Wabash National Corp (WNC) 2014 Q2 法說會逐字稿

Welcome to the second-quarter earnings call.

My name is Vivian, 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 Mr. Dick Giromini, President and CEO. Mr. Giromini, you may begin.

Thank you, Vivian.

Good morning. Welcome to the Wabash National Corporation 2014 second-quarter earnings call. This is Dick Giromini, President and Chief Executive Officer. Joining me today is Jeff Taylor, Senior Vice President and Chief Financial Officer.

Following this introduction, I will provide highlights for the second quarter, followed by a look at the current operating environment and our outlook for the remainder of the year, after which Jeff will provide an overview 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, 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 is being recorded.

I'll begin by saying that we're pleased with the Company's overall performance this quarter, and the ongoing financial and operating improvements we're experiencing in most areas of the business, particularly the Commercial Trailer Product segment. Our solid second-quarter results are further evidence of our ability to consistently deliver on our commitment to continually improve our overall performance and to grow the business through a broad array of products, end markets and geographies.

But we look forward to even better days ahead, as the actions that we have put in place to address some previously reported temporary headwinds related to lumber pricing are now taking hold and will benefit us as we proceed through the balance of the year. Additionally, continued strong demand is providing a favorable environment in support of stronger pricing for our truckload product offerings as we enter the 2015 quoting season.

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.

In the second quarter, we achieved all-time record revenue and operating income for the Company, as we benefited from historically strong shipments and exceptional performance in our Commercial Trailer Products group. Trailer shipments across the business for the quarter were approximately 14,950 units, exceeding our previous guidance of 13,500 to 14,500 units, as customer pickups accelerated and gained considerable momentum throughout the quarter. Second-quarter build levels totaled approximate 14,550 units, up some 1,650 units over the prior quarter and consistent with our earlier projections.

Net sales for the quarter were an all-time record $486 million, representing a $73 million, or 18 %, increase compared to second quarter 2013. In addition, adjusted earnings for the quarter increased more than $2.2 million, or 15% year over year, to $16.9 million. Operating EBITDA, which we believe is an important metric to highlight the Company's progress, increased by 8%, or $3.4 million, to a best-ever $45.7 million in the second quarter.

Operating income for the second quarter was $33.9 million, representing a $3.4 million, or 11%, increase year over year; while gross margin in the quarter did show a deterioration of 150 basis points in year-over-year comparisons to 12.7%. The improvement in operating income was driven by the significant improvement in Commercial Trailer Products and partially offset by the decline in Diversified Products, while the year-over-year change in gross margin was largely attributable to the segment mix shift between Commercial Trailer Products and Diversified Products, with CTP representing 64% of total company revenue in the current quarter, as compared to 59% in the prior-year quarter. I'll provide more color around segment performance in a moment.

Overall, we had a solid second quarter with strong trailer shipments, builds and revenue which translated into strong profitability and operating EBITDA. We achieved new quarterly records for operating performance, as evidenced by our revenue, operating income and operating EBITDA results during the second quarter.

Quote and order activity remained strong throughout the quarter. And in contrast to typical seasonal expectations for the second quarter, our backlog increased during the quarter to $842 million, the highest level since 2000, consistent with the strong industry wide trailer net order levels being reported by Act Research. With six months of reporting now in, industry wide trailer net orders total 156,000 units versus 107,000 units through the same period last year.

This certainly supports our long-standing belief that this could turn out to be a protracted cycle of strong demand for our industry, driven by excessively aged fleets, a demanding regulatory environment, and an improved pricing environment for our customers, leading to improved profitability and investment in new equipment.

Looking forward, we see a continuance of a strong and solid demand environment supporting pricing stability and opportunity for continued growth in the core trailer business. And as you'll hear in a moment, the sentiment is supported by strengthening forecasts from both ACT and FTR.

With that, let's shift focus to some highlights from each of our reporting segments, and Jeff will follow with additional details regarding financial performance. We'll start with the Commercial Trailer Products segment, consisting of our dry and refrigerated van products, platform trailers, and fleet trade used trailer sales. This segment continues to perform well in executing its optimization strategy, setting records across a number of financial and performance metrics in the quarter.

Net sales for this segment increased $70 million, or 26 %, on shipments of 13,900 trailers, or 3,200 more trailers than the prior-year period. This increase in revenue was primarily due to a nearly 30% increase in trailer shipments during the quarter, partially offset by a product and sales channel mix shift impacting ASPs by over $600, including a higher incidence of customer supply tires impacting the van trailer ASPs by $400 during the quarter versus the year ago period, both causing nice gains made in pricing and spec mix of $500 per unit, to lose visibility in the numbers. Net sales of $336 million for the quarter is the highest ever reported for this segment, as now constituted.

On the margin side of the equation, the business is performing well and gaining momentum, as the group generated gross margins of 8.6%, a 70 basis point improvement over the same period last year, representing the highest gross margin ever reported for this segment, as now constituted. And based on the current backlog and build schedule, we would expect the gross margin to improve further in the third quarter, consistent with normal seasonality and continued performance improvement.

As we have discussed in the past several quarters, the CTP team remains focused on the goal of achieving a double-digit gross margin quarter by the end of next year, with a longer-term goal of sustaining that level on an ongoing basis. As reflected in our results, we continue to make consistent progress toward achieving these goals, driven by our stated initiatives of margin growth through selective order intake, pricing, manufacturing productivity optimization, and supply chain cost initiatives.

We expect trailer demand to remain strong throughout 2014, with both industry forecasters expecting total demand significantly above both replacement levels and last year's demand. In fact, the trailer outlook both internally and externally remains strong, with our increase to the full-year trailer guidance, in addition to ACT and FTR, respectively, raising their trailer shipment and trailer production forecast for 2014. Obviously, we're very pleased with the current performance in this segment and look forward to continued progress.

Moving on to the Diversified Products segment, which includes the Walker Group, Wabash Composites and Wabash Wood Products, the story is a little different. Following eight quarters of exceptional performance, the DPG segment took a temporary step back, as it faced the combined impact of the continued headwinds related to lumber pricing, along with unanticipated start-up cost challenges for a new product introduction within the Wabash Composites business.

