Wabash National CEO Discusses Q3 Results - Earnings Transcript

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 |  About: Wabash National Corporation (WNC)
by: SA Transcripts

Wabash National Corporation (NYSE:WNC)

Q3 2012 Earnings Call

November, 1 2012 10:00 a.m ET

Executives

Jeff Taylor – VP, Finance and IR

Dick Giromini – CEO

Mark Weber – CFO

Analysts

Joe O’Dea – Vertical Research Partners

Brad Delco – Stephens

Steven Dyer – Craig-Hallum

Tom Albrecht – BB&T

Jeff Kauffman – Sterne, Agee

Kristine Kubacki – Avondale Partners

Operator

Good morning, ladies and gentleman, and welcome to the third quarter 2012, Wabash National Earnings Conference Call. My name is Chris and I will be your conference moderator for today. Presently, all participants are in a listen-only mode. (Operator Instructions)

And at this time, I would now like to turn the conference over to your presenter for today, Mr. Jeff Taylor, Vice President of Finance and Investor Relations. Sir you may proceed.

Jeff Taylor

Thank you, Chris, and good morning, everyone. Welcome to the Wabash National Corporation Third Quarter Earnings Call. This is Jeff Taylor.

Following this introduction, you will hear from Dick Giromini, Chief Executive Officer of Wabash National, on the highlights for the third quarter, the current operating environment and our outlook. After Dick, Mark Weber, our Chief Financial Officer, will provide a detailed description of our financial results. At the conclusion of the prepared portion of our presentation, we will open the call for questions from the listening audience.

Before we begin, I would like to cover two items. First, as with all of these types of presentations, this morning’s call contain certain forward-looking information, including statements about the company’s prospects, the industry outlook, backlog information, financial condition and other matters. As you know, actual results could differ materially from those projected in forward-looking statements. These statements should be viewed 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. Second, please note this call maybe recorded.

With that, it is my pleasure to turn the call over Dick Giromini, Chief Executive Officer.

Dick Giromini

Thank Jeff. First of all, I’d like to extend our thoughts to all those impacted by Hurricane Sandy. We wish you all the best during these difficult times.

Now let’s discuss third quarter results. Let me start by saying the third quarter was a significant step forward for the company with record revenues and operating income. These results clearly validate the long-term strategic plan that we put in place several years ago and demonstrate the progress we continue to make in executing that plan to profitably grow and diversify the business.

The process of transforming Wabash National from a singularly focused trailer manufacture to a diversified industrial manufacture is well underway. Key metrics from this quarter, evidence that we built the strong platform for higher margin product lines resulting in enhanced financial performance setting a strong foundation for future growth.

Outcomes from the first – from the last quarter show considerable momentum across a number of financial metrics and significant progress toward achieving key strategic initiatives, which include diversifying the business beyond our core product offering to address new market opportunities and enhance our financial profile particularly through the diversified product segment consisting of Walker Group, Wabash Composites, Wabash Energy & Environmental Solutions and Wabash Wood Products.

Secondly, continued integration of the Walker Group companies adding an attractive higher margin business and another component of diversification in terms of products and markets, customers and geographies. And third, driving price and operational improvement in our core Commercial Trailer Products business to increased margins and overall profitability.

Continued execution of these initiatives in the third quarter drove net sales to a record level of $406 million, a 21% increase compared to third quarter of last year. In addition, adjusted earnings claimed to $21 million for the quarter reflecting an increase of approximately 19 times greater than the same period in 2011.

Gross margins improved by 140 basis points, again exceeding expectations in reaching the highest level since 2005, coming in at 12.3% for the current quarter up from the 10.9% delivered in the second quarter of this year in marking the fourth consecutive quarter-over-quarter improvement.

Sequential gross margin improvements comes from mix of higher margin trailer orders from commercial trailer products combined with the full quarter benefit of the higher margin Walker business.

Operating income, excluding the impact of certain acquisition related expenses, for the third quarter of 2012 was $29.7 million which represents a 13-fold improvement compared to the $2.3 million in the previous year period. Operating EBITDA totaled $37.7 million, which represents an increase of $31.1 million compared to third quarter of 2011 and $8.0 million sequentially.

In regards to volume, shipments of 12,200 new trailers across all of our businesses including Walker Group were achieved consistent with our prior guidance of 12,000 to 13,000 total trailers for the third quarter.

Overall, we are pleased with the results thus far in 2012 as well as the substantial improvements in business performance since 2011. We remain focused on strengthening the organization for the long-term to drive sustained growth and to support our efforts to expand into other markets.

With that, let’s now shift focus to some highlights regarding the performance of each reporting segment. And Mark will follow later with some additional financial performance details. We’ll start with the Commercial Trailer Product segment.

Consistent with this year’s focus on margin over volume, the group again delivered on the promise to improve our mix and increase gross margins. With the notable improvement to 7.2% for the quarter or 490 basis points higher when compared to the same period last year. This focused effort to recapture loss margin experience during the downturn along with continuing productivity gains from a new – now more stable and maturing work force has lead to the best performance for this part of our business and increased by $12.5 million year-over-year.

As expected for this reporting period, backlog decreased due to seasonality but still remains at a healthy $385 million representing more than four months of production at current bill levels. In addition, code activity for 2013 has picked up nicely with several large deal orders, meaning orders greater than 500 units already booked with our direct channel customer base and numerous others in active conversations for equipment needs for next year.

