Wabash National Corporation (WNC) Q1 2015 Earnings Report, Transcript and Summary

Welcome to the First Quarter Earnings Call. My name is Yolanda, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. Please note that this conference is being recorded. It's now my pleasure to turn the call over to Mr. Mike Pettit. You may begin.

Thank you, Yolanda, and good morning. Welcome everyone to the Wabash National Corporation 2015 First Quarter Earnings Call. This is Mike Pettit, Vice President of Finance and Investor Relations. Following this introduction, you’ll hear from Dick Giromini, Chief Executive Officer of Wabash National on the highlights of the First Quarter, the current operating environment and our outlook for the rest of 2015. After Dick, Jeff Taylor, our Chief Financial Officer will provide a detailed description of our financial results. At the conclusion of the prepared remarks, we'll open the call for questions from the listening audience. Before we begin, I'd like to cover two quick items. First, please note that this call is being recorded. Second, as with all of these types of presentations, this morning's call contains certain forward-looking information including statements about the company's prospects, industry outlook, backlog information, financial condition and other matters. As you know, actual results could differ materially than those projected in the forward-looking statements. These statements should be viewed being the cautionary statements and risk factors set forth from time-to-time in the company's filings with the Securities and Exchange Commission. With that, it is my pleasure to turn the call over to Dick.

