Wabash National Corp (WNC) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Wabash National Corporation earnings conference call. (Operator Instructions).

I would like to turn the conference over to Mr. Jeff Taylor, Vice President of Finance and Investor Relations. Sir, you may proceed.

Thank you, Chris; and good morning, everyone. Welcome to the Wabash National Corporation third quarter earnings call. This is Jeff Taylor. Following this introduction, you will hear from Dick Giromini, Chief Executive Officer of Wabash National, on the highlights for the third quarter, the current operating environment, and our outlook. After Dick, Mark Weber, our Chief Financial Officer, will 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.

Before we begin, I would like to cover two items. First, at 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.

Second, please note this call may be recorded. With that, it is my pleasure to turn the call over to Dick Giromini, Chief Executive Officer.

Thanks, Jeff. First of all, I would like to extend our thoughts to all of those impacted by Hurricane Sandy. We wish you all the best during these difficult times. Now, let's discuss third quarter results. Let me start by saying the third quarter was a significant step forward for the Company with record revenues and operating income.

These results clearly validate the long-term strategic plan that we put in place several years ago and demonstrate the progress we continue to make in executing that plan to profitably grow and diversify the business. The process of transforming Wabash National from a singularly-focused trailer manufacturer to a diversified industrial manufacturer is well underway. Key metrics from this quarter are evidence that we've built a strong platform for higher-margin product lines, resulting in enhanced financial performance, setting a strong foundation for future growth.

Outcomes from the last quarter show considerable momentum across a number of financial metrics and significant progress toward receiving key initiatives which include diversifying the business beyond our core product offering to address new market opportunities and enhance our financial profile, particularly through the diversified products segment, consisting of Walker Group, Wabash Composites, Wabash Energy and Environmental Solutions, and Wabash Wood Products.

Second, we continued integration of the Walker Group companies, adding an attractive higher-margin business and another component of diversification in terms of products and markets, customers and geographies. Third, driving price and operational improvement in our core Commercial Trailer Products business to increase margin and overall profitability. Continued execution of these initiatives in the third quarter drove net sales to a record level of $406 million, a 21% increase compared to third quarter of last year. In addition, adjusted earnings climbed to $21 million for the quarter reflecting an increase of approximately 19 times greater than the same period in 2011. Gross margins improved by 140 basis points, again exceeding expectations in reaching the highest level since 2005, coming in at 12.3% for the current quarter up from the 10.9% delivered in the second quarter this year and marking the fourth consecutive quarter-over-quarter improvement. Sequential gross margin improvement stems from mix of higher-margin trailer orders from Commercial Trailer Products combined with the full-quarter benefit of the higher-margin Walker business.

Operating income excluding the impact of certain acquisition-related expenses for the third quarter of 2012 was $29.7 million which represents a 13-fold improvement compared to the $2.3 million in the previous year period. Operating EBITDA totaled $37.7 million which represents an increase of $31.1 million compared to third quarter of 2011 and $8.0 million sequentially. In regards to volume, shipments of 12,200 new trailers across all of our businesses including Walker Group were achieved consistent with our prior guidance of 12,000 to 13,000 total trailers for the third quarter. Overall, we are pleased with the results thus far in 2012 as well as the substantial improvements in business performance since 2011. We remain focused on strengthening the organization for the long term to drive sustained growth and to support our efforts to expand into other markets. With that, let's now shift focus to some highlights regarding the performance of each reporting segment and Mark will follow later with additional financial performance details. We'll start with the Commercial Trailer Products segment. Consistent with this year's focus on margin over volume, the group again delivered on the promise to improve our mix and increase gross margins, with a notable improvement to 7.2% for the quarter or 490 basis points higher when compared to the same period last year. This focused effort to recapture lost margin experienced during the downturn, along with continuing productivity gains for a now more stable and maturing workforce has led to the best performance for this part of the business in several years, with operating income for this business segment having increased by $12.5 million year-over-year.

As expected for this reporting period, backlog decreased due to seasonality but still remains at a healthy $385 million, representing more than four months of production at current bill levels. In addition, quote activity for 2013 has picked up nicely with several large deal orders, meaning orders greater than 500 units, already booked with our direct channel customer base and numerous others in active conversations for equipment needs for next year. We expect quote-to-order conversion rates to accelerate over the next several months as clarity is brought to the current, uncertain political environment.

As we now make our way through the 2013 order season, we continue to believe the overall demand environment for trailers will remain strong as key drivers such as the excessive age of fleet equipment, stable customer profitability, regulatory compliance requirements, along with increased residual value of used trailers, and greater access to financing all combine to support continued demand for new trailers. Moving on to the diversified products segment which includes Wabash Composites, Wabash Energy and Environmental Solutions, Wabash Wood Products, and the Walker Group. We saw several elements of growth.

