Wabash National Corp (WNC) 2015 Q1 法說會逐字稿

Welcome to the first-quarter earnings call. My name if Yolanda and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. It is now my pleasure to turn the call over to Mr. Mike Pettit, you may begin.

Thank you for Yolanda and good morning. Welcome everyone to the Wabash international Corporation 2015 first-quarter earnings call. This is Mike Pettit, Vice President of Finance and Investor Relations. Following this introduction, you will hear from Dick Giromini, Chief Executive Officer of Wabash National on the highlights for the first quarter, the current operating environment, and our outlook for the rest of 2015.

After Dick, Jeff Taylor, our Chief Financial Officer, will provide a detailed description of description of our financial results. At the conclusion of the prepared remarks we'll open the call up for questions from the listening audience.

Before we begin I'd like to cover two quick items. First, please note that this call is being recorded. Second, as with all of these types of presentations, this morning's call contains a certain forward-looking information including statements about the Company's prospects, industry outlook, backlog information, financial condition and other matters.

As you know actual results could differ materially than those projected in the forward-looking statement. These statements should be viewed via the cautionary statements and risk factors set forth from time to time in the Company's filings with the Securities and Exchange Commission. With that, it is my pleasure to turn the call over to Dick.

Thanks Mike let me start by saying that we are very pleased with the ongoing progress that we continue to make with the business and in the execution of our strategic plan. Importantly, we started off 2015 with an accelerated pace of improvement from our record breaking 2014.

During this past quarter we achieved all-time records for any first-quarter in our Company's 30-year history and revenue, gross profit, and operating income is historically strong and more balanced topline and bottom line results were delivered across our three segments. These results demonstrate and validate the transformative nature of our strategic growth and diversification initiatives. And the success is provided for the successful initiation of our previously announced share repurchase program acquiring 1.3 million shares during the quarter.

Trailer shipments for the quarter were a strong 14,350 units coming in above of our communicator range of 12,000 to 13,000 trailers as customer pickups accelerated through the back half of the quarter at stronger levels than previously anticipated. Additionally strong productivity out of the gate led to exceptional first quarter build levels that total approximately 16,100 trailers exceeding the first-quarter of 2014 by some 3,200 trailers.

Net sales for the quarter were an all-time, first quarter record, $438 million representing an $80 million, or 22% increase compared to the first quarter of 2014 which was the previous first quarter of record. Consolidated gross profit of $57.2 million also set an all-time, first-quarter record, exceeding first-quarter 2014 by $10.5 million, while gross margin increased to 13.1% for the quarter.

Operating income for the first quarter was $27.3 million representing a $7.8 million, or 40% increase year-over-year, largely driven by significant strides made in the commercial trailer product segment partially offset by a slight decline in diversified products. Operating EBITDA, which we believe is an important metric to highlight the Company's overall performance, increase by 28%, or $8.5 million to $39.1 million in the first quarter which is reflective for strong performance from all three segments and improved balance across the enterprise.

Overall despite the seasonally weak nature typically of the first quarter, we were successful in delivering record financial results driven by strong trailer shipments and builds, which translated to overall growth in revenue profitability and operating EBITDA. Top to bottom, it represented the best first-quarter in the history of Wabash National, with nice momentum to build on as we move through the second quarter with seasonally strong trailer volumes to leverage.

Despite the unseasonably strong shipment levels achieved during this past quarter, backlog nonetheless increased during the quarter reaching a record $1.2 billion and representing approximately eight months of production at a consolidated level. Looking forward, in contrast to some who may be calling the end of the cycle, we anticipate a continuance of a strong order demand environment supporting pricing and volume growth.

With the most manufacturers and suppliers slots all but filled for the current year, it is understandable and expected that overall industry monthly order levels will likely continue to be lower on a year-over-year basis, until we get to mid-year when manufacturers will once again look to open up slots for 2016 bills. And customers begin to more seriously consider their 2016 purchase plans. In fact, numerous customers have requested to place additional orders for 2015 production, that have had to be turned away due to timing needs or capacity restrictions.

Key industry drivers such as continued strong freight demand supporting carrier efforts to increase rates and improve profitability, excess of age, of fleets and regulatory compliance requirements, along with increased residual value of used trailers, all support our view for continued strong demand for new trailers. And as you'll hear in a moment this sentiment is supported by forecasts from both ACT and FTR.

With, let's shift our focus to some additional highlights from each of our reporting segments. We'll start with the commercial trailer product segment, consisting of our dry and refrigerated van products, platform trailers, fleet trade used trailer sales and our wood flooring operations. The segment continues to perform very well in executing its optimization strategy with an ongoing commitment to margin improvement, manufacturing excellence and leadership in product innovation.

First quarter saw best ever first-quarter revenues of $315 million, with gross margins of 9.4% that reached their highest levels since 2005, in what is typically seasonally weaker quarter. This recent data point provides confidence that the CTP team is well on its way to our previously stated objective of achieving a double-digit gross margin quarter this year, with that likely to become a reality during this current quarter. The improvements seen in the first quarter was driven by the team's continued execution of a pricing strategy, committed to favoring margin over volume, as well as continued improvement in productivity and material cost optimization through design and sourcing.

