Wabash National Corp (WNC) 2013 Q3 法說會逐字稿

Welcome to the third quarter 2013 earning call. My name is Vanessa, and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. And I will now turn the call over to Dick Giromini, President and CEO. Sir, you may begin.

Thank you, Vanessa, and good morning. Welcome to the Wabash National Corporation 2013 third quarter earning call. This is Dick Giromini, President and Chief Executive Officer. Joining me today is Jeff Taylor, Acting Chief Financial Officer and Treasurer. Following this introduction, I'll provide highlights for the third quarter, the current operating environment, and our outlook. After which Jeff will provide a detailed description of our financial results. At the conclusion of our prepared comments, 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 these types of presentations, this morning's call contains certain forward looking information including statements about the Company 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 is being recorded.

Let me start by saying I am extremely pleased with the overall results that the team was able to deliver in the third quarter establishing new milestones of performance with record revenue, gross profit, operating income, and operating EBITDA. All business segments contributed to this success with further opportunities ahead. We continue to gain momentum as we leverage synergies among businesses and pursue a higher growth and margin profile. Our growth strategy and disciplined approach to improving profitability includes driving operational improvements in all aspects of our business, in particular our manufacturing operations, and developing innovative product offerings that our customers value and need.

Consolidated net sales for the quarter were $440 million, representing the highest quarterly revenue ever reported by Wabash National, and a $34 million increase over third quarter of 2012. The Commercial Trailer Product segment achieved a level of gross profit and gross margin that has not been achieved since 2007. In addition, the Diversified Product segment once again achieved exceptional results for the quarter with solid contributions from both the Walker Group and Wabash Composites. The Retail segment also contributed to the overall Company performance with a solid quarter for revenue and gross margin.

Consolidated gross margin for the third quarter was 14%, an improvement of 170 basis points from the prior year period driven by stronger performance across all segments and just shy of our record 14.2% achieved in the second quarter due to a higher percentage of Commercial Trailer Product revenue in the total. We continue to explore opportunities that would extend our reach in the higher margin Diversified Product segment as well as other growth opportunities that meet our strategic growth criteria.

Operating income and operating EBITDA for the third quarter of 2013 set record highs for any quarter at $33.8 million and $44.9 million respectively. Operating income and operating EBITDA increased by 24% and 19% year-over-year respectively for the third quarter, reflecting the benefits of executing a diversification strategy that has continued to build a business that is stronger and more resilient with higher long-term growth potential.

In regards to volume, new trailer shipments for the third quarter were 12,600 units, in line with our previous guidance of 12,500 to 13,500 trailers. Trailer shipments improved in the quarter as customer pickups gained some momentum over the second quarter with a number of planned September pickups occurring in October. Quote activity accelerated during the third quarter as we entered the traditional quote and order season for the upcoming year.

As expected, our backlog decreased sequentially during the third quarter but improved year-over-year by $8 million to approximately $563 million as of September 30, 2013. Based on discussions thus far with customers regarding needs for next year and confirmed in discussions this past week at the annual ATA Management Conference and Expo, it certainly appears that 2014 needs will exceed those of the current year. That said we stand firm in our belief that the overall demand environment for trailers into the fourth quarter of 2014 remain solid as fleet age, customer profitability, and regulatory compliance support continue demand for new trailers.

Finally, before I move on to our business segment results, true to our stated desire to place a priority on reducing our debt levels, we made a second voluntary prepayment, the amount of $20 million against our term loan in September, which will reduce annual interest costs by another nearly $1 million. Now I'd like to provide some performance highlights from each of our reporting segments. Per our call format, Jeff will follow with additional details regarding each segment's financial performance.

We'll begin with the Commercial Trailer Product segment consisting of our dry and refrigerated van products, platform trailers, and fleet trade used trailer sales. This segment continues to effectively execute its optimization strategy with a relentless focus on margin improvement, manufacturing excellence, and product innovation leadership. Commercial Trailer Products achieved its highest levels of gross profit in more than 6 years. With a gross profit approaching $2,000 per unit shipped, gross margin within this segment came in at 8% representing an improvement of 80 basis points over the prior year period and a 10 basis point increase sequentially.

This improvement in gross margin for CTP is the direct result of our pricing strategy to favor margin over volume as well as improve productivity. Average selling prices increased nearly $200 or 0.9% compared to the prior year period. Continued productivity enhancements and operational efficiencies gained from a stable, more experienced work force also contributed to margin improvement year-over-year.

While pleased with the progress to date for Commercial Trailer Products, there's certainly more to come as we continue our drive to achieve double-digit gross margins at some point during the next four to eight quarters. A combination of further pricing supported by forecasted stronger demand, continued productivity gains through line speed optimization, combined with increasing purchasing leverage through continued growth all combined suggest that this objective is realistically achievable.

Moving on to the Diversified Product segment which includes -- the Walker Group, Wabash Composites and Wabash Wood Products, we experienced another solid quarter of performance. Continuing the momentum generated throughout the first half of 2013, this higher margin Specialty products segment made significant contributions to the Company's overall performance, delivering near-record levels for both net sales and gross profit, consistent with the overall Company performance.

Net sales for the quarter of $132 million represent an increase of $23 million or 21.4% compared to the prior year period. Gross profit improved by $7.1 million compared to the prior year period while gross margin increased by 150 basis points from 22.2% to 23.7% primarily attributed to the favorable mix of products within our Composite offerings representing a larger portion of Diversified Products this year. Backlog for the Diversified Products segment remained strong with solid quote 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 its ongoing and accelerating integration efforts. We have achieved the cost-savings goals from the synergies delivered by the acquisition of Walker, and we expect continued progress and growth from Walker as they capitalize on having the broadest tank trailer offering in the industry.

