Wabash National Corporation (WNC) Q1 2012 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the First 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. Dick Giromini, Chief Executive Officer. Please proceed.

Thank you, Erica, and good morning. Before we begin I would like to make an important announcement. As with all of these types of presentations, this morning’s call contains certain forward-looking information, including statements about the company’s prospects, the industry outlook, backlog information, financial condition and other matters. As you know, actual results could differ materially from those projected in forward-looking statements. These statements should be viewed in light of the cautionary statements and risk factors set forth from time-to-time in the company’s filings with the Securities & Exchange Commission. Welcome to Wabash National Corporation’s first quarter 2012 earnings call. I am Dick Giromini, Chief Executive Officer. With me this morning is Mark Weber, our Chief Financial Officer. We have great deal to share today and we’ll try to provide as much information as possible. I’ll first comment on several key highlights for the quarter, discuss the broader operating environment, and provide expectations for the coming quarter and fiscal year. Then I’ll ask Mark to give a detailed description of our financial results. At the conclusion of the prepared portion of our presentation, we’ll open the call for questions from the listening audience. With that let’s discuss the first quarter results. While just getting started and with a lot yet to get done. We’re nonetheless pleased with the momentum and ongoing progress that we’re making with the business, both in our financial results and in our company’s overall performance during the quarter. Excluding acquisition-related expenses, we generated net income of $6.7 million representing over 100% improvement as compared to first quarter of 2011 net income of $3.2 million. Margin performance showed progress in the quarter with improved gross margins of 7.1%, up from the 6.0% attained in the prior quarter, as we continue to make gains in the mix of higher margin shipments along with continued workforce maturity offset partially by the decreased absorption related to lower first quarter seasonal production levels. Operating EBITDA totaled $12.3 million which represents an increase of $3.5 million or a 40% improvement when compared with the first quarter of 2011, on approximately 1,400 additional new trailer shipments. Again excluding acquisition-related expenses, operating income for the first quarter of 2012 was $7.1 million, an improvement of $3.1 million or 78% as compared to the previous year period, resulting from new trailer shipments of 10,300 units just of our original guidance of 11,000 units. While modestly below our original estimates, it’s important to stress that this is simply a timing event as new trailer deliveries increased month-over-month throughout the quarter as customers once again slowly adjusted to our increasing build rates following the holiday period. Year-over-year consolidated revenues for the first quarter increased by approximately $56 million or 25%. In addition, as production builds for the first quarter yielded approximately 11,000 trailers, we anticipate the vast majority, if not all of the shipment shortfall to be made up during the course of the second quarter. Most importantly, when excluding the impact of acquisition-related expenses, we were able to deliver operating income of $7.1 million or 2.6%, the best performance since third quarter of 2007 reflecting the improved overhead cost structure of our business. Quote and order activity throughout the first quarter remained healthy and in line with seasonal and cyclical demand trends. Our first quarter orders moderated somewhat from what was experienced during fourth quarter. Overall order patterns this past quarter remain above historical averages and consistent with the stage of the industry recovery that we are in. To put this in perspective, we must recognize the industry orders for the 6 month period of October 2011 through March 2012 totaled nearly 142,000 units as compared to the same 6 month period in 2010-2011 of 131,000 units or 8% higher. Despite the fact that February and March were off from the unsustainable November through January levels in which over 82,000 units were ordered or an unrealistic 329,000 units annualized. There had to be a pause. Customers especially large fleets were earlier in placing orders for this year than they were for last year’s needs, as their comfort level with the overall economy and the level of trucking demand has continued to grow. This was especially true of large truckload dry van orders. Remember the late 2010, early 2011 order season was at the back-end of the longest and deepest downturn and demand that our industry had seen in over 30 years. Customers were only beginning to get comfortable with their decisions to once again place orders and begin addressing their aging fleets leading to slower placement at the outset. Recently we’ve not see a slowdown in quote activity as we entered the current quarter and remained confident of strong demand going forward. That said, our backlog as of March 31, 2012 remained relatively consistent with the December 31, 2011 levels of $587 million and $583 million. Despite the impact of our previously stated intent to be more selective in order acceptance as we work to recapture margin compression experience during the recent downturn, and the rapid production ramp-up coming out of the holiday season. We are encouraged by the overall progress made thus far and continue to see positive improvements in workforce productivity, a strong backlog, continued growing mix of higher margin orders, while also effectively managing for fluctuating commodity prices, which all combined contribute to our improving profitability and overall operating performance. We’ll see continued gains in gross margins and at the operating income line, as we proceed forward through the quarter and beyond. These trends coupled with our successful and focused efforts to diversify the business, position us well for continued improved profitability and long-term growth. For example, the diversified product segment consisting of Wabash Composites, Wabash Energy and Environmental Solutions and