Wabash National Corp (WNC) 2016 Q4 法說會逐字稿

Welcome to the fourth-quarter 2016 Wabash National earnings conference call. My name is Christine, and I will be the 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. You may begin.

Thank you, Christine, and good morning. Welcome, everyone, to the Wabash National Corporation 2016 fourth-quarter and full-year 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; and Brent Yeagy, our President and Chief Operating Officer, on the results on the fourth quarter and full year of 2016, in addition to the current operating environment and our outlook for 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'll open the call for questions from the listening audience. Before we begin, I'd like to cover two brief items. First, please note that this call is being recorded. Second, as with all these types of presentations, this morning's call contains certain forward-looking information including statements about the Company's prospects, earnings per share guidance, 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 Securities and Exchange Commission. With that, it is my pleasure to turn the call over to Dick Giromini, CEO.

Thanks, Mike. I'll begin by saying that we're extremely pleased with the Company's 2016 performance as it marked the fifth consecutive year of record profitability. 2016 proved to be a year of outstanding performance and a year that helped set the stage for the future with some new and exciting growth initiatives that further diversify the Company. Before addressing financial results in detail, I'd like to share a few highlights and initiatives that contributed to this record-setting year.

In 2016, following a year of record industry demand, we experienced a softer but still historically strong overall demand environment for van trailers with total industry shipments overall of 286,900 units representing the third strongest year ever, surpassed only by 1999 and 2015. The commercial trailer products business stayed true to form by leveraging this favorable demand environment through continued focus and execution under three near-term drivers for success: margin growth through improved pricing, operational efficiency, and supply chain optimization.

This focus and commitment to excellence led to significant margin improvement in CTP that we'll discuss more in a few minutes. Overall, we generated record margins, record cash flow, and we once again significantly improved our balance sheet during the year. We have clearly positioned ourselves with ample resources to, one, fund our internal capital needs to support both organic growth and productivity improvements; second, to assure continued reduction of our debt obligations; third, to return capital to shareholders; and, fourth, selectively, but more actively pursue strategic acquisitions.

On the growth front, we continued our efforts to identify both near-term and long-term organic growth opportunities that leverage our engineering and market analytics expertise, evidenced by our new line of truck body products, expansion of CTP's indirect sales channel, and an exciting new material technology in molded structural composites, or MSC. Concurrently, we have accelerated our efforts to proactively identify strategic acquisition targets that we believe can create sizeable shareholder value.

Utilizing both internal and external resources, we expect this effort will yield targets that will allow us to utilize our strong financial position to accelerate our growth and diversification efforts while leveraging our strong competencies and manufacturing execution, sourcing, and innovative engineering leadership to assure strong value creation. At the same time, recognizing value creation through M&A, activity can prove to be a prolonged process and further recognizing that we continue to generate cash flow comfortably in excess of our organic growth requirements, we recently took another step to increase the return of capital to shareholders.

We were excited to announce on December 13 that we were reinstating a quarterly dividend in the amount of $0.06 per share of common stock or approximately 1.8% annualized yield at the time of announcement, expressing our strong confidence in our long-term cash generation ability. Additionally, we took the opportunity to repurchase in excess of 2.7 million shares during the period, bringing our 2016 full-year total to more than 5.6 million shares repurchased, leaving approximately $23 million available under the current authorization as of the first of this year. As a matter of note, we have now repurchased approximately $137 million of shares or roughly 13% of outstanding shares during the past two years.

On the debt front, we took a timely opportunity to repurchase $47 million in principal value of convertible notes early in the fourth quarter, reducing the outstanding balance by roughly half and meaningfully mitigating the impact of dilution from these notes, having now reduced our convertible note balance by $101 million over the past five quarters. So with that, I'll provide some more color around our very successful year.

Following an industry record demand year in 2015 for total trailers, and facing a somewhat softer operating environment in 2016, the team nonetheless delivered another outstanding year in almost all performance categories. Revenue for the full year 2016 was $1.845 billion representing the third best year in our history. Gross margin was very strong, registering a Company record 17.6% and 260 basis points better than 2015, driven largely by a continued favorable demand environment, strong operational execution, and further made possible by our higher margin diversification efforts.

Additionally, despite the decreased revenue level, we established another all-time record in operating income of $202.5 million, representing an impressive $22.2 million or 12% increase over our previous record set in 2015. And our operating margin expanded to 11%, surpassing our previous record by 210 basis points and exceeding our stated goal of a 10% full-year operating margin by 2020. All this led to delivering adjusted non-GAAP EPS of $1.85, exceeding the prior year by 24%, overcoming the weaker industry demand level and the previously discussed impact related to the Lafayette Road construction project.

Looking inside the numbers, our diversified products group business segment continued to face soft demand within the tank trailer and process systems businesses, along with ongoing operational challenges in the aviation business, or AVTE, impacting top and bottom-line results. However, the outstanding execution delivered by our CTP segment more than offset these challenges, again, reinforcing the efficacy of our strategic diversification efforts to date. Overall, our strong financial results directly contributed to the further strengthening of an already strong balance sheet and enable us to deliver on our commitment to a balanced capital allocation strategy by aggressively addressing both return of capital to shareholders and debt reduction in 2016.

Our performance this past year clearly validates our long-term strategic plan first established in 2007 and demonstrates the progress we continue to make in executing that plan to profitably grow and diversify the business to ultimately create ever-increasing shareholder value. We've changed the fundamental composition of our business and continue to strive to make additional improvement to further grow margins, ensure more stable earnings stream, and take advantage of macro growth trends. So that's the year in summary.

