Wabash National's CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: Wabash National (WNC)

Wabash National Corporation (NYSE:WNC)

Q2 2012 Earnings Call

August 01, 2012 10:00 am ET


Jeff Taylor - VP, Finance and IR

Dick Giromini - CEO

Mark Weber - CFO


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


Good day, ladies and gentleman, and welcome to the second quarter 2012, Wabash National earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Jeff Taylor, Vice president of Finance and Investor Relations.

Jeff Taylor

Good morning, everyone. Before we begin, I would like to make an important announcement. As with all of these slides of presentations, this morning calls contain certain forward-looking information, including statements about the company's prospects, the industry outlook, backlog information, financial conditions and other matters. As you know, actual result 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 filing with Securities and Exchange Commission. Also please note that this call maybe recorded.

I'd like to welcome everyone for the Wabash National Corporation second quarter earnings call. I am Jeff Taylor, Vice President of Finance and Investor Relation. I'd like to apologize to everyone for the delays in getting connected today. We wanted to start a few minutes late to make sure that everyone was able to join us.

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

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

Dick Giromini

Thank you, Jeff, and welcome to the team. With that let's discuss second quarter results. The second quarter provided us with significant momentum as we continued to execute our strategic plan to enhance our overall business structure through selective organic and external growth initiatives.

With the addition of the Walker Group, our transformation from a trailer manufacture to a diversified manufacturing business has been considerable traction. When combined with our other diversification initiatives, we have established a strong platform for higher margin product lines, more consistent financial performance and numerous avenues for continued growth.

Our impressive quarterly results, which I will highlight in just a moment, were underpinned by the successful execution of key strategic initiatives, including diversifying our business beyond our core product offering to address new market opportunities and enhance our financial profile, particularly through our Wabash Composites and our Energy & Environmental Solutions products groups.

Executing the acquisition and integration of Walker, which has added an attractive higher margin business and another layer of diversification in terms of products, end-markets, customers and geographies, and driving price and enhancing margins than our core Commercial Trailer Products business.

The combination of these initiatives, not only drove net sales to $362 million, up 26%, but drove adjusted earnings up almost 300% year-over-year. Excluding acquisition related expenses, we generated adjusted earnings of $15.5 million, representing $11.5 million increase over second quarter 2011 adjusted earnings of $4.0 million.

Gross margins exceeded internal expectations moving at the double-digit for the first time since 2005, reaching 10.9%, up from 7.1% attained in the first quarter of this year. As mix of higher margin shipments improved during the quarter within our Commercial Trailer Products group and our higher margins Diversified Products business more than doubled in profit contribution with the addition of Walker.

Operating income excluding the impact of certain acquisition related expenses for the second quarter of 2012 was $22.2 million, representing a fourfold improvement as compared to the previous year period. Excluding acquisition related expenses, operating EBITDA totaled $29.7 million, which represents an increase of $20 million when compared to the second quarter of 2011.

Overall, we're particularly pleased with these results and the continued improvement in our business performance since 2011. Recall, we viewed the fourth quarter 2011 as an important inflection point in our business. And I'm pleased to say we've made good on that promise and we remain encouraged by our prospects for continued progress going forward.

With that, let's discuss the financial performance of each of our reporting segments, beginning with our Commercial Trailer Product segment. Year-over-year net sales for the second quarter increased by approximately $28 million or 11% when compared to the second quarter 2011 on 400 additional new trailer shipments.

Gross margins advanced to 6.7%, up 340 basis points from the prior-year quarter, as the effects of tax pricing improvement action continue to take hold and were realized in the quarter. Operating income for second quarter 2012 was $13.7 million a fourfold improvement of $10.4 million when compared to the previous year period resulting from a higher margin mix of new trailer shipments for the quarter of 11,700 units.

While shipment volume came up shy of our expectations, this is directly attributed to our commitment to drive price and margin enhancement through more selective order acceptance as we opted to decline to low-margin high-volume opportunities in favor of capturing higher margin orders. As a result, gross margins more than doubled from the year ago, driven by a richer mix of smaller batch sized higher spec trailers requiring increased takt times to build.

Consistent with our long-term focus on continuous improvement and our expertise in remanufacturing, we already have initiatives underway to further optimize our line capabilities, enhanced production throughput rates and more optimally accommodate this higher mix of trailers going forward.

Quote and order activity throughout the second quarter remained in line with seasonal and cyclical demand trend. While second quarter net orders of 50,000 trailers moderated from what was experienced during the first quarter of 67,800. This is neither unusual nor unexpected, as second quarter and third quarter are seasonally low quote and order periods.

For comparison, the second quarter in 2011 yielded nearly an identical number of unit orders as this year at 50,700 units. Overall order patterns remained consistent with recent historical averages and in line with the current stage of the industry recovery, and are expected to again show strength later in the year. In fact, early customer increase for 2013, need to support this belief.

Backlog for the Commercial Trailer Products business predictably decreased to $523 million as of June 30, 2012, from the first quarter 2012 level of $583 million, as shipment levels caught up with early orders. Despite this expected and seasonal change, Commercial Trailer Products backlog remains at historically strong level, representing nearly six months of production at current billed levels.

While recent economic data has been mixed, both ACT and FTR continue to forecast a healthy trailer demand environment in 2012 and beyond. The trailer business is in the right part of the cycle and industry dynamics are good. Although, customers sentiment at this point is somewhat mixed due to the economic uncertainty, we remain confident of healthy demand going forward as we enter the 2013 order season later this year.

Capitalizing on an improving platform trailer demand environment, our Transcraft business made significant improvements in the second quarter, achieving their best revenue and gross margin performance since the third quarter of 2007. And our fleet used trailer sales efforts continue to contribute positive results for the sixth straight quarter, generating record levels of operating income during the quarter.