We expect quote and order conversion rates to accelerate over the next several months as clarity has brought to the current uncertain political environment. As we now make our way through the 2013 order season, we continue to believe the overall demand environment for trailers will remain strong as key drivers such as the excess of aged fleet equipment, stable customer profitability, regulatory compliance requirements, along with increased residual value of used trailers and greater access to financing all combine support continued demand for new trailers.

Moving on the Diversified Product segment, which includes Wabash Composites, Wabash Energy & Environmental Solutions, Wabash Wood Products and Walker Group we saw several elements of growth. This segment experienced a year-over-year increase in net sales of $88.9 million directly attributable to the addition of Walker this year while partially offset by decreases in the other businesses during the quarter.

Walker contributed $96.5 million of revenue in the quarter as the Walker business continues to perform above our expectations. Additionally, we are on track to deliver $5 million of synergies within the first 12 months and $10 million to projected annualized synergies overall.

Following three strong quarters and similar to last year’s third quarter, our Wabash Composites business unit experienced some temporary softness this past quarter due to the normal variability associated with the business that was in start-up mode just a couple of years ago. However business fundamentals and market position for Wabash Composites remain strong as this group continues to evolve with several new products in the pipeline that will further expand its reach into new markets unrelated to those currently served.

In fact earlier this week, I attended the emergency management at Homeland Security Expo on Orlando at which we launched our latest offering, the DuraPlate Foldable Emergency Mobile Shelter, an insulated mobile shelter capable of configuration to multiple temporary needs and receive exceptionally good feedback on that product. So we’re looking forward to growing that.

The Wabash Energy & Environmental Solutions business unit also continues to be impacted by the slowdown in demand related to the softening and natural gas pricing and related drilling and fracing activities. Along with the result we shift away from the Marcellus Shale region that was the focus of our early efforts. Nevertheless we have unwavering confidence in the long-term potential of the strategy and in the energy sector in general and remain committed to this effort.

Similar to some of the early growing pains experienced with our Wabash Composites growth effort, that in retrospect it turned out pretty dugong good if I say to myself. EE&S will do just fine over the long haul.

The Energy & Environmental Solutions business recently commercialized the vacuum tanker trailer and we are currently evaluating developing other new products to better position EE&S to take full advantage of the many attractive opportunities that the energy sector inherently has.

Finally, our retail segment continues to make nice progress in all areas delivering the best quarter for operating income nearly $700,000 since the second quarter of 2005 and reflecting an impressive 295% improvement year-over-year.

Before I discuss Wabash National’s expectations for fourth quarter 2012 and next year, first let’s examine a few key economic indicators and industry dynamics that we monitor closely and that also provide broader context for our expectations.

First of all, the conference board leading economic index rose 6% in September to 95.9% following a slight drop of 0.4% at August and 4.4% increase in July. In the past six months, the index has increased 0.3%, down from the growth rate of 2.6% during the prior six months reflecting continued but slower economic growth ahead.

Due to supply management, our ISM manufacturing index increased 1.9 points to 51.5% in September, once again indicating expansion in manufacturing activity following a three months of slight contraction. GDP advanced by 2.0% during the third quarter following the second quarter 1.3% due in part to increases in federal government spending, decline in imports and a rising personal consumption expenditures. This marks the 13th consecutive quarter of growth.

In the housing sector recovery continues and took a nice step forward. At September housing starts at 870,000 units were up 35% year-over-year and September building permits of 894,000 units were 45% higher year-over-year. Both readings were the best since the summer of 2008.

Within the trucking industry itself, the story is the same as with the general economy, mixed singles distort through. The indicators within the trucking industry continue to point of growth although somewhat slower than last year. ATA’s Truck Tonnage index increased at an annual rate of 3.6% year-to-date, somewhat lower than the 5.3% rate in the same period in 2011. The index for September came in at 118.7, a 2.4% increase versus last September.

In addition, FDR’s Truck Loading index for September increased 0.6% over August and 5.2% year-over-year. Additionally the index has grown an annualized average rate of 3.6% year-to-date, just slightly off the 4.0% rate for the same period last year.

Industry-wide trailer shipments in the first three quarters of 2012 totaled almost 181,000 units, an increase of 24,000 units versus 2011 or 15.4% higher this year. While industry backlog remains at a seasonally healthy 78,000 units as we enter the traditional order season for next year.

Newer term the latest report from ACT estimates 2012 trailer shipments at just under 241,000 up 13% year-over-year and just under 259,000 trailers for 2013 reflecting an additional 8% increase year-over-year. FTR now estimates total trailer production for 2012 at 233,400 trailers an increase of 9% year-over-year but our projecting a weaker 208,000 units of production in 2013.

While the current uncertainty in the macro and political environment has driven a disconnect between the primary industry forecasters for next year, both forecasters continue to expect above replacement level demand, a key to pricing in margins with the likely outcome for next year somewhat between the two. Their long-term view forecasting annual demand that well exceeds replacement levels for each year through 2016 and beyond further reaffirms our belief that we remain in the early stages of the cycle that could turn out to be one of the longest and possibly strongest that our industry has seen in many decades if ever.

