Wabash National Corp (WNC) 2013 Q2 法說會逐字稿

Welcome to the second quarter Wabash National Corporation earnings conference call. My name is Christine, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Dick Giromini, President and CEO of Wabash National Corporation. You may begin.

Thanks, Christine, and good morning. Welcome to the Wabash National Corporation 2013 second-quarter earnings call. This is Dick Giromini, President and Chief Executive Officer. Joining me today is Jeff Taylor, recently appointed acting Chief Financial Officer and Treasurer. Following this introduction, I will provide highlights for the second quarter, the current operating environment and our outlook. Afterwards, Jeff will provide a detailed description of our financial results. At the conclusion of our prepared remarks, we will open the call for questions from the listening audience. Before we begin, I'd like to cover two items.

First, as with all of these types of presentations call 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 that this call may be recorded.

I will begin by saying that we are particularly pleased with the continued financial and operating performance we have experienced across all strategic segments of the business. Our strong second-quarter results are further evidence of our ability to consistently deliver on our commitment to continually improving existing businesses and to grow the business through a broad array of products, end markets and geographies. We continue to gain considerable momentum as we execute our broad-based strategic plan and further transform Wabash National into a diversified industrial manufacturer with a higher growth and margin profile.

Outcomes from the second quarter show sustained improvement across a number of financial metrics driven in part by a more balanced contribution from each of our segments to both top-line and bottom-line growth. Net sales for the quarter were $413 million, representing a $51 million increase over second quarter of 2012. While adjusted earnings decreased by just shy of $1 million year-over-year, keep in mind that last year's adjusted earnings are not tax effected, whereas this year's adjusted earnings reflect a tax rate of approximately 40%. Operating EBITDA may be a more appropriate metric to highlight the year-over-year improvement in Company performance, reflecting an increase of approximately $13 million to $42 million in the second quarter of 2013.

Said differently, operating EBITDA increased by 42% year-over-year for the second quarter, which reflects the significantly improved operating performance in our core trailer business, in addition to the benefits of executing our diversification strategy. Consolidated gross margin for the second quarter was 14.2% an improvement of 330 basis points from the prior-year period. Sequentially, gross margin increased by 120 basis points over the first quarter 2013. This continued margin improvement reflects our ongoing commitment to protecting and enhancing margins in the commercial trailer product segment while extending our reach in the higher margin Diversified Products Segment.

Operating income for the second quarter of 2013 was $30.5 million, establishing an all-time record for any quarter. Our record operating income performance can be attributed to successful execution of our growth strategy and disciplined approach to improving profitability, and including an improved mix of higher margin trailer orders, diversification into higher margin opportunities through the Walker acquisition and Beall asset purchase as well as operational improvements in our manufacturing facilities. As expected trailer shipments improved in the quarter as customer pickups began to accelerate. New trailer shipments for the second quarter were approximately 11,400 units, in line with our previous guidance of 11,000 to 12,000 trailers.

Quote and order activity throughout the second quarter remained in line with seasonal trends and showed signs of continued demand strength as several large fleet customers with previously scheduled orders came back for quotes on additional units to be produced later in the year. And contrary to typical seasonal expectations for the second quarter, our backlog activity expanded slightly during the quarter increasing to $680 million despite seasonal build rate ramp-up during the quarter, another good indication of continuing order demand strength along with strong evidence of customer preference for our product as we captured a higher share of total industry orders as compared to the same period a year ago. Additionally, customer feedback on the second half indicates solid, if not robust, needs for additional equipment.

This leads us to believe that the overall demand environment for trailers remains solid as the second quarter has historically been a good indicator of what to expect for the balance of the year. With that, I will now provide some performance highlights from each of our reporting segments. For our call format, Jeff will follow with additional details regarding each segment's financial performance. We will begin with the Commercial Trailer Products segment consisting of our dry and refrigerated van products, platform trailers and fleet trade sales.

Led by Group President, Brent Yeagy, this segment continues to effectively execute its optimization strategy with a relentless focus on margin improvement, manufacturing excellence and product innovation leadership. Gross margin within this segment was 7.9% reflecting an improvement of 120 basis points compared to the prior-year period. Sequentially, this represents a 200 basis point improvement over first quarter 2013. More importantly, gross margin -- gross profit of nearly $2000 per unit shipped is now approaching letter levels last achieved in 2005.

This segment's continued gross margin improvement is the direct result of our ongoing commitment to drive stronger trailer pricing aided by a more discipline competitive environment along with productivity enhancements and operational efficiencies gained from a stable, more experienced workforce, as well as the impact from key capital reinvestment in the business. While pleased with the progress to date for the CTP group, there is more opportunity ahead as we remain focused on ultimately driving gross margins for this business into double-digits.

Consistent compliance with our strategy to favor margin over volume has delivered the desired effect along with actions implemented these past several years to address cost risk associated to commodity and material inflation have proven effective. As we have now have greatly mitigated material cost variability for major commodity inputs of aluminum steel, plastic and tires across all purchase volume along with stable price commitments from key component suppliers for large factory direct customer orders. These actions, along with factory productivity progress, have all helped create a much more consistent and predictable output. And with continued strong forecasted demand, this business is now in position to finally achieve that goal at some point this cycle.

Moving on to the Diversified Product Segment, now led by recently named Group President, Mark Weber, who previously had served as Chief Financial Officer. This segment includes the Walker Group businesses, Wabash Composites and Wabash Wood Products, and, consistent with the theme for the overall Company, this segment delivered an outstanding quarter. Net sales for the quarter of $135 million represent an increase of $63 million or 88% compared to the prior-year period, reflecting the full-year -- full quarter year-over-year impact of the Walker Group business acquisition that closed in May of 2012, with the Walker Group businesses contributing $98 million to the segment in the second quarter 2013.

Gross profit improved by $15.2 million compared to the prior-year period while gross margin increase by 50 basis points from 22.9% to 23.4%, primarily attributed to the mix effect of Walker being a larger portion of Diversified Products this year, along with improved performance from both the Wabash Composites and Wood Products businesses. Operating income more than doubled, increasing 107% or $10 million as compared to the same period last year. Again, due to the full quarter impact of Walker in 2013 as compared to the partial quarter in 2012, integration synergies and a record quarter from Wabash Composites.

