Wabash National Corp (WNC) 2018 Q2 法說會逐字稿

Welcome to the Q2 2018 Wabash National Earnings Conference Call. My name is John, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. And I will now turn the call over to Jeff Taylor.

Thank you, John, and good morning, everyone. Welcome to the Wabash National Corporation 2018 Second Quarter Earnings Call. This is Jeff Taylor, Chief Financial Officer. Brent Yeagy, President and Chief Executive Officer, is on the call with me today. Brent will discuss the overall company performance for the quarter as well as the progress we are making in our strategic initiatives, the current operating environment and our outlook for the remainder of 2018. I will then review the financial results. At the conclusion of the prepared remarks, we will 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 these types of presentations, this morning's call contains certain forward-looking information including statements about the company's prospects, adjusted 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 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 Brent Yeagy.

Thanks, Jeff. As many on the call know, I became CEO on June 2 as part of a planned CEO transition. I spent my first week as CEO traveling to numerous manufacturing locations and meeting directly with the hourly and salaried associates that make Wabash National a great company. I've also had the pleasure to meet with many of our external shareholders and analysts since the transition was announced last December. From those meetings and discussions, one common question emerged, which was how will I lead the company. I want to provide additional color on that question today.

Let me start by saying that we will build on the foundation that was established by my predecessor. The company is stronger and more diverse today than it has ever been in its 33-year history. We are proud of what we have accomplished. Nevertheless, we will continue strengthening the company and accelerating growth in specific areas of the business. In order to do that, my team and I are focused on people, purpose and performance. We will share more about how that plays into our strategic plan over the next few months and during our Investor Day event in New York City planned for November 29 of this year.

With that, let's discuss the company's second quarter performance. We are pleased to deliver strong performance in the quarter, especially considering the challenging environment we face as we continue to execute our strategic plan to profitably grow and diversify. We achieved a new record for quarterly consolidated revenue at approximately $613 million, which is 13% higher than the previous record from the fourth quarter of 2015. This new record is directly attributable to the addition of the Supreme business into our Final Mile product segment and strong demand in our other 2 segments.

As a matter of fact, Final Mile products established a quarterly record for revenue of $121 million. That record encompasses the entire 40-year history of Supreme. We clearly see the Final Mile business segment as a source of both top and bottom line growth as we align the business with the unquestionable market trends and changes in logistic models that are occurring within e-commerce, retail and home delivery markets. All 3 of our strategic business segments continue to experience strong demand, and we expect a stronger second half of 2018 for the company.

While it was a solid quarter for top line results that reinforce our optimism for 2019, we continue to work through many headwinds in many of the same areas that we discussed last quarter. This includes material cost inflation driven by trade and tariff activity out of Washington, a continued tight labor market driven by an 18-year low in national unemployment and supplier constraints for key materials and components, leading to supply disruptions as a result of strong demand for tractors and other industrial and transportation products.

As trailer rates continue to settle across the industry, we should see broader improvement in supply stability as we move through the balance of 2018. As we exit the midsummer period, labor pressure will historically subside. However, we are moving quickly to take internal actions to improve the labor situation through hiring and productivity efforts.

In regard to trade and tariff-related inflation, we are aggressively pricing the impact into our products, which will begin to impact Q4 of 2018 and further into 2019. Overall in the second quarter, trailer shipments of 16,300 units were in line with our guidance range. Truck body shipments were strong in the quarter due to expected seasonal demand from our largest customers in the second quarter. We will see that subside in Q3, as expected. Backlog remained seasonally strong at the end of the second quarter and finished at $1.2 billion. On an absolute basis, the backlog increased 51% year-over-year with the addition of Supreme in 2018. Nevertheless, the backlog is up 35% year-over-year excluding the impact of our Final Mile products or Supreme in the current year.

Trailer demand and orders has remained strong for the past several months, continuing the momentum from the first quarter and supporting a robust trailer outlook for the back half of 2018 and for 2019. Truck body demand remains strong as well, with year-over-year improvement in backlog reinforcing our belief in a growing sector demand for Final Mile and Middle Mile goods movement supported by increasing e-commerce and home delivery activity.

