansion is closer to 170 basis points sequentially. Specifically the commercial trailer product segment improved gross margins sequentially by 140 basis points to 4.8%, excluding the favorable warranty adjustment from last year. This improvement was primarily driven by net trailer pricing improvements of almost 250 basis points this quarter as pricing within the backlog strengthened, as lower margin legacy orders decreased from approximately two thirds of the build in Q4 to approximately 40% of the build this past quarter. We expect this improving backlog trend to continue as we move through Q2 with legacy backlog 10% of production.

This favorable pricing benefit was partially muted by lower production in the quarter which decreased by approximately 2,300 units from Q4. As expected production was seasonally lower this quarter at approximately 11,100 new trailers however, year-over-year production was higher by approximately 17% as the industry continues its early stage recovery. In addition, workforce productivity continued to improve and Materials were generally stable. As a result of the improved backlog, favorable product mix, and generally stable raw material cost, material cost as percent of selling price for commercial trailer product segment improved during quarter 320 basis points from 78.6% of sales to 75.4% of sales in Q1.

In total, commercial trailer products has now demonstrated 250 basis points of improvement in gross margins since the low point of the third quarter last year. Moving into the current quarter, we will make another step function improvement in gross margin, as pricing improves commensurate with the newer backlog and as production volumes increase from seasonally lower Q1. Looking at gross margins in our other sections, several noteworthy signs are evident.

Our new reporting segment, diversified products also demonstrated significant top-line growth of 57% and more importantly gross margins in excess of 20% consistent with our long term strategy, and our retail segment at 10% gross margins is one of the highest levels in history. Even more encouraging Q1 generated positive operating income for the 6th consecutive quarter and represents the 10th consecutive quarter of year-over-year improvement. Q1 generated operating income of $7.1 million, excluding acquisition related costs and reflects an improvement of $3.1 million from last year.

Over the quarter, we generated operating income margin of 2.6%, our highest level since 2007 as we continue to demonstrate leverage from SG&A cost. The acquisition costs noted in the quarter of $1.7 million relates to proposed acquisition of Walker Group Holdings. We expect this transaction to close later this quarter and total acquisition costs-- acquisition related costs are estimated to be in the range of $12 to $15 million.

SG&A for the quarter was flat with the prior quarter at approximately $12.6 million. While this represents approximately 4.5% of revenue,this was significantly better than the prior year's 5.6% and we still anticipate full year SG&A costs to be below 4% of revenue for the year as trailer volumes improve.

Net other expense of approximately $700,000 relates primarily to borrowing costs associated with our revolving credit facility, consistent with prior quarters. In terms of taxes, atMarch 31 we had a U. S. Federal NOL carry-forward of approximately $158 million. However we have our full valuation allowance recorded against a net deferred tax asset.

The Federal NOL carry-forward will begin to expire in 2022. Please refer to the 10K on the details on the annual limitations of our NOLs, however we estimate approximately $107 million of NOLs available for utilization this year, subject to pre-tax earnings.

Finally, for the quarter. Net income excluding acquisition related cost was $6.7 million or $0.10 per share, at the high end of our guidance range provided last month. The details of EPS and share account are included in the press release. On to the balance sheet. In regard to the balance sheet and cash flow statement, let me provide a little more detail on those specifics.

Total inventories increased approximately $25 million driven largely by increased raw materials in the quarter as production levels increased off our year-end shutdown, as well as select material pre-buys ahead of price increases. As a result we expect raw material levels to reduce and normalize this quarter. As of December 31 inventories of $215 million consist of following, raw materials of $70 million, [width] of $18 million, finished trailers of $108 million, parts of $6 million, and used trailers of $13 million.

Capital spending for the quarter was approximately $1 million and we anticipate full year 2012 to be approximately $10 million to $15 million. Our liquidity or cash plus available borrowings as of March 31st was approximately $100 million. In summary Q1 continued the momentum which began last quarter as improved pricing and a stable workforce and material environment allowed for the best operating incomemargin in over four years. Taking stock of the rest of the year, the Company is well positioned to continue the momentum generated last quarter.