Wabash Wood Products generated sales of approximately $32 million for the first quarter of 2012, representing a 57% increase from the prior year period. More importantly, diversified products achieved gross margins in excess of 20% for the quarter meeting one of the key criteria of our strategic growth efforts. Mark will provide more color regarding the individual reporting segments a little later. As you know on March 27, 2012 we announced that we entered into a definitive agreement to acquire Walker Group Holdings, a leading manufacturer of liquid transportation systems and engineered products. Joining forces with Walker further enhance -- advances on execution of our strategic plan to diversify and profitably grow the business. We look forward to adding Walker to the Wabash National family, a clear leader in a complementary and growing market sector with a leading position in nearly all of its product categories, well known brands, strong customer relationships that span over decades and a high margin product portfolio supported by industry leading innovation and low-cost manufacturing. As I noted in March, we made the initial announcement, I emphasized how eager we were to add a deep and talented team under the leadership of Doug Chapple, who currently serves as CEO of Walker. Our 2 companies share a strong cultural fit and we look forward to completing the transaction soon to then begin to integrate best practices, leverage individual talents, and accelerate strategic growth initiatives across the combined entity. Again the strategic rationale for this transaction is broken down into 3 main areas; industry leadership, diversification, and an attractive financial profile. Walker has a leading market position and strong brand recognition in nearly all of the markets it serves. This complements our existing leadership position in van trailer manufacturing and related products and technologies and provides a new platform for growth and value creation. Similar to the strong demand within Wabash National’s van and platform businesses, the tank trailer industry also continues to demonstrate a healthy demand environment as Walker’s backlog as of March 31, 2012 of $179 million represents an increase of 67% as compared to the previous year. Walker and Wabash National share a common culture built on innovation and continuous improvement with a distinguished track record of delivering the very best products and solutions in the market today. Efforts to close this transaction continue to move at a rapid pace and we anticipate the Walker acquisition to close during the current quarter. Mark will discuss details of the transaction in his portion of today’s call. Moving forward, we expect to build on the success of the first quarter of 2012. Throughout the balance of the year, we will continue to move forward as we continue our efforts to transform Wabash National into a diversified industrial manufacturer by leveraging our core competencies in new markets like chemical and pharma by continuing to improve profitability through operational excellence and by capturing additional revenue streams by means of new product development. And as we bring Walker into the fold, we’ll demonstrate our ability to make our broader vision and mission to reality to deliver long-term shareholder value. Now before I review our outlook for the second quarter 2012 and the year, I’ll take a few moments to provide an overview of some of the key economic indicators and industry dynamics that we monitor closely that provide a broader content for our expectations. The Conference Board Leading Economic Index rose in March to 95.7 following a 0.7% increase in February and the highest level in 44 months. The Institute of Supply Management Manufacturing Index advanced from 53.4% in March to 54.8% in April, indicating continued strong expansion activity in the manufacturing sector. For the first quarter of 2012, total industrial production increased at an annual rate of 10.4%. And GDP advanced by 2.2% during the first quarter following fourth quarter 2011 at 3%. This increase consumer spending was offset by government spending cuts but still reflects the 11th consecutive quarter of growth. Within the trucking industry, the ATA Truck Tonnage Index for March came at 119.5 or a 0.2% increase versus February reflecting the 28th consecutive month of year-over-year improvement and the third strongest on record. For the year, truck tonnage rose 2.7%. The FTR Truck and Loading Index moderated slightly in March by 0.5% but still rose year-over-year by 29%. Expectations by FTR’s for this index to grow by 3.1% in 2012 and 4.1% in 2013. Industry-wide net trailer orders in the first quarter totaled nearly 68,000 units following the fourth quarter of just under 74,000 units ordered, pushing industry backlog at quarter-end to 115,000 units. Some of 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 ever seen. Industry forecast has remained similarly optimistic and pointing towards strong demand throughout the next several years, with annual trailer demand exceeding 2011 levels each of the next 6 years. Near-term the latest report from ACT estimates 2012 trailer shipments at 251,000 units, up 20% year-over-year and 267,400 trailers in 2013, up an additional 7% over 2012. Plus FTR now estimates trailer production for 2012 at 249,000 trailers, an increase of 17% year-over-year and 250,000 units for 2013. So considering all of these factors, current quarter expectations are now to ship approximately 13,000 units with full-year shipments remaining within our previous guidance of 50,000 to 56,000 units. In summary, let me underscore how pleased we are with the progress achieved in the first quarter as we execute to build upon key operational improvements and move forward with our strategic plan to diversify our business. We do realize however, that we have work to do to get our margins where they need to be. We are poised for continued top line and bottom line growth as we execute our organic diversification strategies, and through the strategic integration of the Walker acquisition. Combining that with an environment of strong industry demand and a favorable cycle that is expected to last longer than historical periods, and we have the ingredients of strong shareholder value creation in the months and years ahead. With that, let me turn the call over to Mark.