Backlog for the Diversified Products Segment increased during the quarter with solid quarter activity pointing to continued healthy demand levels in most of the markets served. Specific to the Walker Group, this business continues to realize operational and supply chain optimization gains through the ongoing accelerating integration efforts. As you will recall, we purchased specific Beall assets in February of this year. The operational ramp-up at the Portland, Oregon manufacturing facility continues to gain momentum, already turning the corner to profitability, quite an achievement for what was, for all intent and purpose, a start-up in February.

Additionally, the Fond du Lac, Wisconsin facility produced their first Beall 406 trailer in the second quarter providing the Beall product with the strategic advantage and market access in the Eastern US and Canada. Customers reacted very favorably to this product, which was showcased at the Walker Group Expo held last month. We expect continued progress and growth from the Walker Group as they capitalize on possessing the broadest tank trailer offering in the industry, as well as their ability to service a wide variety of tank truck customers from coast to coast.

In addition Walker Engineered Products that serves a number of markets including the biotech and pharmaceutical industries, has recently secured an order for mobile clean rooms utilizing DuraPlate composite panels manufactured by Wabash Composites, another example of sales and product development synergies being realized across the organization.

Speaking of Wabash Composites, this group conceded our expectations by delivering the strongest in its history driven largely by continued sales growth and adoption of the new DuraPlate-based decking system for LTL applications and AeroSkirts in both the OEM and aftermarket segments. Additionally, Wabash Composites recently expanded their product portfolio by introducing a new AeroSkirt designed specifically for tank trailer applications. We expect continued strong demand for this group's composite aerodynamic products as fleets realize that fuel economy benefits in their operations and work to meet car compliance requirements for California operations for dry and refrigerated vans.

Finally, our Retail segment led by Bob Nida experienced significant improvement on a year-over-year basis. Net sales of $48 million represents a $10 million or 26% increase year-over-year due in part to a 38% increase in new trailer sales in the quarter, and the full quarter impact of integrating the former Walker parts and service network, Brenner Tank Services, to the business. Gross profit improved $4 million compared to the prior-year period, again, reflecting the full quarter impact of Brenner Tank Services, while gross margins increased by 70 basis points to 11.5% driven by this more favorable mix of parts and service business.

Top-line and profit growth for the segment are expected going forward as the balance of the legacy Wabash National Trailer Center sites become certified as Tank Repair Service Centers. Additionally, our Retail group is supporting our Wabash Composites business to accelerate adoption of the new DuraPlate-based LTL decking system by providing retrofit services across the US. Before I discuss Wabash National's expectations for the third quarter and remainder of 2013, let's first examine a few key economic indicators and industry dynamics we monitor closely that provide broader context for our expectations.

Overall, the Conference Board Leading Economic Index was unchanged in June at 95.3, following a 0.2% increase in May, and a 0.8% increase in April. In the past six months, the Index increased 1.7% up from the 1.1% growth in the second half of 2012, implying continued but modest economic growth ahead. Following first quarter at 1.1%, GDP in the second quarter of 2013 increased to 1.7%, reflecting stronger consumer spending, inventory investment, as well as exports. This marks the ninth consecutive quarter in which GDP has increased. In June the Institute of Supply Management Manufacturing Index came in at 50.9, indicating continued expansion in manufacturing activity.

The housing sector recover continues its momentum as June housing starts of 836,000 units were up 10% year-over-year. June building permits of 911,000 units reflected a 16% increase year-over-year. Both readings imply strengthening demand for platform and dry van trailers. And the US Census Bureau reported that US Retail and food service sales were $422.8 billion in June, up 5.7% year-over-year. Much of this increase was driven by a 13.8% rise in sales at non store Retailers an a 12.9% increase at auto dealers. Total sales for the April through June 2013 period were up 4.6% from the same period a year ago. Finally, Bloomberg News reports that the Thomson Reuters, University of Michigan Index of Consumer Sentiment rose in July to 85.1 from 84.1 in June, not only exceeding economists' expectations but setting a six-year high and is up almost 13 points from one year a go.

Within the trucking industry, the story is similar to the general economy. ATA's Truck Tonnage Index increased 0.1% in June to 125.9, the highest level on record after rising 2.1% in May. The June tonnage was a strong 5.9% higher than in the same month last year. In addition, FTR's Truck Loadings Index for May increased 0.1% over April and 4.5% year-over-year. Near-term the latest report from ACT forecast 2013 trailer shipments at 244,750 units, up 3% year-over-year, and 258,500 trailers in 2014, up an additional 6% year-over-year. Also, FTR made their latest upward adjustments to their forecast for total trailer production in 2013 and 2014 with total upward adjustments since December of some 46,000 units, now projecting a healthier 241,500 trailers being produced for 2013, an increase of 4% in builds year-over-year and projecting a strong 237,400 units to be produced in 2014.

So now that we have reached the halfway point of the year, the two industry forecasters are already much closer in their view of the prospects for the year. With forecast for builds and shipments now within 3,300 units, or less than more than 1.5% apart between FTR and ACT, respectively, and consistent with our own internal forecast for the year. Based on a multitude of factors, including age of fleet, CSA and hours of service impact, overall tonnage demand and discussions with key customers, we continue to believe the trailer demand will remain strong at levels equal to or slightly greater than 2012.

From a regulatory standpoint, the new hours of service rules went into effect on July 1. The Federal Motor Carrier Safety Administration rule proposal has been challenged by the ATA and is currently under review by the US Court of Appeals for the District of Columbia Circuit. Although it is too early to tell what the true impact of new hours of service rules will have on fleet productivity, according to ACT research, the new hours of service rule will likely constrain fleet capacity by 2% to 3%. However, numerous key customers have publicly commented that the impact is more likely to range from 5% to 12% productivity loss impact based on type and length of haul among other factors. Even small productivity losses may likely lead to increase demand for additional equipment to fill the gap or lead to increased use of drop and hook strategies.

