Wabash National's (WNC) CEO Dick Giromini on Q4 2016 Results - Earnings Call Transcript

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Wabash National Corporation (NYSE:WNC) Q4 2016 Earnings Conference Call February 1, 2017 10:00 AM ET

Executives

Mike Pettit – Vice President-Finance and Investor Relations

Dick Giromini – Chief Executive Officer

Brent Yeagy – President and Chief Operating Officer

Jeff Taylor – Chief Financial Officer

Analysts

Mike Shlisky – Seaport Global

Jeff Kauffman – Aegis Capital

Scott Schoenhaus – Stephens

Alex Potter – Piper Jaffray

Kristine Kubacki – CLSA

Operator

Welcome to the Fourth Quarter 2016 Wabash National Earnings Conference Call. My name is Christine and I will be the operator for today’s call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mike Pettit. You may begin.

Mike Pettit

Thank you, Christine and good morning. Welcome everyone to the Wabash National Corporation 2016 fourth quarter and full year earnings call. This is Mike Pettit, Vice President of Finance and Investor Relations. Following this introduction you will hear from Dick Giromini, Chief Executive Officer of Wabash National; and Brent Yeagy, our President and Chief Operating Officer on results for the fourth quarter and full year 2016 in addition to the current operating environment and our outlook for 2017.

In addition, Jeff Taylor, our Chief Financial Officer will provide an overview of our financial results. At the conclusion of the prepared remarks we will open the call for questions from the listening audience.

Before we begin I would like to cover two brief items. First, please note that this call is being recorded. Second, as with all of these types of presentations this morning’s call contains certain forward-looking information including statements about the company’s prospects, our earnings per share guidance, the industry outlook, backlog information, financial condition and other matters. As you know, actual results could differ materially than those projected in the forward-looking statements. These statements should be viewed via the cautionary statements and risk factors set forth from time to time in the company’s filings with the Securities and Exchange Commission.

With that, it’s my pleasure to turn the call over to Dick Giromini, CEO.

Dick Giromini

Thanks Mike. I’ll begin by saying that we are extremely pleased with the company’s 2016 performance as it marks the fifth consecutive year, a record profitability. 2016 proved to be a year of outstanding performance and a year that helped set the stage for the future with some new and exciting growth initiatives that further diversify the company. Before addressing financial results in detail I like to share a few highlights and initiatives that contributed to this record setting year.

In 2016 following the year of record industry demand we experienced the softer but still historically strong overall demand environment for van trailers with total industry shipments overall of 286,900 units representing the third strongest year ever surpassed only by 1999 and 2015. The commercial trailer products business stay true to form by leveraging this favorable demand environment through continued focus and execution on their three near-term drivers for success; margin growth through improved pricing, operational efficiency and supply chain optimization. This focus and commitment to excellence led to significant margin improvement in CTP that we’ll discuss more in a few minutes.

Overall we generated record margins, record cash flow, and we once again significantly improved our balance sheet during the year. We’ve clearly positioned ourselves with ample resources to; one, fund our internal capital needs to support both organic growth and productivity improvements. Second, to assure continue reduction of our debt obligations. Third, to return capital to shareholders; and fourth, selectively but more actively pursued strategic acquisitions.

On the growth front we continue our efforts to identify both near-term and long-term organic growth opportunities that leverage our engineering and market analytics expertise evidenced by our new line of truck body products expansion of CTP’s indirect sales channel and an exciting new material technology in molded structural composites or MSC.

Concurrently we have accelerated our efforts to a proactively identity strategic acquisition targets that we believe, we can create sizable shareholder value. Utilizing both internal and external resources we expect this effort will yield targets that will allow us to utilize our strong financial position to accelerate our growth and diversification efforts, while leveraging our strong competencies in manufacturing execution, sourcing and innovative engineering leadership to assure strong value creation.

At the same time recognizing the value creation through M&A activity can prove to be a prolonged process. And further recognizing that we continue to generate cash flow comfortably in excess of our organic growth requirements, we recently took another step to increase the return of capital to shareholders. We are excited to announce on December 13 that we are reinstating a quarterly dividend in the amount of $0.06 per share of common stock or approximately 1.8% annualized yield at the time of announcement, expressing our strong confidence and our long-term cash generation ability.

Additionally we took the opportunity to repurchase in excess of 2.7 million shares during the period, bring our 2016 full year total to more than 5.6 million shares repurchased, leaving approximately $23 million available under the current authorization as of the first of this year.

As a matter of note, we have now repurchased approximately $137 million of shares or roughly 13% of outstanding shares during the past two years. On the debt front we took a timely opportunity to repurchase $47 million in principal value of convertible notes early in the fourth quarter, reducing the outstanding balance by roughly half, and meaningfully mitigating the impact of dilution from these notes, having now reduced our convertible note balance by $101 million over the past five quarters.

So with that I’ll provide some more color around our very successful year. Following an industry record demand year in 2015 for total trailers and facing a somewhat softer operating environment in 2016, the team nonetheless delivered another outstanding year in almost all performance categories. Revenue for the full year 2016 was $1.845 billion representing the third best year in our history. Gross margin was very strong, registering a company record 17.6% and 260 basis points better than 2015, driven largely by continued favorable demand environment, strong operational execution and further made possible by our higher margin diversification efforts.

Additionally despite the decreased revenue level we established another all time record in operating income of $202.5 million, representing an impressive $22.2 million or 12% increase over our previous record set in 2015. And our operating margin expanded to 11.0% surpassing our previous record by 210 basis points and exceeding our stated goal of a 10% full year operating margin by 2020. All this lead to delivering adjusted non-GAAP EPS of $1.85 exceeding the prior year by 24%, overcoming the weaker industry demand level and the previously discussed impact related to the Lafayette road construction project.

Looking inside the numbers our Diversified Products Group business segment continue to face soft demand within the tank trailer and process systems businesses along with ongoing operational challenges in the aviation business or AVTE impacting top and bottom line results. However the outstanding execution delivered by our CTP segment more than offset these challenges, again, reinforcing the efficacy of our strategic diversification efforts to-date.