BPB group produced a $400 increase in net pricing in the first quarter, and we expect to continue to see year-over-year net pricing gains throughout the remainder of the year. We also expect trailer demand to remain strong in 2015 with both industry forecasters expecting total demand significantly above replacement levels, and stronger than 2014.

As announced in February our reporting segments have been realigned with Wabash wood products moving from diversified products to the commercial trailer products group. Following up on the progress reported previously, Wabash wood has continued to make nice progress and operational performance, and is producing margins consistent with their more normalized historical levels. We're pleased with the Harrison operation and are comfortable that all last year's cost challenges are now behind them.

Along with their exceptional improvements in profitability, the CTP team remains committed to executing on their key strategic initiatives by introducing innovative new material technologies. These technologies include expanding the application of bonding throughout the trailer, the introduction of new composite materials and new lightweight material solutions such as the high strength steel coupler that reduces 160 pounds from a standard trailer.

CTP is also continuing their efforts to more fully develop the indirect channel, having sold 900 more trailers through that channel in the first quarter of this year versus the first quarter of 2014. With both momentum and a historically strong demand environment on their side, we're more confident than ever that CTP will again deliver record performance for the full year.

Moving on to the diversified product segment which includes our Wabash Composites business, tank and tank trailer business and the engineered products business. This segment delivered a solid first quarter with net sales of $104 million, down approximately $4 million in year-over-year comparisons. But recording a much improved gross margin of 22.5%, getting back in line with its historical range and importantly, up 90 basis points sequentially. This was accomplished through effective operations execution and a favorable product mix.

While some competitive prices challenges persist and a slowing oil and gas market has impacted demand for certain products, the diversity of end market certain in the segment remains a strength, which has allowed it to successfully navigate these headwinds and deliver solid results.

Let's talk about growth. It almost goes without saying that the diversified products group has had a very busy couple of quarters, with a series of growth investments in new facilities and new product introductions. While those initiatives are still in their launch phase, they're each forgetting to deliver bottom-line results to the business. On the facility side we're pleased with the progress seen on DPG's two major facility projects. First, the expansion of our liquid tank trailer operations in Mexico provides necessary floor space to allow for cost-effective production and delivery of stationary silos for the food, dairy and beverage market in Mexico. As Walker's engineered products business begins efforts to expand this product line internationally.

Already armed with a customer backlog for silos for that market that carries into the third quarter, manufacturing began in earnest this past quarter with the initial shipments scheduled to begin during the current quarter. This expansion is a nice compliment to our existing domestic Walker engineered products business and provides an effective platform for growth out of our world-class Mexico facility.

Second, we are well into the start-up and ramp-up process with our new Wabash Composites manufacturing facility in Frankfort, Indiana. This facility, leased to provide needed floor space to support the continued growth of the Wabash composites business, came online at the beginning of the year and the production schedule has been accelerating throughout the quarter. As shared previously, our Wabash Composites business continues to focus on providing innovative solutions that solve customers unmet needs, particularly in aerodynamic product development as we realize the fuel economy benefits in their operations.

Along with the trance from the assembly operations for the workhorse DuraPlate AeroSkirt, new products that had been developed and are in ramp-up phase of the facility include the recently introduced AeroSkirt CX developed to compete with lower priced entrants in the side skirt market. At the high performance end, the team developed event takes VRF side skirt and the AeroFin tail device that provide industry-leading fuel economy improvement and performance, and are scheduled for commercialization midyear.

While still working through the normal launch curve, they have seen strong monthly improvements and the facility is already profitable. We are obviously pleased with the improvement we've seen the past couple of quarters in the diversified products group and are very excited with the investments we've made in the new facilities and the new products that we're launching in these facilities. However, we all need to exercise some patience in the near-term for DPG, as the many growth initiatives begin to take hold. And we all should expect performance to be relatively flat from the first to second quarter. That patience will be well rewarded with profitable new market growth and new product expansion going forward into 2016 and beyond.

Finally, our retail segment showed a nice year-over-year improvement in same-store revenue and profitability. Net sales of approximately $43 million represented a $5 million, or 14% increase year-over-year on a same-store basis when adjusting for the transition of the three West Coast branch locations. Gross margin dollars rose in the quarter to $1.1 million, while gross margin percent was down slightly in year-over-year comparisons to 11.2%.

We remain focused on executing our retail strategy to profitably grow this segment, by increasing our presence in the tank repair and service business to expansion of the number of legacy Wabash national trailer center locations with the capability to perform these services, expanding our mobile fleet services and increasing the number of customer site service locations that we operate. First-quarter profitability was significantly aided by these initiatives and year-over-year comparisons, and are expected to continue to mature and contribute significantly to another record year for our retail operations.

Before I discuss Wabash National's specific expectations for the second quarter and for the full-year 2015, let me comment on a few economic indicators and industry dynamics that we monitor that provide broader context for our expectations. Following modest growth at 2.2% in the fourth quarter, the economy continues to expand at a subdued rate in the first quarter and some macroeconomic indicators were affected by winter weather and decline in oil and gas well drilling.

