Wabash National Corporation Q2 2008 Earnings Conference Call

| About: Wabash National (WNC)

Wabash National Corporation (NYSE:WNC)

Q2 2008 Earnings Call

July 31, 2008 10:00 am ET


Richard J. Giromini - President and Chief Executive Officer

Robert J. Smith - Senior Vice President and Chief Financial Officer


John Barnes - BBC Capital Markets

Akshay Madhavan - Redwood Capital Management

Ren Wood - Stevens, Inc.


Welcome to the Wabash National Corporation second quarter 2008 earnings results conference call. (Operator Instructions) It is now my pleasure to introduce your host, Dick Giromini, President and CEO.

Richard J. Giromini

. 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 conditions and the like. As you know, actual results could differ materially from those projected in the forward-looking statements. These statements should be reviewed in light of the cautionary statements and risk factors set forth from time to time in the company’s filings with the Securities and Exchange Commission.

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 the listeners on today’s telephone conference call, as well as those listening live via the Wabash National internet site webcast. We have 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’ll open the calls for questions from the listening audience.

Overall, our second quarter results were generally in line with our previously stated expectations. We achieved incremental improvement in our gross margin in spite of record high commodity costs, posting a 5.3% margin compared to first quarter gross margin of 3.7%. In addition, profitability improved over first quarter, driven primarily by quarter over quarter volume improvements and further progress achieved with our operational excellence initiatives.

Our efforts to bring capacity in line with demand, right size our operating footprint and optimize our strategic pricing and sourcing continue to positively impact our operating results. But the record level of raw material costs will continue to adversely impact our business and we expect a continued increase during the second half of the year.

While the pricing environment remains challenging as available capacity chases limited demand, we will take whatever steps are available to us to improve our performance. Our ongoing operational initiatives will not only ensure we sustain a viable business throughout the current down cycle but will also provide us with a leaner, more efficient validation suitable for long-term growth. However, in the near-term during these next two or three quarters, you should expect our margins to be somewhat in line with what we delivered during the first quarter.

Now, let me take a few moments to update you on the current environments and our expectations for the balance of the year.

Macroeconomic and industry-related headwinds continue to adversely impact our operating results. A softening economy, a prolonged residential housing market correction, and continued pressure from rising energy and commodity costs have caused demand to slow in our industry, especially for the smaller fleets. In some cases, the condition has become critical as indicated by a recent report showing that 935 trucking fleets, which represents 42,000 trucks or 2.1% of the industry, filed for bankruptcy during the quarter. Fortunately, our exposure to the smaller freight haulers is somewhat limited. Larger carriers, which represent the majority of our customers, have been able to weather the storm more effectively due to their scale and capitalization. And we’ve benefited from their strength as our current backlog remains reasonably strong at $393 million.

While we certainly are not in a position to call the bottom of the cycle today with the number of headwinds continuing in full force, we are seeing some encouraging signs from the carriers. [Freightronics] has now shown eight consecutive months of year over year improvements and the last two months showing month over month improvement.

Carrier capacity is now tracking closer to this current demand environment. While this trend is in part related to modest improvements in demand, we believe the real driver has been on the supply side. The smaller carrier bankruptcies I mentioned earlier have provided opportunities for larger carriers to absorb outstanding freight demand. In addition, a number of larger carriers have tapped into international markets to export used trailers, thereby right sizing their capacity to the current demand environments.

Given the high price of commodities such as steel, freight haulers are also selling some older trailers for scrap value. Again, all positives though non-conclusive but they are helping to improve the carrier’s profitability, which is good for our industry, as carriers will eventually begin to feel more comfortable in making necessary capital expenditures for trailers and related equipment.

That said, current trailer demand levels reflected depressed freight environments as ACT researchers, once again, adjusted their estimates for the year, now projecting total trailer sales of 152,000 units in 2008 and 181,000 units in 2009. This compares to their February estimate of 181,500 units and 220,400 for 2008 and 2009 respectively.