With that said, let me now share Wabash National's expectation for the third quarter 2013 and the full-year. As I stated earlier, trailer shipment levels greatly improved in the second quarter. We expect this trend to continue as customers work to pick up equipment, in some cases to support new dedicated contracts that go into effect during the current quarter. Therefore, we expect total trailer shipments for the third quarter to be between 12,500 units and 13,500 units. At the same time, within the Diversified Products Segment following the exceptionally strong volumes this past quarter I spoke of earlier, some seasonal softening is expected related to some of the non-trailer composite product line offerings during the third quarter and balance of the year.

Longer-term, our view of full-year trailer industry volumes remains in line with the latest ACT and FTR forecasts. We continue to believe that full-year industry shipments will be similar to 2012 if not higher. Internally, based on a strong backlog and current build rates, along with the recognized benefits of maintaining our margin over volume initiative, we are now at a point that we can adjust our full-year guidance for new trailer shipments to a narrower range of 45,500 units to 47,500 units for the full-year.

Key drivers such as fleet age, customer profitability, used trailer values, regulatory compliance and access to financing all support a continued strong demand environment. As I mentioned earlier in the call, second-quarter performance is typically a good indicator for the remainder of the year for our core trailer business. The fact that several large fleet customers have placed orders for additional units to be produced later in the year, further supports our belief in strong demand for the remainder of 2013.

In summary, we are very pleased with the financial and operating performance delivered across all of our business segments in the second quarter. Our core Commercial Trailer Products business continues to drive margin enhancement through pricing discipline and selective order acceptance, driving operational efficiencies in industry leading innovation, all resulting in delivering significant profit improvement quarter-over-quarter and year-over-year. Our Diversified Products group is proving to be a reliable and consistent source for strong performance across all of its business units with the addition of the Walker Group businesses being a dominant contributor to that success. And our Retail business continues to impress with new growth initiatives in parts and service that have all but assured a path for a record year.

We have remained true to our commitment to continue to build a Company platform that is more diverse but still laser focused, more stable but with excellent growth opportunities, and one that can deliver much more attractive margins and overall performance throughout the cycles. We will continue to leverage the success that we have experienced to date in these efforts and look forward to delivering on our promise of record operating income performance for the year.

With that, I will introduce Jeff Taylor who has been in place as acting Chief Financial Officer as of June 1, to provide more color around the numbers. Jeff?

Thanks, Dick, and good morning. In addition to the press release, we filed a 10-Q after the market closed yesterday as well. So I plan to hit the highlights. With that, let's begin. Revenue for the quarter was $413 million, an increase of $51 million or 14% compared to the second quarter of last year. This year-over-year improvement in revenue primarily reflects the benefit of our business development efforts since the second quarter of last year. Specifically, the Walker acquisition which has impacted both Diversified Products and Retail. And the Beall asset purchase offset by lower revenue in Commercial Trailer Products.

Commercial Trailer Products net sales was $266 million which represents a $15 million decline on a year-over-year basis due to lower trailer shipments of approximately 1,000 units. Trailer ASP, average sales price, increased $500 per unit to $23,800, reflecting a stable or slightly improving pricing environment as well as our continued strategy to be selective in order acceptance and focus on margin over volume. Diversified Products net sales increased $63 million to $135 million due to the full quarter effect of the Walker acquisition in the current quarter versus a partial quarter last year in addition to a record quarter from Wabash Composites.

The Retail segment achieved $10 million of growth or 27 -- 26% compared to the same period last year, largely due to higher sales from parts and service with the addition of the six Walker Tank Trailer Parts, Service and Repair locations, but also bolstered by the higher net sales -- trailer net sales as 200 more new trailers were shipped during the second quarter of this year as compared to the previous year.

Sequentially, total Company revenue increased $89 million or 27% lead by Commercial Trailer Products with solid contributions from Diversified Products and Retail, as well. Net sales for Commercial Trailer Products increase $68 million or 34% on 2,700 more new trailer shipments, as trailer shipments ramped up in the second quarter as expected and consistent with our prior guidance. Diversified Products' net sales improved 21% to $135 million due to the strong performance from our Wabash Composites products in addition to the improvement in Walker Group. Net sales from Retail increased $48 million or 18% driven primarily by a higher volume of new trailer sales.

Looking at our various product lines, new trailer sales in the quarter totaled 11,400 units, including 800 trailers related to our recent acquisitions of Walker and Beall, or $307 million. An increase of $14 million or 4.7% from the second quarter of last year. Used trailer revenue came in at approximately $11 million on 1,100 units and was up approximately $1 million from the same quarter a year ago. We continue to see tightness, strong demand and a limited supply in the used, dry van and flatbed trailer markets resulting in firm pricing. Parts, service and other component revenue was approximately $53 million in the quarter, an improvement of approximately $15 million from a year ago. Driven primarily by the strong demand for composite products, as well as the first quarter impact of the addition of the Walker service locations.

In addition, revenue from equipment and other sales of $43 million increased $20 million year-over-year, driven primary by the addition of Walker's Engineered Products business and non-trailer Truck-Mounted Equipment. All told, the additions of Walker and Beall contributed approximately $106 million of the current quarter's net sales for the total business. In terms of operating results, consolidated gross margin for the quarter was $58.9 million, or 14.2% of sales, compared to $39.7 million in the same period last year. This represents a $19.2 million or 330 basis point improvement year-over-year.

As expected, the addition of Walker's higher margin business was a significant contributor to the year-over-year improvement, in addition to the significant margin improvement in the core trailer business resulting from our focus on margin over volume and operational improvements enabled stability and experience from our factory workforce. As Dick has commented many times, we are constantly and relentlessly pursuing continuous improvement in all areas of the business.

By segment, Commercial Trailer Products gross margin has improved 120 basis points since last year, resulting in a 12% increase in gross profit or $2.2 million higher. Sequentially, gross margin increased by 200 basis points or $9.5 million as a result of trailer shipments higher by 2,700 units in the current quarter. Production during the quarter was 11,000 units, up by approximately 1,500 units compared to the prior quarter. Additionally, we continue to experience improve productivity and a higher level of capability with a stabilized and more experienced workforce.