Now, let's take a look specifically at fourth-quarter results. On a quarterly basis, net sales were historically strong, $462 million on shipments of 15,150 units, exceeding prior guidance as customer pickups during December surpassed internal forecasts. Fourth-quarter bill levels totaled approximately 12,950 units, reflecting the normal decrease in operating days during the quarter.

Operating income for the fourth quarter was $40.6 million, representing the second highest fourth-quarter operating income in the Company's history, only surpassed by the fourth quarter of 2015. Operating margin came in at 8.8%, also the second highest fourth quarter behind only 2015. The decrease year over year primarily due to weakness in diversified products end markets that we'll discuss further in a few minutes.

Overall, a solid fourth quarter with strong trailer shipments and revenue which translated into excellent profitability in operating EBITDA. We also produced another strong quarter of cash generation, registering over $72 million of operating cash flow in Q4, a nice finish to a record year. With that, I'll ask Brent to provide some detail on the results of each of our reporting segments. Brent?

Thank you, Dick. Before discussing the business performance for 2016 in more detail, I want to highlight a few points of emphasis as we move forward into our 2017 -- or into 2017. Upon stepping into my current role in October, I was challenged with the task to assure that we are getting the highest level of performance from all areas of our operating segments by leveraging our talents and skill across the business.

This includes top-line growth, organic diversification, and operational excellence at the factory level. First, I'd like to point out the commitment we are making to further diversify revenue streams in all of our businesses. Oftentimes, the external view is that our non-trailer revenue enhancing strategies only exist in the diversified products segment, which is not accurate. It is important to recognize that new sources of revenue are consistently being pursued throughout CTP and DPG.

Additionally, growth efforts within our diversified products group can offer revenue expansion opportunities within commercial trailer products and vice-versa. Key examples include the recent announcement of our licensed ThermHex honeycomb core technology from EconCore that provides non-trailer growth opportunities for diversified products along with new material application opportunities for commercial trailer products.

Other examples being pursued by commercial trailer products include our initiative to grow, our aftermarket parts business, other new material technologies such as our proprietary molded structural composites, and expanded use of high-strength steels and adhesives in new products like truck bodies. These initiatives will generate revenue opportunities for both business segments, thus ensuring a more stable, higher-margin earning stream for Wabash National into the future.

To assure that we are truly leveraging our best and brightest, we have enhanced business collaboration across the enterprise, identified best practices, and are now prioritizing opportunities for accelerated cost reduction in many areas. These include expansion of shared services, further supply chain efficiencies, and manufacturing process optimization by further leveraging our Wabash production system that we have continually been refining over the past 15 years with the objective to deliver improvements in SG&A and operating overhead of $10 million annualized -- of $10 million of annualized savings at current revenue levels. These savings will predominantly be realized with our DPG businesses over the next two years.

Now, let me get into some business specifics from the fourth quarter. I'll start with the diversified products group, or DPG, which includes the composites, tank trailer, aviation and truck equipment, and business systems processes. Overall results in this segment continue to reflect the soft market conditions in many of the end markets served by the DPG businesses with revenue of $86 million and operating income of $1.1 million.

Operating income was down $11.2 million from the fourth quarter of 2015 with over 65% of the year-over-year change in operating income accounted for by reductions in volume and price within our tank trailer business. The remainder of the year-over-year change is primarily attributed to softer volume in these three businesses.

As stated, the tank trailer business continues to experience softness in certain markets, which is creating prolonged top-line pressure in diversified product group's largest business. While the food, dairy, and beverage markets of our tank trailer business continue to see reasonable stable demand, this has been more than offset by extended weakness for products related to the chemical and oil and gas markets, resulting in lighter than desired backlogs for both liquid and dry bulk tanks across the industry, leading to capacity consolidation by multiple competitors.

Likewise, we have taken numerous steps to reduce costs through headcount adjustments, overhead cost reductions, while maintaining ability to respond quickly to return and demand. Recent indicators, such as increased rig counts and a renewed interest from lease fleets, have provided reason for optimism going forward, and signs that the bottom may have finally come.

While we don't expect to see a sudden return to record-setting demand levels for tank trailers that we enjoyed during the 2014 and 2015 in the near term, we do expect improved performance from the business unit as we progress through the year. Driven by an uptick in quote and order activity at the end of 2016, that is carried into early 2017 along with continued cost optimization actions being implemented and an improved pricing environment.

Now, we'll switch to our aviation and truck equipment business, or AVTE. Facility consolidation and subsequent labor optimization have led to some initial improvement in these operations. However, much work remains to be done to bring this business to a level of performance that meets our expectations for operating income and return on invested capital. And we will -- and this will continue to be one of my initial focus areas as we progress throughout the year.

Over the past month alone, we have restructured the business, made leadership changes, and removed $1.5 million of annualized operating costs. As stated, our work is far from over to bring this business to acceptable levels of performance. We've already made measurable progress.

In our process systems business, which produces isolators, downflow booths, and mobile clean rooms for the pharmaceutical industry, along with stationary silos and mixers for the food, dairy, and beverage industry, we have continued to see stronger quote activity than what was seen in early 2016. We expect this business to deliver higher top and bottom-line results in 2017 as compared to what we have seen in 2016.

We have seen nice growth in our craft brew initiative, and we have hit all early growth targets accordingly. We have also started to see a return of quoting activity in some of our end markets within the business unit. It is important to note that we have successfully completed the implementation of SAP within our process systems facilities in Wisconsin. This is part of a larger SAP rollout within our diversified products group businesses and will standardize ERP platforms across our total Company and enable us to take further steps in integration and cost reduction activities.