Thanks, Mike. Let me start by saying that we're very pleased with the ongoing progress that we continue to make with the business and in the execution of our strategic plan. Importantly, we started off 2015 with an accelerated pace of improvement from a record-breaking 2014. During this past quarter, we achieved all time records for any first quarter in our company's 30-year history and revenue, gross profit and operating income is historically strong and more balanced topline and bottom line results were delivered across our three segments. These results demonstrate and validate the transformative nature of our strategic growth and diversification initiatives and the success is provided for the successful initiation of our previously announced share repurchase program, acquiring 1.3 million shares during the quarter. Trailer shipments for the quarter were strong 14,350 units coming in above our communicated range of 12,000 to 13,000 trailers as customer pickups accelerated through the back half of the quarter at stronger levels than previously anticipated. Additionally strong productivity out of the gate led to exceptional first quarter build levels that total approximately 16,100 trailers, exceeding the first quarter of 2014 by some 3,200 trailers. Net sales for the quarter were all time first quarter record $438 million representing an $80 million or 22% increase compared to first quarter of 2014, which was the previous first quarter record. Consolidated gross profit of $57.2 million also set an all time first quarter record, exceeding first quarter '14 by $10.5 million, while gross margin increased to 13.1% for the quarter. Operating income for the first quarter was $27.3 million representing a $7.8 million or 40% increase year-over-year, largely driven by significant strides made in the commercial trailer product segment, partially offset by a slight decline in diversified products. Operating EBITDA, which we believe is an important metric to highlight the company's overall performance, increased by 28% or $8.5 million to $39.1 million in the first quarter, which is reflective of strong performance from all three segments and improved balance across the enterprise. Overall, despite the seasonally weak nature typically of the first quarter, we were successful in delivering record financial results driven by strong trailer shipments in builds, which translated to overall growth in revenue, profitability and operating EBITDA. Top to bottom, it represented the best first quarter in the history of Wabash National with nice momentum to build on as we move through the second quarter with seasonally stronger trailer volumes to leverage. Despite the un-seasonally strong shipment levels achieved during this past quarter, backlog nonetheless increased during the quarter reaching a record $1.2 billion and representing approximately eight months of production at a consolidated level. Looking forward, in contrast to some who may be calling the end of the cycle, we anticipate a continuance of a strong order demand environment, supporting pricing and volume growth. With the most manufacturers and supplier slots, all that filled for the current year, it is understandable and expected that overall industry monthly order levels will likely continue to be lower on a year-over-year basis until we get to mid year when manufacturers will once again look to open up slots for 2016 builds and customers begin to more seriously consider their 2016 purchase plans. In fact, numerous customers have requested to place additional orders for 2015 production that have had to be turned away due to timing needs or capacity restrictions. Key industry drivers such as continued strong freight demand supporting carrier efforts to increase rates and improve profitability, excessive age of fleet and regulatory compliance requirements along with increased residual value of used trailers, all support our view for continued strong demand for new trailers. And as you'll hear in a moment, this sentiment is supported by forecast from both ACT and FTR. With that, let's shift our focus to some additional highlights from each of our reporting segments. We'll start with the commercial trailer product segment consisting of our dry and refrigerated van products, platform trailers, fleet-trade used trailer sales and our wood flooring operations. This segment continues to perform very well in executing its optimization strategy with an ongoing commitment to margin improvement, manufacturing excellence and leadership and product innovation. First quarter saw best ever first quarter revenues of $315 million with gross margins of 9.4% that reached their highest level since 2005 and what is typically a seasonally weaker quarter. This recent data point provides confidence that CTP team is well on its way to our previously stated objective of achieving a double-digit gross margin quarter this year with that likely to become a reality during this current quarter. The improvement seen in the first quarter was driven by the team's continued execution of a pricing strategy, committed to favoring margin over volume as well as continued improvement in productivity and material cost optimization through design and sourcing. CTP Group produced a $400 increase in net pricing in the first quarter and we expect to continue to see year-over- year net pricing gains throughout the remainder of the year. We also expect trailer demand remain strong in 2015 with both industry forecasters expecting total demand significantly above replacements levels and stronger than 2014. As announced in February our reporting segments had been realigned with Wabash Wood Products moving from the Diversified Products to the commercial trailer products group. Following up on the progress reported previously Wabash Wood has continued to make nice progress in operational performance and is now producing margins consistent with their more normalized historical levels. We are pleased with the Harrison operation and are comfortable that all last year’s cost challenges are now behind them. Along with their exceptional improvements in profitability, the CTP team remains committed to executing on their key strategic initiatives by introducing innovative new material technologies. These technologies include expanding the application of bounding throughout the trailer, the introduction of new composite materials and new light weight material solution such as the high strands steel coupler that reduces 160 pounds from a standard trailer. CTP is also continuing their efforts to more fully develop the indirect channel having sold 900 more trailers through that channel in the first quarter of this year versus the first quarter of 2014. With both momentum and a historically strong demand environment on their side, we're more confident than ever that CTP will again deliver record performance for the full year. Moving on to the Diversified product segment, which includes our Wabash Composites business, tank and tank trailer business and the engineered products business, this segment delivered a solid first quarter with net sales of $104 million down approximately $4 million in year-over-year comparison but recording a much improved gross margin of 22.5% getting back in line with its historical range and importantly up 90 basis points sequentially. This was accomplished through effective operations execution and a favorable product mix. While some competitive pricing challenges persists and a slow in oil and gas market has impacted demand for certain products the diversity of end market certain in this segment remains a strand, which has allowed us to successfully navigate these headwinds and deliver solid results. Let’s talk about growth. It almost goes without saying that the Diversified Products Group has had a very busy couple of quarter with a series of growth investments in new facilities and new product introductions. While those initiatives are still in their launch phase, they're each beginning to deliver bottom line results to the business. On the facility side, we're pleased with the progress seen on DPGs two major facility projects. First the expansion of our liquid tank trailer operations in Mexico provides necessary floor space to allow for cost effective production and delivery of stationary silos for the food, dairy and beverage market in Mexico as walkers, engineer products business begins efforts to expand this product line internationally. Already armed with a customer backlog for silos, for that markets that carries into the third quarter, manufacturing began in earnest this past quarter with the initial shipments scheduled to begin during the current quarter. This expansion is a nice complement to our existing domestic walker engineered products business and provides an effective platform for growth one of our world-class Mexico facility. Second, we're well into the start-up and ramp-up process with our new Wabash Composites manufacturing facility at Frankfurt Indiana. This facility leads to provide needed floor space to support the continued growth of the Wabash Composites business, came online at the beginning of the year and the production schedule has been accelerating throughout the quarter. As shared previously, our Wabash Composites business continues to focus on providing innovative solutions