Good day, ladies and gentlemen, and welcome to the Q3 2018 Wabash National Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today’s conference, Mr. Jeff Taylor. You may begin.

Thank you, Demetrios, and good morning, everyone. Welcome to the Wabash National Corporation 2018 third quarter earnings call. I’m Jeff Taylor, Chief Financial Officer; and Brent Yeagy, President and Chief Executive Officer is also on the call today. Brent will discuss the overall company performance for the quarter, as well as the progress we are making in our strategic initiatives, the current operating environment and our outlook for the remainder of 2018. I will then review the financial results. At the conclusion of the prepared remarks, we will open the call for questions from the listening audience. Before we begin, I’d like to cover two brief items. First, please note that this call is being recorded. Second, as with all of these types of presentations, this morning’s call contains certain forward-looking information, including statements about the company’s prospects, adjusted earnings per share guidance, the industry outlook, backlog information, financial condition and other matters. As you know, actual results could differ materially from those projected in the forward-looking statements. These statements should be viewed via the cautionary statements and risk factors set forth from time-to-time in the company’s filings with the Securities and Exchange Commission. With that, it is my pleasure to turn the call over to Brent Yeagy.

Thanks, Jeff. Before we get into prepared remarks, I’d like to discuss Wabash’s recent loss of an industry icon, mentor and friend. Rod Ehrlich, the Co-Founder and our Chief Technology Officer recently passed. Rod inspired a culture of innovation that lives on within Wabash National, its products and hundreds of associates who inspire to find new ways to serve our customers. His legacy is visible to all as you travel our nation highways and walk the hallways with our next-generation of innovators and leaders. He is and will always be Wabash National. Moving on, Wabash has recently been named as an Industry Week Top 50 Manufacturer for the fourth consecutive year. It is an honor to be named with any given year, but to be named to the list for four consecutive years is a tremendous recognition. It is a reflection of the hard work and dedication from all of our Wabash National associates across the company, as well as the improvement of our business as we execute our strategy to grow and diversify. With that, let’s discuss the company’s third quarter performance. As stated in our October 12, preliminary earnings release, the third quarter was a difficult quarter for the company. All three of our reporting segments faced increased operating pressures, which negatively impacted our financial results. While the third quarter result did not meet our expectations, we are actively addressing the issues as quickly as possible. Overall in the third quarter, new trailer shipments of 15,150 units, or 850 units below the midpoint of our shipment guidance range, which also caused consolidated revenue to fall below our revenue guidance range. Total new trailer shipments and revenues were below our prior guidance due to the customers’ inability to pick up units as a result of a tight freight market…

Thank you, Brent. On a consolidated basis, third quarter net revenue was $553 million, an increase of $128 million, or 30% year-over-year, which is the second best quarter for the company in terms of consolidated revenue. Net sales increased for both Commercial Trailer Products and Diversified Products Group compared to the prior year quarter in addition to the favorable impact of adding the Final Mile segment, all segments contributed to the strong revenue for the quarter. Consolidated new trailer shipments were 15,150 units during the quarter below our shipment guidance. Third quarter build levels totaled approximately 15,500 units consistent with our expectations. Components, parts and service revenue was $35 million in the quarter, down slightly – excuse me, was $35 million in the quarter, down slightly from $37 million in the prior year quarter, primarily as a result of lower sales at our branch locations as we continue to transition company-owned branch stores to independent dealers. Equipment and other revenue was $117 million in the quarter, up $88 million compared to the third quarter of 2017, primarily due to the addition of the truck body sales in the Final Mile Products segment. Overall, non-trailer-related revenues for the current quarter totaled $152 million, or 28% of our total revenue. The growth in non-trailer revenue is due to the inclusion of Final Mile Products and other organic initiatives. In terms of operating results, consolidated gross profit for the quarter was $65.2 million, up $4.2 million, or 6.9% year-over-year, which was attributed to the addition of Final Mile Products last year, offset by material cost inflation as a result of strong demand and tight supply, as well as import tariffs impacting both import and domestic material pricing, labor inefficiencies caused by the tight labor market and supplier disruptions, which negatively impact productivity and…

Thank you. [Operator Instructions] And our first question comes from Brad Delco with Stephens. You may proceed.

Hey, good morning, gentlemen.

Good morning, Brad.

