Wabash National Corporation (WNC) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 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, Ryan Reed, Director of Investor Relations, please go ahead.

Thank you, Lorie. 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. 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. I'd like to begin by saying that we're pleased to report our strong 2019 performance continued through the third quarter. Sales reached the third quarter record of $581 million that represents 5% topline growth as compared to the previous year’s third quarter with each business unit providing strong topline contribution. Wabash achieved operating margins of 6.6% during the third quarter which represents a 140 basis point improvement versus the same quarter just one year ago. Our commercial organization has done exceptional job of recovering the cost pressures we felt last year as evidenced by average selling prices that were up in excess of $2,000 per trailer. Within operations we continued to work across our supply chain to improve overall network stability and on-time delivery performance. In addition, we continue to improve our internal management system to drive enhanced tracking and visibility paired with enhanced sales and operations planning process to create better overall execution of our business. Our focus has helped to mitigate the impact created by continued stress supply chain and we will continue to drive ongoing improvement in Wabash operational performance as we become even more responsive to our customer. At the same time we’ve been focused on embedding the Wabash Management System into our culture and utilizing a growing set of enterprise lean tools in new business systems to drive breakthrough improvement across the company. We’re engaged in value stream mapping in [Indiscernible] of the business that further drives profitable growth. At this time, we’ve teams deployed in multiple truck body manufacturing locations, our tank manufacturing sites in Mexico and Wisconsin as well as several areas in our front office. I’m encouraged by the progress we’ve made since the beginning of our Wabash Management System journey in mid 2018. I’d like to thank our employees for their hard work in helping us to achieve these results. However, I’m most encouraged by growing understanding within Wabash that our Wabash Management System is not just about reducing cost, it’s truly about enabling profitable growth and advancing the strategy of our business for our people, our customers and our shareholders. So let’s move onto the performance of our individual strategic business units. The Final Mile Products business delivered a $114 million of revenue in the third quarter, which represents 30% growth versus the same quarter of last year. That pace of growth within Final Mile Products business continues to exceed our expectations and we remain focused on deployment of our enterprise lean tools within FMP’s commercial and operational processes that further enabled ongoing profitable growth of the net business. Two additional highlights from the quarter dimension are the following. In the quarter we announced the opening of our upfitting, parts and service location in Tampa, Florida, which complements existing upfitting, parts and service locations in Cleburne, Texas and Griffin, Georgia. The Tampa location will enhance our truck body penetration within the Florida market as well as position us to grow in the area of medium and light-duty body in van upfitting solutions. This effort reflects our continued execution of our strategy to create additional revenue growth and market presence within the broad Final Mile space. The second highlight is the operational improvement with a Goshen Indiana truck body manufacturing location where year-over-year production has increased over 20% coupled with a 30% improvement in manufacturing productivity. As a result of these improvements and a strong focus on overall execution Final Mile Products achieved 4.1% operating margin during the quarter, which is 580 basis point improvements from the third quarter of 2018. Year-to-date till the end of the third quarter, Final Mile Products has increased operating EBITDA by $8.5 million or by 54%. This reflects our overall commitment and execution to driving ongoing profitable growth within the dynamic markets that make up the Final Mile space for Wabash National. I will now move on to our Diversified Products Group of businesses. Diversified Products Group delivered revenue of $93 million during the third quarter after adjusting for the sale of the AVTE business, Aviation and Truck Equipment. Our overall topline was up slightly. We're very encouraged that the Diversified Products business has continued to drive year-over-year operating margin improvement. DPG's third quarter reflects 220 basis points of adjusted margin expansion in the quarter and reflects active deployment of key Wabash Management System elements, specifically the growing use of sales and operations planning, coupled with improved commercial processes. In