Next I want to update you on the progress of our organic strategic initiatives, which are DuraPlate Cell Core, DuraPlate Honeycomb Core and Molded Structural Composites or MSC. We have successfully completed the first phase of upgrading our manufacturing operations for DuraPlate Cell Core panel production. This enables our Commercial Trailer Products and Final Mile product segments to continue moving forward with trailer and truck body commercialization efforts in 2019. DuraPlate Cell Core can lower the weight of a dry van trailer by up to 350 pounds as compared to standard DuraPlate while maintaining overall panel performance characteristics.

Concurrently to the development of Cell Core technology, we continue to press the development of other lightweight material technologies for use across many end markets. One specific technology of interest is our Honeycomb Core, which has the potential to further reduce the weight of a dry van by up to 650 pounds as compared to a conventional DuraPlate panel. This technology is in the early stages of development and proceeding as expected. We're in the process of producing pilot quantities of this material for product validation testing in 2019. These are just 2 ongoing examples of our commitment to innovative material technologies that further set us apart from our dry freight product competition.

We also continue to move forward on our commercialization of Molded Structural Composite technology or MSC in both refrigerated vans and refrigerated truck bodies. We continue to increase our manufacturing scale within our dedicated MSC manufacturing location in Little Falls, Minnesota. MSC refrigerated van assembly capability was increased during the quarter as our manufacturing processes were refined to increase velocity and improve process capability. We remain on track to have 100 MSC refrigerated van trailers in active testing in 2018.

In addition, the MSC truck body initiative, which was launched in 2016, has progressed faster than originally expected, with over 100 units in the field today and gaining momentum. Therefore, we are allocating additional resources to hasten the development and commercialization of both product lines. All of our development and testing up to this point confirms that this product brings substantial benefits over the existing conventional refrigerated product technology. With breakthrough improvements in thermal efficiency, weight reduction and the elimination of corrosive metals, this innovation has the capability to positively impact the asset model of refrigerated fleets by increasing the useful life of the product, which will drive additional value for both our customer and Wabash National.

Finally, the last strategic initiative I will discuss is the combined integration of Supreme and growth activity within our Final Mile products business. We are taking a more focused and deliberate approach to the integration than in previous acquisitions. By using the Wabash management system, the deployment of Wabash legacy leaders in Supreme and a focused accountability tracking process, we remain on track to achieve our target of $20 million in annual run rate synergies within 5 years.

As planned, we are investing significant capital into the business. In fact, we have already committed $5 million of capital projects to improve manufacturing capability. We will see that investment increase throughout 2018 and beyond, as we have the ability to further streamline, debottleneck and/or improve process capability to enhance profitability and further grow the business. We are already seeing the benefit in many areas, as witnessed by record output in the second quarter, and more benefits will be realized as the productivity projects are completed.

Now we'll shift into a short regulatory update. As you know, the updates from Washington regarding trade and tariffs seem to be changing weekly, if not more frequently. We are actively monitoring these events and the possible effects on our business as this plays out. The majority of Wabash's materials and components are sourced domestically, so the direct impact of tariffs to Wabash is not significant. However, the tariffs have caused domestic cost inflation, specifically for steel and aluminum, which is impacting the 30% of materials and components we are not able to hedge. We continue to proactively manage as much of this risk as possible with our hedging program and are working to expand the breadth of our hedging productivity in the near future.

As previously discussed, the California Air Resource Board or CARB unveiled its own proposal for renewed greenhouse gas standards for medium- and heavy-duty trucks and trailers that operate in California. It is likely that CARB's adoption of these regulations will require fleets to equip trailers with the fuel-saving technologies outlined in EPA Phase 2 greenhouse gas rules, starting in the 2020 time frame. We will continue to monitor the CARB rulemaking as it moves forward.

Last week the House passed an appropriations bill that included an amendment to the EPA's annual budget. The amendment prohibits EPA funds from being used to regulate trailers under the Clean Air Act. This goes back to the argument that a trailer is not a self-propelled vehicle and therefore should not be regulated as such. Should this remain in the bill that the Senate passes, trailers will not be forced to comply with EPA's Heavy-Duty Greenhouse Gas and Fuel Efficiency Standards Rule, which took effect in January of 2017.

