Wabash National Corporation (NYSE:WNC)
Q2 2016 Earnings Conference Call
July 27, 2016 10:00 AM ET
Mike Pettit - VP, Finance & IR
Rick Giromini - President & CEO
Jeff Taylor - SVP & CFO
Mike Shlisky - Seaport Global Securities
Steve Dyer - Craig-Hallum Capital
Michael Baudendistel - Stifel
Jeff Kauffman - Buckingham Research
Alex Potter - Piper Jaffray
Welcome to the Second Quarter Earnings Call. My name is Cynthia and I’ll be your operator for today’s call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded now. I’ll turn the call over to Mike Pettit. Mr. Pettit you may begin.
Thank you, Cynthia, and good morning. Welcome everyone to the Wabash National Corporation 2016 second quarter earnings call. This is Mike Pettit, Vice President of Finance & Investor Relations.
Following this introduction, you’ll hear from Rick Giromini, President & Chief Executive Officer of Wabash National on the highlights of the second quarter, the current operating environment, our outlook for the remainder of 2016, and an early look at 2017. After Dick, 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 of these types of presentations, this morning’s call contains certain forward-looking information including statements about the Company’s prospects, adjusted earnings 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’s my pleasure to turn the call over to Rick Giromini, President & CEO.
Thanks Mike. I am pleased to share that our second quarter marked another record for the Company and rounded on a great first half of the year. Our financial results continue to validate our long-term strategic plan and demonstrate the progress we continue to make in executing that plan to profitably grow and diversify the business. We’ve changed the fundamental composition of our business and it is clear that we’ve made significant progress towards transforming ourselves into a higher margin diversified manufacturer and we remain committed to this effort.
In June we announced our decision to realign our retail segment under the commercial trailer products and the diversified products businesses. We believe this change in segment structure provides enhanced alignment between our two business segments and their channel partners, while supporting our strategic objective to grow the areas of our business that offer the most attractive margins and returns on invested capital. This new alignment will enable future growth that more fully leverages the scale and resources of CTP and DPG and is another example of our unwavering commitment to optimizing business results in all areas of our business.
With this disciplined approach, we’ve put ourselves into a position to further leverage our world-class operations, profitable businesses and strong balance sheet as we continue to grow and diversify this company. I’d now like to discuss a few specific financial results and highlights from the second quarter. Jeff will provide more detail of the financial results in his remarks.
On a quarterly basis, consolidated net sales were 471 million on shipments of 15,900 units consistent with our prior guidance. The business also delivered a strong second quarter for units built totaling approximately 16,650 units. We continue our long streak of operational excellence leveraging our expertise in Lean-Six Sigma as gross margin improved once again to 19.3% and operating margin established a new record of 12.5% besting our previous record by 170 basis points. Trailing 12 month operating margin is 10.9% surpassing the goal we established in 2015. Now our focus is to maintain these levels.
Operating income for the second quarter was a record 58.9 million, representing a 40% improvement year-over-year. Driven once again by excellent operational execution across all areas of our business and significantly supported by a continuing strong demand environment in commercial trailer products. Now let’s take a look at our individual reporting segments.
We’ll start with the Diversified Products Group reporting segment or DPG which includes our composites, tank trailers, aviation and truck equipment and process systems businesses. As expected and guided, the overall DPG financial results improved sequentially in the second quarter. Revenue of 93 million and operating income of 10.3 million represented 7% and 47% improvement respectively. As previously discussed, DPG continues to experience some softness in certain markets which is creating top-line pressure in the business. However, due to proactive cost management and outstanding execution at the factory level, gross margin of 24.7% was close to a record high in the second quarter. I compliment the whole team on their efforts to address the cost structure of the business, effectively right sizing the current demand levels while at the same time driving Lean-Six Sigma improvement initiatives for long-term benefits.
While we don’t expect to see significant near-term improvement in the overall demand environment of the end-market served by this reporting segment, we do however anticipate stronger top and bottom-line performance for this business segment for the second half of '16 assured of ’15 levels.
Now, let's turn to some of the business specifics and growth initiatives within DPG. Our tank trailer business continues to see reasonably stable demand in the food dairy, beverage markets offset by continued weakness for products related to the oil, gas and chemical markets resulting in shorter than desired backlogs. Despite these challenges, the tank trailer team has been proactive in taking necessary actions to mostly offset the weaker demand environment, which has allowed them to deliver strong margins and solid profit contribution. Recent quote activity indicates that we may have already seen the bottom of the tank trailer cycle and as such we now expect to see moderate growth from these levels as we move forward through the year.
In our Aviation and Truck Equipment business unit or AVTE, we've effectively completed the facility consolidation in Kansas City. The focus is now shifting to direct labor productivity optimization efforts to improve the margins in this business. The consolidation and subsequent labor optimization is expected to provide noticeable improvements in this business as we progress through the balance of the year.