Most analysts anticipate the US economy to continue growing moderately at a somewhat less than 3% rate for 2015. Although the general economy continues to produce mixed signals, while reflecting modest growth rates, key indicators within the trucking industry point to continued strong demand and signal a positive outlook. ATA's truck tonnage index increased 1.1% in March to 133.5%, following a 2.8% fall in the prior month. The index was 5% higher than in the same month last year. And in the first quarter of 2015, the index was unchanged quarter over quarter, yet 5% higher year-over-year.

The latest report from ACT research now forecast 2015 trailer shipments at 303,300 units, up 11.8% year-over-year. And forecasting 294,900 trailers for 2016. FTR has again adjusted its projections upward, now forecasting 296,600 trailers to be produced for 2015, an increase of 11.8% year-over-year and now projecting 266,000 units produced for 2016.

From a regulatory and legislative standpoint, on December 16, FY15 funding bill was signed into law that suspends reductions to the 34-hour resell provision of the hours of service rule, until September 30 of this year. While it is being studied again. This action has provided a temporary relief for fleets related to the required nighttime break periods.

According to FTR, class VIII truck utilization decreased to an estimated 96.5% in the first quarter of 2015, from 98.5% in the first quarter last year. However, industry analysts caution that if the hours of service provision should not be renewed when it expires in September, capacity utilization would rise to peak utilization levels almost immediately, leading to significant capacity limitations in the last quarter of 2015 and in 2016. Also, we are all still waiting to see if the increase in pop trailer length to 33 feet will be included in the upcoming Highway Transportation Bill. Doing so would support increased strength and duration for the current demand cycle, through the period 2017 to 2019. At this stage rumors exist that an extension or series of extensions may push any action on this measure until the end of the year or into 2016.

Now let me share Wabash National's expectations for 2015 in the second quarter. We believe overall demand for trailers will remain strong and significantly above replacement levels, through 2015 consistent with 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.

Historically, the first quarter is a seasonally weaker quarter, with trailer shipments picking up in the following three quarters of the year. Total shipments of 14,350 units exceeded our guidance, and based on the strength of production during the quarter, coupled with backlog growth, we remain well positioned as we progress through the second quarter. As a result, we expect second-quarter consolidated shipments to be between 16,000 and 17,000 units, with total bill levels for the quarter within the same range.

While unwavering in our commitment to continue to favor margin over volume, we nonetheless have seen an overall continuing strong demand for our equipment that supports favorable pricing for our commercial trailer product offerings and as such are now raising our expectations for full-year shipments, from the 60,000 to 64,000 previously communicated, to now 62,000 to 66,000 units. This puts our forecasted year-over-year growth in shipments at 12%, or effectively inline with the current updated industry projections.

In terms of earnings, we are raising our full-year EPS guidance to a range of $1.15 to $1.25 earnings per share, as compared to our previous guidance of $1.10 to $1.20. This would present a 35% improvement year-over-year at the midpoint of the range. Furthermore, continuing on our string of improved year-over-year comparisons we expect the remaining three quarters of the year to all show nice year-over-year EPS growth, with the third quarter expected to be the strongest quarter. As noted earlier, second quarter DPG performance will likely be flat the first quarter with a stronger back half, as the new facilities and product offerings make an impact.

Overall, based on the current demand environment, our strong backlog and the discipline execution being delivered by the total team, we expect 2015 to be our fourth consecutive record-breaking year with continued strong cash generation, coupled with a very strong balance sheet. So in summary, we were obviously pleased to have deliver a very strong record-breaking first quarter. We've demonstrated considerable operating improvement in our diversified products segment and continue the string of strong quarterly results in our commercial trailer products business.

While we're extremely pleased with our position, there remains more opportunity and work to be done. We need to continue our focus to further grow gross margins in our commercial trailer products business and accelerate our efforts to introduce more attractive, higher margin growth opportunities to drive its top line. We're now clearly seeing the margin improvements in this business, we need to get the business to consistently deliver double-digits and grow from there.

We need to effectively execute the introduction and ramp up of our exciting new product offerings in our diversified products business, as well as maintain our improved margin performance. And we need to leverage the higher margin tank parts and service opportunities for growth of our retail segment and continue to execute on commitments made with the expansion of customer site service locations. So while much has been done, opportunities abound. We'll 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, we continue to be extremely well-positioned this year to deliver another year of record revenues and profitability with a strong backlog, a demand environment that remains a strong, and a number of new products either already launched or 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 everyone. In addition to the press release, we filed a 10-Q after the market closed yesterday, so I plan to hit the key points. With that, lets get into some of the first-quarter financial highlights.

Consolidated revenue for the quarter was $438 million, and increase of $80 million or 22% compared to the first quarter of last year. Total new trailer shipments were 14,350 units, exceeding our guidance of 12,000 to 13,000 and 4,400 units higher year-over-year. Sequentially, consolidated revenue decreased $90 million or proximally 17%, due to a very strong fourth quarter and the normal seasonal slowdown in the first quarter.

