Good morning, ladies and gentlemen, and welcome to the Q2 2019 Wabash National Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Ryan Reed. The floor is yours.

Thank you, Rusty. Good morning, everyone, and thanks for joining us on this call. With me today are Brent Yeagy, President and Chief Executive Officer; and Jeff Taylor, Chief Financial Officer. A couple of items before we get started. First, please note that this call is being recorded. I'd also like to point out that our earnings release, the slide presentation supplementing today's call and any non-GAAP reconciliations, are all available at ir.wabashnational.com. Please refer to Slide 2 in our earnings deck for the company's safe harbor disclosure statement addressing forward-looking statements. I'll now hand it over and ask that you please refer to Slide 3, as Brent gets us started with his highlights.

Thanks, Ryan. Good morning, everyone. I'd like to begin by saying we're pleased to report that our strong performance continued during the second quarter. Sales reached an all-time high at $626 million in the quarter, which was led by our non-dry van businesses. Both Final Mile Products and Diversified Products grew versus the same quarter last year as we continue our focus on building an even stronger and more resilient Wabash business portfolio. Wabash achieved operating margins at the highest level in two years through a combination of commercial and operating actions to address cost pressures experienced in previous periods as well as accelerating deployment of the Wabash Management system to create sustainable breakthrough operating and financial performance. Over the past year, we have taken necessary steps and committed the additional resources required to drive focus and systematic change in how we plan, manage and execute those business systems that enable powerful performance. Results are now emerging, people are believing, and we are just getting started. I will now give more detail on the performance of each of our individual strategic business units. Our Final Mile Products business unit delivered $135 million of revenue in the second quarter, topping the previous high from the second quarter of 2018 by 11%. We have grown the legacy Supreme business by 40%, since bringing it on board to Wabash National in late 2017. The pace of our growth in the Final Mile business segment remains well beyond our initial expectations. We are also pleased with the business's second quarter operating margins of 6.8%, as they work through integration costs as well as managing the normal and expected pressures that come with high levels of growth. We are clearly focused on broadening beyond the Supreme business and building the Final Mile Products Group into…

Thanks, Brent, and good morning, everyone. Let's -- I'll start on Slide 4. On a consolidated basis, second quarter revenue was $626 million, an increase of $13 million or 2.2% year-over-year. Revenue came in at the high end of our prior guide as a result of strong customer demand within Final Mile Products as well as growth within Diversified Products. Consolidated new trailer shipments were approximately 15,000 units during the quarter. While new trailer shipments were at the midpoint of our second quarter guidance, revenue was at the high end of our guidance as a result of increased average selling prices as we have recovered manufacturing cost increases from the prior year. Additionally, Diversified Products Group as well as Final Mile Products, both contributed strong non-trailer revenue during the quarter. In terms of operating results, consolidated gross profit for the quarter was $88 million or 14% of sales. Gross margin increased by 10 basis points year-over-year as a result of successful efforts to stabilize the company's supplier base, balancing pricing cost as well as the execution of the Wabash Management System for long-term structural improvements. The company generated operating income of $48 million and operating margin of 7.6% during the second quarter. This compares to the second quarter of 2018 adjusted earnings per share of $0.49 per diluted share and represents an increase of 14% over the prior year quarter. SG&A for the quarter excluding amortization was $35 million or 5.6% of sales, somewhat lower than our expected full year percentage of sales due to the seasonally stronger revenue during the second quarter. Operating EBITDA for the second quarter was $61 million or 9.7% of sales. Intangible amortization for the second quarter was $5.1 million, roughly consistent with the prior year period and in line with our expectations. Interest expense…

[Operator Instructions]. Our first question comes from the line of Justin Long from Stephens.

Congrats on the quarter.

Thank you, Justin. Appreciate it.

So maybe to start, I noticed that trailer shipment guidance came down a little bit for 2019. So I was wondering, if you could address that what drove that decline? And since the EPS outlook went up despite that trailer shipment outlook going down, can you talk about what was upwardly revised within the guidance to more than offset the weaker trailer delivery number?