Although challenged, this segment still generated net sales of $135 million, consistent with the prior year period, while gross margin for the segment declined by 480 basis points compared to the prior-year period, to 18.6%, driven notably by the higher wood material costs of $3.5 million, along with new product start-up costs within Wabash Composites of approximately $1 million related to the introduction and ramp-up of a new truck box. Absent just these two temporary cost issues, gross margin for DPG in the second quarter would imply a more normalized 22%, and 13.6% on a consolidated basis for the Company.

On the revenue side, some less favorable tank trailer mix and shipment delays related to non-trailer truck-mounted equipment and other engineered products impacted top line growth year over year. That too should correct itself as we proceed through the balance of the year.

Similar to the actions we put in place in 2012 to address significant tire cost inflation faced at that time, we currently have an active lumber cost recovery initiative underway, along with lumber cost increase protection language now incorporated in all of our new quotes. While these actions were put in place midway during this past quarter, the effect of these actions will begin to be realized during the current third quarter and are expected to put this particular headwind issue fully behind us well before year end.

Our Wabash Composites business delivered somewhat mixed performance, as strong AeroSkirt truck buying demand led to best ever quarterly revenue, countered by a less favorable product mix as compared to last year in the aforementioned truck box start-up cost, all combined negatively impacting operating results by nearly $900,000 year over year.

On the new product growth front, as referenced, the Wabash Composites team began manufacturing a new DuraPlate based mobile truck box for a large LTL carrier, providing improved efficiency for loading and unloading of goods. With the launch cost challenges now behind us, we see excellent growth potential for this product as a means to significantly enhance efficiency, productivity and velocity for LTL carriers.

In addition to finding new applications in mobile transportation and storage, the team continues its work in developing new aerodynamic solutions to support increasing demand for improved fuel efficiency. As after market demand for DuraPlate AeroSkirt sales continues to grow, and with five new products planned for launch during the balance of the year, we look forward to continued top and bottom line growth for this business for the foreseeable future.

Finally, our Retail segment experienced a strong quarter, with year-over-year improvement in revenue and profitability. Net sales of approximately $52 million represent a $4 million increase year over year, primarily due to higher new and used trailer sales, assisted by higher parts and service revenue. Gross margin dollars rose in the quarter to a strong $5.7 million, while gross margin percent was slightly lower at 11.1%, as the increase in sales was offset by higher costs to support our strategic growth initiatives for this business.

As we announced in May, regarding the addition of TEC Equipment Incorporated as a new independent dealer to support the West Coast region, our Retail segment transitioned operation of three Wabash National Trailer Centers to TEC in an effort to aid our core CTP business in further expanding sales and service support in the region, given TEC's extensive footprint and industry connections.

Although this had minimal impact on our overall business during the quarter, we expect this relationship will pay dividends through higher sales of new trailers for our CTP business and the pull through of after market parts in the region. Obviously, this move will result in lower revenues for the Retail segment going forward, but with an even greater positive impact to CTP revenue and profits longer term, as unit sales from this expanded coverage region are expected to more than double.

That said, we remain focused on executing our retail strategy to profitably grow this segment by increasing our presence in the tank repair and service business through expansion of the number of legacy WNTC locations with the capability to perform this service, expanding our mobile fleet, and increasing the number of customer site service locations that we operate. In that regard, we're pleased to announce that we've entered into agreements to operate five additional customer site service locations, bringing the total now to eight locations at which we provide this service. Down the road, more to come.

Before I discuss Wabash National's specific expectations for the third quarter and full year of 2014, let me comment on a few key economic indicators and industry dynamics we monitor closely that provide broader context for our expectations.

Following the slowdown of economic activity in the first quarter of the year due to severe weather, macroeconomic indicators improved in the second quarter. Manufacturing activity, industrial production, retail sales and the labor market have all seen solid growth in recent months. Yet more improvement opportunity exists in the housing sector of the economy, where the recovery pace stalled at the end of last year.

Most analysts now anticipate a return to expansion for the US economy during this next six months, with both residential and nonresidential construction activity anticipated to contribute to growth. And as released just this morning, GDP growth of 4% was reported for the second quarter.

Consistent with the just reported GDP strength, key indicators and forecasts within the trucking industry reflect growing confidence in demand strength and longevity. ATA's truck tonnage index declined 0.8% in June, to a 128.6, following a 0.9% increase in May. The index was 2.3% higher in June than in the same month last year, and has increased 2.8% year to date versus the same period last year.

Catching up to and now even exceeding our own early year internal projections of 5% to 7% year-over-year demand growth, the latest report from ACT Research now forecasts 2014 trailer shipments at just over 262,000 units, up 9.5% year over year, and just under 265,000 trailers in 2015, up another 0.9% sequentially, with the continued belief by ACT that potential legislation to permit 33-foot doubles is gaining support and would be included in a new transportation bill anticipated to be signed into law in mid-2015, which would drive even stronger demand in the 2016 through 2019 timeframe.

FTR has also adjusted its projections upward, now forecasting 259,000 trailers to be produced for 2014, an increase of 10.2% year over year, and projecting 244,000 units to be produced in 2015. According to FTR, the class VIII active truck utilization rate was at 99% during the first half of the year, equaling the historic high from 2004, with expectations that active truck utilization will average 99% in 2014 and 98% in 2015, resulting in a very tight market supporting strong rate increases for carriers.

From a regulatory standpoint, Senator Susan Collins recently introduced a provision to the transportation appropriations bill to deny funding to the hours of service restart rules. The amendment would suspend the two-night rest requirement and the once-a-week limitation on the restart until September 30, 2015, or when the FMCSA completes new hours of service impact study called for in the amendment.

In the meantime, carriers continue to report productivity losses as a result of the hours of service rule. As we've stated in previous calls, these productivity losses, combined with compliance challenges related to CSA, ELDs and CAR may lead to increased demand for additional drivers and equipment to fill the gap. That said, a continuing growing driver shortage will require changes in driver compensation, as recently alluded to by numerous trucking fleets.