Commercial trailer products net sales were $315 million which represents an $87 million or 38% increase, on a year-over-year basis, due to higher new trailer shipments of approximately 4,350 units. New trailer average sales price, or ASP, decreased approximately $500 per unit, primarily resulting from customer and product mix that was biased towards smaller and lower priced product such as LTL trailers and converter dollies. All these products due carry a lower ALT, they do not necessarily have a lower margin profile. Furthermore, while average sales price decreased, we actually saw an increase in net pricing by approximately $400 per unit, which is evident in CTP's proving margins year-over-year.

Diversified products net sales decreased 4%, or $4 million on a year-over-year basis to $104 million. Walker Group revenue was down year over year, primarily due to product mix and some continued pricing pressure within certain product lines of Walker Group. On a sequential basis, diversified products net sales declined 16% primarily due to lower tank trailer shipments in the first quarter. Retail segment net sales on the same-store basis, after adjusting for the transition of three West Coast branch locations in May 2014, increased approximately $5 million or 14% on a year-over-year basis. Sequentially, net sales from retail decreased $5 million or 10% in the seasonally weaker first quarter.

Looking at our various product lines, new trailer sales of $361 million on 14,350 units increased $93 million or 35% year-over-year. Including approximately 850 liquid tank trailers in our diversified products segment. This year-over-year increase is largely due to increased new trailer shipments in commercial trailer products.

Used trailer revenue was approximately $6 million on 350 units, a decrease of approximately $10 million from the same quarter a year ago, as a result of continued tightness in the used trailer market, specifically used dry vans and fewer fleet trades in commercial trailer products. Components, parts and service revenue was approximately $42 million in the quarter, essentially flat from a year ago. Finally, equipment and other revenue on a year-over-year basis decreased by $3 million to $29 million for the quarter. This decrease was primarily driven by lower sales from non-trailer equipment within diversified products which is partially attributable to timing of shipments.

In terms of operating results, consolidated gross profit for the quarter was $57.2 million or 13.1% of sales. Compared to $46.7 million in the same period last year. This represents a $10.5 million or 23% improvement year-over-year. Commercial trailer products was the primary driver of the gross profit increase, and that was partially offset by diversified products and retail.

Let's look at the segment margins in more detail. Commercial trailer products gross margin improved 280 basis points over last year, resulting in a 98% increase in gross profit, or $14.6 million. Sequentially, gross profit decreased by $1.2 million on seasonally low trailer volume. However, gross margin on the lower revenue actually showed a 120 basis point sequential increase.

Production during the quarter was 15,100 units, up by approximately 1,650 units sequentially. On a year-over-year basis, production was up 3,000 units due to strong order intake and productivity. Diversified products gross profit and gross margin decreased $2.4 million and 140 basis points respectively, compared to the prior-year period, due to product mix and continued pricing pressure in certain product lines of Walker Group. However, gross margin of 22.5% is back within our expected range of 21% to 24% and represents the highest performance level since the first quarter of 2014.

Sequentially, gross margin was up 90 basis points primarily due to a seasonally stronger quarter for the composites business. Lastly, the retail segment gross margin on a same-store basis when adjusting for the transition of three West Coast branch locations, increased in the quarter by $0.2 million or 7% year over year, due to increased new trailer pricing as well as continued growth in customer site service.

Sequentially, gross margin increased $0.2 million, or 140 basis points, primarily due to increased parts and service revenue. On a consolidated basis, the Company generated operating income of $27.3 million in the quarter. An increase of $7.8 million or 40% year over year, with solid contributions from all three operating segments. At 6.2% of sales, operating margin was approximately 80 basis points higher than the prior-year quarter. Sequentially, operating income was lower by $6.9 million, primarily driven by the lower shipments of new trailers in both commercial trailer products and diversified product segments, due to normal seasonality.

Operating EBITDA for the first quarter was $39.1 million, a year-over-year increase of $8.5 million or 28%. Sequentially, operating EBITDA decreased by $7 million on seasonally lower new trailer sales. On a trailing 12-month basis, consolidated revenue was $1.9 billion with operating EBITDA greater than $177 million, or 9.1% of revenue.

Cash from operating activities was much stronger in the first quarter than the year ago period, as net income improved and working capital increases were moderated. We expect cash from operations to increase and remain strong throughout the remainder of 2015.

Selling, general and administrative expense, excluding amortization for the quarter, was $24.6 million or 5.6 % of revenue. We expect SG&A as a percent of revenue to be lower in subsequent quarters, as revenue ramps up consistent with our trailer projections. SG&A as a percent of revenue is up expected to be approximately 5% for the full year.

Intangible amortization for the quarter was $5.3 million and is expected to continue at this level for the remainder of 2015. With a full-year expectation of approximately $21 million. Interest expense consists primarily of borrowing cost totaling approximately $5.2 million, a year-over-year decrease of $0.5 million, primarily related to the impact from the $40 million of voluntary term loan prepayments made in 2014. For the full-year, we anticipate interest expense to be about $1 million less than in 2014.