Following their record setting second quarter, Wabash Composites delivered another solid quarter despite entering the seasonally softer part of the year for their business. The Composites business continues to focus on enhancing customer satisfaction by providing innovative solutions that solve customers' unmet needs, particularly in aerodynamic product development as fleets realize the fuel economy benefits in their operations. Another priority going forward will be to identify and add other non transportation-related product offerings to the Wabash Composites portfolio that will not only grow the top line but can help to reduce and offset the seasonality of their current offerings.

Finally, let's look at our Retail segment. Despite a 3.4% dip in net sales over the prior year period from $48 million to $46 million, gross profit margin improved by 40 basis points to 11.4% as a result of an improved mix of higher margin parts, and service. Top line and profit growth are expected longer term as we expand the number of legacy Wabash National Trailer Centers that are certified to perform tank repair services, expand our mobile service fleet, and increase the number of customer site service support locations. To date, four legacy Wabash trailer center sites have obtained the R Stamp Certification with others in process.

Before I discuss Wabash National's expectations for the fourth quarter, let's first examine a few key economic indicators and industry dynamics we monitor closely that provide broader context for our expectations. As you might expect with the recent government shutdown, certain critical economic data were not collected nor reported for the month of September, leaving the current and near-term economic picture somewhat cloudy. However, indicators available from non-governmental agencies point to continuing strong manufacturing activity countered by weakening consumer confidence in spending.

In September the Institute of Supply Management Manufacturing Index came in at 56.2, the highest level since April of 2011, indicating expansion in manufacturing activity for the fourth consecutive month. And just out, industrial production rose by 0.6% in September following a 0.4% increase in August and a 3.2% year-over-year increase. Projections by Blue Chip Economic Indicators are for steady growth through 2014. The Conference Board's Consumer Confidence Index just out, decreased from 80.2 in September down to 71.2 in October, reflecting renewed concerns about jobs and earning and, of course, the unsettled nature in Washington.

The fourth quarter GDP growth rate forecasts are being scaled back. Moody's Analytics has reduced its estimate from 2.6% to 2.1% while Standard and Poor's has reduced forecasts from 3% to 2.4%. And it was reported that employers added 148,000 new jobs in September, while the unemployment rate reportedly increased from 7.3% to 7.2%.

Within the trucking industry, ATA's Truck Tonnage Index increased 1.4% in September to 128.7, reaching the highest level on record. The tonnage was a strong 8.4% higher than in the same month last year and 5.4% higher year-to-date compared to the same period last year. Near term, the latest report from ACT forecasts 2013 Trailer Shipments at 241,150 units, up 2% year-over-year and 251,850 trailers in 2014, up an additional 4% year-over-year. Also, FTR is projecting 234,922 trailers being produced for 2013, an increase of 1.1% year-over-year, and projecting a strong 237,400 units to be produced in 2014. So with three quarters of the year complete, the two main industry forecasters remain positive on expectations for this year with both shipments and builds projected to exceed year-ago levels consistent with our year-long internal forecasts for the year.

From a regulatory standpoint, as you know, the new Hours of Service rules went into effect on July 1. The US Court of Appeals for the District of Columbia circuit issued its decision on August 2 on the Hours of Service litigation brought by the American Trucking Associations and Public Citizen. The court upheld the 2011 hours of service regulations in all aspects with the exception of the 30-minute break provision for short-haul drivers. The regulation limiting drivers to a 70-hour workweek, the previous limit was 82 hours, was upheld which means drivers may resume driving once reaching 70 hours only following a rest period of 34 consecutive hours.

The first reports of Hours of Service impact are now emerging. Several large publicly traded truck load fleets including Heartland, JB Hunt, Covenant and Warner have stated in their third quarter earning releases that Hours of Service rules have adversely affected their productivity and, consequently, operating revenues. Warner, for instance, stated that the number of comparable average monthly miles per truck fell 2% to 3% as a result of new Hours of Service rules. Productivity losses such as these may lead to increased demand for additional drivers and equipment to fill the gap.

Let me now share Wabash National's expectation for the fourth quarter 2013 and the full year. The momentum in customer pickups from the first half of the year is carried over into the third quarter, and we expect this trend to continue. In fact, month-to-month new trailer shipments for October have already exceeded 5,000 units, getting us off to a strong start for this final quarter of the year. So that's great for top line. That said, as we progress through fourth quarter, we now face the normal seasonal decrease in operating days resulting in decreased build absorption levels due to the high incidents of holidays and normal shutdown that occurs during the fourth quarter.

Additionally, higher operating costs per unit for fourth quarter builds resulting from seasonal weather-related higher utility costs will have an impact on manufacturing costs per unit during the fourth quarter and through the first quarter of next year. This is expected and predictable and should not be interpreted as cause for alarm, simply a reality check and reminder. Longer term, our view of full-year van/trailer industry volumes remains consistent with the latest ACT and FTR forecasts. We continue to believe that full-year industry shipments will be similar to 2012 if not slightly higher. In fact, total industry trailer shipment through September now exceed same period shipments in 2012 by some 2,000 units.

And for the trailer segments that Wabash National participates in, the industry-wide numbers are even greater with some 4,500 more shipments this year than last for the first 9 months. Internally based on a solid backlog fill for the balance of the year, along with anticipated shipments during this current fourth quarter, we're now in a position to adjust our full-year guidance for new trailer shipments to a narrower range of 46,000 to 47,000 units for the full year.

For next year and beyond, key drivers such as fleet age, customer profitability, used trailer values, regulatory compliance, and access to financing all support a continued strong longer term demand environment. Some headwinds that fleets must deal with include the driver shortage/driver pay conundrum, Hours of Service impact on productivity among others. Recognizing that we are still in the early stages of the 2014 calendar year quoting season, we are not yet in a position to provide volume guidance for next year as discussions with customers continue. However, I can say that most discussions thus far indicate increased desires for new equipment that exceed the numbers that had been discussed last year at this time. We'll see how this all plays out as the discussions convert to actual orders, but I certainly have reason to feel good at this point.