The Diversified Products Segments continues to perform well thought businesses posting a strong performance in the quarter. From a profitability perspective, both gross profit and gross profit margin increased year-over-year and sequentially. From the year-over-year basis, gross profit increased to $31.7 million, an increase of 92% primarily due to the inclusion of Walker for the full quarter of this year and strong performances from Wabash Composites and Wabash Wood Products. For the past four quarters go Diversified Products represents approximately one-third of the total Company revenue with gross margin greater than 20%. This segment, which has grown primarily through the organic growth Wabash Composites and the acquisition of Walker, has significantly improved the profitability and earnings potential of the overall Company.

Lastly, the Retail segment continues to perform well and experienced another strong quarter. Gross margin increased 70 basis points driven by the combined favorable impact of the additional Walker Parts and Service locations and a favorable mix of new trailer sales. Gross profit increased $1.4 million or 34% to $5.5 million compared to the same period last year. Sequentially, gross margin decreased slightly by 40 basis points to 11.5% due to a higher mix of new trailer shipments. On a consolidated basis, the Company generated operating income of $30.7 million, excluding acquisition related costs during the quarter compared to $22.2 million on a comparable basis last year. This represents an impressive year-over-year increase of 38% and highlights the benefits of the diversification actions we have executed over the past year.

Sequentially, operating income, excluding acquisition related costs during the quarter, was higher by $15.2 million primarily driven by higher shipments of new trailers in the Commercial Trailer Products segment in addition to improvements in Diversified Products and Retail. At 7.4% operating margin excluding acquisition cost was approximately 130 basis points better than the prior-year's performance as a result of strong second quarter performances from all business segments.

SG&A for the quarter was $22.7 million, an increase of $7.3 million from the second quarter of last year. This year-over-year increase is attributable to multiple factors, including a full quarter impact of Walker and Beall, increased employee related expenses as well as increased outside professional services. While the SG&A expense for the quarter on an absolute basis is higher than $1.4 million sequentially, it decreased to 5.5% of revenue due to the higher new trailer shipments and corresponding revenue increase. We expect the SG&A percentage to be lower in the third quarter, as revenue ramps up consistent with our trailer guidance.

However, we now expect SG&A expense in the second half of 2013 on a dollar basis to be similar to the first half. Intangible amortization for the quarter was $5.5 million, essentially flat with the prior quarter and $2 million higher compared to the prior-year period. The intangible amortization in the current quarter is consistent with our guidance provided last quarter and is expected to continue at this level for the remainder of 2013.

Interest expense consists primarily of borrowing costs totaling $6.6 million, a year-over-year increase of $1.1 million primarily related our $300 million term loan credit agreement and $150 million convertible senior notes which were issued in the second-quarter of last year to fund the Walker acquisition. Additionally, it is worth noting that approximately $1.4 million of this is non-cash and primarily relates to the accretion charges associated with the convertible notes. As we previously announced, we entered into an amendment for the senior secured term loan which became effective on May 9 which reduced the effective interest rate by up to 150 basis points.

In addition, and in conjunction with the amendment, we voluntarily prepaid $20 million up to the principle of the term loan, reducing are outstanding balance to $277 million. These actions were the primary driver in lowering our interest cost sequentially by $1 million, and the combined effect is expected to reduce annual cash interest costs by approximately $5 million.

Other expense for the quarter totals $0.3 million and primarily relates to the one-time costs incurred in connection with the early extinguishment of our term loan debt. We recognized income tax expense of $9.4 million in the second quarter, representing an increase of $8.3 million year-over-year and $5.6 million sequentially. The effective tax rate for the quarter was 40%, and we estimate the effective tax rate for the remainder of the year to be approximately 40% as well.

At June 30, 2013, we have an estimated $79 million of remaining US federal income tax net operating loss carry forwards which will begin to expire in 2028 if unused. And we currently estimate approximately $60 million of these NOLs are available for utilization during the remainder of this year subject to pre-tax earnings. As a result, the Company does not anticipate cash taxes to differ materially from those paid in 2012 which were less than $1 million. Please refer to our 10-K for more details on the annual limitations for our NOLs. Finally, for the quarter, net income was $14.1 million or $0.20 per diluted share.

On a non-GAAP adjusted bases after adjusting for acquisition related charges and expenses related to the early extinguishment of debt, net income was $14.7 million or $0.21 per diluted share. In addition, operating EBITDA was $42.2 million, an increase of $12.6 million compared with the same period last year. Sequentially, operating EBITDA and operating EBITDA margin increased by $15.1 million and 1.8% of sales, respectively. On a trailing 12-month basis, revenue increased to $1.6 billion with operating EBITDA reaching $146 million.

With that, let's move to the balance sheet and liquidity. Net working capital increased during the current quarter by approximately $26 million to $228 million at the end of the quarter as we continued to increase production and manufactured more trailers than we shipped. However, this situation is expected to reverse in the third and fourth quarters resulting in lower working capital requirements in the back half of the year. Capital spending was approximately $4 million for the quarter and $6.6 million year-to-date. We anticipate full-year 2013 capital spending to be approximately $20 million, consistent with our previous guidance.

Our liquidity, or cash plus available borrowings as of June 30 was approximately $188 million. As a result, our pro forma total and net debt leverage were 3 times and 2.7 times respectively. In addition, our senior secured leverage covenant under the term loan credit agreement was 1.6 times, well below the required 4.5 times. As we have consistently stated in recent quarters, managing our capital structure is a priority for the Company, and the second quarter term loan debt prepayment demonstrates our commitment to do just that.

In summary, the second quarter was a very solid quarter with strong results from all segments of the Company and several areas delivering record performances. With consolidated gross margin at 14 2%, 330 basis points better than last year and very close to our best ever, it is evident to us that our growth and diversification strategy is delivering the expected results. Looking forward, we anticipate new trailer shipments in the third quarter to be in the range 12,500 to 13,500 units for the total Company, consistent with our revised full-year guidance of 45,500 units to 47,500 units. We are well-positioned as we enter the third quarter with a healthy backlog of $680 million, a stable and experienced workforce and the benefit of an organization that relentlessly pursues cost and efficiency improvements. Thank you.