Our Process Systems business in which we produce isolators, downflow booths and mobile clean rooms for the pharma industry along with stationary silos and mixtures for the food dairy and beverage industry is excited about our entry and expansion into the craft brewing market through a partnership with W.M. Sprinkman Corporation. We'll be able to leverage our expertise in the manufacture of stainless steel processing equipment by building tank processing and storage vessels for craft brewers, a growing segment in the U.S. beer market. This initiative combined with our previously announced facility expansion in Mexico provides us expanded product offerings, geography and manufacturing capacity to further leverage our investment and profitably grow our process systems business.
In our Wabash Composites business, efforts over the past two years to increase the new product development pipeline and accelerate the commercialization of these offerings is paying off, as the business is now well positioned to have their most profitable year on record in 2016. This business continues to experience favorable order trends for many of their products including deck systems and aero products. These results coupled with the recent international growth of our truck box products and continued product development in new composite panel technologies gives us continued confidence in the future growth opportunities of this business.
So to summarize DPG, we're pleased by the overall margin performance of the DPG business during these past few quarters along with the strong potential presented by the new product offerings already developed or in development within the Group. Obviously, we all like to see a return of growth at the top-line to help drive further improvement in operating income, but to recognize the myriad market dynamics facing this more diversified part of our business. The good news is that we now have an improved infrastructure in place to support higher demand without additional investment and expanded product offering throughout the reported segment and have made good progress in our Lean-Six Sigma implementation efforts for this operating segment that should even sustain in further improving margins down the road.
Now let's discuss the results of our Commercial Trailer Product segment or CTP consisting of our dry and refrigerated van products, platform trailers, retail parts and service, wood flooring operations and truck bodies. This segment continues to successfully execute its optimization strategy with an ongoing commitment to margin improvement, manufacturing excellence, and leadership and product innovation. The second quarter proved to be the best quarter in CTP history. Revenues were a lot 382 million, but the profitability delivered in this business was the real story. Record growth and operating margins of 18.1% and 14.9% respectively drove an all time best 57.1 million of operating income.
The outstanding performance delivered in the second quarter was a result of the team’s continued execution of a market strategy committed to optimizing both top and bottom-line, a capable workforce focused on continuous improvement and productivity utilizing our long-term expertise in Lean-Six Sigma and material cost optimization aided significantly by design improvements. These margin enhancing strategies were clearly displayed during the quarter with operating income of 46% year-over-year on revenues that were down some 7%.
Now let’s discuss CTP’s strategic initiatives. The CTP team remains very excited about the entering into the truck body market to support growth in the final-mile and home delivery space. The reception from the target customer base on our new truck body products continues to be overwhelmingly positive and gives us great confidence in our growth projections for this segment. As a reminder, we plan to sell off the 500 dry truck bodies in 2016 including some with our new molded structural composite floor and believe our patent pending molded structure composite refrigerator truck body product introduces proprietary technologies that will provide a superior product for our customers. This refrigerated truck body is now available to sell with deliveries beginning later this year.
As mentioned previously, we believe our truck body business will prove to be $100 million plus revenue business for us by 2020. The medium duty truck demand projected to cumulatively grow by approximately 20% over the next 5 year period timing is optimal for our entry into this arena. In our more traditional trailer space, we remain on track to deliver a commercially available refrigerated van that utilizes our molded structural composite technology by late 2017. We believe that this technology could ultimately transform the refrigerated trailer market and we are optimistic about the growth opportunity it provides for CTP over the next prior year.
The CTP team also remains focused on their other important strategic growth initiatives including more fully developing an already strong indirect channel by growing in underserved geographies. This initiative is gaining momentum and the decision to move the legacy Wabash National trailer center locations under CTP further enhances these efforts.
Switching gears from a regulatory standpoint, we continue to watch the progress on a greenhouse gas legislation that would require fuel saving technologies such as trailer sites grids, low rolling resistance tyres and automatic tyre inflation systems to become standard equipments starting in 2018. We now expect to see a final version of the regulation on or around August 15th. Also on the regulatory front, as previously reported, the FMCSA issued a mandate that all carriers must install electronic logging devices of ELDs by December 2017. Industry estimates and carrier productivity losses as a result of ELDs range from 3% to 10%.
We believe this ruling is likely to have a more significant impact on capacity than anticipated and may ultimately drive increased demand for new equipment as stronger carriers which have to recover lost productivity. While industry estimates vary it is likely that only roughly half the industry utilizes ELDs right now, meaning that a good portion of owner operators or smaller carriers will either adopt the new technology, shutdown or be acquired by a larger carrier.
With that, let me update you on Wabash National’s expectations for full year 2016. We feel confident that overall demand for trailers and commercial trailer products will remain strong and well above replacement levels for the rest of 2016. So why do I say that, first of all from a macro-level fleet trailer age remains high, the regulatory environment including CSA and hours of service is driving the continued need to refresh. Carriers while feeling some periodic softness in load availability and pricing still remain nicely profitable. And overall truck tonnage as reported by ATA has rebounded recently with May results coming in at 139.2 a 2.9% increase over April and a strong 5.9% higher year-over-year with June at 137.2 up 2.1% year-over-year and up 3.7% year-to-date.