addition, they have increased the rate of deployment of enterprise lean tools to improve key areas of operational performance. Now we'll move on to the Commercial Trailer Products. Commercial Trailer Products revenue was $380 million during the third quarter, a 3.3% increase over the previous year's quarter. CTP operating margin was 9.6% representing an 80 basis point improvement versus the prior year's quarter as a result of successful efforts to counter cost challenges experienced in 2018. CTP continues to execute on its innovation strategy to further differentiate its products and provide unmatched value to our customers. CTP is currently commercializing Cell Core Technology across its drive end product lines for 2020 as well as the added benefit of flush-mount integrated logistics to provide unmatched customer value in terms of weight savings and enhanced cargo securement flexibility. Both features received high levels of customer interest at the very recent North American commercial vehicle show in Atlanta. In addition CTP is actively preparing for a launch of its fresh and Transcraft [Indiscernible] flatbed product for 2020 production as well in order to continue to execute better than market growth within that business. On the operational front, CTP has deployed Six Sigma resources within our Wabash Wood Products operation to improve what is already record performance levels. I will end by saying CTP is well-positioned for the next market period of the trailer cycle and continues to strengthen the talent, systems and products that will carry it forward to breakthrough performance into the next market upswing. We're now going to cover our backlog and market conditions. Overall backlog ended the third quarter at approximately $800 million. As reports have shown, backlog have come down as expected within the various trailer market segments as the 2020 order season takes on a more traditional order pattern, a pattern where October is the beginning of the order season. As expected we have seen commercial trailer quote and deal activity increase significantly over the past several weeks of October, currently supporting the forecast range provided by ACT and FTR. In addition, our tank trailer and FMP truck body backlogs set at equal or greater levels than at this time last year. It's too early to provide a detailed view of 2020. However, our outlook is consistent with industry forecasters and we look forward to providing more detail on the 2020 outlook during our year end call. Let's move on the capital allocation. Our primary focus remains repaying debt. In the quarter, we reduced our debt by $15 million and look to continue that pace into the fourth quarter. We also funded our dividend and repurchased $9 million of shares. In addition we've been able to properly fund the necessary capital investments to operate the business and invest in the future. Going forward, deliberate deployment of cash to further strengthen our balance sheet will remain a core part of our capital allocation strategy while continuing to invest in our business and returning capital to the shareholders. As I close out my call, I want to mention that we're pleased to see so many of the investment community at the North American commercial vehicle show last week. It was a great opportunity for Wabash to show the breadth of our product lines that span from the first to the Final Mile as well as how we seek to differentiate our products through innovative materials and design. To further drive our pace of innovation and technology discovery, we have recently consolidated our product and technology research, development and discovery efforts and centralized those resources to form a new Wabash Product Innovation Group, which will be led by Robert Lane and will report directly to me. Innovation is at the heart of Wabash National and we're increasing our commitment through action to provide breakthrough solutions for our customers from the first to Final Mile. The transportation distribution logistics industries are rapidly changing and we want our customers to have ongoing confidence that Wabash National will be there with solutions that will help them win in their space during these transformational times. I will now address our outlook for 2019. With just one quarter to go, we are increasing our full year earnings per share by $0.02 to $1.67 at the midpoint. Given our strong financial performance during the quarter, we are also tightening our full year EPS outlook to a range of a $1.64 to $1.70 per share. At the midpoint of the range, we would demonstrate year-over-year earnings per share growth of approximately 16%. Our financial results for the third quarter of 2019 have demonstrated the effectiveness of the initiatives we've put in place over the last year as well as the cultural changes that are underway. We're excited to continue showing progress over the coming years, but also focused on finishing up this year strongly. With that I'll turn the call over to Jeff for additional color on both our financial performance and the fourth quarter outlook. Jeff?

