Wabash National Corp (WNC) 2017 Q3 法說會逐字稿

Welcome to the Third Quarter 2017 Wabash National Earnings Conference Call. My name is Ellen, 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. Mr. Pettit, you may begin.

Thank you, Ellen, and good morning. Welcome everyone to the Wabash National Corporation 2017 Third Quarter Earnings Call. This is Mike Pettit, Vice President of Finance and Investor Relations. Following this introduction, you'll hear from Dick Giromini, Chief Executive Officer, and Brent Yeagy, President and Chief Operating Officer, on results for the third quarter, the current operating environment and our outlook for the remainder of 2017 as well as an early look at 2018. In addition, Jeff Taylor, Chief Financial Officer, will provide a detailed overview of the 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 2 brief items. First, please note that this call is being recorded. Second, as with all of these types of presentations, this morning's call contains certain forward-looking information, including statements about the company's prospects, earnings per share guidance, the industry outlook, backlog information, financial condition and other matters. As you know, actual results could differ materially from those projected in forward-looking statements. These statements should be viewed 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. As stated in our press release, following prior year record performance is never easy, especially when operating in a somewhat more challenging environment. Throw in an acquisition and the headlines get even more muddied. That said, we are nonetheless pleased to have delivered historically strong performance in the third quarter, but not up to the lofty standards that we've become accustomed to in the past couple of years. Looking forward, we are encouraged by recent market demand trends and excited about what next year will bring as we integrate and leverage our newest addition, Supreme Industries, to our family.

Facing a combination of factors in the third quarter, including shipment pick-up delays impacted by the recent hurricanes, ongoing investment in our molded structural composites initiative, and a tighter labor market along with costs associated with our acquisition of Supreme Industries, all combined to create a veil over all of the good things that are going on in the business that set us up for a strong 2018. With backlog totaling $670 million, excluding Supreme, as of September 30, 2017, we are in a solid position as the 2018 order season has now entered its strongest period.

Our Diversified Products Group segment has finally started to see the pace of market demand improve in its businesses that we have been anticipating since early this year, but too late to favorably impact fourth quarter. As we discussed during last quarter's call, this has prompted us to accelerate the efforts needed to improve profitability in this segment and we placed a greater emphasis and urgency on cost optimization activities over the past 4 months.

I am encouraged by the actions already implemented to date along with other improvement opportunities that will be implemented throughout the balance of the year. Brent will provide more specifics on these actions in his remarks.

In our Commercial Trailer Products segment, a suddenly tight labor market in the Lafayette area impacted available staffing, leading to unplanned overtime and higher operating costs during the quarter to achieve the build plan. To help address this, we've accelerated increased investment in labor productivity enhancement projects that will more effectively utilize our available talent pool while delivering annualized savings of $11 million beginning in 2018. Brent will go into more details in his remarks on this. In total, we have invested approximately $9 million year to date in launch and project related expenses costs on these productivity and growth-related projects which obviously impact current profitability, but will benefit us going forward in 2018 and beyond.

Benefits not only include the profitability improvement delivered by these projects, but also helps to address the realities of operating in a tighter labor market.

On the growth front, we are very pleased to have closed late in the third quarter on our acquisition of Supreme. This acquisition significantly increases our presence in the important Final Mile space that we had first entered in late 2015 with the launch of our dry and refrigerated truck body offerings. The acquisition of Supreme, the second largest truck body manufacturer in the US, allows us to accelerate our growth in Final Mile with increased distribution paths and greater customer reach. This acquisition also propels our efforts to further diversify the company. It significantly reduces our dependence on the drive and demand cycle and establishes a leadership position in the medium and light duty segments.

On the organic front, just 6 short months after closing on the Little Falls property acquisition, we have ramped up the workforce to just under 60 associates and there is significant activity underway as we continue to install the necessary machinery and tooling to support production of our proprietary molded structural composite panels or MSC. As stated previously, this facility will serve as the primary manufacturing site for MSC as well as a flexible launch facility for the final assembly of the MSCT, the thermal refrigerated trailers. Our product engineering team continues to optimize designs for performance and weight as we move through the commercialization process. We are very pleased with the overall progress made to date and are equally excited with how well this organic initiative fits with our recent acquisition of Supreme.

As stated when we first provided our initial 2017 guidance back in February, 2017 would prove to be a step down in earnings per share from the record level achieved in 2016 driven by a somewhat more competitive operating environment along with anticipated material cost headwinds. In the near term, while many of the aforementioned short-term operational issues are behind us, others will continue throughout the balance of this year. As a result, based on the mix of these factors, we are updating our full year guidance for trailer shipments to 53,500 to 55,500 new trailers and adjusting our full year earnings guidance range to $1.33 to $1.37 per diluted share.

