Wabash National Corp (WNC) 2014 Q3 法說會逐字稿

Welcome to the third-quarter earnings call. My name is Richard and I'll be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded.

I will now turn the call over to Mr. Dick Giromini. Mr. Giromini, you may begin.

Thank you, Richard, and good morning. Welcome to the Wabash National Corporation's 2014 third-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 third 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'll 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 third-quarter performance, including the ongoing financial and operational improvements we're experiencing in most areas of the business, particularly the Commercial Trailer Product segment. On the other hand, we're disappointed with the results in the Diversified Products group for this past quarter. While our [consolidated] results again set records in revenue, operating income, and operating EBITDA, the performance in Diversified Products fell short of our internal expectations.

We do, however, anticipate better days ahead as the actions that we have put in place to address some previously reported headwinds related to lumber procurement costs have taken hold and are now completely behind us as we enter fourth quarter. We also look forward to several new product introductions over the next two to three quarters that should help return the Diversified Products group to a margin level more in line with our expectations and this business's historical performance.

Additionally, continued strong trailer demand is providing pricing support for our van and platform product offerings as we enter the 2015 quoting season. For the second consecutive quarter, we achieved all-time record revenue and operating income for the Company as we benefited from historically strong shipments and exceptional operating performance in our Commercial Trailer Products group. Trailer shipments across the Company for the quarter were 15,600 units, in line with our previous guidance of 15,000 to 16,000 units and reflective of the strong demand environment, third-quarter bill levels totalling approximately 15,350 units, up 800 units over the prior quarter and consistent with our earlier projections.

Net sales for the quarter were an all-time record $492 million, representing a $52 million, or 12% increase compared to third quarter of 2013. Net income for the quarter increased $2.1 million, or 13% year over year to $18.3 million. Operating EBITDA, which we believe is an important metric to highlight the Company's performance, increased $1.7 million year over year and finished at a quarterly record $46.6 million, surpassing the previous record set in the second quarter of this year. All this despite challenges within our Diversified Products group segment.

Operating income for the third quarter was $34.9 million, representing a $1.1 million or 3% increase year over year, while gross margin in the quarter deteriorated 150 basis points in year-over-year comparisons to 12.5% due to segment mix impact and the lower gross margins within the Diversified Products group segment. The increase in operating income was driven by the significant improvement in Commercial Trailer Products, while largely offset by the decline in Diversified Products. Overall, we delivered a solid third quarter with strong trailer shipments, builds, and revenue which translated into record profitability and operating EBITDA, as well as another quarter of strong cash generation and a strengthening balance sheet.

Consistent with the strong industry-wide trailer net order levels being reported by ACT Research, our quote and order activity remained strong throughout the quarter. While typical seasonal order trends would have predicted a significant drop in backlog for the third quarter, we experienced a less than 6% decrease, to a solid $794 million of backlog, which is 41%, or $231 million, higher than the third quarter last year. With nine months of reporting now in, industry-wide trailer net orders total 230,000 units versus 153,000 units through the same period last year. This certainly supports our longstanding belief, which we have been very vocal about, that this could turn out to be an extended cycle of strong demand for our industry, driven by excessively aged fleets, the demanding regulatory environment, truck utilization at 99%, and an improved pricing environment for our customers leading to improved profitability and investment in new equipment. It's certainly looking that way.

Looking forward to next year, we see the continuance of a strong trailer demand environment overall providing pricing support and opportunity for continued growth in the core van trailer business, another year of strong tank trailer demand for our Diversified Products group, and a favorable environment for retail and aftermarket growth. And as you'll hear in a moment, this general sentiment is supported by strengthening forecasts from both ACT and FTR.

With that, let's shift focus to some highlights for each of our reporting segments, and Jeff will follow with additional details regarding our financial performance. We'll start 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 perform very well in executing its optimization strategy, setting records across a number of financial and performance metrics in the quarter.

Net sales for this quarter were a record $352 million, increasing $58 million or 20% as compared to the same period last year, driven primarily by strong shipment volume of 14,700 trailers, or 26% more than in the prior-year period. While customer inspect mix had some negative impact on average selling prices, or ASPs, the major influence to ASPs year over year is the significant increase in customer supplied tires that we spoke about in our last call. That all said, net pricing on trailers actually increased on average in excess of $200 per trailer, helping to drive material margins up 90 basis points year over year. As stated, the net sales of $352 million for the quarter is the highest ever reported for this segment as currently constituted.

On the margin side of the equation, the business is performing very well and gaining momentum in the team's quest to achieve double-digit margins, as the group generated gross margin of 9.1%, a 110-basis point improvement over the same period last year, representing the highest gross margin in this segment for any quarter since 2007.

The CPP team is doing an excellent job leveraging the business growth, as demonstrated by a 51% year-over-year operating income improvement on 20% top line growth, and remained focused and committed to delivering on the commitment to achieve a double-digit quarter by the end of next year with the longer term goal to sustain that level of performance on an ongoing basis. We continue to make consistent progress toward achieving this goal driven by our stated initiatives of margin growth through prioritizing margin over volume by way of selective order intake, manufacturing productivity optimization and supply chain cost initiatives. We expect to finish this year on a good note, supported by the strength of our backlog, and all trailer industry forecasters aligned in their projections that 2014 unit volumes will remain significantly above replacement levels for builds and shipments. 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 third-quarter performance in this segment did not deliver results in line with our internal expectations. Following two years of exceptional performance, it seems that it's the Diversified Products group segment turn to face some performance challenges for the second consecutive quarter in which it delivered less than satisfactory financial results.