that solve customer's unmet needs, particularly in aerodynamic product development as we realize the fuel economy benefits in their operations. Along with the trends from assembly operations for the Workhorse DuraPlate AeroSkirt, new products that have been developed and are in ramp-up phase at the facility include the recently introduced AeroSkirt CX developed to compete with lower price entrants in side skirt market. At the high performance end, the team developed the Ventix DRS Side Skirt and the AeroFin tail device that provide industry-leading fuel economy improvement and performance and are scheduled for commercialization mid-year. While still working through the normal launch curve, we're seeing strong monthly improvements and the facility is already profitable. We're obviously pleased with the improvement we've seen in the past couple of quarters in the Diversified Products Group and are very excited with the investments we've made in the new facilities and the new products that we're launching in those facilities. However, we will all need to exercise some patience in the near term for DPG as the many growth initiatives begin to take hold. And we all should expect performance to be relatively flat from the first to second quarter. That patience will be well rewarded with profitable new market growth and new product expansion going forward into 2016 and beyond. Finally, our retail segment showed a nice year-over-year improvement in same-store revenue and profitability. Net sales of approximately $43 million represented a $5 million or 14% increase year-over-year on a same-store basis when adjusting for the transition of the three West Coast Branch locations. Gross margin dollars rose in the quarter to $1.1 million, while gross margin percent was down slightly in year-over-year comparisons to 11.2%. We remained focused on executing our retail strategy to profitable grow this segment by increasing our presence in the tank repair and service business through expansion of the number of legacy Wabash National trailer center locations with a capability to perform these services, expanding our mobile fleet services and increasing the number of customers site service locations that we operate. First quarter profitability was significantly aided by these initiatives and year-over-year comparisons and are expected to continue to mature and contribute significantly to another record year for our retail operations. Before I discuss Wabash National specific expectations for the second quarter and for the full year 2015, let me comment on a few economic indicators and industry dynamics that we monitor that provide broader context for our expectations. Following modest growth of 2.2% in the fourth quarter, the economy continued to expand at a subdued rate in the first quarter and some microeconomic indicators were affected by winter weather and decline in oil and gas well drilling. Most of the analyst anticipate the US economy to continue growing moderately at a somewhat less than 3% rate for 2015. Although the general economy continues to produce mixed signals more reflecting modest growth rates, key indicators within the trucking industry point to continued strong demand and signal a positive outlook. ATA’s truck tonnage index increased 1.1% in March to 133.5 following a 2.8% fall in the prior month. The index was 5% higher than in the same month last year. And in the first quarter of '15, the index was unchanged quarter-over-quarter yet 5% higher year-over-year. The latest report from ACT Research now forecast 2015 trailer shipments at 303,300 units, up 11.8% year-over-year and forecasting 294,900 trailers for 2016. FDR has again adjusted its projections upward, now forecasting 296,600 trailers to be produced for 2015, an increase of 11.8% year-over-year and now projecting 266,000 units produced for 2016. From a regulatory and legislative standpoint, on December 16, fiscal 2015 funding bill was signed into law that suspends reductions to the 34-hour restart provision of the hours-of-service rule until September 30 of this year, while it is being studied again. This action provided a temporary relief for fleets related to the required night-time break periods. According to FTR, Class 8 truck utilization decreased to an estimated 96.5% in the first quarter of 2015 from 98.5% in the first quarter last year. However industry analysts caution that if the hours of service provision should not be renewed when it expires in September, capacity utilization would rise to peak utilization levels almost immediately leading to significant capacity limitations in last quarter of 2015 and in 2016. Also we are all still waiting to see if the increase in pup linked to 33 feet will be included in the upcoming highway transportation bill. Doing so would support increased strength and duration for the current demand cycle through the period 2017 to 2019. At this stage, rumors exist that an extension or series of extensions may push any action on this measure until the end of the year or into 2016. Now let me share Wabash National’s expectations for 2015 in the second quarter. We believe overall demand for trailers will remain strong and significantly above replacement levels through 2015 consistent with ACT and FTR projections. Its key drivers all remain positive. Fleet age, customer profitability, used trailer values, regulatory compliance and improved access to financing all support a continued strong, longer-term demand environment. Historically the first quarter is a seasonally weaker quarter with trailer shipments picking up in the following three quarters of the year, total shipments of 14,350 units exceeded our guidance and based on the strength of production during the quarter coupled with backlog growth we remain well positioned as we progress through the second quarter. As a result, we expect second quarter consolidated shipments to be between 16,000 and 17,000 units with total billed levels for the quarter within the same range. While unwavering in our commitment to continue to favor margin over volume we nonetheless have seen an overall continuing strong demand for our equipment that supports favorable pricing for our commercial trailer products, product offerings and in such are now rising our expectations for full year shipments from the 60,000 to 64,000 previously communicated to now 62,000 to 66,000 units. This puts our forecast in year-over-year growth in shipments at 12% or effectively in line with the current updated industry projections. In terms of earnings, we're raising our full year EPS guidance to a range of $1.15 to $1.25 earnings per share as compared to our previous guidance of $1.10 to $1.20. This would represent a 35% improvement year-over-year at the mid-point of the range. Furthermore, continuing on our string of improved year-over-year comparisons, we expect the remaining three quarters of the year to all show nice year-over-year EPS growth with the third quarter expected to be the strongest quarter. As noted earlier, second quarter DPG performance will likely be flat to first quarter with a stronger back half as the new facilities and product offerings make an impact. Overall based on the current demand environment, our strong backlog and the disciplined execution being delivered by the total team we expect 2015 to be our fourth consecutive record breaking year with continued strong cash generation coupled with a very strong balance sheet. So in summary, we're obviously pleased of delivered a very strong record breaking first quarter. We demonstrated considerable operating improvement in our diversified product segment and continued string of strong quarterly results in our commercial trailer products business. While we're extremely pleased with our position, there remain more opportunity and work to be done. We need to continue our focus to further grow gross margins in our commercial trailer products business and accelerate our efforts to introduce more attractive higher margin growth opportunities to drive its top line. We are now clearly seeing the margin improvements in this business, we need to get the business to consistently deliver double-digits and grow from there. We need to effectively execute the introduction and ramp up of our exciting new product offerings in our diversified products business as well as maintain our improved margin performance and we need to leverage the higher margin tank parts and service opportunities for growth of our retail segment and continue to execute on commitments made with the expansion of customer site service locations. So while much has been opportunities evolve. We will continue to be strategic but selective and pursuing opportunities to grow our business in addition to the organic growth initiatives already underway. We'll continue to be responsible stewards of the business to assure that the proper balance between risk and reward is considered in all decisions. In closing we continue to be extremely well positioned this year to deliver another year of record revenues in profitability with the strong backlog of demand environment that remains strong and a number of new products either already launched or nearing launch status. With that I will turn the call over to Jeff Taylor, Chief Financial Officer to provide more detail around the numbers. Jeff?