Thanks, Dick. And thanks to everyone for joining us this morning to review in more detail the first quarter earnings release that we issued on Monday. As you’re likely aware, we accelerated the release by a day to help facilitate our ongoing financing activities, all good news that I will certainly cover. First, let me mention that in addition to the earnings release that went out on Monday, we also filed our first quarter 10-Q yesterday evening. Also I’ll provide specific commentary regarding the Walker acquisition at the end of my prepared comments on Wabash otherwise unless specifically noted, all my comments around the quarter and outlook pertains to the current Wabash business pre-acquisition. With that, let’s begin. Total revenue for the quarter improved year-over-year by more than 25% to $278 million. In the quarter, new trailer sales totaled 10,300. New trailers were $235 million, an increase of 16% and 21% respectively from the first quarter of last year. New trailer ASP for Q1 increased from the fourth quarter by approximate $800 and versus a year ago by approximately $1,200 coming in at $22,900 per unit. The increase in trailer ASP is due primarily to price increases implemented to recover component commodity cost inflation that was realized throughout last year. Looking at our other product lines, used trailer revenue came in at approximately $8 million on 1,000 units and was up approximately $3 million from the same quarter a year ago, as the used trailer market continues to demonstrate healthy demand and pricing. Parts, service, and other component revenue was approximately $27 million in the quarter, an improvement of approximately $6 million from a year ago, led by increased sale of our non-trailer composite products. In addition, revenue from equipment and other sales of $8 million increased $6 million year-over-year primarily from sales of frac tanks under our agreement with Sabre Manufacturing entered into in March of 2011. In terms of operating results, gross profit for the quarter was $19.7 million or 7.1% and represents an improvement from 2011’s fourth quarter gross margin of 6%. The quarter benefited from improved pricing, a stable workforce, moderate raw materials, and growth in our higher margin non-trailer products. As a remainder, Q4 of last year also benefited from a favorable warranty adjustment of approximately $2 million or 60 basis points. So net margin expansion is closer to a 170 basis points sequentially. Specifically, the commercial trailer product segment improved gross margin sequentially by a 140 basis points to 4.8% excluding the favorable warranty adjustment from last year. This improvement was primarily driven by net trailer pricing improvements of almost 250 basis points this quarter as pricing within the backlog strengthened as lower margin legacy orders decreased from approximate 2/3 of the build in Q4 to approximately 40% of the build this past quarter. We expect this improving backlog trend to continue, as we move through Q2 with legacy backlog representing approximately 10% of production. This favorable pricing benefit was partially muted by lower production in the quarter which decreased by approximately 2,300 units from Q4. As expected, production was seasonally lower this quarter at approximately 11,100 new trailers. However, year-over-year production was higher by approximately 17% as the industry continues its early stage recovery. In addition, workforce productivity continued to improve and materials were generally stable. As a result of the improved backlog, favorable product mix, and generally stable raw material costs, material costs as a percent of selling price for commercial trailer product segment improved during the quarter to 320 basis points from 78.6% of sales in Q4 to 75.4% of sales in Q1. In total, Commercial Trailer products has now demonstrated 250 basis points of improvement in gross margins since the low point of the third quarter of last year, moving into the current quarter, we will make another step function improvement in gross margin as pricing improves commensurate with the newer backlog and as production volumes increase from seasonally lower Q1. Looking at gross margins in our other segment, several noteworthy signs of revenue. Our new reporting segment, Diversified Product also demonstrated significant top line growth of 57% and more importantly gross margins in excess of 20% consistent with our long-term strategy and our Retail segment of 10% gross margins is one of the highest levels in history. Even more encouraging, Q1 generated positive operating income for the sixth consecutive quarter and represents the 10th consecutive quarter of year-over-year improvement. Q1 generated operating income of $7.1 million excluding acquisition-related costs and reflects an improvement of $3.1 million from last year. For the quarter, we generated operating income margin of 2.6%, our highest level since 2007 as we continue to demonstrate leverage from SG&A costs. The acquisition costs noted in the quarter of $1.7 million relates to our proposed acquisition of Walker Group Holdings. We expect this transaction to close later this quarter and total acquisition costs -- acquisition-related costs are estimated to be in the range of $12 million to $15 million. SG&A for the quarter was flat with the prior quarter at approximately $12.6 million, while this represents approximately 4.5% of revenue, this was significantly better than the prior year’s 5.6%, and we still anticipate full-year SG&A costs to be below 4% of revenue for the year as trailer volumes improve. Net other expense of approximately $700,000 relates primarily to borrowing costs associated with the revolving credit facility consistent with prior quarters. In terms of taxes, at March 31, we have a U.S. federal NOL carry-forward of approximately $158 million. However we have a full valuation allowance recorded against our net deferred tax asset. The federal NOL