Although challenged again in the third quarter, this segment did generate net sales of $132 million, consistent with the prior-year period. Lower volumes in the Wabash Composite business, some unfavorable tank trailer mix, and some shipment delays impacted top line growth year over year for the segment. We do, however, expect to see solid year-over-year top line growth in the current fourth quarter, as we anticipate improvement in a number of these areas.

Gross margin of 18.1% for the segment declined by 560 basis points compared to the prior-year period's record margin quarter -- tough comp. Gross margin declines were driven notably by two distinct performance drivers within our Wood Products business: first of all, the remaining overhang related to the raw lumber cost inflation experienced in late 2013 or early 2014 tied to strengthening lumber demand; and secondly, the manufacturing productivity inefficiencies influenced by the higher than originally anticipated trailer demand, combined with yield losses related to the return to more traditional lumber grades now available and being processed -- factors accounting for approximately $2.8 million of year-over-year cost impact.

Additionally, new product development costs within Wabash Composites, primarily related to launch readiness preparation for the new manufacturing facility we announced in September, seasonal softness in the Composites business, and some competitive pressure within certain product lines of Wabash Composites and to a lesser extent liquid tank trailers, make up balance of year-over-year margin decline for the segment. That's the bad news.

The good news is that the lumber cost recovery actions put in place earlier this year have been successful, and the impact of the higher lumber prices is now behind us as we progress through the fourth quarter. And we've seen stabilization in both market pricing and material availability during these past 20-plus weeks, providing improved ability to manage and forecast the business. We do, however, expect to see some temporary lingering productivity headwinds within the Wood Products business during the next couple of quarters, due largely to workforce additions to support the significant increase in internal demand for the Wood Flooring Product as well as the lower anticipated yield levels related to the lumber grades now available in the market than what was experienced in 2013.

While these temporary workforce-related operational inefficiencies had a greater impact on the business in the third quarter than we had anticipated, they are not dissimilar to the learning curve ramp-up headwinds we incurred in our Commercial Trailer Product segment in 2011 and early 2012. And we fully expect to make significant progress during the next couple quarters as the workforce further stabilizes, gains further proficiency, with the facility returning to more normal levels of productivity and profitability.

Our Wabash Composites business also faced some challenges in the third quarter as revenues and margins finished below prior and year-over-year periods. Gross profit was down approximately $2.4 million year over year, which significantly contributed to the decline in the Diversified Product group's overall financial performance. Seasonal softness, some equipment purchase delays, and competitive pressures related to certain products were the primary drivers to the year-over-year decline, while some development costs related to new products being ready for launch in early 2015 were also a factor in the third-quarter performance numbers. Steps are already underway to address this.

In order to facilitate and support the pipeline of new products, among other benefits, we recently announced the expansion of our operations with a $2 million investment in a 100,000 square foot facility in Frankfort, Indiana, that will provide dedicated manufacturing operations for a variety of diverse Wabash Composites products, including semitrailer aerodynamic products, mobile storage containers, mobile offices, and cargo trailers.

Remember, we started the Wabash Composites business within the existing walls of our current facilities by stealing floor space here and there, and have grown it to a $75 million business. So this added facility will provide the much-needed floor space for our Composites business to continue its growth trajectory and will allow for optimized manufacturing process flow for both existing and new products, all of which should yield improved productivity and performance going forward. The facility is slated for start-up by the first of the year. So following normal ramp-up timing for a new start-up, we should expect to see a positive impact by mid-year.

Finally our Retail segment experienced a solid quarter with year-over-year improvement in revenue and profitability when adjusting for the impact of the (technical difficulty) approximately $45 million were consistent with the prior-year period. However, when excluding the impact of the three West Coast branches that we transitioned to independent dealer locations at the end of the second quarter, sales for continuing stores were up $3 million, or 9% in year-over-year comparisons. The increased revenue on a same-store basis was due to higher sales of new and used trailers as well as increased parts and service revenue.

Gross margin dollars finished at $4.9 million, reflecting an increase of 2% on a same-store basis. Gross margin percent was slightly lower at 10.8%, as the increase in sales was offset by investment to support the important growth, strategic growth initiative, of expanding customer onsite service locations. To that note, the Retail team was recently awarded with six additional customer site service locations, all of which are now up and running, bringing the total number to nine locations for this growth initiative.

We remain focused on executing our Retail strategy to profitably grow this segment by further increasing our presence in the tank, repair, and service business through expansion of the number of legacy Wabash National Trailer center locations with the capability to perform these services, expanding our mobile fleet capabilities, and further increasing the number of customer site service locations that we operate.

Before I discuss Wabash National's specific expectations for the fourth quarter 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 strong growth in the second quarter, the economy continued to expand modestly in the third quarter. Economists estimate that third-quarter GDP grew at an annual rate of approximately 3% as most macroeconomic indicators improved. Manufacturing activity, industrial production retail sales, and the labor market have all shown improvement in the past three months. In addition, the housing sector seems to be continuing its rebound as September housing starts and housing permits improved in both month-over-month and year-over-year comparisons. Most analysts anticipate the economy to continue growing moderately at a nearly 3% rate in the fourth quarter this year as well as in 2015.

Although the general economy continues to reflect modest growth rates, key indicators within the trucking industry point to continued strong demand and signal a positive outlook. ATA's truck tonnage index was unchanged since September at a historic high of 132.6. The index was 3.7% higher in September than in the same month last year and has increased 3.2% year to date versus the same period last year. The latest report from ACT Research now forecasts 2014 trailer shipments at just under 267,000 units, up 11.4% year over year; and just over 267,000 trailers in 2015, with a 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 to 2019 timeframe.