So the combination of a slowly strengthening economy, solid truck tonnage, an improving rate environment, and increasing regulatory impact on fleet productivity all support the potential for increased trailer demand overall by our industry.

With that, let me share Wabash National's expectations for full year 2014 and the third quarter. We believe overall demand for trailers will remain solid and significantly above replacement levels in 2014 and beyond, consistent with ACT and FTR projections, as key drivers all remain positive. Fleet age, customer profitability, used trailer values, regulatory compliance, and access to finance all support a continued strong longer term demand environment.

Historically, second quarter performance is typically a good indicator for the remainder of the year in our core trailer business. Total shipments of nearly 15,000 units exceeded our previous guidance. And based on the strength of build levels during the quarter, along with backlog growth, we are clearly well-positioned as we progress through the second half of the year. As a result, we now expect third quarter consolidated shipments to be between 15,000 and 16,000 units.

As stated, quote and order activity remained strong during the second quarter, consistent with our growing backlog. Additionally, with the recent stronger demand projections from both ACT and FTR for the current year, along with our backlog fill for the year, we're extremely comfortable with our internal projections that full-year industry shipments will exceed those experienced in 2013. While still remaining committed to favor margin growth over volume, we're confident in now raising our expectations for full-year shipments to be between 53,000 units and 55,000 units.

In summary, we're obviously pleased to have delivered a solid quarter, overcoming some temporary headwinds within our Diversified Products business segment and continue our momentum from our record-setting year in 2013. Some new records were accomplished, but as always, much opportunity remains.

We're making progress, but still need to make further progress in leveling out the current seasonality in numerous parts of our business that cause concern for external stakeholders and operational inefficiencies for those within. Those efforts continue.

We need to continue the progress we've made thus far to further improve gross margins in our Commercial Trailer Products business and find more attractive, higher margin growth opportunities to drive its top line. Those efforts continue and are beginning to bear fruit.

We need to accelerate the top line growth rate of our Diversified Products business to leverage the attractive margins inherent within its offerings. Again, well underway with new product offerings, new markets. Now we need to improve our launch execution of those new offerings.

And we need to leverage the higher margin tank parts and remote service opportunities for growth of our Retail segment. Same here, underway, as exhibited by the expansion of customer site service locations.

So while much has been done, plenty of work remains. We're now much more diversified as a business and far different from the Wabash of old, leaving historical comparisons with little meaning. We'll continue to look at opportunities to strategically but selectively grow and diversify our business, in addition to the organic growth initiatives already underway, while continuing to be responsible stewards of the business to assure that the proper balance between risk and reward is considered in all decisions. And we'll continue to manage for the long-term to build value and sustainability.

In closing, we're extremely well-positioned at this point to deliver another year of top and bottom line growth, with a solid backlog, a demand environment that has continued to gain momentum, and a number of new products nearing launch stage.

With that, I'll turn the call over to Jeff Taylor, 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, so I plan to hit the highlights. With that, let's get started.

As Dick mentioned, consolidated revenue for the quarter was $486 million, an increase of $73 million, or 18%, compared to the second quarter of last year and the best ever quarterly revenue for the Company. Total new trailer shipments were 14,950 units, 450 units above the top end of our guidance range for the quarter and 3,550 units higher year over year. Sequentially, consolidated revenue increased $128 million, or approximately 36%, primarily due to an increase in new trailer shipments of 5,000 units, driven by our core trailer business.

Commercial Trailer Products net sales were $336 million, which represents a $70 million, or 26% increase on a year-over-year basis, due to higher new trailer shipments of approximately 3,200 units.

Year over year, average new trailer selling prices decreased approximately $600 per unit, to $23,200, primarily due to two factors. First, we are experiencing a higher incidence of customer supplied components, in particular, tires this year, especially with the larger fleets, which accounts for approximately two-thirds of the change. Second, the customer mix continues to be skewed toward the large fleet customers with lower spec and lower priced trailers, as we discussed in prior quarters.

Sequentially, revenue increased $108 million, or 48%, on new trailer shipments of 13,900 units, up 50%. Average selling price was flat sequentially, as the customer mix remained stable, with around 60% direct channel and 40% indirect channel.

Diversified Products net sales were flat year over year, at $135 million. Walker Group revenue was lower, primarily due to the timing of shipments of non-trailer truck-mounted equipment and customer acceptance for other engineered products. New trailer shipments increased by approximately 100 units compared to the prior year, reflecting continued strong demand for liquid tanker trailers.

Wabash Composites revenue was up slightly year over year, as a result of continued strong truck body demand and demand for DuraPlate AeroSkirts, with the Conway AeroSkirt retrofit program being a strong contributor in the quarter. Wabash Wood Products revenue was up 42% over the prior-year period, as a result of increased wood requirements reflecting the higher demand for new trailers in Commercial Trailer Products.

On a sequential basis, Diversified Products net sales increased $15 million, or 13%, primarily due to the increased second-quarter demand for composite products and wood products, consistent with expected seasonal patterns.

Revenue from the Retail segment increased more than $3 million, or 7%, compared to the same period last year on higher sales of new trailers by approximately 100 units, as well as higher used trailer sales and continued strong demand for parts and service. While the TEC agreement had minimal impact on the Retail results in the current quarter, it will impact future results, with the three retail locations being transitioned to TEC, our independent dealer on the West Coast.

These three locations sold approximately 600 new trailers in 2013, and we expect to double this amount in the current year with TEC. However, the new trailer sales will be credited to Commercial Trailer Products going forward. Additionally, these three branch locations accounted for approximately $13 million of parts and service revenue in 2013.

Sequentially, net sales from Retail increased approximately $6 million, or 13%, driven primarily by higher new and used trailer shipments in the current quarter, consistent with normal seasonality. Looking at our various product lines, new trailer sales of $385 million on 14,950 units increased $78 million, or 25% year over year, including approximately 850 liquid tank trailers in our Diversified Products segment. This year-over-year increase is due to strong demand for new trailers across all business segments.

Used trailer revenue was approximately $15 million on 1,750 units, an increase of approximately $4 million from the prior-year quarter, as a result of increased fleet trades within Commercial Trailer Products. As you know, fleet trades tend to be seasonal and are generally front-end loaded in the first half of the year.