carry-forward will begin to expire 2022. Please refer to the 10-K for more details on the annual limitations of our NOLs. However, we estimate approximately $107 million of NOLs available for utilization this year subject to pre-tax earnings. Finally, for the quarter, net income excluding acquisition-related costs was $6.7 million or $0.10 per share at the high-end of our guidance range provided last month. The details of EPS and share count are included in the press release. Onto the balance sheet. In regards to the balance sheet and cash flow statements, let me provide a little more detail on some specifics. Total inventories increased approximately $25 million driven largely by increased raw materials in the quarter as production levels increased off our year-end shutdown, as well as select material pre-buys ahead of price increases. As a result, we expect raw material levels to reduce and normalize this quarter. As of December 31, inventories of $215 million consist of the following, raw materials of $70 million, WIP of $18 million, finished trailers of $108 million, parts of $6 million, and used trailers of $13 million. Capital spending for the quarter was approximately $1 million and we anticipate full-year 2012 spending to be approximately $10 million to $15 million. Our liquidity or cash plus available borrowings as of March 31, was approximately at $100 million. In summary, Q1 continued the momentum which began last quarter as improved pricing and a stable workforce and material environment allowed for the best operating income margin in over 4 years. Taking stock of the rest of the year, the company is well positioned to continue the momentum generated last quarter. Backlog as of March 31 was approximately $538 million essentially flat with the year-end. The demand environment continues to show strong signs with recent strength across all product lines. In fact, April order activity represented our second highest month this year. In regards to the current quarter, we estimate Q2 shipments to be approximately 13,000 and as Dick discussed, we continue to estimate full-year new trailer volumes to be in the range of 50,000 to 56,000. Consistent with the last quarter with a solid foundation and place, we anticipate expanding margins throughout the year as industry demand, pricing, and our organic growth initiatives take hold, while it’s still early the first quarter has put us well on our way to achieving the margin expansion discussed last quarter of between 200 to 400 basis points versus 2011 or said differently, 2012 gross margins of 7.5% to 9.5%. Now let me provide a brief update on the Walker acquisition which we announced on March 27. In that regard, on April 23, we issued $150 million, 3 3/8% senior convertible notes due 2018. The notes are convertible under certain circumstances into cash, shares of common stock or a combination in our election. The notes were priced in at initial conversion premium of 35% or approximately $11.70 per share. To help reduce potential equity dilution, we intend to settle any conversions through net share settlement, whereby when notes are converted, Wabash will pay up to the principal amount of the converted notes and deliver shares for only the conversion value in excess of the principal amount. Under this treatment, the company will apply the Treasury Stock Method and not reflect dilutive shares until the stock price is over $11.70 per share. As an example, as stock price of $16 per share, the impact of potentially dilutive shares related to the convertible notes would be approximately 3.4 million shares or only 5% of our current dilutive shares outstanding. However, no additional shares would be included if their effects would be anti-dilutive which maybe the case. More details will be available next quarter, once we have completed the valuation work required for the convertible notes. In addition, this morning, we priced our new $300 million senior secured term loan to fund the remaining portion of the purchase price of the acquisition. The 7-year term loan was rated B+, B1 by Standard and Poor’s and Moody’s and priced at LIBOR plus 475 basis points with a 1 1/4% LIBOR floor and a 1% original issue discount. The effective yield on this loan is approximately 6 1/4%. All told, we are positioned to put in place a cost effective permanent capital structure at more favorable terms and structure than contemplated at the time of Walker announcement. This structure provides prepay ability as the combined business that generate cash, availability and liquidity to fund working capital and seasonality of the business, and minimize equities dilution. As a result, we do not expect to draw on the first facility and we are on track to complete the transaction and begin the integration process with closing likely to be completed in the next several days. On the business front, Walker’s liquid tank trailer business similar to the strong demand experienced within our core trailer products has shown healthy order activity over the past 6 months with industry net orders up over 22% versus the same period a year ago. This has resulted in a record backlog for Walker as of March 31 of $179 million. Based on internal management reporting, Walker saw top line growth in the first quarter of approximately 25% year-over-year. As a reminder, Walker has consistently generated gross margins of approximately 20% or better, providing solid predictable performance. On our next quarters’ call, we will be able to provide additional color on Walker’s performance and outlook, but rest assured Doug Chapple and his team are focused on execution and position to take advantage of the strong and still recovering liquid tank environment. We look forward to jointly working to accelerate their growth initiatives and to delivering additional synergies of approximately $10 million annually. With that, I’ll turn the call back to the operator. We’ll take any questions you may have. Thanks.