In summary, we're very pleased with the record setting results delivered across all our business segments. Our core Commercial Trailer Products business continues its efforts to optimize performance through margin improvement, operational efficiencies, and industry-leading innovation. Pricing discipline and selective order acceptance, both part of our margin over volume strategy, were key factors to achieving this segment's highest levels of gross profit and gross margin in more than 6 years.

Our Diversified Products group, once again reaching near-record levels this quarter, has proven to be a reliable and consistent source for strong performance across all of its business units. The higher margin Specialty products from Walker and Wabash Composites continue to be important contributors to this segment's success. And our Retail business continues to deliver double-digit gross margins leveraging the integration of the Brenner Tank Services locations, increasing its mobile service operations and growing its customer site service support activities.

Our work is far from over. As I stated last quarter, 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've experienced to date in these efforts and look forward to delivering on our promise of record operating income performance for the year. As demonstrated by the results of these past several quarters, we're a far different company than we were just 2 short years ago, in structure, in performance, in execution.

We have proven to be reliable in our words and in our actions delivering on our promise to strategically but selectively grow our business, to be more diverse and less dependent on any narrow sector or market, to improve our margins to levels never before thought possible, and to be prudent and responsible stewards of the business. We have proven our ability to not only acquire a business with the size and complexity of Walker but to seamlessly absorb it and deliver results that exceed anything done previously.

We are now far more diverse with a broad portfolio of products and end markets that provide stability and growth. This is not the Wabash National of yesterday and should not be viewed as such. Historical comparisons are less and less meaningful as each day passes. This is the new Wabash National. We will continue to manage for the long term, to build value and sustainability. And records will again be broken.

With that I'll turn the call over to Jeff Taylor, acting Chief Financial Officer, to provide more detail 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 $440 million, an increase of $34 million or 8% compared to the third quarter of last year. This year-over-year improvement in revenue is attributable to strong demand in our Commercial Trailer Products and Diversified Product segments, offset by a slight decline in the Retail segment. As Dick mentioned, total revenue for the Company is an all-time record for any quarter. Sequentially, total Company revenue increased $27 million or approximately 6% on higher new trailer shipments from Commercial Trailer Products, partially offset by slight decrease was Diversified Products and Retail.

Moving on to the segments, Commercial Trailer Products' net sales were $294 million which represents a $12 million or 4% increase on a year-over-year basis due to higher new trailer shipment of approximately 300 units. Trailer average sales price, ASP, increased $200 per unit, reflecting a stable or slightly improving pricing environment, as well as our continued strategy to be selective in order acceptance and place a priority on margin over volume. On a sequential basis, net sales for Commercial Trailer Products increased $28 million or 10%, on approximately 1,000 additional new trailer shipments. Consistent with our prior guidance, new trailer shipments continued to ramp up in the third quarter while a number of anticipated September pickups occurred in October.

Diversified Products' net sales increased 21% or $23 million to $132 million on a year-over-year basis as a result of strong market demand from all businesses within this segment, Walker Group, Wabash Composites and Wabash Wood Products. Walker Group revenue was higher due to new trailer shipments increasing approximately 100 units. Wabash Composites' revenue was up over third quarter of 2012 due to stronger demand for DuraPlate decking systems designed for LTL applications and DuraPlate AeroSkirt products.

Wabash Wood Products improved on a year-over-year basis as a result of increased wood requirements from higher demand for new trailers in Commercial Trailer Products. On a sequential basis, Diversified Products' net sales declined slightly from the previous quarter's record levels by less than 3% due to the typical seasonal decline in certain composite markets and lower demand for Walker Group truck-mounted equipment offset by a favorable mix of liquid tank trailers.

The Retail segment declined approximately $2 million or 3% compared to the same period last year, largely due to lower sales of new trailers by approximately 100 units partially offset by higher sales from parts and service. Sequentially, net sales from Retail decreased to $2 million or 4%, driven by a lower volume of new trailer sales. Looking at our various product lines, new trailer shipments in the quarter totaled 12,600 units, including 800 liquid tank trailers in the Diversified Product segment for a total of $340 million in sales, an increase of $15 million or 4.5% from the third quarter of last year.

Used trailer revenue came in at approximately $13 million on 1,400 units and was up approximately $1 million from the same quarter a year ago. We continue to see tightness, strong demand, and limited supply in the used dry van and flatbed trailer markets. Parts, service, and other component revenue was approximately $48 million in the quarter, an improvement of approximately $14 million or 43% from a year ago, driven primarily by stronger demand for Composite products as well as parts and service through our Retail locations. In addition, revenue from equipment and other sales of $39 million increased $4 million year-over-year driven primarily by stronger demand for Walker engineered products and non-trailer, truck-mounted equipment.

In terms of operating results, consolidated gross profit for the quarter was a record $61.5 million or 14% of sales compared to $50.1 million in the same period last year. This represents an $11.4 million or 170 basis point improvement year-over-year. All three segments contributed to the improvement in gross margin while our two largest segments, Commercial Trailer Products and Diversified Products, drove the increase in gross profit dollars while the Retail segment remained consistent year-over-year. With that, let's look at the segments in more detail.

Commercial Trailer Products' gross margin improved 80 basis points since last year resulting in a 16% increase in gross profit or $3.3 million higher. Sequentially, gross margin increased by 10 basis points or $2.5 million as a result of trailer shipments higher by 1,000 units in the current quarter which did produce the expected leverage and fixed overhead costs per unit. However, it was partially offset by a higher mix of dry van trailers and normal variation of manufacturing cost. Production during the quarter was 11,800 units, up by approximately 800 units compared to the prior quarter.

The Diversified Products segment posted a strong quarter with all businesses performing well. From a profitability perspective, gross margin increased year-over-year and sequentially, while gross profit was up $31.3 million, up $7 million or 29% compared to the prior year period due to stronger demand for liquid tank trailers and composite products. Sequentially, gross profit was less -- was down less than $0.5 million due to lower seasonal demand for composite products, but gross profit margins were up 30 basis points due to favorable mix of products during the current quarter as compared to the second quarter.

