Wabash National Corp (WNC) 2015 Q2 法說會逐字稿

Good day everyone, and welcome to your Wabash National Corporation second quarter earnings call. (Operator Instructions). I'd like to now introduce your host for today's program Mr. Mike Pettit, Vice President of Finance and Investor Relations.

Thank you, Roland, and good morning. Welcome everyone to the Wabash National Corporation 2015 second quarter earnings call. This is Mike Pettit, Vice President of Finance and Investor Relations. Following this introduction, you'll hear from Dick Giromini, Chief Executive Officer of Wabash National on the highlights of the second 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 our financial results. At the conclusion of the prepared remarks, we'll open the call for questions from the listening audience.

As a reminder of upcoming events Wabash National will be hosting an Investor Day on August 18th at our Lafayette, Indiana headquarters. Attendees of the event will get a firsthand look at our new facility supporting key growth initiatives as well as our updated five year corporate goal. You can register for the event on the Investor Relations page on WabashNational.com or you can send me an e-mail and I will provide you with additional information.

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 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 statements. 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 Giromini, President and CEO.

Thanks, Mike. Let me start off by saying we're extremely pleased with the continued progress we're making with the overall business and the ongoing execution of our strategic plan. At the midpoint of 2015 our pace of improvement has surpassed that of 2014 and we are well on our way to another record breaking year.

During the second quarter we achieved all time records for any quarter in the Company's 30 year history in gross profit, operating income and operating EBITDA. These results truly demonstrate and validate the transformative nature of your strategic growth and diversification initiatives. Specifically we have continually set new records for Company performance over each of the past five quarters as a result of specific strategic actions executed over the last three years. I've discussed these actions many times, so I'll only highlight the key factors driving our record performance.

First, our Commercial Trailer Products commitment and focus on favoring margin over volume has been a key contributor to our recent performance along with a continued commitment to productivity improvement. Second, the establishment of the Diversified Products Group segment, which is a combination of strategic and organic growth initiatives as a significant contributor to overall Company results has enhanced our business stability and reduced our cyclicality. Third, the inclusion of tank trailer parts and service in to our retail business has added stability and aftermarket growth opportunities to this segment. Finally, our commitment to grow our end markets while leveraging our scale to drive supply chain efficiencies has provided a solid foundation for continued margin improvement. We plan to further leverage these actions as we move through the second half of 2015 and into next year.

Turning to second quarter results. Trailer shipments for the quarter were a strong 16,900 units coming in at the top end of our guidance range of 16,000 to 17,000 trailers. Additionally, strong productivity driven by our ongoing continuous improvement activities led to exceptional second quarter build levels that also totaled approximately 16,900 trailers exceeding second quarter 2014 production by 2,350 trailers. Net sales for the quarter were $515 million representing a $29 million or 5.9% increase compared to second quarter of 2014. Consolidated gross profit of $72.4 million set an all time Company record exceeding second quarter 2014 by $10.8 million while gross margin increased 140 basis points sequentially to a strong 14.1% for the quarter.

Operating margin hit an 11 year high at 8.2% up 120 basis points year-over-year. Operating income for the second quarter was $42.1 million representing an $8.2 million or 24.2% increase year-over-year largely driven by significant strides made in the Commercial Trailer Products segment partially offset by softness in Diversified Products tied largely to timing of shipments and orders. Operating EBITDA, which we believe is an important metric to highlight the Company's overall performance, increased by 17.5% or $8 million to $53.7 million in the second quarter and represents another Company record.

Overall we were successful in delivering record financial results driven by strong trailer shipments and excellent execution which translated to overall growth in revenue, profitability and operating EBITDA. The second quarter represented the most profitable in the history of Wabash National with nice momentum to build on as we move through the rest of the year. Let's now spend some time discussing the results of our business segments.

Let's start by looking at our Diversified Products Group reporting segment or DPG, which includes our Wabash Composites, tank trailer, aviation and truck equipment and our engineered products businesses. All in DPG delivered a quarter effectively in line with the guidance we provided during last quarter's call with net sales of $98 million. While revenues were down approximately $21 million in year-over-year comparisons and $6 million sequentially the DPG team nonetheless maintained healthy gross margin at 22.1% overall, executing effectively and overcoming the reduced overhead absorption related to this lower revenue. As discussed last quarter patience is needed near-term as we launch several new growth initiatives within the segment and ramp up new facilities for the Wabash Composites business and in Mexico.

While certainly not in any way satisfied with the second quarter sales levels, we recognize the somewhat unpredictable nature of the timing of order intake for these businesses that impacted the quarter and are pleased with the team's ability to manage costs effectively and deliver solid gross margins. That said, the DPG business entered the current quarter with the strongest backlog in the past 12 months, nice progress in the ramp up of the Wabash Composites facility in Frankfort and the beginning of shipments of food grade stationary silos from our recently expanded San Jose Iturbide facility in Mexico. We're pleased with the progress seen on DPG's two major facility projects. First, the expansion of our food grade silo operations in Mexico provides necessary capacity to support cost effective production and delivery of stationary silos for the global food, dairy and beverage market as we begin efforts to expand this product line internationally. This expansion is a nice compliment to our existing domestic business and provides an effective platform for further growth out of our world-class Mexico facility.

Second, we continue to progress nicely with the ramp up of our new 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. Frankfort operations saw their workforce expand in the second quarter as increased demand for its industry-leading innovative aerodynamic solutions accelerates and to support production requirements to fulfill recently received orders for its unique truck box product. In addition to the transfer of assembly operations for the core DuraPlate AeroSkirt product, new offerings that have been developed and are in ramp up phase at the facility include the recently introduced AeroSkirt CX developed to provide a cost effective choice for those customers whose decisions are more cost driven than fuel efficiency driven.

At the high performance end, targeting customers who want the very highest in product performance, the Ventix Drag Reduction System or DRS and the AeroFin tail device provide industry-leading fuel efficiency improvement and performance. Combining the DRS and AeroFin tail certifies the trailer for SmartWay Elite status without any additional equipment. Our Frankfort facility is already solidly profitable, and as the new products begin to take hold is poised for a strong second half of 2015.