FTR has also adjusted its projections upward, now forecasting nearly 271,000 trailers to be produced for 2014, an increase of 15.4% year over year, and projecting an excess of 264,000 units to be produced in 2015, reflecting increases of over 22,000 and over 27,000 respectively versus the FTR forecast earlier this year. According to FTR, the Class 8 Act of truck utilization rate was at 99% in the first three quarters of this year, equalling 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, after the November mid-term elections, Congress will likely consider legislation that would suspend for a year the restrictions to the 34-hour restart provision of the Hours-of-Service rule. In the meantime, carriers continue to report productivity losses as a result of the Hours-of-Service rule. In addition, there are several pending regulations that will likely come in effect in the next two years, including electronic logging devices, drug and alcohol clearinghouse requirement, speed limiters, along with CAFE and greenhouse gas standards among others. The cumulative effect of the existing and upcoming regulations will be a further decrease in driver productivity and reduction of the driver pool, which will likely lead to higher demand for additional drivers and equipment to fill the gap.

As I've stated in previous calls, the combination of a gradually strengthening economy, solid truck tonnage and improving rate environment and increasing regulatory impact on fleet productivity, all support the potential for overall increased trailer demand for our industry.

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

Third-quarter total shipments of 15,600 units were in line with our previous guidance, and based on the strength of build levels during the quarter, along with a seasonally strong backlog, we're well positioned as we progress through fourth quarter and into 2015. As stated, quote and order activity showed unseasonal strength during the third quarter. 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 significantly exceed those experienced in 2013. While still remaining committed to favor margin growth over volume, we are confident in raising our expectations for full-year shipments to be between 54,500 and 56,000 units. As a result, we now expect fourth-quarter consolidated shipments to be between 14,000 and 15,500 units.

Furthermore, continuing our year-long string of improved year-over-year comparables, we do expect fourth quarter performance to be measurably better than the 2013 fourth quarter. However, as previously discussed, the fourth quarter brings with it higher manufacturing costs driven by increased holidays, vacations, fewer production days and higher utility costs. So in line with these seasonal expectations, and similar to last year, we anticipate the fourth quarter to be materially below both the second and third quarter earnings levels.

In summary, we are obviously pleased to have delivered a solid quarter, overcoming some temporary headwinds within our Diversified Products business segment to deliver another quarter of record consolidated results, and continuing our momentum from last quarter by setting a second consecutive quarterly record for revenue, operating, income and operating EBITDA. While new records were accomplished, opportunity remains, and we're certainly not satisfied with our present level of performance. We know we can do even better, and will. We need to continue our progress to further improve gross margins in our Commercial Trailer Products business and to find more attractive, higher-margin growth opportunities to drive its top line. Those efforts are yielding favorable results with nice momentum.

We need to accelerate the introduction of new product offerings to drive top line growth in our Diversified Products business as well as return the segment to gross margins more in line with our expectations and historical averages. Those efforts are now well underway, and I assure you that we will be successful. And we need to leverage the higher-margin tank parts and services opportunities for growth of our Retail segment, expand our mobile service fleet, and continue to grow the number of customer site service locations.

So while much has been done, opportunities abound, We will continue to be strategic but selective in pursuing opportunities to grow our business in addition to the organic growth initiatives already underway. We will continue to be responsible stewards of the business to assure that the proper balance between risk and reward is considered in all decisions.

In closing, with three quarters now complete, we are well on our way to deliver another year of record revenues and profitability, with a strong and growing backlog, a demand environment that is solid and gaining momentum, and a number of new products nearing launch status. 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 the 10-Q after the market closed yesterday as well. So I plan to hit the highlights. With that, let's begin.

Consolidated revenue for the quarter was $492 million, an increase of $52 million, or 12% compared to the third quarter of last year. This year-over-year improvement in revenue is attributable to strong demand in our Commercial Trailer Product segment. As Dick mentioned, total revenue for the Company is an all-time record for any quarter. Sequentially, total Company revenue increased $6 million, or 1% on higher new trailer shipments from Commercial Trailer Products.

From a segment standpoint, Commercial Trailer Products net sales were $352 million, which represents a $58 million increase, or 20% on a year-over-year basis, due to higher new trailer shipments of 3,000 units. Trailer average selling price, or ASP, declined by approximately $500 per unit due to customer and product mix, in addition to a higher incidence of customer-supplied components such as tires, as we discussed last quarter. On a sequential basis, net sales for Commercial Trailer Products increased $16 million, or 5% on 800 additional new trailer shipments. Trailer ASP increased sequentially as a result of favorable customer and product mix in addition to reflecting a stable, if not slightly improving, pricing environment in combination with our continued strategy to be selective in order acceptance and prioritize margin over volume.

Diversified Products net sales were flat year over year as a result of steady new liquid tank trailer sales, strong demand for wood flooring, offset by a seasonally weaker quarter for Wabash Composites. Wabash Composites revenue was down in the third quarter of 2014 due primarily to a large one-time LTL aftermarket skirt order in the third quarter of 2013, which obviously did not repeat this year.

Wabash Wood Products revenue improved on a year-over-year basis as a result of increased wood requirements from higher new trailer demand in the Commercial Trailer Products business. On a sequential basis, Diversified Products net sales declined $3 million, or 2% from the previous quarter's levels due to the typical seasonal decline for Composite Products as well as the near completion of an AeroSkirt retro fit program for a specific customer in the second quarter of this year.

Retail net sales of $45 million represents a decrease of less than $1 million versus last year. However, after adjusting for the three West Coast branches that were transitioned to independent dealer locations, sales revenue was up $3 million, or 9%. Sequentially, Retail net sales decreased $6 million, or 12%, driven by a lower volume of new trailer sales after a very strong second quarter, as well as lower parts and service volumes due to the impact of fewer retail locations.