Lastly, the Retail segment continues to benefit from the realignment of Brenner Tank Services with the legacy Wabash National Trailer Centers. Gross margin increased 40 basis points year-over-year on a favorable mix of higher margin parts and service business, while essentially remaining flat sequentially. Gross profit declined less than 1% to $5.2 million compared to the same period last year due to the decrease in new trailer shipments. On a consolidated basis, the Company generated operating income of $33.9 million, excluding one-time acquisition-related costs incurred during the quarter compared to $27.4 million on a comparable basis last year.

This represents a new record for quarterly operating income and highlights the improvements the Company has achieved in the core trailer business, in addition to benefits accrued from the Walker Group and Beall Acquisitions. Sequentially, operating income excluding one-time acquisition-related costs was higher by $3.2 million primarily driven by higher shipment of new trailers in the Commercial Trailer Product segment. At 7.7% operating margin excluding acquisition cost was approximately 90 basis points higher than the prior year's performance as a result of strong third quarter performance, particularly in our two largest segments, Commercial Trailer Products and Diversified Products.

Selling, general, and administrative, excluding amortization for the quarter, was $22.2 million, an increase of $2.5 million from the third quarter of last year. This year-over-year increase is attributable to multiple factors including employee-related costs and bad debt expense identified during the quarter related to a specific customer. Sequentially, SG&A expense for the quarter decreased by $0.5 million which, combined with higher net sales, resulted with an SG&A expenses as a percent of revenue of 5% for the quarter. As discussed last quarter, we expect SG&A expense excluding amortization on a dollar basis in the second half of 2013 to be similar to the first half of 2013.

Intangible amortization for the quarter was $5.5 million, essentially flat with the prior quarter, and $2.5 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 totalling approximately $6.3 million, a year-over-year decrease of $1.5 million, primarily related to refinancing the term loan in May this year, reducing our effective interest rate by 150 basis points and the voluntary term loan pre-payments we have made this year which I will come back to in a moment.

Approximately $1.4 million of our reported interest expense is non-cash and primarily relates to accretion charges associated with the convertible notes. We made a $20 million voluntary term prepayment against the principal in late September which is the second voluntary term loan prepayment we made this year resulting in a total debt reduction of $40 million. As a result, the outstanding balance of the term loan is approximately $256 million at the end of the third quarter. Other expense for the quarter totals $0.6 million and primarily relates to the one-time charge incurred in connection with the voluntary term loan prepayment previously discussed.

We recognized income tax expense of $10.7 million in the third quarter, representing an increase of $9.5 million year-over-year and $1.3 million sequentially. The effective tax rate for the quarter was 39.8%, and we estimate the effective tax rate for the remainder of the year to be approximately 40%. As of September 30, 2013, we have an estimated $50 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 $31 million of these NOLs are available for utilization during the remainder of this year, obviously 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 limitation of our NOLs.

Finally for the quarter, net income was $16.2 million or $0.23 per diluted share on a non-GAAP adjusted basis. After adjusting for acquisition-related charges and expenses related to the early extinguishment of debt, net income was $16.6 million or $0.24 per diluted share. In comparison, the non-GAAP adjusted earnings for the third quarter, 2012, were $20.9 million or $0.30 per diluted share which excluded $2.4 million of nonrecurring charges related to the Walker acquisition. If the tax rate used in computing prior period results were 40% consistent with the current period, non-GAAP earnings per share for the third quarter of 2012 would have been lower by $0.11 per diluted share.

In addition, operating income -- EBITDA was $44.9 million for an all-time high for Wabash National and an increase of $7.2 million compared with the same period last year. Sequentially, operating EBITDA increased by $2.6 million, and operating EBITDA margin exceeded 10% of sales for the second consecutive quarter. On a trailing 12-month basis, revenue was $1.6 billion with operating EBITDA improving to more than $153 million.

With that, let's move to the balance sheet and liquidity. Networking capital decreased slightly during the current quarter to $221 million with production in shipments effectively balanced, while an increase in accounts payable favorably impacted networking capital. Consistent with normal seasonality, we expect shipments to exceed production in the fourth quarter resulting in lower working capital requirements as we finish the year. Capital spending was approximately $5 million for the quarter, and $11.6 million year-to-date. We expect full-year 2013 capital spending to be approximately $20 million.

Our liquidity or cash plus available borrowings as of September 30 was approximately $208 million, an increase of approximately $20 million from the prior quarter after taking into account the $20 million debt payment we made in September. As a result, our pro forma total and net debt leverage were 2.8 times and 2.3 times respectively. In addition, our senior secured leverage ratio under the term loan credit agreement was 1.3 times, significantly below the current covenant requirements.

In summary, the Company delivered against our expectations for the third quarter and established new quarterly records for revenue, gross profit, operating income, and operating EBITDA. All business segments posted solid numbers with consolidated gross margin at 14%, 170 basis points better than last year, and very close to our best ever. It is evident that our overall corporate strategy is delivering the expected results.

Looking forward, we anticipate full-year new trailer shipments between 46,000 to 47,000 units. We have a healthy backlog of $563 million which is $8 million higher than this time last year, and we are well positioned as we enter the fourth quarter with a strong start in October. As Dick previously commented, we also typically experience seasonal headwinds in the fourth quarter due to multiple factors. In general, we experience higher operating costs during the fourth quarter as a result of colder weather and fewer operating days. Production levels will be lower in the fourth quarter for our core trailer business, although shipments are expected to be higher. Additionally, we typically experience seasonal declines in the fourth quarter in Wabash Composites and Retail. As a result, fourth quarter results are typically lower than third quarter results due to the seasonal factors I just described.

With that said, I want to be very clear that our outlook for the fourth quarter, the full year 2013 and 2014, remains unchanged and is consistent with our view for this entire year. We believe very strongly that the core trailer business is still in the first half of potentially the strongest and longest trailer cycle the industry has ever experienced while the other segments of our business are performing at a very high level.