[Operator Instructions] Our first question comes from the line of Steve Dyer with Craig-Hallum.

Mark, I think you had guided sort of a legacy mix of about 10% in Q2. What was it in Q1, I think I had missed that?

Yes, so just we’ll kind of go back in time a little bit and quarter-by-quarter if you go back to Q3 of last year, it was essentially 100% of those lower price legacy backlog. In Q4, about 2-thirds was legacy related and last quarter, it was about 40%.

40%., okay. So I guess if you just sort of do a blended gross margin, it would imply that the gross margin on the new business is somewhere just in the trailer portion of it, somewhere kind of north of 8%. Am I thinking about that right?

Yes, I think if you used Q3 as your starting point with gross margin at 2.3% and then kind of roll it forward, I think you’ll see it in that 7% to 8% range over the past 2 quarters.

And presumably that can grow a little bit as pricing continues to -- as you continue to get pricing going forward?

Yes, I think it’s a factor of the demand environment one, and orders and 2, I think it’s a factor of the channel mix as well. So we’re obviously entering the phase to some degree where you see more of the indirect channel through our branches and dealers and also some of the small mid-markets accounts coming into the book which generally carry a little bit better margins with them.

Okay. And then what about flatbeds which have been obviously very strong so far this year, what’s the margin profile on those?

Yes, I think first point is you’re absolutely right, we’ve seen good -- coming off of very low point for that industry, but on a percentage basis, we’ve seen very strong growth in the backlog and order activity there. And certainly by the nature of it, being much more smaller fleets and owner-operators, there is a better margin opportunity there. We don’t disclose that exact range but it is generally a touch above the fleet guys.

Okay. And then within the Diversified Products group, is there any particular area of that that’s driving the out-performance. Is it the frac tanks or anything you’d like to call out as outperforming there?

Well at this stage, we don’t break out the individual, but the whole group has been gaining steam, certainly the Wabash Composites Group, that’s had some nice success over the past 3 years in growing that business are getting to a nice level of critical mass that helps them generate some nice margins and the Wood Products Group that supports the core trailer business does well. The frac tank business is still ramping up as they absorb not only the new product but the startup and ramp-up of the new blast and paint lines. So they are coming on-stream throughout this last quarter and today.

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

I think, Dick, you mentioned something about, I guess -- or there is focus on the orders and how that sort of progressed this year. And I guess the big question that I am getting is, is there any difference in the order or the timing of orders for your larger fleets versus the smaller fleets, and are you seeing that? And then maybe any commentary as to maybe why we’ve seen some of the orders slowdown here more recently particularly in March, which is little usual relative to historical patterns?

Well, yes I was trying to lay that out in my comments. When we look at what occurred in the later part of the fourth quarter and then into January, the November, December, January period were exceptionally strong for order placement. The total orders placed in those 3 months amounted to 82,000 trailer units. When you annualize that, it comes out to 329,000 for the full-year. That was unsustainable certainly at this stage of the recovery in the industry. There had to be a pause at some point. Customers were more comfortable this year. So last year, March happened to be a very big order month and that was not going to continue. So with the drop-off in March and it was still just shy of 20,000 units, so wasn’t like it was a weak order month. It just a relative to the November, December, January, it’s sent a shockwave through everyone. I think folks tend to look at what has transpired on the Class 8 side where there has been a softening for various reasons. Some thinking that it was tied to the Bendix issue, but we don’t see that currently as a problem. Our quote activity remains strong. We’ve not seen a drop-off. Certainly the size of quotes, the number of units within quotes, are smaller than they were in previous quarters because as Mark stated in his comments, we’re getting more into the mid-sized fleets, smaller fleets, the indirect channels that are now much more active in the quoting and ordering season for themselves. So at this point in time, we feel very comfortable with the demand environment. Our backlog is very healthy. We are being more selective in the orders that we are accepting. I guess you could translate that into saying, if we really wanted to be more aggressive, we’d have even a bigger backlog because there is -- the demand is out there to have but we’re trying to be selective so that we can get that margin recovery and recapture of some of that margin compression we experienced during the downturn. So all in all, I think we’re just a little bit out of kilter. We can’t focus that much on one or 2 months in the cycle. We have to look at it in groups. This tends to be a lumpy order business and we’ve had a good run of orders that are stronger than what they were a year ago. So at this stage of the game through -- I would call it 6 months into the order season, if you count the last 3 months of 2011, first 3 months of 2012, we are ahead of the pace we were last year at this time with a good backdrop of active orders out there. So we still feel very good about the demand environment.

And Dick, just one add-on to that, you said April was your second highest order month of the year. What was the first highest if you don’t mind?

I think that was a comment I made Brad, but it was, I think January would have been -- this year would be our highest and April is going to be just shy of that. For us, I can’t speak for the industry but that gets kind of dovetails into Dick’s comments. These things are lumpy and depending on when things comes to book, you can bridge into one month or the other. And it’s more related to the fact that we still continue to see good quote and order activity. I think we’ve talked about this in prior quarters but the customer base is really broadening and that continues to happen. So a year ago, there weren’t that many LTL buyers in the book across the industry I think just about everybody is in that LTL segment ex maybe YRC, is a buyer of equipment. We’ve continued to see it broaden from the largest guys through the mid-market and smaller fleets. So when you look at FTR and ACT forecast being up 20%, we see that being pretty doable with just the expansion of the customer base. There certainly has been a strengthening in the refrigerated product and flatbed product segments and tank as well. So we feel pretty good about where the total industry is going to be. As Dick mentioned, we’ve been more selective. And I do want to just clarify I think I just spoke that our backlog was $538, its $583 million at the end of March. So we’ve got essentially closed out of Q2 and good visibility for the next several months and the opportunity to take advantage of orders as they come into the book into back half of the year.

And I’ll just add that many of the repeat customers who are ordering consecutive years, are actually ordering trailers equal to or greater in volume than what they did in last year. So it reinforces again our belief that the demand environment is very solid.