Looking at our various product lines, new trailer shipments in the quarter totaled 15,600 units, including 850 liquid tank trailers in the Diversified Products segment, for a total of $401 million in sales, an increase of $61 million or 18% from the third quarter of last year. Used trailer revenue came in at $7 million on 600 units, representing a decline of $6 million from the prior-year quarter. We continue to see tightness, strong demand, and a very limited supply in the used dry van and flat bed trailer markets.

Components, parts, and service revenue was $41 million in the quarter, a decline of $7 million, or 14% year over year, driven primarily by the transition of the three West Coast branch locations in the second quarter and the year-over-year decline in Composite Products. In addition, equipment and other sales of $43 million increased $4 million year over year, primarily due to stronger demand for Walker engineered products and non-trailer truck-mounted equipment.

In terms of operating results, consolidated gross profit for the quarter was $61.6 million, or 12.5% of sales, in line with $61.5 million of gross profit recorded in the same period last year. Commercial Trailer Products saw a significant increase in gross profit year over year that was offset by decreases from Diversified Products and Retail. Consolidated gross margin declined 150 basis points year over year, due to segment mix with a higher percentage of sales from the lower margin Commercial Trailer Product segment and lower gross margin in Diversified Products and Retail.

With that, let's look at segments in more detail. Commercial trailer products gross margin improved 110 basis points over last year, resulting in a 36% increase in gross profit or $8.4 million higher. Sequentially, gross margin increased by 50 basis points and $3.2 million as a result of trailer shipments being higher by 800 units, which produced the expected flow through effect on gross margin. Production during the quarter was 14,450 units, an increase of 750 units or 5% compared to the prior quarter.

The Diversified Product segment posted a disappointing quarter. From a profitability perspective, gross margin decreased 560 basis points year over year, while gross profit was $23.96 million, down $7 million, or 24% compared to the prior-year period. The year-over-year drop in Diversified Products performance is due to margin declines related to lumber pricing and higher operating cost at Wabash Wood Products, in addition to some unfavorable mix and competitive pressures in specific product lines of both Wabash Composites and liquid tank trailers.

Lastly, the Retail segment gross margin decreased by 60 basis points year over year and 40 basis points sequentially, due to a higher mix of new and used trailer sales, in addition to some start-up costs relating to the three new customer site service locations we announced last quarter. Gross profit was $4.9 million, a year-over-year decline of $0.3 million, or 6%, primarily due to the loss of the three West Coast branches that were transitioned to independent dealers in the second quarter of this year.

On a consolidated basis, the Company generated operating income of $34.9 million compared to $33.8 million on a comparable basis last year. This represents a new record for quarterly operating income and highlights improvements the Company has achieved in executing our growth strategy and the benefits of a more diverse portfolio of businesses. Sequentially, operating income was higher by $1.1 million, primarily driven by higher shipments of new trailers in the Commercial Trailer Product segment, largely offset by the decline in Diversified Products.

Selling, general, and administrative, excluding amortization for the quarter, was $21.2 million, a decrease of $1.0 million from the prior-year period, and a decrease of $1.1 million sequentially. This year-over-year decrease is primarily attributable to lower employee-related cost, in addition to lower bad debt expense in the current quarter offset by higher outside services and technology cost. SG&A expense excluding amortization was 4.3% of sales for the quarter. Year to date, SG&A expanse was 4.9% of revenue. And on a full-year basis, we expect SG&A as a percent of sales to be approximately 5%.

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 our guidance provided last quarter, and expected to continue at this level for the remainder of 2014.

Interest expense consists primarily of borrowing costs totaling approximately $5.5 million, a year-over-year decrease of $0.8 million, which primarily relates to the $80 million of voluntary term loan prepayments we've made in the prior five quarters. $1.5 million of our reported interest expense is non-cash and primarily relates to the accretion charges associated with the convertible notes. We made another $20 million voluntary term loan prepayment in late September, which is the second voluntary term loan prepayment we've made this year and the fifth we have made in total, resulting in a total debt reduction of $100 million since the second quarter of 2013. As a result, the outstanding balance of the term loan was $193 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 $10.6 million in the third quarter. The effective tax rate for the quarter was 36.6% and we continue to estimate the effective tax rate for the full year to be approximately 39%.

Finally, for the quarter, net income was $18.3 million, or $0.25 per diluted share. On a non-GAAP adjusted basis after adjusting for expenses related to the early extinguishment of debt, net income was $18.6 million or $0.26 per diluted share. In comparison, the non-GAAP adjusted earnings for the third quarter 2013 were $16.6 million, or $0.24 per diluted share, which also excluded expenses related to the early extinguishment of debt. In addition, operating income was $46.6 million in the quarter, an all-time high for Wabash National, and an increase of $1.7 million compared with the same period last year. Sequentially, operating EBITDA increased by $1.0 million. On a trailing 12-month basis, consolidated revenue was $1.8 million, with operating EBITDA improving to $158.8 million, or 8.8% of revenue.

With that let's move to the balance sheet and liquidity. Net working capital increased during the quarter to $249 million, with most of the increase resulting from higher accounts receivable levels on higher revenue driven by our strong shipment quarter. Consistent with normal seasonality, we expect shipments to exceed production in the fourth quarter, resulting in lowering working capital requirements as we finish the year. Capital spending was $5 million for the quarter and $9 million year to date. We expect full-year 2014 capital spending to be approximately $20 million, as some large front projects make progress in the fourth quarter.