This segment experienced a year-over-year increase in net sales of $88.9 million directly attributable to the addition of Walker this year, while partially offset by decreases in the other businesses during the quarter. Walker contributed $96.5 million of revenue in the quarter as the Walker business continues to perform above our expectations. Additionally, we are on track to deliver $5 million of synergies within the first 12 months and $10 million in projected annualized synergies overall. Following three strong quarters and similar to last year's third quarter, our Wabash Composites business unit experienced some temporary softness this past quarter due to the normal variability associated with the business that was in start-up mode just a couple of years ago.

However, business fundamentals and market position for Wabash Composites remains strong, as this group continues to evolve with several new product in the pipeline that will further expand its reach into new markets unrelated to those currently served. In fact, earlier this week I attended the Emergency Management at Homeland Security Expo in Orlando, in which we launched our latest offering, the DuraPlate Foldable Emergency Mobile Shelter, an insulated mobile shelter capable of configuration to multiple temporary shelter needs.

We received exceptionally good feedback on that product. So we are looking forward to growing that. The Wabash Energy and Environmental Solutions business unit also continues to be impacted by the slowdown in demand related to the softening in natural gas pricing and related drilling and fracking activities along with the resultant shift away from the Marcellus Shale region that was the focus of our early efforts. Nevertheless, we have unwavering confidence in the long-term potential of this strategy and in the energy sector in general and remain committed to this effort. Similar to some of the early growing pains, experience with our Wabash Composites growth effort, that in retrospect, has turned out pretty dog-gone good, if I say so myself. E&S will do just fine over the long haul. The Energy and Environmental Solutions business recently commercialized the vacuum tanker trailer, and we are currently evaluating developing other new products to better position E&S take full advantage of the many attractive opportunities that the energy sector inherently has. Finally, our retail segment continues to make nice progress in all areas, delivering the best quarter for operating income at nearly $700,000 since the second quarter of 2005 and reflecting an impressive 295% improvement year-over-year.

Before I discuss Wabash National's expectations for fourth quarter, 2012, and next year, first, let's examine a few key economic indicators and industry dynamics that we monitor closely and that also provide broader context for our expectations. First of all, the conference board leading economic index rose 0.6% in September to 95.9 following a slight drop of 0.4% in August and a 0.4% increase in July. In the past six months, the index has increased 0.3%, down from the growth rate of 2.6% during the prior six months reflecting continued but slower economic growth ahead.

The Institute of Supply Management or ISM manufacturing index increased 1.9 points to 51.5% in September, once again indicating expansion in manufacturing activity following a three months of slight contraction. GDP advanced by 2.0% during the third quarter following the second quarter at 1.3% due in part to increases in federal government spending, decline in imports, and a rise in personal consumption expenditures. This marks the 13th consecutive quarter of growth. In the housing sector, recovery continues and took a nice step forward, as September housing starts of 872,000 units were up 35% year-over-year.

In September, building permits of 894,000 units were 45% higher year-over-year. Both readings were the best since the summer of 2008. Within the trucking industry itself, the story is the same as with the general economy. Mixed signals to sort through. The indicators within the trucking industry continue to point to growth although somewhat slower than last year. ATA's truck tonnage index increased at an annual rate of 3.6% year-to-date, somewhat lower than the 5.3% rate in the same period in 2011. The index for September came in at 118.7, a 2.4% increase versus last September.

In addition, FTR's truckloading index for September increased 0.6% over August and 5.2% year-over-year. Additionally, the index has grown an annualized average rate of 3.6% year-to-date, just slightly off the 4.0% rate for the same period last year. Industry-wide trailer shipments in the first three quarters of 2012 totaled almost 181,000 units, an increase of 24,000 units versus 2011 or 15.4% higher this year; while industry backlog remains at a seasonally healthy 78,000 units as we enter the traditional order season for next year. Nearer-term, the latest report from ACT estimates 2012 trailer shipments at just under 241,000 units up 13% year-over-year and just under 259,000 trailers for 2013 reflecting an additional 8% increase year-over-year. FTR now estimates total of trailer production for 2012 at 233,400 trailers, an increase of 9% year-over-year but are projecting a weaker 208,000 units of production in 2013. While the current uncertainty in the macro and political environment has driven a disconnect between the primary industry forecasters for next year, both forecasters continue to expect above replacement level demand, a key to pricing and margins, with a likely outcome next year somewhat between the two.

Their long-term view forecasting annual demand that well exceeds replacement levels for each year through 2016 and beyond further reaffirms 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 seen in many decades, if ever. All of that considered, let me now share Wabash National's expectation for the final quarter, 2012, and full year beginning with trailer shipments. Our view of overall industry trailer volumes is fairly consistent with ACT and FTR forecasts for the fourth quarter. However, while we do anticipate an increase in our customer deliveries during the fourth quarter, we have remained selective in order acceptance consistent with our year-long focus to drive margin improvement; and as such, have revised our 2012 full-year new trailer shipments expectation to 46,000 to 48,000 units inclusive of Walker which better ties to the current mix of products, rate of production, and shipments within the business. Let me emphasize that this adjustment in full-year volume guidance is more reflective of our order selectiveness than any systemic softening in our order board or cancellations or customer pickup delays.