Overall our strong financial results directly contributed to the further strengthening of an already strong balance sheet and enable us to deliver on our commitment to a balanced capital allocation strategy by aggressively addressing both return of capital shareholders and debt reduction in 2016.

Our performance this past year clearly validates our long-term strategic plan first established in 2007 and demonstrates the progress we continue to make in executing that plan to profitably grow and diversify the business to ultimately create ever increasing shareholder value. We’ve changed the fundamental composition of our business and continue to strive to make additional improvement to further grow margins, ensure more stable earnings stream and take advantage of macro growth trends.

So that’s the year end summary. Now let’s take a look specifically at fourth quarter results. On a quarterly basis net sales were historically strong $462 million on shipments of 15,150 units, exceeding prior guidance as customer pickups during December surpassed internal forecast. Fourth quarter bill levels totaled approximately 12,950 units reflecting the normal decrease in operating days during the quarter.

Operating income for the fourth quarter was $40.6 million representing the second highest fourth quarter operating income in the company’s history, only surpassed by fourth quarter of 2015. Operating margin came in at 8.8% also the second highest fourth quarter behind only 2015. With a decrease year-over-year primarily due to weakness in diversified product’s end markets that we’ll discuss further in a few minutes.

Overall a solid fourth quarter with strong trailer shipments in revenue, which translated into excellent profitability and operating EBITDA. We also produced another strong quarter of cash generation registering over $72 million of operating cash flow in Q4, a nice finish to a record year.

With that, I’ll ask Brent to provide some detail on the results of each of our reporting segments. Brent?

Brent Yeagy

Thank you, Dick. Before discussing the business performance for 2016 in more detail, I want to highlight a few points and emphasis as we move forward into our 2017, I mean 2017. While I’m stepping into my current role in October I was challenged with the task to assure that we are getting the highest level performance from all areas of our operating segments by leveraging our talents and skill across the business. This includes top line growth, organic diversification and operational excellence at the factory level.

First, I’d like to point out the commitment we are making to further diversify revenue streams in all of our businesses. Often times the external views that our non-trailer revenue enhancing strategies only exist in diversified product segment, which is not accurate. It is important to recognize the new sources of revenue are consistently being pursued throughout CTP and DPG. Additionally growth efforts within our Diversified Products Group can offer revenue expansion opportunities within commercial trailer products and vice versa.

Key examples include the recent announcement of our license ThermHex honeycomb core technology from EconCore that provides non-trailer growth opportunities for diversified products along with new material application opportunities for commercial trailer products. Other examples being pursued by commercial trailer products include our initiative to growth, our aftermarket parts business, other new material technologies such as our proprietary molded structural composites and expanded use of high-strength steels and adhesives and new products like truck bodies. These initiatives will generate revenue opportunities for both business segments, thus ensuring a more stable, higher margin earning streams for Wabash National into the future.

To assure that we are truly leveraging our best and brightest, we have enhanced business collaboration across the enterprise, identified best practices and we’re now prioritizing opportunities for accelerated cost reduction in many areas. These include expansion of shared services, further supply chain efficiencies and manufacturing process optimization by further leveraging our Wabash production system that we have continually been refining over the past 15 years with the object to deliver improvements in SG&A and operating overhead of $10 million annualized – $10 million of annualized savings at current revenue levels. These savings will predominantly be realized with our DPG businesses over the next two years.

Now let me get into some business specifics from the fourth quarter. I’ll start with the Diversified Products Group or DPG, which includes the composites, tank trailer, aviation and truck equipment and business systems processes. Overall result in the segment continue to reflect a soft market conditions in many of the end markets served by the DPG businesses with revenue of $86 million and operating income of $1.1 million. Operating income was down $11.2 million from the fourth quarter of 2015 with over 65% of the year-over-year change in operating income accounted for by reductions in volume and price within our tank trailer business. Remainder of the year-over-year change is primarily attributed to softer volume in these three businesses.

As stated, the tank trailer business continues to experience softness in certain markets, which is creating prolong top line pressure in Diversified Products Group’s largest business. While the food, dairy and beverage markets of our tank trailer business continue to see reasonable stable demand, this has been more than offset by extended weakness for products related to the chemical and oil and gas markets, resulting in lighter than desired backlogs for both liquid and dry bulk tanks across the industry, leading the capacity consolidation by multiple competitors.

Likewise, we have taken numerous steps to reduce costs of headcount adjustments, overhead cost reductions while maintaining ability to respond quickly to return and demand. Recent indicators such as increased rig counts and a renewed interest from lease fleets have provided reason for optimism going forward and signs at the bottom may have finally come.

While we don’t expect to see a sudden return to record setting demand levels for tank trailers that we enjoyed during the 2014 and 2015 in the near-term, we do expect to improve performance from the business unit as we progress through the year, driven by an uptick in quote and order activity at the end of 2016 that is carried into early 2017 along with continued cost optimization actions being implemented at an improved pricing environment.

Now we’ll switch to our Aviation and Truck Equipment business or AVTE. Facility consolidation and subsequent labor optimization where there is some initial improvement in these operations. However, much work remains to be done to bring this business to a level of performance that meets our expectations for operating income and return on invested capital. And we will – and this will continue to be one of my initial focus areas as we progress throughout the year. Over the past month alone we have restructured the business, made leadership changes and removed $1.5 million of annualized operating costs. As stated, our work is far from over to bring this business to acceptable levels of performance. We’ve already made measurable progress.

In our Process Systems business which produces isolators, downflow booths and mobile clean rooms for the pharmaceutical industry, along with stationary silos and mixers for the food, dairy and beverage industry, we have continued to see stronger quote activity than what we’ve seen in early 2016. We expect this business to deliver higher top and bottom line results in 2017 as compared to what we have seen in 2016. We have seen nice growth in our craft brew initiative and we’ve hit all early growth targets accordingly. We have also started to see a return of quoting activity in some of our end markets within the business unit.