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

Thank you.

We will begin the question-and-answer session.

(Operator Instructions)

We have our first question from Brad Delco with Stephens.

Just going to ask two quick questions. Dick, hidden there in some of your comments, but you said you expect that the commercial trailer products gross margins can hit double digits in the next four to eight quarters. Can you just lay out for us what it would take to get there in four quarters? And then what it would take for you to be there at the tailend of that eight quarters. What kind of pricing environment are you looking at? What kind of demand environment, et cetera?

Yes. Obviously, the demand environment would need to strengthen some, give us a little bit more pricing leverage. The pricing environment right now is stable, and we continue to nibble at the edges, be able to pick up a little bit here and there. But if it strengthens, gets close to what ACT is thinking that the numbers will be, then that gives us a little bit more leverage, and that would help.

Importantly also is the -- is out on the manufacturing floor, the work force is much more stable and gaining -- continuing to gain proficiency, and productivity continues to improve on the factory floor. And, as I commented, the opportunities to further optimize line speeds and be able to increase the absorption on a per-unit basis for overheads will help that cause also.

So it's a combination of strengthening demand environment combined with continuing improvement on the factory floor will help deliver that. So the sooner we see some of that, the sooner we get to the double digit. But certainly I do believe that it is realistically achievable to get there over the next four to eight quarters.

Just to make sure I understand. So if demand is in line with the ACT forecast, you think you can get there next year. Is that right?

Yes. I think that's -- I think certainly there's a possibility. And we'll have to see how it all pans out, how quickly we can get the productivity improvements that we've laid out in our planning. So it's possible, it could fall into the following year. That's why I've kind of framed it in a four to eight-quarter time frame.

That's good color. I appreciate that, Dick. And then second, Dick, probably for you, as well, you mentioned you guys are having some pretty good discussions right now with customers for orders for next year, and that it seems as if those discussions are at least exceeding the same level of discussions you had the prior year.

Can you kind of give us some color as to who these customers are? Has the mix changed at all this year versus last year? Is it smaller fleets, larger fleets? Fleets where you think you could have more pricing power? That dynamic would be helpful.

Yes. Early on in the quoting season, typically the conversations are with the larger fleets, so I'll just frame it that way. As you progress through the year into next year, you'll be talking with more of the mid size and smaller fleets. So at the this juncture, most of those types of conversations where numbers are actually being talked about as far as number of units needed tend to be with the larger fleets.

And in most cases, there is a strong appetite by those customers for more equipment than what they were talking about at this time a year ago. Again, we have to see how it all plays out as those discussions convert into actual orders. But we feel -- we feel very good about where those dialogues are currently.

Great. Thanks for the color there. I'll turn it over to someone else.

Our next question comes from Steve Dyer with Craig-Hallum Capital.

Thanks, good morning guys. You've done -- on the gross margin line, you guys have done a great job over the last quarters and years of really bringing that up pretty meaningfully. Volumes, all else equal, how much juice is left there? Trying to get some sense as to -- the comments implied that we shouldn't necessarily take that higher in future quarters. But how much juice is left on that gross margin line, just assuming shipments are flat?

You know, I've used the terminology we can nibble around the edges when it comes to gross margin, when it comes to the pricing side of improving gross margin. We'll continue to push and drive, as I was -- in my comments to Brad's question, we're still going to continue to push on the factory floor in all our locations, most significant in our Lafayette operations where opportunities to continue to improve line speeds will help bring some gross margin improvement.

So there's still opportunity. We firmly believe that 10%, double-digit gross margin for the commercial trailer products business is well within reach. We just need to execute, and we need a stable, solid, and some improvement in the demand environment to get us all the way there.

But so you could, therefore, say there's a couple points of opportunity over the next four to eight quarters to achieve there. On the diversified products side, I wouldn't look for gross margin improvement as much as I would look for continued opportunities to grow the revenue side with new product introductions and getting into some other markets with Wabash Composites continuing to grow and that opportunity there.

And even on the retail side, it's turning into a, guess you would call it a mini growth engine as they continue to expand mobile service opportunities, continue to expand the ability to provide parts and service across all the locations for tank trailer products, and also these customer site service opportunities. So there's going to be some opportunities there to continue to grow.

Perfect. Thanks for the color. Wondering kind of how you would characterize your visibility into next year. I know it's kind of early in the order cycle. Some of our contacts in the industry have suggested that people are still really reluctant to buy a lot more than they really have to in the very near term. How would you characterize your visibility out into next year, relative to last year or your expectations?

Yes, those are the comments I was making in my formal comments and responding to Brad. What we're hearing at this point, and confirmed at the ATA conference last week, is that there seems to be a stronger appetite or need for more equipment this year than there was at the same time a year ago in the discussions. If someone was asking for 700 trailers last year, they might be asking for 900 this year. In some cases it's even more appreciable difference between year over year.

What they end up actually converting from those discussions to what it actually ends up needs to play itself out. But certainly at this point, the dialogue that's taking place is very favorable to a stronger demand environment next year than it was at this point a year ago. And there's noise both years.

Last year of course the noise was tied around the election. This year the whole noise is, again, tied around Washington. So it remains to be seen what -- when customers actually pull the trigger and place the orders if they still feel good about where they're at. But, discussions as recently as last week with those -- with a number of customers was very positive.

Okay. Great. Then just in general, how would you characterize the competitiveness/pricing in the industry? Is everybody still -- it seems as though it's pretty firm. Can you comment a little bit on that?

Yes. I think that it's stable. There's not anyone out there trying to really push price. I mean, we're the guys that lead that charge, and we've been very, very consistent with our approach. There's always those oddball deals out there that you scratch your head and you go, what were they thinking?