And the primary industry has remained positive for this year with ACT Research now projecting 293,200 trailers to be shipped in 2016 and FTR now calling for an increase to 282,000 trailers to be built this year, both strong numbers. At a more micro-level, our total backlog remains at historically strong $860 million as of the end of the second quarter and represents approximately six months of build volume on average with both dry and refrigerated van trailers straight time build slots essentially 100% booked for the full-year while other product lines including aluminum and stainless tank trailers have continued to experience weaker demand and shorter backlogs as referenced earlier.
And as discussed in our last two calls, while our largest manufacturing facility in Lafayette which produces dry vans and components for refrigerated trailers will continue to be impacted by a road construction project that kicked off in early April and is expected to last effectively throughout the remainder of 2016, we are pleased with the progress to-date. This project certainly creates some logistics challenges, but thanks to outstanding cooperation and support from the city and contractor. This has been managed quite well thus far with minimal disruption to production rates experienced.
So while we still anticipate some impact on CTP’s operational efficiencies and margins in the second half of the year, during the heaviest days of the project as previously communicated, we remain solidly confident in our full year shipment projection of 60,000 to 62,000 units with third-quarter shipments for the overall business to once again be in the 15,500 to 16,500 units range.
In terms of earnings, recognizing the productivity and cost optimization momentum that was displayed in the first of 2016, we now expect full-year 2016 adjusted EPS to be in the range of $1.80 to $1.90 earnings per share up $0.15 or 9% from our previous guidance, taking into account a very strong second quarter and a solid backlog that is essentially rounded up for the CTP part of our business for 2016. So I can once again confirm that 2016 is expected to be another record year for Wabash, our fifth consecutive.
Strong cash generation coupled with a healthy balance sheet creates a high level of comfort that we have ample resources to one, fund our capital expenditures supporting both organic growth and productivity improvements. Secondly, continue to reduce our debt and leverage, and third return capital to shareholders as appropriate and finally selectively pursue strategic acquisitions.
So now let’s take a brief look ahead to 2017. As many of you know, ACT Research has recently revised their 2017 projections downward and are now calling for 240,000 trailer units to be shipped. Meanwhile, FTR continues to project 251,000 units to be built next year. A slower start to industry wide orders year-to-date and a moderate level of net orders for June has scared some folks to believe that the downside is upon us. However, while we do expect to see some level of decrease in order demand for the 2017 build year, we do not anticipate quite the significant drop off that ACT Research is suggesting. As we assess feedback from customers about what their expectations and needs are for next year.
In fact in July alone thus far, we have received verbal commitments for 5,000 dry vans which should be converted to orders in August to answer the already booked 4,000 units of 2017 production that are reflected in our reported backlog, with many more discussions just beginning to heat up. While it’s far too early to put any firm numbers around 2017 trailer projections as the typical order season can run through late first quarter, or early second quarter ’17 most notably for the indirect channel. It does appear that we are heading for a solid year once again for overall trailer orders.
In summary, we’re obviously pleased to have delivered another in a long stream of strong quarters driven by continued exceptional execution and results from the CTP segment and disciplined cost management from DPG that combined led to an all time record for profitability in our company’s 31 year history. Not resting on those accomplishments, we will continue our focused efforts to drive ongoing improvements throughout the business, develop new opportunities to once again grow our top-line, margins and capitalized on macro growth trends.
We have an expanded and growing product portfolio including our truck body entry that has been well received by customers along with development of a transformative molded structural composite refrigerated offering. In our composites business, we now have the broadest suite of aerodynamic offerings in the industry, a growing truck box solution both here and in Europe and a recently established entry into the craft brew tank space by a process systems group will provide another incremental growth overtime. All this intended to once and for all change the perception of our business from a fair weather play to one of resilience throughout all cycles.
With that, I’ll turn the call over to Jeff Taylor, Chief Financial Officer to provide more detail around the numbers, Jeff?
Thanks Dick and good morning everyone. Let me start by saying that we are very pleased with the second quarter consolidated results. The high level of execution in our operations and across the Company are reflective in the results this quarter and frankly have been reflective in the results over the past 2 years. Additionally, we are benefitting from the actions we have taken to grow and diversify the company, both from expanding organically into new products and markets such as aerodynamic products, mobile storage and truck bodies, as well as expanding acquisitively with the Walker acquisition which provided critical mass in the diversified higher margin products and services.
Before discussing the results for the quarter, I'd like to comment on our recent share purchase activities, as you know we are executing a balanced capital allocation strategy where we allocate capital to manage liquidity, reduce our debt which intern decreases our leverage, fund our corporate growth initiatives both organic and acquisitive and return capital to shareholders.
In the second quarter, we repurchased just under 750,000 shares of stock with a total spend of approximately $9.6 million. This activity highlights our commitment to increase shareholder value through return of capital and demonstrates our continued confidence that Wabash has a sustainable earning stream and future cash flows. We continue to believe that our balanced capital allocation strategy will reward our shareholders by driving long-term value creation and de-risk the Company all while providing flexibility to proactively grow our business into new and existing markets.