Thanks Brent and good morning everyone. Turning to slide 4, on a consolidated basis, third quarter revenue was $581 million, an increase of $28 million or 5% year-over-year. Consolidated new trailer shipments were approximately 14,450 units during the quarter. In terms of operating results, consolidated gross profit for the quarter was $78 million or 13.4% of sales. Gross margin increased by 160 basis points year-over-year as a result of successful efforts to drive process improvements to address operational challenges during the second half of last year as well as execution of the Wabash Management System for larger term structural improvements. The company generated operating income of $38 million and operating margin of 6.6% during the third quarter. Selling, general and administrative or SG&A for the quarter excluding amortization was $34 million or 5.9% of sales. Operating EBITDA for the third quarter was $51 million or 8.7% of sales. Intangible amortization for the third quarter was $5.1 million. Interest expense for the quarter totaled $6.7 million, a modest decrease over the prior year as a result of our continued debt reduction activities. We recognized income tax expense of $7.4 million in the third quarter. The effective tax rate for the quarter was 22.6% lower than our ongoing rate of 26% to 27% as a result of an R&D tax credit taken during the quarter. Finally, GAAP net income was $25.5 million or $0.46 per diluted share. This compares to third quarter of 2018 adjusted earnings per share of $0.29 per diluted share and represents an increase of 59% over the prior year quarter. With that let's move on to look at the segments beginning with CTP or Commercial Trailer Products on slide 5. Commercial Trailer Products third quarter net sales were $380 million which represents a 12 million or 3.3% increase year-over-year, our new trailer shipments 13,700 units. New trailer average selling price or ASP increased over the prior year by more than $2,000 per unit on pricing actions to mitigate and recover the impact of higher material and operating costs. CTP reported gross and operating margins of 11.6% and 9.6% respectively. Operating margins improved 80 basis points compared to the prior year period due to cost recovery efforts in addition to product and customer mix. Moving to Slide 6, Diversified Products Group net sales were $93 million, a year-over-year decrease of $9 million or 9% for the third quarter, driven by the sale of the Aviation and Truck equipment business in mid January, which represents approximately a 10 percentage point drag on DPG’s year-over-year growth in the third quarter. DPG posted gross margin of 19.4% and operating margin of 7.7%, during the third quarter. The 220 basis point improvement in operating margins as compared to the adjusted non-GAAP operating margin in the prior year period was a result of cost recovery efforts as well as operational and productivity cost improvements driven by the Wabash Management System. On Slide 7, Final Mile Products net sales for the third quarter totaled $114 million driven by strong market conditions as well as demand from customers who appreciate the operational and technology advantages Wabash brings to the truck body space. Growth and operating margin for the third quarter were 14.8% and 4.1% respectively. The 580 basis point expansions and FMPs operating margin versus the same quarter a year ago was a result of higher volume, cost recovery and improved operational efficiency. Slide 8 shows the walk to free cash flow conversion on a year-to-date basis. With operating cash flow of approximately $76 million roughly $22 million has been invested via capital expenditure, leaving $54 million of free cash flow which converted at 76% of net income year-to-date through the third quarter. Moving on to our balance sheet and capital allocation plan, our liquidity or cash plus available borrowings as of September 30 was $288 million or 12% of trailing 12 months revenue. With regard to capital allocation during the quarter, we utilized $15 million for debt reduction, invested $7.2 million in capital projects. Additionally, we returned $13.2 million of capital to shareholders via the quarterly dividend payment of approximately $4.4 million and share repurchases of $8.8 million. At the end of the quarter, we had $80 million remaining under our current share repurchase authorization. Net working capital finished the third quarter at $28 million sequentially, with a decrease in accounts payable, primarily driving that move. Working capital ended the quarter at 9.9% of trailing 12 months revenue. We finished the third quarter with leveraged ratios for gross and net debt at 2.4x and 1.8x respectively. Moving on to Slide 9, with our fourth quarter outlook. Our outlook for margin remains consistent with our prior guidance. We continue to expect between 50 basis points and 150 basis points for full year 2019 gross margin improvement. SG&A as a percent of revenue is expected to be slightly above 6% in the fourth quarter. Brent mentioned the centralization of our Product Innovation Group. As a result of this change, we expect approximately $1 million per quarter to shift from cost to goods sold to general and administrative on the income statement for the fourth quarter and going forward. We are currently estimating the effective tax rate for the fourth quarter to be approximately 26% to 27%, which would bring our full year tax rate to approximately 24%, given the lower effective rate during the first three quarters. Full year capital spending is expected to be higher in 2019 compared to previous years, as we continue to support the pipeline of productivity projects and new product commercialization identified across our business segments. In total, we estimate 2019 capital spending to be between $30 million and $35 million. Our expectation for fourth quarter revenue is to come in between $570 million to $600 million, with new trailer shipments of 14,000 units to 15,000 units. Moving on to total company profitability, we expect operating margin in the fourth quarter of 2019 to step up in the range of 200 basis points to 250 basis points from GAAP operating margins in the fourth quarter of 2018. In summary, we are pleased with our year-to-date performance and our progress on initiatives that have generated the substantial margin expansion seen during the third quarter, particularly the gross and operating margin improved in all three business segments on a year-over-year basis. We continue to generate strong free cash flow, and we'll proceed with our balanced capital allocation plan, that prioritizes debt repayment while continuing to invest in the business and returning capital to shareholders. And lastly, our commitment to position the business for profitable growth continues to unfold with purposeful action as we continue to grow our ability to work on our business for the future, while executing it today. Thank you for your interest and support for Wabash National. With that, I'll turn the call over to Lorie, who will open it up for questions.