Our guess is that some folks from time to time are looking to fill some build slots, and they go after a deal here and there. But certainly the tide has risen significantly. Everyone is charging significantly more than they did a year and a half ago. So it's solid, reasonably stable, but not seeing the kind of increases that we would have seen from a year and a half ago from the prior year. You're seeing much more nibbling, as I like to call it, nibbling around the edges.

Okay. Great. I'll hop back in the queue. Thank you.

Our next question comes from Jeff Kauffman with Buckingham Research.

Thank you very much. Hey guys, congratulations.

Thanks, Jeff.

Thank you. I just wanted to dig down a little deeper into some of the comments on the customer bad debt and try and get some parameters around number of trailers that you think probably should have shipped in September that ended up shipping in October, so that we can make model adjustments.

Okay. Yes, Jeff. I mean, as I commented in my prepared remarks there the bad debt was specific to an individual customer. It's something that was identified during the quarter, and we certainly don't expect that to repeat itself.

Okay. Can you give us an idea of the materiality? Like half a million, quarter million, three quarters of a million?

It's between half a million and three quarters of a million.

Okay. And, Dick, on the trailers that shipped in October, it was interesting because we saw it in the working capital and the receivables and inventory. Are we talking a couple hundred trailers or are we talking something closer to 500, 600, 700 trailers?

You know, it's always hard to pinpoint which ones

Understood.

All from one month to the next month. It's really when customers are able to come and pick that equipment up. But certainly several hundred units that we would have expected and anticipated in September rolled over into October. In my comments, and I misstated when I said already exceeded 5,000. What I meant to say, we're already close to 5,000 units shipped for the month with certainty to well exceed 5,000 in October. But certainly there were several hundred of them that rolled over into this.

Okay. So relative to your original guidance range, your feeling was that's the difference between being at the low end of the guidance range versus maybe the mid point of the guide range?

Absolutely.

Okay. One other question and I'll turn it over. You guys are executing really well. The margins are up nicely. You're paying down debt. Where are we in terms of consideration of allocating some of that free cash toward shareholder return to capital, whether it's dividend or share buyback? Is that something the Board would look to consider toward year end for 2014?

Yes. Thank you, Jeff. You know, first let me say that we're very proud of the fact that we made two $20 million debt payments this year, effectively taking $40 million of debt out up to this point. We continue to work on lowering our overall total debt leverage ratio. Currently we're sitting at 2.8.

We're comfortable with where we are as we move through the cycle. As we get more toward the latter part of the middle innings, then we want to be closer to two times in our total debt leverage ratio. So we're going to continue to work on that in the near term.

Longer term, we always have discussions with the Board, between the Board and Management in regards to all of the options of returning capital to the shareholders. And all the options are on the table in those discussions with the Board. But right now our priority and our focus is on the debt reduction. We'll continue to work on that.

All right. Well, I'll go ahead and stop there. Thank you, guys, and congratulations.

Thanks, Jeff.

Thank you.

And our next question comes from John Mims with FBR Capital Markets.

Dick, let me start with you. When you -- the conversations you've -- you were having or have been having recently with customers and the conversations at the ATA meeting and shipment you've had so far, are you seeing any shift to organic fleet growth, or is this all primarily replacement?

Well, you're always going to have some guys that are doing some growth as they pick up new customers. The better run fleets that are picking up those opportunities on dedicated contracts and all. So there's always a little bit of mix of that. But the vast majority is replacement. We've got, you know, we've got a fleet age that is at or near record highs, far above anything historically.

You've got a regulatory environment with CSA that is increasingly challenging for these guys to keep that old equipment out there with the amount of service that they have to put in equipment to keep it road-worthy, and a challenging environment and finding drivers and being able to retain drivers. Much easier to do when you've got new equipment for them to haul, puts them at less risk for CSA violations. So all those factors certainly point to the need for the fleets to continue to step up and put as much of the resources available that they have to invest in replacing the equipment and getting their fleets younger.

Sure. Sure. That's helpful. And on the -- the Beall plan for fourth quarter, last year you saw 30 basis points of EBIT degradation sequentially from third to fourth quarter in the commercial trailer products. As you said, normal seasonality.

That was also helped by a big surge in pricing. So how should we think about that sequential change this year, because, my sense based on the last couple of quarters, while you were very aggressive with pricing last year that growth has decelerated. So how should that offset from an EBIT margin basis? And also adding to that, where are you in terms of build slots for the fourth quarter?

Well, we're solid as far as backlog through the balance of the year. So that's not a factor. Certainly we'll build less than we're going to ship. This will -- this will be a much stronger ship quarter.

The lower build, less operating days that we talked about, more holidays, we take time out during the Christmas time frame to do a lot of equipment and systems maintenance. So that factor alone will decrease the absorption and decrease the build levels as a result. So you're going to get some -- you'll get some impact as a result of that.

Yes. John, I think in terms of the pricing environment we're in currently, it's stable, as Dick commented previously. We did see a slight increase on a sequential basis this quarter. That's primarily driven by mix, and we talked about that in our comments in regards to the mix we have in the commercial trailer products. I would expect that mix to continue into the fourth quarter to be similar.

Okay.

And the other -- I think the other comments we made would imply we expect normal seasonality, to see some pressure on gross margin and that would flow to EBIT.

Sure, sure. One last question, and I'll turn it back. When you talk about pricing and the comment, Dick, you made about the larger fleets moving in early and that certainly makes sense, do you think -- when I think about the Wabash product, a lot of what you're offering is quality and also that customization and optionality.

As you start to move down that customer food chain, right, you go to the smaller and smaller shippers or truckers that may have less capital flexibility than some of the larger guys, do you -- can you still hold the same market share and pricing power that you've had in the beginning, or do you start to -- does optionality start to lose out over pricing when capital dollars are limited?

The -- we have a very strong dealer body, and also our Wabash National Trailer Centers. When I say dealer body, I include the retail branches that we own in that mix. They do a great job getting out in front of customers. And so the smaller fleets go through those centers, through our independent dealer network and our retail branches. And they do a very good job of selling the value of the Wabash national product.