Looking forward to next year, based on current and projected market conditions along with internal analysis, we are now confident that 2017 will also serve as the inflection point in APS performance. A strengthening economy driving increased trucking demand, strong year-over-year backlog, increasing market interest in our proprietary molded structural composite technology, the addition of Supreme, and the upcoming payback from increased investment in productivity-enhancing technologies in our van operations, all get me excited about what we will deliver in 2018 and beyond.

Overall demand for van trailers within our Commercial Trailer Products segment is projected to remain historically strong for next year, combined with a much-improved demand environment for tank trailers and flatbed equipment. This belief is further supported by several factors, including a growing replacement cycle for 2004 to 2006 dry vans, a more stringent regulatory environment influencing both carrier and driver behaviors, and the continued need to refresh equipment. Additionally, numerous recent indicators further support a strong outlook for 2018. ATA's Truck Tonnage Index was a very strong 144.4 in September, up a strong 7.4% year-over-year and up 2.4% year-to-date. Both FTR and ACT recently increased their 2018 projections, with FTR now forecasting a very strong 290,300 trailers produced for 2018, and ACT now forecasting 267,750 trailers shipped. Both projections are indicative of a strong 2018.

September spot rates were up 9% from August levels, leading to improved fleet profitability and demand for more equipment. And ELD implementation, that's effective December 18 of this year, will impact capacity as adopters lose productivity or simply leave the industry, leading to increased demand for equipment and drivers by remaining fleets.

In addition, we expect top and bottom-line improvements in our Diversified Products segment driven by the improving market conditions served by this segment, their strongest backlog in 2 years as well as realization of various productivity improvement initiatives in both CTP and DPG. Couple these growth and performance opportunities with the addition of Supreme and our Final Mile Products segment, we currently project full-year 2018 earnings expectation of $1.55 to $1.75 per share.

With that, I'll ask Brent to provide some detail on results of each of our reporting segments. Brent?

Thanks, Dick. With the addition of Supreme to the Wabash family late in the quarter, we have expanded the cross functional collaboration across the business to ensure that we identify and leverage best practice within all segments. Rightsizing of the operations has been ongoing to ensure that staffing is in line with current demand levels, while concurrently developing opportunities for revenue growth. We will continue to leverage our Wabash Management System, or WMS, to optimize our manufacturing, supply chain and sales effectiveness across the organization. Real progress is visible with SG&A costs on pace to be down in excess of $5 million in 2017 from 2016 levels excluding acquisition related costs. A fully detailed action plan is in place to ensure that we will achieve our $10 million savings goal by yearend 2018. I will continue to update you on the progress on subsequent calls.

With that, let me get into some business specifics from the third quarter. I will start with the Diversified Products Group, or DPG, which includes our tank trailer, aviation and truck equipment, process systems and composite businesses. Revenue for the segment has been steady over the past 3 quarters, with third quarter revenues of $89 million up slightly year-over-year at 1.6% and down sequentially about 2.2%. Despite flat revenue in the segment, the actions implemented helped to deliver improved bottom line results as third quarter operating income was $5.2 million, achieving the highest level since Q3 of 2016. Gross margins for the third quarter also increased sequentially to 19.6%, an improvement of 70 basis points.

The tank trailer business continued to experience improving demand levels in the markets it serves with backlogs now at the highest levels in two years as of the end of the third quarter. As we have previously discussed, we do not anticipate a return to the unusually strong 2013/2014 demand levels in the tank trailer market anytime soon, but we are clearly seeing a recovery in our order activity and it does appear that 2017 will prove to be the low point for tank trailer shipments. We expect tank trailer shipments to increase by 10% to 15% year-over-year in 2018.

While strong demand will provide obvious benefits, further opportunities remain within tank trailers as we continue to adjust capacity to the near-term demand reality. Lean Improvement actions are underway at our Fond du Lac, Wisconsin and San Jose Iturbide, Mexico operations which will ultimately allow us to serve an improving tank environment more efficiency than in previous periods. Over the past 4 months, we successfully identified cost savings opportunities and our efforts have turned to the execution of the plan. My team remains engaged with tank trailer leadership to expand the use of the Wabash Management System, specifically in the areas of go-to-market and supporting business processes. Based on our optimization efforts detailed above, we expect operating results to continue to improve into the future.