Long-term, fundamental demand drivers are still intact. Considering the current regulatory dynamics at play with CARB, hours of service, and CSA compliance requirements, along with the advanced age of fleet equipment, we are still in the early stages of the replacement cycle with several years of a favorable demand environment expected. As I've emphasized before, we are executing our plan that we put in place this past year that has positioned Wabash National Corporation to achieve stronger margins, a better mix and, as a result, a healthier bottom line. Despite the significant disparity between industry forecasters regarding trailer demand for 2013 along with the current macro economic choppiness and other factors, we remain steadfast in our belief that trailer demand will remain at strong levels for an extended period driven by an excessively-aged fleet, unprecedented pent-up demand following the recession, regulatory drivers including CSA, hours of service, and CARB, and a stable but still-growing economic demand environment that is continuing to drive year-over-year truck tonnage growth. Why are we so firm in our belief? Let's examine a few of today's data points in comparison to last year at this time. GDP in the third quarter of 2011 was 1.3% versus 2.0% this year. Not strong, but better.

Even looking at the average for the first three quarters, GDP compares favorably this year versus last at 1.8% as compared to 1.3% respectively. Truck tonnage in September of 118.7 versus 115.9 last year, another positive. Housing starts are up 35% year-over-year, driving increased demand for both flatbed hauls and drive hauls. That is a positive. Net trailers for our industry in the third quarter were almost 6% higher than the third quarter last year in a traditionally weak order period. As we now progress into the traditional order season, we're experiencing strong quote and inquiry levels for 2013 and are in an even better position than last year at this time to capitalize on the demand for new trailers while continuing to remain selective in our order acceptance consistent with our intent to further enhance margin profile of our core trailer business.

With respect to diversified products, we expect demand in this segment's respective markets to regain momentum in the fourth quarter. At the same time, growth in this segment will be further fueled by the introduction of new products and the attraction of new customers, allowing the organization to bring innovations in new markets, providing increased balance to the overall business that was previously lacking. As a result, the organization as a whole is now better positioned to deal with challenges that could arise due to any economic slowdown resulting from an enhanced business model that is becoming more diversified through both our organic and strategic growth initiatives.

In summary, let's visit what we have said we would do over these past few years. We said we would diversify the business to become less singularly dependent on the core trucking industry. We said that we would further optimize our operating and overhead cost structures. And we said we would emphasize margin over volume in effort to recapture lost margin experienced in the downturn. We have delivered on those commitments. We have significantly optimized our overhead cost structure, permanently removing over $15 million annually. We have improved gross margin by 830 basis point in just the past four quarters alone. Net income has improved by 1600% over the same timeframe. And we have fundamentally changed our business from one whose prospects for success were strictly tied to a single industry to one that now spreads that risk across a broad array of end markets and geographies.

Clearly, the third quarter of 2012 was a good quarter. Record setting, in fact. And it is evidence that we are truly transforming and reinventing Wabash National as a diversified industrial manufacturer. By revitalizing our core business through continuous improvement, leveraging our expertise in (inaudible), capitalizing on cost-cutting measures and managing material cost volatility, we have strengthened the organization. But as with all CI-focused organizations, I can assure you that we are far from slowing our efforts to further improve our operations to grow out top line through both organic and strategic diversification opportunities and drive full-year profitability to all-time record levels. With that, I will turn it over to Mark to discuss specific highlights from Wabash National's third quarter financial performance.

Thanks, Dick. And good morning, everyone. In addition to the press release, we plan to file our 10-Q later today. But I plan to hit the highlights. With that, let's begin. Revenue for the quarter set a record and improved year-over-year by more than 20% to $406 million. The improvement in revenue this quarter reflects the full-quarter benefit of Walker which was completed during the second quarter as well as the continued improvement in trailer ASP in our commercial trailer products segment, which increased to $23,900 per unit. This represents an increase from the second quarter by approximately $700 and versus a year ago by approximately $1,700 per unit or 7.4%.

The increase in trailer ASP is due primarily to price increases implemented to recover component cost inflation in addition to trailer mix which reflects a higher spec in complexity due to our continued strategy to be selective on order acceptance and improved margins. New trailer sales in the quarter totaled 12,200 units including 800 units related to Walker or $325 million, an increase of 7% from the third quarter of last year. Looking at our other product lines, used trailer revenue came in at approximately $13 million on 1400 units and was up approximately $4 million from the same quarter a year ago, as the used trailer market continues to demonstrate firm demand and pricing. Part service and other component revenue was approximately $33 million in the quarter, an improvement of approximately $14 million from a year ago driven primarily by the additional of Walker service locations.