Softer than expected trailer demand is also impacting cancellations as the rate of orders cancelled amounted to some 13.3% during the second quarter. Based on conversations with our customers as well as recent quote and order activity, our view of expected unit sales is generally consistent with ACT’s expectations. We now expect total unit sales for the third and fourth quarters to average around 9,000 units, with the third quarter expected to be stronger than the fourth. As a result, we have also adjusted our full year shipment forecast to a range of 32,000-33,000 units. This compares to our previous projection of 38,000 shipped units for the full year.

The decline in units coupled with the challenges of recovering material cost increases will further adversely impact second half results. As freight hauler profitability increases with reduced capacity and as aging fleets get replaced, we expect to see a return to growth in mid-2009. In the meantime, we will continue to focus on strategic pricing, capturing profitable additional market share, optimizing our cost position and improving our productivity.

Let me shift gears and provide an update on some of the strategic initiatives we’re working on to build a stronger, more profitable company. I’ll start with the Lafayette facility transformation, where we are streamlining production and improving our manufacturing efficiencies. Currently, we’re in the process of optimizing our existing line configurations and improving the facility’s layout to centralize our inventory and warehouse phase. During the second quarter, we seamlessly integrated our Pup trailer production line into the high speed DuraPlate line. We made the transition without any failures while concurrently producing Pup trailers for two of our largest and most demanding customers.

Additionally, we began the process of integrating our high spec DuraPlate line into the high speed DuraPlate line, which is scheduled for completion by October 1st of this year.

We’re very pleased with our progress to date and are on track to achieve our goal of a million dollars of market improvements into 2009 tied to this initiative alone.

As you may have guessed, the planned construction of the drive end manufacturing facility in Kentucky continues to be on hold. While we remain excited by the long-term potential and benefits of this initiative, construction of the facility will commence as leading indicators dictate but no sooner.

We’re also getting closer to finalizing our purchasing consortium. Thus far, we have two agreements in principal and are very close in the process of completing an additional three contracts. We expect the consortium to be fully operational by the end of the third quarter. As we have mentioned previously, we’re initially targeting a 3% annual savings, approximately $350 million spend with additional cost-savings opportunities as the consortium matures and grows.

Expansion of our DuraPlate products group is progressing very nicely. We completed an agreement with a limited scope trailer manufacturer for the sale of DuraPlate panels and licensing of certain production know-how. And we’re in varying stages of discussions with a number of portable storage companies, one of which is a verbal agreement with one of the largest players in the space. This particular relationship will encompass product design, development, manufacturing, logistics and after sales services, both domestically and globally. Once the formal contract is in place, we’ll be able to share more details. Needless to say, we’re very excited about that opportunity and others like it.

While we’ve made good progress on the domestic front, the DuraPlate sales team has also intensified their international sales efforts. In Europe, for example, we are working to build relationships with both specialty and standard trailer manufacturers. While we’re in early stages of discussions with a number of potential customers, a specialty manufacturer has built and is currently test marketing a DuraPlate trailer. We are currently exploring ways to expand this relationship into other markets as well.

Another exciting international opportunity is the increased interest that we received in our RoadRailer intermodal trailers. In the Japanese market, we have been working with a top-tier trucking company, who is leading the establishment of a consortium of companies focused on utilizing this technology. We currently have demonstration units on the ground and participate in a demonstration symposium of our product last month in Japan that was attended by over 700 key government transportation and railroad representatives. During the conference, our RoadRailer product was well received and generated significant interest from attendees.

We’ve also made inroads in the South African and Indian markets. In India, we have a licensing agreement with Kirloskar Pneumatic Limited, where a prototype is currently undergoing testing. We’re very excited about the outlook in opportunities in these markets but we are early in the process and these relationships will take time to mature.

Lastly, I’d like to discuss our press release that hit the wires earlier this week. We recently completed the acquisition of certain operating assets of Benson International, a manufacturer of aluminum flatbeds, steel and aluminum dump trailers, and other truck bodies for approximately $5 million. We can now offer a premier all-aluminum platform trailer line that provides customers with a lower weight, lower fuel consumption alternative that compliments our transcript portfolio of steel and combo flat offerings.