All that considered, let me now share Wabash National’s expectation for the final quarter 2012 and full year beginning with trailer shipments. Our view of overall industry trailer volumes is fairly consistent with ACT and FTR forecasts for the fourth quarter. However, while we do anticipate an increase in our customer deliveries during the fourth quarter we have remained selective in order acceptance consistent with our year long focus drive margin improvement and as such a revised our 2012 full year new trailer shipment’s expectation to 46,000 to 48,000 units includes Walker which better-tied that the current mix of products, rate of production and shipments within the business.

Let me emphasis that this adjustment and full year volume guidance is more reflective of our order selectiveness than any systematic softening in our order board for cancellations or customer pickup delays. Long-term fundamental demand drivers are still intact, considering the current regulatory dynamics at play with carb hours of service and CSA complaints requirements along with the advanced age of fleet equipment we are still in the early stages of the replacement cycle with several years of a favorable demand environment expected.

As I had emphasized before, we are executing our plan that we put in place this past year that has positioned Wabash National to achieve stronger margins, a better mix and as a result a healthier bottom-line.

Despite the significant disparity between industry forecasters regarding trailer demand for 2013 along with the current macroeconomic choppiness and other factors, we remain steadfast in our belief that trailer demand will remain at strong levels for an extended period driven by an excessive age fleet unprecedented pent-up demand following recession, regulatory drivers including CSA hours of services in carb and a stable but still growing economic demand environment that has continuing to drive year-over-year Truck Tonnage growth.

Why are we so firm in our belief? What’s examined a fewer today’s data points in comparison to last year at this time. GDP in the third quarter 2011 was 1.3% versus 2.0% this year, not strong but better. Even looking at the average for the first three quarters GDP compares favorably this year versus last at 1.8% as compared to 1.3% respectively. Truck Tonnage, in September, of 118.7 versus 115.9 last year another positive. Housing starts were up 35% year-over-year driving increase demand for both flat bed halls and drive in halls, that’s a positive. Net trailers for our industry in the third quarter were almost 6% higher than the third quarter last year in a traditionally weak order period.

As we now progress into the traditional order season we’re experiencing strong quote and inquiry levels for 2013, now are even better positioned than last year at this time to capitalize on the demand for new trailers while continue to remain selective in order of acceptance consistent with our intent to further enhance margin profile of our core trailer business.

With respect to diversified products, we expect demand in this segments respective markets to regain momentum in the fourth quarter. At the same time, growth in this segment will be further fueled by the introduction of new products in the attraction of new customers along the organization to bring innovation to new markets providing increased balance to the overall business that was previously lacking.

As a result, the organization as a whole is now better positioned to deal with challenges that could arise due to any economic slowdown resulting from an enhanced business model that is becoming more diversified through both our organic and strategic growth initiatives.

In summary, let’s visit what we have said we would do over these past few years. We said we would diversify the business to become less singularly dependent on the core trucking industry, we said that we would further optimize our operating and overhead cost structures and we said we would emphasis margin over volume in effort to recapture loss margin experienced to the downturn. We have delivered on those commitments, we have significantly optimized our overhead cost structure, permanent removing over $15 million annually.

We have improved gross margin by 830 basis points in just the past four quarters alone. Net increment is improved by 1600% over the same timeframe and we have fundamentally changed our business from one who is prospects for success or strictly tied to a single industry to one that now spreads that risk across a broader ray of end markets and geographies.

Clearly, the third quarter 2012 was a very good quarter, record setting in fact and it is evidenced that we are truly transforming reinventing Wabash National as a diversified industrial manufacture. I revitalizing our core business through continues improvement leveraging our expertise and lean implementation capitalizing on cost cutting measures and managing material cost volatility we have strengthened the organization. But as we’ve all see our focused organizations I can assure you that we are far from slowing our efforts to further improve our operations and draw our top line through both organic and strategic diversification opportunities and drive full year profitability to all time record levels.

With that, I’ll turn it over to Mark to discuss specific highlights from Wabash National’s third quarter financial performance. Mark?

Mark Weber

Thanks Dick and good morning everyone. In addition to the press release we planned to file our 10Q later today but I planned to hit the highlights, with that let’s begin.

Revenue for the quarter set a record and improved year-over-year by more than 20% to $406 million, the improvement in revenue this quarter reflects the full quarter benefit of Walker which was completed during the second quarter, as well as the continued improvement in trailer ASP in our commercial trailer product segment, which increase to $23,900 per unit, this represents an increase from the second quarter by approximately $700 and versus a year ago by approximately $1,700 per unit or 7.4%.

The increase in trailer ASPs due primarily to price increases implemented to recover component commodity cost inflation in addition to trailer mix which reflects a higher spec and complexity due to our continued strategy to be selective on order acceptance and improved margins. New trailer sales in the quarter total 12,200 units including 800 units related to Walker or $325 million an increase to 7% from the third quarter of last year.

Looking at our other product lines, used trailer revenue came in at approximately $13 million and 1,400 units and was up approximately $4 million from the same quarter a year ago. As they used trailer market continues to demonstrate firm demand and pricing, part service and other component revenue was approximately $33 million in the quarter and improvement of approximately $14 million from a year ago driven primarily by the additional Walker service locations.

