Wabash National Corporation (WNC) Q4 2013 Earnings Report, Transcript and Summary

Good morning and welcome to the fourth quarter and full year 2013 earnings call. My name is John, and I will be your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Dick Giromini. You may begin.

Thank you, John, and good morning. Welcome to the Wabash National Corporation 2013 fourth quarter and full year earnings call. This is Dick Giromini, President and Chief Executive Officer. Joining me today is Jeff Taylor, Senior Vice President and Chief Financial Officer. Following this introduction, I will provide highlights for the fourth quarter and full year 2013, followed by a look at the current operating environment and our outlook for 2014, after which, Jeff will provide a detailed description of our financial results. At the conclusion of our prepared remarks, we will open the call for questions from the listening audience. Before we begin, I would like to cover 2 items. First, 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 and Exchange Commission. Second, please note that this call is being recorded. I'll begin by saying that 2013 was truly a transformational and record setting year for Wabash National. Growth initiatives driven by our long-term strategic plan to evolve the company into a diversified industrial manufacturer continued to gain traction and momentum throughout 2013. We are now beginning to realize the full benefits of the strategic actions we’ve taken in the financial operating performance being delivered by all segments of the business. Overall, the success of our long-term strategy to transform the company has exceeded our expectations. For the full year 2013, revenue increased 12%, gross margin improved by 200 basis points, and operating income increased 46% over…

Thanks, Dick, and good morning. everyone. Let's begin with the fourth quarter results. Let me start by saying that the fourth quarter results were consistent with our internal projections and many of the seasonal factors we discussed last quarter impacted the results. On a consolidated basis, revenue for the quarter was $458 million, an increase of $42.5 million or 10.2% compared to the fourth quarter of last year. This represents an all-time record for quarterly consolidated revenue. This year-over-year improvement in revenue is attributable to strong demands in our Commercial Trailer Products segment offset by a decrease in our Diversified Product segment and relatively flat results in the retail segment. As expected, new trailer shipments were 14,200 units during the quarter, consistent with our prior guidance and actually in the top half of the guidance range. Sequentially, consolidated revenue increased $18 million or approximately 4.2% as a result of higher new trailer shipments in our Commercial Trailer Products segment partially offset by decreased components parts and service sales in the Diversified Products segment. Commercial Trailer Product segments net sales were $324 million, which represents a $66 million or 25.5% increase year-over-year. This improvement is primarily due to an increase in new trailer shipments as approximately 13,500 trailers shipped in the fourth quarter of 2013 compared to 10,200 trailers shipped in the prior year period. Average new trailer selling prices decreased approximately 6.1% as a result of customer and product mix. This is not a price decrease in the industry; rather it is attributable to a heavier mix of direct channel shipments in the current quarter which were lower spec and therefore lower priced, in addition to a heavier mix of products with lower ASP such as dry vans and LTL trailers, which has the effect of lowering overall ASP. On…

[Operator Instructions] Our first question is from Steve Dyer from Craig-Hallum.

I just want to make sure that I have everything correct. I think you said 47,000 to 50,000 trailers. Diversified Products and retail, each up kind of in the 4% to 6% range for '14. Is that right?

That’s correct.

Okay. And then from a margin standpoint, margins for the trailers may be up a bit and then the other 2 groups kind of flattish. Is that right?

Yes, but going back to the year-over-year on the top line for the different segments. We stated that Commercial Trailer Products would see between 5% to 7% year-over-year top line and then the other 2 segments 4% to 6%.

Yes. Okay. Got you. But then on the margin side, overall it sounds like margins should be -- gross margins should be up kind of slightly in '14. Is that fair?

I think that's a fair statement, yes.

Okay. As you look at Q1, and I know it's seasonally, typically, the slowest quarter. Would you anticipate gross…

Steve, let me go back and clarify the last statement I just made. Within the segments, yes, but the -- again, remember the commercial trailer products business, when you look at things on an overall basis, you get that weighted average mix issue. Commercial trailer products, of the 3 segments, has the lowest gross margin profile. So with a higher growth rate, even with improvement in gross margin, the slight improvement we expect to see there, on a total basis depending on how that all hashes out, it can affect whether the overall gross margin is flat, up or down. I think the important message is we do expect overall top line and overall bottom line improvement year-over-year. How it all hashes out at the end of the year based on those projected growth rates and expected margins, it could be flat, it could go down a tad, it could go up a tad. But remember, the gross margin within Commercial Trailer Products really drives what happens from quarter-to-quarter. I go back to the second quarter of last year versus third quarter of last year where our gross margins went from 14.2% in the second quarter and then 14.0% overall in the third quarter. Yet the gross margins actually went up in Diversified Products group and went up in the Commercial Trailer Products group, but the overall impact was margins went down by 20 basis points because that was the heavier weighting of commercial trailer products in that quarter. So I want to stress that because that sometimes gets missed in the mix when people are thinking about things and they think because gross margin is going up in commercial that means it's going to drive everything up. It can actually pull it down if the volume is up.