To summarize, we are pleased with the margin recovery and sustainability we have seen over the past few quarters in DPG with continued excellent execution within the tank trailer operations and remain very excited with the investments we've made in the new facilities and the new products that have been launched in those locations. All this progress and a solid backlog bring us to a point that we can now assure significant sequential increases in both top line and bottom line for the DPG business for the current quarter.

Moving on to Retail. This segment showed a nice year-over-year improvement in same store revenue and profitability. Net sales of approximately $45 million represented a $2 million or 5% increase year-over-year on a same store basis when adjusting for the transition of the three west coast branch locations to the independent dealership model that occurred in the second quarter of last year. Gross margin dollars rose in the quarter to $5.3 million while gross margin percent increased 60 basis points in year-over-year comparison to 11.7%. We remain focused on executing our retail strategy to further enhance margins and profitably grow this segment by 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 services and growing the number of customer site service locations that we operate. Second quarter profitability was significantly aided by these initiatives in year-over-year comparisons and are expected to continue to mature and contribute significantly to another record year for our retail operations.

Finally let's discuss our Commercial Trailer Products segment consisting of our dry and refrigerated products, platform trailers, fleet trade used trailer sales and our wood flooring operations. This 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. Second quarter delivered best ever quarterly revenues of $395 million with a gross margin 11.7% that reached its highest level since 2005, as it was constituted previously, as well as significantly surpassing the previous stated objective of achieving a double-digit gross margin quarter. With that initial goal achieved, we now expect the CTP business to achieve its remaining margin goal of double-digit margin sustainment by completing the current full calendar year with double-digit gross margin, achieving this objective a full year ahead of our internal expectations. The improvement seen in the second 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 optimizations through design and sourcing.

In evidence of the superior execution achieved during the second quarter our CTP operations were able to produce 2,200 more trailers than in the same period during 2014, a 15% year-over-year volume increase, while utilizing the same number of manufacturing line shifts and staffing levels. This long time focus on waste elimination and velocity optimization continues to deliver increased operating leverage for the business. Additionally, the business delivered almost a $500 increase in net pricing for the second quarter in year-over-year comparisons and we expect to continue to see year-over-year net pricing gain throughout the remainder of the year.

Now let's discuss our strategic initiatives within CTP. In the third quarter CTP will launch a production facility on its Lafayette campus in support of a new key strategic initiative related to final mile delivery. This repurposed production space is being retooled to support future production of LTL trailers that will be both 28-foot and 33 feet if approved, specially designed truck bodies, and other product lines that specifically benefit from increasing demand in final mile and home delivery shipping trends. This investment demonstrates the Commercial Trailer Products intention to continue to grow their business organically by expanding their focus in to adjacent transportation markets from those we presently serve. We believe that continued strong growth in online sales, home delivery and re-urbanization will continue to redefine the logistical footprint for our customers. We'll be providing tours of this new facility and explaining our growth plans in more detail at our upcoming Investor Day on August 18th here in Lafayette. We look forward to seeing many of you here. With both momentum and a historically strong demand environment on their side we're more confident than ever that the CTP team will again deliver record performance for the full year.

Before I discuss Wabash National's specific expectations for the third quarter and for the full year 2015, let me comment on a few economic indicators and industry dynamics that we monitor which provide broader context for our expectations. Following a decline of .2% in the first quarter the economy expanded an estimated 2.9% annual rate in the second quarter. Most analysts anticipate the U.S. economy to grow moderately at close to a 3% annual rate in the remaining two quarters of 2015. Although the general economy continues to produce some mixed signals while reflecting modest growth rates, key indicators overall within the trucking industry point to continued strong demand and signal a positive outlook. ATA's trunk tonnage index declined by .5% in June to a still strong 131.1 following a 0.8% increase in the prior month, and representing the 12th consecutive month above a rating of 130. The index was 1.8% higher than in the same month last year. Year-to-date through June tonnage was up 3.4% compared to the same period in 2014. The July report from ACT Research forecasts 2015 trailer shipments at 307,900 units up 14.6% year-over-year and a strong 297,000 trailers in 2016. FTR now anticipates 299,200 trailers to be produced for 2015, an increase of 12.8% year-over-year, and projects 267,800 units to be produced in 2016.

From a regulatory and legislative standpoint the Environmental Protection Agency and the National Highway Traffic Safety Administration proposed regulations last month in an effort to further reduce fuel consumption and production of carbon dioxide and other greenhouse gases. The proposal focuses mainly on van trailers and will require fuel savings technologies such as trailer side skirts, low rolling resistance tires and automatic tire inflation system to become standard equipment starting in 2018. Additional regulations would be implemented in 2021, 2024 and 2027. In addition, we all are still waiting to see if the increase in pup trailer length to 33-foot, a provision that is part of a proposed fiscal 2016 funding bill to pass the U.S. House and the Senate Appropriation Committee in June, will be passed by the Senate and signed into law. If so, this legislation would provide tail wind to the strength and longevity of the current trailer equipment replacement cycle.

And as I discussed on our last call, the suspension of our restrictions to the 34 hour restart provision of the hours of service rule until September 30th of this year has provided some temporary relief for fleets related to required nighttime break periods. According to FTR Class A truck utilization decreased to an estimated 95.3% at the end of May this year from 97.5% at the end of 2014. However industry analysts caution that if the hours of service restart provision suspension should not be extended, capacity utilization would rise to peak utilization levels almost immediately, leading to significant capacity limitations in the last quarter of 2015 and into 2016.

In light of that economic and industry backdrop let's now discuss Wabash's view for the second half of 2015 and a first glimpse of 2016. Our backlog remained extremely strong finishing the second quarter at $1.1 billion as compared to 12 months ago at $842 million at this time and representing approximately seven months of production at a consolidated level. This backlog level demonstrates a continuing healthy and strong demand environment. And in contrast to some who may be calling the end of the trailer demand cycle we see it differently and anticipate a continuance of this strong demand environment supporting revenue and margin growth. As a result in response to increasing interest from customers we opened the 2016 order book in late June and began accepting orders for 2016 build slots. We are presently experiencing a much stronger demand for these build slots than what is typical for this time of year and believe that this activity further supports our view that 2016 will be another strong year for the trailer industry.