Approximately $1.5 million of our reported interest expense is non-cash and primarily relates to the accretion charges associated with the convertible notes. We recognized an income tax expense of $6.2 million in the quarter, the effective tax rate for the quarter was 37.3% in line with our guidance for a full-year income tax rate of approximately 37%.

Finally for the quarter, net income was $10.5 million or $0.15 per diluted share. On a non-GAAP adjusted basis and after adjusting for costs associated with refinancing our term loan facility, net income was $13.8 million or $0.19 per diluted share. In comparison, the non-GAAP adjusted earnings for the first quarter of 2014 were $8.3 million or $0.12 per diluted share. Which excluded $1 million of nonrecurring charges related to changes in our statutory tax rates and the corresponding impact from revaluing our deferred tax assets. This represents a year-over-year increase of 58% and adjusted earnings per diluted share.

With that, let's move to the balance sheet and liquidity. Net working capital increased during the current quarter by $31 million, as we ramped up production in the first quarter consistent with our seasonal expectations. We expect networking capital to be relatively stable during the second quarter with the potential for a slight increase as we hit our peak production month in the summer.

Capital spending was approximately $3 million for the quarter and we continue to expect full-year 2015 capital spending to be approximately $25 million. Our liquidity, or cash available borrowings as of the end of the quarter was approximately $269 million, an increase of more than $60 million on a year-over-year basis and inclusive of the $40 million of voluntary debt prepayments in 2014. And $18 million of share repurchases completed in the first quarter. Our total and net debt leverage ratios were 2.1 times and 1.3 times respectively at the end of the quarter.

As I wrap up this section, I would like to highlight a couple of significant accomplishments for the quarter. First, we successfully refinanced the term loan and obtained the key terms we were seeking, specifically we reset the tender with the maturity in 2022, we stripped the remaining financial covenant and we lowered the interest rate for 25 basis points. Overall, this refinancing will lower our annual interest rate expense by approximately $1 million and will provide significant flexibility into the foreseeable future.

Equally important, by extending the maturity an additional three years the only significant debt maturity prior to March 2022 is our $150 million convertible note, which matures in May of 2018. One final point, during the process of refinancing the term loan our corporate credit rating was operated by Moody's to Ba3 from B1.

Second, we made significant progress executing our share buyback program. We've repurchased almost 1.3 million shares or $18.3 million against our 60 million share repurchase program, or approximately 30% of the program in the first quarter. We were pleased with this progress as it provides us with additional flexibility for the remainder of this year and next year as we evaluate share repurchase and other return of capital opportunities going forward.

In summary, we delivered a strong first quarter, a record start for any year in our 30-year history. All business segments posted solid results, the balance sheet remains strong and we are well-positioned to maintain our momentum into the second order. We finished the quarter with strong liquidity and approximately $125 million in cash on the balance sheet, our leverage ratios remain in comfortable territory and we have no significant debt maturities before 2018. Lastly, we remain committed to being good stewards of the Company's capital and managing the Company for long-term value creation. Thank you and I will now turn the call back to Yolanda and we will take any questions that you have.

Thank you.

(Operator Instructions)

Mike Shlisky.

Hello, good morning, this is Leigh on the line for Mike. Just wanted to touch on the order trends that you guys are seeing. How far are you out are you currently booked?

The $1.2 billion in backlog, if you look at it on a consolidated and compressed basis, it translates to about eight months of backlog.

Okay. Great. So are you considering opening your order books for 2016 early at this point?

Not at this juncture. It's a little early in the process to be looking at 2016 needs. Customers will become more serious about that as we get later into the year, as we get into midyear. Our prediction is that you'll see actually an earlier interest by customers to start the dialogue than they would typically, because of wanting to lock up slots. As I shared in my formal comments, some customers have actually faced needs for equipment and have had to delay taking on that equipment because they couldn't find slots in the industry. I think you'll see a little bit of an earlier trend in getting on board and wanting to have those conversations to lock in slots earlier.

Okay. Great. And then one last follow-up if I could. What kind of pricing are you seeing with currently in your backlog. Is it around the same pricing you saw in Q1, or would you say it's slightly better given that you are able to be more selective now?

As I stated in my comments, as we progress through the year, we believe that you'll see continued improvement on year-over-year comparisons on our pricing, on a net pricing basis. Mix can always have an impact as you get some of the smaller, lower priced product, but it doesn't impact the margin that we get from those. So what you'll tend to see is continuing year-over-year improvement in net pricing output, specifically from the commercial trailer products business.

Okay. Great. I will leave it there. Thanks.

Thank you.

Alex Potter.

Hello, this is actually Winnie in for Alex. Last quarter you guys had mentioned that this year Q3 would be the quarter in which the gross margin in BPG get back to the 21 % to 23%. But obviously that wasn't the case, it rose to 22% in Q1. I think you briefly touched upon this. Can you elaborate on what changed. Is the current margin run rate sustainable, both in terms of gross margin and in terms of G&A?

Good question, actually. It really was operational execution that really drove the improvement for the business. They did have some favorable mix in product, but the team is really tried to step up and address some of the challenges that they had previously faced and are working hard to continue to do that as we progress through the year.