With that, let's turn to the financial results for the quarter. On a consolidated basis, revenue was $471 million, a decrease of 43 million or 8%, compared to the second quarter of last year. Consolidated new trailer shipments were 15,900 units during the second quarter in line with our shipment guidance while used trailer shipments declined to 350 units. Components, parts and service revenue was $43 million in the quarter, consistent with 2015 levels. Equipment and other revenue increased on a year-over-year basis by $4 million to $30 million in the quarter. The increase was driven primarily by higher equipment sales in the process systems business unit within diversified products. Importantly on a consolidated level, second quarter non-trailer revenue grew to over 15% of sales.
In terms of operating results, consolidated gross profit for the quarter was $91.1 million or 19.3% of sales, which represents an 18.7 million or 520 basis point increase year-over-year and a new quarterly record. The company also generated record operating income and margin of $58.9 million and 12.5% respectively. Operating margin for the trailing 12 months was 10.9% eclipsing our corporate objective of 10%. In addition, operating EBITDA for the second quarter was $72.8 million, a year-over-year increase of 19.1 million or 36%. This set another company record an increase trailing 12 month operating EBITDA to $269 million.
At the segment level, diversified product net sales of $93 million decreased year-over-year by 12 million for the quarter, but increased sequentially by 7% primarily driven by an improvement in tank trailer shipments and another strong quarter from Wabash composites. Diversified products or DPG margins were very strong in the second quarter with gross and operating margins of 24.7% and 11.0% respectively. While gross profit was down slightly year-over-year, DPG demonstrated a nice step up in operating income to $10.3 million, a 5% improvement year-over-year and 47% sequentially, which highlights the focus and effort from the DPG team to manage cost and even improve margins in a demand environment exhibiting some headwinds.
Commercial Trailer Products or CTP net sales were $382 million which represents a 30 million or 7% decrease year-over-year of new trailer shipments of 15,350 units. New trailer average selling price or ASP decreased year-over-year by approximately $500 which was expected and driven largely by product mix. If you recall, we guided on the first quarter call to the more normal product mix in the second quarter would lend to the lower ASP which is precisely what happened.
Further evidence that the lower ASP was a mix event, commercial trailer products recorded the strongest margins in their history with growth in operating margins of 18.1% and 14.9% respectively. Operating margin was up 540 basis points compared to the prior year period due to pricing and productivity gains. CTP delivered operating income of 57.1 million and produced 16,100 units during the quarter.
Moving on, SG&A excluding amortization for the quarter was $25.5 million or 5.4% of revenue. For the full year, SG&A is now expected to be approximately 5.5% of revenue. Intangible amortization for the quarter was 5.0 million, down about 0.3 million from the prior year period and is expected to be 20 million for the full year. Interest expense for the quarter consisted primarily of borrowing cost totaled approximately $3.9 million, a year-over-year decrease of 0.9 million primarily due to the lower balance of convertible notes outstanding.
0.9 million of our reported interest expense is non-cash and primarily relates to accretion charges associated with the convertible notes. Full year interest expense is expected to be approximately $16 million at our current debt levels. We recognized income tax expense of $19.2 million in the second quarter. The effective tax rate for the quarter was 35.1%. The lower quarterly rate reflects the deduction from the convertible note repurchase we completed in the first quarter of this year. We estimate that 2016 full year tax rate will be approximately 36%.
Finally for the quarter, net income was 35.5 million or $0.53 per diluted share. On a non-GAAP adjusted basis after adjusting for a non-recurring charge of 1.7 million in connection with the segment realignment net income was $36.6 million or $0.55 per diluted share. In comparison, adjusted earnings for the second quarter 2015 were $23.6 million or $0.33 per diluted share, representing a 67% earnings per share growth year-over-year.
Let’s move on to the balance sheet and liquidity. Net working capital finished the second quarter down about $8 million from the first quarter and in line with 2015 second quarter levels. Capital spending was $5 million in the second quarter and we expect to see an increase in capital spending during the second half of 2016. We continue to expect our full year capital spending to be $25 to $30 million. As a reminder, the higher level of capital spending relative to prior years reflects a robust pipeline of organic growth and productivity projects which are expected to generate an attractive return as well as contribute to growth of the top and bottom-line over the longer term.
Our liquidity or cash plus available borrowings as of June 30th was $357 million or 18% of trailing 12 months revenue, an increase of $19 million from first quarter levels. Our 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. Our leverage ratios for gross and net debt are 1.1 times and 0.4 times respectively.
In summary, we're very pleased with the Company's overall strong performance for the second quarter. We established new all-time company records for gross profit and operating income as well as gross and operating margins. We further strengthened our balance sheet during the quarter and remain committed to being overall good stewards of the Company's resources by deploying capital to value creating projects that drive long-term growth. In addition to opportunistically paying down debt and returning capital to shareholders through our authorized share repurchase program. We have a healthy backlog and a solid outlook as evidenced by the increase in our full-year earnings guidance and remain acutely focused on executing at a high level across the Company.
