Good day, ladies and gentlemen and welcome to the Q4 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, Director of Investor Relations. Please go ahead, sir.

Thank you, Katrina. Good morning, everyone and thanks for joining us on this call. With me today are Brent Yeagy, President and Chief Executive Officer; and Mike Pettit, 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 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. Hello and good morning to everyone with us on the call today. Let's start by first looking at our full year. We are pleased to have continued revenue growth while also growing operating income, net income and EPS versus the prior year. Additionally, cash generation continued to be strong. And I'm very pleased to add them to our streak of what is now seven consecutive years of free cash conversion of 100% or greater. We took action to divest business assets that were not part of our strategy or core to our business. We also made major strides and further transforming Wabash in line with the strategic vision that we have for this company, which I'll outline in additional details further on the call. Let's transition and discuss our fourth quarter. During the fourth quarter, we continued the strong top line performance that is characterized for full year of 2019. We generated record sales of just over $2.3 billion during the full year of 2019, with $579 million of revenue in the quarter. Overall top line for the year and the quarter were driven by strong market performance and pricing in all three operating segments. Operating conditions in the quarter were somewhat challenging as we navigated through the end of the year scheduling and demand fluctuations. Our CTP and DPG segments were able to mitigate the majority of these challenges to pricing actions and their ability to leverage leaner and more nimble operations characterized by their overall Wabash management system maturity. However, FMP business had a more difficult time executing through those challenges. As such profitability for the quarter was slightly below expectations on a consolidated basis and as previously stated, CTP and DPG were solid performers that enabled offset FMPs challenges for the quarter. Let me get…

Thanks Brent. Let me start by saying that I'm very excited to begin my journey as CFO for Wabash National. I truly believe we have a very unified team that will accelerate the purpose, vision and mission that Brent has outlined by fully leveraging the scope and experience of Wabash National. With that, let's turn to Slide 5. On a consolidated basis, fourth quarter revenue is $579 million. Consolidated new trailer shipments were approximately 15,000 during the quarter. In terms of operating results, consolidate gross profit for the quarter was $72.3 million or 12.5% of sales. Gross margin increased by 120 basis points year-over-year, primarily as a result of cost recovery. The company generated operating income of approximately $32 million and operating margin of 5.5% during the fourth quarter. SG&A for the quarter excluding amortization was 35.4 million or 6.1% of sales. Operating EBITDA for the fourth quarter was 44.2 million or 7.6% of sales. Intangible amortization for the fourth quarter was $5.1 million. Interest expense for the quarter totaled 6.5 million, a modest decrease over the prior year as a result of our continued debt reduction activities. We incurred income tax expense of 6.9 million in the fourth quarter. The effective tax rate for the quarter was 27.4%. Finally for the quarter GAAP net income was 18.4 million or $0.34 per diluted share. Let's now move on to look at the segments beginning with CTP on Slide 6. Commercial Trailer Products fourth quarter net sales were 399.3 million on new trailer shipments of 14,300 units. New trailer average selling price or ASP increased over the prior year quarter by more than $1,500 per unit on pricing actions to mitigate the impact of higher material and operating costs. CTP recorded growth in operating margins of 12.6% and 10.8% respectively. Operating…

Thank you, sir. [Operator Instructions] Your first question is from Justin Long from Stephens. Line is open.

Thanks. Good morning and Mike, congrats on the new role.

Thanks Justin. Appreciate that.

So maybe to start, the midpoint of your 2020 trailer delivery guidance implies a decline of around 11% year-over-year and it sounds like the expectation for the market is down about 25% based on what you said in the prepared remarks. So that implies a pretty significant level of our performance relative to the market. Could you talk in a little bit more detail about what is driving that? And I know you mentioned product mix, but maybe comment customer mix and if there's any change in terms of strategic pricing as well.

Yeah, Justin, this is Brent. I'll start that off and Mike can follow up as he needs to. I would start with and just repeat what we've been saying almost for I'd say three to four years and specifically our lead position in Commercial Trailer Product. First off, we've reconditioned the customer base that we sell to today and we're saying that pull through will help the direct portion of orders flowing through the order backlog at this time. We've continued to improve the channel mix, specifically strengthen the indirect channel that we believe will pull through as we move through the remainder of the first half – or the remainder of the summer and the second half of the year. We go back to the dealers that we've added really since 2013. We see that happening. The other piece to it is the relative stable pricing that we see moving in from 2019 to 2020, again, representing the premium and the reflection of the product that we put on the road for our customers. We see that, we can measure it and we got $1.1 billion in the backlog to validate that at this time. So that's moving into our calculus at this point on the CTP front. We position that business well. We don't see it pull through. We've also talked about there is – while there's a level of absorption issues that come through anytime that you come off of a higher volume number, we're also picking up a little bit of efficiency, because we're running at peak volumes really for the last two years, right. So overtime comes out and there's just a level of efficiency gain offset by other issues. That helps prop up our decrementals when you think through what'll be going on in 2020. So that's a high level at this point.

