Wabash National Corp (WNC) 2016 Q3 法說會逐字稿

Welcome to the third quarter earnings call. I am Ashley, and I will be your Operator for today's call. (Operator Instructions). Please note that this conference is being recorded. I will now turn the call over to Mike Pettit, Vice-President of Finance and Investor Relations. You may begin.

Thank you, Ashley. Good morning. Welcome, everyone, to the Wabash National Corporation 2016 conference third 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, as well as Brent Yeagy, our newly appointed President and Chief Operating Officer on results for the third quarter, the current operating environment and our outlook for the remainder of 2016, as well and early look at 2017. In addition, Jeff Taylor, our Chief Financial Officer will provide an overview of our financial results. At the conclusion of the prepared remarks we will open the call for questions from the listening audience.

Before we begin I would like to cover two brief items. First, please note 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, adjusted earnings and adjusted earnings per share guidance which has been provided in previous filings with the SEC. The 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 SEC. With that, it is my pleasure to turn the call over to Dick Giromini, CEO.

Thanks, Mike. The third quarter marked another excellent quarter for the Company and delivered bottom line results that were among the best in the Company's history. Our financial results continue to validate our long-term strategic plan and demonstrate the ongoing progress being made in executing that plan to profitably grow and diversify the business. We have changed the fundamental composition of our business and it is clear we have made significant progress toward transforming ourselves into a higher margin diversified industrial manufacturer.

Taking a another step in our journey, in September, we announced that Brent Yeagy would assume the role of President and Chief Operating Officer for Wabash National, which took effect on October first. With this appointment, we have established an enhanced leadership structure to provide more effective and coordinated oversight of our growing and more diverse group of businesses. Brent's proven leadership abilities clearly demonstrated with the CTP transformation now can be leveraged across all operating business units as we continue to grow and diversify the Company.

Additionally, while we have continued to expand our product portfolio organically and strategically over the past five years this move now allows me more time and freedom to increase my focus on further growing the Company and continuing the great success that we have experienced in recent years. As a result of these efforts today we are now generating record margins, record cash flow and possess a pristine balance sheet with only zero point four times net debt leverage.

We have clearly positioned ourselves with ample resources to, one, fund our internal capital needs to support both organic growth and productivity improvements. Two, to assure continued reduction of our debt obligations. Third, to return capital to shareholders as appropriate. And fourth to selectively but more actively pursue strategic acquisitions. On the M&A front we recently initiated an internal effort to proactively identify strategic acquisition targets that we believe can create sizeable shareholder value.

This effort will yield us a cadre of targets that will allow us to utilize our strong financial position to accelerate our growth and diversification efforts while leveraging our strong competencies in manufacturing execution, sourcing and innovative engineering leadership to assure strong value creation.

I want to emphasize that we will, however, continue to remain selective in these efforts just as we have proven over these past five years and will not pursue acquisitions just to grow but will ensure any transaction undertaken is a value creating endeavor.

Recognizing that value creation through M&A activity can take time and reinforcing our continued confidence in our long-term cash generation we have remained commitment to returning capital to shareholders. In the third quarter, we invested $22.3 million in the repurchase of over 1.6 million shares, raising our year-to-date total to over 2.8 million shares repurchased for $38.2 million. Leaving us approximately $62 million available under the current authorized repurchase plan which runs through the end of 2017.

Let me now touch on a few specific financial highlights from the third quarter. Jeff will then provide more detail of the financial results in his remarks later in our discussion. On a quarterly basis, consolidated net sales were $464 million on shipments of 15,450 units coming in just shy of the low end of our prior guidance driven by some delayed shipment in our vans business but as well as demand weakness in liquid tanks and platform markets.

We produced approximately 14,600 units which were less than the prior year period due in most part to a week long planned shutdown in July related to the road construction project underway around our north campus in Lafayette. While the market has remained reasonably strong for our van products we have, however seen continued market softness in both our tank trailer and platform products with both of these product lines now experiencing industry wide numbers on pace to be down approximately 35% from last year's levels. But then, forecasted by ACT Research to increase again for next year.

So we may have already seen the bottom for these markets and as exhibited by our strong financial results, have managed through it quite well. Despite these market segment weaknesses the operating businesses have done a very nice job of containing costs and maintaining respectable margin levels within those product lines.

Leveraging our continued strong operational execution and long time expertise in lean Six Sigma across the enterprise gross margin for the third quarter was a very strong 18.0% with operating margin 11.8%, up 120 basis points from last year. Trailing 12 month operating margin is now 11.2%, far surpassing the 10% operating margin goal we established in 2015. Sustainability is now the opportunity in front of us.

Operating income for the third quarter was a strong $54.9 million, driven once again by excellent operational execution across all areas of our business and significantly supported by a continuing favorable demand environment in the commercial trailer products business overall. With that, I would like to now ask Brent to provide some detail on results for each of our reporting segments. Brent?

Thanks, Dick. I will start with Diversified Products Group, or DPG, which includes our composites, tank trailers, aviation and truck equipment and process system businesses. Overall results in this segment were disappointing and lower than expected in Q3 with revenue of $87 million and operating income of $6.2 million reflecting the continued soft market conditions in many of the end markets served by the DPG businesses.

The tank trailer business continues to experience softness in certain markets which is creating top line pressure in the segment's largest business. This prolonged softness is creating weaker top and bottom line results than previously expected. ACT lowered its 2016 forecast for liquid tank trailers to 4,900 units which represents a 35% reduction from 2015 and down 31% from the tank trailer forecast at the beginning of the year.