Thanks Dick and good morning, everyone. In addition to the press release, we filed the 10-Q after the market closed yesterday, so I plan to hit the key points. With that let’s get into some of the first quarter financial highlights. Consolidated revenue for the quarter was $438 million, an increase of $80 million or 22% compared to the first quarter of last year. Total new trailer shipments were 14,350 units exceeding our guidance of 12,000 to 13,000 and 4,400 units higher year-over-year. Sequentially, consolidated revenue decreased $90 million or approximately 17% due to a very strong fourth quarter and the normal seasonal slowdown in the first quarter. Commercial Trailer products net sales were $315 million, which represents an $87 million or 38% increase on a year-over-year basis due to higher new trailer shipments of approximately 4,350 units. New trailer average sales price or ASP decreased approximately $500 per unit primarily resulting from customer and product mix that was biased towards smaller and lower price products such as LTL trailers and converted alias. While these products do carry a lower ASP, they do not necessarily have a lower margin profile. Furthermore, while average sales price decreased, we actually saw an increase in net pricing by approximately $400 per unit, which is evidenced in CTP’s improving margins year-over-year. Diversified Products net sales decreased 4% or $4 million on a year-over-year basis to $104 million. Walker Group revenue was down year-over-year primarily due to product mix and some continued pricing pressure within certain product lines of Walker Group. On the sequential basis, Diversified Products net sales declined 16% primarily due to lower tank trailer shipments in the first quarter. Retail segment net sales on a same-store basis after adjusting for the transition of three West Coast branch locations in May of 2014 increased approximately $5 million or 14% on a year-over-year basis. Sequentially, net sales from retail decreased $5 million or 10% in the seasonally weaker first quarter. Looking at various product lines, new trailer sales of $361 million on 14,350 units increased $93 million or 35% year-over-year including approximately 850 liquid tank trailers in our Diversified Products segment. This year-over-year increase is largely due to increased new trailer shipments in Commercial Trailer Products. Used trailer revenue was approximately $6 million on 350 units, a decrease of approximately $10 million from the same quarter a year ago, as a result of continued tightness in the used trailer market specifically used drive vans and fewer fleet trades in Commercial Trailer Products. Components, parts and service revenue was approximately $42 million in the quarter essentially flat from a year ago. Finally equipment and other revenues on a year-over-year basis decreased by $3 million to $29 million for the quarter. This decrease was primarily driven by lower sales from non-trailer equipment within Diversified Products, which is partially attributable to timing of shipments. In terms of operating results, consolidated gross profit for the quarter was $57.2 million or 13.1% of sales compared to $46.7 million in the same period last year. This represents a $10.5 million or 23% improvement year-over-year. Commercial Trailer Products was the primary driver of the gross profit increase and that was partially offset by Diversified Products and retail. Let's look at the segment margins in more detail. Commercial Trailer Products gross margin improved 280 basis points over last year, resulting in a 98% increase in gross profit or $14.6 million. Sequentially, gross profit decreased by $1.2 million on seasonally lower trailer volume. However, gross margin on the lower revenue actually showed a 120 basis point sequential increase. Production during the quarter was 15,100 units, up by approximately 1,650 units sequentially. On a year-over-year basis, production was up 3,000 units due to strong order intake and productivity. Diversified products gross profit and gross margin decreased $2.4 million and 140 basis points respectively compared to the prior year period due to product mix and continued pricing pressure in certain product lines of Walker Group. However, gross margin of 22.5% is back within our expected range of 21% to 24% and represents the highest performance level since the first quarter of 2014. Sequentially, gross margin was up 90 basis points, primarily due to a seasonally stronger quarter for the composites business. Lastly, the retail segment gross profit on a same-store basis when adjusting for the transition of three West Coast branch locations increased in the quarter by $0.2 million or 7% year-over-year due to increased new trailer pricing as well as continued growth in customer site service. Sequentially, gross margin increased $0.2 million or 140 basis points, primarily due to increased parts and service revenue. On a consolidated basis, the company generated operating income of $27.3 million in the quarter, an increase of $7.8 million or 40% year-over-year, solid contributions from all three operating segments. At 6.2% of sales, operating margin was approximately 80 basis points higher than the prior year quarter. Sequentially, operating income was lower by $6.9 million, primarily driven by the lower shipments of new trailers in both Commercial trailer products and diversified product segment due to normal seasonality. Operating EBITDA for the first quarter was $39.1 million, a year-over-year increase of $8.5 million or 28%. Sequentially, operating EBITDA decreased by $7 million on seasonally lower new trailer sales. On a trailing 12-month basis, consolidated revenue was $1.9 billion with operating EBITDA greater than $177 million or 9.1% of revenue. Cash from operating activities was much stronger in the first quarter than the year ago period, as net income improved and working capital increases were moderated. We expect cash from operations to increase and remain strong throughout the remainder of 2015. Selling, general and administrative expense excluding amortization for the quarter was $24.6 million or 5.6% of revenue. We expect SG&A as a percent of revenue to be lower in subsequent quarters as revenue ramps up consistent with our trailer projections. SG&A as a percent of revenue is expected to be approximately 5% for the full year. Intangible amortization for the quarter was $5.3 million, and is expected to continue at this level for the remainder of 2015, with a four-year expectation of approximately $21 million. Interest expense consists primarily of borrowing cost totaling approximately $5.2 million, a year-over-year decrease of $0.5 million primarily related to the impact from the $40 million of voluntary term loan prepayments made in 2014. For the full year, we anticipate interest expense to be about $1 million less than in 2014. Approximately $1.5 million of our reported interest expense is non-cash and primarily relates to the accretion charges associated with the convertible notes. We recognized income tax expense of $6.2 million in the quarter. The effective tax rate for the quarter was 37.3% in line with our guidance for a full year income tax rate of approximately 37%. Finally for the quarter, net income was $10.5 million or $0.15 per diluted share. On a non-GAAP adjusted basis and after adjusting for cost associated with refinancing our term loan facility, net income was $13.8 million or $0.19 per diluted share. In comparison, the non-GAAP adjusted earnings for the first quarter of 2014 were $8.3 million or $0.12 per diluted share, which excluded $1 million of non-recurring charges related to changes in our statutory tax rates and the corresponding impact from revaluing our deferred tax assets. This represents a year-over-year increase of 58% in adjusted earnings per diluted share. With that, let’s move to the balance sheet and liquidity. Net working capital increased during the current quarter by $31 million as we ramped up production in the first quarter consistent with our seasonal expectation. We expect networking capital to be relatively stable during the second quarter with the potential for a slight increase as we hit our big production months in the summer. Capital spending was approximately $3 million for this quarter and we continue to expect full year 2015 capital spending to be approximately $25 million. Our liquidity or cash plus available borrowings as of the end of the quarter was approximately $269 million, an increase of more than $60 million on a year-over-year basis and inclusive of the $40 million of voluntary debt prepayment in 2014 and $18 million of share repurchases completed in the first quarter. Our total and net debt leverage ratios were 2.1 times and 1.3 times respectively at the end of the quarter. As I wrap up this section, I would like to highlight a couple of significant accomplishments for the quarter. First we successfully refinanced the term loan and obtained the key terms we were seeking specifically we reset the tenure with a maturity in 2022, we strip the remaining financial covenants and we lowered the interest rate by 25 basis points. Overall this refinancing will lower our annual interest expense by approximately $1 million and will provide significant flexibility into the foreseeable future. Equally important by extending the maturity an additional three years, the only significant debt maturity prior to March of 2022 is $115 million convertible note, which matures in May of 2018. One final point during the process of refinancing the term loan, our corporate credit rating by upgraded by Moody’s to BA3 from B1. Second, we made significant progress executing on our share buyback program. We repurchased almost 1.3 million shares or $18.3 million against our 60 million share repurchase program or approximately 30% of the program in the first quarter. We're pleased with this progress as it provides us with additional flexibility for the remainder of this year and next year as we evaluate share repurchase and other return of capital opportunities going forward. In summary, we delivered a strong first quarter, a record start for any year in our 30-year history, all business segments posted solid results. The balance sheet remains strong and we are well positioned to maintain a momentum in to the second quarter. We finished the quarter with strong liquidity and approximately $125 million of cash on the balance sheet, our leverage ratios remain in comfortable territory. We've no significant debt maturities for 2018. Lastly we remain committed to being good stewards of the company’s capital and managing the company for long-term value creation. Thank you. And I will now turn the call back to Yolanda and we'll take any questions that you have.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question from Mike Shlisky. Your line is open.