[Operator Instructions] We have a question from the line of Justin Long from Stephens. Please ask you a question.

Thanks. Good morning. So, maybe start with the question on 2020. I know you are not giving specific guidance today, but obviously it seems like we'll be facing a tougher end market environment. How should we think about the relative performance of your CTP segments topline to industry trailer production based on how you are thinking about the market strategically, I'd love to get your thoughts around to be in line with the market, should you be better, Should you be worse, any help on that front would be appreciated?

Yes, I mean, as we said, we'll give further guidance at the year end call. I think, I'll start with the market itself and as we said earlier, where CTP sets right now from a deal closure standpoint, productivity level, again is indicative of the forecasted production levels without significant changes to our direct labor content. Meaning that we can collect with over time accordingly without making real structural changes to our operating environment. So, we work pretty linear and how we'll manage variable cost going into this next period. So, I think we're pretty well-positioned there.

Yes Justin, on the G&A side, we do have levers that we can manage there. I would tell you that as we said here today and look forward into 2020. I think we have these in visibility into the first half of the year but we're in a more normal order season there that's going to be really pick-up in Q4 and then extent into Q1. So, we're in a little better as we get into the year-end call, maybe what more of a full-year is going to look like. On a G&A perspective well I would say that I talked about that we're going to move some cost out of COGS into G&A, I think that will drive G&A as a percent of revenue up slightly next year. And that we'll manage that overall spend in the context that the environment we're in making sure that we're also investing for the long-term growth of the business. And probably have more guidance on that on the next call.

Okay. And one last kind of final question on free cash flow conversion. You were in the mid-70s this quarter I guess year-to-date. Any update on how we should be thinking about that metric going forward?

Yes. I think and what you see as historically performing were 76% this quarter. We've been up 100% or just about a 100% for some period of time. That's a pretty reasonable range for us. I think in the fourth quarter, typically we do generate a little extra free cash flow in that quarter as working capital tends to come down at year-end. And so, I think in general it should be in that range.

Okay great, I'll leave it at that. Thanks for the time.

Thank you.

Thanks, Justin.

Your next question comes from the line of Steve Dyer from Craig-Hallum Capital. Please ask your question.

Hey guys, Ryan Sigdahl on for Steve.

Hi, Ryan.

Hi, Ryan.

You've talked some about 2020 and expecting similar toward the industry forecast, ACT and FTR forecasting. What is their current expectations for both in 2020?

Well yes, they reconcile, one's doing shipments, the other one's doing well but general industry is somewhere in the 265 to 275 range as we sit here right now, kind of on a relative level and then it also it breaks down by the various product segments accordingly.

It was kind of asked earlier but do you think you can maintain or take market share in that environment given kind of your pre-planning and what you see?

Yes. The way we going all the way back to our Investor Day this previous February. We were positioning all the businesses to look to grow better than the market, right. So, we are going to and have position the business to look execute that in 2020. Remains would be seeing what the price to volume relationship will be. And we start to work through the remainder of this voter season, really understand how we'll be positioned to do that. But in general, yes, I mean we're looking to execute on the enhanced product commercialization that we have going on, what we're doing with advanced materials. And then ultimately trying to drive the business towards profitable growth. We'll look to do that within the market that we're giving.

Yes. I think it's maybe it's important to make this point here at this time when you ask about ACT and FTR and their numbers. And obviously, we're coming off a record year this year and really the industry itself is moving to more normalized and sustainable levels and while it's down year-over-year, they're not down to a level that is really unattractive for the industry. The strong volume in the industry overall should be a good market overall for the trailer industry in that 265,000 to 275,000 total trailers. And so, just wanted to make that point on the call.

And just one final question on that and then I'll move on. But as you mentioned expecting to take market share and still kind of be determined on priceless volume. Previously it seem like you guys were more focused on margins and that was the bigger focus now. Has that shifted a little bit kind of within enhanced products and trying to go after small market share here or is it still somewhat to what it was before?

Yes, it's always a balance, right. And we've it's no surprise based on what we've been saying for last three to four years that we've continue to position the business to be stronger to really invest in innovation, the differentiate products. And as we move into this stage of the cycle, we're actually we're obviously going to look to flex that as we move into this next market period. Now, we're going to do that smartly and we're going to maintain price leader status as we do that. So, it is a dynamic balance but that is the game plan trying to maximize that relationship and utilize the investments that we made at last three to four years to go out and grow our business.

Great. Moving along to Final Mile, FMP segment. Now they're really strong quarter there. Congrats on that. Given kind of your current capacity, what's the utilization today and then do you think you have enough existing capacity today to support similar type growth rates over the next few quarters and years?

Yes. So, as we look at the growth rates that, that FMP is has seen right, I mean and we've seen 30%, 40%, 50% growth rates on various quarters. And we've said that exceeds our expectations. It does and we think that relative to the markets that we will be given, we can continue a relative level of growth through the period. The capacity that we have is really untapped and that's when we talked about deploying the Wabash Management system. That's really what we're talking about and it's in the original basis when we purchased the Supreme assets back in 2017, is that there was ample capacity within the existing five locations that we had. They were effectively working on a suboptimal one-shift orientation. We are still predominantly working in a one-shift orientation with 30% 40% or 50% growth across the business with only limited second-shift capacity utilization at this time. So yes, we have the physical brick and mortar to grow this business at the rates that we would see over the next several years.