First question, just on the challenges you saw in the first quarter. I just think you would be helpful if you could just sort of address when some of those challenges became more obvious to you guys, because you gave us an update in late July with expectations of sequential improvement in margins across, I think, all three of your business lines. And then we were also to call by surprise. So how do we know we have good visibility here for fourth quarter and into 2019? And any color you can provide there, would be helpful?

Yes, Brad, let me start and then Brent can obviously add to it. In terms of when from a visibility perspective, it really became apparent to us was later in the quarter. And I’ll talk first about supplier disruptions. We have been operating with a normal level of supplier disruption, given the strong industrial production, the strong demand that we’ve seen in trailers over the last couple of years, but 2018, in particular, as well as tractor demand, which as you know, shares many of the same supplier base as we do. And so from our supplier base, capacity utilization has been very high. They have an added capacity in several years, certainly, I think since the last downturn to any great extent. And so that put stress on the supply base this year. But in particular, we saw it manifest itself in Q3. For us, supplier disruptions really increased significantly in August and August was also the peak month we’ve seen for supplier disruptions. And in the couple of months since then, we have seen it improved from the peak that we saw in August. But for supplier disruptions, they’re very difficult to predict ahead of time and you generally know about them when they occur. And while I’m saying that, I also want to tell you that we are taking proactive steps to increase our visibility for supplier disruptions. We are definitely increasing the contact and touch points that we have with our supply base in order to try to get an earlier warning on that, that issue, as well as increasing our monitoring internally. We will also look at adjusting safety stock levels internally to help offset some of those disruptions and the impact they had on our operating performance in the quarter.

Brad, what I would add to that is from a – just a shipment perspective, that’s something that Roy would not have come evident to us until really the latter half of August, beginning of September, as we saw van shipments begin to trail precipitously that – at that point based on just a slowdown in customer pick ups. We’ve seen that now rebound as we’ve entered into the fourth quarter. As we’ve seen the – our customers, our largest customers really begin to pick up the pace that they position assets going into the fourth quarter in anticipation of a strong trade environment, as well as preparing for the Christmas holiday. Now that supplier disruption had a, we call it a negative synergistic effect with our state of labor. If you think about the fact that we’re trading on just a – we call it, a baseline of labor through the organization just nature of the environment that we’re in. And you think about the discontinuity that get created within the manufacturing environment when you’re hit with a quick uptick in disruption, that inefficiency even grows significantly. So that all came to, I’d say, came to ahead in late August early September time period. What’s positive is that, we saw a market decrease over the course of September and supplier disruptions, and we’ve seen it further improved to more like Q2 levels as we’ve entered into the month of October and arguably into the month of November. So that gives us some clarity as to how the environment is impacting us and how we can feel comfortable in our core [ph] projections for the fourth quarter.

Okay. And then two follow-ups, if you don’t mind. With regards to the backlog you have, it seems as if a lot of your suppliers or maybe just the trailer industry suppliers are really unsure about input costs for 2019. And so it sounds like some of the orders here in the trailer industry are sort of committed volumes with sort of unknown price. Is that a fair assumption, or do you feel like your suppliers have given you clear indications of what input costs will look like, or what your cost will look like in 2019?

That’s the way I would characterize that right now is, I’d say, it’s an undeniable truth that there is a – it is not an easy environment to understand what future costs maybe. We are getting through some of the very strong relationship that we have with suppliers, a good understanding of where they set. They’re working with us very diligently to understand how they may be impacted by future tariff-related cost pressures. While we may not know and nor does the industry know, I would say broadly in the industrial market doesn’t know exactly where cost went up over the course of 2019. What we can begin to do and what we have done, we’ve given our customers notice that we intend to pass along in real-time all tariff-related price increases going forward. We’ve sent a letter out and have begun face-to-face communication across our entire customer base to hedge that risk and to let them know our intended intent to pass that cost straight through. in addition, we’ve increased the amount of, what I would call, contractual resetting of price based on periodic increases in cost throughout the 2019 time period to further hedge that risk due to that unknown, right? So there are things that while we may not have certainty as the cost, there are things that we can do to begin to hedge that risk. The last one I would talk about is that, we are further expanding our hedging program, so that we can take a – we’ll call it a fuller bite at the risk that’s left on the table in terms of our largest material cost spend, which is the commodity component of our total cost of materials.

Okay, thanks. That was good color. And then last real quick one, if you can. And you guys know that I’m really interested in this one. But any feedback you’re getting in your pilot program with MSC from your customers? And when do we expect the order book to start building for that?