Component parts and service revenue was approximately $52 million in the quarter, essentially flat from a year ago, with strong demand for composite products as well as parts and service through our retail locations offset by a decline in Commercial Trailer Products non-trailer transportation equipment sales.

Finally, Equipment and Other revenue on a year-over-year basis decreased by $8 million, to $35 million for the quarter. This decrease was primarily driven by lower sales from the non-trailer truck-mounted equipment within Diversified Products.

In terms of operating results, consolidated gross profit for the quarter was $61.6 million, or 12.7% of sales, compared to $58.9 million in the same period last year. This represents a $2.7 million, or 5%, improvement year over year. Commercial Trailer Products was the largest contributor to the gross profit increase, with Retail also making a positive contribution. Diversified Products gross profit decreased primarily due to the temporary one-time headwinds faced during the quarter, which Dick mentioned and I will address momentarily.

With that, let's look at the segments in more detail. Commercial Trailer Products gross margin improved 70 basis points over last year, resulting in a 36% increase in gross profit, or $7.7 million. Sequentially, gross profit increased $13.9 million, or 93%, on seasonally higher trailer volume, while gross margin improved 200 basis points.

Production during the quarter was 13,700 units, up by approximately 1,650 units sequentially, as production ramped up from the first quarter, consistent with seasonal expectations and reflecting the strong industry demand. On a year-over-year basis, production was up 2,700 units due to strong demand.

Diversified Products gross profit decreased $6.6 million, and gross margin declined 480 basis points compared to the prior-year period, due to multiple headwinds experienced in the quarter. Wabash Wood Products declined $3.5 million year over year, and the largest factor was the higher lumber cost, as the base price of lumber increased 45% since the second quarter of last year.

The good news is that lumber prices have been stable for the past 10 weeks, albeit at historically elevated levels; and as Dick mentioned earlier, we have implemented cost recovery and new order cost protection actions. Additionally, as Dick mentioned, after adjusting for the wood price impact and the composite new product start-up costs, Diversified Products gross margin would be 22%.

The Wabash Composites business group gross profit decreased year over year, due to start-up costs of approximately $1 million for a new mobile freight container. Walker Group profit declined in the period, due to lower net sales for non-trailer products and changes in customer and product mix resulting in lower average selling prices for liquid tank trailers.

Lastly, the Retail segment's gross profit in the quarter increased $0.2 million, or 4% year over year, due to increased new and used trailer sales, as well as continued strength in parts and service. On a total company basis, adjusting for the wood impact and composite new product start-up cost, consolidated gross margin would have been 13.6%.

The Company generated operating income of $33.9 million in the quarter, an increase of $3.4 million, or 11% year over year, with solid contributions from all three operating segments. At 7% of sales, operating margin was approximately 40 basis points lower than the prior-year quarter.

Sequentially, operating income was higher by $14.4 million, primarily driven by higher shipments of new trailers in the Commercial Trailer Products segment, due to normal seasonality and reflecting the strong demand environment in the core trailer business.

Operating EBITDA for the second quarter was $45.7 million, a year-over-year increase of $3.4 million, or 8%, resulting from the strong second-quarter performance from Commercial Trailer Products and solid contributions from Diversified Products and Retail. Sequentially, operating EBITDA increased by $15 million on stronger seasonal second-quarter demand. On a trailing 12-month basis, total Company revenue now exceeds $1.7 billion, with operating EBITDA of approximately $157 million, or 9% of revenue.

Selling, general and administrative, excluding amortization for the quarter, was $22.3 million, a decrease of $0.4 million, or 2% over the second quarter last year. This year-over-year decrease is primarily related to lower professional service and bad debt expense, partially offset by higher employee-related costs. Sequentially, SGA expense for the quarter increased by $0.6 million on higher employee-related costs; however, SGA expense as a percent of revenue decreased to 4.6% of sales on higher net sales in the current quarter. We expect SGA as a percent of revenue to be approximately 5.5% or lower for the full year.

Intangible amortization for the quarter was $5.5 million, essentially flat with the prior quarter and the prior-year period. The intangible amortization in the current quarter is consistent with the guidance previously provided and is expected to continue at this level for the remainder of 2014.

Interest expense consists primarily of borrowing costs totaling approximately $5.7 million, a year-over-year decrease of $0.8 million, primarily related to the repricing of the term loan in May of 2013 and the $60 million of voluntary term loan prepayments we made in 2013. Lastly, approximately $1.5 million of our reported interest expense is non-cash and primarily relates to the accretion charges associated with the convertible notes.

In regards to managing our capital structure and debt, we made another $20 million voluntary debt prepayment on the term loan in late June, bringing our total voluntary prepayments up to $80 million since the second quarter of 2013. The annualized impact of the cumulative voluntary prepayments to the term loan is $3.6 million per year of reduced interest cost. Lastly, the outstanding balance on the term loan was $213.5 million as of June 30.

We recognized income tax expense of $10.8 million in the second quarter. The effective tax rate for the quarter was 40%. However, we continue to expect the full-year effective tax rate to be approximately 39% to 39.5%.

At June 30, we have effectively utilized all of the US federal income tax net operating loss carry forwards, which were available at the beginning of this year. As a result, the Company expects to become a cash tax payer of US federal income taxes in the second half of 2014.

Finally for the quarter, net income was $16.2 million, or $0.23 per diluted share on a GAAP basis. On a non-GAAP adjusted basis, after adjusting for expenses related to the early extinguishment of debt and transitioning our West Coast branch locations to independent dealer facilities, net income was $16.9 million, or $0.24 per diluted shares.

In comparison, the non-GAAP adjusted earnings for the second quarter 2013 were $14.7 million, or $0.21 per diluted share, which excluded nonrecurring charges related to the early extinguishment of debt and acquisition expenses related to the Walker acquisition and the purchase of deal assets.

With that, let's move to the balance sheet and liquidity. Net working capital increased during the current quarter by approximately $10 million, resulting from increased production and higher sales compared to the prior quarter. We expect net working capital to be relatively stable during the third quarter; however, it is possible that net working capital increases slightly, due to higher trailer builds, higher trailer shipments, and increased revenue.