We are pleased with the overall progress made by Commercial Trailer Products thus far. And continue to see positive improvements in workforce productivity and a strong backlog containing a growing mix of higher margin orders. Which combined, contribute to our improving profitability and overall operating performance within this segment. We'll see continued gains in gross margin and at the operating income line, as we proceed forward through this quarter and beyond.

Now, let's discuss the financial performance of our Diversified Product segment and the continued progress being made by the business it contains. Our Diversified Product segment consisting of Wabash Composites, Wabash Energy & Environmental Solutions, Wabash Wood Product and the Walker Group companies generated sales of approximately $77 million in the second quarter 2012, representing a 182% increase from the prior-year period.

The Walker Group business has added net sales of approximately $44 million to the quarter. More importantly, Diversified Products achieved gross margins of over 23%, generating over $17 million in gross profit to the business. This represents approximately 45% of our consolidating gross profit, further demonstrating how critical this segment is to our business.

Let me touch on a few important milestones achieved in this segment during the second quarter. Wabash Composites continued strong execution of their strategic plan to gain traction in new markets is growing at customer base.

Most recently Wabash Composites expanded its product portfolio by introducing a new version of the proven DuraPlate and AeroSkirt product designed specifically for less-than-truckload applications. As we've stated with respect to Wabash Composites, the $70 million in revenue for the year, further supporting our overall strategic objectives of topline growth, margin enhancement and diversification.

As well Wabash Energy & Environmental Solutions demonstrated continued improvement and topline growth and operational execution. As you know, we entered the energy and environmental services market in early 2011, with a $70 million contract manufacturing agreement to produce frac tanks for safer manufacturing.

From a strategic standpoint frac tanks provide an entry point into these markets, enabling us to establish a customer base and then begin the process of building a comprehensive product portfolio. We enter this market recognizing importance of developing a broad product offering to help us offset volatility in the energy sector.

To that end, Wabash Energy & Environmental Solutions introduced a carbon steel vacuum tanker product to the market this past May. By leveraging our engineering expertise and industrial expertise in welding, forming, fabrication and assembly, the group was able quickly expand their product portfolio and further penetrate the energy sector. Certain elements of this sector have seen recent softness at a macro level. Demand for many product solutions remain strong exceeding current supply.

On May 8, 2012, we completed the previously announced acquisition of Walker Group Holdings, a leading manufacture of liquid transportation systems and engineered products. I'm pleased to formerly welcome Walker's management team and associates to the Wabash National family.

This acquisition has brought together two industry-leading manufacturing organizations and has already had a significant impact on the corporation. With the addition of the Walker Group companies, we accelerated the momentum of our diversification efforts and substantially increased revenue and profits within the Diversified Product segment.

In addition, the tank trailer industry continues to demonstrate a healthy demand environment, as Walker's backlog as of June 30, 2012, of $190 million represents an increase of approximately $14 million or 8% as compared to the previous quarter. The integration of the Walker Group companies into our business is off to an excellent start and continues to gain momentum.

As we stated on previous calls, we estimated that the run rate for annual synergies was approximately $10 million. These synergies can be broken down at several areas, including supply chain optimization, commercialization and distribution of new and existing products, back office and administrative consolidation, and manufacturing best practices. As such, we expect to achieve $5 million of annual run rate synergies within the first 12 month.

Last but not least, our Retail segment continues to make nice strides, delivering nearly a $500,000 improvement and operating income year-over-year with gross margins advancing 200 basis points from 6.9% in the year ago quarter to 8.9% this past quarter.

Now, before I review our outlook for the third quarter 2012 and the year, I'd like to first take a few moments of provide an overview of some of the key economic indicators and industry dynamics that we monitor closely, and provide a broader context for expectations. The Conference Board's Leading Economic Index declined by 0.3% in June, down from 95.9% in May, which have been the highest level in 47 month.

In the first half of 2012, the index increased by 1% compared to 0.5% in respective half of 2011. The Institute for Supply Management's manufacturing index declined from 53.5% in May to 49.7% in June. The first contraction since July of 2009, yet we saw the overall economy growth for the 37 consecutive month.

For the second quarter 2012, total industrial production increased an annual rate of 2.2% and GDP advanced by 1.5% during the second quarter, following the first quarter 2.2% due to weak consumer spending, government cost and the rise in import, but still reflects the 12th consecutive quarter of GDP growth.

And while not yet robust, we can no longer ignore the influence of the housing sector which has once again become relevant to demand as June housing starts at 760,000 were up 23.6% year-over-year and June housing permits to 755,000 units were 19.3% higher year-over-year.

Since the housing sector hit bottom in the spring of 2009, housing starts now improved by 59% and housing permits are up by 47.2%. In contrast to some of the broader economic news, the indicators within the trucking industry remain solid as ATA Truck Tonnage index for June came at a 119.0 or a 1.2% increase versus May reflecting the 31st consecutive month of year-over-year improvement.

In addition, FTRs Truck loading index advanced 0.2% in June and 2.5% year-over-year. Industry-wide net trailer orders in the first half of 2012 totaled over 117,000 units, pushing industry backlog to over a 104,000 units, the highest levels since 2006, further reaffirming 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.

Industry forecast has remained similarly optimistic, and pointing toward strong demand throughout the next several years. Nearer term, the latest report from ACT estimates 2012 trailer shipment, at 247,400, up 18% year-over-year. And 266,400 trailers in 2013, up an additional 8% year-over-year. Plus FTR now estimates trailer production for 2012 at 246,100 trailers for this year, an increase of 15% year-over-year and 235,000 in 2013.