Okay. That's helpful color. As you look at the commercial trailer group pricing down a little bit year-over-year and I think you distributed that mostly to mix of dry vans, particularly to the large fleets who have maybe a little bit more pricing power, given the volume, is there anything structural in pricing at all that you’re seeing that is changing, topping out, is it getting more competitive or it’s 100% kind of mix?

Yes, we have not seen anything that is alarming going on in the marketplace. As I've said in past calls, you’re always going to have those individual opportunities that somebody wants to go at more aggressively than other opportunities. So you’re always going to have some of those anomalies out there, but what we have been seeing is the ability to consistently maintain and in most cases push pricing. As I’ve said in the past, nibbling around the edges. We’ve had success in all cases either getting equal or greater pricing on all orders that we’ve taken in for this 2014 environment in our commercial trailer products which tends to be the most sensitive.

Okay, perfect. And then the last question from me, not to beat the margin horse to death, but as you look at Q1 would you anticipate gross margins will be kind of in the range of last year’s Q1 or closer to kind of the Q4 number?

I think sequentially that they will show a little bit of improvement. Having said that, Q1 is seasonally one of the lower quarters we have and I think to Dick’s comments a minute ago around mix, obviously the shipments in Commercial Trailer Products are going to be lower in Q1 than they will in Q4, so there could be some mix effects that plays in there. Once again, want to stress that we will continue to see the Wabash Composites or the composite products line in a seasonally lower quarter as well and that impacts the Diversified Products segment.

Next question is from Joe O'Dea from Vertical Research.

First question is just on market share. When you look at the strength of the CTP shipments in the quarter, it does look like you might have outpaced what was going on in the market and so any color behind what might have driven that? As well as in your '14 outlook, sort of the growth you’re looking for in CTP, kind of a split between how much of that is industry and how much of that is market share for you?

Yes, we have not seen the -- obviously, not seen the final numbers for the full year on breakdowns and what the market share numbers will be. We think that, based on the size of the overall market, based on what we have done in the market and those numbers are still being finalized, of course, we believe that our share from a shipment standpoint was up slightly from the prior year. So it’s not appreciable share impact, it’s a mix impact more than share, but we think that there is continuing desirability of the Wabash product over some competitive products. I’ve talked about in some past calls that we had customers that have come back to us that had left us before, they have come back at more acceptable pricing levels, albeit lower ASP because they’re larger fleets, they have simpler specs in many cases, because they generally buy in large quantity of the same product, simpler design, so it just brings down the ASP because it's more -- I'll liken it to the automotive industry. Your base model product is going to have a large -- a lower margin profile than one that has a lot of options, because the options add margin. So we’ve got some of that mix that went on in the fourth quarter, but overall the demand environment remains solid, we see signs and anecdotals of it strengthening in the recent study that I commented on earlier about Transport Capital Partners and the results they were able to get from their survey, certainly would imply or infer that there's some upward potential, upside potential, on demand as we go forward.

Okay, and then just one other one on backlog. Obviously, very strong order quarter for you. Could you just talk a little bit about composition of those orders, how the mix of those orders compares to say 4Q mix versus full year mix? Does it look it improves a little bit with your order activity in the quarter and help you out as you go into the year?

Yes, sure can, this is Jeff. in terms of the backlog, first of all, the back log is strong, you can see that it's up on a year-over-year basis and so that indicates that we're in a -- we're certainly in a healthy spot in the environment here. In terms of the composition of the backlog, I think Q1 of 2014, as we look at that, it looks similar to what Q4 was and then as we move into the seasonally stronger middle part of the year, that will improve some as we pick up more indirect channel-type customers. So that’s what we're seeing in the backlog, but it look good.

Next question is from John Mims from FBR Capital Markets.

Jeff, let me ask you first and then just as a point of clarity, I know there has been a lot of questions about mix and stuff already. But it seemed at the end of the third quarter and actually in the last call, you said that the mix impact, which is a benefit in third quarter, what you had seen so far is that same mix benefit was carrying over into fourth quarter. So as you look at some of these lower spec, lower priced units that made up the pricing in fourth quarter, when did that actually happen, did you know that the order book was going to be full of these kind of lower price units going into the fourth quarter or did that happen as the quarter developed?