Thank you and I will now turn the call back to Cynthia and we will take any questions that you have.
Thank you. [Operator Instructions] And our first question comes from Mike Shlisky with Seaport Global. You may begin.
So I wanted to ask quickly about the cancellation rates that you're seeing in some of the industry data that has been out there recently, you had picked up a bit when looked at as a percent of the prior month backlog, I was curious if Wabash has seen any big increases in their cancellations recently or if that's a issue for other folks in the industry?
I think we have seen some cancellations, I don't think that they are anything exceptional at this point. In one particular instance there was a, one of the customers were actually acquired by another company, so they put a hold on capital, so we did have some cancellations through our indirect channel. But nothing out of the ordinary that causes us any pause, we feel very comfortable and that's why we're able to be very confident in our projections for the rest of the year. We have sold out all of the, all the straight time slots for both our dry van business and our refrigerated. So we're not hearing anything from our customer base that would indicate that the orders are at risk. So time will tell, but that's how we are -- what we're hearing from our customers to-date. And based on conversations with them for next year certainly the conversations have been very good that's why I shared some of the early commitments as if they were looking to be in a mindset of cancelling, they won’t be quite as confident about their placement of orders or commitments for next year.
I wanted to ask secondly, I don't want to get any kind of guidance here but just hypothetically if you were to see a down year next year on the order of what we're seeing in trucks right, I am not saying it will happen but if it were to happen which is down by 25% next year. I was curious if you think of your new cost structure, if you think Wabash could keep it detrimental margins necessarily below the 30% level in 2017, if this were to take place?
I think what we would say Mike is that we’ve improved our cost structure significantly you’re seeing that in the results that we delivered this quarter and honestly we have delivered over the last 6 to 7 quarters, so significant improvement in profitability levels that surpass all time records for the company. So we’re going to manage our cost structure to whatever environment we’re facing in the industry in the core trailer business and we think we’re better positioned today to be able to manage through that than we ever have been in the industry’s history.
And just to add to that Mike it’s certainly indicative by what has been done on the DPG side of the business, where they have taken proactive actions to manage their overheads, wherever necessary to not only sustain but actually have improved their gross margins in an environment that has got a lot of headwind pressure on demand. So, we know how to do it and the team is executing and we’re prepared to deal with that in the event that at some point in time there is a softening on the rest of the business.
Got it, one last one from me, I wanted to just get your thoughts on pricing in the used trailer market, as you said Jeff if your comments on the pricing was just about new just being mix or is there any changes in the used that we should be aware of as well?
No I think the used market is still relatively stable in our view obviously the number of units that we’re taking in on the used side has decreased overtime we’re managing that very closely so that we can manage our overall exposure there. So I think you do see particularly for older equipment that there may be some softening on used pricing, newer equipment is holding up relatively well and we see that market as relatively stable.
Okay, got it guys. I will hop back in queue. Thank you very much.
And our next question comes from Steve Dyer from Craig-Hallum. You may begin.
So June obviously in addition of the cancellations was softer on the order front year-over-year pretty significantly, I am wondering maybe what you attribute that to, is that just a late start to ’17 ordering or was there an anomaly in there that you saw?
Well, last year was the anomaly, it was a tremendously early start to orders as we hear all through last year that it was very surprising for the whole industry how early customers want to get in, they needed equipment, I would suggest that this order season appears to be a more normal timing for engagement still earlier than in some years as I shared, we’ve already received verbal commitments for some 5,000 units from customers that ordinarily would not be making order commitments this early in July, typically that would be 2 or 3 months out. So I don’t think that we should view this as in comparison to last year, we should look at it on a more historical basis on what typically is the timing for customers to be placing orders.
Certainly, there is a lot more noise in the demand environment for the fleets. It's been choppy when you look at the tonnage levels. Over the course of the last 6 to 9 months, they have been up and down, so I think customers are looking at what their needs are going forward. We heard comments from customers that there is an excess of power capacity out there and there has been some adjustments being made, so I think they're just trying to get their houses in order and the conversations as I stated earlier that we're having with customers and the feedback is very positive. In some cases, customers are looking for more equipment than they needed for this year. In other cases, they're looking for less, so it's a little early to make the total assessment. It does seem that, that in our expectation is it will be a little softer but certainly not to the levels that are being projected by some of the forecasters.
And then as you start quoting and having conversations for next year sort of what are you seeing on the pricing environment and what are you hearing in terms of new capacity coming online?
Yes, good question, thanks Steve. And the pricing environment is still very solid with a kind of order quantities, demand environment is still being very strong, it's a solid environment from that standpoint. So I don't see a lot of pressure there, we'll have to see as we go forward to see how that all plays out. But on the capacity standpoint, it's really mixed out there. You've got a couple of the folks who are putting capacity that are pretty much on target with their plans and their beginning their ramp-ups. And this is all obviously hearsay in the industry and that would be both Hyundai and Utility with their facilities. And then on the flipside, there is little slower progress that’s occurring with Great Dane’s conversion of the Fleetwood RV facility to be a dry van facility just getting going on their early part of their ramp-up there.