Yes. So I would say, first off, we are actively engaged right now in looking at filling what we believe is our targeted demand/targeted capacity utilization for 2019. Now that is something we’ll talk about in more detail at specifically the Investor Day in February of 2019, and we have a much more broader perspective that we’ll share. What I’ll tell you is that, we feel very confident that we have the capacity installed to be able to meet the expectations that we have to take a significant step forward in production, i.e., shipment of Molded Structural Composites technology in 2019. That includes not only on the van side of the business, but also on the truck side of the business. Now…

Truck body.

…truck body, sorry, truck body side of the business. Now what’s positive – with further positives, I want to reiterate over there were a million miles on the road right now, we’re getting a significant feedback and we’ll call building anticipation and expectation for what this product can provide. We’ve expanded the number of dealers that we’re talking as soon as they’re expanding the number of people that they are putting in queue as we tell the story of what is possible with this technology. So we – we’re in a good place right now and understanding what the pent-up demand for, we’ll call, first look of this product. And we will be matching that to our intended increase in production accordingly. We’ll tell that story more in February.

Okay, great. Okay, thanks, guys, for all the time. I’ll jump back in queue.

Thanks, Brad. We look forward to seeing you in a few weeks at your conference.

Next week, Jeff.

Next week.

And our next question comes from Jeff Kaufman with Loop Capital Markets. You may proceed.

Thank you very much. Hey, guys.

Hey, Jeff, and welcome back.

Thank you. Thank you. Couple net questions. Can you talk a little bit about the impairment charge at DPG? It seems like revenues are on the way up, margins are getting better. Is it – was it a write-down of a business unit entirely? What caused the impairment?

Yes, Jeff, I’m not going to say a whole lot about it. But it was not a write-down of an entire business unit. As you know, we’re required by accounting regulations to constantly monitor the carrying value of the assets on our balance sheet. And we got into a situation in this one where we felt like that the long-lived assets needed an impairment. And so we took the impairment in the quarter. It was related to goodwill and intangibles for a business, and we haven’t disclosed what business it is.

Okay. If I look at the Final Mile business. Clearly, the chassis disruptions, revenues were down about $35 million sequentially. That business is still relatively new to us. Can you give us a better idea of what you think the normal 2Q to 3Q and 3Q to 4Q seasonality in that business should be? And then as supplier deliveries come back, should we kind of expect a larger than expected seasonal movement in that business?

Yes. Jeff, I think for the business as a whole, the normal seasonality that you should expect to see is that, it generally is going to be strongest in the second quarter. If you look at Supreme as as a public company prior to the combination with Wabash, they generally peaked in the second quarter. And then – but they also – some of that was because of the large lease demand. And so that would also carryover somewhat into the third quarter. And then you see generally Q4 and Q1 at more modest levels, not peak levels in the seasonal profile there. So overall, that’s what, I think, the shape of the seasonality looks like.

What I would add to that as an accurate perspective relative to the historical norms in that business. I do want to stress that – as from a go-forward standpoint, while we believe in general that historical normal carryforward, we are actively working to smooth that demand curve for this business as reflective in Q3 and Q4. From a forward-looking perspective, it’s not a great situation from a labor stability standpoint and overall plan efficiency standpoint to operate a business that way. From Q2 to Q3, for the Final Mile Products business in 2018, I think, it’s important to understand that chassis disruption, which impacted 20% of overall production, i.e., shipments as we did that more stabilized and outdoing years, we’ll start to see a moderation of that from Q2 to Q3 as we actively manage the demand curve going forward. Ultimately, that’s one of the ways we unlock the value in this business on a full-year basis and that’s something we’re actively working to do.

Okay. Thank you, Brent. One or two other nips and I’ll get back in line. So we’re coming off $0.54 second quarter, your normal seasonality wouldn’t be that different. Is it fair to say that the combination of these issues may have cost you as much as, say, $0.20 of earnings in the quarter?

Well, I think, the issues we identified what caused the 250 basis point decline in gross margin, so that drop that down to the EPS line, and the answer is, yes. It was primarily driven by the factors we talked about.

Okay. So a silly question then. If you’re going to finish the year around $1.50 in earnings and may be $0.20 to $0.30 impact from these issues, many of which should abate as we get into 2019. Why do you think you’re only going to earn about $0.10 to $0.20 more on average in 2019? I understand tariffs is some of this. But generally, these are costs that should go away. What else is weighing on that 2019 outlook?

Yes, Jeff, I think our full-year adjusted EPS guidance of $1.50 to $1.55….