The aluminum flatbed provides carriers a lighter, fuel efficient design which is important to our customers given the rising cost of energy. In addition, we gained access to the previously untapped dump trailer market and now have the capability to produce a wide variety of custom designed steel and aluminum dump trailers and platform bodies, all built to customer specifications.

To put that into perspective, sales of flats and dumps amounted to approximately 1,800 units during 2006 and approximately 800 units in 2007, as they were undergoing the challenges of consolidation and startup of the new facility.

As a part of this acquisition, we gained access to an experienced and motivated workforce and will initiate with a lease of an option to buy a current 80,000 square foot state-of-the-art manufacturing facility in Cadiz, Kentucky. This facility is designed for the Benson products and is not an alternative to the aforementioned Franklin site.

In summary, we continue to make good progress on executing our strategic initiatives that are 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, something we have not been able to deliver in the past. While these initiatives will take time, we’re committed to make that happen.

With that, I’ll now turn the microphone over to Bob Smith, our Chief Financial Officer, who’ll provide details behind the financials.

Robert J. Smith

I’ll just take a few moments and discuss the second quarter financial results for you.

Sales in the quarter were $201 million, $500,000 on approximately 8,000 new units; 7,400 vans; 600 flatbed trailers. For the quarter, we had a net loss of $3.2 million or $0.11 a share. Share used in the calculation of EPS were 29.9 million shares. The details are in the press release. During the quarter, we did not repurchase any common shares.

Early in the second quarter, we retired $19 million of the convertible notes. And tomorrow, we will retire the remaining $26 million, using our revolving credit facility. To go into more line item discussion, again, sales for the quarter, $201.5 million on 8,000 units. This compares to $161.1 million on 6,300 units in the first quarter of this year and $294.8 million on 12,500 units in the second quarter of 2007. When you look at it on a segment basis, manufacturing sales were $182.2 million on 7,900 units; retail and distribution sales were $40.8 million on 800 units; and eliminations amounted to $21.5 million or roughly 700 units. When you look at this by product type, new trailer revenues for the quarter just over $175 million, again, 8,000 units; the ASP was approximately $21,900 during the quarter. This compares to $138.8 million on 6,300 units and an ASP of roughly $22,000 during the first quarter of this year. Last year second quarter, we reported sales of $265 million on 12,500 units with an ASP of approximately $21,200.

Units shipped increased 29% in the quarter compared to Q1 of this year and down approximately 30% from last year’s second quarter. The decrease in ASP in the second quarter is primarily a function of mix compared to the first quarter of this year and compared to the year ago quarter, we increased prices almost $500, mainly due to recovering the cost increases of commodities.

During the quarter, sales to our core customer partners accounted for approximately 20% of the units sold. Used trailers, we sold 2,000 units in the second quarter of this year, which is almost double what we did in the first quarter and an increase of 500 units over the second quarter of ‘07. The volume of used trailer sales reflects both the increase in availability of fleet trade and the profitable access to the scrap market for some of the older, lower-priced units that we’ve taken in. The ASP has declined in the quarter and it’s primarily a function of the age and the product type of the used trailers that are being sold.

Parts and services revenue were $14 million in the second quarter of this year, which is up about a million dollars from the first quarter and down roughly a million dollars from the second quarter a year ago. Parts and service revenues continue to be sluggish given the state of the industry and the number of trailers that are parts. Other revenues was approximately a million dollars during the quarter and that’s primarily freight on deliveries.

The gross margin, as Dick mentioned, showed a sequential improvement as production increased approximately 25% over Q1 of this year and we continue our drive to manage costs. As the percentage of sales margin in the quarter was 5.3% in this quarter compared to 9.4% in the second quarter of last year. Again, the decrease is primarily what’s happened with the volumes and the fact that the raw material costs are outpacing selling price increases.

SG&A is approximately $13.8 million, down a little over a million dollars from the first quarter and down about $2.6 million from last year’s second quarter, continuing our drive on managing our spend, professional service, salaries and related employee costs are all down. Some of this is timing and nature but overall we are driving cost out of SG&A.

Interest expense amounted to approximately $1 million during the quarter and our average borrowings amounted to just about $52 million under our revolving credit line.