With that let's discuss expectations for the coming quarter and full year beginning with Commercial Trailer Products. Our view is industry trailer volume is consistent with ACT and FTR forecast.

We remain selective in order acceptance as we drive margin improvement and are revising our guidance for full year trailer shipments of 48,000 to 52,000 units inclusive of Walker.

This strategy is validated by the significant improvement in gross and overall performance this quarter, and our expectation for continued growth in margins as we progress through the remainder of the year.

I want to be clear on this point. The adjustment that we've made in our volume guidance is not in anyway tied to a softening in our order board. Cancellation, customer pickup delays or any need to idle assembly line due to weakening demand. We've heard all that chatter. This directly and outcome of our focus is about lost margin recapture, margin expansion and profit growth at the forefront of our effort this year, even at the risk of some share loss.

And we have communicated this approach clearly, since early last year. Our backlog remains strong with the 2013 order season right around the corner. Share growth is always an opportunity at the right price and we continually evaluate the balance between share volume versus margin. In the end, bottomline impact wins that debate. I'm pleased with way our plan is evolving. Stronger margins, better mix, healthier bottomline, enough said on that.

On the Diversified Product standpoint, we expect each of these businesses to continue to execute according to there strategic plan as they enter new markets, introduce new product offering and capitalize on growth opportunities.

As I mentioned earlier, the addition of the Walker Group companies to this segment has considerably changed our business. Their already diversified business model continues to pay dividend reflected by their strong backlog and margin levels.

In summary, this past quarter was truly a breakout period for our business, with a completion of the Walker Group acquisition certainly a highlight. Despite the macroeconomic headwinds emerging, our business remains on solid footing for the much stronger and improving margin mix that is becoming an engine to drive continued profit growth throughout the balance of the year and beyond.

With that let me turn the call over to Mark.

Mark Weber

Thanks Dick and good morning. In addition to the press release, we plan to file the 10-Q later this week. Then I'll try to hit the highlight. With that let's begin.

Revenue for the quarter improved year-over-year by more than 25% to $362 million, the improvement in revenue this quarter reflects the additional Walker which was completed mid-quarter as well as the continued improvement in trailer ASP in our Commercial Trailer Product segment which increased to 23,300. This represents an increase from the first quarter by approximately $500 and versus a year ago by approximately $1,300 per unit.

The increase is trailer ASP is due primarily to price increases implemented to recover component commodity cost inflation. In addition, new trailer sales in the quarter totaled 12,000 unit including 400 units related to Walker or $293 million, an increase of 16% from the second quarter of last year.

Looking at another product volumes, used trailer revenue came in at approximately $9 million on 1,100 units and was up approximately $3 million for the same quarter a year ago, as the used trailer market continues to demonstrate healthy demand and pricing.

Part service and other component revenue was approximately $37 million in the quarter, an improvement of approximately from a year ago, driven by the addition of the Walker service location and continued growth in our non-trailer composite product.

In addition, revenue from equipment and other sales of $22 million increased over $20 million year-over-year with the addition of Walkers non-trailer product, including its engineer products family and continued growth in the Wabash energy and environmental solution product sales which was just beginning startup activities on truck production at this time last year.

In terms of operating results, the gross profit for the quarter was $39.7 million or 10.9%, representing the third quarter of sequential margin improvement up from first quarter's gross margin of 7.1% and 5.7% from a year ago.

As expected approximately half of the improvement in margins this quarter was derived from the improvement in our backlog which reflected current market pricing as we work through the majority of lower priced legacy orders last quarter.

Balance of the improvement in margins was primarily a result of the addition of Walker this quarter, which as we have previously discussed generates higher margin within our business, which are generally north of 20%.

By segment, Commercial Trailer Products realize improvements and topline revenues of $28 million but more importantly gross margin improved 340 basis points from a year ago.

In addition, on a sequential basis gross margins improved for the third consecutive quarter by approximately 190 basis points to 6.7%. The improvement in margins was a result of improved pricing, product mix and favorable channel management.

Net trailer pricing improved by approximately 500 basis points this quarter, but this benefit was partially muted by lower production at the quarter, which decreased by approximately 2,000 from a year ago.

As Dick mentioned, production during the quarter was essentially flat with the first quarter at 10,800 trailers as the mix of higher spec trailers and shorter batch runs requiring higher label content, frequent changeover impacted production, client fees.

However, the pricing and margin improvement achieved this quarter was the primary goal. And as always, we are focused on productivity initiative to efficiently accommodate a broader mix of trailers as we move forward.

In total Commercial Trailer Products has now demonstrated 440 basis points of improvement in gross margin, since the low point of the third quarter last year.

Improvements are evident in our other segment as well, looking first to Diversified Product. This segment demonstrated significant topline growth, improving revenues over $49 million. The addition of Walker and continued momentum in our organic growth businesses of Wabash Composites and Wabash Energy & Environmental Solution won the way.

In terms of gross margin, the segment benefited from the addition of higher margin Walker product as well as significant productivity improvement, and our Wabash Wood Product and improvements in Wabash Energy & Environmental Solutions. With revenues this quarter of approximately $77 million and with gross margins over 23% the diversification in contribution, the segment provides us real and substantial.

The Retail segment continued the improvement trend. Our topline revenue decreased modestly. The business was able to improve gross margins 200 basis points to 8.9% through improved trailer pricing and a favorable mix of sales.

Q2 generated positive operating income for the seventh consecutive quarter and represents the eleventh consecutive quarter of year-over-year improvement. Q2 generated operating income of $22.2 million, excluding acquisition-related cost and reflects in improvement of $17.1 million from last year or more than four times.