Backlog as of March 31st was approximately $583 million, essentially flat with year end. The demand environment continues to show strong signs with recent strength across all product lines. In fact, April order activity represented our second highest month this year. In regards to the current quarter we estimate Q2 shipments to be approximately 13,000 and as Dick discussed, we continue to estimate full year, new trailer volumes to be in the range of 50,000 to 56,000.

Consistent with last quarter with a solid foundation in place, we anticipate expanding margins throughout the year as industry demand, pricing and our organic growth initiatives take hold. While it's still early the first quarter has put us well on our way to achieving the margin expansion discussed last quarter of between 200 to 400 basis points, vs. 2011, or said differently, 2012 gross margins of 7.5% to 9.5%.

Now, let me provide a brief update on the Walker acquisition which we announced on March 27th. In that regard, on April 23rd , we issued $150 million 3 3/8% senior convertible notes due 2018. The notes are convertible under certain circumstances and to cash, shares of common stock, or a combination on our election. The notes were priced at an initial conversion premium of 35% or approximately $11.70 per share. To help reduce potential equity dilution, we intend to settle any conversions through net share settlement whereby when notes are converted, Wabash will pay up to the principle amount of the converted notes and deliver shares for only the conversion value in excess of principle amount.

Under this treatment the Company will apply the treasury stock method and not reflect diluted shares until the stock price is over $11.70 per share. As an example at stock price of $16 per share the impact of potentially dilutive shares related to the convertible notes would be approximately 3.4 million shares or only 5% of our converted shares outstanding. However, no additional shares would be included if their effect would be anti-dilutivewhich may be the case.

More details will be available next quarter once we have completed the valuation work required for the convertible notes. In addition, this morning we priced our new $300 million senior secured term loan to fund the remaining portion of the purchase price of the acquisition. The seven year term loan was rated B+, B1 by Standard and Poors and Moody's, and priced at LIBOR plus 475 basis points with a 1.25% LIBOR floor and a 1% original issue discount. The effective yield on this loan is approximately 6.25%.

All told, we are positioned to put in place a cost effective permanent capital structure at more favorable terms in structure than contemplated at the time of the Walker announcement. This structure provides for pre-pay ability as the combined businesses generate cash, availability and liquidity to fund working capital and seasonality of the business, and minimized equity dilution. As a result, we do not expect to draw on the bridge facility and we are on track to complete the transition and begin the integration process with closing likely to be completed in the next several days.

On the business front, Walker's liquid tank trailer business, similar to the strong demand experience within our core trailer products has shown healthy order activity over the past months with industry net orders up over 22% vs.. the same period a year ago. This has resulted in a record backlog for Walker as of March 31st of $179 million. Based on internal management reporting Walker saw top line growth in the first quarter of approximately 25% year-over-year.

As a reminder , Walker has consistently generated gross margins of approximately 20% or better providing solid predictable performance. On our next quarter's call we will be able to provide additional color on Walker's performance and outlook, but rest assured Doug Chapple and his team are focused on execution and positioned to take advantage of the strong and still recovering liquid tank environment. We look forward to jointly working to accelerate their growth initiative and to delivering additional synergies of approximately $10 million annually. With that I will turn the call back to operator. We will take any questions you may

(Operator Instructions). Our first question comes from the line of Steve Dyer, with Craig-Hallum.

Thanks. Good morning guys.

Hey, Steve. (multiple speakers)

I think you had guided a legacy mix of about 10% in Q2. What was it in Q1?I think I missed that.

We will go back in time a little bit and work quarter-by-quarter. If you go back to Q3 of last year, it was essentially 100% of the lower-priced legacy backlog. In Q4 about two-thirds was legacy related and last quarter it was about 40%.

40%. Okay. So I guess if you just do a blended gross margin it would imply that the gross margin on the new businesses somewhere, just on the trailer portion of it, somewhere north of 8% Am I thinking about that right?