Taxes, we recorded $1 million dollar benefit in Q2. The effective rate was about 24% for book purposes. We had a small valuation reserve that we needed to provide it on some state taxes. The federal NOL at the end of the quarter amounts to about $52 million net of reserves. As I mentioned before, the EPS calculation is in the press release.

Depreciation and amortization in Q2 is $5.2 million and we’re looking at about $20 million for the full year.

Capital expenditures through the six months just under $4 million. We expect the year to be in the $8-12 million range, excluding the assets acquired from Benson.

The headcount at the June 30th amounted to 2,900 full-time associates.

Balance sheet, $27.8 million at June 30th; revolver borrowings, $54 million; convertible debt, $26 million; liquidity, cash plus available borrowings under our line of credit was approximately $103 million and this takes into the account the convertible notes.

Accounts receivable, $49 million. The DSO was approximately 23 days. Inventory’s essentially the same as reported in the first quarter of this year, $133 million. A little bit of movement between raw materials being down about $4 million and finished goods being up. Turns stayed about the same as 6x.

At this time, operator, we’ve concluded our prepared remarks and we’ll open it up to questions.

Question and Answer Session


(Operator Instructions) Your first question comes from John Barnes - BBC Capital Markets.

John Barnes - BBC Capital Markets

Just sort of thinking about your ‘09 trailer delivery forecast and of the current backlog that you have, can you give us an idea of how much of that extends into ‘09?

Robert J. Smith

Very little goes into ‘09. The vast majority of order intake this year was exclusively for 2008 and it’s too early at this point to speculate on just what’ll happen in the demand environment and what customers will be looking to do. So, a little bit early for us this year.

John Barnes - BBC Capital Markets

This acquisition that you just announced, given the size of that facility, does it change your mind about the other announcement you made? Is it a facility large enough where you could actually do the trailer manufacturing in a facility of that size along with the other product lines and not have to greenfield this other facility in Kentucky you’re talking about? Or is that even up for debate?

Richard J. Giromini

No, John, the facility that we acquired assess to with the Benson acquisition is designed specifically for that type of product and really doesn’t have the clear span space required to build van trailers. And so, that would not be something that we would be looking to do.

John Barnes - BBC Capital Markets

In terms of the average selling price on your trailers, is the eventual improvement there solely a function of the demand environment or is there something else in the near term that you can do to get those prices back up? Is it really going to have to be back into the 60,000 unit range or something in that ballpark before you start to see a material improvement in your selling price?

Richard J. Giromini

No, selling price will improve. Yes, it’s more challenging in a depressed demand environment but selling price will improve as new quote opportunities and new orders are led. We will be able to recover the raw material increases. The challenge that we face in the industry, us and our competitors, face is commitments made to customers on orders taken in advance of some of the raw material rapid spikes. If there were gradual increases, you can absorb those through improvements; you can absorb those and being able to pass along some increases. But when you get the rapid spikes and in a short timeframe that’s happened especially with steel, very difficult to be able to respond quickly enough. So, you’re always playing catch-up. So, the best thing could happen is for fuel prices to stabilize somewhat or continue coming down a little bit as they have little more recently and also having some stabilization in raw materials. Then you can have the ability to catch up over a quarter or two time.

John Barnes - BBC Capital Markets

And then last question, your strategy of using the DuraPlate product in other types of applications, 1) can you just update us on where you stand in that strategy? I know it’s early on but I’m curious as to any success stories you’ve had thus far and then 2) along with that, this acquisition of Benson that you just made, is there any product line that they currently produced that would accept a DuraPlate type product in its manufacturer?

Richard J. Giromini

The Benson products are flatbeds and dump bodies and really DuraPlate is not directly applicable to those types of products. So, our initial thoughts there are consistent with the current products that they have, not transferring the DuraPlate technology there.