Our tank trailer business continues to see reasonably stable demand in the food, dairy beverage markets offset by continued weakness for products related to the oil and gas and chemical markets resulting in shorter than desired backlogs for both liquid and dry-bulk products. The positive news is that there has been industry capacity coming out of the liquid tank space and we are well positioned to take advantage of stronger future demand.

We also continue to be very proactive with cost management and have had solid execution at the factory level. These actions have allowed us maintain a healthy gross margin of 21.7% for the segment in line with our historical range of 21% to 25% despite the weaker top line. While we don't expect to see a return to the demand levels for tank trailers that we enjoyed during the 2014 and 2015 time frame any time soon, we do anticipate a stronger environment in 2017 and remain optimistic about the future as we have not only preserved margins and market share but positioned the business to capitalize on any recovery as we have made excellent progress with our lean Six Sigma efforts during the past 12 to 18 months.

In our Aviation and Truck Equipment business, or AVTE, the facility consolidation and subsequent labor optimization combined with an uptick in orders has started to drive improvements in the business. Our work is far from over to bring this business to desirable levels of performance but AVTE backlog is now at its highest level of the year and we are well positioned to finish 2016 on a positive note. Our process systems business which provides isolator's, down flow booths, and mobile cleaning rooms for the pharma industry along with stationary silos and mixers for the food, beverage, and dairy industry has seen positive signs in the market as quote and order activity has increased in recent weeks.

We have also successfully completed the implementation and go live of SAP in our Process Systems facilities in Wisconsin. This is part of our larger SAP roll out within our DPG businesses and will standardize ERP platforms across the enterprise and enable us to take the next step in integration and cost reduction activities. In the Wabash composite business efforts to increase the new product development pipeline and commercialization process are ongoing and now we have an exciting new technology to accelerate those efforts. In September, we announced an agreement with EconCore the technology leader for continuous flow production of honeycomb sandwich panels to produce their patented honeycomb core technology in North America for specific markets.

We have the exclusive rights to manufacture and sell certain honeycomb sandwich material configuration in the containment and transportation industries in the United States, Canada and Mexico. This technology offers significant material property advantages compared to existing materials including weight savings, sheer strength and energy absorption.

These panels will have applications with many of the core products already in production or in development for Wabash composites but in addition we also see future product applications within the markets served by the commercial trailer products segment. To summarize, we remain pleased by the overall margin performance of the businesses during the past two years as key markets had continued to contract along with strong potential presented by new product offerings already developed or in development within the group.

Obviously, we need to see growth return at the top line to help drive further improvement in operating income but do recognize the market dynamics faced by the segment. Factoring in recent market conditions we now expect the second half of 2016 top line results to be more in line with the first half of the year. We also expect lower bottom line results for the DPG segment as compared to the first half of the year as our mix continues a bit more skewed to some of the lower margin products.

The good news is that we have an improved infrastructure to leverage a higher demand environment without additional investment an expanded product offering throughout the segment and have made solid progress in our lean Six Sigma implementation efforts that should aid in sustaining and further improving margins down the road.

Now let's discuss the results of the Commercial Trailer Products segment, or CTP. Consisting of our dry and refrigerated van products, platform trailers, dry and refrigerated truck bodies, retail parts and service and wood flooring operations. This segment continues to successfully execute its optimization strategy with an ongoing commitment to margin improvement, operational excellence and leadership in product innovations.

The third quarter proved to be another strong quarter for CTP. Revenues were a solid $381 million and profitability delivered in the segment was again very impressive. Gross and operating margins of 17% and 14.5% respectively drove $55 million of operating income. The outstanding performance delivered in the third quarter was the result of the teams continued execution of a market strategy committed to optimizing both top and bottom line, a capable work force focused on continuous improvement and productivity utilizing our long-term expertise in lean Six Sigma and material cost optimization.

These margin enhancing strategies were clearly demonstrated during the quarter with operating income up 20% year-over-year on revenue that was down 6%. And as discussed in the last several calls, while our largest manufacturing facility in Lafayette which produces dry vans and components for refrigerated trailers continues to be impacted by a road construction project that kicked off in early April, we are pleased with progress to date.

This project certainly created some logistics challenges but thanks to outstanding cooperation and support from the city and contractor this has been managed quite well thus far with minimal disruption to production rates experienced. So, while we have experienced some impact to CTP operational efficiencies and margins during the second half of the year as communicated, including a production down week during the heaviest phase of the project, we have effectively mitigated most of the negative effects.

Now, I'll discuss some updates on CTPs strategic initiatives. The CTP team remains very excited about the entry into the truck body market in order to take advantage of the future growth in the final mile and home delivery space. Dry truck body product assembled within our final mile manufacturing facility has been positively received by both end customers and a growing number of indirect channel providers. With the promise to provide innovative and robust products and improved responsiveness taking route we look to further develop our mid-west channel and begin expanding our indirect channels into additional regions of the country throughout 2017.

As a reminder, we are also in the process of developing our patent-pending molded structural composite technology that we believe will have broad applications in the dry and refrigerated truck body and refrigerated space. We continue to validate the technology through designs that provide customers unparalleled value through significant improvements in weight, thermal performance, extended asset life and other operational efficiencies.