Justin, this is Jeff. I'll comment on those 2 pieces there. We did pull down the high end of the trailer shipment guidance range. I think that's consistent with outlooks for the second half of the year and consistent with effectively continuing to perform at the level we did in Q2 for the remainder of the year. So we feel like that's consistent with what we've delivered up to this point and with the outlook outside as well. In terms of the performance of the business overall, obviously, our strong second quarter performance was included in our decision to increase our outlook for the full year. And that's the biggest piece of it, we've maintained our outlook for the second half from a profitability and a performance perspective.

Okay. Great. And Jeff, you gave some color on margins, the margin level you expect in the third quarter. But is there any color you can provide by segment on how you expect margins to progress sequentially over the back half of the year?

I think if you -- it will be consistent with performance we've seen across the 3 segments over the past few years, there is seasonality in the individual business units. And once again, CTP is going to continue to perform consistent with where they are. They will have some mix, some higher direct channel mix coming in the second half of the year, which will slightly impact their margins. Final Mile Products generally have seasonality, they're generally strongest in the second quarter, and then you'll see them because of seasonality pull back slightly in Q3 and Q4. And then DPG also exhibits at times a similar pattern of behavior. So we feel like the guidance that we've given is very consistent with past performance and what we expect for the businesses for the next two quarters.

Okay, great. And then lastly, quickly, you mentioned on your leverage multiples today, but any updated thoughts on where you see leverage ending this year? And maybe any initial thoughts on leverage at the end of next year?

We want to continue to move to decrease our leverage. We're very comfortable with where our leverage is, we're also very comfortable with our balance sheet and the liquidity that we have in the business today. But we'll continue to work on that. I think from a debt reduction perspective, at this point in time, and I would comment that this is something that we actively manage. But at this point in time, I think our full year debt reduction would be in the $30 million to $50 million range, and that should give you an example of where we want to be at the end of the year.

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

Just kind of curious, as we look forward to 2020, I know it sounds like most manufacturers have not opened order books yet, but we're getting closer. Just maybe some color on where you are with that? And more generally speaking, what you're hearing from customers just around appetite into 2020, given that '19 is pretty well booked up?

Sure. Steve, this is Brent. I'll take that one. Yes. So we see the -- for specifically the trailer business, or CTP, we'll see the order book up -- order book open up in more of that traditional early to mid-September and then move through the balance of the second half of the year, more of a traditional order book start as we've experienced over the last 10 to 15 years. And why? I think it's just simple. The -- we're experiencing -- in the headlines, we're experiencing a level of deceleration in the market. They're taking a timeout right now in the mid-summer to understand what their capital needs will be. So we're going to move to more of a traditional period off of peak demand levels. We know that. And there's nothing surprising about that. And this is in line with how we see the market in 2020 in relationship to our ACT and FTR, we think the world is lining up to their expectations. There's, again, nothing surprising there. Everything we're experiencing is in line with how we see the world. In terms of how our customers, our specific Wabash customers are reading the market right now? I'll talk specifically around our larger customers, which we're in active dialogue with relative to 2020, I would say, again, it's a stable perspective on their part. These are fleets that are still maintaining high levels of cash generation, still relative high levels of operating margin. They're not concerned necessarily about their ability to purchase equipment. They're just trying to hone it down right now what their exact expectations will be. So again, I'd say it's generally in line with what we see 2020 to be, as we expect, and we're not surprised.

Got it, that's very helpful, Brent. And then my other one just, obviously, you had mentioned it as well, some cancellation levels spiking in the industry, and you had indicated you're not seeing the same level. Just curious, any color around that as due to the specific customer or two, that is not yours, is it a product line, what do you, sort of, give to account for that -- for you guys holding up better?

Sure. Well, I think general trailer industry, we've seen cancellations really through the entire first half of the year, a little bit higher in the June time frame. ACT has reflected that in their numbers. And that's in dry van, refrigerating platforms predominantly, a little bit in tanks. Why are we saying that? Well, specifically in dry vans and in platforms, it's a spot rate phenomenon, and that's affecting some of the smaller, we'll call it, customers out there from a broad industry perspective. I think the other thing that you're seeing is that some of our competition decided to take maybe a higher level of speculative order that went into 2020. And you're seeing that get reset as people try to understand what their market needs will be in 2020 as well as a fall in material costs. So I think it was -- when we look at that dynamic, we were expecting that from a broad industry standpoint, but it's off to sort of how we manage our backlog. We manage our backlog in a much more prudent manner. Our dealer base is stronger, which minimizes the effect of the small and medium-sized customer pulling back. We manage the robustness of a firm order differently as a publicly traded company. And the strength of the portfolio that we've created over the last 7-plus years within CTP allows our larger customers to be more stable. It's been always part of the plan and it's positive that we're seeing and experiencing exactly what we have designed to happen. So I guess, that's the long and short of it.