The first part of your question, as I stated in my prepared comments earlier, we’re having some nice successes. We have a verbal agreement in principal with one of the largest portable storage unit businesses that we will be the provider for the design, manufacturing and distribution of their required portable storage units. We just don’t have a formal signed agreement yet. So, I can’t share any other detail relative to that but we’ve made nice progress and getting a lot of positive feedback from customers or potential customers that we’ve been in front of. So, I’m really excited about the prospects that the DuraPlate products group are uncovering for us. And over the coming weeks and months, I’m sure we’re going to have a lot more real things to report on than what we can today.


Your next question comes from Akshay Madhavan - Redwood Capital Management.

Akshay Madhavan - Redwood Capital Management

Bob, just a quick question on your revolver balance. I assume that once you actually pay off the convertible notes your debt balance will remain at $80 million. However, the mix would be almost entirely borrowings $80 million of your revolver would have been used pro forma for the converting [inaudible {28:33}]. I was hoping you could explain how your borrowings base is calculated in terms of advance rates against receivables and inventory, if that’s possible because I think a receivables balance of approximately $50 million and inventory for about $130. I was trying to figure out how the borrowings base is actually determined.

Robert J. Smith

Well, the borrowing base is a function, as you said, of inventories, receivables and property plant and equipment. And the borrowing capacity, it’s a determination of what is acceptable to get into the base side, the credit quality or the age of the individual receivable accounts, the status of the inventory, finished goods carrying a fairly high value relative to borrowing base and raw materials and work in process. And used trailers a lower amount of borrowing base. So, right at the moment we have availability on the line of $70-ish million if you take cash out of what I said, the liquidity number is, plus we would be borrowing roughly $80 million against that. So, the borrowing base at June 30 would be the combination of the $80 and the $70 in round numbers.

Akshay Madhavan - Redwood Capital Management

Great and I guess my real question is just trying to figure out as working capital reverses and sort of the industry sort of shrinks here for the foreseeable future, is there any concern that liquidity could be an issue as your receivables and inventory balances shrink?

Robert J. Smith

Well, we look out as best we can and we feel comfortable with our liquidity position going forward.

Akshay Madhavan - Redwood Capital Management

My second question just had to do with early 2009. Have you gotten any sense for, I think, in speaking with the ACT folks, they’ve sort of largely tempered that 2009 views commensurate with 2008. But is there any reason to suspect recovery in ‘09 versus 2008 for any specific reasons, for example, like the classic pre-buy? Is there anything else driving ‘09 recovery versus 2008?

Robert J. Smith

Well, one of the big drivers is really tied to the housing industry and the correction that’s occurring there and that’s what is believing to be prolonging the recovery relative to the trailer segment. The fleets have done a good job in rightsizing their capacity to meet the demand environment. So, they’re starting to gain some pricing leverage with the shippers. That’s going to help them improve profitability so when they are in a position to need trailers, they’re going to be better positioned to be able to make those investments. But the demand side is really the driver for it and some of that is tied to this housing correction. Our expectation is pretty consistent with what the ACT folks are saying that it would be more like a mid-2009 is when the recovery will begin and we’ll start seeing some increased demand. A lot’s up in the air if fuel continues and if we do get some improvements there, then it could help prop up things and accelerate it but my expectation at this point is second half 2009.

Akshay Madhavan - Redwood Capital Management

I think sitting here 12 months ago, it was projecting a second half of ‘08 recovery and obviously that’s not likely. And I was wondering if there were any specific characteristics that made ‘09 different than ‘08 because obviously ACT projections for the last 12 months have been way off and I was just trying to see if there’s any sort of bottom that want to clear because of any specific factors in 2009?

Robert J. Smith

No, I think the ACT and much like everyone else, including the folks in Washington, no one at the time, I don’t think, predicted accurately how deep the housing crisis was going to be with the subprime mess that was tied to it and I think that folks are getting a better understanding of what’s happening in that market and it’s not bottom yet. And the recovery on that side needs to happen with inventories reducing significantly before we see some strong recoveries. So, I think that in ACT’s defense going back 12 months back from today, it just wasn’t understood how deep that problem was going to be.

Akshay Madhavan - Redwood Capital Management

Great, and one last clarification, you said in order for the back half of 2008, we should expect gross margins in line with the first quarter of 2008. Is that correct?