Hi good morning, this is Lee on the line for Mike. I just wanted to touch on the order turns that you guys are seeing, how far out are you currently booked?

Well the $1.2 billion in backlog, if you look at it on a consolidated and compressed basis, it translates to about eight months, worth of backlog.

Okay, great. Are you considering opening your order books for 2016 early at this point?

Not at this juncture. It’s a little early in the process to be looking at 2016 needs customers will become more serious about that as we get later into the year as we get into mid-year. Our prediction is that you’ll see actually an earlier interest by customers to start the dialog than they would typically because of wanting to lock up slots. As I shared in my formal comments some customers have actually faced needs for equipment and have had to delay taking on that equipment because they couldn’t find slots in the industry. So I think you’ll see -- you’ll see a little bit of an earlier trend in getting on Board and wanting to have those conversations to lock-in slots earlier.

Okay. Great and then one last follow-up if I could? Are you -- what kind of pricing are you seeing was currently in your backlog? Is it around the same pricing you saw in Q1 or would you say it’s slightly better given that you’re able to be more selective now?

Well, as I stated in my comments, as we progress through the year, we believe that you’ll see a continued improvement on year-over-year comparisons on our pricing, on a net pricing basis. Mix can always have an impact as you get some of the smaller lower priced product, but it doesn’t impact the margin that we get from there. So what you’ll tend to see is continuing year-over-year improvement in net pricing output specifically from the Commercial Trailer Products business.

Okay. Great. I’ll leave it there. Thanks.

Thank you.

The next question is from Alex Potter. Your line is open.

Hi this is actually Winnie in for Alex. Last quarter you guys had mentioned that this year Q3 will be the quarter in which the gross margin in DPG get back to the 21% to 23%. But obviously that wasn’t the case. It rose to 22% in Q1. I think you briefly touched upon this. Can you elaborate on what changed and is the current margin run rate sustainable both in terms of gross margin and in terms of SG&A, thanks?

Yes good question actually. Really it was operational execution that really drove the improvement for the business. They did have some favorable mix in product but the team has really tried to step up and address some of the challenges that they had previously faced and are working hard to continue to do that as we progress through the year. I do want to reemphasize what I commented on in my formal comments earlier as that as we transition from the results of the first quarter through the second quarter we'll have to have some patience. We're looking at probably a flat quarter-over-quarter performance by that business, Diversified Products as they transition and get these new expansions up and running effectively get some of their product, the new product produced, shipped and start getting able to recognize some of those efforts as we go forward. But as we progress through the latter half of the year, we should expect some marked improvement, but our 21% to 24% previous guidance for gross margin for the Diversified Products business stays as our guidance for that. So that’s what we’re trying to achieve and maintain in that range.