We are also making progress establishing strategic relationships with key partners in the composites world for the development, manufacturing and further extension of the technology. As an example of the extension of this innovative technology we now believe that the molded structural composite material can provide an effective flooring alternative in our dry truck body product that could significantly reduce the weight of the truck body by up to 350 pounds depending on the specification, while still providing industry leading capacity ratings. This is just one tangible example of how we believe molded structural composites can be a transformative technology for us in the coming years.

We also continue to believe that technology will provide a superior refrigerated truck body product for our customers. First announced to the market in October of 2015 we have successfully commercialized the molded structural composite refrigerated truck body and have been successful meeting early stage growth targets. As mentioned previously, we believe our truck body business will prove to be a $100 million plus revenue business by 2020. We are well on our way to making this a reality.

In our more traditional trailer space, we continue to believe that molded structural composite technology could ultimately transform the refrigerated trailer market and we are optimistic about the growth opportunities it provides CTP over the next five years.

As we announced at ATA's 2016 Technology and Maintenance conference, we have secured several commercialization launch customers for molded structural composite refer-vans and as communicated at that time, we will begin limited production in the first half of 2017 for those fleets. I would publicly like to thank those fleets for their trust and recognition of Wabash being the innovative leader within the trailer industry.

Now I would like to update those on the call to regulatory items that pertain to Wabash National. The US EPA and NHTSA agencies proposed new greenhouse gas regulations in July of 2015 in an effort to reduce fuel consumption and production of carbon dioxide from heavy duty commercial vehicles. Following a comment period, the final rule was released in August of 2016.

The rule focuses mainly on van trailers and is divided into four stages of increasingly stringent greenhouse gas reduction standards. The rule requires fuel saving technologies on van trailers such as trailer side skirts, low rolling resistance tires and automatic tire inflation systems to become standard equipment starting in January of 2018.

For tank trailers and flat bed trailers the rule will require low rolling resistance tires and automatic tire inflation systems beginning in 2018. More stringent van trailer standards will hit in model years 2021, 2024 and 2027 requiring more advanced fuel efficient technologies such as rear boat tails, higher percentage improvement aerodynamic side skirts and low rolling resistance tires.

Now, I will give the floor back to Dick to discuss 2016 and 2017 expectations.

Thanks, Brent. Let me first give you a backdrop from my views on our market and prospects for the balance of this year, and then next year. Looking forward we are confident that overall demand for van trailers and our commercial trailers products business will remain historically strong throughout next year and possibly beyond. This belief is based on a number of factors that continue to be positive trailer demand drivers.

First, and probably most importantly, is the excessively aged nature of the van trailer population. While the overall average age of trailers has come down in recent years, there continues to be a significant number of old vintage dry vans that have remained in use as a result of the massive industry under buy of 2008 through 2010. By their very nature these pieces of equipment are less reliable, thereby costing more to maintain and operate. Second, the regulatory environment including CSA, and hours of service is influencing both driver and carrier behaviors leading to the continued need to refresh equipment or to add equipment to increase drop and hook opportunities.

Next, carriers while currently feeling the impact of periodic softness in load availability and pricing, still remain nicely profitable and traditionally look to invest that cash flow into new equipment to optimize operating costs. Lastly, while somewhat choppy in 2016, capacity is expected to tighten in 2017 as freight rebounds and regulatory drivers such as ELDs constrict capacity. Illustrative of the ups and downs in the 2016 freight market, ATA's truck tonnage index decreased 5.8% in September to 132.7 following a 5% increase in August.

Year-to-date, the truck tonnage index was 3% higher than in the same period last year. We also believe that ELDs are likely to have a more significant impact on capacity than some may anticipate and may ultimately drive increased demand for new equipment as stronger carriers attempt to recover lost productivity. Industry estimates vary widely on carrier productivity losses as a result of ELD's but some where in the range of 3% to 10% is probably what can be expected.

For the diversified products business we are currently experiencing industry demand for 2016 tank trailers that is down significantly from what the industry had enjoyed the past five years. Now nearing 2010 rebuild rates. While there is never any guarantee, the latest industry forecast would indicate 16 is the bottom with the recovery in demand of 6% to 7% that may be in the cards for next year.

While modest, this improvement would allow us to leverage the progress that we have realized from our continued operational excellence initiatives this past year. At the macro level in terms of total environment purchases for 2016 we have seen overall industry projections revised downward in recent updates with ACT Research now projecting 282,500 trailers to be shipped in 2016 and FTR now calling for 276,300 trailers to be built this year. Both representing historically strong numbers but down from projections just a couple of months ago.

At a more micro level, following two years of unusually early seasonal order placement that drove backlog to historically high levels it appears that this 2017 order season is a return to normal for what has traditionally been expected for this time of year. With the total backlog now at a seasonally strong $643 million as of the end of the third quarter, and representing approximately four months of build volume overall on average, including approximately five months of van production backlog.

It's important to note that while we have seen sequential backlog decline the September 30th backlog level lags only 2014 and 2015 for the highest third quarter backlog over the past 15 years as the fourth quarter marks the traditional start to the order season for the upcoming year. While healthy backlog levels remain for dry and refrigerated van levels, other product lines including tank and platform trailers have continued to experience weaker demand and shorter backlogs as referenced earlier.

So in terms of earnings for full year 2016, recognizing the productivity and cost and optimization momentum that was displayed in the first three quarters and contrasted with the somewhat weaker demand environment than we had previously anticipated for the tank and platform businesses, along with normally seasonally higher fourth quarter operating costs, we can now narrow our guidance for full year 2016 adjusted EPS to a range of $1.81 to $1.86 earnings per share, or an improvement of approximately 23% from 2015's record performance level which will mark our fifth consecutive record year earnings for the Company.