Yes, that actually -- this is Dick. That actually took place as we progressed through the quarter. There's a couple of factors that come in. Late orders of needs by customers that come in late in quarter, in October, past the third quarter is my comment. And then also the mix of what actually gets shipped is always -- while we try and analyze by customer, by the product that’s on the ground and in the schedule we build, it's always a little bit of a crap shoot from quarter-to-quarter on which ones actually go out and what the mix of the product that actually gets picked up by customers at the end of the day. We had an extremely strong pickup quarter. We presume that a lot of that was driven by the expiration of the bonus depreciation that customers could get. So we believe that, that helped drive a little stronger quarter than what we had even anticipated ourselves and the mix of it is the big guys who had the resources to pull those things in and want to take advantage of it. So we believe that, that had some impact on the little bit heavier mix than what maybe we had anticipated and previously implied.

I guess just where I’m confused on that and I appreciate giving more color on the guidance for 2014, but the comment that the results were exactly in line with your internal forecast, but the internal forecasts don’t really seem to be consistent with the comments that you provided on the third quarter call, I mean as it relates to mix. I mean you did say there was headwinds, et cetera, and I appreciate that. But if that mix dynamic was changing over the course of the quarter, when or how that could have been communicated better?

Yes, John, I think if you -- first of all, I think we just have a difference of opinion on this one. We did know that the fourth quarter was going to be lower than the third. I think we made a very strong attempt at communicating that in the call last quarter. And I think if you go back and read the transcript you will see that I did cite that commercial trailer products would be a larger percentage of the overall mix. I did cite that we would have a heavier mix of dry van trailers in the quarter. And so if somehow that was misinterpreted, that’s something we'll work to improve in the future, but we felt like we were giving strong indicators that the quarter was going to be down.

Okay, fair enough. And we can talk about it more offline, but just one more. When you talk about, Dick, in the comments about minimizing fluctuations is the task from here on out, what do we need to see, like what still has to happen? Like how does the order book need to evolve? Is that a 3-, 4-quarter period of time it takes to get there or is that more a couple of years? Can you help us kind of see like what we can visually use as benchmarks as to when the first and fourth quarters start to balance out a little bit more with the middle of the year?

Yes, it comes in a number of fashions. But one is trying to get more level load on the commercial trailer product side on the build levels for the business. That can drive a lot of the internal costs, the absorption of overheads. So if we can bring more builds into the first quarter, that will help significantly. This year we’ve made a little bit of progress in that regard. Builds are higher this year than last or at least anticipated to be higher in the first quarter. And that, of course, breaking that code of getting customers to pick up trailers on a more normalized regular basis and that drives the revenue recognition side of things. So we’ve got both those factors that we are continuing to work on and we'll see how that progresses. On the other side of it, we talked in our formal comments about finding ways in the Diversified Product side of the business, with our Wabash composites business more specifically, to level them out, the seasonality that they have, where 60%, 65% of what they produce is done in the second and third quarter and they have weaker volumes, that because of the type of products they currently produce and provide to the market, weaker volumes in the first and fourth quarters and we had that big drop off from third quarter to fourth quarter. They’re working on products that would have less of a seasonality and maybe be able to push a lot more of that into those quarters that are running shy today, and get that. So one is product driven to address seasonality, the other is taking the product we have and just getting it built across the full year, and that's working specifically with customers. It's not different product, it’s just working with customers to accept builds spread out more evenly throughout the year.

Sure, no, that's really helpful. Just one little add-on and then I'll leave it to someone else. But pick-ups in first quarter as it relates to weather. Have you seen an impact in this quarter versus -- that's significantly different than other first quarters?

Yes, that's a great question, John. We actually here in the Midwest as folks -- and not just in the Midwest, but the East Coast and all, have been subjected to much harsher weather conditions this year already than what we experienced at any time last winter. We have actually had 3 different days that we have taken down early in January, and then with the second wave, a storm, another day was taken out. We've made those days up, the production related to those days, with weekend overtime. But it has been a much more challenging environment, and it's been a slower start to the year than what any of us would have liked to see. So we've had some impact. We’ve worked through it, and we’ll have to see how the rest of it plays out for us. But we have tried to take that into account in our projections.

Sure. How big does that overtime component show up in SG&A?

Minimally.

Next question is from Jeff Kauffman from Buckingham Research.

Couple of quick questions. Dick, you had talked about going to this 10% margin, hopefully within 2 years or so in Commercial Products. You did about a 7% this year, give or take. So if you're right and we're getting to that 10% margin and your guidance was margin should be a little bit better next year. Should I think of it as to get there we need about 100 basis points a year of improvement or should I think of it as maybe 50 basis points this year, and then it’s kind of back-end loaded for some reason?