And I will now turn the call back to Christine who will take any questions you may have.

(Operator Instructions)

Joe O'Dea, Vertical Research Partners.

First question is just into the back half of the year particularly to step-up in Q3 shipment volumes, visibility on that activity at this point one month into the quarter, and really thinking about it in terms of industry fundamentals have been supportive of higher demand for a while, but what is driving the sequential improvement into Q3 to see some of that demand materialize?

Well, it is really driven by the already booked orders and scheduled production that we have. We're pretty much filled out into the fourth quarter, with that backlog that we talked about, the $680 million across the business. And what I am speaking specifically about when I talk about the backlog fill, as our slots fill, is with our Commercial Trailer Products business, which is the bulk of the volume. We have a very high confidence level based on that for what the third quarter will deliver. And we have good quote and order activity that is continuing at a higher level than what we saw at this time a year ago. So it gives us a high level of confidence based on not only the quote activity and the rate of that but also the conversion rate and discussions with customers that we'll be successful filling out what remains in the fourth quarter. So both third-quarter and full-year numbers look very good to us.

Okay, great. And then one more.

In Diversified Products, the gross margin was kind of flat versus Q1 with revenue up about 20%, sequentially. Trying to get a sense of how mix affects the overall margin as you look out into the second half and whether there's any sort of expectation for that margin to move from first-half levels or if it should stay kind of flat?

Joe, the margins in Diversified Products are relatively similar across the three businesses that are included in that, the Walker Group, the Wabash Composites and the Wabash Wood. Mix will have an effect on it but in general, all of those businesses are over 20%. Obviously, we work every day to improve margins in our manufacturing facilities. We are going to continue to do that. As we move forward, I think we expect margins in that business to stay in the mid- 20s. We will continue to work to improve that going forward.

Okay. Thanks very much.

Jeff Kauffman, Buckingham Research.

Congratulations to Jeff on your new responsibilities and congratulations on a very strong quarter.

Thanks, Jeff.

A couple of nit questions.

When I look at the changes in working capital and inventory, it looked like a lot of the inventory increase was in finished goods. You had mentioned how some customers are coming back to you and placing more orders, but did we also have a little bit of slippage of trailers that we thought might be delivered to customers in Q2 that for whatever reasons are just getting picked up in Q3? The reason I'm asking because of the finished goods inventory number.

Yes. And that's a good observation, Jeff.

As you know, we struggle from quarter-to-quarter, I guess I should say, our customers struggle from quarter-to-quarter in getting predictable time frames when they will actually be able to free up drivers, free up equipment to come and pick up trailers. I think one of the effects we are seeing right now is with the demand levels where they are at on track tonnage and loadings increasing and the capacity reductions that have occurred from an equipment standpoint across the industry as far as power equipment and driver shortages. I really believe that we are seeing customers faced with the difficult choice of sending a deadhead driver to pick up an empty trailer or going and picking up a live load that generates revenue and profit for them. 9 times out of 10, the decision is going to be go after the live load. I think it is the managing of their routes, managing of getting their drivers freed up to be able the pick up trailers.

They certainly need them. In many cases they have already been paid for. They are sitting here as an asset. We just can't recognize the revenue until they physically are picked up. In some cases, customers are actually moving some equipment to other sites until they can actually deploy them -- closer sites, until they can deploy them into their systems. We have not had any indications, cancellation rates remain extremely low on any orders to be built. We have not had any indications from any customers that they don't need or want the equipment. That is why we feel very good about what the third quarter, the balance of the year will support.

Okay.

And then, I guess the point I was making was as good as the quarter was had these pickups occurred, it could've been better. This working capital drain that we are seeing should reverse, and it should convert back into free cash flow later this year?

Yes. We saw the same trend last year, Jeff, in the third and fourth quarter. If everyone goes back and looks at those numbers, free cash flow in third and fourth quarter accelerated as we got through the balance of the year.

Okay. And then two detail questions.

When do you start to open your books up for the 2014 order year?

Well, we are getting close to that time frame. You generally start seeing some discussions that can occur as early as August. And then you start really seeing order placements a little bit later than that. Generally customers will put out or RFQ's and over the course of 30 to 45 days start making decisions. So we should expect September, October time frame that you start getting into more serious discussions and some order placement. There is always the surprise early ones or the surprise late ones. But that is generally the time frame you see. September, October, November seem to be some peak months.

Last year was an anomaly with December being a particularly large month, but as we have discussed in the past, that was the Presidential election effect that occurred last year where a lot of customers were just holding off and we had over almost 31,000 industry-wide orders in December, which is certainly unusual.

Okay. And final question.

Of the 800 trailers that were sold through DPG, approximately how many of those were Beall.

No. Jeff, we don't break out the trailer shipments for Diversified Products segment by our different business units within that segment.

Well, it never hurts to ask. Thanks so much and congratulations.

Thank you.

John Mims, FBR Capital Markets.

Dick, let's start with the backlog up a little bit sequentially. Can you break that out between commercial products and diversified and what those numbers were in the first quarter and the year-over-year comps?

Yes, John we provided some visibility into the Walker Group backlog in past quarters because we were giving you visibility as to what the increase from the acquisition we made in the second quarter of last year were. Going forward, at least right now we are going to report the total Company backlog. I think what we can say is, though, that the backlog in commercial trailer products and Walker group are similar to first quarter. CTP is relatively flat, and the Walker group is up slightly. But both are very solid and very healthy.

Okay.

John, I think the important point, John, that I made in my prepared comments was that while relatively flat quarter-over-quarter slight increase, which actually surprised us. We expected some decrease. But we had a relatively strong order receipt quarter. It picked up significantly higher percentage of the total orders placed across the industry in the second quarter, relative to what we experienced last year. And that was very pleasing to us, and it just reinforced the desirability of our product despite the higher pricing levels that we pushed into the market. That was good to see. And, with the ramp-up, the normal second quarter seasonal ramp-up in production build levels, we were still able to maintain and slightly grow the backlog which was very pleasing.

Sure, no that's helpful.

And following on what Jeff was asking and related to the backlog, and when you look at these new orders that were placed, do some of those orders stretch into 2014? Or is this a pretty transparent backlog as it relates to back half production?