Capital spending was approximately $2.1 million for the quarter and $4.2 million year to date. At this stage, we anticipate full-year 2014 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 $222 million, an increase of $16 million from the end of the prior quarter, inclusive of the $20 million debt prepayment that I previously discussed. Cash on the balance sheet was the driver of the increased liquidity, as the asset based revolver remains untapped.

The pro forma total and net debt leverage were 2.4 times and 1.9 times, respectively. You may recall from our Investor Day presentation in May of 2013 that one of our long-term financial objectives was to lower our net leverage ratio below 2 times, and we accomplished this goal in the second quarter. In addition, our senior secured leverage ratio under the term loan credit agreement was 0.9 times, significantly below the current covenant requirement of 4 times or less.

With that, let me wrap up with some overall financial highlights. The Company performed very well during the quarter, despite the significant but temporary headwinds impacting the Diversified Products group. We were pleased with the financial results, in particular, the record levels of revenue, operating income, and operating EBITDA; however, we see the potential for further improvement.

The balance sheet remains strong, with a solid cash balance and strong liquidity. Our leverage ratios and debt covenants remain in comfortable territory. The business is generating strong cash from operations and operating EBITDA.

Looking forward, we are well-positioned going into the third quarter, with a very solid backlog of $842 million, a more experienced and capable workforce, which is reflected in the operational improvements across the company, and trailer industry forecasts from both ACT and FTR, which suggest the current strength in the trailer market is sustainable not only in the near term, but also into the foreseeable future.

Lastly, we were very pleased that Standard & Poor's recently upgraded our corporate credit rating one notch, from B+ to BB-, citing improved profits and cash flow with a stable outlook.

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 now begin the question and answer session.

(Operator Instructions)

Brad Delco.

Good morning, Dick.

Good morning, Jeff.

Good morning, Brad.

Dick, you made some comments about the Wood Products division and the margin pressure you saw and the color on what steps are being taken to address that. It sounds like we'll see some corrective actions in the third quarter, and you hope to fully recover by fourth quarter. With $3 million of year-over-year headwinds this quarter, can you give us some more quantification as to what we might see in the third quarter, and then maybe fourth quarter, in terms of how this phases out or how quickly this phases out?

Yes. During the third quarter, it gets progressively better as we progress through the quarter. So you look at the $3.5 million. By the time we get to the fourth quarter, that's behind us. But in the third quarter, probably something less than $1 million of impact as we progress through.

You have to think back to the time frame in which we put the actions in place. And that was about midway through the past quarter. And when you look at the backlog that we already had in place, so the actions to get all of the initiatives in place, the recovery actions in place. So we're starting to see the impact, but it slowly builds up as we progress through the quarter.

So I would suggest something less than $1 million of favorable impact relative to the position we were in the second quarter for the third quarter, and then full recovery in the fourth quarter.

Got it. So when we think about your not necessarily guidance, but the parameters you set for gross margin expectations for the Diversified Products segment, being in that 21% to 24% range isn't out of the norm. But maybe we see a little bit of pressure continue in the third quarter? Can you be in that range in the third quarter, or is it going to be something closer to what we saw?

It should improve somewhat. But it'll be low end of the range that we provided in the past, and then be more normalized as we get into that fourth quarter. In the example I gave earlier about the 22%, if we fully address the two elements -- the lumber cost issue and the startup cost issue going away -- it's a more normalized 22%, so in that 21% to 24% range that we've spelled before. So, yes, it's going to be pressure on the lower end in the third quarter for certain.

The other factor that will come into play there, Brad, is the seasonality of Wabash Composites is slightly different than the core trailer business. And for the past couple of years, their strongest quarter has been Q2; and then they typically pull back a little in Q3. So that's the normal seasonal pattern that we see for Wabash Composites, as well, which could play a role in the third-quarter results.

Got you. And then maybe final question.

Dick, in your comments, you also said you expect gross margin to improve in the third quarter. Are you specifically calling out gross margin dollars? Or how do we think about the seasonality of gross profit margin percent from second to third quarter, and what could be affecting that?

Brad, I think obviously, Commercial Trailer Products is two-thirds of the Company on top-line revenue. So that's going to be a big driver. And you know the shipment guidance that we gave there. We have a healthy backlog. And so given the strong builds, the strong shipments, which we've discussed many times in regards to that seasonal pattern, Q3 is typically our strongest quarter there. And so that will be a big driving factor.

And then we expect Diversified Products to improve sequentially, as well, as we just discussed, and Retail to perform also.

Got you. So looking specifically, though, at Commercial Trailer Products and not taking into account the mix between the segments. If I look back historically, you typically improve your gross profit margins in that trailer business by about 20 bps. What could affect that one way or the other? It seems like with you running close to 90% utilization, pricing should be a little bit more pronounced and maybe those margins could be better. What could work against you in terms of that normal sequential change?

It should improve second quarter to third quarter.

Okay. All right. Thanks for the time. I'll get back in queue.

Thank you, Brad.

Joe O'Dea.

Good morning. First question. Just looking at the implied shipments into the back half of the year, it looks like right now you're calling for a little bit of a sequential step down from 3Q to 4Q that would be larger than what we've seen over the past few years. And so is that just a matter of waiting for a little bit more backlog support in those numbers, or just looking for a little bit more details on that implied guide?

Joe, I think we've consistently said we typically would expect Q3 to be slightly stronger than Q4, just as a normal seasonal pattern. And our guidance for Q3 is 15,000 units to 16,000 units. I think if you do the math that you'll see that Q4 is slightly below that. But it will depend upon customer pick-ups during Q3 and Q4. We are predicting a really nice, healthy, strong second half of the year. And I think that's the real important message from the guidance we've given.

Okay. And then maybe just a little bit bigger picture. When you talk about a double-digit margin in CTP, you think about the volumes you'll have in the back half. Those are very supportive volumes. For that kind of target, is that on the types of volumes that we'll be seeing in the back half? And could you just talk about the operational steps that you have planned to then drive toward that double-digit margin target?