In addition, revenue from equipment and other sales of $35 million increased $30 million year-over-year with the addition of Walker's non-trailer truck-mounted equipment and other products as well as its engineered products family. In terms of operating results, gross profit for the quarter was $50.1 million or 12.3% in revenue and represents the fourth quarter of sequentially margin improvement, up from the second quarter's gross margin of 10.9% and 4% from a year ago. As expected, the addition of Walker's higher margin business was a significant contributor to the improvement both sequentially and year-over-year, in addition to the significant improvement in margins in the core trailer business. By segment, commercial trailer products saw revenues decrease approximately $30 million compared to the prior year period, reflecting their continued strategy to be selective on orders.

More importantly, however, the results of this strategy, which is focused on improving gross margins are evident in this quarter as gross margins showed a 490 basis point improvement from a year ago, more than offsetting the impact of reduced shipments with 2300 trailers. On a sequential basis, gross margins improved for the fourth consecutive quarter by approximately 50 basis points to 7.2%. Production during the quarter was essentially flat with the second quarter at 10,500 trailers. However, continued productivity was experienced on the floor as build complexity increased further in Q3 from the second quarter. Significant improvements are also evident in our diversified products. This segment demonstrated significant top line growth, improving revenues over $89 million versus a year ago. The Walker addition with $96 million in revenue accounts for this large increase, and with margins typically over 20%, this segment is now contributing equally with our Commercial Trailer Products and highlights the benefit of our diversification strategy. The retail segment continued to improve. Top line revenue increased $11 million due to an increase in new trailer sales, which were higher by approximately 50%.

While new trailer sales carry lower margins of parts and service, gross margins held up and it only decreased slightly to 8.7%. As a result, on a consolidated basis, Q3 generated record operating income of $29.7 million excluding acquisition-related costs. This represents the eighth quarter of positive operating income and represents the 12th consecutive quarter of year-over-year improvement. The Q3 improvement of $27.4 million represents an increase of more than ten times versus the quarter a year ago. And in terms of margin at 7.3% represents our highest level since 2005 and demonstrates the leverage from our investment in SG&A. SG&A for the quarter increased $4.3 million from the second quarter to $19.7 million including the impact of Walker for the full quarter. This represents approximately 4.8% of revenue. We will continue to leverage our SG&A investment as volumes move higher and our diversification initiatives take hold with a target for SG&A as a percent of revenue of approximately 5%.

In addition, you will note that we have shown intangible amortization separately on the face of the income statement this quarter. Intangible amortization of $3 million and acquisition costs of $0.2 million for the quarter primarily relate to our acquisition of Walker Group Holdings which closed on May 8th. Intangible amortization will run approximately $3.4 million for the fourth quarter of 2012 and approximately $5.2 million per quarter for 2013. Net other expense consists primarily of borrowing costs totaling approximately $7.8 million primarily related to our $300 million term long credit agreement and $150 million convertible security senior notes which were issued in the second quarter to fund the Walker acquisition.

It's worth noting that approximately $1.4 million of this is noncash and primarily relates to increase in charges associated with the convertible notes. In terms of taxes, at September 30th, we have a U.S. federal NOL carry forward of $125 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 for more details on the annual limitations for our NOLs. However, we currently estimate approximately $107 million of NOL available for utilization this year subject to pre-tax earnings. This quarter, we did incur approximately $1.2 million in tax expense associated with the Walker transaction related to state jurisdictions where we have no existing NOL and a noncash deferred tax liability associated with the created goodwill. We will continue to evaluate the adequacy of our deferred tax assets reserves as we progress through the balance of the year.

Finally, for the quarter, net income was $18.4 million or $0.27 per diluted share. On a non-GAAP adjusted basis after adjusting for acquisition-related charges, net income was $20.9 million or $0.30 per share. In addition, our operating EBITDA, which takes into account many of the other noncash charges associated with the Walker acquisition increased more than five times from a year ago to $37.7 million or 9.3% of sales. In regards to the balance sheet and cashflow, let me provide a little more detail on some of those specifics. Networking capital improved from the second quarter by approximately $20 million led by inventory decreases of approximately $18 million primarily driven by reductions in finished goods and raw materials in the quarter.