Okay. Great, thank you so much for the color. And then another question is the non-trailer revenue in the DPG segment had a pretty meaningful step down seems like on a sequential basis. How much of that was due to seasonality? How much was it due to ASP pressure other cost and can we -- or we justified in modeling that bounce back in there?

Yes, I wouldn’t get into too much granular there. There are so many moving parts within the Diversified Products business, but some of the non-trailer product would be coming out of our Wabash Composites business and we previously -- in previous calls discussed some of the pricing pressures on the Workhorse DuraPlate AeroSkirt product. So that dynamic remains the same. And then in the engineered products part of the Walker business, they have some timing seasonal issues as they build some of the product in that business takes longer periods of time to build, construct and ship. So there tends to be some timing delays from time to time on getting that product completed and shipped. Stationary silos, some of the pharmaceutical down flow booths and isolator booths, those are the types of things that will tend to be lumpy throughout the year. So the DuraPlate products business or excuse me, the Diversified Products business has a lot of that lumpiness from quarter-to-quarter that you have to contend with, within the Engineered Products business and within the Wabash Composites business. So I wouldn't read anything into it. Just patience through the second quarter as we build up and get into the latter half of the year.

And there is just some natural variation that occurs in that business as a result of as Dick mentioned the diverse set of businesses, products in markets that we serve in the Diversified Products Group. So some of that to be expected.

Okay. Thanks. I'll pass it on.

Thank you.

Our next question is from John Mims. Your line is open.

Hey good morning, guys. Let me ask Dick, kind of following up on the question on backlog and pricing power and what not. I am curious to know how much flexibility you have for slots in the back half of the year in terms of being able to kind of triage more aggressively priced trailers or how much of that is just locked in with the larger kind of longstanding orders that you're still selling?

The drive in segment is the one that has had the largest increase in demand across the industry and obviously that’s the part of the business that gets build up the earliest and has pretty much been that way. What we have done as the orders were coming in late last fall in droves we were standing very firm and strict on our commitment to favor major over volume. So we were looking at each one of those and adjusting pricing where we could. Remaining slots we have been extremely tight on scrutinizing just which order opportunities, which code opportunities has actually been converted to orders to get the most price benefit that we could out of them. So we've been very selective. We feel we've done a very good job with that. I always hate to say that we're completely filled up because the Commercial Trailer Product team just continues to drive productivity improvement efforts within the business and that’s what's allowed us to increase our projections for the year. Some of those activities and efforts that have resulted in creating effectively additional capacity without having to invest anything in the business to create it other than the productivity improvement efforts through our CI activities and events.

Okay. That makes sense. And I know you have the backlog to be technically full, but when you look at build slots, are you all actually full or do you save a pocket of production capacity for emergency orders, high priced orders that may come in and need to be filled quickly?

Yes. We don’t effectively save the slots. We -- I guess you could say some of the higher bidder, I hate to use that expression, but we've been as my earlier comments, we try and be very selective in how we fill the remaining slots, but the team while we're not effectively saving slots, the team has found ways to be able to take advantage of small, smaller opportunities here and there -- through their productivity improvement initiatives to create some of them. And we always have some overtime that we will use on weekends to take advantage to some very attractive priced opportunities. But no, we do not do any slot holding per se that make go on in other pockets of the industry.

Sure, that makes sense. And then on the labor side, can you comment on wages, labor availability wage inflation if I look at G&A excluding depreciation, I ticked up a little bit of percentage of revenue this quarter and the first quarter is kind of tough to read for the full year. But are you having to do across the Board wage increases? Are you paying more overtime this year than last year? Any help there would be helpful.

Well there may be some more. We've not had any wage pressures per se. We have normal adjustments that we will pass along, but nothing out of the ordinary. On the overtime front, clearly as I stated about being opportunistic on attractive code opportunities to accept orders that would provide an opportunity to utilize overtime to build those, we're going to be obviously paying an overtime premium to build those on weekends. So yes, we're going to see an increase in this environment in the amount of overtime, but those are taking advantage for the opportunity.

Sure and that still -- any increase in overtime there is still within that 5% SG&A target that you put out Jeff.

Well on a full year basis, we expect to still be around 5%. Obviously the first quarter is 1% of revenue is one of the highest quarters we have. The good news is this year first quarter as a percent of revenue was lower than it was last year. I think the increases you see in any kind of SG&A is really related to the company performing at a higher level the growth we experienced and some investment in the future growth opportunities that we're pursuing and investigating.

And just to clarify John, the overtime increase cost would be reflected up in the cost of goods sold.

Okay. That’s right. That’s helpful. Okay. And then just one last one and I'll turn it back, when you're in this kind of environment where everybody is making trailer as fast as they can and truckers are running around and freight assessors they can, can you charge the mileage for the trailer that you're manufacturing but people are too busy to come pick up that’s in new yard as well.