Before I turn the call over to Jeff, let me share our views about the market and the expectations for the balance of the year. At the macro level, GDP remains strong, consumer confidence is high and housing starts continue to climb, just to highlight a few indicators. At a more micro level, carrier profitability is strong, contract and spot rates for carriers are at elevated levels, truck tonnage is at or near record levels, load availability and truck utilization are off the charts and quote and order activity are all on a path to set all-time records.

The industry forecasters, ACT and FTR, are both extremely bullish in their views of the overall demand for trailer equipment, with FTR recently increasing its forecast to 310,500 units of production, while ACT continues to forecast an all-time record of 320,000 units to be produced this year. Additionally, the trailer demand outlook for 2019 continues to be strong, with ACT and FTR forecasting trailer production next year of 298,200 units and 300,000 units, respectively.

In response to customer demand, we recently opened the order book for 2019, which is seasonally early and another positive indicator that the trailer cycle remain at historically strong levels. While there is less clarity beyond 2019, ACT and FTR still continue to forecast strong demand above replacement levels for the foreseeable future.

Given the strong market conditions, there are a few headwinds that could impact 2018 outlook and constrain the industry from producing at the current forecasted levels. Specifically, we expect the challenges experienced in Q2 -- the stressed supply base, material cost inflation and a tightening labor market -- to continue throughout the remainder of 2018. We are developing contingency plans to address each of these issues. However, further escalation could have a material impact on performance in the second half of the year.

With a full order book for the back half of the year and strong industry indicators such as continued strong freight rates, high tractor utilization and truck tonnage, we are tightening our 2018 full year trailer shipment guidance to 60,000 to 62,000 units. Specifically for the third quarter, we anticipate total trailer shipments to be in the range of 15,500 and 16,500 trailer units. For Final Mile products, with a strong backlog and focused execution in the business, we now expect full year truck body shipments to exceed 24,000 units, the high end of our prior full year shipment guidance.

Taking into account our year-to-date performance, the strong demand outlook for our products as well as the challenging environment with continued headwinds as previously discussed, we are updating our 2018 full year adjusted earnings per share guidance range to $1.94 to $2.00. In the near term, we remain focused on delivering a strong second half of this year and positioning the company for an even stronger 2019.

With that I will turn the call over to Jeff for the financial update. Jeff?

Thanks, Brent. On a consolidated basis, second quarter net revenue was $613 million, an increase of $177 million or 41% year-over-year, establishing a new high point for quarterly revenue. Net sales increased for both Commercial Trailer Products and Diversified Products Group compared to the prior year quarter, and the favorable impact of adding the Final Mile segment all contributed to the strong revenue in the quarter.

Consolidated new trailer shipments were 16,300 units during the quarter, consistent with our shipment guidance. Second quarter build levels totaled approximately 16,150 units. Components, parts and service revenue was $39 million in the quarter, down slightly from $42 million in the prior year quarter, primarily as a result of lower sales at our branch locations as we continue to transition company-owned branch stores to independent dealers.

Equipment and other revenue was $148 million in the quarter, up $119 million compared to the second quarter of 2017, primarily due to the addition of truck body sales in the Final Mile product segment. Overall, non-trailer-related revenues for the current quarter totaled $187 million or 30% of our total revenue, which both represent new all-time records for non-trailer revenue. This increase is due to the inclusion of Supreme and our other organic initiatives to continue growth in non-trailer products.

In terms of operating results, consolidated gross profit for the quarter was $85.3 million, up $17.6 million or 26% year-over-year, attributed to the addition of Final Mile products. Consolidated gross margin of 13.9% decreased 160 basis points year-over-year due to the challenging operating environment which Brent previously described, including material and component cost inflation, higher labor costs and continuing costs to ramp up labor, in addition to the impact of supplier constraints. Nevertheless, $85 million of quarterly gross profit is historically very strong performance for the company and the highest level achieved since the second quarter of 2016.

The company generated operating income of $46 million, a year-over-year increase of $7.4 million or 19%, attributed to the addition of Final Mile products and partially offset by decreases in CTP and DPG. Operating margin of 7.5% declined by 140 basis points compared to the prior year period, consistent with gross margin. In addition, operating EBITDA for the second quarter was $58.9 million or 9.6% of revenue.