In addition to quote and order activity key industry drivers such as continued strong freight demand supporting carrier efforts to increase rates and improve profitability, excessive fleet age, regulatory compliance requirements along with increased residual value of used trailers all support our view for continued strong demand for new trailers and an extended trailer cycle. A favorable demand environment coupled with record production levels and an extremely strong backlog provides a solid environment to finish out the year on a strong note. As a result we expect third quarter consolidated shipments to be between 16,500 and 17,500 units with total builds levels for the quarter within the same range. Our expectation for full year shipments is now 63,000 to 66,000 units. This puts our forecasted year-over-year growth in shipments at 12% to 13% or effectively in line with industry projections.

In terms of earnings we are raising our full year EPS guidance by $0.10 per share to a range of $1.25 to $1.35 earnings per share. This would represent a 46% 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 two quarters of the year to each show nice year-over-year EPS growth.

Looking ahead to 2016 we see another solid year for the industry, and we fully expect continued growth from our strategic initiatives. As our 2016 order book grows, we will update our guidance. But at this time, assuming global and economic growth remains in line with where it has been over the past couple of years, we would expect 2016 to be at least comparable to 2015 in terms of full year earnings per share. Overall based on the current demand environment, our strong backlog and the disciplined execution being delivered by the total team we fully expect 2015 to be our fourth consecutive record year with a continued strong cash generation coupled with a very strong balance sheet.

In summary, we're obviously pleased to have delivered a very strong record breaking second quarter and to have continued the string of strong quarterly results in CTP. We're also encouraged that DPG gross margins held above 22% for the second quarter and largely maintaining the improvement recorded in the first quarter. While extremely pleased with our position there remains more opportunity and work to be done. In the Commercial Trailer Products segment we'll continue our focus to accelerate our efforts to introduce more attractive higher margin growth opportunity to drive its top line and bottom line. We're now clearly seeing the margin improvements in this business but we need to ensure the business consistently delivers double-digit margins and then 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 consistently maintain our improved margin performance. We also need our new products to deliver on expectations to grow in their respective markets and contribute to DPG's top line in the second half of 2015. Furthermore we need to leverage the higher margin tank parts and service opportunities for margin expansion 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, there remain other opportunities to improve. We will continue to be strategic but selective in pursuing opportunities to grow our business in addition to the organic growth initiatives underway. We'll continue to be responsible stewards of the business to ensure that the proper balance between risk and reward is considered in all decisions.

In closing we're extremely well positioned this year to deliver our fourth consecutive year of record revenues and profitability with a strong backlog, a demand environment that remains favorable and a number of new products either already launched or nearing launch status as well as operations that are performing at a very high level. With that, I will turn the call over to Jeff Taylor, Chief Financial Officer to review in detail our financial results. Jeff.

Thanks, Dick, and good morning everyone. In addition to the press release we filed the 10-Q after the market closed yesterday, so I will cover the key points. Overall it was a very strong second quarter which is reflective in the financial results. All three segments contributed to our record breaking performance. Albeit at different levels nevertheless our record setting performance demonstrates the benefits from the improvement in our operational execution during the quarter and our strategic diversification efforts. With that, let's get into some of the second quarter financial highlights.

Consolidated revenue for the quarter was $515 million an increase of $29 million or 6% compared to the second quarter of last year. Total new trailer shipments were 16,900 units near the top of our guidance range of 16,000 to 17,000 units and 1,950 units higher year-over-year. Sequentially consolidated revenue increased $77 million or approximately 18%. Commercial Trailer Products net sales were $395 million, an all time record for this segment as currently constituted, which represents a $59 million or 17% increase on a year-over-year basis due to higher new trailer shipments of approximately 2,250 units.

New trailer average sales price or ASP increased approximately $500 per unit primarily resulting from improved pricing and a lower mix of customer supplied tires partially offset by a product mix that was biased towards lower priced products such as converter dollies. Diversified Products net sales decreased 18% or $21 million on a year-over-year basis to $98 million. DPG revenue was down year-over-year substantially due to lower sales within the Wabash Composites and engineered products businesses, both significantly impacted by the timing of orders and shipments. Retail segment net sales on a same store basis adjusting for the transition of three west coast branch locations in the second quarter of 2014 increased approximately $2 million or 5% on a year-over-year.

Looking at our various product lines new trailer sales of approximately $436 million on 16,900 units increased $51 million or 13% year-over-year. This year-over-year increase is largely due to the increased new trailer shipments and improved pricing in Commercial Trailer Products. Used trailer revenue was approximately $11 million on 650 units, a decrease of approximately $4 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. Components, parts and service revenue was approximately $43 million in the quarter down $9 million from a year ago primarily as a result of the large LTL AeroSkirt retrofit project in last year's results which did not repeat this year.

Finally equipment and other revenue on a year-over-year basis decreased by $9 million to $25 million for the quarter. This decrease was primarily driven by lower sales from nontrailer equipment within Diversified Products. In terms of operating results consolidated gross profit for the quarter was an all time record for the Company at $72.4 million or 14.1% of sales compared to $61.6 million or 12.7% in the same period last year. This represents a $10.8 million or 17.5% improvement year-over-year. Commercial Trailer Products was the primary driver of the gross profit increase which was partially offset by decline in Diversified Products and Retail.

Let's look at the segment margins in more detail. Commercial Trailer Products gross margin improved 340 basis points over last year resulting in a 65% increase in gross profit or $18.2 million. This year-over-year profitability improvement in Commercial Trailer Products was driven by manufacturing efficiencies and operating leverage gained from increased volume in addition to improved pricing. Production during the quarter was 15,950 units, up by approximately 2,200 units year-over-year due to strong order intake and productivity. Diversified Products gross profit decreased $4.7 million compared to the prior year period primarily due to lower volume and revenue within Wabash Composites and engineered products. However this segment maintained its gross margin at 22.1%.