The Wabash composites business continues to perform well with current focus on adding to its new product development pipeline and new material technologies that will be key to its future growth. We are currently working on multiple new honeycomb composite sandwich panel applications, both within and outside the transportation industry utilizing our new licensing agreement with EconCore for use of their patented ThermHex honeycomb core technology. The key for us will be to accelerate commercialization of value-added products that enhance our portfolio.

We recently installed new capital equipment on site that now provides us production capability to drive this initiative. The first display of these efforts will be at the upcoming NTEA Work Truck Show in Indianapolis in March where Wabash National will showcase a dry truck body with honeycomb panel technology. This will be the first piece of equipment from Wabash utilizing this type of composite sandwich panel.

To summarize, our diversified products group segment Q4 results, weak demand in a number of areas pressured segment results, overshadowing bright spots of new product offerings that will drive further growth in the segment. It was a challenging quarter as we continued to see pressure on top line as key markets remained weak, but we are confident that we are taking the proper steps to return this business segment to a more acceptable level.

We are starting to see some early improvement in the market dynamics facing this business, and we expect 2017 to be a stronger year across the board in this segment. While we experienced a significant pressure on Q4 margins, we expect to see gross margins improving in the first quarter with levels approaching 20% with additional improvement to gross margins as we move through 2017, bringing us back to more historical norm or 21% to 25% by the end of the year.

Now, let's discuss the results for 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 innovation. The fourth quarter proved to be another very strong quarter for commercial trailer products. Revenue was a solid $379 million and the profitability delivered in the segment was again very impressive.

Gross and operating margins of 15.6% and 13.2% respectively represented the highest fourth-quarter margins in the segment's history and drove $49.9 million of operating income. This outstanding performance delivered in the fourth quarter was a result of the team's continued execution of a market strategy committed to optimizing both top and bottom line, a capable work force focused on continuous improvement and Lean Six Sigma, as well as material cost optimization. While we expect another very strong year for commercial trailer products in 2017, we do expect to see some modest margin compression versus record margins seen in 2016 as industry volumes pull back from the 2015 and 2016 levels.

We've seen an uptick in material cost inflation since the election, and we will lose some manufacturing leverage as build volumes are forecasted to be down in 2017 as compared to the past two years. Additionally, the capacity increases that were added to the industry over the last two years are now online and could begin to have some limited impact to pricing. However, even accounting for headwinds previously discussed, we expect commercial trailer products to deliver very healthy gross margins in 2017, and we expect them to be approximately 200 basis points -- within 200 basis points of the 2016 margin levels, while far surpassing margin levels at any other year prior to 2016 in the Company's history within this segment.

Now, let's discuss some updates on commercial trailer products important strategic initiatives. The commercial trailer product team's entry in the truck body market in order to take advantage of future growth in the final mile in home delivery space really started to take hold as we took in more truck bodies in the last three months of 2016 than the first three quarters combined. Dry truck bodies assembled within our final mile manufacturing facility continue to be positively received by end customers and a growing number of indirect channel providers.

With the promise to provide innovative and robust products and improved responsiveness taking root, we will continue to develop our midwest channel and will begin expanding our indirect channel into other regions throughout 2017. As discussed, we believe our truck body business will prove to be a $100 million plus revenue business for us by 2020. We are well on our way to making this a reality, and we expect 2017 to produce over $10 million of revenue before more than doubling each of the next three years.

We now have a dedicated sales team, significant order momentum, and recently hired an industry veteran that has been added to the commercial trailer products senior team to lead this effort in achieving these growth goals. In addition, our present truck body design, we continue to actively develop our patent pending molded structure composite technology that we believe will have broad applications in both dry and refrigerated truck body markets as well as the refrigerated trailer space.

Our molded structural composites with thermal technology, or MSCT, will provide a superior refrigerated truck body product for our customers based on reduced weight and improved thermal performance. First announced to the market in late 2015, we have successfully commercialized the MSCT refrigerated truck body and continue to meet early stage growth targets. While in early stages of manufacturing system development, we are making significant progress on establishing a supply chain and additional manufacturing capability for this important material technology. We expect to be able to announce further progress on this front in the very near future.

In our more traditional trailer space, we secured an additional commercialization launch customer in Q4 for our molded structural composite refrig vans, and as communicated at the time, we will begin limited production in the first half of the year of 2017 for those adopters of refrigerated van MSCT technology. CTP made significant progress in 2016 from another important strategic initiative of improving an already best-in-class indirect channel with new dealer partners established in Arizona, New Mexico, and Florida. We continue to be very excited about the sales performance and the potential of this channel.

This is an important step for us as it helps us smooth out the inherently lumpy nature of our direct sales order profile and efficiently opens our product sales to an expanded customer base. This emphasis on the indirect channel has been key -- a key component to our margin-over-volume strategy that has helped commercial trailer products to the best ever margin levels in 2016. Now, I'd like to get an update on the regulatory items that pertain to Wabash National.

As previously discussed, the US EPA and NHTSA agencies released new greenhouse gas regulations in August of 2016 in an effort to reduce fuel consumption and production of carbon dioxide from heavy duty commercial vehicles, including both trucks and trailers. At the moment, there are bills in Congress that will ultimately determine whether these rules go into effect.

In addition, the Truck Trailer Manufacturers Association has filed a petition in the US Court of Appeals seeking review of the rule as it relates to the authority of the agencies to regulate trailers under the Clean Air Act. While we continue to prepare for compliance with new greenhouse -- with the new greenhouse gas rule, we will also continue to monitor these activities.