In addition, revenue from equipment and other sales of $35 million increased $30 million year-over-year with the addition of Walker’s non-trailer truck managed equipment and other products as well as it’s engineered product’s family.

In terms of operating results, gross profit for the quarter was $50.1 million or 12.3% and represent the fourth quarter of sequential margin improvement up from the second quarter’s gross margin of 10.9% and 4% from a year ago. As expected, the addition of Walker’s higher margin business with a significant contributor to the improvement both sequentially and year-over-year, in addition to the significant improvement and margins on the core trailer business.

By segment commercial trailer products our revenues decrease approximately $30 million compared to the prior year period reflecting their continued strategy to be selecting on orders. More importantly however, the result of this strategy which is focused on improving gross margins are evident in this quarter as gross margin, so a 490 basis point improvement from a year ago more than offsetting the impact of reduced shipments of 2,300 trailers.

On a sequential basis, gross margins improved for the fourth consecutive quarter by approximately 50 basis points to 7.2%, production during the quarter was essentially flat with the second quarter at 10,500 trailers. However, continued productivity was experienced on the floor as build complexity increased further in Q3 from the second quarter.

Significant improvements are also evident in our diversified products, this segment demonstrates significant top line growth of improving revenues over $89 million versus a year ago. The Walker addition with $96 million in revenue accounts for this large increase and with margins typically as the trailer product segment and highlights the benefit of our diversification strategy.

The retail segment continue to improve, top line revenue increased $11 million due to an increase in new trailer sales which were higher by approximately 50%. While new trailer sales carry lower margins in parts and service gross margins held up and only decrease slightly to 8.7%.

As a result, on a consolidated basis Q3 generated record operating income of $29.7 million excluding acquisition related cost. This represents to eighth quarter of positive operating income and represents the 12th consecutive quarter of year-over-year improvement. The Q3 improvement of $27.4 million represents an increase of more than 10 times versus the quarter a year ago and in terms of margin at 7.3% represents our highest level just 2005 and demonstrates the leverage from our investment SG&A.

SG&A for the quarter increased $4.3 million from the second quarter to $19.7 million including the impact of Walker for the full quarter, this represents approximately 4.8% of revenue. We will continue to leverage our SG&A investment as volumes move higher and our diversification initiatives take hold with a target for SG&A as a percent of revenue of approximately 5%.

In addition, you will note that we have shown intangible amortization separately on the face of the income statement this quarter. Intangible amortization of $3 million and acquisition cost of $0.2 million for the quarter primarily relate to our acquisition of Walker Group Holdings which closed on May 8th. Intangible amortization will run approximately $3.4 million for the fourth quarter of 2012 and approximately $5.2 million per quarter for 2013.

Net other expense consist primarily in borrowing cost totaling approximately $7.8 million, primarily related to our $300 million term loan credit agreement and a $150 million convertible security senior notes which we’re issued in the second quarter to fund the Walker acquisition. It’s worth noting that approximately $1.4 million of this with non-cash and primarily relates to the accretion charges associated with the convertible notes.

In terms of taxes at September 30th we have a U.S. Federal NOL carry forward of $125 million, however, we have a full valuation allowance recorded against our net differed tax assets. The Federal NOL carry forward begins to expire in 2022, please refer to our 10-K for more details on the annual limitations for our NOLs, however we currently estimate approximately $107 million of NOLs available for utilization this year subject to pretax earnings.

This quarter we did incur approximately $1.2 million in tax expense associated with the Walker transaction related to jurisdictions where we have no existing NOLs and a non-cash differed tax liability associated with the created goodwill. We will continue to evaluate the adequacy of our differed tax assets reserves as we progressed through the balance of the year.

Finally for the quarter, net income was $18.4 million or $0.27 per diluted share, non-GAAP adjusted basis after adjusting for acquisition related charges net income was $20.9 million or $0.30 per share. In addition, our operating EBITDA which takes into account many of the other non-cash charges associated with the Walker acquisition increase more than five times from a year ago to $37.7 million or 9.3% of sales.

In regards to the balance sheet and cash flow let me provide a little more detail and some of those specifics. Networking capital improved from the second quarter by approximately $20 million led by inventory decreases of approximately $18 million primarily driven by reductions and finished goods and raw materials in the quarter. Capital spending for the quarter was $5.4 million and we anticipate full year 2012 spending to be approximately $13 to $15 million insistent with our previous guidance.

Our liquidity or cash plus available borrowings as of September 30 was approximately $182 million reflecting a complete pay down of our revolving credit facility in the quarter, a debt reduction of $25 million. As a result, our pro forma total and net debt leverage improve to 3.3 times and 3.0 times respectively.

In addition, our senior secured leverage covenant under our term loan credit agreement improved to 1.9 times and as well below the required 4.5 times.

In summary, our Q3 performance highlights the earnings and cash flow potential of Wabash in larger company with critical mass across two segments, double digit gross margins and annualized operating EBITDA of approximately $150 million. We will look to build up on these performance metrics as we continue to improve margins in our core trailer products business and continue to introduce growth initiatives in our Diversified Products businesses.

The company is well positioned going into the last quarter of the year with a total backlog as of September 30th of $555 million. More importantly, the long-term demand fundamentals remain intact with the average age of equipment and an all time high in increasingly tougher regulatory environment for our customers in a trailer fleet which has been reduced by over 10%. As Dick discussed, this has been evidenced by continued strong cores and inquiry levels for 2013.