Our liquidity or cash plus available borrowings, as of September 30 was $220 million, a decrease of $2 million from the prior quarter after taking into account the $20 million debt payment that we made in September. As a result, our pro forma total and net debt leverage were 2.3 times and 1.7 times, respectively. In addition, our senior secured leverage ratio under the term loan credit agreement was 0.8 times, significantly below the current covenant requirements.

As we look to the remainder of this year, we anticipate full-year new trailer shipments between 54,500 to 56,000 units, which represents a 16% to a 20% year-over-year increase. Having said that, we typically experience seasonal headwinds in the fourth quarter for multiple factors. In general, we experience higher operating costs during the fourth quarter as a result of higher utility costs due to colder weather and fewer operating days related to increased holidays and vacations during the quarter. Additionally, we typically experience seasonal declines in the fourth quarter in Wabash Composites in addition to parts and service activity in 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, we expect strong operating results for the fourth quarter of 2014 to be lower than our seasonally strong second and third quarters of this year. However, consistent with our recent performance, we expect the fourth quarter to be better on a year-over-year basis.

Longer term, the initial indications for the quote and order season are very positive, based on the September order numbers. And both industry forecasters, ACT Research and FTR, are forecasting continued strength in the core trailer markets in 2015. We have a very strong backlog of $794 million, which is $231 million, or 41% higher than this time last year. And we are well positioned as we enter the fourth quarter with a strong start in October.

In summary, we delivered another solid quarter and established new quarterly records for revenue, operating income and operating EBITDA. Our largest revenue segment, Commercial Trailer Products, posted solid numbers with gross margin at 9.1%, 110 basis points better than last year. And this business continues to move closer to achieving a gross margin of 10% or better in an individual quarter.

As a whole, we performed well during the quarter, despite the headwinds faced by the Diversified Products group. The Diversified Products segment remains a significant contributor to the overall Company and we look forward to this segment improving and returning to performance levels consistent with our expectations in the near term.

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

(Operator Instructions)

Our first question on line comes from Mr. Joe O'Dea.

So on Diversified Products and the trajectory to seeing the gross margin come back up over the next several quarters, could you give a little bit of an outline for measures that you're taking in 4Q? And then into next year, what we should expect for a 4Q margin? Is this a hockey stick in terms of not seeing the margin really come back until the middle of next year, or is there some pretty strong progress based on the lumber correction in 4Q? But to get a better sense of how we should see those margins now respond to actions you're taking.

Yes, hi, Joe. Good morning, this is Jeff. In regard to the DPG performance and the outlook and the turnaround plan there, it's definitely multi faceted because as you heard there are multiple factors that have contributed to the performance in this quarter. And so obviously the biggest contributor was the impact from Wabash Wood Products.

But what I would tell you is that of the $2.8 million impact of Wabash Wood in this quarter, about half of that was pricing, about half of that was operational. We put -- we took actions earlier this year to respond to the pricing issues that we were seeing. And so those are effectively behind us as we move through the fourth quarter here.

The operational issues as Dick laid out in his conversation there was that that's something we're going to be working on for the next couple of quarters. I think similar to what you saw as we faced a similar type of challenge in Commercial Trailer Products in 2011 and 2012, we would expect to make some incremental gains as we go through the next couple of quarters. So it's not all going to come back in that component of it immediately but over time.

As we look at the Composites business and their performance there, there's a normal seasonal decline that we typically see there. Having said that, this business faced some really tough comps this quarter compared to the last quarter of this year and the third quarter of last year. Both of those quarters had big after-market LTL skirt orders that were one-time orders and weren't repeating. So that's one that's going to recover over time as well.

Obviously the new product launches will contribute once we start launching those new products in the first half of next year, first and second quarter of next year. And we should see that impact come through that business as well. And obviously the investments we make, and that's how we view them, the money we spend preparing the new facility and preparing for launch readiness of these new products is something that'll continue. Certainly in the fourth quarter, and then hopefully as we start launching new products in the first quarter, we get the benefit of that.

So it's not all going to come back immediately in Q4, but we do expect to make incremental gains in each of the components as we move through the next couple of quarters.

Joe, let me add a little bit more color around that. The -- relative to the raw lumber procurement cost issue, as Jeff said, that is now fully behind us. There was a continuing impact in third quarter as we communicated there would be for this quarter; now it's behind us. So half of that $2.8 million is tied to that element. And so going forward, that goes away.

Relative to the productivity and proficiency issues related to the increased demand that the wood flooring operation is taking on, that's going to take a couple quarters to fill out, much like what we had faced two or three years ago in the Commercial Trailer side.

The one piece that is a continuing change is really the fact that we no longer have a tailwind that we experienced in early 2013 related to the lumber, the raw lumber grade that we were able to get at that time provided a higher yield from that material. That part is -- was a temporary tailwind that we didn't fully appreciate at the time.

And now it's a more normalized grade of material that is available and typically used in the market for all wood flooring manufacturers. So that one will linger but it's a smaller piece of the pie. But I did want to clarify that in the explanation for that.

As far as the Diversified Products, as far as the Wabash Composites business, we're really excited about the new facility that will be starting up at the first of the year. There'll be a couple quarters of ramp-up impact that they will face as they transition existing product that are tucked into corners within the current facilities. They'll be able to lay this out, get an optimized manufacturing flow for the product.

And the expectations are that once up and running and through the ramp-up period, that they'll actually gain productivity which will actually help optimize the manufacturing cost for existing products and then gives them an opportunity to launch these new products in a good facility.

So we're very hopeful that over the next three quarters or so, as we get into mid-year of next year, we start seeing some nice favorable benefits from moving into that new facility.

Okay, thank you for details there. And then on CTP, if you could talk a little bit about the mix. It's been an ongoing stretch now where mix has been more or less a headwind with the strong demand from the larger fleet side of things.