Yes. It is predominately 2013 demand. We really have not been entertaining 2014 demand at this point. There may be some slight carryover, but I think the predominant amount of it is for this year.

Okay.

But is there no 12 month orders of that type of magnitude?

No. We haven't -- the multitude of the orders, obviously, are in the commercial trailer products side just by sheer volume of units. In that business we have not entered into 2014 dialogs yet.

Okay.

Can you say what percentage of the backlog, the large orders you referenced represents?

Well we typically -- it depends on the -- where we are in the cycle. Early on we were getting -- we had as high as 70% of the orders were large orders back in the 2010 time frame when the first people coming back into the industry were the large customers. And as we migrated forward, that percentage dropped to 60/40 and more of a 50/50 kind of a target range for this year. So we are somewhere in that range of the 50% large, 50% mid-market and smaller orders. And that's typical kind of a movement we see. That was what we set out as our target for this year to have a much better balance between large orders, large customer orders and the rest.

Yes, okay.

That was what I'm getting at. Yesterday Celadon had made the comment that they were done buying trailers. To what degree you are having that rotation into the smaller guys and then when you talked in the prepared comments as far as prepared order activity, how much pricing power you have in that -- among those smaller guys and how -- I guess, how much more you have to work to keep the backlog filled as you rotate into the smaller guys?

Well, as I shared, we are doing quite well in our backlog fill in the second-quarter order intake we picked up a higher percentage than what we would have expected going into the quarter of the total orders that were placed during the quarter industry-wide. That was a very good sign for how we are doing and how our sales force is doing out in the marketplace.

As far as 2014, as I stated just a few moments ago, we have not entered into those dialogues yet. I would expect that the large customers will have similar needs driven mainly by replacement needs, pent-up demand, age of the trailers, regulatory compliance, drive rather than growth perspective. Maybe that's where some of the confusion in the market is on what the demand environment is for trailers, especially commercial trailers.

The demand is really driven by pent-up replacement demand rather than growth demand. I have said many times that we really don't need in our industry a very strong macro environment. We need a favorable one but not an excessively strong one, because the pent-up demand to replace extremely aged equipment is there. The need to comply with the regulatory environment, CSA and now with the onset of hours of service will help drive the need to replace equipment and get better equipment in their system. Also the driver shortage drives some of that mindset also. Fleets want to have better equipment to be able to attract and retain drivers. Drivers want to work for companies that have newer, younger equipment so they are less prone to getting negative CSA scores.

Sure.

Without any real organic fleet growth, how long does that pent-up replacement demand support the industry?

Well, the analysis that has been done a couple of occasions in different ways, when we look and compare at the significant number of trailers that were produced back in 1998 through 2000 in excess of 860,000 units, and we look at what the typical trade cycles are for a lot of the larger fleets anywhere from 8 to 12 years, nominally. You have got some that do it on a shorter basis. Celadon you mentioned, they've been very aggressive in trying to get a very young fleet. Hartland has been the most consistent in having a relatively young fleet. Knight is another one that turns their equipment over on a more frequent basis. You've got some other that try to stretch them out 12 years and beyond. On average, 8 to 12 years or nominally 10 years so when you look at the equipment built in '98 through 2000 and you go forward 10 years, that was 2008 through 2010 time frame when only 350,000 trailers were built.

That gap is in excess of 500,000 units that would normally have been already gone through their typical replacement cycle or certainly a good percentage of them. When you combine that with the fact that there were 200,000 units taken out of the system, so capacity reduced during the system during the downturn, during that 2008/2010, you could say there's a net 300,000 that are yet to be replaced from that '98 through 2000 time frame. That takes several years. Normal replacement on an average basis is about 200,000 units. At a 240,000 rate that takes eight years to replace at that level. That is where there has been a lot of suggestion that this could turn out to be the strongest, certainly the longest cycle of strength for our industry, maybe ever.

The replacement levels will help sustain demand levels above normal replacement for an extended period of time. It is not unrealistic to look at the projections that ACT has for next year that are close to 260,000 units and say, yes, that's reasonable. That's only 60,000 units above normal replacement and note that 60,000 excess is just cutting into that 300,000 backlog of old teenage trailers, 13, 14, 15-year-old units that need to get out of the system.

Okay. That is very helpful. Thank you for the thorough response and walking through that.

One last one for me, and then I will turn it over to someone else. When you look at kind of everything you just said as far as multiple years of basically flat to maybe slightly ticking up industry quarter-end, and you contrast that to build rates that are naturally improving as you work through the cycle, build rates pick up. How much confidence do you have? If you're looking at the fourth quarter and looking at 2014, that you we'll be able to hold the pricing power that you have gotten over the last couple of years as the industry build rate start pick-up then there's more competition from everyone else on a price basis, which would mean -- does that put you in a situation where you either need to scale back the market share that you can expect to capture? Or do you have to start to get more aggressive on price or alternatively, am I looking at this wrong and there's enough order demand just from a replacement standpoint out there that you can continue to get both?

Yes. I think if you look at what is happened with build rates, they have pretty much stabilized. I think just about across the industry, everyone struggled with ramping up to chase -- the volume comes before the build. The orders come in and everybody has to start hiring people, ramping up adding lines. I think that activity has pretty much stabilized, and we are starting to see that in the type of build rates we have. We would expect, and I think everyone would expect the third quarter with the type of old rates we have there's going to be some pull down of backlog levels as a result of getting into the slowest period of order activity that we would typically see. This is the seasonal slow; July, August time frame, especially. Then you get into the order period for the 2014 needs and year-end needs, and you always have some of those.

I think one of the fallacies in some folks' thinking is we get into the summer season and orders go to zero. Well, they don't go to zero, they drop about 20% from the average for the year versus the high points of being plus 20% to 25%. So you've got a 40% or so band throughout the year, but during the third quarter call you still see order rates of 14,000 to 16,000 total units during the course of any month. We would expect to get our fair share of those going forward, as would the competitors.

Right.

So that will sustain the build rates that they have.