It is important to note that we have successfully completed the implementation of SAP within our Process Systems facilities in Wisconsin. This is part of a larger SAP roll out within our Diversified Products Group businesses and will standardize ERP platforms across our total company and enable us to take further steps in integration and cost reduction activities. The Wabash Composites business continues to perform well with current focus on adding to its new product development pipeline and new material technologies that will be key to its future growth.

We are currently working on multiple new honeycomb composite sandwich panel applications both within and outside the transportation industry, utilizing our new licensing agreement with EconCore for use of their patented ThermHex honeycomb core technology. The key for us will be to accelerate commercialization of value added products that enhance our portfolio. We recently installed new capital equipment onsite that now provides us production capability to drive this initiative. The first display of these efforts will be at the upcoming NTEA Work Truck Show in Indianapolis in March where Wabash National will showcase a dry truck body with honeycomb panel technology. This will be the first piece of equipment from Wabash utilizing this type of composite sandwich panel.

To summarize our Diversified Products Group segment Q4 results, weak demand in a number of areas pressured segment results, overshadowing bright spots of new product offerings that will drive further growth in the segment. It was a challenging quarter as we continue to see pressure on top line as key markets remain weak. But we are confident that we are taking the proper steps to return this business segment to a more acceptable level. We are starting to see some early improvement in the market dynamics facing this business and we expect 2017 to be a stronger year across the board in the segment.

While we experienced a significant pressure on Q4 margins, we expect to see gross margins improving in the first quarter with levels approaching 20% with additional improvement of gross margins as we move through 2017 bringing us back to more historical norm or 21% to 25% by the end of the year.

Now let’s discuss the results for the Commercial Trailer Products segment, or CTP, consisting of our dry and refrigerated van products, platform trailers, dry and refrigerated truck bodies, retail parts and service and wood flooring operations. This segment continues to successfully execute its optimization strategy with an ongoing commitment to margin improvement, operational excellence and leadership in product innovation.

The fourth quarter proved to be another very strong quarter for Commercial Trailer Products. Revenues was a solid $379 million and the profitability delivered in the segment was again very impressive. Gross and operating margins of 15.6% and 13.2% respectively represented the highest fourth quarter margins in the segment’s history and drove $49.9 million of operating income. This outstanding performance delivered in the fourth quarter was result of the teams continued execution of a market strategy committed to optimizing both top and bottom line, a capable work force focused on continuous improvement and Lean Six Sigma as well as material cost optimization.

While we expect another very strong year for Commercial Trailer Products in 2017, we do expect to see some modest margin compression versus record margins seen in 2016 as industry volumes pull back from the 2015 and 2016 levels. We’ve seen an uptick in material cost inflation since the election and we’ll lose some manufacturing leverage as build volumes are forecast to be down in 2017 as compared to the past two years.

Additionally, the capacity increases that were added to the industry over the last two years are now online and could begin to have some limited impact to pricing. However, even accounting for headwinds previously discussed, we expect commercial trailer products to deliver very healthy gross margins in 2017 and we expect them to be approximately 200 basis points of the 2016 margin levels, while far surpassing margin levels in any other year prior to 2016 in the company’s history within the segment.

Now let’s discuss some updates on commercial trailer product’s important strategic initiatives. The commercial trailer product team’s entry in the truck body market in order to take advantage of future growth in the final mile and home delivery space really started to take hold as we took in more truck bodies in the last three months of 2016 than the first three quarters combined. Dry truck bodies assembled within our final mile manufacturing facility continue to be positively received by end customers and our growing number of indirect channel providers. With the promise to provide innovative and robust products and improved responsiveness taking route, we will continue to develop our mid-west channel and will begin expanding our indirect channel into other regions throughout 2017.

As discussed, we believe our truck body business will prove to be a $100 million plus revenue business for us by 2020. We are well on our way to making this a reality and we expect 2017 to produce over $10 billion of revenue before more than doubling each of the next three years. We now have a dedicated sales team, significant order momentum and recently hired an industry veteran that has been added to the commercial trailer products senior team to lead this effort in achieving these growth goals.

In addition, our present truck body design, we continue to actively develop our patent-pending molded structural composite technology that we believe will have broad applications in both dry and refrigerated truck body markets as well as the refrigerated trailer space. Our molded structural composite with thermal technology or MSCT will provide a superior refrigerated truck body product for our customers based on reduced weight and improved thermal performance.

First announced to the market in late 2015, we have successfully commercialized the MSCT refrigerated truck body and continue to meet early stage growth targets. While in early stages of manufacturing system development, we are making significant progress on establishing a supply chain and additional manufacturing capability for this important material technology. We expect to be able to announce further progress on this front in the very near future. In our more traditional trailer space we secured an additional commercialization launch customer in Q4 for our molded structural composite refer-vans and as communicated at the time, we’ll begin limited production in the first half of the year 2017 for those adopters that refrigerated van MSCT technology.

CTP made significant progress in 2016 from another important strategic initiative of improving an already best-in-class indirect channel with new dealer partners established in Arizona, New Mexico and Florida. We continue to be very excited about the sales performance and the potential of this channel. This is an important step for us as it helps us smooth out the inherently lumpy nature of our direct sales order profile and officially opens our product sales to an expanded customer base. This emphasis on the indirect channel has been a key component to our margin over volume strategy that has helped commercial trailer products to the best ever margin levels in 2016.

Now I’d like to give an update on the regulatory items that pertain to Wabash National. As previously discussed the U.S. EPA and NHTSA agencies released new greenhouse gas regulations in August of 2016 in an effort to reduce fuel consumption and production of carbon dioxide from heavy duty commercial vehicles including both trucks and trailers. At the moment there are bills in Congress that will ultimately determine whether these rules go into effect. In addition, the Truck Trailer Manufacturers Association has filed a petition in the U.S. Court of Appeals seeking review of the rule as it relates to the authority of the agencies to regulate trailers under the Clean Air Act. While we continue to prepare for compliance with the new greenhouse gas rule, will also continue to monitor these activities.