Capital spending for the quarter was $5.4 million, and we anticipate full-year 2012 spending to be approximately $13 million to $15 million consistent with our previous guidance. Our liquidity or cash plus available borrowings as of September 30 was approximately $182 million, reflecting a complete paydown of our revolving credit facility in the quarter, a debt reduction of $25 million. As a result, our proforma total and net debt leverage improved to 3.3 times and 3.0 times respectively. In addition, our senior secured leverage covenant under our term loan credit agreement improved to 1.9 times and is well below the required 4.5 times. In summary, our Q3 performance highlights the earnings and cashflow potential of Wabash,a larger company with critical mass across two segments, double-digit gross margins, and annualized operating EBITDA of approximately $150 million. We will look to build upon these performance metrics as we continue to improve margins in our core trailer products business and continue to introduce growth initiatives in our diversified products businesses. The Company is well positioned going into the last quarter of the year with a total backlog of as of September 30th of $555 million. More importantly, the long-term demand fundamentals remain intact

with the average age of equipment at an all-time high and increasingly tougher regulatory environment for our customers and a trailer fleet which has been reduced by over 10%. As Dick discussed, this has been evidenced by continued strong quote and inquiry levels for 2013. In regards to the current quarter, we estimate Q4 shipments to be approximately12,000 to 13,000 trailers, consistent with current rates in the business and bringing our full-year new trailer volumes to be in the range of 46,000 to 48,000, which includes Walker-related trailer shipments since the acquisition date. With that said, while the fourth quarter generally has fewer production days and higher seasonal cost, we look to demonstrate performance metrics and margins generally consistent with those achieved in Q3. While it is still early in the 2013 order season, we believe we are well positioned to respond to industry demand, introduce new products, capture Walker synergies, and continue to grow margins.

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

Thank you. (Operator Instructions). Our first question comes from the line of Steve Dyer. You may proceed.

Good morning, Dick. Good morning, Mark.

Hey, Steve.

Steve.

Can you remind me again if you had in the quarter any legacy orders, the lower margin stuff, or was that completely flushed and is this a new -- first full quarter on the new business?

I would say from the comment relating to the legacy backlog. It was really a commercial trailer products factor that we carried through the first quarter and Q2 in that regard was pretty clean. I think Q3 becomes clean from the fact that you have a full quarter of Walker in there.

Right.

So in total Q3 is a pretty good representation, I think, of where the business sits today in both the backlog and the combined businesses.

Okay. So gross margins in Q3 on a similar to maybe slightly higher revenue run rate should be in the same area?

That is really what we are trying to pull off for Q4, if that's the question. Yes.

Okay. And then, G&A and selling expenses were a bit lower, certainly, than I expected. Is this a decent run rate going forward or was there anything one-time that made those less?

Obviously, we have broken out the amortization costs. As I said, that will go up slightly from the Q3 run rate to the Q4 run rate which was $3.4 million. SG&A. I wouldn't say that there is any one thing necessarily one way or the other, but it does have some potential to be a little bit higher. We are still going to target to be at 5% of revenue or slightly under that as we go forward.

Okay. And then the core diversified products, the softness in the quarter, did I hear that right? That it was primarily attributable to the energy frack tank business?

So, in diversified products is where our Wabash Energy and Environmental Solutions business is.

Right.

Yeah. I'd say Walker at $96 million really performed on-par with expectations. The revenue softness we did see was in our Energy and Environmental Solutions business, which is oil- and gas-related as well as some softness in Wabash Composites. Which is more the fact they are still building up the product portfolio, some seasonal softness there. And at least on the Composites side, we expect to see that come back a little bit quicker than the oil and gas piece of it because we really only have two products, and we are still building out the distribution channels.

How should we think about Q4 in that range? Is that kind of back on trend or is it going to be a little bit softer yet?

I think Composites has a little bit of room. I think in general the run rate is probably not a bad run rate. Maybe there is a point or two of revenue growth in across the businesses. But it is not far off from our expectations.

Okay. Two last questions. Are you still expecting that a full tax rate -- effective tax rate, Mark, for next year is probably in the cards?

Well, we have got to go through the complete analysis after we close out Q4. It is factoring in a lot of things. We are still working through the final tax implications of the Walker acquisition and what's deductible there versus for book as well as getting a little more clarity and visibility on the backlog and outlook for next year. So, I'd say we still have a lot of homework to do, but certainly the performance in Q3 and expectations for Q4 are the types of performance levels we need to get comfortable in reducing that reserve. So it looks like it is heading that way, but I would say that we still have a lot of homework to do after we cross over the year end.

Okay. Then, great quarter from a free cash flow generation perspective. What is the thought process going forward on how to deploy that? I saw you paid down a little bit of the longer-term debt. How do you think about that going forward?

Certainly, we paid down $25 million on our revolving credit facility and reduced net debt by about $25 million in total. That's at the top of the list in terms of things to do, certainly, at least in the shorter term, and we will evaluate other alternatives. I think, certainly if we pay down a little bit of debt and continue to make good progress next year and the stock price is still where it's at, then probably a number two item becomes potentially a share repurchase. Number one, continue to work the balance sheet. As I said in my prepared comments, we feel pretty good about where we are at. Liquidity is well in hand at over $180 million. That has been a key for us in terms of managing risk in the business, and liquidity has really been what's impacted the business during the downturn. We feel very good about that side of the business. And in terms of the leverage, we have got a lot of head room relative to our covenants. And we feel good about it; however, it's something that over time, we want to take care of and take it down even further.