Sure but just on year-over-year basis daily build rates are higher -- they are progressively higher each year, where backlogs are not progressively and order rates are not progressively higher? Right?

The order rates have been but -- when you're talking year-over-year -- you're talking just last year? 2010, '11, '12 and into '13, as we had the rapid ramp-up in-demand, there was a chase to get build to support that ramp rate. So backlogs grew to a very strong level, and then there was a catch-up time frame where folks had to get their folks trained, they had to get their productivity levels up to speed to be able to keep up. Now we have gotten to a level where, I believe, much like us, competitors aren't going out actively adding shifts and adding staffing. They pretty much have stabilized to the levels that will support the build and expectations are, depending on what happens, is that they are at a sustainable level. Everyone is flexible in being able to adjust build rates up or down, because they don't have to go and add equipment, because the capacity is there. They can add staff either through overtime or through adding temporary labor or through -- if it goes up significantly, adding to the current staffing by adding a shift.

Right. Okay.

So the flexibility is there, and these are smart people that operate the businesses within our industry, and they respond to what they see as the demand environment fluctuates. I think most people do carry a level of contract level people -- contract associates or temps that they can flex the business with to manage it or work overtime, as I stated.

Sure. Okay. That's very helpful. Thank you.

Brad Delco, Stephens.

Dick, I want to touch on a comment I think I heard. Just want to make sure I heard it correctly, and I think it was the first time you said this. I think you said, you're expectations is to work back towards seeing double-digit margins in your Commercial Trailer Products segment, which, I guess strong performance this quarter but still means there's a long way to go. Can you talk about the drivers to that? And then maybe kind of specifically thinking about third quarter and how quick a progression we could be to get towards that target with -- more volumes running through your kind of fixed overhead cost structure?

Sure. Yes, I certainly -- in my comments, I wanted to make it clear that we believed we could get there sometime during the cycle. I don't expect that we are going to get there in the next quarter. Anything is possible. I don't want to say that the guys can get there. A number of factors play into it. The ability to continue to favor pricing over volume and being very selective about the orders that they take. That is one of the factors that will help and it has been continuing to help as we've gone along. Second key factor is the continued improvement in productivity, line velocity with the maturing workforce.

Now that the workforce is much more stable than what we experienced during the ramp-up period in 2010, '11 and '12 were all some challenging periods, as you recall. Now it's stable. They are gaining improvement, gaining productivity. There will be some contribution from that effort. The third element is the work that's being done on the procurement side from our supply chain team. They continually have been able to gain us leverage. The combination of Walker and Wabash, combined with the buying power they have, gives us some leverage on the material side, not only in the procured cost of those materials and components but also then the protection that we are getting by some of the actions that we have put in place over the last few years to mitigate risk that is associated with the fluctuation of material costs.

In many cases material cost inflation, commodity cost inflation that had been impacting us, we've taken that element out of it. So we get a much more stable environment that we are operating in. So those factors is what we see will help drive it. And then if demand turns out the way that ACT certainly expects, with continued growth and the thesis that I put forward about all of this pent-up demand and getting the old equipment out of the system, that could help drive, just as you pointed out, the extra leverage and flow through that you can get with the increased volume.

No. That makes sense. The only reason I ask is when I look at your sequential improvement in revenue in that segment and then your sequential improvement in gross profit, it looks like you had a 14% incremental gross margin, which I imagine is the result of you absorbing some of that overhead cost.

Well, just to wrap up that question, is it safe to assume, though, that at least, on a sequential basis more volumes you expect your Commercial Trailer Products' gross margin to improve in the back half of the year?

Yes. I certainly would expect that we should see some improvement. I think that the cards are set up to be able to do that for all of the factors that I pointed out. Now they just have to be able to execute. We've got to get the equipment picked up. We've got to continue driving the continuous improvements on the factory floor, and we've got to make sure that our material cost controls are robust so that we don't see any impact, if any costs were to inflate.

Okay. Well, great. Thanks for the color there, Dick, and I'll just turn it over and let somebody else have at it.

Steve Dyer, Craig-Hallum.

Most have been answered by now -- just a couple of them. It sounds like you gained some pretty nice share in the quarter, and it also sounds like you were able to sort of do that while maintaining pricing discipline. Am I right? Pricing, holding up pretty strongly there overall?

Yes. That is correct, Steve. We put a very high priority on maintaining that discipline around that. What we have seen in the marketplace is it seems to be much a more disciplined environment than what we were seeing a year ago, as we were trying to push the pricing. The competitors certainly seemed to be taking advantage of the lead that we took to help improve -- drive their margins, internally. We don't see them but certainly that seems to be what we are seeing in the marketplace more going on in the same opportunities out there.

Okay. Great.

And what is your sense, I guess, of overall industry capacity over the next three to four months? There's been some industry chatter lately that maybe there's been some softness in order patterns, which certainly doesn't sell like anything you guys are seeing. Maybe freeing up some slots in the near-term, what are you seeing overall there?

Well, it is an interesting question. We don't know what our competitors may be seeing in some of the customer sectors they may serve. The ones we serve, we know the feedback we are getting on our own customer checks, our own internal channel checks, if you will. I have not heard, other than different comments, scuttlebutt, of what is happening in the rest of the market. We just know that we had a pretty successful second quarter on order intake and percent.

I read the transport topics like a lot of folks do, and it seems that the comments from competitors who were quoted in transport topics seem to believe that in some cases they had a stronger second quarter than their previous quarter. In other cases they say it is stable, and they are expecting to see demand pickup as we get toward the latter part of the third quarter. I didn't see any quotes in there that would indicate that they were seeing a pronounced softness.

Got you. Okay. One last one from me.

Back half of the year you guys should generate some pretty good free cash flow. How do you think about prioritizing the deployment of that capital going forward? Maybe looking at the buckets of buying some other assets, paying down debt, share buy-back, dividends, those types of things? What is the overall thought process there?

Yes, Steve, this is Jeff. Thanks for the question.