Most of you are aware that the Federal Motor Carrier Safety Administration has issued a mandate that all carriers must install electronic logging devices or ELDs by December of 2017. Industry estimates vary widely on carrier productivity losses as a result of the ELDs, but somewhere in the 3% to 10% range is what we would expect. While there have been lawsuits against the ELD mandate, these motions have been denied to date increasing the likelihood that this will be effective in December of this year.

To recap, we are accelerating our efforts to drive common practices and leverage shared growth opportunities in final mile, advance composites and distribution. These actions combined with a strong demand environment Commercial Trailer Products and improving market conditions within diversified products gives us great confidence in our outlook for the year and beyond.

I’ll now turn the call over to Jeff to discuss some additional financial details.

Jeff Taylor

Thanks, Brent and good morning, everyone. I’d like to echo the previous comment, that we are very pleased with the overall performance of the business in 2016, as we delivered record margins and profitability, despite the buckets of demand weakness that we are experiencing in certain markets within diversified products.

While fourth quarter results were weaker than anticipated in diversified products that remains a high level of execution in our operations and business functions across the company, which is reflected in our overall results for the year. We continue to strive to grow and diversify the company and we’re benefiting from actions taken over the past several years with this aim in mind. The company will continue to push into new products and new markets in order to continue the transformation into a more diversified industrial manufacture.

Before discussing results for the quarter in more detail, I’d like to comment on our recent capital allocation activities where we were able to take advantage of some favorable market conditions and execute against our capital allocation plan. Specifically on return of capital to shareholders, we ramped up our share repurchase activity in the fourth quarter by taking advantage of an attractive stock price with a total investment of approximately $39 million to repurchase just over 2.7 million shares. Since reinitiating share repurchase in early 2015, we have repurchased approximately 10.2 million shares.

Additionally we reduced our total debt again by purchasing $47 million face value of convertible notes in the fourth quarter. Aside from taking advantage of the favorable market conditions early in the quarter retiring the convertible notes is attractive. Because it decreases our total debt, reduces our earnings per share dilution, in addition to decreasing the short interest on the stock. At an average share price of $16 per share for the quarter or approximately 40% above the conversion price of the notes. The reduction of convertible notes in the fourth quarter would effectively reduce our diluted share count by over 1 million shares for our earnings per share calculation.

Lastly, but certainly not least, we were very pleased to announce in December the re-initiation of a regular quarterly dividend of $0.06 per share, we made the first dividend payment last week. We will continue to prioritize return of capital to our shareholders and we view our recent actions as a strong signal that the company is healthy and well positioned to continue to generate cash flow, far in excess of our business requirements over the long-term.

For the full year 2016 proved to be a perfect example of this capital allocation strategy in action, as we opportunistically paid down $82 million of convertible bond debt, repurchased $77 million of common stock which is approximately $17 million more than the prior year, reinstituted a regular quarterly dividend and funded productivity in growth projects, in both commercial trailer products and diversified products, all while maintaining liquidity levels above $300 million for the entire year.

With that, let’s turn to the financial results for the quarter. On a consolidated basis revenue was $462 million, a decrease of $82 million, or 15% compared to the fourth quarter of last year. Consolidated new trailer shipments were 15,150 units during the quarter above our shipment guidance on strong December customer pickups. Components, parts and service revenue was $33 million for the quarter, down from fourth quarter 2015 levels, primarily due to lower sales in Wabash Composites in our branch locations as we continue to transition some company own branch stores to independent dealers. This was partially offset by an increase in part sales from commercial trailer products aftermarket parts growth initiative.

Equipment and other revenue also decreased on a year-over-year basis primarily due to lower sales in our Aviation and Truck Equipment and Process Systems businesses. In terms of operating results, consolidated gross profit for the quarter was $71.5 million, or 15.5% of sales. Our growth profit was down $16.3 million from 2015, gross margin decreased by only 70 basis points to some of the market weaknesses experienced in diversified products was offset by strong execution in commercial trailer products. The company also generated operating income and margin of $40.6 million and 8.8% respectively.

Operating margin for the full year 2016 finished at 11.0%, well in excess of our corporate objective 10%. In addition, operating EBITDA for the fourth quarter was $53.6 million bringing full year 2016 operating EBITDA to $253 million or 13.7% of revenue. At the segment level diversified product or DPG produced net sales of $86 million in the quarter, a decrease year-over-year of $27 million, primarily driven by continued weakness in the tank trailer industry. This weakness is also reflected in DPG new trailer shipments that recorded a reduction of 200 units year-over-year.

DPG gross margin was 15.8% driven largely by a demand environment exhibiting some headwinds that impacted not only volume, but also pricing in the fourth quarter. Commercial trailer products or CTP net sales were $379 million which represents a $55 million or 13% decrease year-over-year on new trailer shipments of 14,600 units.

New trailer Average Selling Price or ASP increased sequentially by approximately $500 on a strong mixed profile with increase sales of higher speck units in the quarter. On a year-over-year basis, ASP decreased slightly as we sold a higher percentage of smaller pieces of equipment such as converter dollies in the fourth quarter of 2016 as compared to 2015. Pricing remained solid throughout 2016, but we expect ASP in the first quarter to be flat or just slightly down from where we ended the year.

Commercial Trailer Products once again recorded very strong margins with growth in operating margins of 15.6% from 13.2% respectively. Operating margin was up 130 basis points compared to the prior year period and margins were down sequentially in line with seasonal expectations as we produce fewer trailers and have less operating days than in the third quarter. Nevertheless, CTP delivered their highest ever fourth quarter in terms of both gross and operating margins which resulted in operating income of $49.9 million.

Selling, General and Administrative, or SG&A, excluding amortization for the quarter was $25.9 million, or 5.6% of revenue. For the full year, SG&A finished at 5.5% of revenue and SG&A spending levels are expected to remain relatively flat year-over-year. Intangible amortization for the quarter was $5.0 million, down about $0.3 million from the prior year period and was $19.9 million for the full year. We expect intangible amortization to be approximately $17 million for 2017.