Most of you are aware that the Federal Motor Carriers Safety Administration has issued a mandate that all carriers must install electronic logging devices, or ELDs, by December of 2017. Industry estimates vary widely on carrier productivity losses as a result of ELDs, but somewhere in the 3% to 10% range is what we would expect. While there have been lawsuits against the ELD mandate, these motions have been denied to date, increasing the likelihood that this rule will be effective in December of this year.

To recap, we are accelerating our efforts to drive common practices and leverage shared growth opportunities in final mile, advanced composites, and distribution. These actions combined with a strong demand environment for commercial trailer products, and improving market conditions within diversified products gives us great confidence in our outlook for the year and beyond. I'll now turn the call over to Jeff to discuss some additional financial details.

Thanks, Brent, and good morning, everyone. I'd like to echo the previous comments that we are very pleased with the overall performance of the business in 2016 as we delivered record margins and profitability despite the pockets of demand weakness that we are experiencing in certain markets within diversified products. While fourth-quarter results were weaker than anticipated in diversified products, there remains a high level of execution in our operations and business functions across the Company, which is reflected in our overall results for the year.

We continue to strive to grow and diversify the Company, and we are benefiting from actions taken over the past several years with this aim in mind. The Company will continue to push into new products and new markets in order to continue the transformation into a more diversified industrial manufacturer. Before discussing results for the quarter in more detail, I'd like to comment on our recent capital allocation activities where we were able to take advantage of some favorable market conditions and execute against our capital allocation plan.

Specifically, on return of capital to shareholders, we ramped up our share repurchase activity in the fourth quarter by taking advantage of an attractive stock price with a total investment of approximately $39 million to repurchase just over 2.7 million shares. Since reinitiating share repurchase in early 2015, we have repurchased approximately 10.2 million shares. Additionally, we reduced our total debt again by purchasing $47 million face value of convertible notes in the fourth quarter.

Aside from taking advantage of the favorable market conditions early in the quarter, retiring the convertible notes is attractive because it decreases our total debt, reduces our earnings per share dilution in addition to decreasing the short interest on the stock. At an average share price of $16 per share for the quarter, or approximately 40% above the conversion price of the notes, the reduction of convertible notes in the fourth quarter would effectively reduce our diluted share count by over 1 million shares for our earnings per share calculation.

Lastly, but certainly not least, we were very pleased to announce in December the reinitiation of a regular quarterly dividend of $0.06 per share. We made the first dividend payment last week. We will continue to prioritize return of capital to our shareholders, and we view our recent actions as a strong signal that the Company is healthy and well positioned to continue to generate cash flow far in excess of our business requirements over the long term.

For the full year, 2016 proved to be a perfect example of this capital allocation strategy in action as we opportunistically paid down $82 million of convertible bond debt; repurchased $77 million of common stock, which is approximately $17 million more than the prior year; reinstituted a regular quarterly dividend; and funded productivity and growth projects in both commercial trailer products and diversified products, all while maintaining liquidity levels above $300 million for the entire year.

With that, let's turn to the financial results for the quarter. On a consolidated basis, revenue was $462 million, a decrease of $82 million or 15% compared to the fourth quarter of last year. Consolidated new trailer shipments were 15,150 units during the quarter, above our shipment guidance on strong December customer pickups.

Components, parts, and service revenue was $33 million for the quarter, down from fourth-quarter 2015 levels, primarily due to lower sales in Wabash composites in our branch locations as we continued to transition some Company-owned branch stores to independent dealers. This was partially offset by an increase in parts sales from commercial trailer products aftermarket parts growth initiative.

Equipment and other revenue also decreased on a year-over-year basis, primarily due to lower sales in our aviation and truck equipment and process systems businesses. In terms of operating results, consolidated gross profit for the quarter was $71.5 million or 15.5% of sales. While gross profit was down $16.3 million from 2015, gross margin decreased by only 70 basis points as some of the market weakness it experienced in diversified products was offset by strong execution in commercial trailer products.

The Company also generated operating income and margin of $40.6 million and 8.8% respectively. Operating margin for the full year of 2016 finished at 11%, well in excess of our corporate objective of 10%. In addition, operating EBITDA for the fourth quarter was $53.6 million bringing full-year 2016 operating EBITDA to $253 million or 13.7% of revenue.

At the segment level, diversified products, or DPG, produced net sales of $86 million in the quarter, a decrease year over year of $27 million, primarily driven by continued weakness in the tank trailer industry. This weakness is also reflected in DPG new trailer shipments that recorded a reduction of 200 units year over year. DPG gross margin was 15.8%, driven largely by a demand environment exhibiting some headwinds that impacted not only volume, but also pricing in the fourth quarter.

Commercial trailer products, or CTP, net sales were $379 million, which represents a $55 million or 13% decrease year over year on new trailer shipments of 14,600 units. New trailer average selling price, or ASP, increased sequentially by approximately $500 on a strong mixed profile with increased sales of higher spec units in the quarter. On a year-over-year basis, ASP decreased slightly as we sold a higher percentage of smaller pieces of equipment, such as converter dollies, in the fourth quarter of 2016 as compared to 2015.

Pricing remained solid throughout 2016. We expect ASP in the first quarter to be flat or just slightly down from where we ended the year. Commercial trailer products once again recorded very strong margins with gross and operating margins of 15.6% and 13.2% respectively.

Operating margin was up 130 basis points compared to the prior-year period, and margins were down sequentially in line with seasonal expectations as we produced fewer trailers and had less operating days than in the third quarter. Nevertheless, CTP delivered their highest-ever fourth quarter in terms of both gross and operating margins, which resulted in operating income of $49.9 million.

Selling, general, and administrative, or SG&A, excluding amortization for the quarter was $25.9 million or 5.6% of revenue. For the full year, SG&A finished at 5.5% of revenue, and SG&A spending levels are expected to remain relatively flat year over year.