And then what we're hearing as that Vanguard is several months behind anywhere from 3 to 6 months behind, it doesn’t look like they'll have their capacity online until sometime early 2017 or even later into the year and lot of challenges and being able to get the facility up built and get the equipment installed and proved out. So overall our assessment is that obviously no impact this year 2017-2018 is likely to be limited to maybe well 15,000 to 20,000 units of capacity addition to the industry, not the 30,000 to 35,000 units that have been talked about previously and that's just because of some of the delays in being able to actually execute and then ramp-up and get the staffing in place, the training in place and then proving our product and getting orders. So a little slower from that standpoint than what was being talked about earlier, so more of a 15,000 to 20,000 unit impact in maybe ’17 and ’18.
So more capacity and a little bit softer demand, but I think what you had said was so far your pricing expectations for next year your margin expectations remain pretty solid?
Yes, we certainly believe so at this time, the demand environment remains quite strong although there may be a level of softening, it’s not dramatic, so the capacity utilization for manufacturers will remain strong enough up to support it, that’s our belief and that’s also combining with the improvement initiatives we continue to implement throughout our operations and we have made a lot of progress with investment in productivity and velocity optimization initiatives that are really paying off for us. So that is what gives us some confidence that we’ll be able to hold on to margins for the most part.
Okay. Thanks guys.
And our next question comes from Michael Baudendistel with Stifel. You may begin.
I just want to ask you a question on the gross margin percentage on the quarter which I guess was a record and when I look at your Q, it looks like a lot of that was in the commercial trailer segment related to material costs being down or at least not keeping us with price. Could you just talk a little bit about, is there any sort of timing issue there with respect to material costs and how much of that is due to commodity cost being down versus material taken out of trailers or any other issues there?
Yes, you get a little bit of both, we have done some component design optimization that has benefitted us in that regard so there has been material cost that’s been taken out from there but on the raw commodity side, we certainly have had some benefit from raw commodity environment and just for some recollection for everyone, on the aluminum and the hot roll steel side of the business, we go out and take forward positions to -- and we price our product according to what the projections are for cost and then we actually go out and take forward positions when we secure a firm order from customers. So we mitigate any of the upside or downside that is associated with those commodities. So we don’t see an impact when it comes to aluminum and to hot roll steel or the material that goes into rear frames and the bracketry systems and all for lining gear.
Likewise, we implemented program for tyres and the lumber side, tyres going back all the way to 2012 lumber more of a last 2.5 half change in the way of practices and we just pass along the cost on those to customers we will make adjustments up or down based on what happens in the market, if it there is significant movement on those. So we mitigate about 70% of the material input into the cost of a trailer that ends up being effectively fixed, but it’s built into the cost model and then of course built in to the pricing. So we don’t see as much variability but there is going to be some that we have and I can’t quantify that for you sitting here as to how much of the impact was tied designed versus tied to actual commodity fluctuation but certainly we’ve gotten some benefit from it over the last year, year and a half.
Great, that’s good detail.
The favorable margins obviously are a reflection of the pricing, the productivity and then obviously some materials as well. Having said that, I don't want to overlook the very strong margin performance that DPG delivered in the quarter and particularly with the headwinds they're facing. For them to deliver a 24.7% gross margin is really fantastic, so they were a nice contributor to the consolidated number as well.
Great, thanks for that detail. And the other question I had is on orders and backlog and the drop in backlog sequentially from 1.1 billion to 860 million, is that what you would have expected seasonally and is in your experience does that usually drop to that extent seasonally and was there any impairment of orders that may have not taken place in the second quarter because the order book for 2017 wasn't open for the full duration of the quarter?
Yes, the first question is, no, it's not unusual and in my comments earlier about, if we look at more what would happen and I'll call it normal history as opposed to the anomaly of 2015 typically would see a drop off as we get into the mid part of the year because the orders typically drop and the bills increase, so you've got just the opposite occurring there. And then as you typically proceed into the third quarter, you'd see further drop because third quarter is typically the one of the strongest, if not the strongest build quarter and it's still just starting the early ramp-up of orders on a more typical year that's why this recent history is really causing confusion for a lot of folks as they look at numbers and only looking back to one year. So we didn't find it as anything unusual, it's more of what would be considered the usual pattern. And the second question you had Mike?
Yes, it was the 2017 order book not being opened unfortunately does that impair orders in the second quarter?
Yes, this is there is always that impact, we actually shutdown accepting 2016 orders in the first quarter, so clearly in the second quarter we're already full as I stated earlier, so we've been very careful about accepting any orders for 2016 that could disrupted by any potential impact of the road construction project. So as I stated in my formal comments, straight time build slots are all full, so we do have in the event that a customer were to come to us as we progress through and we see the opportunity to handle it as we get later in the year, if a customer came back to us and said because I need 300, I need 500 units, I need 600 units. We could possibly depending on timeframe and the progress of the highway project we could take on some additional units. If it makes sense, if we had the lead times to get suspension systems and the components here go into the trailer and there was minimal interruption from the highway project. So that possibly exists by using Saturday overtime.