Yes.

…if you look at our third quarter year-to-date adjusted EPS numbers of $1.06 were higher than $0.10 to $0.26 EPS in Q4.

Okay. All right. I’ll stop there. I’ll let some others add it. Thank you.

Okay. Thank you, Jeff.

[Operator Instructions] And our next question comes from Mike Baudendistel with Stifel. You may proceed.

Thank you. Just wanted to ask you what is the customer response then to going back in your backlog and asking for higher prices on those piece of equipment? And to your knowledge, are your competitors doing the same thing?

Well, we took around at increasing – look at material-related price increases or pressures in 2018. I would say that we had a greater than 50% to 70%, we’ll call, positive response to those activities. I think, it’s kind of a undoubtable back to the prices going up, cost is going up, customers understand that. We’re just in the midst of going around from a – from the tariff-related letter that we just sent out. We’re engaging customers right now and we’re taking generally a stronger position even than what we did in 2018. So, again, this is a – pseudo regulatory-related pressure. Our customers understand that. They’re dealing with it in other ways. We feel confident that we will be able to recover a significant portion – a very significant portion of that amount going forward in 2019.

Okay. And then maybe just to think about in other way. I mean, how much of your $1.3 billion in backlog would you say, given those pricing actions are now at a margin that would be sort of a normalized margin?

What I would say right now in general and we’ll add further color as we move into further calls is that we’ve already taken a substantial price increase across the Board as we price the backlog for 2019. And I would say that we have – and I think it’s reflected in the guidance that we’ve given for 2019 accordingly that we have a level of visibility to the margin of our backlog going forward and it encompasses again a significant amount of price recovery to date. In addition to that, we have the added protections of increased pricing recover mechanisms to further protect that backlog. And we’re telling our customer base that any tariff-related costs that may have not been priced in at the time of the original deal. So remember that there is a substantial amount of backlog that was taken in July, August and early September prior to the release of the 301 tariffs. Anything that’s not priced in there, we are very upfront telling our customers that we’ll be adding that to the price of the trailer. I hope that answers your question.

Yes, it does. Thank you.

And we have a follow-up question from Jeff Kaufman. You may proceed, sir.

Thank you very much. So regarding the five issues that you spoke about the labor inefficiencies, the raw material issues, supplier deliveries, the chassis availability, and customer pick up. I think, you addressed the majority of those in terms of timing. I am assuming the labor efficiencies, it’s a hiring and training and productivity issue that last into, I think, you said second quarter 2019, you’ve addressed the raw material issues. Can you – and I think you hit on customer pickups. I thought I heard a number 1,800 units, I don’t know if that was a right number. But can you address where you are on the delay customer pick ups and when you believe you’ll be back where you need to be?

What I would tell you right now, Jeff, is that, we are – we have kicked off the fourth quarter in line with expectations relative to customer pick ups. And again, I think based on conversation with our customers, they fell behind to their own internal expectations of the repositioning and uptake of assets in the third quarter. So for them to hit their revenue targets, they are highly motivated to get product offer a lot and into service, and we’re seeing that reflected in our pick up rates today.

All right. So you think maybe we’re where we need to be as we finish fourth quarter hopefully?

I would say, it’s trending that way, and we have a quarter in front of us. We have – we need to see and understand, we have two more months to play out. But all indications right now based on what we know indicate again that they are motivated to do it.

All right. And a couple other OEM’s had cited Hurricane Florence as an issue with some of the suppliers that were in that region, the Southeast U.S. But as mentioned, that’s getting a little bit better. Can you talk about kind of how disruptive the supplier delivery issue and the chassis availability still is to your business as we sit here at the end of October? And what your hope is in terms of when much of that will be resolved?

Sure. Hurricane Florence, I would not say had a material impact on our supplier disruption-related issues. Our issues are really based off of the precipitous increase in production from Q1 to Q3, both in the trailer and the tractor-related industry really coming to ahead in August, coupled with a lack of logistics capacity in some cases for some of our specific chassis manufacturers as they move chassis at a large number to the overall mounting facility or mounting factories. When we think about how supplier disruptions look to us today, I would say, as we sit here in October, it has reached – it is at a level that is more like what we saw in Q2. So we have absolutely seen a material reduction in disruptions as we sit here today. And we have no reason to believe that they will specifically spike going into the rest of the fourth quarter. There is nothing on the table that says that should happen barring any black swan event that we can’t necessarily understand.

Got it.

