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Wabash National Corporation (NYSE:WNC)

Q1 2008 Earnings Call Transcript

April 29, 2008 10:00 am ET

Executives

Dick Giromini – President and CEO

Bob Smith – SVP and CFO

Analysts

Peter Nesvold – Bear Stearns

David Cohen – Midwood Capital

Kristine Kubacki – Avondale

Operator

Greetings and welcome to the Wabash National Corporation's first quarter 2008 earnings results conference call. (Operator instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dick Giromini, President and Chief Executive Officer for Wabash National Corporation. Thank you Mr. Giromini, you may begin.

Dick Giromini

Thanks Rob. Good morning. Before we begin, I would like to make an important announcement. As with all of these types of presentations, this morning's contains certain forward-looking information including statements about the company's prospects, the industry outlook, backlog information, financial condition and the like. As you know, actual results could differ materially from those projected in the forward-looking statements. These statements should be viewed in light of the cautionary statements and risk factors set forth from time to time in the company's filings with the Securities & Exchange Commission.

Welcome to Wabash National's first quarter earnings call. I'm Dick Giromini, Chief Executive Officer. In the conference room with me this morning is Bob Smith, our Chief Financial Officer, who will discuss the company's financials. I'd like to welcome all of the listeners on today's telephone conference call as well as those listening live via the Wabash National Internet site webcast. We've much to cover today and we'll try to provide as much information as possible. At the conclusion of the prepared portion of our presentation, we will open the call for questions from the listening audience.

Overall, the first quarter results were encouraging relative to the broader market and compared to our internal expectations. Our efforts during the course of last year to right size our business combined with more recent cost containment initiatives and excellent operational performance allowed us to deliver gross margins of 3.7% ahead of our previously stated expectation of breakeven gross margin for the quarter. While these actions have helped us navigate through this challenging period, perhaps more importantly they provide us with a leaner, more efficient foundation from which to grow profitably over the longer term as we come out of the current trough.

At the risk of stating the obvious, the near-term macroeconomic environment remains very challenging. Few, if any, economic indicators have shown any signs of strength. Fuel costs are up, consumer confidence is down. Steel costs are at record highs and going higher, and aluminum costs continue to remain at record high levels. ACT Research has once again adjusted their forecast downward, now projecting 2008 shipments of just 162,000 units industry-wide. This compares to their February forecast of 182,000 units or a decrease of 11%. This latest forecast reflects a year-over-year decrease of 25.3% as compared to the 217,000 units shipped last year and represents the lowest demand level since 2002.

Prospects for 2009 have also been adjusted downward, now at 186,000 total units as compared to the February forecast of 220,000. On a vans-only basis, ACT numbers are now at 112,000 and 131,000 units for 2008 and 2009 respectively, reflecting year-over-year decrease of 26% for 2008 and then increasing 17% for 2009. Our view, based on customer input, quote and order activity and other indicators is generally consistent with ACT.

For the second quarter this year, we now expect to ship approximately 8,500 units as compared to earlier expectations of approximately 10,000 to 12,000 units. As we look beyond second quarter, we currently expect third and fourth quarter shipments to reach 11,000 to 12,000 each. We are adjusting our full year forecast to a total of 38,000 units shipped for our previous projection of 42,000. Inferred in our forecast is approximately a 2 point gain in market share for the year. As I discussed in the last call, this better-than-the-industry outlook is predicated on a number of factors including the quality of our customer base, which includes many of the largest and best-positioned organizations in the freight hauling business.

These operations include our core customer accounts and the midmarket accounts we've cultivated over the last four years. The financial strength of these customers puts them in a position to capture business opportunities that many of their competitors can't.

Second the quality, performance and expanding acceptance of our DuraPlate composite trailers, the original composite panel trailer. Our DuraPlate product has been and continues to be the premiere standard for the industry, which has led to more opportunities than ever with new and existing customers.