There's obviously, the strong market is certainly supporting those efforts. So higher volume obviously brings the potential to get some leverage on it. But the team has been very focused on favoring the margin improvement over volume. So in other words, not going after orders just for the sake of getting orders. They're trying to get the best of what's available out there.

Now, in this environment, you get a lot of large orders from key customers because they're very healthy and they're replacing some very aged equipment. And that's where our comments earlier about the mix being in that 64%, or 60% to 40%, some ratio like that, in the large direct versus the indirect segment. So it's still skewed heavily toward that group. I think it was like 62%/48%.

And the second element, of course, is the ability to push the pricing through the market. We had six months worth of backlog at the end of the first quarter. So if you think about what the remaining opportunities for quoting as we completed through the second quarter and now in the third quarter, while pricing is continuing to be pushed, the impact is less impactful than what it will be for the 2015 calendar year, which we're just entering that quoting season. So we continue to push. As all new quotes come in, we're trying to take advantage of the stronger demand environment to continue to push pricing and ultimately improve those margins.

The other factors that come in are the normal actions that we take under all conditions. And that's continuing to drive operational improvements on the factory floor through our continuous improvement efforts; improving the proficiencies of the workforce, the capabilities; running lean events to optimize line velocity and inefficiencies on the factory floor; and then the initiatives we take in our supply chain side on our supply components and materials pricing initiatives with suppliers as we enter into new agreements from year to year.

So all of those factors play into getting to that double-digit margin and hopefully beyond. Once we get there for a quarter, then we get that to be sustainable for full year, and then continue to look at ways to further enhance it through different product offerings and different end markets that we can get into.

Got it. Thanks very much.

You're welcome. Thank you.

Alex Potter.

Thanks.

Hello. I was wondering if we could touch again on Diversified Products. Obviously, there are the new product start-up costs and there's the wood and all of this. But it sounds like also there were some mix impacts. I noticed the ASPs on new trailers came down quite a bit in that segment; and you called mix out as well.

I was just wondering if you could flesh that out a little bit more. What was going on there, specifically, in layman's terms? And then, do you expect that to correct, or is that something that's going to persist?

Alex, the mix that impacted in the Diversified Products -- let me start with the Walker Group. And I think that's probably the biggest area of impact there. Those liquid tank trailers, there's a lot of variation in that space. And the average price of liquid tank trailers in a fairly normal range is somewhere between $60,000 and $120,000 for each unit. And certainly, very unique units can be even significantly higher than that high end.

But with that wide a range for the normal product variation, then you're going to see some variation in ASP. And we saw that in the second quarter, where we had some of those units that were on the lower end of the range there. And that's what contributed some to the product mix.

In addition, you'll notice that the unit volume was up 100 units quarter over quarter from the prior year. And we did have some larger order sizes that shipped. And obviously, those bigger orders put some pressure on pricing as well. And that also impacted the quarter. That's what we would describe as customer mix.

How does it proceed going forward? We look at the average selling price that we have right now as within the normal range. So we would expect to see the normal variation continue there. It could go up or it could go down.

Okay. Interesting. Thank you.

I was wondering also. If we talk about within that liquid tank business, obviously fracking, hauling liquids, hauling water into and out of those oil and gas fields is a secular trend. And to the extent that your mix in Walker shifts more toward that segment, generally speaking, would that be a positive or a negative or a neutral for margins?

I think you're talking about the energy in oil and gas. And a couple of years ago, that market was really hot; and the margins were pretty inflated. I think based on what we see in the current environment, those margins are within the normal range of what we see in the liquid tank trailer space.

Okay. Very good. Thank you.

You're welcome. Thank you.

Steve Dyer.

Good morning, Dick.

Good morning, Jeff.

Hello, Steve.

So most of mine have been asked. I just want to make sure I'm thinking about the math correctly. It sounds like mix -- sort of what it has been in terms of CTP versus DPG. And it sounds like gross margins in the trailer business kind of remaining where they are, maybe a little bit of improvement as we go here. And then a little bit of improvement in Q3 and more in Q4 for DPG margins. So safe to assume that gross margin in aggregate improves in Q3?

I think your assessment in terms of the individual segments sounded pretty accurate from what we've talked about. The only factor that comes into play there is the segment mix, where CTP can grow proportionally to the rest of the Company and represent a higher percentage of the total revenue. And Dick mentioned that in his comments for this quarter. To the extent that you have a little bit of that movement in Q3, then we'd have to do the math and work that out for segment mix.

But I think your analysis of the individual segments sounds consistent with what we said.

So given that we're a month through the quarter and you kind of know what you have in the backlog, would you expect the CTP mix to grow in excess of the rest in Q3? Or do you expect that 64%, 65% level?

In terms of channel mix, I think the backlog --

No, he's talking the mix between segments.

The mix between the segments, yes. You know, the driving factor there is going to be the shipment guidance that we gave, Steve. So we said 15,000 units to 16,000 units in Q3. We did 14,950 units in Q2. So it'll be up slightly for CTP. But once again, you just need to do the math.

Well, but you didn't give -- at least that I heard -- DPG guidance directionally for any sort of specifics for Q3 over Q2. So that's what I'm trying to get the sense of, what you see more growth from and ultimately what the mix is in Q3.

I think we expect DPG to perform fairly consistent with historical patterns there.

Okay. Thank you.

You're welcome. Thank you.

John Mims.

Good morning. Thanks.

Jeff and Dick, there's been a lot of numbers thrown around. So I just want to make sure I understand what you were saying about margins and the progression in third quarter in the DPG group. You said it would be pressured at the low end of the range of 21% to 24%. But then you typically would see some seasonal softness from Q2 to Q3. So from what you know now -- and I realize it's still somewhat fluid -- but does pressured mean below that typical range or just at the low end? I just want to make sure I understand what you're saying right.

I think what Dick was saying was that considering all the factors that are impacting us in the current quarter and the comments we made relative to Q3, that we would expect the DPG margins to be near the low end of that range. I don't think we can give specific guidance and comment as to whether it's slightly above or slightly below. But I think both of those are in play.