For the quarter we generated operating income margin of 6.1%, before acquisition cost, the highest level since 2005. As we continue to demonstrate leverage from our investment and SG&A. Acquisition cost for the quarter of $12.2 million relates to our acquisition Walker Group Holdings, which closed on May 8, and were in line with the guidance provided last quarter.

SG&A for the quarter increased $6.3 million from the first quarter to $18.9 million with the addition of Walker. While this represents approximately 5.2% of revenue, it is worth noting that SG&A cost this quarter include approximately $2.7 million and intangible amortization, associated with the Walker transaction.

On a quarterly basis, incremental intangible amortization associated with the Walker acquisition will run approximately $3.9 million per quarter this year, and normalized at approximately $3.6 million per quarter for 2013 and beyond. Excluding these cost, SG&A as a percent of revenue will be approximately 4.5%.

If Walker would have been part of the business for the full quarter, SG&A cost would have been approximately $25 million, which is generally in line with our expectations for SG&A on a quarterly basis for the back half of the year. We will continue to leverage our SG&A investment as volumes move higher and our diversification initiatives take hold.

Net other expense consists primarily of borrowing cost totaling approximately $5.4 million related to our $150 million revolving credit facility. As well as our $300 million term loan credit agreement and $150 million convertible senior notes which were issued in the second quarter to fund the Walker acquisition.

It is worth noting that approximately $1 million of this is non-cash in nature with the majority representing accretion charges associated with the convertible notes. If our current capital structure had been in place for the full quarter, interest expense would have been approximately $7.5 million with approximately $1.4 million being non-cash in nature.

In terms of taxes at June 30, we have a U.S. Federal NOL carryforward in excess of $140 million. However, we have a full valuation allowance recorded against our net deferred tax assets. The Federal NOL carryforward begin to expire in 2022. Please refer to our 10-K for more details on the annual limitations of our NOL. However, we estimate approximately $107 million of NOLs available for utilization this year, subject to pre-tax earning.

In addition, this quarter we incurred about $400,000 in tax expense associated with the Walker transactions related to tax jurisdictions, where we had no existing NOLs and approximately $700,000 in a non-cash deferred tax liability associated with the created goodwill. We expect this run rate of approximately $1 million to $1.5 million to continue, while our deferred tax assets remain for our reserve. We will continue to evaluate the adequacy of our deferred tax asset reserve as we progress through the balance of the year.

Finally, for the quarter, net income was $1.9 million or $0.03 per diluted share. On a non-GAAP adjusted basis after adjusting for acquisition-related charges net income was $15.5 million or $0.23 per share. In addition, as I just reviewed, there were several non-cash charges incurred in the quarter related to the Walker acquisition or related to financing, which totaled approximately $4.1 or $0.06 per diluted share.

This is evident in our operating EBITDA, which takes into account these non-cash charges, which more than tripled from a year ago at $29.7 million or 8.2% of sales. In regards to the balance sheet and cash flow statement, let me provide a little more detail on some specifics. Total inventories increased approximately $35 million, driven by the additional Walker, as the legacy Wabash business realized a $15 million decrease, primarily related to reductions of finished goods and raw materials in the quarter.

Capital spending for the quarter was approximately $3.6 million and we anticipate full year 2012 spending to be approximately $10 million to $15 million. Our liquidity or cash plus available borrowing as of June 30, was approximately $151 million. In addition, our senior secured leverage ratio of 2.4 times is well below the required 4.5 times under our term loan credit facility.

Our gross debt as of June 30, consisted of the following: outstanding on the revolving credit facility, $25 million; convertible senior notes of $150 million; and term loan of $299 million for a total of $474 million. The net debt reflected on the balance sheet of approximately $442 million is net of OID cost, financing fees, and in case that converts and allocation or a portion of the debt-to-equity of approximately $21 million.

In summary, Q2 performance improved significantly, consistent with our continued focus to improve pricing and margins in our core business, and our strategic efforts to diversify and growth the business and higher margin products. As we have discussed in the past, the goal for gross margin this year was to realize margin expansion of between 200 basis points to 400 basis points versus 2011 or 2012 gross margin of 7.5% to 9.5%.

With the first half of the year behind us, our legacy business is now operating towards the upper end of this range, earlier in the year than we had originally anticipated. And with the addition of Walker, we've been able to move margins further towards our long-term goal of sustainable double-digit gross margin.

We will continue to make progress this year in margin as we drive further productivity on the manufacturing floor, continue to grow our Diversified Product offering and implement synergy opportunities with Walker. The company is well positioned to close up the back half of the year with the total backlog as of June 30 of approximately $713 million, inclusive of a $190 million related to Walker.

While the recent macro data points have trended flat-to-down, the long-term demand fundamentals remain intact with the average age of equipment at an all-time high, a tougher than ever regulatory environment, which puts an emphasis on newer compliant equipment, and a fleet size which has been reduced by over 10%.

In regards to the current quarter, we estimate Q3 shipments to be approximately 12,000 to 13,000 trailers. And as Dick discussed, we are adjusting our full year new trailer volume to reflect the mix of trailers currently being produced to be in the range of 48,000 to 52,000, which includes Walker related shipments since the acquisition date.

We anticipate our Diversified Product segment, which includes Walker, to continue to grow with topline revenues reaching between $135 million and $145 million per quarter in the second half of the year. With that said, we anticipate further expansion of margin throughout the year, as we continue to execute our tactical and strategic initiatives to improve margins and diversify the business.

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

Question-and-Answer Session


(Operator Instructions) And our first question comes from the line of Rob Wertheimer with Vertical Research Partners.