Moving on to Retail. On the same store basis when adjusting for the transition of three west coast branch locations the gross profit in this segment increased in the quarter by $0.4 million or 7% year-over-year due to increased new trailer pricing as well as continued growth in customer site service. On a consolidated basis the Company generated operating income of $42.1 million dollars in the quarter an increase of $8.2 million or 24% year-over-year driven primarily by improvements in Commercial Trailer Products. An 8.2% operating margin was approximately 120 basis points higher than the prior year quarter and 200 basis points higher than the first quarter of this year. Sequentially operating income was higher by $14.8 million primarily driven by seasonally higher shipments of new trailers in the Commercial Trailer Products business and a strong demand environment.

Operating EBITDA for the second quarter was $53.7 million, a year-over-year increase of $8 million or 17.5%. Sequentially operating EBITDA improved by $14.5 million on seasonally higher new trailer sales. On the trailing 12-month basis revenue was approximately $2.0 billion with operating EBITDA approximately $186 million or 9.4% of revenue.

Cash flow from operating activities was strong in the second quarter and was approximately $51 million higher through the first six months of the year than the same period last year due to increased net income and effective management of working capital. As typical we expect cash flow from operations to be stronger in the second half of 2015 than what was experienced in the first half.

Selling, general and administrative expenses excluding amortization for the quarter was $25 million or 4.9% of revenue. SG&A as a percent of revenue excluding amortization is 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 consisting primarily of borrowing costs totaled approximately $4.8 million in the second quarter a year-over-year decrease of $0.9 million primarily related to the impact of a voluntary term loan prepayment in 2014 as well as lower interest expense due to refinancing of our term loan. We anticipate interest expense will be relatively stable throughout the remainder of this year. Approximately $1.3 million of our reported quarterly interest expense is noncash and primarily relates to depreciation charges associated with our convertible notes.

We recognized income tax expense of $16.7 million in the quarter. The effective tax rate for the quarter was 36.8% in line with our guidance of a full year income tax rate of approximately 37%.

Finally for the quarter net income was $28.6 million or $0.41 per diluted share. On a non-GAAP adjusted basis and after excluding $8.3 million of gains from the sale of two former retail branch properties and a $0.3 million charge incurred in connection with the amendment of our revolving credit facility during the quarter net income was $23.6 million or $0.33 per diluted share. In comparison the non-GAAP adjusted earnings for the second quarter of 2014 was $16.9 million or $0.24 per diluted share, which included the impact of early extinguishment of debt charges and the transition of three retail branch locations to independent dealer facilities. This represents a year-over-year increase of 38% in adjusted earnings per diluted share.

With that, let's move to balance sheet and liquidity. Net working capital decreased slightly by $8 million from the first quarter. We expect net working capital to continue to be relatively stable during the third quarter with a potential for a small increase as we hit our peak production months during the summer. Capital spending was approximately $2 million for the quarter and we continue to expect full year 2015 capital spending to be up to $25 million. Our liquidity or cash plus available borrowings as of June 30th was approximately $308 million an increase of $39 million from the first quarter including the $25 million increase in the borrowing capacity from the asset based revolver which occurred in the second quarter and inclusion of approximately $22 million of share repurchases completed in the second quarter. Our total in net debt leverage ratios were 1.9 times and 1.1 times respectively at the end of the quarter.

As I wrap up this section, I want to highlight the significant progress we've made executing our share buyback program. We repurchased almost 1.6 million shares or $21.7 million in the second quarter, bringing our 2015 repurchased total to 2.9 million shares or $40 million against our $60 million share repurchase authorization or approximately two-thirds of the program competed in the first half of this year. We are pleased with this progress as it provides us with additional flexibility for the remainder of this year and next year as we evaluate all of our capital deployment alternatives including investing in the business, debt reduction, return of capital to shareholders through share repurchase or dividend and of course, strategically growing the business either organically or through acquisition.

In summary the Company delivered a record second quarter and the strongest first half performance in our 30-year history. We gained momentum in the second quarter and are well positioned to make further gains in the second half of this year. All three business segments posted solid results and contributed to the record quarterly performance. The balance sheet is strong and expected to strengthen further. We finished the quarter with strong liquidity and approximately $140 million of cash on the balance sheet. Our leverage ratios remain in comfortable territory and we have no significant debt maturities until May 2018.

Lastly, we look forward to leverage the success we have had to date and delivering strong result for the balance of the year all while remaining 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 Roland. We will take any questions you have.

Thank you. (Operator Instructions). And our first question comes from the line of Mike Shlisky. Your line is now open. Your question please.

I was going to try and save some questions for the analyst event, but this whole last mile thing it sounds like you're going to be doing drones from now on. I kind of wanted to touch briefly on the June orders here. It sounds like you didn't open the book until the very end of the month. The industry orders at least were up pretty substantially. I guess it is a two part question. First of all, what part of the orders (Inaudible) in the month might have been pent up from the previous few months when people wanted to order but couldn't? And secondly, were you guys at the end of the quarter still filling a lot of calls all the way through June 30th for folks trying to get into the queue for deliveries for 2016?

The quote board is quite strong. The orders that were ultimately quotes converted to orders in the latter part of June were those that were already in discussion and we had not opened the order book up for 2016 and finally made that decision to do so. So there was a large group of orders that were received and just reflective of the $1.1 billion the backlog that we reported I think pretty much says it all.

Okay. And just a quick follow-up on that question. I guess are you giving people a bit higher pricing in these new orders to ensure them early delivery in 2016 or is the pricing environment on these most recent orders fairly normal?

Well, it's not necessarily guaranteeing early delivery in 2016 because the quote activity that occurs early in the process and this year as I stated in my formal comments is earlier than normal are generally larger fleets who are placing orders for the whole year of next year. So the orders that were received in most part are for quantities of trailers that are spread across the 12-month period. Certainly on the pricing side we try to continue to favor margin over volume so we're always trying to look and see how we can optimize the pricing of the trailers relative to the strength of the market.