Great. And then maybe just one last quick question, looking at I guess you’re maintaining your volume guidance for the year and then you provided us 13,000 deliveries in the second quarter. If I look at the higher end of that guidance, it would suggest I guess production just over 16,000 units a quarter. Is that possible right now with the current workforce or what would be needed in order to produce that?

Well we would adjust to and we talked about this in earlier quarters. When we set that range of 50,000 to 56,000, one of the statements that I made at the time is that if the demand environment supports the kind of margins that we are willing to accept, then we could be closer to the high-end of the range. If the environment is tougher because we are being much more selective than what we’re accepting, then we would be at the lower end of the range. The answer is probably somewhere in between as we work the market and see what we can do from a standpoint of margin recovery as we’re pricing the quotes. But to answer the question directly, yes, we can achieve that. We would do some things, we have opportunities to work overtime. We still have shifts available to add if necessary as we progress through the year. So we’ll play that card if we get closer and we see what’s happening with order intake.

Got you. And we’d love to see price more than volumes at this point. So keep managing the business well.

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

Couple of things I want to clarify. A little bit related to Brad’s question but a little bit different. If I look back at let’s say 2004 and 2005, your gross margins got to consistently at 11% to 12% through a variety of quarters and back then you didn’t really have a Diversified Products division. So if gross orders are 7% to 8% for more recent orders, can you think about eventually getting back to 11% to 12% over the next 2 or 3 years?

We certainly think that’s possible. I’ve talked about it in the past, arithmetic works against you a little bit, denominator is much larger today which average trailer pricing going from the mid-$16,000 range to the $22,000-plus range. So you have to go out and get margin on the material. So that gets a little more challenging but that’s where we’re working. We’re working the process, we’re continuing to push price. We’re taking big mouthfuls of the apple, not little nibbles and we’ve made some big leaps during this last pricing cycle and we’ll continue to push that in subsequent years. If in fact the projections that ACT and FTR suggests over these next several years, it provides a lot of opportunity for all manufacturers of trailer equipment to take the opportunities to push price and recapture margin and recapture loss margins through the downturn and then some. So we feel very good going forward. It’s not going to be like falling off a log, but we’re going to keep pushing it and get to that level and then let the other diversification efforts of our business get us beyond those levels that we enjoyed in ‘04, ‘05.

And a couple of other things. Mark, on your comment about SG&A, 4% or better, I wanted to clarify, did you mean for the next 9 months or that’s still the goal for the entire 2012 average, and I still have another question?

That was -- comment for the 2012 average.

Okay. And then Dick or Mark, when I look at the gross margins in Diversified Products, they are terrific and I think we’re all starting to better understand why you’re developing this other business line but the gross revenues for that was over $31 million, but the external sales was about $19 million. So $12 million or so was internally -- are the gross margins really 20% when you have such a big inter-company sale like that? In other words, if we really knew the gross margin on just the external sales, would it still match up at 20%?

It would be slightly higher. The inter-company piece of that Tom, primarily relates to our laminated hard wood oak, that’s being sold into the dry van trailers. We have those priced where we think the market is for that. That line is -- that product line is generally slightly below 20% gross margin. So that this brings the average down a little bit to be honest.

Okay. And then my last question would just go back to demand and you’ve provided some very helpful comments on flatbed and I think the tank market and even LTL, but if you look at the big buckets that are out there, one of course is that traditional van truckload carrier. I am just wondering what is the level of quotation activity like for the van customer. I think we can figure out reefers, flatbeds et cetera and LTL but what the core truckload guys?

Yes, I don’t know that we can provide you that kind of granularity sitting here. I will just say that the total quote activity for the van operations remains very strong. The absolute number of quotes that we have coming through the system has not pulled back at all quarter-over-quarter. So the mix of it may have changed somewhat. And that excludes flatbed and other products, this is just talking about the van business. When you talk about the large truckload fleets, the high percentage of those folks have already placed their orders, that’s why we had such strong order intake as an industry in the later part of the fourth quarter, early part of the first quarter. But now as we’ve commented earlier, a lot of the indirect channels and a lot of the more mid-market type fleets are in the game because there the order quantities that they have aren’t in those levels but there are some exceptions out there and the truckload guys that are still looking at, quantities of 1,000 or more remaining this year. So while I don’t have exact numbers to be able to share, we generally don’t break it down that way. While there is some slowdown that we saw in the absolute orders for March, the overall environment is still pretty good.

I think I’d just add to it, if you go back to the beginning of the fourth quarter when those guys were coming in, I mean we saw demand from essentially everybody that was a buyer in 2011 looking for equipment in 2012, with the -- from everybody, there is maybe a couple of fleets out there that have maintained a pretty good replacement rate brought their average down. There are still buyers of equipment this year maybe not as much but they are still buying. Everybody else is buying as much or more and there has been -- there has certainly been some new guys that have come into the books that hadn’t bought in the last 3 years. And then I’d say that there are still some guys that are sitting on the sidelines that haven’t bought in the last 3 to 4 years that are going to be having to get in the replacement mode 2013, 2014 time period.