Okay. I just want a point of clarification. When you said 5% or just under on operating expenses, does that include the amortization of intangibles or are you just talking about G&A and selling?

That is the G&A and selling ex intangibles.

Okay. Thanks, guys.

Our next question comes from the line of [Rob Wordheim]. You may proceed.

Hey. Good morning, gentlemen.

Hey, Rob.

Obviously, great margins in the quarter and solid discipline on pricing. I had three questions around that. Are you anticipating pricing to be up next year? Is the environment amongst your competitive group also disciplined? If you do see materials cost, I know you have changed the way you protected some of that, but let's say materials go down, do you end up keeping a little bit of that in making the pricing easier? Or do you think that will go right back to your customers?

We will try to take those in the sequence that you asked them. We do expect to see pricing stay pretty stable. We think there are some opportunities to gain some further pricing in the market, but it certainly won't be anything like what we saw this year. We took the big steps this year to recapture much of the lost margin that we experienced during the downturn, but we do believe there are some smaller steps that can still be taken. Regarding the competitive environment, it has become much more disciplined in recent months. We have seen that. Most of the key competitors have followed suit as we have reached out to recapture margin. They have done the same thing with their businesses. So we are seeing a lot more stable environment on the pricing front. That has -- all of the channel checks, all the feedback that we are getting through the marketplace substantiates that belief. We will remain focused and be selective in our order acceptance going forward, but we do believe there is some significant opportunities out there.

We have already started to see some of that. Early orders that have been placed with some of the large, core customers, and those are ones with orders of greater than 500 units. We already have some in the books for next year. We have numerous other active conversations with customers for their equipment needs for next year and pricing has been favorable in those discussions, both on the orders already booked and the ones that are very active and looking very promising. We feel very good about the opportunities going forward.

And materials? If there is a decline, do you think that accretes to you a little bit, or does that straight go through the customers?

Any material softening tends to be sticky. We hold on to that as long as long as we can unless there is significant movements in the market, then you adjust pricing as necessary. But in what we believe is a strong demand environment for trailer products, that allows us to hold on to that, so that should -- in the event that occurs, that should allow us to further enhance margins going forward, at least in the near term --

That's great. And just one more, if I can -- oh, sorry.

Once we lock in pricing, it is locked in. That is why we take the steps we do to mitigate risk on aluminum and in some cases on steel and, of course, with our current strategy that we've had in place this last year and a half on tires.

Perfect. And then just one other for me. The only negative I saw is it seemed like the high end to what you expected for 4Q in units turned into -- you know ,the low end turned into the high end. I am just curious. You seem optimistic based on customer conversations for next year, things go okay. Did they have pushouts, where people that you thought would come in in 4Q were talking about one? Or is there any material degradation, or is it just lumpy? Thanks.

No, it is mainly tied to the continued strong focus that we have had on being very selective in the order acceptance. We made a conscious decision at the outset of this year's order season to recapture margin. As such, we ended up taking on a larger percentage of higher spec, more complex trailer builds, which impact the line speeds. So based on production levels mix, that is why we ultimately adjusted to what is more realistic on what the production build levels are and line speed. We feel good where we are at. The results show it, and we think there is some opportunities. We have already had some customers come back to us as they became more comfortable with the pricing that we were having out there. We have already gotten some of those back going into next year. So we feel very good with the prospects for 2013.

That's all very helpful. Thank you.

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

Good morning, Dick. Good morning, Mark.

Brad.

My first question is addressed on your last comments. Dick, if I am thinking about next year, right? And it sounds like there are various projections out there, but let's say it is flat in terms of trailer demand, what are the opportunities or for the margin expansion to come from either productivity enhancements you're seeing from the workforce that is ramped up versus pricing? Is it more balanced or is there still opportunities for margin expansion and to what extent next year in a flat demand environment?

Just to comment on the flat comment. We do believe that dependent on where the totals end up this year that next year will be flattish to slightly above those levels next year. We do believe that there is opportunity. There may be some slowness as the year starts as a result of this political uncertainty that is out there. We have to get through this election. There certainly seems to be a tone with some customers of waiting to see what happens before orders are actually placed. Now that said, in recent weeks, we have seen some very positive activity. As I stated, we have several orders that have come in that are in the larger 500-or-more category that we feel very good about and numerous other conversations with customers. There is also the commentary out there that I want to wait. I'm going to wait until after the election. I will make a determination on how many I will need. That type of chatter that has been going on. So we want to get through next week, and I feel pretty good going forward. Direct response to the rest of your question, we feel there is still a lot of opportunity to further improve the productivity, the through-put, the line speed, the tack times out on the factory floor in the core commercial trailer products business. So that has some upside opportunity. We do feel that there is some pricing opportunity out there. Again, it will not be nearly what we anticipated. We think there may be a point or point and a half of opportunity here and there throughout the quoting process. I am not going to try to quantify overall what that is, but certainly, we believe there is upside to the margins that we delivered thus far. Mark, did you want to add anything to that?