Great. And if I could just squeeze in a second follow-up on that question. The industry forecasters that you kind of mentioned in your prepared comments are both seeing declines in 2016. I think one is up to 10% decline in 2016. But based on what you said later on in your comments I guess, Dick, do you disagree with what those forecasters are saying? Do you feel like we'll have a flat to up year in 2016 just very broadly speaking?

Well, there two distinctly different forecasters and what they look at. One forecasts shipments the other forecasts production. But that said, we tend to agree more closely with what ACT Research says. Their analytics are closer to our analytics. FTR on the other hand has been more conservative in their outward views and their outlook. And they have been regularly updating and increasing their projections for both 2015 and 2016 as each of the months have passed over the past year or two. So when you look at the ACT Research numbers there is really no significant difference between 308,000 units or 298,000 units. It may quantify as about 10,000 unit difference but in reality it is pretty peak demand peak capacity utilization for our industry and what can be produced because the dominant number in there is really driven by the dry van segments. So those numbers we view as equivalent for the sake of argument and what we can do with the business in sustaining margin and continuing to improve profitability for the business.

Mike, this is Jeff. I would just like to add that obviously we haven't finished 2015 yet so we'll see where that number finishes out and then 2016 will play off of that. Having said that, any time that demand in this industry is significantly above replacement demand, replacement demand being approximately 220,000 units. So when the industry is above 250,000 units let's say that is very strong capacity utilization and we think a very positive environment for the industry as a whole and certainly we think could support stability if not improvement in the pricing environment. So at the levels that ACT and FTR are forecasting for next year we view that as a strong very positive environment for us and the industry as a whole.

Okay, great. Makes sense. I will pass it along. Thank you.

Thank you. Our next question comes from the line of John Mims. Your line is now open. Your question please.

Thank you. Good morning Dick, Jeff, Mike. Great quarter. So let me ask first on the backlog the $1.1 billion with the 2016 book being open now how much of that is for production that is planned for next year versus stuff that you should still finish out this year?

We haven't split that out, John. So I would not want to try and guess on what that split would be. But we got our fair share of the orders that were reported for the month of June I guess I can say that.

Okay. That is fair. That's fair. But from a build plan standpoint are you totally full for 2015 or could you still, you know, you're tightening the shipment guidance range. But is there room to move that up around up as the year progresses or are you at maximum capacity?

On the dry van side of the business we've effectively been full. We have been able to maneuver here and there for some small orders here and there with overtime. But that is basically where any limitation is now it would be on the overtime side of things to squeeze some smaller orders in here and there which is what we have done. But effectively dry van is full. Refrigerated has some capacity opportunity but it would require us to then go and staff and at this stage we're going to see what the 2016 demand is before we would try to add any staffing to support further capacity there. And the other businesses the lead time is always shorter, so you always have some open capacity to be able to accept orders whether it is in the platform business or in the tank side of the world.

Sure. That is helpful. And then, Jeff, let me ask you one on the margin improvement this quarter. The 340 basis points and you cited improved operations, operating efficiency as well as pricing. If you were to split those out just directionally how much did pricing impact that improvement for this quarter relative to just building better?

It is relatively evenly split between the two. I mean manufacturing efficiencies and operational execution was a significant contributor to the improvement we have made. Taking advantage of the operating leverage from the higher volume. And then we have improved pricing certainly year-over-year so pretty evenly split.

Okay. Just trying to figure out we talked about pricing and demand has been strong and my sense is there is good pricing going in to the backlog throughout this but that has typically been offset by mix. And I think it was somewhat this time, but seeing that pricing was strong enough to push through this quarter. So are we in an environment now where your backlog is starting to weigh more heavily on the more advantageously priced orders such that we can still see this type of positive impact from pricing on margin, or is there still going to be this tendency for the big orders to pull some of that -- to kind of offset that pricing power for the next several quarters?

I think what we typically see in the back half of the year is some movement toward a shift to more indirect channel business opportunities, but it can float. Because third quarter is always a very strong quarter for production and shipments and it really has to do when the numbers roll through on how many of the large order lower spec type of equipment flows through. So it is often times very difficult to predict then which ones actually get shipped out and get recognized in revenue. But your general theme is consistent. You do tend in the back half to have more indirect channel orders that flow through the system but I wouldn't put any weight on it. What I will say is that we do expect back half margins within CTP to be as strong or stronger than what we just delivered in the second quarter. I think you can go to the bank on that.

Appreciate the time, but I did have that as follow up just a quick one. There was nothing to second quarter unique to this quarter that would drive that big of an improvement. Because you say double digit but double digit can mean a lot of things. But this kind of high 11% in to 12% is a decent run rate for the back half of the year?

There was no question that there was tremendous execution during the second quarter. So it wasn't just in pricing improvement. Obviously that played a part, but the manufacturing execution on the factory floor was outstanding and that really helped deliver the exceptional result, the 11.7% margin that you saw. We got a lot of good flow-through as a result of the incremental units and the effective utilization of the staffing that we have to produce those incremental units.

Great.

John, in addition to that we get productivity improvements from the capital expenditures we make the portion of capital expenditures we make in our manufacturing facilities and we are seeing some of those benefits as well. So it is really nice performance and execution on the manufacturing side of the house.

I agree. Thank you so much for the time. We'll see you in a month. Thanks.

Thank you. Our next question comes from the line of Alex Potter. Your line is now open. Your question please.

Thanks very much guys. I was hoping you could chat a bit about new product introductions in DPG. Obviously the revenue there if you can find one weak spot in the quarter it was the revenue there seemed to unravel a bit in DPG specifically in nontrailer products. But it also sounds like in your comments you've got a pretty healthy backlog there and some increasing confidence in the new products. So just hoping you could shed additional light on what you're seeing there, where the confidence comes from and what your expectations are looking out in to the backhalf and into 2016?