Joe O'Dea - Vertical Research Partners

It's actually Joe O'Dea for Rob. First, I guess, on margins. One, could you talk a little bit more about contribution to margin from Walker and then from legacy business, sort of respective, how much more you have to go on the legacy business, so that 200 and 400 bips have tailed into the year? And then the 22% gross margin at Walker and rather Diversified Products looked really good in quarter. Is that something that we can kind of expect going forward as well?

Mark Weber

Joe, I think if look at, as Dick mentioned, the Diversified Products had about $44 million in revenue from the additional Walker this quarter. And I've stated their margins we're really similar to what you saw the entire segment generated at around 23%. So if you back that out, taken to your point, you would come up with like legacy Wabash margin of just above 9% on a consolidated basis.

So we're really very close to the high-end range that we were looking to target this year of 9.5%. We're very close. There certainly is room for improvement as we go throughout the balance of the year, but probably at that 25 bips a quarter type of range of improvement as we go after productivity.

On the Diversified Product side, obviously you'll get the addition of Walker for a full quarter in the back half of the year. And we expect margins to remain similar to what you saw in Q2.

Joe O'Dea - Vertical Research Partners

And then looking into back half of the year, I think typically you see your share kind of improved sequentially throughout the year. It looks like based on implied outlook that you're not expecting much share gain into the back half. Can you talk a little bit about competitors build slots as it looks like that's rolled up. Does it look like you've got an opportunity maybe to sort of exceed the share expectation that seem quite a bit lower than where they were last year on the pricing initiatives?

Mark Weber

Certainly, we will remain opportunistic with any quote order opportunities that come along to still open the slot that we may have. But again, we are taking a very structured and selective approach to which orders we're accepting assuring that we stay true to our focus on recapture of lost margin during the downturn, and enhancing margins, going forward. So that the focus that we have and had now for the past year, is on what ultimately impacts the bottomline.

So an opportunity to just accept an order for volume sake, that doesn't enhance margin and ultimately doesn't enhance bottomline, will probably not be the one we'll go after. We will stay focused and get those and get those that we can get the kind of pricing and margins that we want.

Joe O'Dea - Vertical Research Partners

And then one more for you, just on the Walker side of things with drought conditions and the impact on AG, anything that you out there on Walker, any impacting into the back half of the year?

Dick Giromini

No, I don't think there is any specific related to the back half of year in that area, and that they've got a pretty broad product portfolio.

They continue to see good demand. One of their food related area is more around dairy, exposure things like that, but it continue to remain pretty stable.

Mark Weber

One of the things that was attractive about the Walker business structure was the already diversified nature of their business. It gives them a much better cushion during any volatile periods, that if one sector is having some choppiness, then other sectors are holding up real well for them. And they shift their available capacity to focus on those sectors that have the stronger demand. So we feel very comfortable with the outlook for them for the balance of the year.


And your next question comes from the line of Brad Delco with Stephens.

Brad Delco - Stephens

Wondered if you could talk a little bit about, maybe the backlog on your legacy business? I think you suggested six months of backlog. I guess do you have those slots available? And then maybe talk about with the kind of macro data we're picking up, it looks a little bit weaker. Do you fear that there is any risks of pricing given you're more focused on margin now? And how the demand environment looks?

Dick Giromini

That the make up of the backlog of course, we reported 12 months backlog. So some of that does roll over into 2013, but we have open slots in the fourth quarter. So we continue to look at those quote opportunities that make the most sense, fit our acceptable profile to fill those swaps in the fourth quarter.

So from that perspective, we feel pretty good about the numbers we put out there as far as the range volume that we would expect. If there is opportunity out there, that are attractive then we may go after them, and accept those. If not, then we'll hold firm. We've not seen any erosion on the pricing side, based on some of the choppiness that's out there, and the concerns about some pause or slow down in orders.

I look at the historical order rates last year versus this year, and when you look at them, it's really not out of kilter. We had such a strong first quarter in this order season, which is the forth quarter 2011, beating 2012 needs. That as we now get closer into entering the 2013 quotes and order season, and some of the early feedback and the early inquiries we're getting from customers, certainly makes me feel very comfortable, that we're are going to see a strong quote and order activity as we get later into this quarter, and certainly into the fourth quarter.

Brad Delco - Stephens

And Mark, second question for you. Can you talk about what SG&A was specifically for Walker in the quarter, and maybe what the expectations are for SG&A for Walker going forward in the quarters to come?

Mark Weber

There is obviously a bigger non-cash deposit because there SG&A runs, there business model runs higher than ours and then the acquisition cost it's higher. I think if you look at our historical run rate of just over $12 million, with Walker they are going to be about the same, bringing this to a $25 million in total, a big component of that obviously, amortization of the intangible that's where that's flowing through the SG&A line on the P&L.

Brad Delco - Stephens

So it's all the amortization associated with the acquisition is in SG&A?

Mark Weber

That's not hitting cost of good sold, its hitting on SG&A.

Brad Delco - Stephens

And then maybe Dick, just kind of high level, can you talk about the acquisition thus far, what's been the positive surprise? What are the things maybe that I don't know if there is anything concerning given the current environment, but just talk about how it's performing relative to your expectations, would be helpful?

Dick Giromini

We've been very pleased. We haven't found any skeletons in the closet if that's part of the question. We've been very pleased overall with the acquisition, with the result thus far. They are actually performing beyond what our original expectations were. So that's very pleasing to us and it again it makes us feel very good for what's going to come in the future.

We believe that we've just scratched the surface on what the longer term opportunities may be, the synergies between that the organization. Clearly, we're on our way on the supply chain side, the purchasing side of gaining those opportunities, the synergies.