Interest expense for the quarter totaled approximately $3.7 million, a year-over-year decrease of $1.1 million primarily due to the lower amount of convertible notes outstanding. $0.7 million of reported interest expense is non-cash and primarily relates to accretion charges associated with the convertible notes. Full interest expense was $15.7 million. We expect interest expense in 2017 to be approximately $12.5 million at current borrowing levels and interest rates.

We recognize the income tax expanse of $12.2 million for the fourth quarter. The effective tax rate for the quarter was $34.7 million – excuse me, 34.7% bringing our full year rate to just under 35.6% consistent with our previous guidance. We are estimating the 2017 full year tax rate will be approximately 36% and that rate obviously does not include the impact of any corporate tax reform.

Finally for the quarter, net income was $23.0 million or $0.36 per diluted share. On a non-GAAP adjusted basis after adjusting for charges of $1.2 million in connection with the loss on debt extinguishment from the purchase of our convertible notes, as well as the sale of certain assets of our Denver and Miami branches to a third-party dealer, net income was $24.2 million or $0.38 per diluted share. In comparison, GAAP and adjusted earnings for the fourth quarter 2015 were $33.3 million and $34.1 million respectively. GAAP and adjusted earnings per share for the fourth quarter of 2015 were $0.50 and $0.51 per diluted share respectively.

Let’s move on to the balance sheet and liquidity. Networking capital finished the fourth quarter down about $33 million from the prior quarter, as we typically experience an inflow of cash from year end introduction of working capital. We finished 2016 with networking capital levels $22 million below year end 2015 level and we expect to see a further reduction of working capital in 2017.

Capital spending was $5 million in the fourth quarter and $20 million for the full year in line with the past two calendar years. We expect our full year capital spending to be meaningfully higher in 2017, as some of our previously discussed growth initiatives require a more substantial investment in plant, property and equipment. In addition, we also have a full pipeline of productivity projects across both business segments.

In total, we expect 2017 capital spending to be between $30 million and $40 million, depending on timing of project implementation. Our liquidity or cash plus available borrowings as of December 31 was $333 million or 18% of 2016 revenue and generally in line with levels we maintained throughout 2016. Our continued strong free cash flow allowed us to maintain liquidity at a healthy level, our first priority for capital allocation in addition to finding our organic growth initiatives and other capital allocation priorities, such as share repurchase and debt reduction. We finished 2016 with leverage ratios for gross and net debt at 1.0 times and 0.3 times respectively.

In summary, we were very pleased with the company’s overall strong performance for 2016. We generated very strong levels of gross profit and operating income, as well as record growth in operating margins, delivering a record level of cash flow from operations. We also utilized record levels of capital in the fourth quarter in 2016 to further strengthen our balance sheet by opportunistically paying down debt as well as returning capital to shareholders through our authorized share repurchase program.

With that, I’ll now turn the call back to Dick where he will give some detailed commentary on our outlook for 2017.

Dick Giromini

Thanks Jeff. So looking forward, we’re confident that overall demand for van trailers and our commercial trailer products business will remain historically strong throughout the year, and possibly beyond. This is based on a number of factors that continue to be positive trailer demand drivers, and remain consistent with what I’ve stated for several years now. First and most importantly is the excessively aged nature of the van trailer population.

While the overall average age of trailers has come down in recent years, there continues to be a significant number of excessively age dry vans that have remained in use as a result of the significant industry under buy during the period 2008 through 2010, resulting in lower reliability and availability, higher maintenance and operating cost per mile and decreased performance. Second, the regulatory environment including CSA, and hours of service has influenced both driver and carrier behaviors leading to the continue need and desire to refresh equipment or to add equipment to increase drop and hook opportunities.

Third, carriers while currently feeling the impact of periodic softness in load availability and pricing, still remain profitable and traditional look to invest that cash flow into new equipment to optimize operating costs. Last, while so much choppy in 2016, load capacity is expected to tighten in 2017 as freight rebounds and regulatory drivers such as ELDs constrict industry capacity. We also believe that electronic logging devices or ELDs are likely to have a more significant impact on capacity than some anticipate and may ultimately drive increase demand for new equipment as stronger carriers attempt to recover lost productivity.

On the order front following two years of unusually early seasonal order placement that drove backlog to historically high levels is clear that the 2017 order season is a return to normal for what has traditionally been expected for this time of year.

Our backlog is at a seasonally very strong $802 million overall as of the end of the fourth quarter, up $160 million sequentially or 25% from the third quarter, and represents the third strongest year end backlog level in the past 15 years, only surpassed by the prior two years. This backlog represents approximately six months of build volume overall on average, including approximately seven months of van production backlog. While very strong backlog levels remain for dry and refrigerated van trailers, other product lines including tank and platform trailers have continued to experience weaker demand and shorter backlogs.

While 2017 will likely reflect a pullback in overall demand from the record level of 2015 and the historically strong 2016, we nonetheless expect another strong year overall for our industry with order levels well above replacement demand. The two primary industry forecasters are becoming more aligned to their thinking, following two consecutive months of near record level orders with ACT Research recently increasing their forecast to 260,700 trailer units to be shipped in 2017, while FTR now projects 255,000 units to be built in 2017, an increase of 17,000 units over what their forecast indicated just two months ago.

The very strong November and December order months and our direct feedback from customers about their expectations and needs for 2017 gives us increased confidence in our long held view that overall demand will again be solid in 2017, driven by the factors mentioned earlier. As a result, we now expect to see an industry in the 250,000 to 260,000 unit range with Wabash National shipments in the 51,000 to 55,000 unit range. Additionally, we now expect to deliver total company revenue of approximately $1.6 million to $1.7 million. We can certainly operate very effectively in that environment.