Our next question comes from the line of Jeff Kauffman with Sterne Agee. Two questions. Normally you give us the backlog number but to be in backlog you have to have an assigned production slot, that has to be built within a certain timeframe and then there is a larger backlog number which is signed contracts that just haven’t been assigned or going to be built too far out. Could you give us the total aggregate in backlog number?

Jeff, I am not sure that we do normally disclose the -- I guess what we would call internally as kind of firm or held backlog.

Okay. You have in the past in various quarters, that’s why I was asking.

Yes, I think it’s the $583 million is the formal one where we have orders, you’re correct. There is always some discussions ongoing at any given time to where we feel very good or have an principal an agreement and we’ve held slots for that. And some of that’s the increase in orders that we saw in April finally getting converted into the order which is what we saw last month.

But suffice it to say that number is larger than the $583 million?

It is.

Okay. Just one little bit of math on margins, and this kind of gets back to an earlier answer. If I assume your 60-40 legacy versus I am sorry, new contracts the legacy and I kind of take that 4% margin rate and the third quarter on the legacies and something closer to an 8% or 9% or change on the new contracts. And just do the math of that going to 90-10, I get about a 150 basis points of sequential pickup in gross margin. And then if I add in the idea that you’re going from about 11,000 units of production to 13,000 units of production, there are some efficiencies. So am I wrong in thinking that this is not a promise or a forecast but a sequential improvement in gross margin in the 150 to 200 basis point range is not unreasonable?

That’s not unreasonable.

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

Just in terms of after April, can you give us an idea that what your build slot availability is for Q3 and Q4. And then a follow-up to that question would be, are you hearing or would you expect that maybe some of these fleets who have basically put their chips on the table at this point, would they come back in with the advantage of 50% bonus depreciation still in 2012 and maybe take advantage of some of those build slots?

That’s possible. We would have expected with a 100% bonus depreciation that fleets could have gotten last year that there would have been a mad rush at the end of the year to pickup equipment, put it in service, take advantage. We didn’t see that. So I don’t know what to expect with the 50%. Anything is possible. It’d be kind of the last hurrah for them. So that’s one of those, we’re just going to have to go and see. We have not heard a lot of fleets talk about taking advantage. We had a couple last year, but the vast majority never came up in discussion as a reason for their buying patterns. Most of what we’re hearing is purely need. Need to update and refresh the fleets. And as Mark said a few moments ago, many of those same customers are wanting more equipment this year than they did last year. So if they were really trying to take advantage of it last year, they would have pulled forward. So I don’t expect nor count on the 50% bonus depreciation being a significant factor in decisions.

Okay. And then what’s your build slot availability in Q3 and Q4 after April?

It varies based on the products but we have installed capacity as a company to do upwards of 75,000 total units across the business. Dry vans, reefers, and flatbed products, and of course its mix dependent on that to get to that level. So we still have plenty of capacity remaining that we can leverage in the second half of the year. Of course larger customers, their product is spread throughout the year, so it’s not like we go -- that $583 million worth of backlog goes out effectively 6 months and then stops and there is nothing, I mean it spreads throughout the year. So there are slots that remain throughout the year and of course greater number of slots as you get into third and fourth quarter. But we have the ability to leverage -- as I responded earlier to one of the questions from Brad, we can actually either work some overtime if there is some growth opportunities that are attractive or add shifts, if it gets significant enough we can just add another shift.

Okay. And then just a clarification and I know I am -- this is splitting hairs here but in terms of the 700 units that you missed in terms of the shipments in the first quarter, were those 700 units legacy pricing, newer pricing or a combination thereof?

It was 700 units. I guess it wasn’t -- we’ve had quarters -- it’s a fair question. We had quarters where we’ve had one particular customer that’s repositioning all their fleet and that’s why it lagged from one quarter to next. That really wasn’t the case here, it’s really just kind of spread across the entire customer base. So for practical purposes I guess it would follow the same split of the build which was 60% new, 40% old. But I can't tell you specifically.

Okay. No, that’s fair enough. And then just my last question was on, you mentioned that used or used equipment market continues to be pretty robust. Can you just give us kind of your general take? Is equipment pricing out there on the used side, is it generally up year-over-year, quarter-to-quarter still, can you just give us your indications?

Yes, I think it’s safe to say it’s up year-over-year and quarter-to-quarter. Obviously with used is kind of mixed bag depending on what you have available for the markets. So that’s been a lot of what we’ve been working on its salability, but let see -- so there is some mix here, but ASP last year was $7,500 on used trailers. Last quarter, it was $6,700 and it was up in the first quarter of this year at $7,600. So obviously there is a lot of mix there but it was up in both instances, that I think on -- if you were to look at an apple-to-apple we see it being up on a raw basis as well.

Our next question comes from the line of Rob Wertheimer with Vertical Research Partners.