I tried to share a little bit in my formal comments but it was a good quarter for order intake as we were leaving the quarter and as we entered in to the third quarter both on the Wabash Composite side and on the engineered product side. Those were the two businesses that were really trailing on getting orders in a timely way. Some of it is just the way these orders fall in. Last year in the second quarter there was a very large order for Wabash Composites for AeroSkirts for a significant customer. That didn't occur this year, so it hurt their revenue line. They have since gotten some nice orders in. I mentioned about the specialty truck box that they have produced for LTL. They received finally a significant order for those that is going to really help them in this quarter and the balance of the year. On the engineered product side they received a nice order for some stationary silos to help support the backlog for the new expanded Mexican operation for the food grade stationary silos down there that new initiative down there and also received orders for mobile clean rooms which will really help them in the back half of the year. So those are the most significant items that stand out that helped increase the backlog for the DPG group.

Okay. But it is not necessarily some of these brand new leading edge products that you've talked about. You still expect the ramp up for those to be coming potentially first part of 2016?

Well, they have got some of that stuff is coming through. The aerodynamic products they have some of that coming through. But I was giving you the most notable ones. But yes we expect that as they gain traction on manufacturer and getting those new products out in front of customers and putting those products into trials for customers so that they can see the benefits of them then we will see that as a continuing growth opportunity for the Wabash Composites business. On the engineered products side both comments that I made, the food grade stationary silos in the Mexican market that is a growth opportunity. We never penetrated or serviced the Mexican market previously, so that is all new growth for the business. And then the MCR or mobile clean room opportunity that was one we had just gotten into about a year and a half ago maybe seven quarters ago and that is an opportunity that we see growth opportunity going forward. So both of those are new initiatives either brand new in the case of the stationary silo opportunity in Mexico or in the mobile clean room example in the last year and a half there that has some nice growth opportunity for that business.

Okay, great. Thanks a lot. That is really helpful. I was wondering also if you could chat a little bit about retail. Obviously not as big a contributor to the P&L, but if you can get margin leverage there as a result of some of these new initiatives that you've been talking about, tank repair, tank service and things of that nature then potentially that could end up being a bigger driver of operating income. And it seems like in the quarter both from the numbers and also from your commentary that you are starting to get some traction with that. So I was just wondering if you could elaborate there a bit.

It is a slower process there just because it is a smaller business. There's going to be a period of time now on a year-over-year comparison basis where the numbers have been impacted with the transition of the west coast locations over to an independent dealer so there is some play there. What I was extremely pleased with is that despite that the business is actually able to deliver higher operating income this year with the three less locations than they did a year ago in the second quarter. So the business really executed well and that is proof positive of the benefits of some of the growth initiatives with increasing the mobile service opportunities that we have and also the customer site service opportunities and we continue to work on gaining R stamp approval at the traditional WNTC locations so that more of them can actually do tank service work which provides higher margin opportunities also. Those are the three initiatives that are going on in the business and we're just pleased to see the consistency coming out of it and the dependability on delivering profitable bottom line. We had not seen that over the years out of the retail segment. So it is to your point, Alex, becoming a contributor and we expect it to become more and more of a contributor as we go forward.

Okay. Very quickly if I could just squeeze one additional follow-up on that do you think reading between the lines in your comments there that the operating margin that we saw coming out of retail in this quarter is a good baseline and potentially continue moving higher in to the next couple of years, couple quarters to couple years?

Well, that certainly is what our expectation is to continue to drive those initiatives that can further enhance the margin profile for the business. So it is difficult to say are we going to have every single quarter that performs. A lot of it has to do with how many new trailers are sold because new trailers can really shift the number quite a bit because when they're sold through retail outlet there, there is a lower margin associated because they get transferred to or sold if you will to the retail business just like they get sold to dealers. And then the retail business puts margin on top of it, but it certainly is much lower than what the consolidated margin is for the retail business. So it is a hard one to say depending on how many new trailer sales they get in any quarter.

Alex, we have made some investments upfront to position that business to grow in the areas and initiatives that Dick talked about. And those areas and initiatives we are working on are higher margin opportunities than the core business. So if we're successful and as they grow then I would say we do expect the margins to increase there both the gross margins and operating margins. Don't want to comment really on the pace or the timing of when that is going to occur, but certainly it is our expectation that it does improve over time.

Okay. Great quarter, guys. Thanks a lot.

Thanks, Alex.

Thank you. Our next question comes from the line of Brad Delco. Your line is now open. Your question please

Good morning, Dick. Good morning, Jeff.

Hey, Brad.

Good morning.

Jeff, you made a response to an earlier comment about the strong margin performance in CTP and some of it was related to efficiencies with higher volume and then also pricing. But could you comment at all on the impact of commodity cost because it seems like the commodity market has been hit pretty hard here. And just wondering if we saw some of that benefit in the current quarter or could we see further benefit in the quarters to come as a result of that?

Well, Brad, the commodities have been in a good spot. They have been relatively stable if not slightly down for the past couple of quarters. What I would say is as you know had your raw material costs when we take orders so effectively we are locking in the material price for those orders at the time that we take the order. We're protecting the margin at the time we take the order when we do that and we give up some potential upside to protect the downside. So I would say that overall is the material position we're in. And the biggest contributors to the margin improvement in the quarter were truly the factors we talked about there in terms of the manufacturing efficiencies and the operational execution and improved pricing.

Okay, great. And then, Dick, you made a comment and you may address this in the questions earlier. You expected significant top line growth in DPG in the third quarter. Can you give us a ballpark as to how much acceleration we could see in top line in DPG for the third quarter?

Certainly we're going to see numbers that are much more representative of what we would expect if we were to look back a year ago at this time in the second quarter numbers more like that are probably to be expected. At the same time when you look at the what the flow through to the bottom line would be we would expect at least as good as what we saw at that time.

Okay. That is helpful. I know that seasonally you don't see second quarter revenue below first quarter so that caught us by surprise. I just want to make sure we are being fair in what we expect for that in the back half of the year. And then another really high class problem that you guys have and this is per your comments, Dick, your free cash flow generation is typically better in the second half of the year and it hadn't been that bad so far. Should we expect you guys to renew or re-up a share authorization, or do you feel like there are another uses of cash at this point that are more worth the time and dollars?