Our next question comes from the line of Joel Tiss from BMO.

I wonder if you can give us a little color on the parts of the Diversified Products Group that are a little bit stronger? Like where is the strength, is it chemicals or just a little color on what's going on there?

Sure. Well, there's -- we'll call 3 major areas that we look at within our Diversified Products Group. We have our tank trailer business or process systems and our Wabash Composites. So again, it's a very diversified group that covers multiple end markets and that's why it's called the Diversified Products Group. So when we look at the relative margin strength across that specific organization, it strengthened all parts. They've all implemented the areas of the Wabash Management System that has allowed them to execute better. They -- that has given, not only what I would call, shopboard generation of margin, but I think from a commercial activity, we're seeing dynamics and execution at a higher level that were driving margin across all 3 at this point. Now specifically from a top line standpoint driving flow through, tank trailers has executed very well in terms of, what I would say, growing better than the market in 2019. And they really have executed on all cylinders in that regard. And that's a reflection of the strength of the team that Dave Hill within the tank trailers has put together. Dave Nick within our Process Systems Group is executing in an outstanding fashion in understanding his sales and operations planning and pricing in a global food dairy and beverage market and Wabash Composites specifically is understanding their input costs at a much higher level has allowed that to translate to margin accordingly.

Is there a lot more to go in that business as we look over, I guess, that's going to be a big driver of your 2021 goals. Is that fair?

Yes. What I would say is that all of our businesses have opportunities to drive higher levels of performance as we implement all the aspects of the Wabash Management System. We have a long journey to go as we increase performance. So to be able to narrow it down on exactly how fast they can unlock and grow those organizations is somewhat of a moving target. But yes, we would -- there's going to be some ups and downs relative to the seasonality, specifically with Diversified Products. But it is our intent that over the -- at least the period that we communicated will go out to 2021, yes, they have the opportunity to -- on a same-same volume for the sake of discussion, continue to grow operating margin accordingly if they continue on this path and perform and take advantage of the opportunities in front of them.

And then last, a bit behind the -- sort of the -- whatever you want to call it the uncertainty of customers in the summertime. Can you just remind us the dynamics like the big structural picture, the age of the fleet and the replacement demand and kind of what the -- when you look out kind of 2 to 5 years, what some of the big drivers are from a structural standpoint?

Yes. I'd say, that's a great question. A lot of parts to that, and I'll try to be as succinct as I can. I would say, in the near term, when I say near term, let's say, 24 months, obviously the macroeconomic reality, both, we'll call it national and global are going to shape how these next 2 years turn out, and that's what we're watching specifically. These can turn on a dime and I'm just being very candid, up or down, depending on what happens with trade policy, fed, or an election that's around the corner, all those things can be net favorable, if they turn out a certain way with certain timing. Vice versa, depending on how those go, they can add somewhat of a negative impact. And that is a much more harder situation to understand what that really means. And I'm not going to try to put odds on any of that right now. We're going to manage our business based on what we control and whatever the market throws at us, we're going to be able to do it better than we do it today. And that's kind of how we position it. In terms of how we look, we'll call it above that fray, general replacement within the van business specifically is going to be somewhere in that 215,000 to 230,000 units. We think that has shifted up for various reasons, everything from the spec realities today versus what it was 10 years ago. We're going to -- we see that in the change in asset-light management within the fleets as a result. So we think there are some things going on there. And then just the population will continue to grow. Yes, we have a young age, but I think again that's moderated by the trade cycles and how they manage their business over the last 5 to 7 years coming out of the downturn, a lot has shifted as a result. So those are part of the big pieces with it. And then we have this whole other thing called the dynamic change in logistics, distribution and transportation, that's going on right now that -- bigger than just Final Mile. And I think that's going to drive everything from asset mix to asset growth that traditional models don't necessarily take into account. We see that right now within our FMP business, where the growth that we're experiencing far exceeds anything that you could proxy off of the medium-duty chassis type of economic output. And we think that's going to grow and continue to diverge. That's why we've positioned the business accordingly. So I hope that's given some color and feel free to ask a follow-up if needed.