Intangible amortization for the quarter was $5 million, down about $0.3 million from the prior-year period and was $19.9 million for the full year. We expect intangible amortization to be approximately $17 million for 2017. Interest expense for the quarter totaled approximately $3.7 million, a year-over-year decrease of $1.1 million, primarily due to the lower amount of convertible notes outstanding. $0.7 million of our reported interest expense is noncash and primarily relates to accretion charges associated with the convertible notes.

Full-year interest expense was $15.7 million. We expect interest expense in 2017 to be approximately $12.5 million at current borrowing levels and interest rates. We recognized income tax expense of $12.2 million for the fourth quarter. The effective tax rate for the quarter was $34.7 million, excuse me, 34.7%, bringing our full-year rate to just under 35.6%, consistent with our previous guidance. We are estimating the 2017 full-year tax rate will be approximately 36%, and that rate obviously does not include the impact of any corporate tax reform.

Finally for the quarter, net income was $23 million or $0.36 per diluted share. On a non-GAAP adjusted basis after adjusting for charges of $1.2 million in connection with the loss on debt extinguishment from the purchase of our convertible notes, as well as the sale of certain assets of our Denver and Miami branches to a third-party dealer, net income was $24.2 million or $0.38 per diluted share.

In comparison, GAAP and adjusted earnings for the fourth quarter 2015 were $33.3 million and $34.1 million, respectively. GAAP and earnings adjusted per share for the fourth quarter of 2015 were $0.50 and $0.51 per diluted share, respectively.

Let's move on to the balance sheet and liquidity. Net working capital finished the fourth quarter down about $33 million from the prior quarter as we typically experience an inflow of cash from year-end reduction of working capital. We finished 2016 with net working capital levels $22 million below year-end 2015 levels but we expect to see a further reduction of working capital in 2017.

Capital spending was $5 million in the fourth quarter and $20 million for the full year, in line with the past two calendar years. We expect our full-year capital spending to be meaningfully higher in 2017 as some of our previously discussed growth initiatives require a more substantial investment in plant, property, and equipment. In addition, we also have a full pipeline of productivity projects across both business segments. In total, we expect 2017 capital spending to be between $30 million and $40 million depending on timing of project implementation.

Our liquidity, or cash plus available borrowings, as of December 31 was $333 million or 18% of 2016 revenue, and generally in line with levels we maintained throughout 2016. A continued strong free cash flow allowed us to maintain liquidity at a 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 and debt reduction. We finished 2016 with leverage ratios for gross and net debt at 1.0 times and 0.3 times respectively.

In summary, we were very pleased with the Company's overall strong performance for 2016. We generated very strong levels of gross profit and operating income as well as record gross and operating margins delivering a record level of cash flow from operations. We also utilized record levels of capital in the fourth quarter in 2016 to further strengthen our balance sheet by opportunistically paying down debt as well as returning capital to shareholders through our authorized share repurchase program.

With that, I'll now turn the call back to Dick where he'll give some detailed commentary on our outlook for 2017.

Thanks, Jeff. So looking forward, we're confident that overall demand for van trailers and our commercial trailer products business will remain historically strong throughout the year and possibly beyond. This is based on a number of factors that continue to be positive trailer demand drivers and remain consistent with what I've stated for several years now.

First and 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 excessively aged dry vans that have remained in use as a result of the significant industry underbuy during the period 2008 through 2010, resulting in lower reliability and availability, higher maintenance and operating costs per mile, and decreased performance.

Second, the regulatory environment, including CSA and hours of service, has influenced both driver and carrier behaviors leading to the continued need and desire to refresh equipment or to add equipment to increase drop and hook opportunities. Third, carriers, while currently feeling the impact of periodic softness and load availability and pricing, still remain profitable and traditionally look to invest that cash flow into new equipment to optimize operating costs.

Last, while somewhat choppy in 2016, load capacity is expected to tighten in 2017 as freight rebounds and regulatory drivers such as ELDs constrict industry capacity. We also believe that electronic logging devices, or ELDs, are likely to have a more significant impact on capacity than some anticipate and may ultimately drive increased demand for new equipment as stronger carriers attempt to recover lost productivity.

On the order front, following two years of unusually early seasonal order placement that drove backlog to historically high levels, it is clear that the 2017 order season is a return to normal for what has traditionally been expected for this time of year. Our backlog is at a seasonally very strong $802 million overall as of the end of the fourth quarter, up $160 million sequentially or 25% from the third quarter and represents the third strongest year-end backlog level in the past 15 years, only surpassed by the prior two years.

This backlog represents approximately six months of build volume overall on average, including approximately seven months of van production backlog. While very strong backlog levels remain for dry and refrigerated van trailers, other product lines, including tank and platform trailers, have continued to experience weaker demand and shorter backlogs.

While 2017 will likely reflect a pullback in overall demand from the record level of 2015 and the historically strong 2016, we nonetheless expect another strong year overall for our industry with order levels well above replacement demand. The two primary industry forecasters are becoming more aligned to that thinking following two consecutive months of near record level orders with ACT research recently increasing their forecast to 260,700 trailer units to be shipped in 2017, while FTR now projects 255,000 units to be built in 2017, an increase of 17,000 units over what their forecast indicated just two months ago.

The very strong November and December order months and our direct feedback from customers about their expectations and needs for 2017 gives us increased confidence in our long-held view that overall demand will again be solid in 2017, driven by the factors mentioned earlier. As a result, we now expect to see an industry in the 250,000 to 260,000 unit range with Wabash National shipments in the 51,000 to 55,000 unit range.