And third, the strength of our existing backlog. As noted in the press release, our backlog at the end of the year amounted to $336 million representing approximately 15,000 units. Following a strong first quarter of order intake, as of the end of March, we had $537 million in hand. To date, we have approximately 76% of our full year projection on the books. Pricing will continue to be challenging as available capacity chases limited demand, while raw material and component costs are rising at unprecedented rates and to levels never before seen.

At the revised 8,500 unit level, we remain slightly below our breakeven point and we expect to report a net loss for the second quarter albeit better than the first quarter. We continue to examine all opportunities to cut costs, increase revenue, and offset raw material costs increases to optimize the results for the full year, while volume improvements in the second half of the year combined with further cost containment actions and cost pass-throughs will partially offset these costs.

We now expect gross margins for the year to be approximately 250 basis points lower than those delivered in 2007. Longer term, we are positioned well. Our strategic initiatives that we announced at our Investor Day on March 26 are beginning to show great promise as we have laid the foundation for opportunities to grow our business profitably by leveraging our core strengths in ways that we have not yet realized.

We thank those of you who were able to make the trip personally and also those who took the time to dial in for the webcast. During the course of that day, we introduced our Strategic Pyramid and the 17 key executable initiatives, including a detailed explanation of the benefits of our announcement to construct a dry van facility in Kentucky. While we are excited about the long-term potential of this initiative, we will not commence construction until economic indicators return to more favorable levels.

Secondly the restructuring or transformation that is already underway at our Lafayette manufacturing facilities. We are early in the process and we'll have more to share with you on this initiative during the course of the year.

Third, the creative implementation of a purchasing consortium. As we previously stated, we expect to formally launch this effort during the course of the second quarter. Recall, we are budgeting $1 million in cost savings for 2008 and $5 million in 2009 from this initiative alone.

Fourth the exciting prospects for our recently formed DuraPlate products group. We are currently in several late stage discussions with potential buyers from a wide array of industries. Recall, we are expecting this group to grow from $5 million to an $80 million business by 2012, a 75% growth rate. And finally, a number of our other growth and profit generating initiatives that are underway such as our strategic sourcing initiative, inventory management, and our next generation dry and refrigerator [ph] van developments.

All of these initiatives were designed and intended to diversify our business model to counter the cyclical nature of the trailer industry. This will provide the platform to deliver more consistent, reliable results to our shareholders. These initiatives will take time, but we are committed to making them happen. With that, I'll now turn the microphone over to Bob Smith, our Chief Financial Officer who will provide detail behind our financials. Bob?

Bob Smith

Thanks Dick. We'll just take a quick look at the results for the first quarter. Sales of $161 million for the quarter on 6,300 new units, 5,800 vans, and 500 flatbed trailers. For the quarter, the net loss was $6.4 million or $0.21 per share, equivalent shares were 29.9 million for the EPS calculation. The press release provides the detail on the share count.

We did not purchase any common shares during the quarter. However, we did retire $59 million in convertible notes, and so far in April, we've repurchased an additional $19 million in convertible notes. As of today, we have $26 million of the $125 million convertible note issue remaining outstanding.

Sales again for the quarter $161 million on 6,300 units, this compares to roughly $258 million on 10,800 new trailer units in Q4 '07 and $259 million on 11,000 units in the first quarter of 2007. When you look at sales by segment, manufacturing was $142 million on a total of 6,300 units, retail and distribution sales were just over $28 million, roughly 400 new units and eliminations amounted to $9.6 million, again roughly 400 new units.

If I look at the sales by product line, new trailer revenues amounted to just under $139 million on 6,300 units with an ASP of slightly over $22,000 per unit. This compares again with $235 million on 10,800 units and an ASP of $21,800 in the fourth quarter '07, and in the year-ago quarter we reported $233.5 million in sales on 11,000 units with an ASP of $21,200 units. Roundly, the units decreased approximately 40% from each of the periods I referred to above.