Not really. We've looked at that in the past and it's just not something that generally works well in the industry. What we have done though is we work much more closely with our customers to get them to indentify which product and which orders that they intend to pick up themselves we call customer pickup versus turning it over to us to prepare and plan for the delivery of it. And what we've changed in our system and why we're in recent quarters having better success is actually working with them prior to the build completion to actually identifying which approach they want to take and that’s something that helps the process get started earlier in the planning process for it and it gives a little bit more predictability. I am not going to say it's perfect yet, but it gives us a little bit more predictability on what we will be able to accomplish and that’s relatively recent change that we've made and it seems to becoming more effective in getting a steadier flow of shipments out of the door. A little early for us to say that with the 99% confidence and predictability, but it seems to be getting much better over these last couple quarters.

All right, understood. Okay. Well thanks so much. Great quarter and great start to the year.

Thanks John.

Our next question is from Jeff Kauffman your line is open.

Hey guys.

Hey Jeff. Good morning.

Hey. Good morning. Congratulations. That was fantastic quarter. Nice to see. A couple follow-ups with Jeff, Jeff you mentioned with the term loan, the positives, the lower rate, the absence of financial convenience would save you about a $1 million in interest expense. But your guidance a little bit earlier was that interest expense was going to be only about a $1 million lower than last year. So should I assume that none of the guidance you've given in corporate setting debt paid down from this date forward?

Yes, I don’t forecast debt pay down. We take that on a quarter by quarter basis. It's a discussion as you know Dick and I have with our Board of Directors on a regular basis and obviously you know that’s part of our overall capital allocation strategy as well.

Okay. And the share repo, you said I think you bought back about 1.3 million shares.

Yes. Just short of 1.3 million.

Okay. Was that late in the quarter because it didn’t seem like there was a big change in shares outstanding?

Well, there are couple of moving pieces there and when you look at the outstanding shares especially on a diluted basis John, so, sorry Jeff…

That’s okay.

Like we said, we repurchased approximately 1.3 million on a diluted basis so the convertible notes will add about 1.7 million shares to the calculation. So you have to take that into account when you look at the total diluted share count. I think the good news is, is we came out of the gate very strong on the share repurchased program. We made significant progress in the first quarter and it gives us great flexibility over the next seven quarters as we evaluate that form of return of capital and other forms of return of capital.

Okay. And just a follow-up on that, you do have the convertible security out there I guess the good news is we’re starting to worry about getting in the money eventually. Can you refresh on what the options are for using cash to maybe repurchase that if you choose to do so and kind of what those prices are that would trigger some of those events?

Sure. So let me try to just give a high level summary of the $150 million convertible notes that are due in May of 2018. The conversion price is around $11.70 per share. So from that perspective Jeff the share would already be in the money at the current share price. Having said that, the holders of those notes don’t have the ability to convert and still our share price is above 30% above the conversion price for 20 out of 30 days at the end of the quarter. So that translates into $15.21. So we haven’t triggered that mechanism for them to be able to convert at this point in time. And during the last six months of the convertible notes, they can convert it anytime as long as the price is above the conversion price.

Okay. Thank you.

And then we don’t have a call provision on that. So those notes are not callable by us Jeff. So it’s I'll say not easy to repurchase those shares. We could either repurchase in the open market or obviously if there are big holders that were willing to do it a private transaction we could investigate that as well.

I guess where I’m going with this is if I take your earnings guidance and subtract the CapEx even with the share repurchase that you’re looking at somewhere between $80 million and $90 million of uncommitted cash flow for this year and I know acquisitions or alternative dividends are alternative. But does it make sense to raise cash levels in the event that the share price doesn’t have a whole lot more to go to trigger that maybe have some cash in reserve or how do you think about capital deployment that way?

Well I think you have to plan for all of the potential outcomes there Jeff and so we need to be in a position to meet any of those scenarios. And I think obviously we've kicked the term loan out for another seven years that’s in a good spot. It allows us to turn on occasion for the convertible notes. We'll evaluate opportunities for further de-levering against the convertible notes as those opportunities present themselves. And in the interim, I think if you look at our de-levering in terms of our net debt leverage is potentially we do hold more cash on the balance sheet.

All right guys. Hey thanks so much Jeff.

Well thank you, Jeff.

Our next question is from James Goodfellow. Your line is open.

Hi good morning, guys. This is Jamie on for Kristine this morning.

Good morning.

Stepping on for Christine, I wanted to dig into what’s going on in the tanker market? What you’ve seen in terms of pricing and basically is it fair to assume that your competitors who might have heavier exposure directly to energy end markets are feeling some pricing pressure and might those pressures flow through to the broader market, including the players not serving those markets directly?

Yes it’s great assessment James. What we have -- we have some direct exposure as everyone knows, which the Walker business itself 10% to 12% exposure to the energy sector. So while we have some of impact there, some impact there, there is also the indirect impact and that’s since those competitors who maybe more exposed will shift their focus to other products and therefore we end up feeling some of the indirect impact of the softness in the O&G space. So yes, that is creating some of the pricing pressures that we shared and described last quarter and those have continued and we’re hopeful as O&G the price of the oil -- barrel of oil tends to stabilize, go up and we may see some moderation there, but that’s been some of the effect that we’ve talked about.