But what I’ll tell you, again, is that, what we are seeing and how we are executing is reflective of a much different supplier disruption environment again, to second quarter of 2018.

Okay. Well, thank you for your candor and good luck. Thanks, guys.

Thank you, Jeff.

And our next question comes from Steve Dyer with Craig-Hallum. You may proceed.

Thanks. Good morning, guys.

Good morning, Steve.

The industry guys, FTR and ACT are obviously sort of forecasting a bit of a step back very minor next next year. And I think, you had indicated that you expect your consolidated revenue and EPS actually, both to be up next year. So as you think about your ability to outperform, is that – you feel like the components of that being as pricing, is it taking share and dry vans, or is it really kind of more centered around Final Mile outperformance just in your ability to sort of all in all outperform the industry expectation?

Well, thank you very much. It’s a great question. I think what we said right now is that we feel comfortable that we have taken a very large step forward in the recovery of pricing-related pressures or cost-related pressures from 2018 to 2019, that’s number one and that’s a huge lever for us. The second is based on our order intake to date, reflective in our backlog, we are – have – we have significantly leveraged what I believe is market share as we move into 2019, right? And while we want to manage and grow the business, we also feel that we’re doing it in a way that fits within the capacity that we have installed to date, right> So I think we are in a position where we can actually improve pricing relative to material cost recovery. We’re also in a position where we can leverage an installed manufacturing base without any substantial ramp to this period, which gives us the ability to optimize the business. And based on the backlog actually pick up some incremental share accordingly. That’s specifically in the van business. And I think, you can see by the backlog numbers and just a continued performance of our Final Mile Products business that they’re in a position where they have absolutely grown their business accordingly. We think they can continue to do that in 2019. And with the work that we’ve done from adding capacity really through productivity improvements on the line using mixed models scheduling and lean methods. They’re positioned also to execute at a much higher level reflective in the EPS range that we’ve given.

Okay, that’s helpful. And then you obviously have a good visibility in your order book at this point in time in pricing and so forth. As you had sort of price increase discussions, as well as just recent tariff letter, are you seeing any sensitivity around order numbers? In other words, if somebody wanted a thousand trailers at a certain price, is that price moves up if you’re finding it elastic? Are they cutting the numbers, or do they just sort of view that as a cost of doing business, and overall demand doesn’t change, cancellations are still relatively small?

Yes. I would say, as the order book is unfolded, there has been somewhat of an elasticity of price they had been willing to pay the price that we have generally been asking for. We’ve raised price significantly. We’ll talk more about that at different time accordingly and customers continue to generally order at the level that they initially indicated, meaning, they’re not cutting their actual order volume as a result of the price increases. That’s a general statement. Obviously, there are a handful of customers that may have moderated their buy. But overall, I think they understand. What has happened in this type of environment and also have to realize with many of these carriers are sitting on record profitability. They have the capital and the wherewithal and a market they need the assets. So it’s a good market to push through our price increase right now.

Got it. Last one for me and then I’ll move along. The chassis availability issue in the Final Mile side seems to be fairly pervasive in the industry. And all of the commentary does not suggest there’s necessarily going to be a quick fix for it. Is that generally what you’re seeing as well?

I would change that a little bit. I think, if you look at, we’ll call it just chassis production or Class A production in general, Class A, it’s just a surrogate. I know it’s a microcosm of multiple classes of vehicle. But when I think about it from a supply base standpoint, very precipitous increase in total demand, trailer, truck, chassis, how you want to frame it from first quarter to third quarter. Overall, not only in the trailer industry, but also within the truck industry, there’s somewhat of a moderation, more of a level of demand between now and the second quarter of 2019. So when you talk about suppliers, they’re not necessarily in a position to add additional capacity, plant, property and equipment, but they have reached the level of, we’ll call it installed labor capacity, that will benefit them over the course of the next three to four, yes, three to four quarters. So we should see some improvement. They’re indicating that in our conversation that they’re in a better position to be able to respond. Does that remove all supplier disruption? No, but it does lessen the rest of what we may have seen in the fourth quarter, where we think it really just peaked in the context with their plans.

Yes, Steve, we do expect some level of impact there from chassis availability, but not to the extent we saw in the third quarter.

Got it. Okay, thank you, guys.

Thank you. This concludes our Q&A portion of today’s call. I would like to turn the call over to Brent Yeagy.

Thank you for your interest and support in Wabash National Corporation. Jeff and I look forward to speaking to you again on our next call. Thank you.