In our aviation and truck equipment business, or AVTE, improvements on the commercial front have increased our backlog well into Q2 of 2018. The AVTE business remains cash flow positive as we have leaned out the operation driving a greater than 50% reduction in raw and wet inventories year-over-year. Now with stronger sales momentum, coupled with labor optimization efforts and implementation of Lean Manufacturing principles, we should begin to realize much improved operating performance in 2018.

In our Process Systems business, which produces isolators and downflow booths for the pharmaceutical industry along with stationery siloes and mixers for the food, dairy and beverage industry, we are continuing to see health demand in backlog levels. We continue to explore revenue growth opportunities in current markets served us well as in new adjacent markets that we believe are poised for long term growth. Implementation of Lean principles has delivered in excess of 25% line speed or velocity improvements in key areas while reducing line inventory or WIP by 50% in less than 4 months. With capacity constraints now being lifted, we have shifted focus and resources to once again grow this topline.

The Wabash Composite business unit continues to perform well, delivering profit contribution in Q3 on par with prior quarters as demand for truck body and door panels remained strong during the quarter. As a reminder, consistent with past years, this business unit is now in its seasonally weakest demand quarter, so profit contribution in Q4 will be the lowest of the year. Key to the future growth for this business unit is the continued development of new material technologies. Based on progress to date, we expect 2018 to be the year when we begin to see adoption of our steel skin and honeycomb panel technology in truck bodies in addition to the launch of perforated core panels into the trailer space.

To summarize DPG overall, we are continuing aggressive actions and increasing the pace of cost reductions, positioning the business to serve their markets more efficiently and improving the focus of leadership to execute on their organic growth initiatives. Overall demand is improving as witnessed by our recent growth in backlogs which will contribute to increased profitability in 2018, driving meaningful improvements in bottom line performance for the segment.

Now, let's discuss the results of our Commercial Trailer Products or CTP, consisting of our dry and refrigerated van products, platform trailers, retail parts and service, and wood flooring operations. As we have come to expect, the CTP segment performed well in the daily management of the business while dealing with a handful of headwinds along the way, delivering revenue of $339 million and operating income of $36.3 million. Shipments came in approximately 600 units lower than we anticipated as timing of customer pickup was delayed as a result of hurricanes in the southeast impacting not only revenue and income, but also overhead absorption resulting in lower gross and operating margins. These units will be shipped during the current quarter.

While CPT gross margin experienced year-over-year declines Q3, we knew that Q2 and Q3 of 2017 would be the most difficult comparison points due to record setting second and third quarters being delivered in 2016. Gross margins are expected to flatten out in Q4 from Q3 levels ending the margin compression we've seen over the past couple of quarters and we would expect to maintain these healthy margin levels into 2018.

Additional impact to margins was due to the recent tightening of the local labor market along with higher than anticipated commodity and material costs. As a result, overtime in excess of plan was required to achieve the build commitments resulting in a higher cost per unit. On the labor front, we are making headway replenishing our labor pool, but unfortunately, we expect this headwind will most likely continue into Q4 and then subside in Q1 of 2018.

On a positive note, the CPT team is in the process of implementing several large productivity and quality improvement projects that will further optimize the manufacturing process and reduce labor hour requirements. We mentioned these actions briefly on the last call, but I'd like to give a bit more detail as to the scale and scope. We have two significant projects at our Harrison, Arkansas Wood Products operation that combined will improve yield by over 5%, reducing material costs by $5 million annually and eliminate 30 manual operations. This first step, the first step of these projects was implemented midyear and has already ramped up to full capability. The second, an auto defecting project, will be installed and operational in the second half of 2018. In Lafayette, there are several automation projects set to be installed in our main dry and refrig assembly line that when fully implemented by the end of 2018 will reduce labor hour demand by 560 hours per day providing margin improvement as well as help offset the effects of the tight labor market. These projects are a continuation of effort over the past several years that have allowed CTP to grow and maintain healthy margin levels over a wide range of demand environments.

Now I'd like to provide some key updates on some other important Wabash National strategic initiatives. First, our CTP team continues to actively develop its patent pending molded structural composite technology that will have broad applications in both dry and refrigerated truck body markets as well as the refrigerated trailer space. Our new Little Falls site is the primary manufacturing location for molded structural composite comments as well as a flexible launch facility for the final assembly of MSC refrigerated trailers and truck bodies. We are already producing both refrigerated and truck body MSC components out of this site and have now begin final assembly of full 53-foot refrigerated van products from our previously, for our previously stated launch customers. I can't say enough about how pleased we are with the progress to date and the excitement we have for the potential of these products to change the landscape within the refrigerated product space.