Now for a look at financial results in each of the business units. I'll start with Commercial Trailer Products or CTP. Net sales were $403 million, which represents a $54 million or 16% increase year-over-year on new trailer shipments of 15,650 units. New trailer average selling price or ASP was up year-over-year due to increased market demand and better pricing in response to rising material and labor costs. Additionally, it is worth noting that our platform or flatbed trailer products that are manufactured in Cadiz, Kentucky, which includes both the Benson and Transcraft brands, had a very strong quarter with high double-digit increases in revenue and operating performance as a result of strong demand in energy, industrial and housing markets.

In total, Commercial Trailer Products once again reported strong margins, with gross and operating margins of 11.8% and 10.1%, respectively. Gross and operating margins were down year-over-year due to higher raw material costs, labor increases to ramp up production on stronger market demand and our investment in development costs for Molded Structural Composites manufacturing expense during the quarter. Operating income of $40.8 million increased by $11.3 million or 38% sequentially on the normal seasonal pickup in the second quarter.

Next is Diversified Products Group or DPG, which includes our composites, tank trailer, process systems and aviation and truck equipment businesses. Second quarter revenue was $94 million, consistent with the previous quarter and an increase of 4% year-over-year, delivering operating income of $4 million. Overall, the top line results in this segment reflect improving market conditions resulting in increased demand, primarily within our tank trailer business. Operationally, gross and operating margins for the segment were 17.7% and 4.7%, respectively. DPG gross margin was impacted by material and component cost inflation, short-term labor inefficiencies from an influx of labor and higher-than-normal levels of overtime to meet rising demand levels. We expect the continued top and bottom line improvement from DPG as we increase production and shipments within the tank trailer segment in the second half of the year and as production labor efficiency improves in Q3.

Last is the Final Mile products, whose net sales for the second quarter totaled $121 million. This is the strongest revenue quarter in Supreme's history, which is the result of a strong demand environment in the truck body market and improved throughput at many of the Final Mile facilities. Final Mile products delivered the improvement in margins, with gross and operating margins of 17.3% and 8.5%, respectively. Operating income of $10.3 million improved $9.6 million sequentially as the second quarter seasonal uptick with our largest truck body customers.

SG&A excluding amortization for the quarter was $34.3 million or 5.6% of revenue. For the full year we expect SG&A as a percent of revenue to be flat year-over-year at approximately 6%. Intangible amortization for the quarter was $4.9 million, flat with the first quarter, and is expected to be approximately $20 million for the full year. Other income for the second quarter totaled approximately $4 million as the company realized the gain on the sale of former properties.

Interest expense for the quarter totaled $7.2 million, a year-over-year increase of $4.3 million due to the interest on high-yield unsecured notes added to the capital structure in the third quarter of 2017 as related to the Supreme acquisition, primarily -- partially offset by lower interest costs on the convertible notes. As communicated on our previous call, our convertible bond debt matured on May 1, and the remaining outstanding principal value of $35 million was settled in cash and inclusive of premium settled for approximately $63 million.

We recognized income tax expense of $11 million in the second quarter. The effective tax rate for the quarter was 25.7%, in line with our full year effective tax rate guidance of 25% to 27%.

Finally for the quarter, net income was $31.9 million or $0.54 per diluted share. On a non-GAAP adjusted basis after adjusting for nonrecurring gains of $3.7 million, primarily related to gains on the sale of former branch locations, our adjusted earnings were $29.2 million or $0.49 per diluted share, a year-over-year adjusted EPS increase of 32%.

Let's move on to the balance sheet and liquidity. Net working capital finished the second quarter at levels consistent with both the previous quarter and prior year period. We anticipate working capital to remain generally flat for the balance of the year. Capital spending was approximately $5 million in the second quarter, and we are revising our full year capital spending estimate to be approximately $40 million, depending on the implementation and timing of several large projects.

Our liquidity for cash-plus available borrowings as of June 30 was $288 million or approximately 14% of trailing 12 months' revenue. In regards to capital structure, we finished the second quarter with leverage ratios for gross and net debt at 2.6x and 2.0x, respectively.