Can you quantify to any extent what the pricing is done and where it’s trending there?

James, we’re not going to talk about unfortunately pricing in individual market segments within the Diversified Products Group. I think as a whole, you’ve seen that there has been some price pressure there. Some of that is related to the product mix. As you know we sort of a diverse set of markets there from energy which is crude oil, refined fuels, food, dairy, beverage, chemical, environmental in all of those market segments. So as Dick mentioned the indirect impact on oil and gas I think it does put pressure on some of those other markets and probably the vast visibility is through the -- through just the average sales price that you see in the overall segment.

Got it. Well that’s very helpful. Congrats on the quarter guys.

Thank you.

Our next question is from Brad Delco. Your line is open.

Good morning, Dick. Good morning, Jeff. How are you guys?

Hi Brad.

Very good.

May have missed this. I apologize I've been on two calls, but you made a comment about seeing kind of sequential flat performance in Diversified Products, were you speaking specifically about revenue or gross margins or earnings or anymore color there would be helpful?

Yes, I think you want to look at both lines, revenue and the profit line as they’re transitioning and getting the new facilities, the facility in Frankfurt that is the new leased facility for the Wabash Composites business to get the needed floor space to be able to expand the business and introduce the new product offerings, the new aerodynamic offerings they’ve got. And then you’ve got the expansion in our Mexico facility for the introduction of stationary silos for food, dairy, beverage industries to service the Mexican market. That’s a growth initiative, but it’s in its ramp up phase. The expansion in Mexico was completed late last year and we got production started up earlier this past quarter and we'll start seeing some shipments flowing out of there this quarter. So that’s going to help the business going forward. But we need a little bit of patience as we transition through those ramp ups and get the operating efficiencies in line and get into the second half and that’s all I was trying to communicate there. You got a combination of a number of factors, those ramp ups, the introduction of those new products and then you got the -- some of the softness that’s been created by slowdowns in the oil and gas sector that have had some direct impact on our business. But then the indirect impact of competitors that are refocusing their efforts and creating not only some pricing pressures but some competitive nature as they shift away from some of the O&G product that they produced to try and produce some of the other product that they were not producing previously which would be more in our warehouse. So you’ve got a combination of a number of factors that are impacting it and we’re just trying to remain cautious as we go through the second quarter because of some of that noise. So that's much stronger as we enter the second half.

Okay. So that’s what I was sort of getting that in terms of what’s embedded in guidance, it seems as if flat into 2Q, but because of these investments in growth, we should see maybe some acceleration in the back half of the year, is that a fair way to describe that?

Absolutely.

And then just want to touch on put up really strong margins in the CTP sector on a lot of volumes running through the plant. Is the idea I guess going into second and third quarter is that those margins can improve because of I guess the improved price in the backlog or is there additional productivity that can be realized from just your higher production rates?

Yes you get a little bit of both. Certainly as we continue to fill out the backlog, as we were taking newer, newer quotes were coming in and filling out the balance of the backlog. The pricing environment is better today than it was several months ago. So we’ve taken advantage of that and with the maturity of the workforce, the number of productivity improvement initiatives that the team is able to throw at the workforce is with a much more mature group. They are able to handle it. So we’re getting improvements in velocity, in productivity, in efficiency times being improved. So we’re getting more out of what we already have installed in the factories and that’s what allowed us to make the adjustment on the top line for total trailer output for the year is leveraging some of that newly created capacity along with some opportunities to grab some attractive orders and work over time to fulfill those.

Yes and Brad, recall we ramp up in first quarter. So there is some first quarter ramp up there. As you get into second quarter, you’re really firing on all cylinders and you get the benefit of that in the second and third quarters and the rest of the year.

Okay. Got it. That makes sense. And then this maybe a very random question, but looking at some of these truckload names, you’re hearing a lot about driver wage inflation, I’m just curious to get your perspective, are you seeing any wage inflation pressures from your workforce or is there a way for us to think about wage inflation in your business over the course of the year and maybe in the next year?

Yes that was a question that was asked previously. So I’d just reiterate. We have not seen anything unusual in our business. Obviously you're always going to have certain locations that may need if you have location that has eight mechanics and you’re going to have to go out and find the mechanic you may end up making some adjustments. But for the masses talking about here in the main headquarters location in Lafayette, where we actually have a total of 3,500 of our associates are here, we’ve not seen anything unusual. The workforce is far more stable today than it has been in a number of years. So the turnover rates are lower and we’ve got programs in place that provide incentives for performance, but we’ve not seen anything unusual from a wage pressure unlike what our customers may be seeing as they fight for decreasing pool of drivers.

Okay great. Sorry for making you repeat that but thanks for the time and congrats on the quarter.

Thanks.

We have no further questions at this time. I'll turn the call back over to Dick Giromini for final remarks.

Thank you. In conclusion, we’re extremely pleased with the results we’re able to deliver in the first quarter of 2015. 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 hyper focus on execution and delivering results, I’m confident that we’ll do just that. Thank you for your interest and support of Wabash National Corporation. Jeff, Mike and I, all look forward to speaking with all of you again on our next call. Thank you.