Obviously somewhat softer demand environment for van trailers, some margin compression resulting from increased industry capacity and effects of material inflation will put some pressure on our financial metrics, but not at what history might imply. We’re a far different company from what we were in past cycles with exceptional operational execution on all fronts, driven by our highly engrained Lean Six Sigma culture. With a much expanded and diversified product portfolio including extensive composite offerings, increased presence in non-trailer markets and our medium duty truck body entry, we’re confident that we are better positioned than ever to deliver solid results in a softer demand environment.

So in terms of earnings, despite the aforementioned potential headwinds and recognizing the productivity and cost optimization momentum by the businesses, we now expect to deliver full year 2017 earnings per share in the range of $1.40 to $1.55 per share. Coming out of the gate, please remember that the first quarter always brings with it seasonal headwinds such as lower shipments and higher winter operating cost per unit. With that in mind, we would anticipate a typical seasonal first quarter lag in customer pickups are expecting total shipments to be between 11,000 and 12,000 for the quarter.

In summary, we’re certainly pleased to have delivered another in a long string of strong quarters, driven by continued exceptional execution and results from the Commercial Trailer Products segment. However, not wanting to rest on any of these accomplishments, we continue our focused efforts to drive ongoing improvements throughout the business, deliver new opportunities to grow our top line and margins and capitalize on macro growth trends.

With that, I’ll turn the call back over to the operator and we’ll take any questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mike Shlisky from Seaport Global. Please go ahead.

Mike Shlisky

Good morning guys.

Dick Giromini

Hi Mike. Good morning.

Mike Shlisky

So may want to touch first on some of the broader numbers out here. Just checking out back to your 2020 goals that you put out a couple of years back, we’re now three years away. The big ones that are not absolute numbers, you’ve already gotten those, you really got the operating margin goal of 10% plus and it looks like you’ll probably get in 2017 as well even in a down market in most scenarios what you’ve regarded to, and you’re already about 20% on the ROIC line. But I guess – I think there is probably still some pretty big step to get to that $3 billion top line goal and that $250 EPS goal, and it is only about three years away.

So perhaps it is a bit more of a M&A question, but is that long-term goals still intact today and what can you do beyond just organic growth trying to push further towards those goals at this point on? Is it getting outside of the trailer and positive market? Is it something totally different or at this point if you’re not going to buy anybody in the trailer, well, can you actually buy somebody in an entirely different business?

Dick Giromini

Yes, Mike. We – excuse me, this is Dick Giromini. We have stated in the past that our focus is to continue to diversify our business so that we’re less dependent on the dry van segment in particular, not walking away at all from the dry van segment, just diversifying in other areas. That was indicated or exhibited by our acquisition of the Walker Group Holdings business back in May of 2012. We want to grow and continue to diversify, leverage many of the existing non-trailer businesses that we have and build on those.

So obviously undefined at this point at least publicly, but as I stated in my earlier comments, we have an extensive effort going on at this time, identifying target opportunities that would continue to drive that strategy. So we’ve got work to do ahead of us over these next four years through 2020 to achieve that target, but it will be a split in some ways between organic growth opportunities and acquisition targets.

Mike Shlisky

Okay, great. Just switching gears here, I also wanted asked about the dairy market. Can I ask your kind of last thoughts as to what you might be seeing here on your order books today and kind of your outlook for dairy in 2017, both in stationary and the trailers?

Brent Yeagy

Yes, Mike. This is Brent Yeagy. I think on the dairy front right now we’re seeing stable demand as compared to 2016, maybe just a slight uptick on the silo base businesses within our process system group, but generally in line with 2016 demand levels.

Dick Giromini

Yes, Mike. As we’ve commented in the past too, that’s a very stable market that food dairy beverage market is. Typically going to grow slowly close to economic growth and our population growth and I think we see that overall in the market over the long-term and you obviously can have ups and downs in any short periods. It’s a nice market.

Mike Shlisky

Okay, great. On the road construction project, I just wanted to confirm that’s totally done, and in 2017 do you kind of see any improvement in your day-to-day operations with maybe different light timing or patterns of traffic outside your office facility that we should be aware of that might be helpful for the margins this year?

Brent Yeagy

Mike, this is Brent again. We don’t anticipate any headwinds in 2017 related to any ongoing road construction within the city in which we operate here in Lafayette, Indiana. We’ve taken some optimization efforts through capitalizing on some the road construction, but nothing I would say is material for the purposes of your call.

Dick Giromini

Let me just add Mike. There is another phase of the projects. So if you come visit us, it is highly, likely that as we get into the spring time and summer, there you’ll see construction going on. But it’s to the North side of our property which is far less disruptive and concern than it was when we were dealing with all of the construction that was on the South of our property. So there is construction to be planned for this year, but we don’t anticipate it to be a negative impact on the business.

Mike Shlisky

Okay, great. One last one from me, there’s some news out from Amazon the last couple days looking to build out a giant sortation hub in Cincinnati that there’s going to be a few thousand trailers that they need as well as I would assume some final mile type vehicles. I was wondering if you can give us your thoughts as to what your positioning is with Amazon today in their current trailer business. And when do you think you’ll be in the running for any of their final mile products going forward?

Dick Giromini

When they first started – this is Dick. When they first began the process of getting into their own – managing their own transportation operations I shared on one of the calls that we had looked at potential opportunities there and they – it did not fit the criteria for what we felt was an acceptable proposal, and elected not to participate at that time. We will certainly entertain any opportunity, we’ll evaluate it. But if it doesn’t meet our criteria we’re not chasing volume as you know we want to run a very effective business and that may not meet what our expectations or requirements are.

Mike Shlisky

Got you. All right guys, thanks so much.

Dick Giromini

Thank you, Michael.

Operator

Thank you. Our next question comes from Jeff Kauffman from Aegis Capital. Please go ahead.

Jeff Kauffman

Thank you very much. Hey congratulations everybody terrific results.

Dick Giromini

Thank you, Jeff.

Brent Yeagy

Thanks Jeff.