So are you -- have you seen, over the course of the third quarter when smaller fleets would tend to be a little more active, do you have some of that contribution to the backlog now that should add some natural mix lift? Do you think that you've fully fleshed out exactly -- you have reached a floor on how much of a mix headwind you could face because of just such a significant contribution from large fleets, or is there something maybe more structural there where you don't get a mix lift on smaller fleets?

The large fleets are the guys that have the most buying power. So you're -- I think you're going to continue to see that, we'll call it that 60%-ish of large fleet in the mix. That's a more normalized level.

And with the dynamics that are occurring in the marketplace, the large guys continue to get stronger, more profitable. I think that they're going to continue to have the buying power strength over what the smaller guys will be able to have. So I think it's a more normalized mix that you can expect, and that can range from 55% to 65%. Sometimes it goes a little bit higher during certain periods of the year, especially early in the year we often see that. But I would not look at that as an issue or a headwind. I would say it's a statement of fact that that's how the business operates.

The positive part of this whole thing is that prices are going up across the board. Margin improvement is being recognized whether it's with large fleet opportunities, mid sized fleet opportunities or small fleet opportunities. The dynamic that comes into play here that is also considered part of the mix equation is the balance between long vans and doubles or PUPs. So the 53-footers are obviously going to carry a higher ASP than what a 28-foot PUP is going to carry. And I think that gets mixed in it. And that's a -- it's a wild card as to what quantities certain fleets will need from year to year and how that part of the mix equation plays out from year to year, quarter to quarter.

So it's a positive. Again, I want to reinforce it again. Pricing is improving, margins are improving across all sectors of what we sell, whether it's direct sales or indirect sales through our indirect channels.

Great. And then to be clear, Jeff, you said 4Q better than 3Q, I believe. Revenue line of sight seems pretty good there. Does that include gross margin where you expect the -- I'm sorry, a year ago, so you expect 4Q gross margin to be better than 4Q 2013?

I think in general, yes, we expect 4Q of this year to be better on a year-over-year basis and as we said also we usually see a 4Q decline sequentially.

Right. So you've got that lower base for 3Q 2014, but you do expect the 4Q gross margin to be better than the 4Q 2013?

Yes, I think we expect 4Q to be stronger this year than last year, yes.

Okay, thanks.

Our next question online comes from Mr. Brad Delco.

I'm going to ask a few quick questions. First on the backlog, if somebody were to place orders with you today, at what point could you deliver those units? How stretched out is your backlog based on your production?

That's a really tough question because there's always some opportunity to slot some trailers into the mix. Obviously for the balance of the year, it's effectively booked just because of lead times to do that. But we're booked out.

But you get into the early part of the year and you can always slip in some trailers. It really comes down to how large are the quantities of orders? So the backlog that we have in some cases stretches out throughout all of next year for specific name plate customers. But there's open slots just about everywhere that you can take advantage of to leverage, if the price is right.

Got you. Second question, you talked about seeing the normal sequential decline in earnings, but is there any commentary you can give specifically about Commercial Trailer gross margins? What do you typically see on the sequential basis from Q3 to Q4?

Yes, Brad, this is Jeff. I think for Commercial Trailer products, that's the biggest business we have. So the comments we made relative to the Company are pretty much a reflection of the Commercial Trailer products business. And that is that that business will be impacted by the factors we suggested in the fourth quarter and that puts some pressure on that business and their margins in Q4.

Having said that, the market is still strong for trailer demand in Commercial Trailer Products. And I think as we look at where the demand is in the current environment, we see that as supportive of pricing, and we have been successful at achieving price increases. So you balance those two factors, but the higher utilities, the weather, the lower operating days does have an impact on Q4 for that business.

Well the reason why I ask, if you look over the last three years, you saw 150 basis point decline last year, relatively flat in 2012, and you actually saw a 100 basis point improvement in 2011. So there's not a really consistent trend, so I was trying to get maybe some more color on what your expectation would be for sequential margins in that business.

I don't particularly want to quantify it, but I think last year is more reflective of the current environment we're in this year.

Okay.

And obviously in 2011 we were making big price increases year over year which impacts the margin line there. So I don't see 2011 as a very good comp.

Got you. And then last question, maybe for you, Dick. You mentioned some specific competitive pressures you're seeing on the tank side. I was curious, would you mind commenting on maybe what specific end market those products are going to?

Yes, we've not broken those down. But it was minor relative to the majority of impact that we saw in the Diversified Products that was the least of the impacts. You had the wood flooring operations issues, the Wabash Composites issues were the dominant players in that piece.

But we did want to just make the statement that there is some competitive pressure as at least one of the key competitors is out there trying to fill some backlog that they were not as successful in dealing with. So we are seeing some noise out there. But it's not the significant issues that we saw in the other two areas.

Got you. So -- but you couldn't say whether or not this is an energy-related project or your dairy business or your refuelers that are serving the airlines?

No.

Okay. All right well that's it for me. Thanks, guys.

Our next question online comes from Nicole DeBlase.

So I was hoping maybe you could elaborate a little bit on the competitive issues that you cited within Diversified Products? Is it a pricing issue, who's cutting pricing, and how are you responding to the competitive pressure?

Yes, as I just shared with Brad, we won't get into the details within the Walker side of the business. But within the Wabash Composites piece, one of the natural evolutions of any product is with the growth and adoption of the aerodynamic side skirts, that space is seeing increased pressure on the pricing in the market as more and more folks have entered the market, more and more fleets have adopted it both for OEM manufacturer installation and also after market installation. So that's the area that Wabash Composites business is seeing the most pressure is on the skirt business.