In regards to the current quarter, we estimate Q4 shipments to be approximately 12,000 to 13,000 trailers consistent with current rates in the business and bringing our full year new trailer volumes to be in the range of 46,000 to 48,000 which includes Walker related trailer shipment since the acquisition date.

With that said, well the fourth quarter generally has fewer production days of higher seasonal cost, we look to demonstrate performance metrics and margins generally consistent with those achieved in Q3. And while that’s still early in the 2013 order season we believe we are well positioned to respond to industry demand, introduce new products, capture Walker synergies and continue to grow margins.

I will now turn the call back to the operator and we’ll take any questions that you may have. Thank you.

Question-and-Answer session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Steve Dyer, you may proceed.

Steven Dyer – Craig-Hallum

Good morning Dick, good morning Mark.

Mark Weber

Hey, Steve.

Dick Giromini

Hi Steve.

Steven Dyer – Craig-Hallum

Can you remind me again if you had in the quarter any legacy orders the lower margin stuff or was that completely flushed in this kind of a new kind of first full quarter on the new business?

Mark Weber

I’d say from the comment relating to legacy backlog and it was really a commercial trailer products factor that we carried through the first quarter and Q2 in that regard was pretty clean. So, I think Q3 becomes clean from the fact that you got a full quarter of Walker in there. So in total Q3 like a pretty good representation I think where the business is today and suppose the backlog and the combined businesses.

Steven Dyer – Craig-Hallum

Okay so gross margins in Q3 on a similar to maybe slightly higher revenue run rate should be sort of in the same area?

Mark Weber

That’s really what we’re trying to pull off for Q4, that’s the question, yeah.

Steven Dyer – Craig-Hallum

Okay. And then G&A and selling expenses were a bit lower certainly than I had expected, is this a decent run rate going forward or is there anything kind of one time that made those less?

Mark Weber

Yeah I mean obviously we have broken out the amortization cost and as I said that will go up slightly from the Q3 run rate to the Q4 run rate which was $3.4 million. SG&A, yeah I mean there is – I wouldn’t say that there is any one thing necessarily one way or the other but it does have some potential to be a little bit higher, we’re still going to target to be at 5% of revenue or slightly under that as we go forward.

Steven Dyer – Craig-Hallum

Okay. And then the core diversified products the softness in the quarter, do I hear that right that it was primarily attributable to the energy for our tank business?

Mark Weber

Yeah, so in diversified products is where our Wabash energy and environmental solutions business is. And yeah, I’d say Walker at $96 million really performed on part with expectations. The revenue softness we did see was in our energy environmental solutions business which is oil and gas related as well as some softness in Wabash composites which is more, the fact that there is still building up the product portfolio, some seasonal softness there and at least on the composite side we expect to see that come back a little bit quicker than the oil and gas piece just because we really only have two products and we’re still building out the distribution channel of that business.

Steven Dyer – Craig-Hallum

So how should we think about Q4 in that range, is that kind of back on trend or is it going to be a little bit softer yet?

Mark Weber

I think composites has a little bit of room I think in general the run rate is probably not a bad run rate, maybe there is a point or two of revenue growth across the businesses but it’s not far off from our expectation.

Steven Dyer – Craig-Hallum

Okay. And then two last questions, are you still expecting that a full tax rate, effective tax rate Mark for next year is probably in the cards?

Mark Weber

Well, we’ve got to go through the complete analysis after we close out Q4 and its factoring in a lot of things, we’re still working through the final tax implications of the Walker acquisition and what’s deductable there versus for book, as well as getting little bit more clarity and visibility on the backlog and outlook for next year. So I’d say, we still have a lot of homework to do but certainly the performance in Q3 and expectations for Q4 are the types of performance levels we need to get comfortable and producing that reserve. So it looks like it’s heading that way but I don’t say that we still have a lot of homework to do and after we cross over the year end.

Steven Dyer – Craig-Hallum

Okay. And then great quarter from a free cash flow generation perspective, what sort of the thought process going forward and how to deploy that, I’d say you played down a little bit of the longer term debt how do you think about that going forward?

Mark Weber

Yeah certainly we paid down $25 million on our revolving credit facility and reduced net debt by about $25 million in total and that’s a top in the list for things to do the cash, but certainly at least in the shorter term and we’ll evaluate other alternatives I think certainly, if we paid down a little bit of debt and continue to make good progress next year and the stock price is still in the set and probably a number two item becomes potentially share repurchase but number one is continue to work the balance sheet.

As I said in my prepared comments, we feel pretty good about where we’re at, what it is well in handed over a $180 million that’s been a key for us in terms of managing risk in the business and liquidity is really been the impact of the business during the down turn so we feel very good about that side of the business, and in terms of the leverage we’ve got a lot of headroom relative to our covenants and we feel good about it however it’s up to that overtime and we want to take care of and take it down even further.

Steven Dyer – Craig-Hallum

Yeah okay, and then just one point of clarification, when you said sort of 5% are just under on operating expenses, does that include the amortization of intangibles or you’re just talking about G&A and selling?

Mark Weber

That’s the G&A and selling X intangibles.

Steven Dyer – Craig-Hallum

Okay, thanks guys.