I think if you use Q3 as starting point and roll it forward. I think you will see in 7% or 8% range over the past two quarters.

And presumably that can grow a little bit as pricing continues to-- as you continue to get pricing going forward?

I think it's a factor of demand environment one and orders. And two, I think it's a factor of channel mix as well. So we're obviously entering the phase to some degree where you see more of the indirect channel through our branches and dealers and also some more of the small mid-market accounts coming into the book which generally carry a little bit better margins with them.

Okay. And then what about flat beds which have been obviously very strong this year. What's the margin profile on those?

Yes, I think first point is you're absolutely right. We've seen good -- you know coming off a low point for that industry. But on a percentage basis we've seen strong growth in the backlog and order activity there and certainly by the nature of it being much more smaller fleets and owner-operators, there is a better margin opportunity there. We don't disclose that exact range. But it is generally (inaudible) above the fleet, fleet guys.

Okay. In the diversified product market group. Is there any particular area of that that's driving the outperformance? Is it the frac tanks or anything you would like to call out as outperforming there?

Well, the -- at this stage we don't break out the individual but the whole group has been gaining steam. Certainly the Wabash composites group that has had some nice success over the past three years in growing that business are getting to a nice level of critical mass that helps them generate some nice margins. The wood products group that supports the core trailer business does well. The frac tank business is still ramping up as they absorb not only the new product but the start up and ramp up of new blast and paint lines. So they are coming on stream through out this last quarter and today.

Perfect. I will hop back in the queue.

Our next question comes from the line of Brad Delco, with Stephens. Please proceed.

Morning Dave, morning Mark.

Hey Brad.

Morning.

I think Dave, you mentioned something about, I guess, or there's focus on the orders and how that progressed this year. I guess a big question that I'm getting is there any difference in the order-- or the timing of orders for your larger fleets vs.. the smaller fleets and are you seeing. that and maybe any commentary as to why we have seen some of the orders slow down here more recently, particularly in March can which seems a little unusual relative to historical patterns.

Well yes, I was trying to lay that out in my comments. When we look at what occurred in the latter part of the fourth quarter and then into January. The November, December January period were exceptionally strong for order placement. Total orders placed in those three months mounted to 82,000 trailer units. When you annualize that it comes out to 329,000 for a full year. That was unsustainable, certainly at this stage of the recovery in the industry. There had to be a pause at some point. Customers were more comfortable this year. So last year, March happened to be a very big order month and that was not going to continue.

So with the drop off in March, and it was still just shy of 20,000 units, so it wasn't like it was a weak order month. Just relative to November, December, January, it sent a shock wave through everyone. I think folks tend to look at what has transpired on the Class 8 side where there had been a softening for various reasons. Some thinking that it was tied to the [debendix] issue.

We don't see that currently as a problem. Our quote activity remains strong. We have not seen a drop off. Certainly the number of units within quotes are smaller than they were in previous [Poors] because as Mark stated in his comments, we're getting more into the mid-size fleets, smaller fleets, the indirect channels that are now much more active in the quoting and ordering seasons for themselves. At this point in time, we feel very comfortable with the demand environment.

Our backlog is very healthy. We are being more selective in the orders that we are accepting. I guess you can translate that into saying if we really wanted to be more aggressive, we would have even a bigger backlog because the demand is out there to have. But we're trying to be selective so that we can get that margin recovery and recapture some of that margin compression we experienced during the downturn. So all in all, I think we're just a little bit out of kilter.

We can't focus that much on one or two months in the cycle. We have to look at it in groups. This tends to be a lumpy order business. We've had a good run of orders that are stronger than what they were a year ago. At this stage of the game, through, I would call it six months into the order season, if you count the last three months of 2011, first three months of 2012. We are ahead of the pace we were last year at this time, with a good backdrop of active orders out there. So we feel very good about the demand environment.

And Dick I just -- one add-on to that, You said April was your second highest order month of the year. What was the first highest?