Van trailer ASPs in the first quarter of this year, roughly $300 up from the fourth quarter. This is primarily a function of customer mix. Compared to the year-ago quarter, the increase of $900 reflects many of the pricing actions we took during the course of last year. On a unit basis, our sales to core partner customers accounted to approximately 28% of van units sold during the first quarter.

From a used trailer side, we did $8 million in revenue on 1,100 units in the quarter, roughly it's $7,300 ASP. Revenue is up compared to the fourth quarter of last year when we did $7 million on 800 units with an ASP of roughly $8,800, and compared to the first quarter of last year was $9 million revenue, 1,100 units in sales, $8,000 ASP. The ASP is largely influenced by the type of equipment we are selling, the age of the product, etcetera. So there's really been no significant deterioration in that market.

Parts and service revenue were $13 million in the fourth quarter. This is down a little bit from the – or equal to what we did in the fourth quarter of last year and about $1 million less than we did in the first quarter of 2007. Parts and service revenues remain sluggish given the fact that the equipment uses by truckers is down relating to freight demand.

Other revenue is roughly $2 million during the quarter, it's primarily freight related. As Dick mentioned, the margin for the quarter, gross margin was 3.7%. This is down from the 7.4% and 7.8% registered in fourth and first quarters of last year respectively. Volume is the key contributor to the problem and volume will again be a contributor in the second quarter of this year.

SG&A was just under $15 million, essentially what we saw in the fourth quarter of last year and $2 million down from the year-ago quarter. We continue to focus greatly on spending controls. Interest and other expense is roughly $1.2 million. The reduced dollars of the convertible outstanding and the fact that we were only borrowing on average about $6.5 million under the revolving credit facility.

We recorded a tax benefit of $3.7 million in the quarter, roughly 37% rate, which is similar to what we've experienced in past quarters. The NOL is roughly $71 million going forward. Take a look at some of the cash items. Depreciation and amortization, $5.2 million in the quarter and we expect this to run just about $20 million for the full year.

Capital expenditures in the first quarter $1.7 million. For the year, we are looking at about $10 million to $12 million in CapEx. A lot of the spending in the first quarter was maintenance type capital. At the moment, we expect, as Dick said, the Franklin facility will be started when economics look like it should be started, and as a consequence, we are expecting very minimal spending in 2008.

Headcount at 3/31 was roughly 2,700 full-time employees. On the balance sheet, we closed out the quarter with $6.3 million in cash. On the revolver, at the end of the quarter, we had $32.8 million outstanding, and the convertible debt at that point in time was just under $46 million. Yesterday, we executed an amendment with our bank group on the revolver. As many of you are aware, come May 1, we will require to put the cash in escrow to retire the debt since the convertible note outstanding is just roughly $26 million.

That requirement has been waived by the bank group. However, we are required to take that into account when we do our liquidity calculation or available calculation for the bank. So looking at it from the revised agreement standpoint, our liquidity at the end of the quarter was roughly $100 million.

Accounts receivable, $65.5 million, a little less than the $68.8 million at 12/31, and DSOs stands at about 37 days. Raw materials – inventories came up roundly $20 million from year end to March 31, $7 million in raw materials, roughly $5 million in work in process and about $5 million in used equipment. Inventory turns are down a little bit but it's not out of line with what our expectations are.

At this point, operator, I'll open the call up to questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question today is from the line of Peter Nesvold with Bear Stearns. Please proceed with your question.

Peter Nesvold – Bear Stearns

Morning guys.

Dick Giromini

Morning Peter.

Peter Nesvold – Bear Stearns

Hi, Bob. Okay, you mentioned that you have $100 million of liquidity, is that before a draw down of $26 million to fund the convert at some point?

Bob Smith

Yes, the $26 million is netted out of that $100 million.

Peter Nesvold – Bear Stearns

So you have $100 million in available liquidity over and above the $26 million required to –

Bob Smith

That is correct. We recalibrated or provided you the calculation based on the revised amendment which we just closed out on yesterday.