[Operator Instructions]. Next question comes from the line of Jeff Kauffman from Loop Capital Markets.

And congratulations, everyone. I was wondering, if you can give me an update on what's going on with molded structural composite? I did notice that the CapEx guidance did seem to come down a little bit. So I guess, as a follow-up to what's going on with MSC, if there was a reduction in capital spending, where is it coming from?

Jeff, so I would just say, the capital spending reduction has little to nothing to do with molded structural composites. There was nothing planned in the near term from a capital deployment before that project. It's mainly more of a timing available resource phenomenon at this point in terms of how we want to deploy capital. So it's just a change in our overall plan, right, I'm not going to be terribly specific about it.

That's correct.

From molded structural composite standpoint, what I would tell you right now, I mean, this is again is -- it's still a pre-commercialization item. We're doing a significant amount of field validation now as we're on the path, have over 1 million miles on the road by the end of the year. The initial feedback coming out in various points of validation for product that's been on the road really throughout 2018 and into 2019 has exceeded our expectations in terms of thermal efficiency, air leakage, off-gassing, so on and so forth, right, as demonstrated by real thermals with real validated testing. No wish list there. We continue to refine the design of the base product, not necessarily the molded structural composite technology itself that's proving out in spades. It's more of making sure that we validate the application-specific designs within the product to move into a commercialization phase, and that can only be done with time. So we're going to -- we're continuing to increase every day the amount of product on the road, and that's going to grow at the pace at which it grows, that is not being constrained necessarily by customer demand. It's being constrained by Wabash National to meet the requirements of a properly positioned, what we call, design verification process, though, this is a long-term play. This is a -- it has the potential for a structural change within the reefer market and how Wabash National plays in it. We are not going to go fast for the sake of short-term gains. This is a long-term investment, and we're acting accordingly.

Okay. And just one follow-up. You mentioned in your answer to Joel Tiss about how broader term, longer term, you were seeing changing specs in the industry. So I was just kind of curious, can we differentiate how the structural shift in trailer specs is occurring versus are you starting to see any change in trailer specs, given what we're seeing kind of a slightly weaker truck environment?

Well, let me try to unpack that. So when I think about trailer specs, in general, I'm going to bridge this with Final Mile Products as well because this is now one ecosystem. People need to understand that. These are not 2 different businesses. This is one now connected logistics change with a set of disruptors that's moving through all 3 phases, first, middle and final mile. So let's put that to the side for a second, I'll come back to it. The other thing that we're seeing in terms of specs, we started talking about this 5 years ago on the move when we took the roadshow out is that we saw a real change in asset management methods coming out of the downturn, where Wabash, and not really industry, play towards that 10 to 12-year replacement cycle, we would just pick a dry van, other products are different, but it's not terribly different across the board. But going from that 10 to 12-year engineered or longer to more of a one that was in the 5-year range, right? Matching warranty cycles and asset turns, more like a truck, right? We've seen that, that started again in 2009, '10, '11 thousands and thousands of trailers would change their spec, accordingly, big fleets, high volumes. There is still that group that maintain that 10 to 12 year, right? So we saw that change, and we're going to -- we have to figure out exactly how that affects replacement values as these things are kind of coming through their next cycle due with a shorter life, maybe going on round 2, when you think about a 10-year period. And then you also have the 10 to 12s, that will be coming to going into this next cycle. All of this is going to kind of flush out in the middle of some economic uncertainty. A lot going on there. On top of that, you've got the disruption changes where things like lift gates are popping up at higher and higher percentages, both on the FMP side and -- or the Final Mile Product side as well as on the truck side, as we go to shorter and shorter hauls, different applications, logistic models are changing. You're seeing different specs begin to come through in terms of more flexible assets, in general, the shift is underway in real life right now. Does that help?

Yes. And that was fantastic.

As there are no further questions at this time, I will now turn the call back to Ryan Reed.

Thanks, Rusty. And thanks, everyone, for joining us today. We'll look forward to following up during the quarter.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.