Yes, it’s a work in progress. It's going to come from a number of initiatives and I commented on those. Certainly, one is on the pricing side. And we continue to push pricing. As the market continues to strengthen, that gives us a little bit more opportunity there. It’s going to come with some operational productivity improvements, continuing velocity, line velocity and all. And then the third element, of course, is through our purchasing efforts and our material cost components. So it’s 3 sizes that are being worked at all times. The real driver for it is the strengthening market. We'll get the most leverage from that and, with what we're seeing right now, it does give us some confidence to be able to push it and I clarified in the last call when I talked about getting to the 10%, was more on a quarter basis rather than on a full year basis. We still have to -- we need to get to the 10% for a quarter or 2 first before we can even think about it for a full year. And the third quarters tend to be our strongest both on production volumes, build volumes and on shipments being strong. Weather conditions are generally in our favor so you don’t have those cost, operating cost, headwinds. So we want to look for having made some strides in that regard this third quarter and then, of course, a year from now third quarter would be a good target for trying to get close to or achieving that level. That’s kind of what we’re looking -- and then after that, what does it take to sustain that level on a go-forward basis across a full year. Does that help you?

Yes, a little bit. So I guess, follow-up to questions here. Number one, you have a pretty good idea of what your 2014 pricing is at this point because you've been selling those trailers in your backlog. What is -- when we look at your pricing and I know ASP is going to differ a little bit, are you pricing at higher margin in your 2014 book than your 2013 book?

Yes, the answer is yes. We have been successful, as I stated earlier, we've been successful in our pricing of continuing to push price. The wildcard is how things turn out at the time we actually bill. So it’s an order-by-order effort. Some pricing and margins had been flat. In other cases, pricing and margins have increased. So directionally overall, margins are up. And then you’ve got the mix effect of the business that we have. So I’m not trying to be evasive on the response, it’s a mix-affected benefit to the business. There's an upward bias to it but it really comes down to the market again, the market demand, the ability to continue to fill out the year and be able to take advantage of the stronger market and continue to push the pricing.

Okay, just one follow-up on gross margin, then one quick balance sheet question for Jeff. The only thing I’m scratching my head on here, Dick, is if I understand with Walker the business is different seasonally, but if I look back to last year, your fourth quarter consolidated gross margin was only about 50 basis points below your third quarter. If I look back previous to that this is pre-Walker. In 2011 it was up 180 basis points. Now if I want to go back to the mid-2000s and say, "Well, we were in a recovery cycle," your traditional fourth quarter gross margin was about 40 basis points to 60 basis points above the third quarter gross margin. So fourth quarter gross margins this year being down 250 basis points, I get the comment that it's mixed, but it just seems to be bigger than that. So can you help me understand it because, to Mims's point, this doesn’t feel like normal seasonality or maybe there was just a communication issue where you guys were thinking this is seasonality, but the rest of us looking at historicals wouldn’t come up with that. I was just surprised at the magnitude of the pullback sequentially.

Yes, Jeff, this is Jeff Taylor. So on a year-over-year basis when we evaluated this year’s results, about 75% of the drop in gross margin is attributable to the change in the segment mix, so that’s by far the largest component of it. The rest of it is, as we talked, some of the higher cost that we’ve experienced in the quarter. I think when you look back at diversified products in the Walker business last year, we had some year -- some artifacts from the year 1, it being the first year of the acquisition where we got some equipment pushed through the year that you can't sustain on a year-over-year basis. We certainly think that this fourth quarter is a more normalized type of year and indicative of the type of seasonality we would expect to see.

But you wouldn’t tell me that the mix you saw this quarter was indicative of your normal mix the rest of the year?

Talking about in relation to the Commercial Trailer products piece, that's correct.

Okay, all right and then final question on the balance sheet and thank you. You're looking like you're about 1.6x net debt to your 2014 projected EBITDA here. You got the most cash I’ve ever seen in the history of the company on the balance sheet. I mean 2 years ago you had $20 million, now you got $113 million. How much more do we have to go before we come back to shareholders and say it’s time for the dividend, it’s time for the share repurchase?