I do want to re-emphasize what I commented on in my formal comments earlier, is that we transition some of the results of the first quarter through the second quarter we will have to have some patience. We're looking at probably a flat quarter-over-quarter performance by that business, diversified products. As they transition in and get these new expansions up and running effectively, get some of their product, the new product produced, shipped and start getting able to recognize some of those efforts as we go forward.

But as we progress through the latter half of the year we should expect some marked improvement. But our 21% to 24% previous guidance for gross margin for the diversified products business stays as our guidance for that. So that is what we're trying to achieve and maintain in that range.

Okay. Great. Thank you so much for the color. And then another question is the non-trailer revenue in the DPG step down it seems like on a sequential basis. How much of that was due to seasonality? How much was it due to ASP pressure or other causes and our can we justify a bounceback in there?

I wouldn't get into too much granularity there, there are so many moving parts within the diversified products business. But some of the non-trailer product would be coming out of our Wabash composites business, and we previously -- in previous calls discussed some of the pricing pressures on the workhorse DuraPlate AeroSkirt product, so that dynamic remains the same.

And then in the engineered products part of the Walker business, they had some timing seasonal issues as they built some of the product in that business, takes longer periods of time to build, construct and ship, so there tends to be some timing delays from time to time on getting their product completely shipped. Stationary silos, some of the pharmaceutical down flow booths and isolator booths. Those are the type of things that will tend to be lumpy throughout the year.

So the DuraPlate products business -- the diversified products business has a lot of that lumpiness from quarter to quarter that you have to contend with within the engineered products business and within the Wabash composites business. I wouldn't read anything into it. Just patience through the second quarter as we build up and get into the latter half of the year.

And there's just some natural variation that occurs in that business as a result of, as Dick mentioned, the diverse set of businesses, products and markets that we serve in the diversified products group. So some of that is to be expected.

Okay, thanks, I'll pass it on.

Thank you.

John Mims.

Good morning, guys. Let me ask Dick, kind of following up on the question on backlog and pricing power. I'm curious to know how much flexibility you have for slots in the back half of the year in terms of being able to kind of triage more aggressively priced trailers, or how much of that is just locked in with the larger long-standing orders that you are still filling.

The drive-in segment is the one that has had the largest increase in demand across the industry. Obviously that's the part of the business that gets fille up the earliest. And has pretty much been that way. What we have done, as the orders were coming in late last fall in droves, we were standing very firm and strict on our commitment to favor margin over volume. So we were looking at each one of those and adjusting pricing where we could. Remaining slots we have been extremely tight on a scrutinizing just which order opportunities, which quote opportunities have actually been converted to orders to get the most price benefit that we could out of them.

So we have been very selective. We feel we have done a very good job with that. I always hate to say that we're completely filled up because the commercial trailer products team just continues to drive productivity improvement efforts within the business and that's what's allowed us to increase our projections for the year. Some of those activities and efforts that have resulted in creating effectively additional capacity without having to invest anything in the business to create it, other than the productivity improvement efforts through our CI activities and events.

Okay. That makes sense. And I know you have the backlog to be technically full, but when you look at billed slots are you actually full or do you save a pocket of production capacity for emergency orders, high priced orders that may come in and need to be filled quickly

We don't effectively save the slots. We, I guess you could say sell them to the highest bidder, I hate to use that expression, but we've been -- as my earlier comments, we try to be very selective in how we fill the remaining slots. But the team, while re not effectively saving slots, the team has found ways to be able to take advantage of smaller opportunities here and there through their productivity improvement initiatives to create some of them. We always have some overtime that we will use on weekends to take advantage of some very attractive priced opportunities. We do not do any slot holding per se that may go on in other pockets of the industry.

Sure. That makes sense. And then on the labor side, can you comment on wages, labor availability, wage inflation. As I look at G&A excluding depreciation that kicked up a little bit is a percentage of revenue this quarter, I know the first quarter is kind of tough to read for the full year, but are you having to do across-the-board wage increases, are you paying more overtime this year than last year, any help there would be helpful?

There may be some more. We have not had any wage pressures per se. We have normal adjustments that we will pass along, but nothing out of the ordinary. On the overtime front, clearly as I stated about being opportunistic on attractive quote opportunities to accept orders that would provide an opportunity to utilize overtime to build those, we're going to be obviously paying an overtime premium to build those on weekends. So yes, we're going to see an increase in this environment in the amount of overtime, but those are taking advantage of the opportunity.

Sure and any increase in overtime there is still within that 5% SG&A target that you put out Jeff?

On a full-year basis, we expect it to still be around 5%. Obviously the first quarter is, on a percent of revenue, is one of the highest quarters we have. The good news is, this year first quarter as a percent of revenue was lower than it was last year. I think the increases you see in any kind of SG&A is really related to the Company performing at a higher level. The growth we've experienced and some investment in these future growth opportunities that we're pursuing and investigating.

And just to clarify, the overtime increase costs would be reflected up in the cost of goods sold

That's right. That's helpful. Just one last one and I'll turn it back. When you're in this kind of environment where everybody's making trailers as fast as they can and truckers are running around as fast as they can, you charge the marriage for trailers that you are manufacturing but people are too busy to come pick up, that's in your yard for a while?