I think that was a comment I made, Brad. I think January would have been -- this year would be our highest and April is going to be just shy of that. For us. I can't speak for the industry. I think it duck tails into Dick's comments. These things are lumpy, and depending on when things come to the book, you can bridge into one month or the other. And it's more related to the fact that we still continue to see good quote and order activity.

We talked about this in prior quarters. The customer base is really broadening, and that continues to happen. A year ago there weren't that many LTL fires in the book. Across the industry, I think just about everybody is in that LTL segment, ex- maybe YRC. It is a buyer of equipment.

We continue to see it broaden from the largest guys through the mid-market and smaller fleets. When you look at FTR and ACT forecast being up 20%, we see that being pretty doable with just the expansion of customer base. There certainly has been a strengthening in the refrigerated product and flatbed product segments and tank as well. We feel good about where the total industry is going to be.

As Dick mentioned, we've been more selective, and I do want to clarify. I think I misspoke. I said our backlog was $538 million. It's $583 million at the end of March. So we've got essentially closed out of Q2 and good visibility for the next several months, and the opportunity to take advantage of orders as they come into the book in the back half of the year.

I will just add that many, many of the repeat customers who are ordering consecutive years are actually ordering trailers equal to or greater in volume than what they did in the last year. So it reinforces again our belief that the demand environment is very solid.

Great and maybe one last quick question. Looking at you maintaining your volume guidance for the year. You provided us 13,000 deliveries for the second quarter. If I look at the higher end of that guidance, it would suggest, production just over 16,000 units a quarter. Is that possible right now with the current workforce? Or what would be needed to produce that?

Well, we would adjust to -- we talked about this in earlier quarters. When we set that range of 50,000 to 56,000, one of the statements I made at the time is that if the demand environment supports the kind of margins that we are willing to accept, then we could be closer to the high end of the range. If the environment is tougher because we're being much more selective on what we're accepting,then we would be at the lower end of the range. The answer is probably somewhere in between as we work the market and see what we can do from standpoint of margin recovery as we're pricing the quotes.

But to answer the question directly, yes. We can achieve that. We would do some things, we have opportunities to work overtime. We still have shifts available to add if necessary as we progress through the year. So we will play that card as we get closer and we see what is happening with order intake.

Gotcha. Thanks Dick. Thanks, Mark. And we'd love to see price more than volumes at this point, so keep managing the business well. Thanks.

Our next question comes from the line of Tom Albrecht, with BB&T. Please proceed.

Hey, guys. Couple of things I want to clarify. A little bit related to Brad's question but a little bit different. If I look back at 2004 and 2005 your gross margins got to consistently 11% to 12% through a variety of quarters. Back then you didn't have a diversified products division. So if gross orders are 7% to 8% for more resent orders can you think about eventually getting back to 11% or 12% over the next two or three years?

We certainly think that's possible. You know, I talked about in the past,arithmetic works against you a little bit. Denominator's much larger today withaverage trailer pricing going from mid-$16,000 range to $22,000 plus range. You have to go out and get margin on the material. So that gets a little more challenging.

We're working the process. We're continuing to push price. We're taking big mouthfuls of the apple. Not little nibbles. We have made some big leaps during this last pricing cycle, and will continue to push that in subsequent years. If, in fact, the projections that ACT and FTR suggest over these next several years, it provides a lot of opportunity for all manufactures of trailer equipment to take the opportunity to push price and recapture margin and recapture loss margin through the downturn and then some.

We feel very good going forward. It's not going to be like falling off a log but we will keep pushing it and get to that level and let the other diversification efforts of our business get us beyond those levels that we enjoyed in 2004, 2005.

A couple of other things. Mark, on your comment about SG&A 4% or better, I wanted to clarify. Did you mean for the next nine months or that's still a goal for the entire 2012 average. And I still have another question.