I think, obviously, in a demand environment that -- call it, 240,000 this year, it's been a good demand environment for us, and I think for the rest of the OEMs in the space to run their plans and come up with optimum production plans to get pricing. And I think that continues, and as Dick said, you get a little bit there. We continue to work on the shop floor to improve productivity. A couple one-off things that we have this year that we wouldn't have next year that'll be upside, so we obviously have Walker for about a quarter and a half in the front half of the year that we didn't have. That is beneficial. As we talked about earlier, we had the legacy backlog issues that we dealt with in the first quarter of last year that we wouldn't have as an overhang heading into 2013. So, I think the shorter answer is we would feel pretty good about a flat environment and our ability to improve margins.

Great. That is good color, guys. Two more real quick. Mark, on your comments about uses of cash. Obviously, you have paid down the revolver now. Are you comfortable paying down some of the term? Would that be the next order of operations there versus -- relative to looking at share buybacks? What is your thought on what you would pay down?

Yeah. You are right. With the ABL completely paid off, the next capital item in the structure that we would go after would be the term loan facility, which we can prepay without penalty. That was the whole attraction when we did the financing upfront in terms of figuring out how to structure this was to go with the term loan over a high-yield option so that we could take advantage of cash flow and pay it down as needed. We will be looking at that as we close out the end of the year and seeing what makes sense.

Great. And maybe just to follow up to that. Again, I think one of the highlights of the quarter was the free cash flow generation. Is this the type of free cash flow you would expect to be generating on a go-forward basis with earnings in line with what you just posted, or is there any kind of working capital adjustments that you think were one-time in nature in the quarter?

No, I mean from -- working capital wasn't bad. You will still see seasonal impacts for working capital. Q4 should be theoretically an even better networking capital item for us just because customers generally do a much better job getting equipment at the end of the year and paying for equipment, and generally networking capital is our lowest at 12/31. And then you do go through a little bit of a working capital build through the first four or five months of the year as productions ramp back up for seasonal demand levels in Q2 and Q3. So you will have some of that through a seasonal perspective on a quarterly basis. As a run rate, it is not a bad position to be in.

Great. Well, that's good color. Thanks, guys, for the time and congrats.

Thank you.

Our next question comes from the line of Jeff Kaufmann. You may proceed.

Thank you very much. Hey, guys, congratulations. It is nice to see this all come to fruition. I guess, two questions. Number one, you mentioned some of the new business that you were signing in the new model year. I just want to be clear. When you give us the third quarter backlog, these new signings are post-third quarter, so they would not be part of the backlog number you quoted necessarily?

Potentially -- certainly, not all of them have been. Some of them, we might have had a couple of those in September that made it in. I wouldn't know exactly off the top of my head here, but certainly some of them have been closed in October as well.

Okay. Then, you used to give us the two backlog numbers. One that was the book backlog and then one that included all the other orders that had not yet scheduled but basically had been penned. Can you give us a feeling for what that second number is?

Well, we saw the industry orders step up in September. I guess, from an industry perspective, while the true order season is really going to kick in, I think, November, December, January, February, we expect to see pretty healthy numbers traditionally. I think we will see that October rates across the industry stepped up again from the September rates. We don't have that exact number for you.

All right. Great. Then one final question for Dick. You know, Dick, you were talking about the concerns your customers had about the political landscape and how that might be responsible for some of the delays in ordering decisions and what-have-you. If you had to segregate the two events, which would be, number one, the election; number two, the fiscal cliff, and think about the customers. The real risk is the customers say, okay, we're going to order 3,000 trailers this year. That is what our budget is. But because of the election, maybe we only put in 1500 now, and maybe we hold the other 1500 for fiscal cliff, what-have-you. How much impact, when you talk to your customers, do you think the political landscape has; and might we see orders in the next few months that might not necessarily be indicative of what the real, ultimate orders will be just because customers are holding back? Can you give us a sense for that?

I certainly can't separate what is in their heads versus just the election versus the pending fiscal cliff. I won't even attempt to conjecture on that part of it, but certainly customers in many cases are trying to sort out just how much they want to invest next year in equipment from both a replacement demand side and then a growth side. I think they are pretty clear in their minds what they want to do from replacement demand. The net-plus, which would be above what we experienced this year because virtually all equipment purchased this year was for replacement demand. I think what they are really wrestling with is how much growth investment they want to make, which would be incremental to the kind of numbers that we have been talking about. I think that is really where the conversations take place, and in many cases, they are not willing to offer up what they would want to do in growth. It is kind of a wait-and-see. In some cases, they are holding off placing the whole order because they are saying, well, we are trying to sort out whether we do just replacement or replacement and growth. And what we're telling them is, well, go ahead and place the order for the replacement demand; and we will talk about growth opportunities later on. So those are the kind of conversations taking place out there.