And lastly, the integration of Supreme Industries into Wabash National as the cornerstone of our Final Mile Products reporting segment, is actively underway and is meeting or exceeding all cultural and synergy related expectations to date. We have found the Supreme team to be actively engaged and eager to take advantage of synergy opportunities and place Final Mile products on the path for significant growth. With Supreme now being part of the Wabash National family, the CTP organic truck body initiative which was launched in 2015, will now reside within the Final Mile products reporting segment going forward. Final Mile products will begin reporting for the fourth quarter as part of our next earnings call.

Now I'd like to provide an update on some regulatory items that pertain to Wabash National. As previously discussed, the Greenhouse Gas Regulations introduced in 2016 are presently under review in Congress with the EPA and NHTSA, that will ultimately determine whether this rule actually goes into effect. The Phase 2 Greenhouse Gas Rules were set to require compliance starting in January of 2018. The Truck Trailer Manufacturers Association has filed a petition in the U.S. Court of Appeals seeking review of this rule as it relates to the authority of the agencies to regulate trailers under the Clean Air Act. In addition, the Truck Trailer Manufacturers Association also filed for a stay to suspend enforcement of the rule to allow time for the EPA emits of the reconfigured trailer provision. Last week, the Court of Appeals granted the motion for the stay of the Greenhouse Gas 2 Rule as it applies to trailers. While compliance is on hold, the final impact on the trailers industry will not be known until we have a final ruling on the TTMA lawsuit. While we prepare for compliance with the new Greenhouse Gas Rule, we will also continue to monitor these activities.

In addition, we continue to monitor the reaction of fleets in response to the Federal Motor Carrier Safety Administration's mandate that all fleets must install Electronic Logging Devices or ELDs by December of 2017. At this point, it seems very likely that this rule will go into effect in December, and assuming implementation, this mandate will result in capacity tightening, improved pricing dynamics within the industry, and ultimately stronger demand for trailers.

To recap, we remain focused on improving the business as we drive common best practices across all segments. We also continue accelerating efforts to improve overall manufacturing system efficiency in all of our businesses as we look forward to top and bottom line growth in 2018. I will now turn the call over to Jeff to discuss some additional financial details.

Thanks, Brent. Good morning, everyone. I will echo the comments from Dick and Brent that the third quarter results were strong overall with CTP delivering solid results especially from an historical perspective despite a challenging environment. DPG has stabilized with strong positive indicators in all of its businesses. That said, we now have higher expectations after the strong performance that Wabash has delivered during the past couple of record years. We will continue to proactively address the areas that need improvement by continuing to invest in automation and productivity projects that will improve our operating efficiencies and lower the overall labor content of our products in addition to continuing to address our overhead and SG&A costs to ensure the appropriate level of cost to support the business and future growth while being cognizant of the current business environment and performance.

Before discussing the results for the quarter in more detail, I'd like to comment on our recent capital allocation activities. Specifically, on our return of capital to shareholders, in the third quarter, we returned approximately $7.6 million of capital to shareholders through our regular quarterly dividend and share repurchase. In terms of our capital efficiency efforts, we remain focused on the efficient deployment of capital to areas with the highest returns and strategic importance in support of our corporate goal to meet or exceed 20% return on invested capital annually. As we previously announced, we completed the transition of our Texas Wabash National Trailer Center branch locations to an independent dealer in the third quarter. Lastly and most notable change to our capital structure for the quarter, we completed the Supreme acquisition late in the third quarter for a purchase price of approximately $360 million and financed a portion of the purchase with a new high yield debt offering of $325 million.

With that, let's turn to the financial results for the quarter. On a consolidated basis, revenue was $425 million, a decrease of $39 million or 8% compared to the third quarter of last year. Consolidated new trailer shipments were 13,900 units during the quarter, slightly below the range of our prior shipment guidance. Third quarter build levels of approximately 14,350 units, exceeded shipments and supports a strong fourth quarter shipment level as these units are sold customer units which are expected to ship in the fourth quarter.

New trailer revenue was $355 million, down from the prior year period due to the lower units shipped. Components, parts and service revenue was $37 million in the quarter, down $3 million from 2016 levels, primarily due to lower sales as a result of fewer retail locations in CTP and lower sales of non-trailer equipment in DPG. Equipment and other revenue increased by approximately $1 million on a year-over-year basis.