I would just add just it represents a strong mix of customers in our direct channel as Brent mentioned, a strong and improving indirect channel and obviously a belief from our customers in a very strong value proposition of our best products.

I think the other piece is that the diversification strategy that we've implemented over the last six, eight years starts to come through in a cycle like this. We've got a growing revenue base within our Final Mile Products due to secular demand. We've got the ability of improving those operating margins with work that we're going to implement in 2020 and we'll be working on that. Diversified products has shown a higher level of revenue stability, specifically we'll experience that in a trough environment as their cycles a little bit different. And ACT actually just raised their expectation by a couple hundred units for 2020. So we'll see that stability, coupled with the fact that they stabilize their margins and they've shown the opportunity to continue to work on those with the performance that they've had so far in 2020, as well. So there's a lot of things coming together. And we've alluded to that all going back to the Investor Day that we talked about in March of 2019.

Okay, great, that's a really helpful color. Maybe to circle back on my on the next question back to what he said on operating margins. Mike, I think you mentioned in the first quarter it's somewhere between 1.5% to 2.5%. If you look at that, compared to the full year guidance for 2020, it implies a pretty nice pick up sequentially over the balance of the year. So can you talk a little bit more about how you – I guess, the quarterly cadence of operating margins over the course of this year and where you expect to exit 2020 from a margin perspective.

Sure. I will break down each quarter. But what I will say is typically Q1 is our seasonally weakest quarter. And then that's being added to this year, we mentioned we do have some headwinds from FNP coming into Q1, which is embedded in our 1.5% to 2.5% guidance for the first quarter. What you do see typically in this business and we expect it again this year is much stronger Q2 and Q3 performance. As the business ramps through the first quarter, you will see strong production exiting Q1 and then you'll see sometimes that shipment lag will move into Q2 and that's why we very regularly see very strong Q2 and Q3 quarters within the overall Wabash National business. Furthermore, we expect Final Mile Products to improve as we go through the year both in operational performance and in the demand environment. So we would expect the second half of that business to provide a lift for the overall margins. And that will – that work will be provided as we exit 2020, so that's all embedded in our guidance of a softer Q1 and a much stronger Q2 to Q4.

Okay, and maybe just one last question and then I'll hop back in the queue. But looking at the revenue guidance for the full year, could you speak to what's getting baked in for the DPG and FMP segments?

Yeah, we don't typically break that out amongst the three segments. But I will say that those businesses, as Brent alluded to, we're now expecting is much growth in FMP as you seen the last couple years and then DPG as well, I would think with trend in general in the same trailer shipment guidance that we gave for the overall business.

Yeah, the only thing I would add is on the – obviously on the demand performance side echoing to what Mike said to a degree. I think we're not we're not looking for diversified products to make any large steps in terms of share necessarily this year, we need them to execute their business. They have a stable demand to do that and they need to work on their margins accordingly. On the Final Mile Product space the market is going to have some down pressure. We've got some growth opportunities. We'll see how those offset each other. That's factored in. CTP, that's a story we keep wanting to tell. We should see a level of share expansion in 2020. As we've already have seen in our backlog numbers, we're not going to get into what that share number is at this point. But we do clearly see the fruits of our labors paying off. So we'll – CTP is going to be a big part of the revenue story this year and that's always been part of our strategy.

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

Thank you.

Next question is from Felix Boeschen from Raymond James. Line is open.

Hey, morning, guys.

Good morning.

Good morning.

So maybe it's like a follow up on some of the comments around really trailer pricing. I think obviously you're reaping some of the benefits from some pricing recoups, really from higher raw material costs. But curious if you could touch on your expectations for pricing to 2020, maybe first half versus second half of the year, and really what you're seeing in the market right now?

Yeah, I mean, that's – we've got so many products and so many different markets. So I'll just – I'll quickly say for the FMP and DPG business, just based on demand environments, they've got the customer base, I think we're still looking at, we'll call it stable pricing from 2019 to 2020. And that's baked in our guidance. For CTP, I think the general layman's expectation is that we would be seeing higher levels of pricing pressure at this stage of the game. And what we're seeing right now is relatively stable pricing as we execute the innovation work that we put into our product. We're launching multiple commercialization efforts in 2020, as well as garnishing what we did in 2019. So I would just say we are very happy with how pricing is entering into 2020. But I will stress, it is a dynamic year and there are some different channels that still need to come through based on traditional timings, specifically the indirect channel. We look for that to be a general positive story with the work that we've done, but that's an aspect of the overall trailer channel makeup that is really a Q2, Q3 activity under normal traditional calendarization of orders.

Okay, that's helpful and then just shifting gears sort of back to Final Mile here, I mean, obviously margins were maybe a bit softer than expected and 4Q, do you mind maybe elaborating a little bit more on that? Is there anything in there that we could point to as maybe more one time in nature? I get some of it will roll over into 1Q '20 foot, but I'm really trying to understand sort of what's the go forward run rate as we really approach the second half of 2020 here?