So we feel very good there. It's proving out to be what we expected and anticipated, when we first of were looking at the opportunity. But longer term there is a lot of opportunities for cross-selling between the businesses, of different product and we've not build that into any of our synergy projections, or expectations.

We went into it with an open mind, say we'll going to evaluate it, take our time to evaluate what those opportunities are. But we certainly are seeing plenty of opportunities on that front to increase the topline and then drive further bottomline impact through some cross-selling opportunities.

Brad Delco - Stephens

And then maybe, one last question, I feel just for clarification purposes. Mark, did you say, you thought your poor legacy business could improve gross margin about 25 basis points, going forward in the back half the year? And with the total implied guidance on the diversified products, so that the margins stay relatively flat, or will that improve as Walker, kind of comes into the full quarters.

Mark Weber

Yes, I think, your point on the first one is correct. As I said, at the end of Q2, that the legacy business has add about the just north of 9% and our goal is 9.5% out of the gate at the high end of our range. So I think we have opportunity to make the progress towards that as we close out the year, call it 25 basis points quarter.

On the diversified, a lot of it, how quickly we can get something commercialized. I think it's based to be around where the Q2 margins were at 23%.

And if we can get some more stuff commercialized, if we get some customer and investments off the bank and if we can get quicker traction on the synergies that Dick talked about, then so may be we can get some leverage there. But we're certainly very pleased with the progress that that has shown already this yearend.


Your next question comes from the line of Steve Dyer with Craig-Hallum.

Steven Dyer - Craig-Hallum

Mark, I miss something you said right at the end of your prepared remarks, something about the $135 million to $145 million quarterly run rate. Was that overall total diversified products Walker plus your core diversified products?

Mark Weber

Yes, if you really look at it, is really, was trying to give you some guidance on both diversified products would look like on a full run rate basis with Walker in there. So the Walker plus our existing composite, energies and wood product business.

Steven Dyer - Craig-Hallum

And then on the 12,000 to 13,000 unit shipment guidance for Q3, I mean is it right to think of that that Walker's is kind of 800ish of that and the legacy is the balance?

Mark Weber

Yes, I think it's a pretty good rough split.

Steven Dyer - Craig-Hallum

Gross margins on blended basis you've enviously given a lot of color, the lot of moving parts. Where does that sort of get you to on a full quarter gross margin blended basis? I mean, I am giving 12,000 plus or minus, what's a good number to use going forward?

Dick Giromini

Yes, obviously the biggest driver on the balance of the back half year is going to be full run rate of Walker addition, and I think your math is pretty close to the right expectation.

Steven Dyer - Craig-Hallum

Can you talk a little bit more about taxes? You obviously reported a full statutory tax rate. Is that something you're going to be doing going forward, and again, what's the delta between cash taxes and the statutory rate?

Mark Weber

Well, so the taxes are still a little bit of strange reporting spot. So there was just over $1 million in the quarter. $400,000 of that was cash, and I think the balance was non-cash for tax liability.

And we'll see about a $1 million to a $1.5 million at quarter in the back half of the year. And it's really related to the acquisition, new jurisdictions where we don't have existing NOLs and deferred tax liability.

That being said, we still have a significant reserve in place against our NOL. That's something that we continue to evaluate, as we get to the end of the year and we see what our backlog for 2013 look like, with the industry shaping up.

If we could be in a position to reverse a portion and all of that reserve, but that's something we'll evaluate. If that were to happen then in 2013, we get into a situation where we have something that looks more like a 39% or 40% of effective tax rate.

From a cash perspective, though, the NOLs are still in place as I discussed, and we have about $107 million available this year to offset taxable income, and around $40 million-ish in the K, but $40 million available for next year.

Steven Dyer - Craig-Hallum

So statutory tax rate just for modeling purposes going forward, is the mid-30s reasonable?

Mark Weber

I'd use the $1 million to $1.5 million for the balance over the year regardless what income looks like because we're still in this reserve position.

Steven Dyer - Craig-Hallum

And then Walker you gave backlog quarter-over-quarter, what was Walker's backlog last year exiting Q2 and it goes $190 million this year?

Mark Weber

I don't know that I have that available, Steve, I can follow-up with it. It's certainly up significantly year-over-year but I don't have the exact delta available.

Steven Dyer - Craig-Hallum

And then last question, any sort of leftover acquisition expenses in Q3 or are those done?

Mark Weber

Actually, we had the big slot that was acquisition cost of $12.2 million, that's on the P&L and that we have another adjustment for some short term in nature purchase accounting related adjustment, about $1.4. And you'll probably see about that same level in Q3, and maybe a little bit in Q4.

Steven Dyer - Craig-Hallum

For just the second line item, not the big $12 million?

Mark Weber

It just was a short term purchase accounting item the majority should fall in Q3, but there might be little bit of tail in Q4.

Steven Dyer - Craig-Hallum

And acquisition expenses should be nil going forward?

Mark Weber

Yes, it should be zero

Steven Dyer - Craig-Hallum

And are you going to add back the non-cash hit to the SG&A to arrive at your pro forma EPS?

Dick Giromini

No, you can see the reconciliation we really left it as a one-time item or one-time in the quarter, or short term in nature and the ongoing amortization of about $3.5 to $4 million, we have excluded from that. We will continue to show the operating EBITDA which factors those out. But as I said, just in this quarter the non-cash item associated with Walker that we didn't adjust that of EPS with another $0.06.


And our next question comes from the line of Tom Albrecht with BB&T.