And our next question comes from Jeff Kauffman with Buckingham Research. You may begin.
Jeff, Dick, I'm going to ask my normal question on what we do with all this cash. The good news is you're on track for about 250 million EBITDA based on your guidance. I am looking at operating cash flow of just under 200 million we are going to spend 25 million to 30 million on CapEx maybe 50 million on share repurchase although we’re trailing behind that so far this year. You’ve already done about 45 million of debt reduction, it still leaves almost $80 million unspoken in your 0.4 times debt-to-EBITDA not forcing your hand but what do we do here, do we just let cash accumulate?
Jeff, I think as you’ve pointed out in the past in some of your research notes, it’s a high quality problem to happen and the company is in a position where we have tremendous flexibility with the strong performance that we’ve demonstrated certainly over the last 6 to 8 quarters. So we’re really excited about that flexibility and the opportunity there, I think in terms of priorities for capital allocation, obviously I’d to take some more data off the table opportunistically particularly the convertible notes which have the more near-term maturity in the year 2018 once again those aren’t callable, so we have to have the opportunity do that and we’ll continue to monitor that. We think returning capital to shareholders, through the share repurchase is value creating and it provides an ROC for the shareholder and so we’ll continue to opportunistically evaluate that as well. And then I think the last component there is really strategically growing the company we continue to be active in that regard and Dick can comment on that in a minute if he’d like. But it is something we’re going to be strategic but selective. I think it’s something that we all would like to do and we have put the company in a fantastic position from a balance sheet perspective to be able to increase our activity level there.
Jeff covered it but I’ll just reinforce that we continue to evaluate opportunities to further diversify the business grow where we believe it makes sense but it’s going to have to be strategic but selective and I just keep repeating those words because we will be very prudent stewards of the business that’s what we’ve stated in the past and we continue to look at opportunities but they’ve got to be the right ones, they’ve got to make sense and they’ve got to be priced right.
Okay, Jeff I think 100 million was the latest share repurchase authorization, we’re tracking about 9 million a quarter here is there a timeline on when that authorization gets spent and could we see more share repurchase activity to catch up, or do we just kind of stay at this 9 million to 10 million rate for the time being?
The authorization was a 2 year authorization, so it covers 2016 and 2017 I think obviously if we have access cash available, it’s something that we could accelerate if we think it makes sense and copy that over the next year and a half.
Okay, one last follow-up and then that’s good for me. The new composite floor product you mentioned you were getting ready to roll that out and that will be available now for your regular trailer product I am thinking more particular refers. How is the customer interested in that van, I mean this is really a game changer product from what I understand?
Yes, just to clarify, the product that we’re talking is the truck body product that’s ready today and we’ll be able to build and ship accept orders and then be able to build and ship later this year, the refrigerated van trailer itself different from a truck body, refrigerated van trailer are the ones that we introduced a prototype at the TMC show in Nashville earlier this year back in March and would expect that not to be available until the latter part of ’17, early ’18, so that's got a lot of development we're working with three different customers to actually test out, prove out, provide feedback optimize design before we would go forward and commercialize that, so the truck body product is the segment that we entered that's the new even duty segment that we've entered and that one is the one that we’re in production on going forward. The facilities are here and ready and I think you had the opportunity to tour and see the early stages of it late last year and that facility has continued to be staffed up and we're building product and shipping.
And our next question comes from Alex Potter with Piper Jaffray. You may begin.
I wanted to ask a question on DPG, you talk about sort of the revenue headwinds that you have had there and the good margin performance. I don't want to lose sight of that, but one of things that stood out to me within DPG was sort of the non-trailer product category which in my view has sort of been the litmus test about whether some of the new products you guys are introducing are going to gain traction and that non-trailer component of DPG comes down year-over-year for something like two years and then this quarter it turned around and was positive and can you guys sounded like that seemed like a pretty good sign, I am just wondering whether you think this is sort of the start now of restraining a positive year-over-year growth results and if so what the main maybe two or three drivers of it all?
The two areas of the diversified products business saw some nice progress in the most recent quarter, the process systems business in finally getting some traction with getting products shipped that's very lumpy. There are a lot of large high hour content type products when you talk about silos and pharmaceutical equipment. These are not your typical like a dry van that has a limited hours and tag time to actually produce something. These take a long time and they can't be just shipped or used away so I mean it takes a lot of coordination, a lot of time to produce and coordination with customers to get these shipped. So process system had a better quarter in that regard and the our Wabash composites business. As I stated in my prepared comments had a very strong quarter, the product so the truck box products that they produce are starting to really resonate and getting that traction there and that's a new product that was introduced late last year, so that was a strong quarter them. And they have expanded a suite of aerodynamic products in site skirts and rear aerodynamic devices with air open, so those are starting to resonate and pick up some additional incremental revenue and generate nice profit contribution.