Additionally, we now expect to deliver total Company revenue of approximately $1.6 billion to $1.7 billion. We can certainly operate very effectively in that environment. Obviously, a somewhat softer demand environment for van trailers, some margin compression resulting from increased industry capacity, and effects of material inflation will put some pressure on our financial metrics, but not what history might imply. We're a far different company from what we were in past cycles with exceptional operational execution on all fronts, driven by our highly engrained Lean Six Sigma culture.

With a much expanded and diversified product portfolio, including extensive composite offerings, increased presence in non-trailer markets, and our medium duty truck body entry, we're confident that we're better positioned than ever to deliver solid results in a softer demand environment. So in terms of earnings, despite the aforementioned potential headwinds and recognizing the productivity and cost optimization momentum by the businesses, we now expect to deliver full-year 2017 earnings per share in the range of $1.40 to $1.55 per share.

Coming out of the gate, please remember that the first quarter always brings with it seasonal headwinds such as lower shipments and higher winter operating costs per unit. With that in mind, we would anticipate a typical seasonal first-quarter lag in customer pickups and are expecting total shipments to be between 11,000 and 12,000 for the quarter.

In summary, we're certainly pleased to have delivered another in a long string of strong quarters, driven by continued exceptional execution and results from the commercial trailer product segment. However, not wanting to rest on any of these accomplishments, we continue our focused efforts to drive ongoing improvements throughout the business, deliver new opportunities to grow our top-line end margins, and capitalize on macro growth trends. With that, I'll turn the call back over to the operator and we'll take any questions.

(Operator Instructions)

Our first question comes from Mike Shlisky from Seaport Global. Please go ahead.

Good morning, guys.

Good morning.

Good morning.

So may want to touch first on some of the broader numbers out here. Just checking out back to your 2020 goals that you put out a couple years back. We're now about three years away. The big ones that are not absolute numbers, you've already gotten those. You've already gotten the operating margin goal of 10% plus and it looks like you'll probably get there in 2017 as well even in a down market in most scenarios what you're guided to, and you're already above 20% on the ROIC line.

But I think there's probably still some pretty big steps to get to that $3 billion top-line goal and that $2.50 EPS goal and it is only about three years away. So perhaps this is a bit more of an M&A question, but is that long-term goal still intact today, and what can you do beyond just organic growth to push further towards those goals at this point on?

Is it getting outside of the trailer end positive market? Is it something totally different? Or at this point, if you're not going to buy anybody in the trailer world, can you actually buy somebody in an entirely different business?

Yes, Mike. We -- excuse me. This is Dick Giromini. We have stated in the past that our focus is to continue to diversify our business so that we're less dependent on the drive end segment in particular. Not walking away at all from the drive end segment, just diversifying in other areas. That was indicated or exhibited by our acquisition of the Walker Group Holdings business back in May of 2012.

We want to grow and continue to diversify, leverage many of the existing non-trailer businesses that we have, and build on those. So obviously, undefined at this point, at least publicly, but as I stated in my earlier comments, we have an extensive effort going on at this time identifying target opportunities that would continue to drive that strategy, so we've got work to do ahead of us over these next four years through 2020 to achieve that target, but it'll be a split in some ways between organic growth opportunities and acquisition targets.

Okay. Great. Just switching gears here, I also wanted to ask you about the dairy market. Can I get us your kind of latest thoughts as to what you might be seeing here on your order books today and kind of your outlook for dairy in 2017, both in stationary and trailers?

Yes, Mike. This is Brent Yeagy. I think on the dairy front right now, we're seeing stable demand as compared to 2016, maybe just a slight uptick on the silo-based businesses within our process systems group, but generally in line with 2016 demand levels.

Yes, Mike, this is Jeff. As we've commented in the past, too, that's a very stable mark that food, dairy, and beverage market is. Typically going to grow slowly, close to economic growth and/or population growth, and I think we see that overall in the market over the long term. You obviously can have ups and downs in any short periods. But, it's a nice market.

Okay, great. On the road construction project, just wanted to confirm that, that's totally done. And in 2017, do you kind of see any improvement in your day-to-day operations with maybe different light timing or patterns of traffic outside your facility we should be aware of that might be helpful for the margins this year?

Mike, this is Brent again. We don't anticipate any headwinds in 2017 related to any ongoing road construction within the city in which we operate here in Lafayette, Indiana. We've taken some optimization efforts through the capitalizing on some of the road construction, but nothing I would say is material for the purposes of your call.

Let me just add, Mike, there is another phase of the project, so if you would come visit us, it is highly likely that as we get into the spring time and summer that you'll see construction going on, but it's to the north side of our property, which is far less disruptive and concern than it was when we were dealing with all of the construction that was on the south half of our property. So there is construction to be planned for this year, but we don't anticipate it to be a negative impact on the business.

Okay. Great. One last one from me. There's some news out from Amazon the last couple days looking to build out a giant flotation hub in Cincinnati that there's going to be a few thousand trailers that they need as well as, I would assume, some final mile-type vehicles. I was wondering if you could give us your thoughts as to what your positioning is with Amazon today and their current trailer business, and when do you think you'll be in the running for any of their final mile products going forward?

When they first started -- this is Dick. When they first began the process of getting into their own -- managing their own transportation operations, I shared on one of the calls that we had looked at potential opportunities there and it did not fit the criteria for what we felt was an acceptable proposal and elected not to participate at that time. We will certainly entertain any opportunity. We'll evaluate it, but if it doesn't meet our criteria, we're not chasing volume, as you know. We want to run a very effective business and that may not meet what our expectations or requirements are.

Got you. All right, guys. Thanks so much.