Not really. We have looked at that in the past and it's just not something that generally works well in the industry. What we have done though is we work much more closely with our customers to get them to identify which product and which orders that they intend to pick up themselves. What we call customer pickup versus turning it over to us to prepare and plan for the delivery of it.

And what we have changed in our system and why we're in recent quarters having better success, is actually working with them prior to the build completion to actually identify which approach they want to take. And that's something that helps the process get started earlier in the planning process for it, and it gives a little bit more predictability. I'm not going to say it's perfect yet, but it gives us a little bit more predictability on what we will be able to accomplish. And that's a relatively recent change that we've made and it seems to be becoming more effective in getting a steadier flow of shipments out the door. It's a little early for us to say that with a 99% confidence in predictability, but it seems to be getting much better over these last couple of quarters.

All right. Understood. Thanks so much. Great quarter and great start to the year.

Thanks.

Jeff Kauffman.

Hello guys.

Hello Jeff.

Good morning, congratulations. That was a fantastic quarter. It was nice to see. Couple of follow-ups with Jeff. Jeff you mentioned with the term loan the positives, the lower rates, the absence of financial covenants would save you about $1 million in interest expense. But your guidance a little bit earlier was that interest expense was going to be only about $1 million lower than last year. So should I assume that none of the guidance you've given incorporates any debt paydown from this date forward?

I don't forecasted debt paydown. We take that on a quarter by quarter basis, it's a discussion as you know, Dick and I have with our Board of Directors on a regular basis and obviously that is part of our overall capital allocation strategy as well.

Okay. And the share repo. You said you brought back about 1.3 million shares.

Just sort of 1.3 million.

Was that late in the quarter because it didn't seem like there was a big change in shares outstanding.

There are a couple of moving pieces there and when you look at the outstanding shares, especially on a diluted basis. John. Sorry Jeff. Like we said, we repurchased approximately 1.3 million on a diluted basis, so the convertible notes will add about 1.7 million shares to the calculation. You have to take that into account when you look at the total diluted share counts. I think the good news is, is we can out of the gate very strong on the share repurchase program. We made a significant progress in the first quarter. And gives us great flexibility for the next seven quarters as we evaluate that form of return of capital and other forms of return of capital.

Okay. And just a follow-up on that. You do have the convertible security out there, I guess the good news is are starting to worry about it getting in the money eventually. Can you refresh us on what the options are for using cash to maybe repurchase that if you choose to do so and kind of what those prices are that would trigger some of those events?

Sure. So let me try to give a high-level summary of the $150 million convertible notes that are due in May 2018. The conversion price is around $11.77 per share. So from that perspective Jeff, the shares would already be in the money at the current share price. Having said that, the holders of those notes don't have the ability to convert until our share price is above -- 30% above the conversion price or 20 out of 30 days at the end of a quarter. So that translates into $15.21, so we haven't triggered that mechanism for them to be able to convert at this point in time. And during the last six month of the convertible notes they can convert at any time as long as the price is above the conversion price.

Okay.

And we then we don't have a call provision on that. So those notes are not callable by us, Jeff, so it's I would say not easy to repurchase those shares. We could either repurchase in the open market or obviously if they were big holders that were willing to do it. A private transaction, we could investigate that as well.

I guess where I'm going with this is, if I take your earnings guidance and subtract the CapEx, even with the share repurchase you're looking at somewhere between $80 million and $90 million of uncommitted cash flow for this year. And I know acquisitions are alternative dividends are alternative, but does it make sense to raise cash levels in the event that the share price doesn't have a whole lot more to go to trigger that? Maybe have some cash in reserve or how do you think about capital deployment that way?

I think you have to plan for all of the potential outcomes there, Jeff, so we need to be in a position to meet any of those scenarios and I think obviously we've kicked the term loan out for another seven years. That is in a good spot. It allows us to turn our attention to the convertible notes. We will evaluate opportunities for further delevering against the convertible notes as those opportunities present themselves. And in the interim, I think you look at our delevering in terms of our net debt leverage as potentially we do hold more cash on the balance sheet.

All right guys. Thanks so much, Jeff.

Thank you, Jeff.

Jamie Goodfellow.

Hello, good morning, this is Jamie on for Kristine.

Good morning.

Jumping on for Christine, I wanted to dig into what is going on in the tanker market, what you have seen in terms of pricing and basically is it fair to assume that your competitors who might have heavier exposure directly to energy end markets are feeling some pricing pressure. And might those pressures flow through to the broader market, including the players not serving those markets directly.

It's a great assessment James. While we have -- we have some direct exposure as everyone knows, which for the Walker business itself, 10% to 12% exposure to the energy sector. So while we have some impact there, there is also the indirect impact and that's since those competitors who may be more exposed will shift their focus to other products and therefore we end up feeling some of the indirect impact of the softness in the O&G space. So that is creating some of the pricing pressures that we shared and described last quarter and those have continued. We're hopeful as O&G -- of the price of the oil, barrel oil tends to stabilize, go up that we may see some moderation there. But that has been some of the effect that we've talked about.