Yes. And I would add to that that I wouldn’t think that only is just struck by the growth and we talked about the opening of the Tampa facility for upfitting parts and service. And there's opportunity for us to grow into those adjacent markets within Final Mile products as well. And that'll be areas where we will look to grow further in the future also.

And last one for me, then I'll turn it over. So, it looks like the new trailer shipment guidance is reduced by 15,00 units at the midpoint for this year. Can you elaborate on what segment or product category those are related to?

I think for first of all, I'll tell you that we're still within the original range we gave. So, we may have lowered at the midpoint but we're within the overall range that we've been talking about for a few quarters here. So, not in consistent with that, just normal variation in our business. I think that if you think about it by segment, it's going to be relatively close to what the breakout between CTP and DPG is on the trailer side of there.

Yes. That's exactly how I would have found, then it's pretty equally spread across all the businesses and there is not one single one that's dragging that down. In any way sheer performance and reiterate, it's within our or it's kind of stated guidance, we're just tightening it up a little bit and taking into account kind of the market conditions that we got, what right activity is and being prudent in what we think that's to be.

Great, thanks. Good luck.

Thanks, Ryan.

Thanks, Ryan.

[Operator Instructions] We have a question from the line of Jeff Kauffman from Loop Capital Markets. Please ask your question.

Thank you, very much. Good morning and congratulations.

Thank you, Jeff.

So, a quick question for Jeff. It looks like inventories are up relative to the direction of receivables here. is that just the timing between new order flow versus current production and we should see working capital get a little bit better as the or more of a source of cash and use of cash as we normalize in the industry.

That's exactly right, Jeff. I would say that the inventory is within normal variation of what we see relative to production and shipments. Production in the quarter was 14,900 units. So, we produced a couple of 100 units more than we shipped and obviously as we move into the fourth quarter, usually we'll pull inventory down by the end of the year. And that inventory will I think inventory levels will represent that. So, nothing outside of normal variation happened in there and in any of the three components of networking capital.

Okay. And then, sometimes in third quarter it's just busy and customers can't pick up the trailer units. I saw the guidance on the trailer shipments changing a little bit but did we have that any of that issue with pickup and timing of units?

Yes. So, when you look back to freight dynamics, there were some headwinds relative to freight availability going into the July timeframe end of June, beginning of July continued to the first couple of weeks of August. And when that occurs, you because our customers pickup and you are from 70% 80% of the product, trailers that we produce. When they're not moving and makes it hard for them to come up in pickup trailers. So, we saw a little bit of lag during that period. And then, as we saw freights continue to lag and walk in late August going into September and continuing into October. We've seen shipment rates pickup accordingly right in line with what we'll expect.

Okay. You gave unit guidance on CTP and the units in DPG. Can we think about kind of where the unit count is for Final Mile if we look at it may be on an annual basis instead of the quarterly. Kind of where we looking to comment that on Final Mile units for 2019 at this point?

Yes, Jeff. We haven’t given that guidance there at this point in time, so I don’t have the number in front of me to give on the call here today. We'll certainly take that into consideration in terms of making sure that we can communicate and help this tree to understand the performance and the investors on that business unit. But I think as we continue to grow and diversify that business, truck bought is a component and then but also there are fitting parts and service will grow there as well. And so, revenue maybe up a better way to look at that business overall, when you think about modelling that and obviously we gave total company revenue guidance for the fourth quarter or so.

Okay. Last question. Pricing was up a lot this year on units but a lot of that was following a big increase in raw materials we saw about a year ago. Could you give us an update on where raw material costs are trending as we close this year heading into 2020 and your hope on industry pricing as we begin to I guess we use the term "normalize" in terms of industry demand.

Sure. And you know Jeff, as you know we're hedged out through the backlog that we have really through the end of 2019 and hedge partially for what we've committed to are already in the backlog for 2020. When we look at the overall materials curve, we see steel and aluminum I think there is a lot more softness as we're really into the entering into that period right now. We'll see it really go through mid-2020 and they sort of cover a little bit in 2000 -- I'm sorry, the second-half of 2020, long past the closing of the order season for 2020. So yes, it provides us somewhat of an opportunity from a material margin standpoint. We'll look to execute that and lock it in with our existing hedging practices accordingly. The market will define how much of that we're going to be able to capture accordingly and we're at the early stages of backlog. Then will know a lot more at the year-end call.

Okay. And well, thank you very much and congratulations.

Thank you.

Thanks, Jeff.

We have no further questions at this time. I will turn the call over back to Ryan Reed for his closing remarks.

Thanks, Laurie. And thanks everyone for joining us today. Look forward to following-up with you 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.