Operator

Our next question comes from the line of Robert Hayman (ph). You may proceed.

Robert Hayman (ph)

Hey good morning gentlemen.

Mark Weber

Hey Rob.

Robert Hayman (ph)

So, obviously great margins in the quarter and solid disciplines on pricing, I had three questions around that I mean are you anticipating pricing to be up next year, is the environment amongst your competitive group also staying disciplined? And then if you just see materials costs I know that you’ve sort of changed your way protected some of that but let’s say materials go down, do you end up keeping a little bit of that and making the pricing easier or do you think that’ll go right back to your customers?

Mark Weber

We’ll try and take those in the sequence that you asked. We do expect to see pricing stay pretty stable, we think there is some opportunities to gain some further pricing in the market but it certainly won’t be anything like what you – what we saw this year. We took the big steps this year to recapture much of the loss margin that we experience during the downturn but we do believe there is some smaller steps that can still be taken.

Regarding the competitive environment it’s become much more disciplined in recent months, we have seen that. Most of the key competitors have fall suit as we’ve reached out to recapture margin, they have done the same thing with their businesses, so we’re seeing a lot more stable environment on the pricing front and that has all the channel checks, all the feedback that we’re getting through the market place substantiates that belief.

We will remain focused and be selective in our order acceptance going forward but we do believe there is some significant opportunities out there. We have already started to see some of that early orders that have been place and with some of the large core customers and those are ones with orders of greater than 500 units and we already have some in the books for next year and we have numerous other active conversations with customers for their equipment needs for next year and pricing has been favorable in those discussions both on the orders already booked and the ones that are very active and looking very promising.

So we feel very good about opportunities going forward.

Robert Hayman (ph)

And materials, if there is a decline do you think that accretes you a little bit or does that straight go through the customers?

Mark Weber

Any material softening tends to be sticky, we hold on to that as long as we can unless there is significant movements in the market and then you adjust pricing as necessary but in what we believe is a strong demand environment for trailer products that allows us to hold on to that so that should, in the event that that occurs that should allow us to further enhance margins going forward, at least in that near term.

Robert Hayman (ph)

That’s great and then just one more if I can…

Mark Weber

Once we lock in pricing it’s locked in that’s how we take the steps we do to mitigate risk on aluminum and some cases on steel and of course with our current strategy that we got in places last year and a half on tires.

Robert Hayman (ph)

Perfect. And then just one other from me, the only negative I saw is that seem like that sort of high end of what you expect it for 4Q in units turn into the low and turn into the high end, and I’m just curious I mean you seem pretty optimistic based on customer conversations for next year things go okay, did you have push outs where people would thought come in 4Q were talking about one or is there any material degradation or is it just lumpy? Thanks.

Mark Weber

Yeah, no it’s mainly tied to the continued strong focus that we’ve had on being very selective in the order acceptance. We made a conscious decision at the outset of this year’s order season to recapture margin and as such we ended up taking on a larger percentage of higher spec more complex trailer builds which impact the lines feeds. So based on production levels mixed that’s where we ultimately adjusted to what’s more realistic on what the production build levels are lines feed, so that’s – we feel good where we’re at, the results show it and we think there is some opportunities we’ve already had some customers come back to us.

As they became more comfortable with the pricing that we were having out there we’ve already gotten some of those back going into next year. So we feel very good with the prospects for 2013.

Robert Hayman (ph)

That’s all very helpful, thank you.

Operator

Our next question comes from the line of Brad Delco. You may proceed.

Brad Delco – Stephens

Good morning Dick, good morning Mark. I guess my first question is somewhat addressed on your last comments but Dick, if I’m thinking about next year right and it sounds like there is various projections out there but let’s say it’s flat in terms of trailer demand. What are the opportunities for the margin expansion that come from either productivity enhancements you’re seeing from the workforce that is kind of ramped up versus pricing and is it more balanced or I mean is there still opportunities for margin expansion and to what extent next year in a flat demand environment?

Dick Giromini

Yeah, just to comment on the flat comment, we do believe that depending on where the totals end up for this year that next year will be flattish to slightly above those levels next year. So we do believe that there is opportunity, there may be some slowness as the year starts as a result of this political uncertainty that’s out there, we got to get through the election, there certainly seems to be a tone with some customers of waiting to see what happens before orders are actually placed.

Now that’s said, in recent weeks we’ve seen some very positive activity as I stated, we have several orders that have come in that are in that larger 500 or more category that we feel very good about and numerous other conversations with customers. But there is also the commentary out there that I want to wait and see I’m going to wait till after the election, I’ll make a determination on how many will need that type of chatter that’s been going on. So we want to get through next week and I feel pretty good going forward.

So direct response to the rest of your question, we feel there is still a lot of opportunity to further improve the productivity, the throughput, the lines feed, the tax times out in the factory floor in the core commercial trailer products business. So that has some upside opportunity and we do feel that there is some pricing opportunity out there again it will not be nearly what we anticipated but we think there may be a point or point and a half of opportunity here and there throughout the coding process. So I’m not going to try and quantify overall what that is, but certainly we believe there is upside too to the margins that we delivered thus far. Mark, if you want to add anything to that.