Jeff Kauffman

Dick, just a question the doubles are little bit in the details here and I was looking at the new ACT forecast. And it looks like they are starting the year with about 72,000 to 73,000 industry shipments dropping to a number closer to 58 toward the end of the year. That’s a pretty steep drop as the year continues on. In terms of your forecasting, how are you thinking that progression of the 250 to 260 plays out during the year. And it just seems like based on those numbers your forecast of 11,000 to 12,000 units seems like a little less share the market than you would normally do. Do you think it’s more an issue of the ACT numbers starting high and kind of coming down during the year? I am just trying to figure out how to model as we go through the year and try to figure out what you’re expecting production to look like.

Brent Yeagy

As we’ve said consistently in the past, the first quarter always has – it has less operating days, effectively coming out of the holidays. You have lower customer pickups because of the holiday season haven’t passed so there’s a little bit of a lag in pickup. So we always start out slower on shipments, production levels generally exceed shipment levels early in the year and then there’s a – so there is some inventory build for customers pickup as we proceed into the second third quarter which are the strongest quarters of the year.

Typically there is occasion where fourth quarter messes that up but typically second third quarters are the strongest demand quarters for us from a build and shipment standpoint. And then fourth quarter shipments can generally exceed as they did this past quarter generally exceed builds in the fourth quarter.

So you have to look at builds differently from shipments and you have to look at orders differently from builds and shipments because they don’t all align. There’s always going to be that lag from order to build to shipment. So it’s very seasonal on the – versus the builds versus the shipments versus orders. I don’t know if that helps you. But it’s hard to explain over the phone.

Jeff Kauffman

Yes, that part of it I get. I just – if I’m following your normal progression seasonally and I match it up against the ACT data, it just looks like your share of the market is unusually low in the first quarter and then unusually high in the fourth quarter. I know, you don’t base your forecast on what ACT says, I’m just, I’m trying to reconcile where that big drop coming up – maybe that’s a better question.

Brent Yeagy

I think what you get in there is you get some mix effects in there, you get some manufacturers who will build a lot of stock units in the early part, move those to dealers. We tend to build based on demand. We don’t build a lot of speculative equipment the vast majority of ours is built to order. We do build some for dealers for their early season stocking. But then we manage that throughout the year. So I think you get some – I hate to say false indicators but maybe misleading indicators when you try to look at what ACT puts out. We provide guidance based on what our – the real world experience we have. As you know two-thirds to 60% – anywhere from 60% to 70% of our builder are direct to large carriers.

So there’s timing events with them on when they want to take the equipment and also our mix maybe different than what the overall ACT mix, because they’re talking about all trailer across all types of trailers – in some cases we don’t participate in like the specialty equipment and dumps and those types of things.

Jeff Kauffman

Okay that’s fair. Just one follow-up bigger picture. Dry vans really been driving a lot of the strength over the last year, year and a half. I think you noted the rig counts are up and you are starting to see some green shoots on the energy side maybe we get some construction related stimulus from the new administration. Does this generally portend that even though your volumes maybe kind of taking a breather year in 2017 that the mix impact as we go through the year should get more and more favorable in terms of trying to figure out in ASP or something like that.

Dick Giromini

Yes you’re going to have – excuse me, you should expect some mix shift as a result of the dynamics that you just talked about. When the dry van segment decreases obviously the ASPs on a dry van are significantly lower than ASP on any tank trailers. So you’re going to get some mix effect relative to the aggregated ASP. So you do get some of that. It’s a much smaller influence because the volumes are so much lower on tank products then they are on the dry van segment.

Notably, however the dry vans were the single – when you look at the ACT detail numbers the 21,000 unit increase that they made from their previous forecast to now was notably mostly in the dry van segment. So they did increase it. So there’s expectation and we agree with that that strength in dry van will be stronger than what the forecasters were thinking – excuse me forecaster were thinking just a couple months ago.

Jeff Kauffman

All right. Well, thank you for the dividend and congratulations on a great year.

Dick Giromini

Okay. Jeff thanks.

Operator

Thank you. Our next question comes from Scott Schoenhaus from Stephens. Please go ahead.

Scott Schoenhaus

Hey, guys. Good morning.

Dick Giromini

Hey, Scott. Good morning.

Scott Schoenhaus

Hey, Brent I just want to dig in a little bit on your first quarter DPG gross margin guidance. I believe you said you’ve put out a 20% figure for this quarter coming up. And I think you said also that you’re seeing some – the pricing move up on the tank trailer side or you’re seeing some improvement, but you also mentioned about cost cuts. Can you give us the biggest driver on achieving those much stronger margins for the first quarter? Is it mostly cost cuts or is there some pricing inflation baked into that guidance?

Brent Yeagy

Yes. Thanks, Scott. First off we’re going to – I think we’ll be approaching 20% in the first quarter. I want to make sure that we’re clear on that.

Scott Schoenhaus

Okay.

Brent Yeagy

I think it’s pretty much an equal spread between the cost optimization efforts as well as some additional overhead spread that will get from improving volumes. And we hope to recover pricing throughout the quarter. And we’ll see that progress sequentially throughout the year. So I’d say it’s third at this point.

Jeff Taylor

And Scott…

Scott Schoenhaus

Understood. And I guess my last question – I know you guys always say that you can pass pretty effectively based on the contract, any inflationary commodity pricing, I guess. First one is: are you seeing inflationary commodity pricing currently, and are you expecting that to continue throughout 2017. And if you’re having increased competition from capacity is coming on throughout the year. Does that hinder any ability to pass along those extra costs to your customers?

Brent Yeagy

There’s a lot of question there.

Scott Schoenhaus

Yes, sorry.

Brent Yeagy

I think I would start with yes, we’re anticipating specifically within our steel and aluminum, stainless steel commodity groupings some level of continued inflation throughout 2017. For the majority of our CTP business specifically dry vans, a large portion of our backlog is already committed – its already seen through our numbers. There is limited potential to recover pricing on that front. On our other product lines platforms, truck bodies, tank trailers in general, we have much more flexibility of pricing and inflationary pressures into our pricing. And we factor that into our numbers accordingly, we’re generally pretty good at being able to recover those costs.