While Brent shared our view on the full year, I want to provide some additional color on our expected financial performance for the remainder of 2018 as well. Given the third quarter trailer shipment guidance and the headwinds outlined previously by Brent, we expect the third quarter to be similar to the second quarter in many respects. With continued strong market demand in all 3 segments and considering the normal seasonal drop in Final Mile products, we expect consolidated revenue to be between $580 million to $610 million in the current quarter. While trailer pricing has improved sequentially as expected, operating margins in the current quarter will be similar to slightly better, as the favorable pricing impact has been largely offset by the continuation of headwinds we first experienced in the second quarter. With a full backlog for the year, we expect to realize the impact of additional price increases and a more significant improvement in operating performance in the fourth quarter.

In summary, the company's overall performance in the second quarter was strong, particularly with record quarterly revenue. Despite material cost and labor headwinds, we generated strong levels of gross profit and operating income and are well positioned with a full, strong backlog, a strong balance sheet and a positive industry outlook for the year ahead. We are committed to the 3 core areas of focus for the company -- people, purpose and performance -- and are prepared to deliver on the expectation to increase shareholder value now and into the future.

With that I'll turn the call back to John and we'll begin the question-and-answer session.

[Operator Instructions.] And our first question is from Brad Delco from Stephens.

This is actually Scott Schoenhaus on for Brad. I guess I'll start off -- I know you guys commented that 30% of your domestic raw material costs weren't able to be hedged. I wonder if you could talk about where you see that. Is that sort of a baseline of where you can't hedge raw material costs? And then I guess I'll segment gross margins. I know, Jeff, you just said that pricing should flow through better in the third quarter. Can you kind of just walk us through what gross margins could be, should be in the near term and maybe longer term for each segment?

Yes, so let me maybe start with the second piece first. We don't give specific guidance by segment at a margin level, so our commentary, I think, is directional at best for you, that we do expect to see continued improvement as pricing continues to take hold and we continue to work aggressively to offset and mitigate, to the greatest extent possible, the increased volatility that we're seeing in raw materials and then, obviously, the additional headwinds from labor and supplier constraints. I think all 3 segments, we would expect to see some level of marginal margin improvement as we move into the third quarter and then into the fourth quarter by year end. But as a practice, we don't quantify what that amount would be.

Scott, just to give a little bit more color on the margin, kind of a backdrop for Q3 and Q4, in the previous earnings call we talked about the fact that CTP specifically had conducted a backlog repricing event early in the first quarter and going into the second quarter with an effect that would begin to show itself in the third quarter, but primarily in the fourth quarter, right, as those actions take place. Subsequently, both on our platforms business and within our tank trailer business, we've also enacted a level of pricing recovery or material cost recovery efforts successfully. And again, that gives us reason to believe that we should start to see that impact specifically in Q4. So those are some things that we've been doing as well as aggressively pricing the material cost inflation in our quote models that are leading into the rounding out of the backlog that occurred over the past 6 to 8 weeks.

Right. So Scott, to move back to the first part of your question, which was around hedging and the 30% that we are not effectively hedged at this point in time and historically have not been in our history, we are able to effectively hedge the key metals that we use directly. So steel and aluminum in general, we hedge those products, those materials, as we purchase them. We are not effectively able to hedge all of the metal content that comes through components that we purchase. In specific situations, we may be able to get a small portion of that hedged, but to a large extent that is a portion that remains unhedged at this time, as does high-density polyethylene which, as you know, is the core material for the DuraPlate composite sidewall. We are actively working to -- and evaluating -- if we can effectively hedge additional material and component exposure in the core in the future, and that's something that we'll talk about as it develops.

I guess my follow-up question would be as investors, obviously, fearing that this could be where the peak of the cycle, the freight cycle, could you talk about what your customers are telling you and what your demand really is looking like with your backlog into 2019, what sort of end markets you're seeing the most strength from and if it's large or smaller customers? Could you just talk about what your customers are telling you?

Yes, I'll specifically talk about the trailer segments first -- tanks, platforms and dry refrigerated vans. We see high quote levels across the board as we move into an early quote period as the backlog/demand is picked up for 2019. It is significantly higher than we saw at the same time last year, which indicates and tends to agree with everything that we're saying in terms of both the macro and micro measures, both in freight and the economy. So we feel really good about where we sit right now. Customer sentiment is bullish, really, across the board as we sit here. I'll just kind of leave it at that in terms of customer sentiment. And as we also talked to our suppliers in the context of how they will gauge capacity for the second half of the year and for 2019, they also echoed those same bullish sentiments in how they look to plan their business. Truck bodies, it's a very similar conversation as well, specifically for our largest truck body customers, who tend to see and align with this secular demand. So specifically around e-commerce, we feel good about where we're at today in setting up for 2019.