Tom Albrecht - BB&T

I wondered you just kind of dug in a couple of things here. First of all, one the new production or deliveries guidance of 48,000 to 52,000, last quarter you had not closed Walker when you had earnings and your guidance was 50,000 to 56,000, and I believe that was excluding Walker. Now it includes Walker, so I wanted to just make sure I heard you correctly.

Dick Giromini

Yes, you are absolutely on point, Tom. We are talking about another question here, but if you look at the run rate that Walker had in Q2 of 400 that would roughly imply a couple of thousand units from the full year from them at that kind of run rate levels. So if you're trying to get to an apples-to-apples on the 50,000 to 56,000, it's 46,000 to 50,000.

Tom Albrecht - BB&T

That's fine. I just want to make sure, I heard you correctly. And then secondly, so if the third quarter is 12,000 to 13,000, based upon what you've done year-to-date, you need about 26,000 in the second half of the year. So couple of quarters at 13,000, but if you're at the low end 12,000, is there the possibility you could do 14,000 in the fourth quarter, just to get to that 48,000 number.

Mark Weber

Yes. Two things obviously we're going to be looking to continue to build inventory really in the first half of the year, so we expect shipment to catch up. So there will be some shipments in excess of up production. But then as Dick talked about, throughout we've already been working on productivity initiatives to deal with the broader specs. So production will creep up in Q3 and in Q4 to hope to get us there.

Dick Giromini

And the back half of the year is always stronger than first half of the shipment side, so that's certainly our expectation that we'll be able to hit those kind of numbers.

Tom Albrecht - BB&T

And then back to the SG&A. So you've given some pretty good color there, but pre-Walker your target was 4% or less, even though I think in the first quarter it was 4.5%, and then a minute ago you said it was about 4.5% pre-Walker as a percentage of revenue. So I just want to make sure have you raised your SG&A expectations on the core-Wabash business?

Dick Giromini

No, we haven't, Tom. It's more of a factor of the topline or anything. So we've got a fixed piece primarily in the G&A. We have a pretty lean selling line and it's been having the impact on adjusting that the topline down is really what's impacted that as a percent of revenue. We're going to continue to work the business to get to that higher run rate, but I think 4% is still achievable with the business model we have.

Tom Albrecht - BB&T

And then just two other things and I'll jump back in the queue. Just to make sure, I heard you correctly, so if Walker's SG&A is $12 million or $13 million a quarter, did I hear that about $4 million of that was the amortization of intangibles?

Dick Giromini


Tom Albrecht - BB&T

I know you don't give guidance, but we've got a full quarter of Walker and we've got shipments that are likely to be the same or slightly higher than what we just had. Would you expect the earnings to continue to improve sequentially?

Dick Giromini



And our next question comes from the line of Jeff Kauffman with Sterne Agee.

Jeff Kauffman - Sterne, Agee

Can you talk a little bit about raw material cost and kind of what they did? How much of that kind of a flip versus what we're talking about six months ago. How much of the raw material costs are moving down in some of these contracts and indexes, and how much of the lower raw material costs are you actually going to keep?

Mark Weber

From the aluminum perspective, what we do is when an order is confirmed and received, we then go out and we lock at what the market is at that time. So we will buy forward contracts, tied to the projected bill or planned bill date for that order.

So as aluminum has adjusted in the market, we will get the benefit of that based on the timing of the order and the bill. So if it's a order that's for fourth quarter bill, we take what the forward contract pricing is, and we lock in at that price. So we mitigate risk up or down, relative to that. From that standpoint, we get some benefit in this environment.

On the steel side, we have quarterly index adjustments that we adjust our steel pricing on, so as the market has come down, we get some benefit or if it goes up, we'll get the hit on that.

So again, we've talked about this in the past quarters. Our costing model will build into it in forward quarters, what the projected cost based on the best market information and projections that are out there, we build into our cost. So when we're pricing our product and costing out new quotes, we build in what the expected is into those models to assure that we get the kind of margins that we're targeting. So in some cases we are mitigating as much of that risk to margin as possible, much better than we used to be able to in the past.

Jeff Kauffman - Sterne, Agee

Mark, you mentioned ex the new businesses about 9% gross on the legacies, did I hear that right on the legacy trailer business?

Mark Weber

Well matched without Walker.

Jeff Kauffman - Sterne, Agee

Within that 9%, what percentage of the billed was still representing those 2011 contracts without the raw material recapture?

Mark Weber

It was very low. We built the majority of that out in the first quarter, so it was below 10%.

Jeff Kauffman - Sterne, Agee

But there was still a small drag on the quarter end, and going forward those who are almost completely done now?

Mark Weber

Yes. There is always some level of guys ahead of schedule throughout the year, but it's a pretty deminamous impact and obviously we continue to push pricing. And net material margin, I think is probably part of the question you're trying to get at. We continue to fall for that, and push that higher as we pulled out of the balance of the year. The next big push at that will be when we enter the order season for 2013 in the fourth quarter, and try to get another a point or two margin versus 2012.

Jeff Kauffman - Sterne, Agee

One of the issues that have come up when we talked to investors, is the debt taken on by the acquisition, and I know the rating agency reported, there was some discussion about debt pay down in the first 12 months of the acquisition.

Now, you're throwing off free cash, again, can you give us an idea of what the priorities are in terms of getting that down, and how quickly and how much of the free cash flow would you divert to debt reduction over, say the next 12 months to 18 months?

Dick Giromini

I think short term, certainly as I discussed part of our debt at the end of the June was $25 million on our outstanding on the revolver. So we'll continue to pay that piece of the debt down, as we have free cash flow and a liquidity position of the company which had been at the end of June was $150 million. So we feel pretty good about where we're at on our liquidity situation.