It really comes down to the ability for smaller guys to gain access to financing they need for equipment. So I don't have a really good response for you as far as the optionality. Whether or not somebody de-options some of their trailers just to meet basic needs, we don't -- I have not seen that.

We have so many customers, but most customers in -- I think are going the other way. We're seeing a lot more folks opting for galvanized rear frames, for example, so that they can address the corrosion issues that they face and get longer life going forward out of equipment without having to take it out of service, to be blasted and re-coated or replaced if that's the case.

So I think we're seeing so much more installation of skirts because they get benefits from the aerodynamic benefit of having those side skirts on. I'm not seeing -- and I'm not aware that we're hearing customers taking options out of trailers because of cost.

Sure. Are you seeing people just adding skirts and fixing trailers, older trailers just to get by in this market, or -- are people -- is the price point close enough that it makes more sense to just go ahead and buy new?

I think you get a mix of all of that. You've got some folks who may not be as financially sound as some others who may opt to carry equipment longer than they would like to. And then you've got other guys who are going out there and really trying to have very young fleets to attract the best of drivers that are available out in the marketplace.

In all cases, customers recognize the challenges that they face because of CSA, and the challenge of road-worthy ness, if you will, of the equipment and not wanting to have low CSA ratings. So there's pressure on that standpoint, but you're going to have a mix of folks based on what their individual financial situation is and in what their philosophy on equipment. Some like to have young fleets, and some like to get as much out of the equipment as they can. So it varies from 5-year trade, sell and refresh, to as much as 13 or 14 years.

Right. But you feel like there's still enough well-healed customers that have yet to come to market that are still out there to push you forward?

There are a number of folks that over these past couple of years have little by little trickled back into the market -- getting back in the game that had not purchased trailers. We had a number of them this year that had not purchased trailers for several years. And next year there's others that have not been purchasing trailers that are talking about finally getting back in the game.

But, again, we have to how that all plays out. Going back to my earlier comments, certainly based on numerous customers who we have been having dialogue with over the past month or so continue to talk about needing equipment in volume numbers exceeding what they would have been looking at a year ago this time.

Sure. Okay. Thank you so much for the time.

We have our next question from Thom Albrecht with BB&T capital markets.

Two questions here. First of all, Dick, on the potential for double digit gross margins, I didn't really take that necessarily as an annual target, but just some sort of eventual possibility on some of the quarters. Is that the way you meant it?

Yes. That is a fair way to look at that. Because as we know, we've got the seasonality challenge that we always face in the first quarter and the fourth quarter each year because of build rates. So you tend to have a little bit more difficulty in those quarters in holding it, because you're -- you don't have the builds to absorb the overhead, so it does put some downward pressure. The second and third quarters, typically, are the strongest quarters from builds and strengthening shipments.

The other thing, I was a little bit confused, Jeff, by your comments about the fourth quarter. Obviously, you highlighted some legitimate things that are seasonal, higher utility costs, oftentimes a little bit of gross margin degradation from Q3 to Q4, but -- and I can't remember exactly what you said, but it sort of implied like lower results.

But when I look at last year's fourth quarter, Walker -- excuse me, DPG had a very big quarter. The revenues for everything there were over $140 million. You're also going to deliver more trailers this quarter than you have all year. So are you trying to say that results will be down at the bottom line even with a bigger top line?

Yes, Thom, a couple of comments there. First of all in regards to the Walker, or the Diversified Products revenue last year, I think we commented last quarter that we were doing some revenue recognition adjustments in that business last year which certainly bolstered the total -- the top line revenue. Had a relatively minimal impact on profit and op income, but certainly impacted the top line there.

Then, you know, in regards to the fourth quarter, I think if you break it down and think about it in a couple of components, first of all, I think we laid out that we expect to see higher operating costs in the quarter due to lower production levels, colder weather. We have higher utility and operating costs. That will certainly put some pressure on margins in the quarter.

I think the other thing I would say is, you can expect probably the margin to be impacted by the overall mix. Trailer shipments will be up in the quarter. And as you know, commercial trailer products is the lowest margin segment of the Company. So just by virtue of it being the largest portion of the total Company, you can expect it to impact on the overall margin, as well.

Okay. So I'm a little slow here. But you basically did $0.24 in the quarter on a continuing op. So you would expect earnings to be down slightly from that? Because consensus is $0.26, I think?

Right. And Thom, we don't provide guidance on quarterly EPS estimates. But again, I think our comments in general would suggest that we expect pressure there.

Okay. And then just one last question here. Let the me see -- margins, quote, production. Oh, within the retail segment, even though it had good gross margin performance, its operating income fell by almost 50%. What was behind that?

The op income in the retail segment was impacted by two things. First of all, they had fewer new trailer shipments in the segment during the quarter. That's really, I think, normal variation as with all of our segments that sell trailers. They can be lumpy from time to time. If I remember correctly, it was down from $900 million last year to $800 million this year.

So that's part of it. The other part of it is we have higher SG&A overhead costs there, as we're investing to be able to support growth in that segment going forward. The SG&A has increased somewhat this year over last year.

Yes. One of the growth initiatives and -- we commented on it is the increase opportunities to do customer site service activities. So we have ramped up some infrastructure to be able to support that, to manage that process. And that's going to pay back big dividends as we move forward over the next couple of years. But there is a cost to it at this point.

Okay. All right. Thank you very much, guys.

And our next question comes from Joel Tiss with BMO Capital Market.

You guys are awfully patient. There's a lot of questions. Can you talk a little about receivables and inventories? They seem a little bit -- they're up quite a bit year-over-year. Can you just talk about where we might end the year? And I'm just -- it's more of a free cash flow kind of question.

Certainly, Joel. You know, receivable are up certainly this quarter sequentially, and year-over-year, driven primarily on higher revenues. So that's a reflection of the strong performance we're seeing in the business. We expect certainly on the trailer side to -- that continue into the fourth quarter.