Yes, and I think in tank trailer, we continue to see positive indicators as that business slowly improves from where it's been over the past couple of years. And many of those key markets with strong economic growth are showing increased activity.

Our next question is from Mike Shlisky from Seaport Global.

So just kind of to kick it off here, could you give us a number as to whether Supreme was accretive in Q2 excluding any of the one-time costs?

If it was accretive in Q2? Actually, I think the strong performance with record revenue and the very strong increase you saw in operating income for the business, that I do believe it is accretive. I haven't done the actual calculation on a quarterly basis, but this very strong performance leads me to believe that it would be, yes.

Okay. And just following up there on Supreme, there have been some issues with other upfitters and other truck line makers that with getting the appropriate amount of chassis delivered for upfitting. Has any part of Supreme experienced that recently?

I would say we're not without our struggles relative to the availability of complete chassis, but I would say that it has not created, in that regard, a material impact relative to supply disruption for our Supreme business. Not without struggles, but I would say without material disruption.

And now I want to get a sense of your market share so far this year. Because so many of the different companies are actually in different parts of the country -- some are central U.S., some are West Coast, et cetera -- do you think that everyone's facing the same challenges, especially on labor? And do you think you've held in there with respect to your share in some of your more important categories so far in 2018?

Yes, without nailing down an exact share number at this time, our indications say that we are either holding or growing share in all of our major markets, so I think we're navigating well in our ability to capitalize on this market. I don't think there's any manufacturer that is void of supply disruption at this point, based on the feedback that we've been given. And in some cases, we may be in an advantaged position relative to our competition. That's somewhat qualitative feedback, but that's the feedback that we have and that we've been given. In terms of the labor market, I think it's tight across the country. There are absolutely labor markets that are tighter in pockets. Lafayette, Indiana, is sitting at 3.6%, plus or minus, unemployment as we sit here today. The national average is 4%. We have some areas that are better; we have some areas that are worse. I don't think our competition is any different.

I want to just kind of squeeze in one last one here, and that was one of your later comments there, Brent, on the EPA's potentially exempting trailers from some of the GHG and fuel standards going forward. I'm kind of curious if that matters much to your product development pipeline going forward. I mean, if you guys, it kind of makes sense to develop products that reduce fuel consumption for the customer anyway, because that's going to save them on costs. So is there any kind of way you can kind of outline for us how you might change the R&D plan if this were to pass?

Sure, sure. So first off, the products that we've already put into the pipeline and made ready for market already meet the initial demands that are required for the 2021 deadline, so that would not affect that in any material way. We introduced the Ventix skirt a couple of years ago that would begin to satisfy the requirements for the 2024 cutoff period for the next tranche of requirements. So we in many cases have begun to work for that next tranche already as well as with the AeroFin XL also allows for some additional additive ability that we could bring into 2024. So we've been playing our pipeline accordingly to meet those requirements. There wouldn't be a material effect there. But to your point, whether or not there's a greenhouse gas rule or not, we're going to market products that add value to customers. And while we may not have the regulatory push in terms of being a market driver, we'll still look to add those value-added features, or sell those value-added features, to those customers that demand it.

Our next question is from Steve Dyer from Craig-Hallum.

Just a question as I try to parse here kind of your margin and earnings guidance for the remainder of the year. So the implication based on trying to square Q3 with what you said for the year was a fairly sharp increase in margins for Q4, which typically doesn't happen, just given volumes and holidays and things like that. So can you just give us a little confidence or help us sort of appreciate what you're seeing to expect that kind of ramp?