That was-- comment was for the 2012 average.

okay. And then you know, Dick or Mark, when I look at the gross margins in diversified products, they're terrific and I think we're all starting to better understand why you're developing this other business line. But the gross revenues for that was over $31 million but the external sales was about $19 million. So $12 million or so was internally. Are the gross margins really 20% when you have such a big inner company sale like that?In other words, if we really knew the gross margin on just the external sales would it still match up at 20%?

It would be slightly higher. The inner company piece of that, Tom, primarily relates to our laminated hardwood oak that's being sold into the dry van trailers. We have those priced where we think the market is for that. That line-- that product line is generally slightly below 20% gross margins. So that's bringing the average down a little bit to be honest.

Okay. And then my last question would go back to demand. You've provided some very helpful comments on flatbed and the tank market and even LTL, butas you look at the big buckets that are out there, one of course is the traditional van truckload carrier. I'm just wondering, what is the level of quotation activity like for the van customer? I think we can figure out refers, flat beds etc., and LTLBut the core truckload guys? Hello.

Yes, I don't know that we can provide you that kind of granularity sitting here. I will just say that the total quote activity for the van operations remains very strong. The absolute number of quotes that we have coming through the system has not pulled back at all quarter-over-quarter. The mix of it may have changed somewhat. That excludes flatbed and other products. It's just talking about the van business.

When you talk about the large truckload fleets, the high percentage of those folks have already placed their orders, that's why we had such strong order intake as an industry in the latter part of the fourth quarter, early part of the first quarter. But now, as we commented earlier, a lot of the indirect channels and more mid-market type fleets are in the game because the order quantities that they have aren't in those levels. But there are some exceptions out there in the truckload guys that are still looking at quantities of 1,000 or more remaining this year. While I don't have exact numbers to be able to share, we generally don't break it down that way. It's -- while there's some slow down that we saw in the absolute orders for March, the overall environment is still pretty good.

I think if you add if you go back to the beginning of the fourth quarter when those guys were coming in, we saw demand from everybody that was a buyer in 2011, looking for equipment in 2012, from everybody. There's maybe a couple of fleets out there that have maintained a pretty good replacement rate and brought their average down, but they're still buyers of equipment this year. Maybe not as much but they're still buyingEverybody else is buying as much or more and there's certainly been some new guys that have come into the books that haven't bought in the last three years. I would say that there are still some guys that are sitting on the sidelines that haven't bought in the last three to four years, that are going to have to be getting in replacement mode 2013, 2014 time period.

Okay. That's helpful. Thank you guys.

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

Thank you, Sterne Agee. Hey, guys. Two questions. Normally you give us the backlog number but to be in backlog you have to have assigned production slot, they have to be built within a certain time frame. Then there's a larger backlog number which is signed contracts that haven't been assigned or are going to be built too far out. Could you give us the total aggregate in backlog number?

Jeff, I'm not sure that we do normally disclose the, I guess, what we would call internally firm or held backlog.

You have in the past in various quarters. That's why I was asking.

I think the $583 million is the formal one where we have orders. You're correct. There's always some discussion ongoing at any given time to where we feel very good or have in principle an agreement We have held slots for that. And some of that is theincrease in orders that we saw in April finally getting converted into the order which is what we saw last month.

But suffice it to say that number is larger than the $583 million.

It is.

I'm just doing a little bit of math on margins. This gets back to an earlier answer. If I assume your 60/40 legacy vs.. -- I'm sorry,new contracts to legacy and I take that 4% margin rate in thethird quarter on the legacies and something closer to an 8% or 9% or change on the new contracts, and just do the math of that going to 90/10,

I get about 150 basis points of sequential pick up in gross margin. Then if I add in the idea that you're going from about 11,000 units of production to 13,000 units of production there are some efficiencies. So am I wrong in thinking that this is not a promise or a forecast. That a sequential improvement in gross margin in the 150 to 200 basis point range is not unreasonable?

That's not unreasonable.

Okay. That was my question. Thanks guys.

Our next question comes from the line of Kristine Kubacki, with Avondale Partners. Please proceed.

Good morning.

Morning, Christine.