Scott Schoenhaus

Well, that’s it for me. I’ll hop off. Thanks guys.

Brent Yeagy

Scott just to emphasize, we have built into our – taken that into consideration material cost inflation into our projections on EPS for the year. So it’s all been baked in.

Scott Schoenhaus

Thanks, very helpful.

Jeff Taylor

Yes. Scott, this is Jeff Taylor. Just want to make one final comment on your first question around DPG margins. I just want to remind you that that segment has multiple businesses in it and there is some mix impact that will occur sequentially quarter-to-quarter. And as you know, Wabash Composites generally pulls back some in the fourth quarter and then starts to pick up in the first half of the year as some of their end markets will pick up. And so that will also drive some of the improvement sequentially you’ll see in DPG margins as well.

Scott Schoenhaus

Thanks, Jeff.

Jeff Taylor

You’re welcome. Thank you.

Operator

Thank you. Our next question comes from Alex Potter from Piper Jaffray. Please go ahead.

Alex Potter

Hi, guys. Congrats on the good results.

Brent Yeagy

Thank you, Alex.

Alex Potter

I guess I had a follow-up question there on DPG gross margin going beyond the first quarter you mentioned steady sort of increase throughout the year getting back towards your normal range in the back half or towards the fourth quarter. I was just wondering if you could comment on, I guess specific levers that you expect to pull in your visibility into your ability to achieve that outlook.

Brent Yeagy

Yes. There’s a couple of different points there. One, we expect to see a stronger demand environment on tank trailers throughout 2017 that will factor in the pricing accordingly. We’ll see the mix effect that Jeff talked to as we continue to see stronger end markets, what we believe in our other non-tank trailer businesses. We’ll see a positive upside there specifically within our Wabash Composites Group which is material and our overall DPG gross margins. We’re also taking actions within our Aviation and Truck Equipment group that will truly fully materialized later within the year and that will fall and grow that overall gross margin contribution.

Alex Potter

Okay. Thanks, that’s helpful. And then I was wondering if you could also maybe refresh your thinking regarding the math surrounding the size of that quote, unquote excessively aged van fleet. I know that we’re still coming back to that period of under buying back in 2008 through 2010 presumably that tailwind will eventually be exhausted. But I was just wondering if you could update everyone regarding what you estimate to be the size of that fleet that still requires replacement.

Jeff Taylor

Yes. And this is a really rough estimate. These are not any documented or published numbers. Three years ago, the number was estimated to be north of 3,000 units, a year ago it was estimated that there were still about 200,000 units remaining. So it’s something less than that. But still very aged equipment that are up into the mid-teens in age and that type of equipment needs to get out of the market especially for the large truck load fleets that are still doing some catch up. And the reason it’s taking so long to address those is just the sheer mass number of those pieces of equipment and the ability of even the large profitable fleets to manage through that to be able to get rid of the old ones and acquire the new ones and get them into their system. And that’s where we’re seeing.

And in some cases some fleets didn’t get back into buying modes until the last couple years. So they were not getting back in 2011, 2012, 2013 they’ve just gotten back in. So there’s a little bit of a carryover effect for them before they can get to purge their system of the very, very aged equipment. So over the next couple years we should see, you probably hear me talk less about the excessively aged side of things, then what you’ve heard from me for the last three or four years or so. As this diminishes but we’re still seeing aged equipment out there – some of the large customers continue to operate and just going to take some more time for them to get them out of their system.

Alex Potter

Okay. Thanks a lot.

Brent Yeagy

Thank you.

Operator

Thank you. Our next question comes from Kristine Kubacki from CLSA. Please go ahead.

Kristine Kubacki

Hey, guys. Good morning. Just a question on the pricing environment out there. I guess it’s coming in a little weaker than I expected I guess though we’ve added capacity in the industry not yourself. I guess from a pricing standpoint and capacity standpoint, do you think that we’ve kind of added all the capacity that’s out there at this point that was on the drawing board or is there still stuff that still suppose to come online?

Jeff Taylor

The majority of the capacity is online clearly with some of the more recent capacity additions there is always a ramp up phase that any new manufacture gets into the growing pains of hiring, training and then ramping up capabilities to be able to take orders. So that’s why we say that now in 2017, we probably start seeing some impact from this. We did not see an impact up until this point. So we built that into our models also. But the offsetting that is a little bit stronger market than what some were expecting. So that can help offset some of that and put a little upside push to it.

So we’re still thinking in FY – Brent mentioned in his comments somewhere upwards in the 200 basis point range of margin compression that we see a combination from material inflation and maybe some downward pressure on margins as a result of some of the adding capacity.

Kristine Kubacki

Fair enough. And then just one question on your supply chain. How much of your supply chain is sourced within the United States?

Brent Yeagy

Yes. I’m assuming that question’s going to heading towards border tax adjustment.

Kristine Kubacki

Correct.

Brent Yeagy

Right now we look at it as a percentage of material cost roughly about 15% of our total sourced componentry and some other materials roughly about 15% at this time and that doesn’t begin to account any mitigating actions and then we would have.

Dick Giromini

So that’s total around the world. So outside of the U.S. and then we have the opportunity to obviously mitigate much of that by in sourcing that if the financials make sense to do that depending on what type of border tax ends up coming in, if it does and what it is.

Kristine Kubacki

Okay. Fair enough. You’re in a better position than most. I appreciate it. Thank you.

Operator

Thank you. I will now turn the call back over to Dick Giromini for closing comments.

Dick Giromini

Thank you, Christine. So, while much has certainly been done opportunities continue to be available to us in the future. We’ll continue to be strategic but selective in pursuing opportunities to grow our business in addition to the organic growth initiatives already underway. We’ll continue to seek out ways to increase returns and value for all shareholders while assuring that the proper balance between risk and reward is considered all decisions.

In closing, we’re proud to have delivered another record year of profitability in 2016 with strong margins, continuing support of demand environment and a continued focus on execution. Thank you for your interest and support of Wabash National. Mike, Brent, Jeff and I look forward to speaking with all you again on our next call. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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