In terms of operating results, consolidated gross profit for the quarter was $61 million or 14.3% of sales. Gross profit was down $22.5 million year-over-year and $6.7 million sequentially. The company generated operating income and margin of $26.6 million and 6.2%, respectively. However, after adjusting for nonrecurring acquisition related expenses of $8.7 million, operating income and margin would have been $35.3 million and 8.3% respectively. Third quarter operating margin was down year-over-year for both business segments, experiencing margin decline during the quarter which I will discuss momentarily.

In addition, operating EBITDA for the [second] quarter was $46.6 million, bringing trailing 12-month operating EBITDA to $191.5 million or 11.4% of revenue.

At the segment level, Diversified Products Group or DPG, produced net sales of $89 million in the quarter, an increase year-over-year of $1 million and a decrease sequentially of $2 million. DPG gross margin was 19.6%, down year-over-year by 210 basis points and up sequentially by 70 basis points. The year-over-year margin decline was attributable to commodity cost increases partially offset by increased pricing.

Commercial Trailer Products or CTP net sales were $339 million for the quarter which represents a $41 million or 11% decrease year-over-year on new trailer shipments of 13,350 units. New trailer average selling price or ASP of $24,000 was essentially flat compared to the prior year quarter. Commercial Trailer Products once again rebounded, recorded historically strong margins with gross and operating margins of 12.9% and 10.7% respectively. However, both gross and operating margins are down in year-over-year comparisons due to lower trailer shipments, the impact of higher commodity and labor costs, and a higher mix of lower spec, lower price end margin trailers during the quarter as well as tough quarterly comparisons to our record setting performance last year. Despite the challenges CTP experienced during the quarter, CTP delivered $36.3 million of operating income and delivered its ninth consecutive quarter of double digit operating margin.

Selling, general and administration, excluding amortization for the quarter, was $21.6 million or 5.1% of revenue. For the full year, we expect SG&A spending levels to be down more than $5 million year-over-year as we continue to implement cost optimization initiatives throughout the business. As a percent of revenue, SG&A is expected to finish the year essentially flat with 2016 levels.

Intangible amortization for the quarter was $4.1 million, down $0.9 million from the prior year. Interest expense for the quarter totaled $3.2 million, a year-over-year decrease of $0.7 million, primarily due to the lower amount of convertible notes outstanding. $0.5 million of our reported interest expense is noncash and primarily relates to accretion charges associated with the convertible notes.

We recognized income tax expense of $10.7 million in the quarter. The effective tax rate for the quarter was 36.2%. We expect the full year tax rate to be approximately 35.5% to 36%

Finally, for the quarter, net income was $18.9 million or $0.30 per diluted share. On a non-GAAP adjusted basis, our adjusted earnings were $21.2 million or $0.34 per diluted share after adjusting for the $8.7 million of one-time acquisition related expenses and $5.2 million net gain realized on the transition of former branch facilities to third party dealers. Both adjustments mentioned are pretax adjustments.

Non-GAAP adjusted earnings for the third quarter of 2016 also excluded gains related to the transition of branch locations. In comparison, GAAP and adjusted earnings for the third quarter of 2016 were 33.4% and $32.9 million, respectively. GAAP and adjusted earnings per share for the third quarter of 2016 were $0.51 and $0.50, respectively.

Let's move to the balance sheet and liquidity. Net working capital was essentially flat from the second quarter and decreased year-over-year by approximately $43 million excluding the impact of the Supreme acquisition. The year-over-year improvement was driven largely by branch transition activities and aggressive working capital management, but also impacted by lower revenue. We expect working capital to decrease at yearend consistent with our typical seasonal pattern.

Capital spending was approximately $5 million in the quarter, bringing our year-to-date capital to $15 million. We project full year capital spending to be approximately $25 million, depending on the timing of project implementation. Our liquidity or cash plus available borrowings as of September 30, was $323 million, down $25 million sequentially, due to a portion of the Supreme acquisition being funded from balance sheet cash. The company continues to generate a high level of free cash flow and operating EBITDA which allowed us to maintain liquidity at a very healthy level. Our first priority for capital allocation as well as funding the other components of our balanced capital allocation plan including capital expenditures for growth and productivity improvements in addition to returning a portion of our free cash flow to shareholders through the dividend and share repurchase.

We continue to maintain a healthy balance sheet and finished the third quarter with leverage ratios for gross and net debt at 2.9x and 2.1x, respectively, inclusive of the debt added to the balance sheet to fund the Supreme acquisition. On a pro forma basis, including trailing 12-month Supreme EBITDA, net debt would be 1.8x.