We also now expect 2016 total unit shipments to be at the low end of our 60,000 to 62,000 shipment range communicated previously. Okay. So another record year for 2016. What about 2017? Clearly there is a softening in overall demand for the upcoming year. The two industry forecasters are closely aligned in their views as ACT Research is now calling for 239,250 trailer units to be shipped in 2017, and meanwhile FTR projects approximately 240,000 units to be built next year.

A more typical start to industry-wide orders year-to-date and a moderate level of net orders in the third quarter has generated a strong narrative about a potentially weak 2017. However, while we do expect to see a decrease in order demand for the 2017 build year, our direct feedback from customers about what their expectations and needs are for next year will certainly support that overall demand will likely be some what stronger than what the third-party forecasters have indicated.

While it is still too early to put any firm numbers around 2017 trailer projections as the typical order season can run through late first quarter, early second quarter of 2017, most notably for the indirect channel, it does appear that we are heading for another solid year for overall trailer orders and would not be surprised to see an industry in the 240,000 to 250,000 unit range with Wabash National shipments somewhere north of 50,000 units. We can certainly operate effectively in that environment.

Obviously, a somewhat weaker demand environment for van trailers will put some pressure on revenue, margins and profit, but not at what history might imply. We are a far different Company than what we were in past cycles with exceptional execution on all fronts driven by our highly engrained lean Six Sigma culture. With a much expanded and diversified product portfolio including extensive composites offerings, increased presence in non trailer markets and our medium duty truck body entry we are confident that we are better positioned than ever to deliver solid results in a softer demand environment.

When our 2017 order book fills more completely as expected during the balance of the year we will be better able to provide 2017 full year EPS guidance on our year end call in late January. In summary, we are certainly pleased to have delivered another in a long string of strong quarters driven by continued exceptional execution and results from the CTP segment and disciplined cost management from DPG.

However, not wanting to rest on any of these accomplishments we will continue our focused efforts to drive ongoing improvement throughout the business, develop new opportunities to once again grow our top line margins and to assure that we capitalize on macro growth trends. With that, I will turn the call over to Jeff Taylor, our Chief Financial Officer to provide more detail around the numbers. Jeff?

Thanks, Dick. And good morning, everyone. We are very pleased with the third quarter consolidated results as we delivered operating income and net income comparable to the record performances the last two years and we delivered these strong results despite the pockets of weakness we are experiencing in certain markets as Dick and Brent previously discussed. There was a high level of execution in our operations and business functions across the Company which is reflected in our results. But it is more than just solid execution and operational improvement.

We are benefiting from the actions we have taken over the past several years to grow and diversify the Company into new products and new markets. Before discussing the results for the quarter in more detail, I would like to comment on our recent share repurchase activities. As you know, we continue to execute a balanced capital allocation strategy where we allocate capital to maintain our liquidity, deleverage the balance sheet, fund our organic and strategic growth initiatives and return capital to shareholders as appropriate.

In regards to return of capital to shareholders for the third quarter we increased our share repurchase activity with a total spend of approximately $22.3 million for just over 1.6 million shares. Since re-initiating share repurchase in early 2015 we have allocated over $98 million which represents approximately 11% of our current market cap and repurchased approximately 7.5 million shares. This activity demonstrates our commitment to increase shareholder value through return of capital as part of the overall balanced capital allocation approach.

With that, let's turn to the financial results for the quarter. On a consolidated basis revenue was $464 million, a decrease of $67 million, or 13% compared to the third quarter of last year. Consolidated new trailer shipments were 15,450 units during the second quarter, slightly below our shipment guidance while used trailers came in at 250 units. Components, parts and service revenue was $40 million in the quarter, down from 2015 levels, primarily due to lower parts and service revenue in our branch locations as we transitioned our Phoenix location to an independent dealer in July, and had significant flooding in our Baton Rouge tank parts and service location.

Equipment and other revenue also decreased on a year-over-year basis primarily due to timing of sales in our AVPE and Process Systems businesses but we expect to recover some of these sales on shipments in the fourth quarter. In terms of operating results, consolidated gross profit for the quarter was $83.5 million, or 18% of sales. While gross profit was down $2.6 million from 2015, gross margin increased by 180 basis point year-over-year.

The Company also generated operating income and margin of $54.9 million, and 11.8% respectively. Operating margin for the trailing 12 months was 11.2%, far eclipsing our corporate objective of 10%. In addition, operating EBITDA for the third quarter was $66.8 million, bringing trailing 12 months operating EBITDA to $268 million, or 13.9% of revenue. At the segment level, DPG produced net sales of $87 million, a decrease year-over-year of $40 million for the quarter primarily driven by continued weakness in the tank trailer industry.

This weakness is also reflected in the DPG new trailer shipments in the quarter. However, on a more positive note we believe we have maintained market share in liquid tanks. DPG gross margin was 21.7% and stayed within our typical range of 21% to 25% which highlights the focus and effort from the DPG team to manage costs in a demand environment exhibiting some head winds. The weaker demand environment led to gross profit and operating income levels that were down in year-over-year and sequential comparisons.

However, it is important to note that this segment is still solidly profitable with double digit EBITDA margins even in a demand environment where some of their largest product lines are seeing industry volumes down over 35% from last year. CTP's net sales were $381 million which represents a $26 million, or 6% decrease year-over-year of new trailer shipments of 14,900 units. New trailer Average Selling Price, or ASP, decreased by about $200 year-over-year which was largely driven by mix as we saw an increase in direct channel trailer shipments in the third quarter.