John, we're not trying to be elusive or evasive. It's difficult to project, even at this point in the quarter, what the ultimate shipments are. We recognize revenue when we actually ship the equipment. So we can do some internal modeling. But at the end of the day, it really comes down to what mix of products ends up shipping for the quarter. That's what is the elusive thing in trying to respond to that question.

Okay. That makes sense. And that's what I wanted to clear up. Because I feel like going to 21%, I realize that you could probably get there by fourth quarter. But that's a lot to make up when you're still working through some of that backlog. So I just wasn't sure if I misinterpreted the range comment. But that's helpful.

Let me ask on the commercial trailer side, given that orders are as strong as they have been, backlog is where it is, are you totally full from a build standpoint for the rest of this year? Or do you have some triage and flexibility as far as what you can do to leverage more pricing from guys in the back half?

There's always some opportunity to leverage capacity. We can do that through overtime. The area where we probably have the least amount of open available capacity would be in the dry van segment. Orders have been very, very strong in the dry van segment.

In the refrigerated, there's always some opportunity. In the flatbed business, that typically doesn't have the long lead times. That's typically 12 weeks to 15 weeks, more typical than what -- when you see you're about six months, we're talking about in the aggregate. So that area of the business continually is quoting and taking orders, even for the current model year, the current calendar year.

So there's always some flexibility. If an opportunity comes along -- there's a dedicated contract order that the customer gets, it's a reasonably short lead time item that they need, and they're willing to pay the premium to have us open up some weekend slots -- then we may consider taking advantage of that opportunity. So we always have some flexibility.

Okay. That makes sense. And I'm assuming -- and I know you can comment if I'm right or not -- but given the industry, the order trends and how tight most people are, that you're getting more pricing power even in your standard dry vans now than you were earlier in this year and certainly at this point last year. So if everybody's enjoying a little bit of that tailwind, when is it reasonable -- is it more of a 2015 or maybe a little bit earlier -- that it's reasonable to see a pickup in ASPs, again, just on your standard dry products?

Let me touch on that because that brings up a couple points I want to reinforce. The ASP -- and I know that we threw a lot of numbers at you earlier on what happened with ASPs in the Commercial Trailer Products business. A good portion of that -- I think $400 of that deterioration -- was strictly tied to the significant increase in customers opting to supply tires. So the tire value is not included in the price of those trailers when they get shipped and recognized. So that's a little bit unique.

And when we look at, on a year-over-year basis, this 2014 customer supplied tires were at the highest level ever. Between 3.5 to 4 times the percentage of, on a percentage of units, that customers elected to do that. So that moves the needle on that. So that one is unpredictable as to what they would elect to do as we quote for the 2015 calendar year, whether they elect to supply tires on their own or have us procure tires in the marketplace.

So it's not a deterioration in price. And I know some folks have looked at it and thinking that price deteriorated. Quite the opposite. Price was improving during the same time. But it was in a way overwhelmed in the numbers by the customer-supplied tire side of it.

But as we get into the 2015 quoting season, that's when some nice gains can be made in pricing. If we go back to the normal quote and order patterns for the CTP business in particular, recall that during the fall and early spring or actually winter season of the year -- so the October, November, December, January, February months -- tend to be very, very strong months for large-customer, large-order intake. And by the time you get through that period, you've got a good portion of your backlog for the year already established. And the pricing at that time is lower than what it's going to be this coming fall.

So I just say that because it's the smaller orders, the smaller customers, that we're able to continue to push pricing as we go throughout the year. Once we lock with the big guys, it's locked for the full year. So the orders that they place in the October, November, December time frame are for all 12 months of the following year. So you have those locked.

So it does take time when you have your pricing initiatives to start showing and taking hold. And that's why as we progress through the year -- and we've shown this in the last two, three years -- that we continue to have some pricing improvement. Because as the smaller orders come in, it gives us the opportunity to assess what the market is and our ability to continue to push pricing into the market.

So this next quote season, as we're just entering now, we feel very good about where the demand environment is and the ability to be able to continue pushing pricing for the 2015.

Sure. That makes total sense. And I understand the tire disparity. I didn't think that was a decline in price at all.

But I guess what I was asking more is you've seen in May and June, from an industry basis, it's sort of bucking its seasonal trends, where orders have stayed really strong instead of starting to fall off. Maybe you can comment on how that's trending in July. But if you are taking more and more of these small orders now, and you're starting to push production for some of those into 2015, as you enter the big order season this fall, are you in the scenario where there's already enough build capacity taken up from the orders that you're receiving now that you can be more aggressive with pricing with the bigger guys? Does that make sense?

Yes, it does. The vast, vast majority of orders that have been accepted are for 2014 builds -- just to clarify. So it's not that we're taking small orders for 2015 at this point. But the same notion does hold true in what you're saying. The position we're in today does provide -- and the strong demand environment and the expectations for continued strong demand for next year -- does put us in a much better position than we were a year ago at this time when it comes to pricing those very large-customer, large-order quotes.

And then just a quick comment on July order trends versus normal seasonality?

The quote activity has continued to be favorable relative to prior periods. When you look at, on a seasonally-adjusted basis and you look historically, the trends that we've seen over this whole quoting year have been favorable to what we had seen in previous years. So that's what has given us more and more confidence in our projections and our ability to be a little bit more bold about the projections. We wanted to be sure the last quarter before we went and changed anything.

We were out ahead of ACT, as you recall, at the beginning of the year. They were at the 1.5% to 2% year-over-year projection. We were at 5% to 7%. Some folks thought we were being too aggressive. But we were confident, based on conversations with our customers and what we were seeing from early quote activity. And what we didn't know is, would that be able to continue with the strength as we progressed throughout the second quarter. And as we now know, it has.

It even surprised us with the amount of strength that has continued. And of course now, both ACT and FTR have caught and had passed us. But now with the backlog fill that we've been able to gain, we felt confident in going out with much stronger numbers.

How much of that do you think is more still replacement driven versus real trailer fleet growth -- the drop and hook and all of those secular trends?