Mark Weber

Yeah I think obviously in a demand environment that’s call it 240,000 it’s been a good demand environment for us and for I think the rest of the OEMs in the space to run their plans and develop optimum production plans to give pricing and I think that continues and I think if you get a little bit there we continue to work on the shop floor and food productivity couple one-off things that we have this year that we wouldn’t have next year that’ll be upside, so obviously we have Walker for about quarter-and-a-half in the front half of the year that we didn’t have that’s beneficial.

And as we talked about earlier we had the legacy backlog issues that we dealt with in the first quarter last year that we wouldn’t have as an overhang heading into 2013. So I think the short answer is we feel pretty good about flat environment and our ability to improve margins.

Brad Delco – Stephens

Right. That’s good color guys. And two more real quick. Mark, on your comments about uses of cash, obviously you paid down the revolver now, are you comfortable I guess paying down some of the term, is that would be – would that be the next order of operations there versus you – relative to looking at share buybacks or what’s the thought on what you would pay down with that?

Mark Weber

Yeah, so you’re right. So with the ADL completely paid off then the next capital item in the structure that we can go after would be the term loan facility which we can prepay without penalty. I mean that was the whole attraction when we did the financing upfront in terms of figure how the structure this was to go with the term loan over a high yield options so that we could take advantage of cash flow and pay it down as needed. So we’ll be looking at that as we close out the end of the year and seeing what makes sense.

Brad Delco – Stephens

Great. And then maybe just a follow-up to that, again I think one of the highlights of the quarter was that free cash flow generation, I mean is this the type of free cash flow you would expect to be generating on a go-forward basis with kind of earnings in line with what you just posted or is there any kind of working capital adjustment that you think were one-time in nature in the quarter?

Mark Weber

No, I mean, from a working capital wasn’t bad. I mean you will still see seasonal impacts for working capital, so Q4 should be theatrically an even better net working capital item for us because customers generally do a much better job getting the equipment at the end of the year and then paying for equipment and generally net working capitals are lowest at 12/31 and then you do go through a little bit of a working capital build through the first four or five months of the year as productions ramp back up for seasonal demand levels in Q2 and Q3. So you’ll have some of that through a seasonal perspective on a quarterly basis, but as a run rate it’s not a bad decision to be in.

Brad Delco – Stephens

Right. That’s comfortable. Thanks guys for the time and congrats.

Mark Weber

Thanks Brad.

Dick Giromini

Thank you.

Operator

And next question comes from the line of Jeff Kauffman. You may proceed.

Jeff Kauffman – Sterne, Agee

Thank you very much. Hey guys congratulations. It’s nice to see this all come to fruition.

Mark Weber

Thanks Jeff.

Jeff Kauffman – Sterne, Agee

I guess two questions. Number one, you mentioned some of the new business that you were signing in the new model year. I just want to be clear, when you give us the third quarter backlog, these new signings are post-third quarter, so they would not be part of the backlog number you’ve quoted necessarily.

Mark Weber

Potentially – certainly not all have been, some of them, we might have had a couple of those in September that made in and I wouldn’t know exactly as its top of my head here and but certainly some of them have been closed in October as well.

Jeff Kauffman – Sterne, Agee

Okay. And then you used to give us the two backlog numbers, one, that was the book backlog and then one that included all the other orders that had not yet been scheduled, but basically had been penned. Can you give us a feeling for what that second number is?

Mark Weber

We saw the industry orders step up in September and I guess from an industry perspective, we – while there were true order seasons really going to kick in, I think November, December, January, February would expect to see pretty healthy numbers traditionally. I think we’ll see that October rates across the industry stuff again from the September rates, but we don’t have that exact number for you.

Jeff Kauffman – Sterne, Agee

Okay. All right. And then one final question for Dick. Dick, you were talking about the concerns your customers had about the political landscape and how that might be responsible for some of the delays in order decisions and what have you. If you had to kind of segregate the two events which would be the number one, the election, number two the fiscal cliff and thinking about your customers, the real risk is that the customers there, we’re going to order 3,000 trailers this year that’s were our budget, as with the election maybe we only have put of 1,500 and maybe we held the other 1,500 for fiscal cliff of what have you.

How much impact when you talk to your customers? Do you think the political landscape has and might we see orders in the next few months that might not necessarily be indicative of what the real ultimate orders will be just because customers are holding back? Can you give us a sense for that?

Mark Weber

Yeah, certainly can’t separate what’s in their heads versus just the election versus the depending fiscal cliff. I won’t even attempt to conjecture on that part of it, but certainly customers in many cases are trying to sort out just how much they want to invest next year in equipment from both a replacement demand side and then on growth side. And I think they’re pretty clear in their minds what they want to do for replacement demand, the net clause which would be above what we experience this year because virtually all equipment purchase this year was for replacement demand.

I think what they’re really wrestling with is how much growth investment they want to make which would be incremental to the kind of numbers that we’ve been talking about. And I think that’s really where the conversations take place and in many cases they’re not willing to offer up with what they would want to do and growth it’s kind of a wait and see and some cases they’re holding off placing the whole order because we’re seeing what we’re trying to sort out whether we do just replacement or replacement in growth and what we’re telling them is, well go ahead and place the order for the replacement demand and we’ll talk about growth opportunities later on. So those are the kind of conversations taken place out there.

Jeff Kauffman – Sterne, Agee

So the point being that this maybe one of those unusual order seasons or maybe what we see coming in, in the next month or two might not be as comparable to what we would see in the past.