We experienced a significant increase in ASP sequentially which was also largely a mix event as our shipments were skewed more towards higher ASP products as compared to the second quarter. Commercial trailer products once again recorded very strong margins with gross and operating margins of 17.0% and 14.5% respectively. Operating margin was up 320 basis points compared to the prior year period due to pricing and productivity gains. Margins were down sequentially in line with previous guidance as our Lafayette campus had a production down week in July in conjunction with the heaviest phase of the road construction project.

Nevertheless, CTP delivered operating income of $55 million. Selling, General and Administrative, or SG&A, excluding amortization for the quarter was $23.6 million, or 5.1% of revenue. For the full year, SG&A is still expected to be approximately 5.5% of revenue. Intangible amortization for the quarter was $5.0 million, down about $0.3 million from the prior year period and is expected to be $20 million for the full year.

Interest expense for the quarter consisting primarily of borrowing costs totaled approximately $3.9 million, a year-over-year decrease of $0.9 million primarily due to the lower amount of convertible notes outstanding. $0.9 million of our reported interest expense is non cash and primarily relates to accretion charges associated with the convertible notes. Full year interest expense is expected to be approximately $16 million at our current debt levels. We recognized income tax expense of $18.4 million in the third quarter.

The effective tax rate for the quarter was 35.5%. The slightly lower quarterly rate reflects a deduction for research tax credit we recognized in the third quarter. We now estimate the 2016 full year tax rate will be approximately 35.5%. Finally, for the quarter, net income was $33.4 million, or $0.51 per diluted the share. On a non-GAAP adjusted basis after adjusting for a nonrecurring charge of $0.7 million in connection with the sale of certain assets at our Phoenix branch to a third-party dealer, net income was $32.9 million, or $0.50 per diluted share.

In comparison, GAAP and adjusted earnings for the third quarter of 2015, were $31.8 million, or $0.47 per diluted share, representing a 6% adjusted earnings per share growth year-over-year. Let's move to the balance sheet and liquidity. Net working capital finished the third quarter up approximately $17 million from the second quarter, largely due to the timing of shipments in the quarter. We expect to have a fairly significant release of working capital in the fourth quarter of the year and to finish 2016 with net working capital levels below year end 2015 levels.

Capital spending was $7 million in the third quarter and we expect to see fourth quarter capital spending to be in the same range depending on the final timing of project completions. We now expect our full year capital spending to be under $25 million. Our liquidity or cash plus available borrowings as of September 30, was $359 million, or 19% of trailing 12 month revenue, generally in line with second quarter levels. Our continued strong free cash flow allowed us to maintain liquidity at a very healthy level, our first priority for capital allocation in addition to funding our organic growth initiatives and other capital allocation priorities such as share repurchase.

Our leverage ratios for gross and net debt are 1.1 times and 0.4 times, respectively. In summary, we are very pleased with the Company's overall strong performance for the third quarter. We generated very strong levels of gross profit and operating income as well as gross and operating margins. We further strengthened our balance sheet during the quarter and remain committed to being overall good stewards of the Company's resources by deploying capital to value creating projects that drive long-term growth in addition to opportunistically paying down debt and returning capital to shareholders through our authorized share repurchase program. We have a healthy backlog and solid outlook for 2017 as evidenced by Dick's previous comments, and we remain intensely focused on executing at a high level across the Company. Thank you. I will now turn the call back to Ashley and we will take any questions that you have.

Thank you. (Operator Instructions). And from Stephens, Inc. we have Brad Delco.

Good morning, gentlemen. And congrats, Brent, on the new role.

Thank you, sir. I appreciate it.

Dick, in your comments you mentioned some of your conversations with customers are a little bit more optimistic about trailer needs next year. Can you give us a little bit more context there? Just in light of a lot of these truckload reports where CapEx has been cut and the outlook for 2017 has been cut as well. Are you trying to make a distinction between what is expected on the tractor side versus the trailer side?

We certainly can only speak about what is occurring on the trailer side and what our customers' needs and expectations are for the upcoming year. We always do a bottoms up analysis and compare and contrast what customers' stated needs are for the following year relative to what they purchase in the preceding year or two. And in many cases, customers are saying that they will be needing more trailers and plan to order more trailers. Other cases, the numbers are about the same.

And in some cases, the numbers are less. So it varies, but overall based on our assessment gives us confidence in the feedback and the current quote activity and discussions that are occurring and some of the orders already placed, give us strong confidence that it will be a respectable year next year. As I stated in my formal comments, it will be down year-over-year but not as much as what some folks are anticipating. And I'm speaking mostly in those comments in the van segment of our business. As I noted, the tank trailer markets and the platform or flat bed markets have remained soft throughout the year, and we are not seeing a huge amount of upside activity.

We have seen some notion of it on the tank trailer side with some increased quote activity. But, you know, even with what ACT is projecting, 6% to 7% recovery in that market from where it is this year, it is difficult for us at this time to say that it would be anything more than that. But on the van side, we feel it will be stronger than what they are saying specifically on dry vans.

That makes sense. To me, it sounds like basically at least sort of a worst case scenario back to normal replacement demand on the dry van side. Is that a fair way of thinking about it?