It's always hard to sort out. Customers don't tell us. If they want 1,000 trailers, they don't say 700 of them are for replacement and 300 are for additional drop and hook. We don't know how they actually use the fleet. My belief is that the vast majority are driven by replacement.

You're always going to have some growth that some customers are trying to gain some new lanes and new customers that they're going to have some needs. But the vast majority is really catch up replacement as a result of the very deep and protracted downturn we went through, where very few people were spending any money on replacing equipment. And now the fleet is excessively aged. And you've got this very, very tough regulatory environment, with the CSA regs putting even more pressure on fleets. So the vast majority is replacement.

Great. It sounds like it can continue for a while. Thank you so much for all the time.

And our last question comes from Jeff Kauffman.

Thanks so much. Hello.

Hello, Jeff.

Question of a quality type. There's a lot of cash on the balance sheet, which is great. I know you're paying down debt. I know you haven't made any acquisitions yet this year. But we should get a more positive working capital profile in the second half of the year, which means more cash. What are your thoughts on managing that cash right now?

Thanks, Jeff. I was wondering if we were going to get through a call without having the capital structure question. But I appreciate that. (Laughter)

I think the answer to that is stay the course. We've said, I think, for the last four to six quarters that we're focused on managing our debt. And as you mentioned, we did make an additional $20 million voluntary prepayment against the term loan in the second quarter. So that's the primary focus, managing debt and evaluating strategic opportunities to grow the business.

I think to your point, we do typically recover working capital in the second half of the year. And in my comments, I did mention that we could see a slight increase in working capital in the third quarter. But in general, the second quarter is very favorable for us from a recovery perspective and generating good cash flow.

Jeff, I'll just add that we made the commitment, one, to address the debt side. And we've gotten to one of our first thresholds, and that was getting the 2 times on a net basis ratio that we wanted. We've also made the commitment to continue to look for ways to grow and diversify this business, both with organic efforts, which do take investment from time to time, but also strategically through acquisition.

We are now in a much better position to be able to look at those types of opportunities with a lot more confidence than maybe we were a year ago. Because of wanting to put the heavy priority on the debt reduction and getting our ratio at a more comfortable level. So we've gotten ourselves to a lot more flexibility to take advantage of some opportunities that we may have considered over time.

So I guess the way I interpret that is, if we don't see strategic opportunity in the second half of the year, do we maybe think about getting even more aggressive with the pace of debt reduction?

Yes, Jeff. I think we look at those actions on a quarter-by-quarter basis. That's the process we've had for the last, like I said, four to six quarters. And I think that's the process we'll continue. It's worked very well for us.

So we'll take it quarter by quarter and see where we are, see what opportunities we have in the Company. We'll evaluate where we get the best flexibility and the best return from the various options we have available to us. And we'll make the decision at that point.

Okay. Please remind me, when do we start to anniversary these mix imbalances on the CTP side?

That's a fair question, Jeff. If we were to go back a year ago, we had targeted to go to a 50/50 target between the large direct accounts and the indirect. I'm speaking to the CTP business, because that's where the mix effect really plays within the segment.

We're always going to have to deal with and discuss mix issues related from segment to segment, as one segment may grow faster than another or the cyclical demands or seasonal demands for CTP, which overshadows the DPG. So that part of it won't go away. But within the segment, within CTP, I think what we're seeing now, as we're getting to this level in the cycle with the big guys really going after addressing the replacement of their fleets, while we're going to continue to push for the 50/50, it's probably more likely that that 60/40 ratio is probably going to be more realistic. T

here's just so much buying power that the larger guys have that I think it's going to be tougher and tougher to get to the 50/50 without just walking away from some of them. So to your point, the anniversary, yes. We're probably getting to that point where it looks like quarter over quarter, we may have some benefit from one quarter to the next.

But over the course of the year's time, maybe we'll say 55 to 60. Rather than 60/40, it would be a 55/45 might be about as good as we can get. And we'll just see how it goes. But we don't want to make it a significant issue from quarter to quarter. That's not our intention.

We're just trying to lay it out for you that we do have that issue. And because of the huge difference between ASPs within CTP-type product versus ASPs within DPG, that it can really move the needle when you have some shifts like that.

Okay. Understood. The TEC trailer conversions where we're going to start to see some of those retail trailers show up in CTP, I think you mentioned 600 trailers. Number one, is that an annual number? And number two, when should we start seeing that transition into the CTP numbers?

Jeff, that is an annual number. That was the new trailer shipments from those three locations in 2013. So it's a full-year number. That transition was effective, I think, June 1. So effective June 1. And TEC is our West Coast dealer representing us in three states out there.

Okay. Then one last question. You mentioned the start-up costs related to a new product. And I think I heard you say modal box. That sounds a lot like a container to me. Could you give us a better idea? Are you getting back into the container business? Or is this something unique for a very specific customer purpose?

It's a unique solution. It's referred to as a mobile truck box. It actually is an efficiency improvement on how hand load materials are managed for LTL. Instead of manually loading one box at a time, they're staged in these boxes external to the trucks. And then this box is put within the truck, within the trailer.

And it's just an operational efficiency improvement that has some really nice potential related to it. It speeds up, improves velocity for the LTLs and being able to manage when they do their loading and unloading from distribution center to distribution center. So it's, in their minds, a big improvement in operational efficiency.

It is in its early stages. But the launch was more challenging than what had been anticipated and a little bit unique in what we have experienced with these type of launches. And that's why it was notable. We hope we don't have any more notable ones to have to speak of in going forward.

So there was a big lessons learned review on this whole thing to identify what went wrong in the launch of it so that we don't have a recurrence of that going forward. So we're expecting that to be a one and only, and we'll see how we do on that.

All right. Well, congratulations and thank you.

Thanks, Jeff.

We have no further questions at this time. I will now turn the call back over to Dick.

Please go ahead.

Thank you, Vivian.

In conclusion, we're pleased with the results we were able to deliver overall in the second quarter 2014. And that said, we continue to see further opportunities to accelerate top-line growth; expand our product and market breadth; and to deliver even greater performance in almost all aspects of our business. And with a key focus on execution and delivering results, I'm certainly confident that we will 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, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.