As I stated in my comments, managing working capital is still a priority for us. Our philosophy hasn't changed in that regard. As a result of that, we are focused on our debt levels and our leverage ratio. As we have stated, consistently in the past few quarters, that is going to continue to be the focus for this year. Until we get the leverage ratio to a lower level that is consistent with what we are comfortable with in the cycle. We are comfortable where we are today, but we certainly want to push that down going forward. Having said that longer-term, we will look at the other options for return of capital to the shareholders. Today the current priority is paying down debt. At the same time, we want to preserve our option to look at strategic opportunities as they become available.

Great. Okay. Thanks, guys.

Thom Albrecht, BB&T.

Congratulations on a good quarter.

I wanted to just explore a couple of revenue angles here. In the quarter, the Beall revenues were about $8 million. Should we think of that as the run-rate going forward, or will that be even higher, closer to $12 million?

No. I think -- first of all, Tom, the way you have calculated the $8 million is you took the $106 million that we said was the impact of Walker and Beall on the total Company.

Right.

Minus what Dick quoted as the $98 million for the impact to diversified. The piece you are missing there is the impact of the renter tank services business, the Walker parts and service piece that is now rolled up in the retail segment. As I stated a couple of minutes a go, we don't disclose the revenues on a per business level. But the $8 million is not Beall alone. It would be the Beall plus the parts and service business from Walker.

Okay. I see. Is that a good run-rate? Or is it still ramping up giving the newness of Beall and that I think just directionally?

No,Tom, your question is very valid. They are in a ramp-up mode. We would expect to see some level of growth in their business as we proceed through the third quarter and balance of the year.

And then on the ASP, it increased about $500 year-over-year, but I think we all struggle a little bit because we don't know quite what your mix of production is from one quarter to the next. There is huge price differentials between a Reefer trailer, versus a van, versus a flatbed, et cetera. How much of that $500 would you really characterize as price? Maybe $200 and then $300 would be mix? What is your comments there?

That is a difficult question, Tom, in terms of how much of the $500 is price versus mix. Although I think -- I don't have the numbers in front of me, but based on what I am recalling, I would say the majority of that is going to be price, let's say $300 of it is an estimate. Frankly, that is all it is, an estimate, or the majority of its going to be priced price and then a smaller portion is going to be mix. From a mix and complexity standpoint we've -- we are relatively stable right now. As I think back to second quarter of last year, I think that holds true.

Well, I guess the other question that comes in then, it seems like a lot of the van carriers have adequate trailer to tractor ratios, even within hours of service change. What I detected is there maybe a little bit more of a willingness for flatbed and Reefer guys to slightly boost the trailer track to ratio. Has your production mix changed to favor Reefer and flatbed just a little bit more because of that dynamic? Or is it still the same mix of Van, flat and Reefer?

Yes. We have not seen the suggested shift that you are talking about. We are still seeing very strong demand for the [drive in] product.

Okay.

And then on the DPG, that is been such a volatile category, the consolidated revenue line from quarter-to-quarter. There were a couple of quarters after you bought Walker that were maybe a little bit disappointing; the third quarter of last year and that first quarter of this year. Of that $98 million that was Walker in the quarter that just ended, is that the highest quarterly Walker revenue level you have had since you bought them?

No, Tom, it's not. Q4 of last year was the highest quarter for Walker revenue since we acquired the Walker business.

How much was that? (multiple speakers). I'm sorry. Go ahead.

Tom, as he's looking that up, part of that was driven by the transition of going from being a privately held business to being part of a public company. Walker was going to the transition of the revenue recognition issue. They ended up having a strong fourth quarter as they continued to work with their customers on the need to get equipment picked up, because they used to recognize it upon completion before. Of course as being part of Wabash they can only recognize, now once it gets shipped and picked up.

Right.

The Walker revenue in the fourth quarter was $123 million.

Okay. That is a good healthy number.

Seems like I had one. Back to the G&A question.

Jeff, I know you gave some comments there. I was a little surprised, even though it is not that big amount of money that your guidance was that the second half of the year would be comparable to the first half. I was surprised you didn't take more of the second quarter run-rate. I am combining in that the amortization so $20.4 million. You are saying it would actually be a little bit less than that because the first half the year was just under $40 million?

Yes, Tom. I think were talking a little bit of apples and oranges. The SG&A guidance that I gave excludes the intangible amortization. It is the sales and the G&A lines, combined. If you look at those for the first half of the year, I think the total is $44 million. My guidance was we are going to be similar to that for those two line items on the income statement in the second half. The amortization line is going to stay flat with what you have seen in the first two quarters.

Okay. All right. Thank you for that.

Lastly, quarterly interest expense should drop to about $5 million. Is that basically what you're saying with the new facility?

It was $6.6 million this quarter. We have said on an annual basis it is going to decrease by about $5 million so take $125,000 off a quarter. It is going to be in the $5 million to $5.2 million range, I believe.

Yes. Take 1.25 off, yes, okay.

Right.

Okay. That's all I had. Thank you very much.

Kristine Kubacki, Avondale Partners.

I just had a question on the tank side a little bit. The industry statistics have been relatively depressed. I understand a lot of that is going into the energy end market. It sounds like your business is relatively stable. I was wondering if you could comment on what you're seeing, the fundamentals there? And what -- I know when you did the acquisition you talked about trying to get more exposure to the energy end market and how you've progressed with that or if you are still thinking about that?

Yes, no. It certainly is not a strong as that market was 1.5 years ago or 1 year ago. With the decrease in rig count, there was some softening. We talked about that, the back half of last year, on the products that we produce and supply to that industry. We have seen some come back for it but certainly not to the levels that we had experienced in the first half of the year. We are seeing some recovery. We continue to expand the product offerings so that we can, when the bounce back comes, that we are prepared to take advantage of it.

Okay. Very good. Thank you very much.

Thank you. I will now turn the call back over to Dick Giromini.

Thank you, Christine.

In conclusion, we are extremely pleased with the performance that we were able to deliver this past quarter. That said, we see further opportunities to accelerate top-line growth, expand product and market breadth, and to deliver record level performance in almost all aspects of our business. With a key focus on execution and delivering results, I am confident that we'll be able to do just that.

Thank you for your interest in and support of Wabash National Corporation. Jeff and I look forward to speaking with all of you again on our next call. Thank you.

Thank you and thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.