Peter Nesvold – Bear Stearns

And I think the Kentucky facility to your point put it on hold for now, but that's about $25 million program? Is that right?

Bob Smith

$20 million to $25 million, you are in the right ballpark Peter.

Peter Nesvold – Bear Stearns

How comfortable are you with the liquidity right now? I mean to Dick's point, there isn't a lot of visibility at that the things are looking any better. Granted [ph] we've been here at the bottom for probably a year and a half, but no signs of an upturn yet. Do you think you have to do something else on the balance sheet to make the funding structure a little more permanent?

Bob Smith

Well at some point we certainly would like to do that, but for the near term foreseeable type future it comfortable.

Peter Nesvold – Bear Stearns

It's comfortable but it didn't sound like it's enough to fund your growth plans?

Bob Smith

If we don't see something going forward. Now the $25 million, if you are talking about SVP?

Peter Nesvold – Bear Stearns

Yes.

Bob Smith

We pick up some of that with industrial revenue bonds. We do some of that with leasing, and we do some of that either with operating cash flow or short-term borrowings.

Peter Nesvold – Bear Stearns

At what point do you have to start thinking about evaluation allowance again against the NOLs? And if that were to occur, what would be the practical impact, putting aside just the optics on the GAAP [ph] needs?

Bob Smith

Well, I think the question becomes of what is the outlook for the current year and future years in terms of the expectations for the operations and will you generate enough taxable income to consume the NOL? This is something that we look at on a very regular basis and revisit the subject essentially quarterly to see where we think we are. NOL is one event, goodwill is another event. So there are multiple iterations to what happens if the outlook starts to turn real south.

Peter Nesvold – Bear Stearns

What was the goodwill created from the Transcraft deal?

Bob Smith

The predominance of the goodwill is Transcraft. There's a small amount of goodwill that dates back to the acquisition of the Wood Products facilities.

Peter Nesvold – Bear Stearns

But something like Transcraft, would you have to do a write down just on the cyclical downturn or it doesn't add to some other dynamic that drives the write-down like permanent impairment?

Bob Smith

We really have to look at your expectations for the business over the cycle, but will you get your – in effect, will you get your paid back over that timeframe.

Peter Nesvold – Bear Stearns

So from a practical perspective, let's assume the worst case, just for a point of discussion, that you have to write-down some of the Transcraft goodwill and you've got to take a valuation allowance against the NOLs. What is the practical impact from that other than just optics? Would there be any –?

Bob Smith

The reality is it doesn't change the game plan in the short term. It doesn't change the cash event in the short term, but it certainly is a negative optic event.

Peter Nesvold – Bear Stearns

So, it would not impact your credit facilities at all? Negatively impair your credit facilities?

Bob Smith

No.

Peter Nesvold – Bear Stearns

Okay. Can you tell me, how are you handling aluminum and steel right now? We got off the call just a few minutes ago from a Tier one supplier that's getting a lot of pressure from they didn't name who it is but Mittal on steel price increases and talking to how they are going to be trying to push more of this through. I have to believe that there isn't a lot of pricing power for you guys right now into the end market. So are you hedged on aluminum? How far up do those hedges run? Is there any headroom here to take any kind of increased steel prices from your suppliers, and what's your ability to pass that through going forward?

Dick Giromini

Yes, as we've shared in some previous calls, we do take forward positions on aluminum. We don't go too far out because the cost of going significantly out gets pretty expensive. We do take positions and generally it's a ratchet down as you go forward quarter by quarter. So in the current quarter we are always 100% covered. On the steel side, a little bit different. There are no forward positions that you generally can take. So we do have contract arrangements with our steel suppliers that give us some protection on a rolling quarter basis. So we do have some protection relative to that. But certainly we will be impacted by some of these crazy $1,000 per ton and higher numbers that are being thrown around in the industry. And our intent is to pass through costs as best we can, recognizing that it's a very difficult market out there now. So our expectation is that we will be successful to some extent but certainly we would not be able to pass through 100%, and that's the way we've done our modeling internally.