In terms of after April, can you give us an idea of what you build slot availability is for Q3 and Q4?And a follow up to that question would be are you hearing or would you expect that maybe some of these fleets who have basically put their chips on the table at this point, would they come back in with the advantage of 50% bonus depreciation still in 2012 and maybe take advantage of some of those build slots?

You know, that's possible. You know, we would have expected with 100% bonus depreciation that fleets could have gotten last year that there would have been a mad rush at the end of the year to pick up equipment, put it in service, take advantage. We didn't see that. I don't know what to expect with the 50%. Anything is possible. It would be the last hurrah for them.

So that's one of those we're just going to have to see. We have not heard a lot of fleets talk about taking advantage. We had a couple last year. But the vast majority, it never came up in discussion as a reason for their buying patterns. Most of what we're hearing is purely need. Need to update and refresh the fleets.

As Mark said a few moments ago. Many of the same customers are wanting more equipment this year than they did last year. If they were really trying to take advantage of it last year they would have pulled forward. I don't expect nor count on the 50% bonus depreciation being a significant factor in decisions.

Okay. What is your build slot availability in Q3, Q4 after April?

It varies based on the product. We have installed capacity as a company to do upwards of 75,000 total units across the business. Vans, dry vans, reefers, and flat bed product. It is mix dependent to get to that level. So we still have plenty of capacity remaining that we can leverage in the second half of the year.

Of course, larger customers their product is spread throughout the year. It's not like wego that $583 million worth of backlog goes out effectively six months and then stops and there's nothing. It's spread throughout the year. So there are slots that remain throughout the year.

And of course a greater number of slots as you get into third and fourth quarter. We have the ability to leverage as I responded earlier to one of the questions from Brad. We can work some over time if there's some growth opportunities that are attractive or add shifts that they get significant enough. We can just add another shift.

Then just a clarification. I know this is splitting hairs here, but in terms of 700 units that you missed in terms of the shipments in the first quarter, were those 700 units legacy pricing, newer pricing or a combination thereof?

It was 700 units. It was -- I guess -- we have had quarters. It's a fair question. We have had quarters where we had one particular customer that's repositioning all their fleet and that's why it lagged from one quarter to the next. That wasn't the case here. It's just spread across the entire customer base. So for practical purposes, it would follow the same split of the build which was 60% new, 40% old.

Okay. No, that's fair enough. Then my last question was you mentioned the used equipment market continues to be pretty robust. Can you give us your general take. Is equipment pricing out there on the used side, is it generally up year-over-year quarter-to-quarter still. Can you give us your indications?

Yeah, I think it's safe to say it's up year-over-year and quarter-to-quarter. Obviously, with used it's a mixed bag depending on what you have available for the market. So that's been a lot of what we have been working on in availability. But let's see. So there's some mix here. But, ASP last year was $7500 on used trailers.

Last quarter It was $6700. It was up in the first quarter of this year at $7600. There's a lot of mix there. It was up in both instances. But I think if you were to look at an apple to apple. We would see it up on raw basis as well.

Okay. Fair enough. Thank you very much.

Our next question comes from the line of Rob Wertheimer, with Vertical Research Partners. Please proceed.

Hi, just a quick question on the impression of industry discipline. You guys have shown good price discipline and that's great. Industry orders I think over the last couple of quarters were up year-over-year and you weren't. Just curious is the industry slowly getting more rational in your view, or whether there's still irrationality?

It's coming around. As I like to say, the tide is certainly rising across the spectrum of manufacturers. As we have continued to raise prices to get margin recovery and recapture. Competitors across the board are raising prices also. We tend to be the premium guy out there. But it varies. In some cases a competitor may need to be more aggressive on a certain deal and the spread between us and them is larger.

On others it's not as large. But it's all moving in the right direction. And I've stated on some previous calls that as I've learned in this industry and have been told by others in the industry as the demand environment improves the folks who have been this business a long time, manufacturers admit it's a long time, they recognize that they have to make their profit during the good years.