Mark Weber

No I was trying to make it clear that what we saw this past year was basically replacement demand. So I think what we’re hearing in some of the conversations is that there may be even greater opportunity if they decide that the economy is strong enough, the demand is strong enough that they’re getting a lot of confidence, they’ve had stability now over the last couple of years or earnings or getting much stronger. And now you’ve got some fleets out there, starting to look again at growth opportunities. And I think that’s really how we’re reading it.

So I think the demand that we’ll see over the next two, three months should be consistent with normal replacement demand kind of need. Now replacement tends to be not in that 185,000 to 200,000 range because we’re in abnormal times coming out of the extended downturn and all that pent-up demand so that the 240,000-ish units of total demand for the industry that we saw majority of which was replacement demand or addressing the pent-up demand to get some of that very, very disproportionally aged equipment out of the system. That trend is going to continue and then there could be upside to it if customers get comfortable that the economy could take a bump up and GDP starts growing it more than the 2% or 2.5% kind of projections and gets more into the 3% or so. And then they may have a lot more confidence to start going after some growth. That’s how we read it. I’m not going to pretend to be an expert on either the economy or certainly try to get into their heads on what they’re really thinking, but that’s kind of the message we’re getting out of it.

Jeff Kauffman – Sterne, Agee

Okay, thank you for the clarity. And congratulations again guys.

Mark Weber

Thanks Jeff.

Dick Giromini

Thanks Jeff.

Operator

Our last question comes from the line of Tom Albrecht. You may proceed.

Tom Albrecht – BB&T

Hey guys, good morning and nice job here. I know you’ve waited a long time for these last couple of quarters.

Mark Weber

Thanks.

Tom Albrecht – BB&T

My question is, all right, the gross profit margin in the trailer manufacturing business was 7.2%, it was 6.7% in June. Years ago, when you were really all trailers you were able to get as high as 12% on that figure. That may or may not be attainable, but what do you think is that gross profit margin, realistic target just for trailer manufacturing?

And then secondly, how resilient would be the diversified margin that pulling out at 22% to 23%, any chance that could slip to 19% or 20%?

Dick Giromini

I’ll answer the second question first. Yeah, anything is possible if there is a significant downturn but the experience that we saw out of the Walker Group during the course of the last recession, which as we all know was an extremely difficult challenging and deep recession. Their gross margins held up right about that 20% level. So that was kind of their bottom and that’s a tribute how well diversified their business was. So we feel pretty good that 20% and above is the kind of number that we could expect out of Walker and out of the rest of the business, our Wabash Composites business has demonstrated those kind of numbers consistently. The rest of that is more growth and Energy & Environmental Solutions is kind of growth but it’s smaller in the whole realm of things at this point, so less of an impact.

On the Commercial Trailer Product side, the makeup of the CTP is a little bit different than what we had booked at historically, it doesn’t have the Wood Products piece of it which enjoys somewhat better margins than what we had. So that would have been a small help to it in the old days, but we talked about this is in the past, when we look at just on a pure gross margin dollars of contribution to the business basis, the business is doing pretty well and we certainly believe that not only will we be at numbers that we enjoyed back in that ‘04/‘05 timeframe on a dollars of margin contribution per unit, but getting to the 11% and 12% is little more challenging, just because the denominator, the actual selling price, ASP is so much higher than what it was back in those days.

So on a strength of the business, on a strength of that segment, as part of the dollars contribution, which is in my mind what really matters will certainly not only meet but exceed that and the guys are getting awful close to that right now. So I don’t want to try and quantify, we’ve thrown numbers around before about what is achievable. We certainly think there is more opportunity to further improve from the 7.2 and maybe those numbers get up to 89%, it will be difficult for that business to get to the 11%, 12%. So somewhere in that range we certainly believe there is opportunity both through productivity improvement and further pricing enhancements.

Tom Albrecht – BB&T

That’s helpful. And then Mark, I’ve got so many calls today, could you repeat the ASP, I was getting on, just as you were saying that both current period and I think you gave a year ago.

Mark Weber

Yes. The current period is 23,900 that’s just the core Commercial Trailer Products business. And that was up 1,700 year-over-year and up sequentially 700.

Tom Albrecht – BB&T

Terrific. Thank you guys.

Mark Weber

Thanks Tom.

Dick Giromini

Thanks Tom.

Operator

We have no further questions at this time. I would now like to turn the call back over to Mr. Dick Giromini for any closing remarks.

Dick Giromini

Thank you, Chris. We’re obviously pleased with the results that we’re able to deliver in the third quarter, but importantly, it’s particularly rewarding to see the quarter-over-quarter improvements that our team has made in these past four quarters, leading to the even more impressive cumulative effect in the year-over-year comparisons.

As I’ve said before, the performance this quarter is the result of a lot of hard work but we’re not finished. It is still our goal to build on our current position and maintain the momentum that we’ve created. All of our businesses see further opportunities and I look forward to continuing our journey. We remain committed to further optimizing the performance of our core trailer business in addition to growing and maximizing the value of the Diversified Products businesses and our retail business.

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

Operator

Ladies and gentlemen that concludes today’s conference. Thank you so much for your participation. You may now disconnect. Have a great day.

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