Peter Nesvold – Bear Stearns

And last question, you mentioned that ASPs were down sequentially year over year unused but you said it was more of a function of mix I believe, just older equipment etcetera. We've been hearing reports of guys like XTRA starting to liquidate their trailer lease fleets. And we are seeing bankruptcies rising among smaller carriers, are you starting to see there's a supply/demand imbalance in terms of used trailers? And at what point does that start to undercut your ability to pass through these higher materials costs in for new equipment?

Dick Giromini

Well that's a good question. We've not seen that impact that you are referring to as of yet out in the marketplace. Certainly we've been doing pretty good job on the used trailer side. It's the decrease in the average selling price in used just happened to be a mix of the trailers that we had. They vary all over the lot on age and market value. But we've actually been pretty successful in the margins that we've been able to get relative to the individual sales on used trailers. But certainly the potential does exist out there as more and more of used trailers are put into the market. It'll just make some of those factors a little more challenging.

Peter Nesvold – Bear Stearns

Actually I'll sneak one last one in here. When I think about your business, you have got a pretty– I mean for the trailer industry, a reasonably sophisticated balance sheet, permanent balance sheet relative to the industry populated by a lot of private guys. I mean are you starting to hear any comments about some of these smaller trailer builders on the edge of filing to help take out some of this excess capacity or just seems like there's a list of trailer makers never changes decade to decade?

Dick Giromini

Three it tends to move around a little bit, doesn't Peter? My view and I have shared this before is the landscape that we participate in, while filled with a lot of privately-owned companies, these are sharp guys. These folks have been around in some cases multiple generations, and they understand how to get through these times. They have been through a number of these cycles. And I think that is what explains why you don't see a lot of change in the competitive landscape as far as the names that we tend to compete against. I don't sell any of our competitors short. I think they are pretty good operators and they know how to get through these cycles. That said, there's always rumors. There were rumors a few years ago about our demise. And so rumors are always going to be out there about some of the maybe less financed competitors or smaller competitors are having difficulties in the market whether or not they are going to survive. There's certainly a lot of dynamics occurring out there with low demand combined with high materials costs that will make it especially challenging for some of the smaller or weaker players. But I'm not going to suggest that they are not going to make it through this. I think that they are just very, very smart on how they manage their cash and get through these times. So our internal modeling is not predicated on having some folks drop out. Our modeling is that the competitive landscape will remain very strong and that we just have to continue to find ways to redo our business model and our business strategy, and that's why we have rolled out the strategic plan initiatives that we shared over the last month or two and are really pushing a lot of diversification efforts through our DuraPlate products group initiatives.

Peter Nesvold – Bear Stearns

Thanks for the time.

Dick Giromini

Yes.

Operator

(Operator instructions) Our next question is coming from the line of David Cohen with Midwood Capital. Please proceed with your question.

David Cohen – Midwood Capital

Hi. I was wondering if you could give any color to the degree to which the fleets have placed orders and subsequently cancelled. How is that dynamic playing out with respect to your backlog, if you could quantity that?

Dick Giromini

Yes we've done pretty well. We've had some cancellations. I think more than anything though we've had push outs as the carriers are seeing that the demand is not recovering maybe as quickly as what they had hoped or expected. They have a tendency to move the orders or parts of their orders back a month or two or push them back a quarter. So we are seeing some of those kinds of activities, but to this point, cancellations have not increased dramatically. As reported, I believe cancellation hit 9% last month after a very, very low period in February, so there are some indicators that there's some nervousness out there about what the needs are. But we've thus far been pretty successful and pretty fortunate to hold on to the backlog we have.