So the point being that this may be one of those unusual order seasons where maybe what we see coming in in the next month or two might not be as comparable to what we would see in the past?

No, I was trying to make it clear that what we saw this past year was basically replacement demand. So, I think what we are hearing in some of the conversations is that there may be even greater opportunity if they decide that the economy is strong enough, the demand is strong enough, that they are getting a lot of confidence. They have had stability over the last couple years. Their earnings are getting much stronger. And now you have got some fleets out there starting to look at growth opportunities. I think that is really how we are reading it.

So I think the demand that we will see over the next two, three months should be consistent with normal replacement demand needs. Now replacement tends to be not in that 185,000 to 200,000 range because we are in abnormal times coming out of the extended downturn, and all of that pent-up demand. So the 240,000ish units of total demand for the industry that we saw, the majority of which was replacement demand or addressing the pent-up demand to get some of that very, very disproportionally-aged equipment out of the system. That trend is going to continue. Then, there could be upside to it if customers get comfortable that the economy could take a bump up and GDP starts growing at more than the 2% or 2.5% projections and gets more into the 3% or so. They may have a lot more confidence to start going after some growth. This is how we read it. I am not going to pretend to be an expert on either the economy or certainly try to get into their heads on what they are really thinking, but that is the message we are getting out of it.

Okay. Thank you for the clarity and congratulations again, guys.

Thanks, Jeff.

Thanks, Jeff.

Our last question comes from the line of Tom Albrecht. You may proceed.

Hey, guys. Good morning and nice job here. I know you have waited a long time for these last couple of quarters. My question is, alright, so the gross profit margin in the trailer manufacturing business was 7.2%. It was 6.7% in June. Years ago, when you were really all trailers, you were able to get as high as 12% on that figure. That may or may not be attainable. But what do you think is a growth profit margin realistic target just for trailer manufacturing? And then secondly, how resilient would be the diversified margin holding out at 22% to 23%? Any chance that could slip to 19% or 20%?

I will answer the second question first. Anything is possible. If there is a significant downturn. The experience that we saw out of the Walker Group during the course of the last recession which, as we all know, was an extremely difficult, challenging, and deep recession. Their gross margins held up right about that 20% level. So that was their bottom. That is a tribute to how well diversified their business was. So we feel pretty good that 20% and above is the kind of number that we could expect out of Walker and out of the rest of the business. Our Wabash Composites business has demonstrated those kind of numbers consistently. The rest of that is more growth, and Energy and Environmental Solutions' growth, but it is smaller in the whole realm of things at this point, so less of an impact. On the commercial trailer product side, the makeup of the CTP is a little bit different than what we had looked at historically. It doesn't have the Wood Products piece of it, which enjoys somewhat better margins than what we had, so that would have been a small help to it in the old days. But we talked about this in the past.

When we look at, just on a pure gross margin dollars of contribution to the business basis, the business is doing pretty well; and we certainly believe that not only will we be at numbers that we enjoyed back in that 2004, 2005 timeframe on a dollars of margin contribution per unit, but getting to the 11%, 12% is little more challenging just because the denominator, the actual selling price -- ASP -- is so much higher than what it was back in those days. So on a strength of the business, on a strength of that segment as far as dollars contribution, which is in my mind what really matters, we'll certainly not only meet but exceed that, and the guys are getting awful close to that right now. I don't want to try to quantify. We have thrown numbers around before about what is achievable. We certainly think there is more opportunity to further improve from the 7.2%. Maybe those numbers get up to 8%, 9%. It will be difficult for that business to get to the 11%, 12% numbers. So somewhere in that range. We certainly believe there is opportunity both through productivity improvement and for the pricing enhancements.

That's helpful. And then, Mark, I have got so many calls. Could you repeat the ASP? I was getting on just as you were saying that. Both current period, and I think you gave a year ago?

Yes. the current period is 23,900. That is just the core commercial trailer products business. And that was up 1700 year-over-year and up sequentially 700.

Terrific. Thank you, guys.

Thanks, Tom.

Thanks, Tom.

We have no further questions at this time. I would now like to turn the call back over to Mr. Dick Giromini for any closing remarks.

Thank you, Chris. We are obviously pleased with the results that we were able to deliver in the third quarter. But importantly, it's particularly rewarding to see the quarter-over-quarter improvements that our team has made over these past four quarters leading to the even-more-impressive cumulative effect in the year-over-year comparisons. As I've said before, the performance this quarter is the result of a lot of hard work. But we are not finished. It is still our goal to build on our current position and maintain the momentum that we have created. All of our businesses see further opportunities, and I look forward to continuing our journey. We remain committed to further optimizing the performance of our core trailer business in addition to growing and maximizing the value of the diversified products businesses and our retail business. Thank you for your interest in and support of Wabash National Corporation. Mark, Jeff, and I look forward to speaking with all of you again on our next call. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect. Have a great day.