I think it will be a little stronger. If you go back historically and look at demand levels, there is still a pent up demand for replacing extremely aged equipment going back to the 1990-2000 time frame there is still equipment in the market that is still operating and that equipment would have been replaced during the last downturn, or shortly thereafter. And there is still some catch-up going on trying to get that equipment out.

Many of the fleets were hurt significantly during the downturn, as many of us were, and had to put on hold a lot of their replacement plans. And since that time there has been a lot of catch-up. And if you recall, 1998 through 2000 were the three strongest years of trailer build and shipments in the history of our industry. It just timed itself at the downturn at a bad time for replacement. That targeted group of equipment has just continued to age, 15, 16, 17-year-old equipment nowadays and it is just not reliable.

And our customers with the truckload carriers need to have highly reliable equipment in order to keep their operating costs in check, maintenance costs in check so they can turn a nice profit of course, and service their customers. The other part is attracting and retaining drivers. With CSA implementation four or five years ago, the best of drivers seek out carriers to drive for that will put them at least risk of getting caught in a roadside inspection and with the potential of losing their CDL if they accumulate too many points for the road worthiness of equipment. That is just one other factor that plays into this.

That makes sense.

Just to expand on that real quickly, here. I think our view is the replacement demand for total trailers is the 200,000 to 220,000 level. So, if we see the industry at 240,000 to 250,000 total units, then it's slightly above replacement demand. As much as 10% to 15%, potentially. But, it's a very strong environment. Even coming down from obviously the historic levels you saw in 2015.

That makes sense. Maybe one last question before I turn it back over. Dick, I don't want to read into too much of your comments but you did seem to sort of touch on exploring M&A opportunities. And again, I don't want to read too much into that. What specifically could be out there that you would have interest in? And then maybe Jeff or Dick, either one of you can comment on would you be willing to increase the leverage on your balance sheet and to what Levels?

Well, at this point in time, I certainly won't share any specifics on what we are considering. We have just started to undergo a process to clearly identify what those targets may look like. I will say that we want to leverage the core competencies that we have as an organization so obviously we are not going to go significantly afar from the kinds of things we do. But we want to grow our non-trailer side of the business.

We set that as a goal, as you recall, to decrease the dependency especially on the dry van segment. Not walking away from the dry van but decreasing dependency by growing the business in other areas and other markets. We certainly want to leverage the strong businesses that we acquired as part of the Walker acquisition in 2012. Some of the markets that they serve, or adjacency's to those markets certainly would be in consideration as we go through our process going forward.

Thanks, Dick. And Brad, as Dick alluded to in his comments, obviously we have a pristine balance sheet with net leverage at 0.4 times. We have tremendous flexibility to take the opportunity in front of us to evaluate strategic opportunities to grow. That could potentially include adding some leverage to the balance sheet. I think we're going to do that in a very thoughtful and meaningful way if we come to that. And we're going to remain focused on maintaining our bank ratings, you know, for the Company.

So we could add leverage to the balance sheet. I won't comment as to exactly how much. It depends on what the credit markets look like and what a potential target would look like. We certainly have tremendous flexibility given the position we are in today.

That makes sense. Congrats, guys, on these results. I agree, the balance sheet does look great. So keep up the good work.

Thanks, Brad.

Thank you.

Thank you. And next we have a question from Mike Shlisky, with Seaport Global.

Good morning, guys. Could you give some thoughts on your potential for decremental margins in 2017 based on where you positioned yourself for lean Six Sigma? If it's going to be down in the year I think people might want to know the basic range as to what the operating or downside pull-through might be on the operating income side?

Thanks, Michael, and good morning. This is Jeff. I will speak on the Company as a whole. Obviously, as we look year-over-year, it is the van area where you are going to see the pull back slightly next year in total volume. Having said that, our total margins today are in the 16% to 18% range. We have made tremendous improvements through operational efficiencies and productivity improvements and as you know we allocate a pretty significant portion of our CapEx budget to funding those initiatives.

We certainly expect to maintain those benefits, as total volume pulls back slightly next year. So, I think it's reasonable, with the margins where they are in the 16% to 18% range. Obviously the decrementals will be slightly above that. Potentially in the 18% to 22% range as a broad range of where you could see decrementals overall. Having said that, we certainly have the potential for some of the markets that have been depressed in the current environment, specifically on the tank trailer and platform side, over time to turn around and start to come up at exactly the time when we need it.

It is exactly the reason why we did the diversification and acquisition we did in 2012 and potentially setting up very nicely to see those benefits over the next couple of years. Nothing is carved in stone there, but, potentially that is where we see potential decrementals going.

Is that what you saw going into this year? Clearly, you have a down year you've increased the margins by I think it is over three full points so far this year. Is that what you were looking at before, or is this going to be how things flow in at a bit lower volume level next year?

The opportunity that we had this year was that while the top line volumes may look like they come down in prior calls we've tried to get folks to understand when you are running at the kind of levels that our industry was running at in 2015, there was an excessive amount of overtime being spent, which is not as cost effective running on straight time.

This year as a result of some pullback in the demand level to a more reasonably still excessively strong environment, we were able to leverage that and the CPT team did an outstanding job of producing the product on far less overtime required to produce it. At the same time, taking advantage of some capital investment in optimization initiatives on the factory floor. So a combination of factors have led to the higher margin performance for the business.

Great. And I also wanted to ask one more thing about your M&A potential here. At this point, still roughly in the 20% range for the US market. Can you give us a thought as to whether you might be looking at buying another trailer maker right now? If your Company is trading at less and five times EBITDA and you are one of the better operators in the sector I would imagine other guys with smaller with less scale probably trying to get much less than that EBITDA currently. Could there be a chance to get a good deal do you think? Or still looking at almost entirely outside of your core dry van (inaudible)?