Just a quick question on your impression of industry thus far, I mean you guys have shown good price discipline and that’s great. Industry orders I think over the last couple of quarters were up year-over-year and you weren’t. So I am curious if the industry is slowly getting more rational in your view or whether there is still irrationality?

It’s coming around. As I like to say the tide has certainly rising across the spectrum of manufacturers. As we have continued to raise prices to get margin recovery and recapture, competitors across the board are raising prices also. We tend to be the premium guy out there, but it varies. In some cases, our competitor may want to be more aggressive on a certain deal and the spread between us and them is larger. And then on others, it’s not as large but it’s all moving in the right direction and I’ve stated on some previous calls that as I’ve learned in this industry and have been told by others in the industry as the demand environment improves, the folks who’ve been in this business a long time manufacturers in this long time, they recognize, that they have to make their profit during the good years. And once you get above the replacement level demand which we achieved this past year and now looking to be 20% above that, now is the time for all manufacturers to make some profit. And they know this. And we tend to see this repeat itself each cycle. So again prices are rising. All competitors recognize that they have to make nice profit during this cycle and we expect that this will provide good strong environment going forward to continue to be pushing price and enhancing margins for everyone.

Great. And you’ve talked about this along the call but I am not sure if I heard a quantification of just on the mix shift from if you’re willing to from the largest fleets to mid-sized. Is it 10 percentage points or 20 percentage points and is it increasing hopefully that’s positive for margin? Thanks.

Yes, I think just to revisit the history a little bit, last year our large direct accounts accounted for about 70% of the volume we did last year which was really above what we’ve ever historically done. We typically move 40% to 60% of our business on a direct basis. And then the balance goes through either our branch network or independent dealers. And that’s where you’re getting at or those small mid-market accounts. And so I think the answer is one, we’re certainly trying to shift back into that normalized historical region for us under 60% for this year. And when you do that, you’re talking about a customer that’s usually buying less than 500 versus somebody that can be buying several thousand at a time. And it’s easy to see certainly a couple of percentage points of margin or pricing differential between that size of order. So we’re expecting at least a 10 point shift in that ratio over what we did last year.

Our next question comes from the line of Frank Bisk with Pilot.

So your gross profit on the commercial trailer was 4.8% in Q1. What was that in Q4?

Commercial trailer products, it was 4% in Q4 and in Q3 which was kind of the bottom point last year, it was 2.3%. So in total it’s improved 250 basis points.

Okay. That’s what I thought you said. And then I guess on the lower price backlog, I guess we’re going to have 1,300 or so still in this quarter that we’re in now. Are any of those or even historically money losing? There is some I guess some are money losing, is that the average -- the average was 2.3% but…

I mean it’d be I guess still contributing to the business but maybe technically from a gross margin negative, but -- lower margin than the rest absolutely.

Okay. And then lastly when you talk about the Composites Group on the diversified product, is that mostly the PODS or there is something else there?

It’s the portable storage containers is one of the products. Also components for truck bodies, we sell into and then also the side-faring, the aerodynamics side skirt, that we call the AeroSkirt, that’s also one of the growing volume, profit opportunities that the group has been selling.

We have a follow-up question from the line of Jeff Kauffman with Sterne Agee.

Mark, you alluded to it in your earlier comments but can you talk about the cost, I think you said $12 million to $15 million all-in to acquire Walker and kind of the timing of what occurred in this quarter versus -- this past quarter versus 2Q or 3Q. And then just talk about the NOL and how we should think about the forward tax rate post integration?

Yes, on the acquisition-related costs in Q1 was primarily due diligence work that happened through the first quarter. The balance of that number that you quoted will happen in the second quarter generally when we close primarily bridge related financing fees that we’ll -- won’t incur now that we’ve got the permanent financing or nearly half of the permanent financing here in place and advisory work that’s taken place. So it’s all kind of transaction related, it’s not integration related per se. The financing related -- other financing related fees will certainly be able to capitalize with the transaction acquisition costs we can. In terms of going forward -- NOLs we’ll evaluate our position. We certainly feel like we have enough NOL availability there and that will continue to be I think through the balance of this year. A 0% effective tax rate I guess will maintain our asset but I think it’s certainly something that we’re going to continue to evaluate primarily as we get through the end of the year and have better outlook of the combined business heading into 2013. In the case where we were to reverse that reserve I mean I think conservatively I’d look at a 40% effective tax rate on anything that wasn’t shielded by NOL.

Okay. And then lower cash rate until the NOL was utilized?

Correct.

We have no further audio questions. I will now turn the call back over to Dick Giromini for any closing remarks.

Thank you, Erica. We’re pleased with the progress we’ve made thus far in executing our plan for the year. Our work obviously has not done. We’ve got ways to go. We remain committed to making this year of execution and results, improving margins and profitability while delivering exceptional value to our customers and all other stakeholders. Thank you for your participation today. Mark and I look forward to speaking with all of you again on our next call.

Thank you for your participation in today’s conference. This concludes the presentation. Everyone may now disconnect and have a great day.