Robert J. Smith

Yes, we’re going to continue to be challenged with the raw material cost run-ups and as I shared in my response to John Barnes a little earlier, that it’s just very difficult to play catch-up when the prices or cost are rising as rapidly as they’ve been, you’re always in a catch up mode. So, we’re going to be further challenged as the significant increases that the second half faces relative to raw materials and we’re just going to be playing catch up. So, I would expect to be more similar to our first quarter margin results.


Your next question comes from Ren Wood - Stevens, Inc.

Ren Wood - Stevens, Inc.

With regards to a couple modeling questions, do you guys have the break out of gross profits by division? I know that you do it in the 10-Qs.

Robert J. Smith

The Q will be out and filed this afternoon. So, it’ll be available then.

Ren Wood - Stevens, Inc.

And with regards to the tax rate, I think you said you have $52 million left in the NOL.

Robert J. Smith

Net of reserves. Right.

Ren Wood - Stevens, Inc.

So, you would assume that the tax rate would kind of remain at the Q2 level for the rest of the year?

Robert J. Smith

I would think it would be somewhere in that neighborhood.

Ren Wood - Stevens, Inc.

Then with regards to used inventory, I was kind of surprised the strength with that. You mentioned some of the reasons behind that. Can you talk a little bit about your used inventory and, I guess, you guys feel pretty comfortable that there wouldn’t be a write down with regards to that, like some of the Class A dealers have had to do?

Robert J. Smith

Well, what we do consistently, Ren, is value that inventory as best we can in light of current market conditions and keep it appropriately valued on the books based on what we think that we can move it for. And that’s our practice and that’s what we’ve done historically. Doesn’t eliminate the fact that you may end up with a surprise but we’ve tried to value those as conservatively as possible.

Ren Wood - Stevens, Inc.

And so, for the third quarter we can kind of model that same level in the second quarter?

Robert J. Smith

I think that the inventory or, excuse me, the move of used trailers in the third quarter should be reasonably similar to what we saw in the second.

Ren Wood - Stevens, Inc.

And then lastly, if I do the math, it looks like net new orders in the second quarter were like $57 million. That’s pretty low. Is that kind of what you’re expecting in the third quarter? And do you really need to get into kind of to fall to figure out what your customers are going to do with regards to 2009? I mean what are your customers telling you guys?

Robert J. Smith

Well, I think that as we’ve seen historically, customers tend to come in fourth quarter and first quarter with the large volume or the largest percentage of the order intake, I should say, occurs in those two quarters. And what you see over the course of the second and third quarter is generally living off your backlog that you’ve created and adding net, some additional incremental orders as you go through the middle part of the year. And I think historically if we look back, we would probably see 75% of what we do in a given year is in the book by March, maybe April, at the outside timeframe. And I think again, given the kind of market you have, spotty and a question of when your customers show up. Again, I don’t think we’re going to see very much in terms of indications for next year until fourth quarter of this year.

Richard J. Giromini

Yes, we’ll start getting some crystallization of that during this third quarter as we get into the latter part of it and customers start developing what their plans and what their needs are for next year and we start the conversations at that point. But it’s a little early for them recognizing the unevenness of the demand environment that they’re seeing now for them to feel comfortable with giving us numbers. We have gotten some positive surprises in some conversations with some customers who had not been in the market for some time and are talking some respectable numbers for next year. Gives us some hope but it’s a little early to firm anything up.


There are no further questions at this time.

Richard J. Giromini

In closing, I’d just like to say that in spite of record high commodity costs, we did achieve incremental improvement on our gross margin, driven by our cost containment and operational excellence initiatives. We’re pleased with the progress but there’s clearly more work to be done. We will continue to leverage our leadership position in the market, our strong customer relationships and operational excellence initiatives to sustain our business in the near-term while we build a leaner, more efficient foundation for profitable long-term growth.

More importantly, we’ve made good progress on our strategic initiatives designed to diversify our business model to counter the cyclical nature of the trailer industry. Overtime, these initiatives will help us deliver more consistent reliable results to our shareholders. And we’re very confident and excited about what the future prospects bring.

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

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