In summary, the overall performance of the company continues to be strong despite the challenges we faced during the quarter. The company continued to generate strong levels of gross profit and operating income, and we've generated in excess of $150 million of free cash flow and $190 million of operating EBITDA on a trailing 12-months basis. Lastly, we are excited to have completed the Supreme acquisition and look forward to growing in the Final Mile space.

I'll now turn the call back to Dick, where he'll give some detailed commentary on our outlook for the remainder of this year and 2018.

Thanks, Jeff. As we've outlined in detail today, as we close out 2017, we're facing some near-term factors impacting the headline numbers including a tighter labor market, some commodity cost pressure, and necessary investment expenses associated with continued development of our molded structural composite technology in Little Falls, numerous manufacturing productivity projects, and the Supreme acquisition integration.

Looking forward to 2018 however, we see far more positive tailwinds to our longer-term performance than headwinds. Market demand drivers in our favor with strong truck tonnage and freight rate numbers. The recently increased projections or 2018 trailer production and shipments from FTR and ACT. ELD implementation that will constrain capacity and drive demand. And strengthening tank trailer and platform markets. In addition, investments in our CTP automation initiatives come online to help offset the labor market tightness, improve yields, and productivity. And commodity outlook is much more stable. Our Little Falls ramp up will turn income positive by mid-2018. And to top it off, Supreme provides a full year of positive impact to the business while also positioning us well to take advantage of the growing Final Mile and home delivery markets.

So while third quarter results were not in line with our high expectations for the business, we see significant opportunity as we head into 2018. I'm extremely confident that we'll be successful as we close out 2017 and continue to implement our existing growth plans. We'll also continue to be strategic but selective in pursuing additional opportunities to grow our business and we'll continue to seek out ways to increases returns and value for all shareholders while assuring that the proper balance between risk and reward is considered in all decisions. With that, I'll turn the call over to the Operator, and we'll take any questions.

(Operator Instructions) Brad Delco, Stephens.

I don't know, Dick, if this is for you or Brent or Jeff, but I just kind of wanted to get a little bit more color on the adjustments for 2017 guidance and 2018. Big picture, at least when I think about 2017, it looks like you had a little bit of an issue with customers picking up trailers, so that should be a net benefit to fourth quarter. You also have the Supreme acquisition, so how do those two things play into your fourth quarter guidance and then your 2018 guidance? I guess, sorry, to simplify the question, what are you expecting accretion wise from Supreme in fourth quarter and in 2018?

Brad, let me talk first about the adjustments to 2017 EPS and how we -- obviously the fourth quarter performance was about half of the overall adjustment. As you've seen, we had some labor constraints in the quarter that were a significant factor in the third quarter performance, certainly relative to the prior guidance that we gave. As we look at the impact of commodities as well, there will be some continued commodity impact there. Not as significant in the quarter relative to prior guidance as the labor issue was, but we are seeing the impact of commodities is more pronounced in the second half of 2017 than it was in the first half of 2017. That will continue to flow through. Then thirdly, as I mentioned in my comments, we have seen a higher mix of lower margin, lower spec trailers in the quarter, third quarter, and that mix we expect will be consistent as we move into the fourth quarter as well. So those are some of the significant factors that are impacting the overall results, or the overall adjustments to guidance we made in 2017. In terms of the impact of Supreme for the fourth quarter, what I would say is that as you know, when you do an acquisition, from a GAAP perspective you are required to write up all of the inventory and assets that are acquired. So from that perspective, a lot of the shipments that will occur in the fourth quarter from Supreme will have that stepped up basis on our books and therefore will certainly show a lower margin in the fourth quarter until we clear out that inventory that we acquired. Obviously going forward, we expect that margin to return to normal and potentially grow as we capture synergies over time. In terms of 2018, we haven't broken out the specific guidance for Supreme in the individual business units, so what you've got is our full year estimate at this point in time. We'll bring more clarity to that in the next quarter and as we go through the early part of 2018.

That's helpful, but just to be clear, in terms of I guess the labor issue or the commodity cost issue, these are things that I guess weren't anticipated at the end of July when you updated guidance. What kind of changed so quickly that caused the labor issues or the raw material costs to sort of catch you by surprise?

Hey, Brad, this is Brent. I think what we saw in the August and September timeframe was not necessarily an issue with attrition. We really saw it just in the overall tightness of the labor market in order to replenish our ranks. So as a result, we had to work the overtime to be able to make up and provide the total hours required to produce the units. Coupled with, with the hurricanes coming and the effects on the southeast, we saw a runup in HDPE prices which affected us in Q3 and will continue to affect us in Q4. And there was portion of the backlog that was open at that time that as we reprice those trailers, with general rising commodities, we were unable to recover that cost impact.