Well, we examine all that stuff on a regular basis. We have those dialogues with our Board. And we'll be determining what the best opportunities for use of cash is as we continue forward. When we put the share repurchase program in we felt that was the best opportunity to return capital to shareholders and we have delivered on that promise. But it is always an opportunity to look at as we continue to improve the business it actually gives us that much more flexibility to look at how we want to continue to invest in the business to continue to grow and increase value and return to shareholders.

That makes sense. Since one of the options is share repurchases and you have gone through it so quickly I didn't know if we should expect to see a greater authorization just to keep that option open. And last quick question, just to make sure the updated guidance the $1.25 to $1.35 does that assume your adjusted $0.33 number for the quarter or the GAAP number?

That's a non-GAAP adjusted EPS guidance. So it assumes the $0.33.

All right. Well, perfect. Thanks guys for the time. I appreciate it. Congrats on the quarter.

Thanks, Brad.

Thank you. Our next question comes from the line of Joel Tiss. Your line is now open. Your question please.

Hi guys. How are you doing?

Hi, Joel.

Good morning, Joel.

I think you might have just sort of answered this, but I wondered you talked a lot on diversified products about the growth side of it. But I just wondered if you could talk a little more about the cost cutting and the efficiencies you put in place and the crux of my question is you think by 2017 you could get the operating margins back towards that 14% where you were prior?

So Joel, since we completed the acquisition in May of 2012 we have been working on a process to capture synergies from that business and from that acquisition. Obviously early on the first piece of that was really on the procurement side through purchasing of materials and that was extremely successful. Since then, we have been looking at some other opportunities for effectively managing the cost there and we have transitioned some of their back office programs whether it is HR benefit programs in to the Wabash National programs. We transitioned some of the tax and financial planning functions in to the corporate functions. We continue to evaluate opportunities to continue that type of integration to further gain those synergies. One of the bigger ones that we're still working on is really on the IT and the ERP side and that's one that's going to be a multi year project that we're working on. And we do expect that as we complete that project that it will provide some cost benefits as well, but it is going to take a little more time than some of the ones that were low hanging fruit. Just in addition to that they continuously work on lean manufacturing and operational excellence to take cost out of their manufacturing processes. They have made gains there as well during this quarter and throughout this year and they will continue to do that. So certainly one of our goals is to continue to grow and expand the operating margin of that business and I think certainly at a high level we don't see any reason that we shouldn't be able to get it back to operating margins consistent with what you've seen in the past.

Okay. And then on the free cash flow side is there any chance you think you could generate enough cash between the end of this year and the end of 2016 to be almost net debt free or is that a little too aggressive?

The business is performing at a very high level and cash generation is extremely strong. Obviously my net debt right now is 1.1 times. So I think it is a pretty high class problem to have in terms of what are you going to do with the cash you're going to generate, and as Dick talked about we have tremendous flexibility in evaluating further debt reduction which would continue to lower that net debt number that you're referencing potentially return capital to shareholders either through share repurchase or dividend at some point in the future. But also more importantly we do want to continue to grow and diversify this Company and we evaluate those opportunities continuously and obviously it is something we don't comment on until we have something that is actionable. But all three of those are certainly viable alternatives for the use of cash.

Okay. Thanks very much.

Thank you.

Thank you. Our next question comes from the line of Jeff Kauffman. Your line is now open. Your question please. Jeff Kauffman, please check your mute button.

Can you hear me now?

Hi Jeff.

Very good. Sorry I had you on mute. Jeff, you kind of hinted at this on our last discussion but you kind of look at different ways we can spend capital obviously growing the business is a priority. But has the Board had discussions about how many new shareholders we could potentially put into play to own the Company's shares if you were to initiate just a small 1%-ish kind of dividend or something like that? You're in the luxurious position of having more cash than you need over the near-term. I guess how much if you went that direction do you think it would take to establish something that would be relevant enough to draw another 10% or 15%potential shareholders in to the stock?

Jeff, thanks for the question. What I will say is that we have an ongoing dialogue with the Board around capital deployment and uses of cash, and dividend is one of the topics that is covered during that conversation. So it is something we talked about with the Board of Directors and that Dick and I have talked about as well. And specifically to your point about dividend paying stocks do open up a percentage of the investor base that probably can't invest in you if you don't pay a dividend. So it is something we're cognizant of. I think it is something that is part of the discussion with the Board of Directors. Won't comment in terms of how big of a change we think that would make in an investor base if we put something in place probably until we get to the point where it is something we have decided to pursue but it is certainly part of the conversation.

Okay. Just one brief follow-up. You mentioned that you were sold out for the remainder of this year on dry. You were trying to evaluate whether or not to bring on more people for additional refrigerated business. How many shifts are you running right now? How much could you potentially extend production capacity if you maxed out your shifts? And in light of the terrific earnings at what point would you evaluate incentive compensation accruals, are they already built in to the numbers or is that something we would look at in the second half of this year?

Jeff, let me take the second piece of that first, which is incentive compensation accruals. We make accruals every quarter for incentive compensation based upon our current performance and our forecast for the rest of the year. So those are baked in to the existing numbers and also included in any kind of guidance we give around earnings as well.

And on the first part of your question the dry van segment and we t talked about this in prior quarters, we are running three shifts on the dry van. So really the only opportunities would be through our continued execution of lean principals. So when I talk about the velocity optimization I'm really talking about being able to reduce the tack time which increases velocity of the line so you can build more trailers per shift with the same number of shifts with the same number of lines operating. We have been practitioners of lean for the last 13 years. Now that the workforce coming out of the downturn the workforce has gained proficiency much more stable so we're able to throw more of these opportunities at them and they have been accepting them really well. And that's where this past quarter really showed the benefits of the maturity and the proficiency gains that the teams have made. So there would be some opportunity, but it is incremental it is not dramatic like adding a full shift. On the refrigerated side we run a two shift operation. But my comments earlier were that based on where we are in the ordering cycle for refrigerated trailers we would likely not make a decision to add anything for this year, but we would examine that as we proceed through the balance of the year to see if there is merit in adding any more staffing for the refrigerated to support that. And then of course, we do have opportunities in the other areas because lead times on whether it is the platform type equipment or tank equipment tends to vary from product to product and end market to end market and it doesn't generally get out the 8 month, 12 month, 15 months like some of the dry van stuff can.