Having said that in the other segments we should see a little bit of a gain there in the fourth quarter. For inventories, yes, I think we ended the quarter with about 5,000 trailers or close to 5,000 trailers, finished goods trailers in inventory. That's basically flat the with where we were in Q3.

We anticipated it would be somewhat lower than that, but certainly as we move through Q4 we're going to ship more trailers than we produce. We would expect the finished good inventory to come down. I think if you look at last year's number, we would expect to finish closer to that in terms of number of trailers that are on our lot, somewhere between 1,500 to 2,000 fewer than we currently have.

Okay. And then can you translate that into -- free a cash flow estimate for 2013? Can you just update us on what you're thinking there.

Joe, I don't have a free cash flow estimate for the full year in front of me. That will be something I have to check my numbers and get back to you on.

Okay. No problem. last, can you give us a little bit of an update of where you are on the Walker and Beall integration process? Is there more juice to squeeze out of that in 2014 and 2015?

Yes. The integration's going really well. You know, Beall has -- is still in their ramp-up mode, as they continue to add staff and continue to increase their build rates and go out now and quote and bring in orders to support them going forward. We're very pleased with it.

But certainly there's a lot more steam to be gained from the Beall side. Not only out in Portland to support West Coast consumption needs but also taking the product designs that we acquired with Beall and bring that to the midwest and leveraging that so we'll get some top line and profit contribution from being able to market and sell those Beall products in the Midwest and in the East. So yes, we're not done with that.

As far as Walker, we've still got opportunities just like in any diverse business to continue to make productivity improvements within the businesses and continue to increase the product offerings there. So we're not done with it. My comments earlier about gross margin and not getting overly enthusiastic about seeing gross margins in that business continue to increase quarter-over-quarter-over-quarter. They're sitting in that 22% to 24% from quarter to quarter; that's probably good range-bound area. I don't think you're going to see a lot the there. You will see top line, bottom line improvement going forward.

On the Wabash Composite side, they'll continue to have growth opportunities there. So we feel very good about it, but we're not done with integration opportunities, to answer your question.

Great. Thank you very much.

And our next question comes from Rob Wertheimer with Vertical Research Partners.

A quick follow-up. Dick, you mentioned I think the hours of service and the impact. Have you had specific -- I'm curious what your specific conversations with fleets are on whether you've heard anybody changing the tractor to trailer ratio, how that's playing off at a micro level rather than a macro.

Yes. We have not had someone make that specific statement. We have had them make reference to more of a generic statement saying you will see more drop and hook activity as a result of this without anyone quantifying new targets for ratios. But we have heard that comment on more than one occasion, that this -- that will be a likely outcome, that you will see more drop and hook.

So we feel good about that. Longer term, we're have to how it all plays out. I had one fleet actually tell me -- this is a smaller fleet -- tell me that they were seeing a 20% productivity impact as a result of hours of service. Now, you know, my guess is that they have just certain limited routes that they're able to run. They're not able to optimize those as much as the larger fleets can.

We've heard comments, 2% to 3% impact, ranges, 5% to 13%. We had one outlier that actually said 20% impact at one point. So, it's going to continue to shake itself out over the next several quarters as fleets figure out ways to optimize their routing software, and address it through physical means, through adding equipment, drop and hook, what have you.

That's really helpful. Thank you. Then one quick question. The government disruption and such, did that have -- you mentioned it earlier. Did that have a differential impact on big fleet versus smaller fleet, and do you think it had a material impact at all on the order curve? Thanks.

You know, I can't respond on if there of a difference in impact between large and small for that short period of time. The large guys just by nature are more sophisticated in process, and they've got the staff, they've got experience, and they try and take advantage as much as they can. I really don't have any specific data relative to that. What was the second part of your question, Rob?

That's fine. Thank you very much, and I'm all set.

And we have time for one more question. Our final question comes from Kristine Kubacki with Avondale Partners.

Good morning. Hopefully I'm the last but not least. Just one quick question. Most of my questions have been answered. But on the -- in terms of the third quarter, was there any reason why the fleets were a little bit late on picking up their trailers? And I mean, was it due to hours of service; was it due to the seasonal uptick in freight?

Absent any incentive and the real question I'm asking, is there any reason why there could be a risk despite what you've already seen in October? Is there a risk that we could see some of those orders -- or some of those pickups fall into January especially given that we're going to be looking at a compressed holiday season for the fleets this year?

I don't know that -- answering your first part of your question. I don't know of any specific reason that equipment may have slipped. It's -- you know, you have conversation with customers. They tell you when they plan to pick up, and they, in some cases, they get there and they pick up a whole bunch, and then the next day they're not able to because maybe they had loads that they picked up.

My guess is that -- typically is that if you've got -- and I say this all the time, talk about this -- if you've got al live load versus sending somebody to dead head and pick up an empty trailer, which one are you going to take? You're going to take the live load and generate revenue and profit for yourself. Most customers started really ramping up pickups as we were getting toward the latter part of the quarter. That may have been part of it that they waited a little bit too long and got their systems, got their scheduling in line. And it was just later than what would have been expected, and that's why you see such a large number of them rolling into October and just continuing in October.

Now it's crunch time. They've got to get the equipment in place to meet that holiday rush. That still does happen, maybe not to the extremes it would happen years ago, but they still need that equipment. And we -- we're just -- we're pleased that they're finally responding.

Will there be risk to them getting them picked up by the end of the year? There's always risk until it happens, and you can book it. With the bonus depreciation, with the fact that it's a model year changeover, I think you're going to see a majority of pickups occur. I think the fleets want to get that equipment. They want to get it registered and in place so that they can take advantage. They are profitable, so they can take advantage of the bonus depreciation.

Okay. That's helpful. Thank you very much. Appreciate it.

And that concludes the question-and-answer session. I will now turn the call back over to Dick Giromini for closing remarks.

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

Thank you for the 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.

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