So I think the way to answer that, Jeff, is, is that we remain steadfast in how we evaluate the uses of cash and uses of capital. First and foremost, protecting the business and maintaining a sufficient amount of liquidity is important. So we finish the year end with a nice strong positive cash balance. But remember, we're going into the first half of the year, where we generally are users of working capital during the first half of the year. So from that regard, we're going to be conservative in managing the balance sheet. Paying down debt will continue to be our priority as we go forward. But we're also going to evaluate opportunities for growth, continuing to grow, strengthen and diversify the company. We do continue to have internal dialog and dialog with the Board of Directors in regards to what are the appropriate uses of cash. And so that’s a dialog that continues but as to where we sit today, we're going to make sure that we are certainly managing liquidity and continuing to focus on paying down some additional debt.

And we have a question from Mike Baudendistel from Stifel.

I wanted to ask a question on the new product introductions that you referenced. What markets are you targeting with those products? And, just high level, what's the objective? Is it to reduce the cyclicality or seasonality or how should we think about the strategy?

Mike, we -- for competitive reasons we won’t disclose that at this time.

Okay and one other question is the -- it seems like you had a good order season and I noticed the other day that Heartland announced that they're purchasing some trailers from you. Have the orders been overwhelmingly placed by the large sort of I'd call well-capitalized carriers that are similar to Heartland or have you also seen the smaller mid-size companies come in?

We certainly have seen a lot of energy out of those large well-capitalized guys getting back in, getting out in front of it and making some nice orders during the course of the last 3-, 4-month period.

Okay, and just one last one.

[indiscernible]

That makes sense and then just one last one on the cost components that you referenced as having some impact on margins. Was it just the wood flooring or were there other components there too and is there any thought of hedging those [indiscernible] costs a little bit more heavily and could you remind us what portion of the raw material component costs you end up hedging?

Yes, with aluminum, we take forward positions on aluminum upon receipt of order, so we have upside, downside protection on that. So we take the risk out of the aluminum. On the steel, we're doing more and more forward contracting there. That’s been growing for us over the last 1.5 years or so, when we started doing that. As you recall, we, back in early 2012, we took tires out of the equation as a risk by actually quoting those separately when we quote our trailers to customers and they have the option of providing the tires or accepting any adjustment in pricing that may occur going forward. And then on the component side of it, so I should also add, that about 50% is the raw material-type stuff and 50% of the input material cost is converted components. So on the component side in many cases, we have fixed price arrangements with our suppliers for all of those large fleet orders and then for the smaller orders we have, in our terms and conditions, actually have the flexibility to adjust pricing based on what’s happening to the market on material cost, to make adjustments on a quarterly basis prior to the build of the product. So overall, we have calculated that about 70% of the input cost ends up getting protected, so there is some exposure, but it’s reduced significantly on what we used to experience years ago.

Our next question is from Brad Delco from Stephens Inc.

It’s actually Ben on for Brad. I guess, first, can you kind of give us some color on how we should think about the longer term growth rates in the Diversified Products division? I know it’s a GDP-plus type of growth business, but what are the key end markets that drive that business?

Well, it’s diversified. So that makes it a little difficult. In the Wabash Composites, it’s really taking our composites material and growing it to other markets. We commented about how they've really put a lot of focus on aerodynamics and producing and developing products to expand in that space. We've looked at what are the end uses are for the material. So there's a number of products and, as I commented, certain things that are sensitive that we don’t want to share that they're growing in there. But it's using that type of structural material to solve other areas. We did talk in last quarter about the mobile clean room initiative that Diversified Products has within their engineered products business that is also using our DuraPlate panel material as part of that solution. So that’s a new area of growth for us and that’s in the pharmaceutical side of the world. So there are so many different growth initiatives that it’s really difficult to point to anyone. It’s a lot of small pieces that will add up over time to some sustainable year-over-year growth. That’s certainly our hope and expectation.

Okay. So GDP-plus is kind of how we should think about it?

Yes, I think that’s fair.

Okay. And then on the SG&A line, what kind of inflationary cost pressure should we expect there for this year?

You should expect the normal types of inflationary cost related to employee-related costs that we’re going to see there. I think probably the other place that we’re tracking and monitoring fairly closely is the impact of health care related to the Affordable Care Act and how that will potentially impact us.

And that was our final question. I’ll turn it back over to you, Dick, for any final remarks.

Thank you, John. In conclusion, we're extremely pleased with the record setting performance that we were able to deliver in 2013. That said, we see even further opportunities to accelerate top line growth, expand product and market breadth and to deliver even greater performance in almost all aspects of our business. With a key focus on execution and delivering results, I'm confident that we'll do just that. Thank you for your interest in and support of Wabash National Corporation. Jeff and I look forward to speaking with all of you again on our next call. Thank you.

Thank you, ladies and gentlemen. That concludes today's teleconference. Thank you for participating. You may all disconnect at this time.