Okay great. And I guess one last one maybe a sort of philosophical or strategic question. You hear a lot of people obviously focusing on this, the prospects for a downturn in 2017 not just in the trailer market but I guess in the freight market overall, Class A, the fleets its hard times for fleets and they all seem to be guiding and whenever they make public comments, it is just doomsday. But then you don’t see the follow through really on cancellations, right. So in period they really felt the world was coming to an end and things were so bad then you should see Class A and trailer cancellations spiking up which are not. So I am trying to maybe interpret what some of these fleets are saying, do you think that they are posturing in order to try to get better rates from the shippers because in the back of my mind they know that ELBs and other things and capacity constraints are on the horizon and well this isn’t that bad and is that kind of thinking at the back of their mind?
I certainly don’t want to try and think for them, they have the number of challenges that deal within their business and our job is try and help them do better by providing good products cost effectively and all that. Certainly the projections that I see continue to indicate that the demand environment for goods to be transported and you look at GDP projections at all for next year versus this year are still projected to be higher next year than they are this year. We’re continuing to see year-over-year increase and total truck tonnage loads, loads continue to increase albeit at a moderate level, but I’m not seeing any projections on that side of it as far as the demand environment for the fleets decreasing, I am seeing continued moderate growth.
What we are seeing though and the headwinds that the fleets are seeing is really on the regulatory front and I think that’s what they’re probably trying to be somewhat conservative on their projections because their costs have continued to go up and if the choppiness in the market ends up causing them challenges in getting rate increase, then they look at and say while their profits will be compressed somewhat because of that. It doesn’t mean that they don’t remain healthy and they don’t continue to run their business and invest in equipment replacements where necessary to further optimize their operating costs. But I think it’s just an indicator that the environment that they’re operating in with whether it’s hours of service or electronic logging device or the big fleets are already managing through those issues but the rate environment has been choppy for them and I think that’s probably why they’re a little bit cautionary in their statements.
And our next question comes from Mike Shlisky with Seaport Global. You may begin.
I wanted to ask also about the greenhouse gas that you referenced in your comments, do you think it’s going to have a pull forward of demand as you’re current trailer products if were to happen or is it more likely after changeover, you have sales of higher tech products or more component tree looking at your trailer after it takes place.
The ELD technology that’s really tied to the power unit side.
Not at the GSG rules not the ELD.
Kind of …
The greenhouse gas, GSG 2.
Yes meant the GSG rules yes.
No, I don't anticipate any pull ahead the 2018 rates for the most part customers have done a lot of adoption of those technologies already, especially the customers that we deal with. So I don't know that there will be an appreciable amount of pull ahead from that standpoint. We're not anticipating there. And we're not planning on it ourselves that first phase is technology it's all available and it's been increasing in adoption over the last several years, that's what is unique about our industry. We tend to adopt those things that make sense. When I say we I am talking our customers, our industry in total adopt technology that makes sense that help optimize cost, optimize performance, reduces fuel usage by putting aerodynamic devices on. And so on so forth so the fact that the EPA is pushing through the GSG 2 regulations, longer term can be a challenge, but in the near-term it's really the real biggest issue with it is that a lot of these technologies don't do a lot of good in short haul city run type environments where you don't get the benefit of highway speeds to get the fuel economy savings and that's the big headache for fleets to do that type of haul. And those are not the ones that we deal with as much, our strength as more in the direct channels which is a lot of truckload fleets and all that, that have already adopted a lot of this technology.
So just to kind of summarize then the benefit you might get from GSG would be in ’18 rather than ’17, if there was any upside from that rule?
That's really difficult to say because again our customers have been early adopters of a lot of the technology. There is really minimal reason for them to do a pull ahead, you see I am saying. The longer term benefit for us could be that the larger fleets that are well capitalized have adopted the technologies already. The smaller carriers that are less capitalized will be more challenged if you see consolidation in the industry occur that obviously would push towards the customers that we are stronger with.
Let's talk about the platforms as well not anything assuming but some of the major off loader equipment companies maybe seeing certain cases up on I am not so sure about culture, but those other areas essentially on the oil and gas side, if we were to see any kind of increase in there in the equipment companies sales in 2017, would that be a benefit to your platform sales if that were to take place in 2017 or is there unused capacity if not shipping things around it might take till ’18 for the platform and placement to kind of perk up?
We could see some positive influence in demand from any increase in shipping activity there, so yes we will see some, I don't want to make it sound like it would be appreciable but there certainly would be some favorable impact.
And we have no further questions at this time. I will now turn the call over to Rick Giromini for closing comments.
Thank you. So while much has been done, opportunities certainly are bound we’ll 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 way to increase returns and value for all shareholders while assuring that the proper balance between risk and reward is considered in all decisions. In closing, we’re on pace to deliver another record year in 2016 with a strong first half, a solid backlog, a supported demand environment and a continued strong focus on execution. Thank you for your interest in and support of Wabash National Corporation. Mike, Jeff and I all look forward to speaking with you all again on our next call. Thank you.
Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.
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