All right. Hey, guys, congratulations and thank you.

Thanks, Jeff.

Thank you. And our next question comes from the line of Mike Baudendistel. Your line is now open. Your question please.

I wanted to ask you on the larger 33-foot pup trailers what are you hearing from customers? I mean would you expect them to be ordering those aggressively if that were to come to fruition?

Mike, it is really a little bit all over the map. Because what you've got is there is always a need for the 28-footers so you're not going to have everyone wholesale transitioning from 28 to 33. There is going to be portions of their business that make good sense and then there is going to be other portions they want to maintain 28. The other aspect is they are not going to replace a late model unit, a late model 28-footer with a new 33-footer. What they would end up doing is have that extended or stretched as we tend to refer it and we do that work. And we can do that work at our retail locations. We may have that work also distributed through select dealers who have capability to do that kind of work, so there is going to be a mix of that. But certainly the talk of customers is that it is very beneficial to them to increase their productivity. If they get an instant 18% increase in cube capacity so that can actually have a tremendous benefit. For every six step ups it eliminates -- you get a denser haul. 33-footers actually haul smoother than two 28s in combination. There is actually an improvement based on a studies that the fleets have done improvement in safety because it hauls better. For every six set ups you eliminate one tractor, so you reduce greenhouse gas emissions because a tractor is out of it you reduce congestion on the highway. You have got safety benefits, environmental benefits, productivity and cost benefits. It should help keep future increases to consumers down on transported goods. A lot of good reasons for the legislation to be approved. We are just hopeful that it does go through. But it is a mixed bag on what will happen as far as implementation on the part of customers. We are even hearing that in some cases you'll see some of the truck load guys actually deploying some of their network to hauling double 33s. So it should have a net benefit to the whole industry on demand.

Great, thanks for that detail. Also wanted to you about the proposed greenhouse gas regulations that include trailers for the first time. How do you see that impacting the industry? Will that increase the price of a trailer significantly and do you anticipate any market share changes or other industry changes as a result of that?

It is a real interesting one. Some customers already do everything that is included in the 2018 implementation stage with low roll resistance tires with air inflation systems and with aerodynamic skirting devices which are the three requirements that are in the first phase of this thing in 2018. So it won't impact those customers at all. Others who have not jumped on that bandwagon would be effected with cost increases of around in our estimates based on what pricing is for those three type of devices out in the marketplace around $1,500 impact, some might call $1,200 to $1,500 impact or more for customers who are not already adopters of that technology.

Great. That's all from me. Thank you.

Thank you. Our next question comes from the line of Steve Dyer. Your line is now open. Your question please.

Thanks, guys. Mine have all been answered.

All right. Thanks, Steve.

Thanks, Steve.

Thank you. And we have a question from the line of Kristine Kubacki. Your line is now open.

Good morning, guys. A question on the capacity side. It sounds like you are pretty full and I'm talking dry van here. I guess the question is looking at the industry it sounds like you are getting pricing it sounds like things in terms of requirements for 2016 are starting to fill out. I guess when would the industry add capacity or is it a supply base problem that you can't add capacity?

I think you may have answered the question yourself. I think the supply chain as far as ability to supply enough axles, enough suspensions enough extrusions those tend to be the problem children in any strong environment historically. So you could see more capacity going in. There is not a huge barrier to entry for assembling a trailer but there are large barriers to entry adding capacity for a lot of the more complex engineered converted components that go into that, you know, to put extrusion lines in or to put suspension manufacturing lines in there is a lot more barrier to entry there to add that. So suppliers would have to feel very confident that there is a long run of very strong demand before we would see them taking the plunge. That is just my assessment of it at this point.

Okay. That is helpful. And then just one question on the order cadence. Obviously order books open we get the big pop and I just want to make sure I understand so it seems like there was some confusion earlier in the year when orders fell down. So are you expecting to go back to a normalized order trend maybe we see elevated orders in July but then we kind of go through a little bit of this summer, post summer lull and then back into the order season in the fourth quarter. Is that how you expect it to play out or am I wrong there?

That is a really, really excellent question, Kristine. It is always difficult to try and assess what is in the customers' mind and what they're thinking about getting their slots locked. My suspicion is based on the amount of quote activity the amount of dialog and how early customers were getting in knowing that they were asking for 2016 builds that we're going to see this continue but it can't continue at very, very high rates. It is not like everything started three months ahead this year and it is just going to continue at very high levels. I think at the end of the day the number of trailers ultimately ordered for 2016 will be consistent with the kind of numbers that ACT is talking and what we're thinking somewhere in that range. But I don't know that we're going see the big 45,000 unit order like we did in December last year. I think it is starting earlier so it will spread itself out a little bit more.

Okay. That is extremely helpful. Thank you very much guys.

Thank you.

Thank you. And I'm showing no further questions in the queue at this time. I'd like to hand the program back over to Dick Giromini for any concluding remarks.

Thanks, Roland. In conclusion we're extremely pleased with the results that we were able to deliver in the second quarter of this year. That said, we see even further opportunities to accelerate top line growth, expand our product and market breadth and deliver even greater performance in almost all aspect of our business. And with a hyper focus on execution delivering results I am confident that we will do just that. Thank you for your interest in and support of Wabash National Corporation. Jeff, Mike and I all look forward to speaking with you again on our next call and hope to see many of you at our Investor Day in just a few weeks. Thanks all.

Ladies and gentlemen, thank you very much for your participation. This does indeed conclude the program. You may now disconnect. Everyone have a wonderful day.