The other thing, I think that we really forget about is the leverage position where we're we sitting at, though, on a senior secured basis, as I mentioned it's 2.4 times. So we have brought that down, even since, we put that capital structure placed early in May. So we're getting the leverage ratio down.

As we get to the end of the year, we'll be looking at, and we'll be talking with the board and evaluating way for the best alternative use for free cash flow whether that's continuing to invest in the organic businesses or M&A or debt pay down or other utilization.

Jeff Kauffman - Sterne, Agee

Is there a level that you'd like to get that down to ideally before you start thinking about things like dividends or share repurchases?

Mark Weber

I think, we'd like to see from leverage perspective. I can give you the ratio, closer to two and under two point


And our next question comes from the line of Kristine Kubacki with Avondale Partners.

Kristine Kubacki - Avondale Partners

Just a bigger picture question, it's clearly there are lot of macro worries out there. I'm just trying to set stage for how we could see order trends. I mean you've commented about open slots in the fourth quarter, something that you didn't have at this point a year ago.

What's the probability in giving kind of the freight uncertainty, that we see a later order season given the fleets are probably hoping to have more favorable price negotiations. So I guess when could we see orders reaccelerate, is there a probability that may be the order season maybe falls more into next year?

Dick Giromini

That's one of those, what if, certainly hypothetical from timing. We've talked in the past about how you can be off by one or two months when specific customers end up making there decisions to actually place the orders. The early inquiries that we've gotten from customers, certainly implies that customers are already talking about, in some cases 2013 needs. And in number of cases, the volumes that they are talking are equal to a higher than what we have been talking this year.

And in some other cases, it's with customers that didn't buy in 2010 or 2011 that are now talking about needs for 2013. So from a standpoint of trailer demand, we still feel very good that the volumes for 2013, the demand for 2013 will be strong.

If customers make those placements of orders and October and November or if they push it to December, January, that's a tough call to make. Certainly, we have seen that from year-to-year when we look at specific nameplate, on when the decisions are made. It can move by a couple of months, either way.

Kristine Kubacki - Avondale Partners

So we've seen a fair amount of the large fleet may comment that they've cut their CapEx budget. Are you seeing more activities from the mid-to-smaller sides' fleets out there? I mean do you expect the larger fleet's to maybe comeback in next year? Obviously, they had a big pull ahead, last year due to bonus depreciations.

Dick Giromini

We're not seeing what the comment you just made about big fleet. We've heard some of that commentary. We're wondering if that's more related to the power unit side and to this trailer side.

We've had a customer that early in the year was talking about needing an excess of what their initial order was, then they decided that they wouldn't need them. And then more recently, have come back said, oh, we do need additional trailers, yet this year.

So I think they're trying to get a read on what's happening out in the marketplace. First two weeks of June was strong, last two weeks of June weren't what they expected. So there is a lot of tough reads out there for the fleets. And I think fundamentally, the fleet age is at all time peak highs.

The regulatory environment is getting tougher and tougher for these guys to use old equipment. They recognized, and they took some of the equipment during the downturn. They recognized they don't have the access to choose from many more. They got to have good equipment in their fleet. And they're just really now just trying to determine what the best time for them to make those moves.

But we're clearly seeing based on some of the early dialogues we've had with a number of strong named customers, that if they had that need, and again, it's equal to or more than what they did either this year or last year and in some cases had been in the game for two or three years and are getting back in.

So we still feel very good about what the overall demand environment is for the balance of this year and then especially for next year's buying season which starts later this quarter.


And we have a follow-up question from Tom Albrecht with BB&T.

Tom Albrecht - BB&T

On the 9%, I think you were talking about gross margin for sort of the existing Wabash business, is that correct, pre-Walker?

Dick Giromini

Yes. If you go to back in what the Wabash numbers would have looked like excluding Walker that gross margins sort of were just above 9%.

Tom Albrecht - BB&T

The reason I got a little confused with that is that in the segment information for Commercial Trailer Products in Q2, you show us 6.7%. So what's the difference there that I'm missing?

Dick Giromini

Well, you've got the Wood Product business, you've got the Wabash Composites and you've got the Energy & Environmental Solutions, that's what Mark was referring to. If you were to extract Walker out of it, and go back to pre-Walker, what it would have looked like. So you can do kind of a relative basis, that's why we're just trying to give you another comparison point.

Tom Albrecht - BB&T

I know you've got early thoughts, do you have any thoughts you want to share with us just yet regarding next year's deliveries?

Dick Giromini

You know much like what I shared with Kristine. It's too much of guessing the future at this point. We feel very confident and comfortable with the earlier discussions we've had with a number customers and what their needs are looking like. But it's really too early to have what the expectation.

One thing I will say, I don't think that 2013 is going to be less than 2012. I think it's going to be stronger based on the dialogues that we've had and just the commentary from different customers. And the fact that some folks who have stayed on the sideline during these last two, three, four years are getting back into the fray, certainly would imply that 2013 would be higher than 2012.


Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn the call back over to Dick Giromini for closing remarks.

Dick Giromini

Thank you. Just in summary, this past quarter was truly a breakout period for our business. With the completion of the Walker Group acquisition, certainly being a highlight.

We're pleased with the progress we've made throughout the first half of this year. We continue to gain momentum as we execute our strategic plan and transform Wabash National from a trailer manufacturer to a diversified manufacturing organization.

Although, there is much work to be done, we now have a strong platform for higher margin product lines, more consistent financial performance and numerous avenues for continued growth. But this is just a beginning. We remained committed to making this a year of execution and results. So we may continue to deliver exceptional value to our customers and shareholders.

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


Ladies and gentlemen, we thank you for you participation in today's conference. This concludes the presentation. And you may now disconnect. Have a good day.

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