Do you think that the raw material headwind was more related to HDPE versus I guess what you guys have historically been able to hedge with forward contracts with steel and wood and aluminum?

Absolutely.

So HDPE was a bigger factor than the other 2, the other 3? Raw materials?

It would be in general, Brad, because we don't -- we haven't hedged HDPE, but we're able to hedge, as we've discussed previously, at least a percentage of our exposure to aluminum and steel. And wood, as you know, and tires, both are put into our contract language to effectively be a passthrough on the majority of our customers.

That makes sense. I just wanted to make sure I understood what we were really talking about with raw material inflation.

Back to my original comment, I think labor was a bigger issue in terms of the impact of Q3 relative to prior guidance than commodities were, but they both contributed in the quarter.

Just to add to that, Brad, in my comments earlier, this is Dick, a number of productivity improvement initiatives. And these are significant capital investment projects that are automation related in the CTP business for the van lines. Those start to come online and will offset some of that labor hour demand that we face. So that's important for us as we progress through 2018 and beyond because those savings will continue. They're not one-time savings, they are ongoing savings as those automation initiatives go in place.

Thanks. That leads me into my next question. And Brent, I think I heard you correctly, you said the improvements you're making at Harrison will cut out 5% of overall material costs or just wood costs? And 30 people, is that what you also mentioned in Harrison? And then also can you provide that data on Lafayette as well? I think you said 560 hours per day, but can we put a bigger number to that in terms of what we would expect to see from a savings perspective?

Sure, so relative to Wabash Wood Products, we talked about a 5% yield improvement in the conversion of wood into wood flooring, which results in a $5 million material savings. That kind of buckets what it is for WWP. In terms of manned operations, yes, you're talking about effectively the equivalent of 30 associates that would be reflected there. But in most cases, we're going to redeploy those associates, again, to relieve the labor tightness issues we have in that portion of the business. Similar situation within Commercial Trailer Products. Yes, it's 560 hours of production requirements on a daily basis. We then take that knowing we get the productivity savings and then redeploy those workers to reduce overtime within the business.

Joel Tiss, BMO Capital Markets.

Dick, you gave us a bunch of the positive sort of tailwinds for 2018. I just wonder if you could balance it out with a couple of things you're worried about. Because I'm just looking at how wide the guidance is for 2018 and I just wanted to get more of a balanced view of what both sides of that you're looking at.

That's certainly fair. The reason there is a wide range is we're so early in the process. But I want everyone to recognize and understand how confident we are that 2018 will be a step up from where we're at today. Truly, 2017 is, as I stated earlier, an inflection point. We've taken on a lot of initiatives this year and many of those come to fruition as we enter 2018. Many of the productivity improvement initiatives and some of the near-term issues pass as a result of the productivity issues, like some of the labor constraint issues that we faced. We also have, on the positive side, obviously a full year worth of impact from Supreme being part of our business now. We have a very, very strong market demand environment right now. Truck tonnage is up at near record levels, all of the economic indicators are very strong. So it could very well be that 2018 turns out to be even stronger in a trailer demand than what we are suggesting it would be. So there could be upward bias going forward as we get more clarity and we get through this heavy order intake period which is the fourth quarter and early into the first quarter. We know on an overall trailer demand, September orders were very, very strong. October orders look very, very strong. We'll have to see how it all turns out when everything is consolidated for the industry. In conversations with customers, we are hearing some customers will buy somewhat less, some customers will buy somewhat more. So on balance, it's feeling a lot like this past year from a demand standpoint. And that's a good thing. If demand comes in at the levels that it's come in this year, it will be very similar to what FTR is suggesting for next year. That's very strong and that could put upward bias on projections and that's why we've left a lighter range at this early stage. We'll get more clarity as we proceed forward obviously next quarter and as we go through the year.

Awesome. Then just last, can you talk a little bit about pricing? I know it's early, but just what are the indications? And it sounds like supply/demand is pretty tight and you've got a lot of new product introductions and a lot of enhancements on your existing products. Can you just give a sense if there's going to be enough pricing to be able to cover the raw material costs or if you can get a little bit of extra margin out of that side of the equation?

I think with the pricing environment that we're seeing right now, I think it's generally positive as we look at 2018. And I think we should be in a position to begin to offset the commodity and material cost headwinds that we saw in 2017. I'm not going to go so far as to tell you what I think that exactly is, other than to say it's generally positive.