Can you quantify to any extent what the pricing has done or where it's turning there?

James, we're not going to talk about, unfortunately, pricing in individual market segments within the diversified products group. I think as a whole you have seen that there has been some price pressure there. Some of that is related to product mix. As you know, we serve a diverse set of markets there from energy which is crude oil, refined fuels, food, dairy, beverage, chemical, environmental and all of those market segments. So as Dick mentioned, the indirect impact on oil and gas, I think it does put pressure on some of those other markets. And probably the best visibility is through just the average sales price that you see in the overall segment.

Got you. That's helpful. Congrats on the quarter.

Thanks.

Thank you.

Brad Delco.

Good morning, Dick. Good morning, Jeff. How are you guys?

Hello Brad.

I may have missed this, I apologize I have been on two calls. But you made a comment about seeing sequential flat performance in diversified products, were you speaking specifically about revenue or gross margins or earnings, or any more color there would be helpful.

I think you want to look at both lines of revenue and the profit line. As they are transitioning and getting the new facilities. The facility in Frankfort, that is the new lease facility for the Wabash composites business to give them the needed floor space to be able to expand the business and introduce the new product offerings. The new aerodynamic offerings they've got. And then you've got the expansion in our Mexico facility for the introduction of stationary silos for food, dairy, beverage industries to service the Mexican market, that's a growth initiative but it's in its ramp-up phase.

The expansion in Mexico was completed late last year and we got production started up earlier this past quarter and will start seeing some shipments flowing out of there this quarter. So that is going to help the business going forward, but we need a little bit of patience as we transition through those ramp ups and get the operating efficiencies in line and get into the second half. That is all I was trying to communicate there, is that you've got a combination of a number of factors.

Those ramp ups, the introduction of those new products and then you've got some of the softness that's been created by slowdowns in the oil and gas sector that have had some direct impact on our business, but then the indirect impact of competitors that are refocusing their efforts and creating not only some pricing pressures but some competitive nature, as they shift away from some of the O&G product that they produce to try and produce some of the other product that they were not producing previously, which would be more in our wheelhouse. So you have got a combination of a number of factors that are impacting it and we're just trying to remain cautious as we go through the second quarter because of some of that noise. We've gotten much stronger as we enter the second half.

Okay. So that's what I was getting at a terms of what is embedded in guidance. It seemed as if flat into 2Q but because of these investments in growth we should see maybe some acceleration in the back half of the year, is that a fair way to describe that?

Absolute.

Just want to touch on, you put up really strong margins in the CTP sector on a lot of volumes running through the plants. Is the idea I guess going into the second and third quarter, is that those margins can improve because of the improved price in the backlog, or is there additional productivity that can be realized from just your higher production rates?

You get a little bit of both. Certainly as we continue to fill out the backlog, as we were taking newer and newer quotes were coming in and filling out the balance of the backlog, the pricing environment is better today than it was several months ago. So we've taken advantage of that and with the maturity of the workforce, the number of productivity improvement initiatives that the team was able to throw at the workforce is with a much more mature group. They were able to handle it.

So we're getting improvements in velocity and productivity and efficiency, tack time is being improved. So we're getting more out of what we already have installed in the factories and that is what allowed us to make the adjustment on the top line for total trailer output for the year, is leveraging some of that newly created capacity, along with some opportunities to grab some attractive orders, and work overtime to fulfill those.

And Brad, recall we ramp up in the first quarter so there were some first-quarter ramp up there. As you get into the second quarter you're really firing on all cylinders and you get the benefit of that in the second and third quarters. And in the rest of the year.

That makes sense. And this may be a very random question, but looking at some of these truck load names, you're hearing a lot about driver wage inflation and just curious to get your perspective, are you seeing any wage inflation pressures from your workforce? Or is there a way for us to think about wage inflation in your business over the course of the year and maybe in the next year?

That was a question that was asked previously so I'll just reiterate. We have not seen anything unusual in our business. Obviously you're always going to have a certain locations that might need, if you have a location that has eight mechanics and you're going to have to go out and find a mechanic you may end up making some adjustments.

But for the masses and talking about here in the main headquarters location in Lafayette, where we actually have a total of 3500 of our associates are here, we have not seen anything unusual, the workforce is far more stable today than it has been in a number of years. So the turnover rates are lower and we've got programs in place is that provide incentives for performance. But we've not seen anything unusual from a wage pressure, unlike what our customers maybe seeing as they fight for a decreasing pool of drivers.

Okay, great. Sorry for making you repeat that, but thanks for the time and congrats on the quarter.

Thanks.

We have no further questions at this time. I'll turn the call back over to Dick Giromini for final remarks.

Thank you. In conclusion, we are extremely pleased with the results we were able to deliver in the first quarter 2015. That said, we see even further opportunities to accelerate top line growth, expand product and market breadth, and to deliver even greater performance in almost all aspects of our business.

With a hyper focus on execution and delivering results, I'm confident that we'll do just that. Thank you for your interest in and support of Wabash National Corporation. Jeff, Mike and I all look forward 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.