Okay, that's really helpful. And then the second thing it's more of a tick the box item. Your selling expenses looked a little bit low this quarter. Would you expect that to step back up to the $7 million to $8 million range in the next quarter, or is it sustainable where it was this quarter?

I think it's going to be fairly consistent quarter over quarter, Nicole.

Okay, got it. And the last one on tax rate, are you guys still forecasting 39% to 39.5% for the full year?

I would say 39% for the full year is the current estimate.

Perfect. Thank you so much.

Our next question online comes from Alex Potter.

Hi, this is Winnie in for Alex. First question is on the CTP segment margins, do you guys still think that the 10% gross margin is achievable in the near future?

Absolutely. We would expect that sometime next year. First quarter is not likely as we've shared in the past. That's always a very challenging quarter both on the produced unit side, the shipped unit side and also of course the winter headwinds that we talked about earlier in the call. But as we progress into third -- second and third quarter of the year, it would be -- that would be the likely timeframe to be able to break that barrier.

Okay, great. And then another question, with the raised new trailer shipment guidance, I think you guys are implying an 18% year-over-year increase over 2013. And ATA is forecasting about 12% increase with total trailer shipment. So how should we interpret the delta, is it share gain or some other reasons?

I think the -- Winnie, I think that discrepancy that you're seeing there is that you have to look at the specific segments. So if you look at dry vans, which is our strongest segment, then that segment is going to show I think year-over-year increases that are stronger than the average for the total trailers. And obviously our guidance is a reflection of strong dry van, refrigerated van, flat bed and liquid tank trailers all combined.

Okay. Thank you.

Our next question comes from Steve Dyer.

I'm not sure I completely understand what's changed in the DPG segment. So last quarter on the call we were a month into the quarter, and you guided to the low end of the 21% to 24% gross margin range, and primarily citing wood costs. And you [missed] that number obviously.

And now it sounds like it's a few quarters before that's remotely on the table again, and we're hearing about productivity issues and so forth. And I guess to me it feels a little bit like whack-a-mole in this segment. And I'm trying to understand maybe what has changed in three months that really pushes that margin range out. It sounds like two, three, four quarters still.

Yes, Steve, that's a great question because we were somewhat surprised and absolutely embarrassed here to have to be talking about it the way we are today. We did not anticipate the level of headwind that was being faced by the wood operation as they were trying to ramp up to take on the increased volume that they were taking on. As the Commercial Trailer Products business demand increased significantly, as we just talked about, increasing range from 15% to 20% over where we were at the end of last year, and I think we underestimated what that task was going to be for the location. And it wasn't clear to us at the call three months ago.

So we missed the boat on that. And as we progressed further through the quarter and started seeing the numbers and asking more questions and going and visiting, we understood that the challenge -- it's a highly manual operation, and the challenge in bringing new folks in to ramp up to the higher levels and to go onto an increased amount of overtime to support the increased levels of demand for the Commercial Trailer Products, that they were taking on more costs than we realized.

We had thought that the majority of it was tied strictly to the combination of the lumber -- raw lumber price increases in the market, and also the grade of material that we didn't fully understand the impact of that that they were -- the tailwind that they were taking advantage of. So shame on us for not fully understanding that. We'd not faced it in the past and didn't quite understand it. Now we have a full appreciation for it. And that's why we tried to share as much as we could about it today.

Okay. And then hopping over to CTP, what's the right way to think about ASPs when you balance pricing edging up along with it sounds like you have higher percentage to customer who are supplying their own trailers and so forth. Just directionally, more than anything, what's the right way to think about ASPs in that segment going forward?

Yes, that's a great question, too. I think we'll see more stabilization going forward. The big increase in customers opting to supply their own tires was a huge step up in the prior quarter that we had not seen previously.

I don't know that it'll get much higher. I think that the players that have adopted that, we may see some smaller increases. But it tripled or quadruples from quarter to quarter on the percentage of customers that were opting -- the tires themselves, the number of tires -- that were opting to supply tires. And of course when you take the cost or the value of the tires out of the equation, it has an appreciable impact on what the ASP is. So I would think going forward, that adjustment may be behind us.

And then you've always got some quarter-to-quarter mix influence that's very difficult to predict more than a quarter or two ahead. And so that one's a little bit of a wild card based on the mix between the long vans and the PUP or double type product.

And Steve to add a little to Dick's comment there on the customer supplied tires, obviously that's going to be driven by specific customers. And as you know in this business, that -- one individual customer can have a significant impact. It can be a lumpy business as we've talked about in the past.

And so with the large fleets leading the recovery in the trailer industry here, we've seen that pick up and customer supplied tires driven by specific customers who have the preference to do that. And so it does have a big impact on ASP, and it's at times difficult to understand, but it can be lumpy as well.

All right.

And the impact, the impact of not having tires as part of the equation on what the selling price is of a long van, can amount to about 10% of that trailer price. So if you're looking at a dry van that's -- and let's just say $22,000 to $24,000, the tires are in that $2,000 to $2,200 or $2,300 range for eight tires on a trailer going at $250 to $300 a piece. So that's what makes it such a significant influence on ASPs.

Got it. Okay, thank you, guys.

Our next question comes from Jeff Kauffman.

A quick follow up here. If we're -- if the customer is supplying the tires, shouldn't that be an upward bias on the margins of the division? So you talk about the effect on ASPs, but if tires are a pass-through, and we're taking that out of the equation, shouldn't the reported margins be better?

There is some margin that is in the cost side of the trailer. But the tires themselves are taking out for the customer at actual cost. So yes, it's going to be de minimis in the whole realm of things when you start running numbers. So it could influence by 5 or 10 basis points, but it's not a huge influence.