Thank you. Our next question comes from Jeff Kauffman from Aegis Capital. Please go ahead.

Thanks very much. Hey, congratulations, everybody. Terrific results.

Thank you, Jeff.

Thank you, Jeff.

Dick, just a question. The devil is a little bit in the details here, and I was looking at the new ACT forecast, and it looks like they're starting the year with about 72,000 to 73,000 industry shipments dropping a number closer to 58,000 toward the end of the year. That's a pretty steep drop as the year continues on. In terms of your forecasting, how are you thinking that the progression of the 250 to 260 plays out during the year?

It just seems like based on those numbers, your forecast of 11,000 to 12,000 units seems like a little less share of the market than you would normally do. So do you think it's more an issue of the ACT numbers starting high and kind of coming down during the year? I'm just trying to figure out how to model as we go through the year and trying to figure out what you're expecting production to look like.

As we've said consistently in the past, the first quarter always has less operating days effectively coming out of the holidays. You have lower customer pickups because of the holiday season having passed, so there's a little bit of a lag in pickups, so we always start out slower on shipments. Production levels generally exceed shipment levels early in the year, and then there's a catch -- so there's some inventory build for customers' pickup as we proceed into the second and third quarter, which are the strongest quarters of the year typically.

There is occasion where fourth quarter messes that up, but typically second, third quarters are the strongest demand quarters for us from a build and shipment standpoint. And then fourth-quarter shipments can generally exceed as they did this past quarter, generally exceed builds in the fourth quarter. So you have to look at builds differently from shipments, and you have to look at orders differently from builds and shipments because they don't all align. There's always going to be that lag from order to build to shipment. So it's very seasonal on the -- versus the builds, versus the shipments, versus orders. I don't know if that helps you, but it's hard to explain over the phone.

Yes. That part of it I get. Just if I'm following your normal progression seasonally, and I match it up against the ACT data, it just looks like your share of the market is unusually low in the first quarter and then unusually high in the fourth quarter, and I know you don't base your forecast on what ACT says, I'm just trying to reconcile with that big drop coming off. Maybe that's a better question.

I think what you get in there is you get some mix effects in there. You get some manufacturers who will build a lot of stock units in the early part and move those to dealers. We tend to build based on demand. We don't build a lot of speculative equipment; a vast majority of ours is built to order.

We do build some for dealers for their early season stocking, but then we manage that throughout the year. So I think you get some, I hate to say false indicators, but maybe misleading indicators when you try to look at what ACT puts out, and we provide guidance based on what our -- the real-world experience we have.

As you know, two-thirds to 60% -- anywhere from 60% to 70% of our builders are direct to large carriers, so there's timing events with them on when they want to take the equipment and all. So our mix may be different than what the overall ACT mix because they're talking about all trailer across all types of trailers that in some cases we don't participate in, like the specialty equipment and dumps and those type of things.

Okay. That's fair. Just one follow-up bigger picture. You know, dry van has been really driving a lot of the strength over the last year, year and a half. I think you noted the rig counts are up, and you're starting to see some green shoots on the energy side. Maybe we get some construction-related stimulus from the new administration.

Does this generally portend that even though your volumes may be kind of taking a breather year in 2017 that the mix impact as we go through the year should get more and more favorable in terms of trying to figure out an ASP or something like that?

Yes. You're going to have -- you should expect some mix shift as a result of the dynamics that you just talked about. The -- if when the dry van segment decreases, obviously the ASPs on a dry van are significantly lower than ASP on any tank trailer, so you're going to get some mix effect relative to the aggregated ASP. So you do get some of that. It's a much smaller influence because the volumes are so much lower on tank products than they are on the dry van segment.

Notably, however, the dry vans were the single -- when you look at the ACT detail numbers, the 21,000-unit increase that they made from their previous forecast to now was notably mostly in the dry van segment. So they did increase that. So there's expectation and we agree with that, that strength in dry van will be stronger than what the forecasters were thinking just a couple months ago.

All right. Well, thank you for the dividend, and congratulations on a great year.

Okay, Jeff. Thanks.

Thank you. Our next question comes from Scott Schoenhaus from Stephens. Please go ahead.

Hello, guys. Good morning.

Hi, Scott.

Good morning.

Hey, Brent, I just wanted to dig in a little bit on first quarter DPG gross margin guidance. I believe you said -- you put out a 20% figure for this quarter coming up, and I think you said also that you're seeing some -- the pricing move up on the tank trailer side or you were seeing some improvement, but you also mentioned about cost cuts. Can you give us the biggest driver on achieving those much stronger margins for the first quarter? Is it mostly cost cuts or is there some pricing inflation baked into that guidance?

Yes, thanks, Scott. First off, I think we'll be approaching 20% in the first quarter. I want to make sure that we're clear on that.

Okay.

I think it's pretty much an equal spread between cost optimization efforts as well as some additional overhead spread that we'll get from improving volumes, and we hope to recover pricing throughout the quarter, and we'll see that progress sequentially throughout the year. So I'd say it's one-third, one-third, one-third at this point. (multiple speakers)

I guess my last question is, I know you guys always say that you can pass pretty effectively based on the contracts any inflationary commodity pricing. I guess first one is, are you seeing any inflationary commodity pricing currently and are you expecting that to continue throughout 2017? And if you are having increased competition from [capacity] coming on throughout the year, does that hinder any ability to pass along those extra costs to your customers?

There's a lot of question there.

Yes. Sorry.

I think I would start with, yes, we're anticipating specifically within our steel and aluminum stainless steel commodity groupings some level of continued inflation throughout 2017. For the majority of our CTP business, specifically dry vans, a larger portion of our backlog is already committed; it's already seen through our numbers. There's limited potential to recover pricing on that front.