It is unlikely that you would see us buying another van trailer manufacturer, if that was the question.

Okay. I will leave it there. Thanks, guys.

Thanks, Michael.

Thank you, and your next question comes from Alex Potter, with Piper Jaffray.

This is actually Winnie, in for Alex. Hi. Thanks for taking the call. The first question is in the DPG segment, I guess if you take the tant trailer revenue and divide that by the tant trailer volume, it looks like pricing was down quite a bit versus last quarter. And actually is coming down longer term dating back to like 2013. Can you elaborate a little more on that and what we should expect going forward?

Winnie, I'm a bit perplexed because, sequentially pricing is up pretty significantly and it's largely driven on mix as I commented during my previous comments. So I think we continue to see very strong pricing in the industry. I'm sorry, I was speaking to dry vans. For tanks. Okay. There's really two story's on the tank side of the business. The first side is the food, dairy, beverage side, which as you know is a bigger portion of our portfolio has been relatively stable through the current environment. That overall industry is typically more stable and we see that maintained in approximate levels where they are going forward. The ones where we do see some pressure on pricing in the tank side is certainly in the markets that fold back from the oil and gas and chemical side.

We do see some price depression there. Lower ASPs. Given that we think that that volume has bottomed out, certainly our hope and our belief is that it's going to stabilize around current levels with the potential to start to see those improve going forward as volumes improve.

Winnie, this is Brent. The only thing I would add on a qualitative basis is that we have seen relatively flat ASPs over the last several months. Kind of building off of Jeff's point that we have seen the market bottom out or at least be flat from a ship build and order intake standpoint. We feel good right now relative to the pricing environment. We think we are well positioned for the upturn being forecasted in 2017, but generally we feel good going forward.

Great. Thanks. And then, I guess I have a follow-up. Regarding the non trailer revenue in DPG segment. Seems like now is the time that I guess when you are willing to start (inaudible) there, given the coming down trend cycle. But it looks like revenue in the non trailer revenues have dropped 13% versus last quarter in this quarter. So question is, do you still expect this sub segment within DPG to be a sustainable source of revenue growth? And if so, when do you think it will start moving year-over-year revenue gains.

This is Brent again. We saw some head wind in Q3 relative to the movement of stock related non trailer product. We hope to see that turn around somewhat in Q4. We are seeing backlogs improve in the AVTE and the Process Systems segment of DPG moving into Q4 so we are seeing some early signs of some recovery. And relative strength in those specific markets going into 2017, we should see some improvement accordingly. So, early stages, it is not going to be at the same scale as what we would see in our van or tank businesses but they are serving their purpose and adding additional value in this upcoming year.

Okay. Thank you. I'll turn it over. Thanks.

Thank you. Our next question comes from Steve Dyer, with Craig-Hallum.

Good morning. And I will add my congratulations to Brent.

Thank you, sir.

Jeff, I kind of tuned out half of the commentary on decrementals for next year what the numbers you were giving and whether that relates to total Company margins or one of the segments?

It generally relates to total Company. Having said that, CTP is obviously the largest segment and will drive those numbers to a large extent.

And what were those numbers, if you could repeat those?

Steve, I can't believe you are going to make me repeat those numbers. Having said that, our gross margins have been in the 16% to 18% range with a pullback in van business potentially. Decrementals will be slightly north of that, somewhere in the 18% to 22% range potentially.

Okay. Great. And then you know with respect to the CTP segment you guys have obviously made a lot of improvements from a manufacturing standpoint, Six Sigma standpoint. You've also had a pretty good run of raw materials here as you guys have talked about in your filings. Is it possible to talk a little bit about how the early raw materials commentary looks for next year? What it might mean to margins? And maybe bucket how much the improvement over the last year to two years to three years has been raw material driven versus, 50/50, is it mostly manufacturing? How should we think about those two items going forward?

Let me start with the last piece. Steve in terms of total margins and how they have improved obviously over the last year or so there have been multiple factors. There has been pricing. There have been productivity improvements and then obviously, there have been manufacturing costs. That includes materials but also includes some of our labor costs as well. In general, those have been fairly evenly split across the year. We have had nice price improvement year-over-year for some time. That certainly translates to improvement on the bottom line.

We have made significant improvements in our productivity. I think one of the prior questions talked was a question about decrementals and the fact that volume this year is down slightly from last year, yet our margins have improved. Clearly demonstrates some of the productivity and operational improvements that we have made. And then, obviously, there is a manufacturing cost component that has provided some benefit there as well.

As I said before, I think those are relatively evenly split across all three. In terms of forward-looking, Dick and Bret can chime in as well, but material costs are generally very stable. They fluctuate. We see up-ticks and we see down ticks in steel and aluminum and plastic and those types of things. In general, they have been fairly range bound.

Just as a reminder, Steve, we will take forward positions on the aluminum content and steel content that go into our trailers once we actually receive a confirmed order from a customer. We also build in those costs into our costing model when we are pricing products. So, we end up protecting ourselves and alleviating any of the fluctuation that can occur from the time we take an order until the time we build it by doing that. And that is major benefit to us.

And it ends up, based on calculations we have done, ends up protecting about 70% of the input costs for raw materials into the product. All of the actions we take. There is others but those are two key ones.