Steve Dyer, Craig Hallum Capital.

Ryan Signal on for Steve. Thanks for taking our questions. So industry forecasters are expecting the overall trailer market to be approximately flat this year compared to last. But your shipment guidance implies something like down 10% year-over-year. Any additional color there on what's causing the deviation?

Yeah, I think what we've looked at in an environment with increasing commodity costs are intent to try to drive margin over volume. We've had to make choices in 2017 to try to maintain as advantageous an environment for Wabash as we possibly can. In some cases that has resulted in somewhat of a drop in market share. But in general, we feel positive in 2018 that not only can we begin to regain parts of that market share, but also able to recover some materials.

It's also, as we've commented in the past, Ryan, the large customers who we work very well with, the large fleets, they are significant orders in the industry and they're lumpy, so if one customer orders strong in one year and orders a little less the next year, then that will impact obviously our market share numbers in the overall industry. Nevertheless, we've maintained a strong position with that customer and we feel very good about the relationships we have with our customers and the large fleets and the positions we have this year. But we do certainly favor margin over volume as Brent discussed for our pricing strategy there.

And we think it's important as an industry leader to make sure to give a certain amount of floor relative to pricing. We tried to drive that in 2017. And I think overall the industry has benefitted from that.

I think just to add a little bit more color to it, we have had some early success with some of the orders that we have been able to gain during this I call it 2018 pricing season that we're in now. Larger orders that are being priced for larger fleets for next year. We have had some success in getting some reasonable price increases with orders to help offset some of that material cost or commodity cost increases that we experienced through the year. So we feel pretty good about it.

Great. Then transitioning to guidance next year, what does that incorporate from an industry standpoint? How does that compare to ACT and FTR forecasts? Because they have fairly wide expectation deviations I guess between the two, so are you somewhere between or do you side with one versus the other? Thanks.

At this point we try to take a somewhat more conservative view. As in my comments earlier, we're still early in the heat of the 2018 order season. We're encouraged by what we have seen both at the macro level for our industry and order intake that we have seen ourselves. But we will take a harder look at it as we proceed through November, December and January. That will really tell the story of what customers are saying, is it true or is it higher? One of the things that I believe, and I'll clarify, I've said these comments previously, I don't think I mentioned them today, but with the ELD implementation, we believe that the impact will be greater than what some of the forecasters have indicated and have included in their projections on what the impact in demand requirements will be for the industry and the impact on what the capacity constraints will actually turn out to be for the industry. There will be fleets who will simply decide to stop operating. There will be others who will decide to continue operating until they're caught. In any case, those who do elect to adopt will end up seeing a productivity decrease as a result of the limitations of hours that they can drive. That will end up causing a need for more equipment in the system to be able to make up for that lost productivity. It will not be an immediate impact, it will probably be something that we start to see as we progress through the year, more notably in the second half of 2018. So from a demand standpoint, my belief is you will see customers' fleets coming back a second and maybe a third time and ordering incrementally more trailers. So if a fleet orders 300 today, 6 months from now they may come back and want to order another 200 to pick up because they picked up lanes that have been left, demand is not being covered. And then they may come back a third time later in the year and buy another 100 trailers for example. For larger fleets, those numbers would be even larger increments. That's the prediction that I am making internally, but it's too early to really be able to build it into any numbers until we see how the base order rates come out over these next 3 months or so.

Okay. And one final one for me, just a quick clarification. On the inventory step up from Supreme, is that going to be included in adjusted EPS in the guidance that you guys have? Or will you guys back that out as kind of a one-time inventory step up?

It's still being discussed, but I think it will probably be adjusted out. On an adjusted basis. It will definitely be included in the GAAP numbers.

Brad Delco.

Just quickly on the acquisition costs, the $8 million or so, that seems like a big number. What's included in that number?

Brad, that's just all the fees and costs associated with completing an acquisition. We capitalize what we can on the balance sheet and amortize it over a period of time, but some of it is expense and some of those things would be some of the bankers' fees, some of the financing costs. The normal costs associated with an acquisition.

So the financing costs in there, that seems like it was the lion's share of it, is that fair?

A piece of the financing cost is expense and then a piece of it is capitalized. But the $8.7 million has some bankers' fees, lawyers' fees, accountants' fees, and then some other financing fees.

This concludes today's question and answer session. I'd like to turn the call back to Dick Giromini for closing remarks.

Thank you, Ellen, and thank you all for your interest and support of Wabash National Corporation. Mike, Brent, Jeff and I certainly look forward to speaking with all of you again on our next call. Thank you, everyone.

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