On our other product lines, platforms, truck bodies, tank trailers in general, we have much more flexibility of pricing in inflationary pressures into our pricing and we factor that into our numbers accordingly. We're generally pretty good at being able to recover those costs.

Well, that's it for me. I'll hop off. Thanks, guys.

Scott, just to emphasize, we have built into our -- taken that into consideration material cost inflation into our projections on EPS for the year, so it's all been baked in.

Scott, this is -- Scott, this is Jeff Taylor. Just wanted to make one final comment on your first question around DPG margins. I just want to remind you that, that segment has multiple businesses in it, and there is some mix impact that will occur sequentially quarter to quarter. And as you know, Wabash composites generally pulls back some in the fourth quarter and then starts to pick up in the first half of the year as some [avrarian] markets will pick up. And so that will also drive some of the improvement, sequentially you'll see in DPG margins as well.

Thanks, Jeff.

You're welcome. Thank you.

Thank you. Our next question comes from Alex Potter from Piper Jaffray. Please go ahead.

Hi, guys. Congrats on the good results.

Thank you.

I guess I had a followup question there on DPG gross margin going beyond the first quarter. You mentioned steady sort of increase throughout the year getting back towards your normal range in the back half or towards the fourth quarter. I was just wondering if you could comment on I guess specific levers that you expect to pull in your visibility into your ability to achieve that outlook?

Yes. There's a couple different points in there. One, we expect to see a stronger demand in environmental tank trailers throughout 2017. That will factor in the pricing accordingly. We'll see the mix effect that Jeff talked to as we continue to see stronger end markets.

What we believe in our other non-tank trailer businesses, we'll see a positive upside there, specifically within our Wabash composites group, which is material and our overall DPG gross margins. We're also taking actions within our aviation and truck equipment group that will truly fully materialize later within the year and then that will fall and grow that overall gross margin contribution.

Okay. Thanks. That's helpful. And then I was wondering if you could also maybe refresh your thinking regarding the math surrounding the size of that quote-unquote excessively aged van fleet. I know that we're still coming back to that period of underbuying back in 2008 through 2010. Presumably that tailwind will eventually be exhausted, but I was just -- I'm wondering if you could update everyone regarding what you estimate to be the size of that fleet that still requires replacement?

Yes. It's -- and this is a really rough estimate. These are not any documented or published numbers. Three years ago the number was estimated to be north of 300,000 units. A year ago, it was estimated that there were still about 200,000 units remaining, so it's something less than that, but still very aged equipment that are up into the mid-teens in age, and that type of equipment needs to get out of the market, especially for the large truckload fleets that are still doing some catch-up.

And the reason it's taking so long to address those is just the sheer mass number of those pieces of equipment and the ability of even the large profitable fleets to manage through that to be able to get rid of the old ones and acquire the new ones and get them into their system, and that's where we're seeing in. And in some cases, some fleets didn't get back into buying modes until the last couple years, so they were not getting back in, in 2011, 2012, 2013; they've just gotten back in. So there's a little bit of a carryover effect for them before they can get to purge their system of the very, very aged equipment.

So over the next couple years, we should see -- you'll probably hear me talk less about the excessively aged side of things than what you've heard from me for the last three, four years or so as this diminishes. But we're still seeing aged equipment out there that some of the large customers continue to operate. It's just going to take some more time for them to get them out of their system.

Okay. Thanks a lot.

Thank you.

Thank you. Our next question comes from Kristine Kubacki from CLSA. Please go ahead.

Hello, guys. Good morning. Just a question on the pricing environment out there. I guess it's coming in a little weaker than I expected, I guess, though, we've added capacity in the industry, not yourselves, and I guess from a pricing standpoint and a capacity standpoint, do you think that we've kind of added all the capacity that's out there at this point that was on the drawing board, or is there still stuff that's still supposed to come online?

The majority of the capacity is online. Clearly, with some of the more recent capacity additions, there's always a ramp-up phase that any new manufacturer gets into, the growing pains of hiring, training, and then ramping up capabilities to be able to take orders. So that's why we say that now in 2017, we probably start seeing some impact from this. We did not see an impact up until this point, so we have built that into our models also.

But the -- offsetting that is a little bit stronger market than what some were expecting, so that can help offset some of that and put a little upside push to it. So we're still thinking and that's why Brent mentioned in his comments somewhere upwards in the 200 basis point range of margin compression that we see a combination from material inflation and maybe some downward pressure on margins as a result of some of the added capacity.

Fair enough. And then just one question on your supply chain, how much of your supply chain is sourced within the United States?

Yes. I'm assuming that question is going to heading towards border tax adjustment.

Correct.

So right now, we look at as a percentage of material costs roughly about 15% of our total sourced componentry and some other materials, roughly about 15% at this time. That does not begin to account any mitigating actions we would have.

So that's total around the world. So any outside of the US that -- and then we have the opportunity to obviously mitigate much of that by insourcing that if the financials make sense to do that depending on what type of border tax ends up coming in, if it does and what it is.

Okay. Fair enough. You're in a better position than most. All right. Appreciate it. Thank you.

Thank you. I will now turn the call back over to Dick Giromini for closing comments.

Thank you, Christine. So while much has certainly been done, opportunities continue to be available to us in the future. 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'll 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 all decisions.

In closing, we're proud to have delivered another record year of profitability in 2016 with strong margins, continuing support of the demand environment, and a continued focus on execution. Thank you for your interest in and support of Wabash National. Mike, Brent, Jeff, and I look forward to speaking with all of you again on our next call. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.