The only thing I would add is based on the commodity groupings that make up the bulk of the material costs. For the products that we produce, material costs have some amount of inflationary component in some of the sectors, but as Jeff alluded to, some are actually going the other direction. As we look at the next several (inaudible) quarters, matched up with the order season which we said pushed out into the Q4, Q1 time frame. We are not looking at material costs that are terribly dissimilar to where we were at this time last year. And with future positions, as Dick alluded to, we are in a decent position to manage our material costs accordingly.

Okay, great. And lastly for me, I know that the order season has started I guess more normally this year in than in the past year or two. What are your thoughts on pricing? Or what are your early conversations for next year seeming to indicate in others? There's been some chatter about a little bit more capacity coming online, and as we get later into this season, how are the pricing conversations changing, if at all?

Sure. This is Brent. In general, we have seen limited pricing pressure on the tail end of 2016. It is a little too early to say definitively and what that will be for 2017. But we will see some level of market competitive pricing pressure based on what the market conditions will be. I will say at this time we feel generally well positioned with where the customer base is at, at the moment, with the deals we have closed.

We feel it is appropriate with where the market is at and generally feel as if we are in a good position based on how well specifically the commercial trailer products business has performed in terms of responsiveness and just general value creation for the customers. So while yes, we are going to see some pressure. I think you will see something a little less pointed than maybe what you would have seen at comparable periods in the past. So we generally feel good for where we sit right now.

Great. Okay. Thank you.?

Thank you.

Next, we have a question from Mike Baudendistel, from Stifel.

Hi, thank you. You talked about the regulations and impact that the EPA regulations might have but I also wanted to ask you about the food safety rule for refrigerated carriers. Does that impact your refrigerated business at all?

Not substantially. We'll say after public comment and rule as it reads today it's much less impact and leveragable from a manufacturer's standpoint. It is going to have impact on the physical carriers and the added requirements. We don't necessarily see that relating into any material impact from a manufacturer's perspective at this time.

Okay. That's helpful. Wanted to ask you about some of the industry data. The last few months there has been an uptick in cancellations and speculation that those weren't really true cancellations, more cancellations going to be re-ordered for 2017 delivery. Is that what you are seeing?

I think cancellations are a mixed bag. Across the industry, there were some cancellations, to your point, that were just re-calendarizations moving into 2017. I think most of the cancellations in general were within what I would call the small and medium tier players from an end customer stand point, not the larger customers. At least that was definitely how we saw it from our perspective. In general, cancellations have begun to really quiet as we move into this fourth quarter. We feel the market has generally calmed down and has reset itself moving into 2017.

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

The next question from Jeff Kauffman, from Aegis Capital.

My question is for Dick. A lot of my questions have been answered. Dick, congratulations also on your new role. And kind of listening to your commentary, should I think of it as now you have more time to focus and think about potential acquisition targets? So, we are going to take a look, or we have got a lot that we looking at and this is a change in gears on our strategy, so to speak?

Well, it sounds more like former than the latter based on the way you described it. And that is what I tried to share in my comments. By appointing Brent into the role as Chief Operating Officer he effectively fills a role that I have been carrying all this time. While I did not carry the title anymore, it is a title I had previously, and as we have expanded and have grown the business it gets that much more difficult to spend appropriate amount of time overseeing the myriad of businesses that we now have. And this will allow me a little more freedom and time to focus on growth initiatives for the business.

So, going back to the way you framed your question, yes, it should provide me a little bit more freedom to spend time looking at how we reinvigorate the growth opportunities for the business. So that can include acquisition growth but it also will include organic growth opportunities for the business.

Okay. And just I can't remember if I'm remembering this number right, but did you say in your longer term goals that the idea by 2020 is to have the core trailer dry van businesses as we think of it be roughly a third of the total revenues?

Yes. And we did not put a firm number around it because it has a lot to do with how we get there. But, yes. That would be a nice place to end up. As we exit the 2020 year, it would be nice to be looking at it and be having about a third of the business having a, I will call it a dependency, on the dry van segment. And that has really been driven by an internal look at what our business struggled with back in the last downturn. And going into the downturn we recognized that we had a significant dependency on the dry van segment. Nearly 85% of the business was dependent on it.

As I've said many times, that great strength became a great weakness for us as we got into the great recession when demand levels dropped by about 80%. As you recall, Jeff, we went from about 60,000 units of demand for our business in 2006 down to 12,000 units in 2009 and that was really driven by the dry van segment. Less dependency on it.

Obviously we are a much better business today. Our dry van segment operates much better than it did going into the downturn so we would manage through it more effectively. Having growth initiatives for the business that would, not walking away, again, I want to emphasize we are not walking away at all from the dry van business, but growing the business in other areas other than dry van can really be helpful to us in the event that we some day in the future face that kind of challenge.

Congratulations on some terrific margins in a real tough quarter and best of luck. Thank you.

Thank you, Jeff.

Thank you. And we have no further questions. I would like to turn the call back over to Dick Giromini.

Thank you, Ashley. So, while much has been done opportunities certainly abound and we will continue to be strategic but selective in pursuing opportunities to grow our business in addition to the organic growth initiatives already underway. We will continue to seek out ways to increase returns and value for all shareholders while assuring that the proper balance between risk and reward is considered in all decisions.

In closing, we are again on pace to deliver another record year of profitability in 2016 with strong margins, continuing supportive demand environment and continued focus on execution. Thank you all for your interest and support of Wabash National Corporation. Mike, Brent, Jeff and I all look forward to speaking with you all 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.