All right. Well let me move onto the questions I do have because I -- it's a little frustrating. I feel like this is the best backdrop we've had in 20 years in this industry, and you guys are watching it walk by with the whack-a-mole issue. Something here, something there, something there. You take a look at it, and what do you think you underestimated? Whether it was a mix issue in a division or this raw material issue we had a year ago and now we've got a different raw material issue. There's a consistent theme here, what did we not appropriately handicap coming in?

I don't know. I think that some folks have overestimated what the capabilities even within the current environment are. And I would remind everyone that we just set another record quarter for performance for the business. So while we have some identified opportunities, I wouldn't consider this a total miss.

We tend to be much more open about the opportunities that the business faces than maybe some other companies. And I think that we should feel pretty good about the quarter we just delivered, being a record in top line performance, operating income, and operating EBITDA.

Okay. Question for Jeff. Jeff, if I take a look at Walker, I'm going to guess that's about $400 million of revenue, give or take with Beall. You said Wood Products group I think if I heard that right was about $75 million. That would imply you have about what $45 million, $50 million in other business in the DPG?

The Composite business is about $75 million.

All right. In terms of the margins, they're looking to be about 300 some basis points below last year, that's about $17 million in gross profit. How would you allocate the difference in gross profit amongst the three pieces? And I think you talked a little bit about, okay, we've got the wood products pricing part of this. Our arms are around that. Productivity continues, we got pressure on some of the issues at Walker. How would you allocate that $17 million difference between this year and last year among the pieces in DPG?

Yes, so Jeff, we're not going to break out each individual piece. But qualitatively what we have said is that this year the wood piece of it is by far the largest piece of it. And then as you look at it and I think the order, we went through them in the script, is the order of importance that you see there. And so that's going to be the wood issues we faced this quarter and this year. Second to that for the quarter is going to be the issues that the Composite business faced. And then lastly and to a lesser extent, it's the issues in the liquid tank trailers and the Walker business.

Okay. Working capital was a drain this quarter, normally in the third quarter that's a positive item. You talked about some inventory build from some products that might not have shipped in the fourth quarter. How much might that have affected revenues and working capital?

Well working capital was up based on the strong demand. It was primarily in accounts receivable. Inventory is up some, that's obviously inventory. Finished goods is a large component of that that's going to be shipped in the fourth quarter. And to a large extent, the raw material and work and process inventory that's on our balance sheet at the end of the quarter will to a large extent be converted into finished goods and hopefully shipped in the quarter.

All right, guys, final question, and thank you. Monster industry number, 36,000 units last week. That's a great start to a new year. In theory, you guys should be in a very good position to change some of these mix issues, change some of these ASP issues. Where are you seeing the new demand as we head into 2015, and how was the customer orders or what the customers are asking for changing with the backlogs at five months heading into the beginning of the order year?

I'll just say the same thing I say at this time every year. It's always the large guys that start the process. They're the ones that are in early with setting up their orders for the following year. And when they order, they're ordering for their needs for all of the following year. So the majority of orders placed are for -- from large customers for their 2015 needs.

Okay. So maybe guys ordering a little bit more early to get a spot in line this year?

Well, I think we've seen -- yes. You're always going to have, and I talked about it before, you're always going to have a one, two, maybe even three-month change from year to year on specific customers when they get their process completed, when they actually end up placing orders. But in most cases, we're seeing good, healthy needs out of customers and what the order patterns that we have seen this far, and I expect across the industry the same thing.

There's a -- it's a good operating environment for the fleets. It's a good pricing environment for the fleets. They're getting their increases pushed through. We're hearing significant increases 4%, 5% and more for dedicated contracts. We're hearing double-digit increases on the spot side.

So it's a good environment for them, and they're putting that money to work and trying to refresh their equipment. And the whole industry will benefit. All the manufacturers will benefit from that by having good early backlog bills that they can then set their businesses around.

Okay, guys. Thank you very much.

Our last question comes from Mr. Joel Tiss.

To clarify, I guess you've probably given all the pieces, but to try to sharpen it up, what's left between here and double-digit operating margins in the Commercial segment?

Yes, it's the same approach that they've been taking over this last couple years now. They're going to continue to push pricing. It's a strong market, it gives them opportunities to continue. As we shared in the call and in our previous calls, we've been getting some nice improvement in margin tied to pricing increases.

In the last quarter when we did the comparisons and analysis, it was a net gain of $200 in pricing -- net pricing gain. During the quarter that was a really strong performance by the team. They'll continue to gain on the factory floor with productivity and velocity improvements on the line which spreads the cost, lower cost per unit across all of the trailers.

So that's -- and then the other work is being done by the strategic sourcing team, the purchasing and procurement team that is out there getting leverage as the business continues to grow and getting new contracts that are more favorable to us. So all three of those activities have been going on, continuing to go on and will continue to go on until we get to that double-digit target and more.

All right, thank you very much.

We have no further questions at this time. I'd like to turn the call over to Mr. Giromini for closing remarks.

Thank you, Richard. Three quarters through the year and it's shaping up to what could be the third consecutive record-setting year for the Company. While true that we've experienced some challenges in certain parts of our business this year, our ability to produce consecutive record-setting quarters despite these headwinds demonstrate the effectiveness of our growth and diversification strategy.

Additionally, I'm confident we have the people, processes and technology in place to address and correct any issue that we may face. Even more encouraging than our current year performance is the strong start to the quote and order season for 2015, which suggests that next year has the potential to be even better.

Having said that, I don't want to get ahead of myself. It's still early in the 2015 quote and order season. We've considerable work yet to complete in 2014 in all of our businesses and across the Company.

With that we remain focused on executing against our goals, and I'm 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, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.