Yes, sure, Steve. I think, as you've heard us say in prior calls, that as the backlog built for the full year, the pricing increased as that backlog did build. And so it's pushed the most favorable pricing into the back half and, honestly, into the last quarter of the full year. And so that's, on a top line basis, that's driving the favorable pricing impact that we see there as we -- also, as we look at Q3, we do expect to get some improvement in the overall labor market and some more stability in regards to our workforce that we believe will lead to stability and an improvement in productivity in that regard for the quarter. And then as you think about the -- as we look at our product mix that we're building for the third quarter and the fourth quarter, the third quarter will have a pretty strong mix of direct customers. And as you know, those customers are generally priced lower than indirect channel customers. And so we'll see an increase in indirect channel mix in the fourth quarter, which will also help improve the margin profile in that quarter. It's also possible, and current forecasts are for the raw materials to stabilize. There's even a possibility that there could be some favorability in Q4 as well. We'll wait to make that call, maybe, until the next call we have.

And then as it relates to capacity, you mentioned you've opened the order book for 2019. I wonder -- just wondering how you're handling pricing for that, if you're giving firm pricing or, just kind of given all the volatility in commodities, et cetera. And then another question, a follow-up on capacity in the past, you guys have left some slots open in the current year to try to take a few higher-margin orders. Wondering if that's an opportunity for upside in the second half or if you're booked tight. That's it for me. Thanks.

So I'll take the first one in terms of pricing for 2019 and how are we looking at risk management from a pricing material volatility standpoint. We are absolutely, in talking with our direct customers, looking at adding additional risk protection frameworks in terms of material inflation, both in the dwell period between quote and hedging as well as various mechanisms to recover inflationary pressures throughout the life of the build. Those discussions are ongoing right now. We believe our competitors are also beginning to follow suit in having similar conversations with customers as well as they look to negotiate the -- we'll call it a challenging inflationary environment. So time will tell, but we look -- we think that the market is setting up to allow that to occur. In terms of absolute pricing, I won't give hard numbers right now, but it's safe to say that we're looking at not only covering the material inflation that we've been working through all of 2018, but also look to recover margin as part of the process as well, and we're pricing accordingly to be able to do that. We think the market, again, allows us. We've talked about volume precedes pricing. We think maybe we're in that position where that turn is starting at this point. In terms of capacity in Q4, we are -- the constraint relative to added capacity is really going to be mirrored by what is the level of supply disruption as we go into Q4. This goes hand in hand with our labor stability and efficiency. As the supply environment begins to stabilize, which we believe will occur in Q3 based on feedback that we have, we should start to see some improvements relative to, we'll call it labor conversion on the floor. If that truly occurs, we may have the ability of maneuvering into Q4, and we're prepared to do that. Those game plans are on the table. But those will be metered out based on the ongoing stability improvement of the supply chain.

Our next question is from Joel Tiss from BMO Capital Markets.

You've answered a lot. I just wondered if we could spend a few minutes on the Final Mile business. What are you seeing there? And do you see the cycle as being similar to the dry van cycle? And can you talk a little more about the operating margins as we look into the second half of the year and maybe even any sense for 2019 as well? Thank you.

In terms of cycles between our predominantly medium-duty truck body business relative to our heavy-duty van business, we don't necessarily see the cycles being the same in, really, any material way. We think that the fundamental drivers, both micro and macro, for the truck body business are effectively separate. The -- and again, we see a level of secular demand, specifically in that Final Mile piece, that isn't being picked up in the medium-duty numbers that we think disproportionately propel growth within the markets that we serve. So we feel pretty good about what 2019, and then even 2020 and 2021, begin to look like for our Final Mile business. That's why we're excited and that's why we're investing in it in order to have efficient capacity online to take advantage of it. I'll let Jeff cover the margin question.

Yes, in terms of operating margins, Joel, I mean our goal is to continue to expand those margins. Having said that, we do have a business that has a seasonal profile to it. Generally, the strongest period is in the second quarter, as you know. And if you go back and look at Supreme's history as a publicly traded company, you'll get a pretty good view of what that seasonal profile looks like. So I won't necessarily comment quarter-to-quarter. We do expect just normal drop in top line. Obviously, that will impact the overall margins there from an operating leverage perspective on lower volumes. But longer term, our investments that we're making in manufacturing capability and facilities and new technologies and product development -- all of that work, over time we expect to continue to grow operating and gross margins over the long term.

And I'll now turn the call back over to Brent Yeagy for closing remarks.

Thank you all for your interest and support of Wabash National Corporation. Jeff and I look forward to speaking with you again on our next call. Thank you.

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