David Cohen – Midwood Capital

So, if you quantify like for example if you look at this quarter and say your expectation now for the second quarter, to what degree has that been affected by push-outs?

Dick Giromini

I don't have – you mean from quarter to quarter?

David Cohen – Midwood Capital

Well, that's why – I guess you had some original expectation around these quarters based upon your backlog and now it's obviously lower. I don't know if that's –

Dick Giromini

Yes that's why we adjusted our second quarter outlook to around 8,500 units. We have previously expected to be in the 10,000 to 12,000 for the second quarter. But we have a lower slot than what we had anticipated. Some of that is based on some deferrals by orders by customers.

David Cohen – Midwood Capital

When you say that that's been a rate of deferral, is it fair to say six months ago, is it the same, better or worse?

Dick Giromini

Well, it increased. We weren't getting any deferrals previously. So we had some but yes it's higher, and as we get further along but hard to say what's going to happen as we go forward.

David Cohen – Midwood Capital

Okay. Thanks guys.

Dick Giromini

Yes.

Operator

Our next question is from the line of Kristine Kubacki with Avondale. Please proceed with your question.

Kristine Kubacki – Avondale Partners

Hi guys. I just wanted to piggyback on that question. How much of your backlog do you expect to fill this year?

Bob Smith

Majority of it.

Dick Giromini

Yes, the vast majority of our backlog is 2008 backlog.

Kristine Kubacki – Avondale Partners

Okay. And then I was just wondering if you look at the truck tonnage numbers, they were marginally better in February and then they fell off again in March. I was wondering how much of your negative view is what came late in the quarter or has even precipitated out? How are your customers feeling, late March and into April? Are they feeling worse?

Dick Giromini

No, I don't think that it's changed dramatically. The folks who I speak with regularly, I'm hearing the same message that I was hearing over the past two and three months that it's a very difficult operating environment. In some cases, they say it's the most difficult operating environment that they have had in their careers. In some cases, folks in 30 and 40 years in the business, and when they talk about the operating environment, they are speaking about all of the events, the flattish type demand combined with very, very high fuel costs and the fact that shippers are putting pressure on rates, and when you combine all those things, it's putting a lot of downward pressure on their ability to generate margin. That's the type of thing that they are talking about. And of course, when they are having their margins compressed, they are less likely to feel comfortable about placing orders for new trailers. So it's a combination of factors. But it's about the same. I have not heard customers recently saying it's taken a dramatic turn for the worse. They have had concerns as we've gone along these last few months.

Kristine Kubacki – Avondale Partners

Okay. And then just one last question, I was wondering if you could remind us you guys have done a really good job at rationalizing your business in terms of labor force and where you are at now. Are there additional kinds of cost leverage or flexibility in your business that you could turn to if the market turns drastically lower from here?

Dick Giromini

Yes, Kristine. We are currently evaluating a number of possible opportunities, and we are in that evaluation phase now and trying to assess what the merits of each of those are for the business, both from a short-term impact and then what the long-term impact would be to the business. So certainly there are always other things that businesses can do, and we are in that process now.

Kristine Kubacki – Avondale Partners

Okay. Thank you gentlemen.

Operator

Mr. Smith, Mr. Giromini, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Dick Giromini

Thanks Rob. While we are pleased with our progress on our cost containment operational excellence initiatives, there's clearly more work to be done. Despite operating in a difficult macroeconomic environment, our backlog remains strong with 76% already booked and gives us a measure of confidence that our revised projections can be met. Our position in the market, strong customer relationships, and operational excellence initiatives continue to position the company for a long-term sustained growth. We've built a leaner, more efficient foundation that positions us well to leverage our profitability when the market recovers. More importantly, we've launched our strategic initiatives designed to diversify our business model to counter the cyclical nature of the trailer industry. Over time, these initiatives will help us deliver more consistent, reliable results to our shareholders.

Thank you for your participation today. Bob and I look forward to speaking with all of you again on our next call.

Operator

Thank you. This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

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