And once you get above the replacement level demand which we achieved this past year and now looking to be 20% above that, now is the time for all manufacturers to make some profit. They know this. And we tend to see this repeat itself each cycle. So again, prices are rising. All competitors recognize that they have to make nice profit during this cycle and we expect that this will provide good strong environment going forward to continue to be pushing price and enhancing margins for everyone.

You have talked about this issue a lot on the call, but I'm not sure if I heard a quantification of the mix shift from the largest fleets to mid-size. Is it 10 percentage points or 20? And is it increasing? And hopefully that's positive for margin. Thanks.

I think just to revisit the history a little bit. Last year our large direct accounts accounted for about of 70% of the volume we did last year. Which is above what we've ever historically done. We typically move 40 to 60% of the business on a direct basis. Then the balance goes through either our branch network or independent dealers.

That's where you are getting at more of those small mid-market accounts. I think the answer is while we're trying to shift back to that normalized historical region for us under 60% for this year. And when you do that, you're talking about a customer that is usually buying less than 500 vs.. someone that is buying several thousand at a time. It's easy to see a couple of percentage points of margin or pricing differential between that size of order.

So we're expecting at least a 10 point shift in that ratio over what we did last year.

Perfect. Very helpful thank you.

Our next question comes from the line of Frank Bisk with Pilot. Please proceed.

Hi, good morning. So your gross profit on the commercial trailer was 4.8% in Q1. What was it in Q4?

On commercial trailer products it was 4% in Q4 in Q3, which was the bottom point last year, it was 2.3% So in total it's improved about 250 basis points.

Okay. That's what I thought you said. And then on the lower price backlog. I guess we're going to have 1300 or so still in this quarter that we're in now. Are any of those historically money losing?There are some that are money losing. Is that the average was 2.3%.

Yeah, I mean, it would be still contributing to the business but maybe technically from a gross margin negative.

Okay.

Lower margin than the rest.

And then when you talk about the composites group is that mostly the pods or something else there?

It's the portable storage containers is one of products. It's also components for truck bodies. We sell into and then also the side fairing. The aerodynamic side skirt, we call the aero skirt. That's also one of the growing volume profit opportunities that the group has been selling.

All right. Thank you.

We have a follow up question from the line of Jeff Kauffman of Sterne Agee. Please proceed. Jeff, your line is open, you may proceed.

Thank you very much. Mark, you alluded to it in your earlier comments, butcan you talk about the costs, I think you said $12 million to $15 million all in, to acquire Walker and the timing of what occurred in this quarter vs. -- this past quarter vs. 2Q or 3Q and then just talk about the NOL and how we should think about the forward tax rate post integration.

So the acquisition related cost in Q1 was primarily due diligence work that happened through the first quarter. The balance of that number that you quoted will happen in the second quarter generally when we close. Primarily bridge related financing fees that won't incur now that we've got the permanent financing or nearly have the permanent financing here in place, and advisory work that's taken place. So it's all transaction related, it's not integration related per se.

Other financing related fees we'll certainly be able to capitalize but the transaction acquisition costs, we can't. In terms of going forward, NOL, we will evaluate our position. We certainly feel like we have enough NOL availability. That will continue to be through the balance of this year. Zero percent effective tax rate because we'll maintain our asset.

But I think it's certainly something that we will continue to evaluate primarily as we get through the end of the year and have a better outlook of the combined business heading into 2013. In the case where we were to reverse that reserve,Conservatively I would look at 40% effective tax rate on anything that wasn't shielded by an NOL.

And then lower cash rate until the NOL was utilized.

Correct.

Thank you very much.

We have no other audio questions. I will now turn the call back over to Dick Giromini for any closing remarks.

Thank you, Erica. We're pleased with the progress that we made thus far in executing our plan for the year. Our work obviously is not done, we've got a ways to go.

We remain committed to making this year of execution and results, improving margins and profitability while delivering exceptional value to our customers and all other stakeholders. Thank you for your participation today. Mark and I look forward to speaking with all of you again on our next call.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect and have a great day