Yeah. So for diversified products, when they think about their margins and then we alluded to in Q4 from a Wabash composites perspective that kind of weighed on margins in the fourth quarter, A big part of the revenue stream for that business unit is really driven off of dry van volume and converted truck body volume to replay technology. And that began to show itself in Q4, just based on demand loading at that time, that's a normal Wabash composite that is always pressured in the fourth quarter. We saw it a little bit more with those input items and that's what affected that margin accordingly. Our other business segments inside of there, tank trailer and process systems did well for the market condition that they've had. So really what we should see as CTP continues to perform and we probably alluded to why we believe that will be the case that will prop up Wabash composites through Q1 to Q3 accordingly, but it will still weigh on to a degree in Q4.

Okay, but anything else you guys can say around Final Mile Product specifically, sort of as we look in the cadence of margins into next year?

Yeah, so what we mentioned in the remarks was that Q4 represented a pretty significant shift in their order demand and profile, which we see start in Q1 period off as well. So that's really what causes margin compression and softness. We are seeing some nice order intake as we move through Q1 and we believe that a lot of what we saw in Q4 that caused that step down significantly from earlier part of the year will pass throughout Q1 and then we'll see much better margins Q2 to Q4 period.

Okay, thanks, guys. I'll leave it there.

Thanks Tyler.

Next question is from Ryan Sigdahl from Craig-Hallum Capital. Line is open.

Good morning guys and congrats on the new role, Mike.

Thank you

So given maybe just some guidance, it's fairly back half weighted and you guys have talked some about it, but I guess how much of that business is in the existing backlog that you have versus maybe indications of orders or expectations of future orders, maybe between those three buckets?

Yeah. So Ryan I think you might be aware, I mean, for our – the majority of that backlog obviously is within our Commercial Trailer Products business. That back log is relatively evenly spread throughout the full calendarization of the year at this point, that's mainly coming from the direct channel that makes up the bulk of our CTP demand profile. So we factor that into the guidance itself. We know what the trailers are laid in. We know what an active – quarter more activity has indicated where that will come in the future. So we're very comfortable right now with how we have laid out the distribution of revenue in our guidance.

Yeah. I would just add that traditionally the truck body business or the Final Mile Product segment would not have much backlog beyond q2 in this point of the year ever. So they would expect so seeing those orders starting to roll as they get into late Q1, early Q2.

And then on – just on CTP pricing, you mentioned innovation technology certainly helping you guys from a pricing as well as market share standpoint. Have you guys seen any pricing pressure in the industry from competitors and you guys are just offsetting that? Or is the industry actually holding up maybe better than feared given the demand environment?

I don't think that one or the other at this point. I mean, it's kind of twofold. Yes, we are seeing some level of pricing pressures in certain markets for certain products and certain customers. And I know that's a mouthful, but that's the way that we look at it. The way we positioned our customer base buffers that – buffers us from that to a large degree. So while we see it, we know it's going on. We've been able to avoid it in most cases, with the bulk of the demand coming in for our CTP products. I will say this, I am pleasantly surprised with the level of rationality that we're saying in our – with our competitors at this moment in time.

Good, that's it for me. Good luck guys.

Thank you.

Next question is from Joel Tiss from BMO. Line is open.

Hey guys, how's it going?

Hey Joel.

Can you talk a little bit about your 2020 free cash flow expectations and just kind of your preference like which way you're leaning with your 140 million of cash that you already have for share repo versus debt reduction?

So I would expect another year of 100% plus free cash conversion. So you can get to that with our implied guidance, what we expect a kind of a minimum of free cash to be. In terms of our existing cash and new cash being generated in 2020, as we mentioned, debt pay down and the delever remains a priority for the business as well as investing in some really good growth projects we have. We have some really nice organic growth opportunities. MSC remains a real positive area for us to invest capital and then depending on what happens with the share price that's always an opportunity for us to continue to move some capital with valuations to point us in that direction.

Okay. Can you give us a little bit more color on what some of the cost savings targets are for 2020 and any numbers you have around that?

In terms of like our productivity projects?

Yeah.

Yeah. So there obviously are – they're all in slide on our guidance, but we had several projects in the hopper through our Commercial Trailer Products, Diversified Product and Final Mile Products all have active. We spent $38 million of capital last year and good chunk of is on projects that we believe will come through into 2020. Final Miles is a good example of one where we deployed some capital last year that we believe will help significantly to be able to expand the margins of what you saw over into the second half 2020 into 2021 based on that capital deployed in the business. I'm not going to break out specific margin expansion by business based on those projects. But a good chunk of our capital that's been deployed organically into the business, which has been in the high $30 million range over the last couple years, has been devoted to is going to these projects.

Yeah, I would add just a little bit more granular level, we have three to four planned line velocity lean, we'll call it deployed initiatives that are either actively or actively being worked on or will be worked on in 2020. Some are within the Final Mile Product; some are within tank trailer we as well as some within Commercial Trailer Products. Two to three major Six Sigma projects, one of those will be at our Wabash Wood Products facility to improve productivity there and yield that'll be meaningful. And when we look at all of those at a minimum target, we want to offset at a minimum labor inflation as just a general rule in what we try to do, that's a given that's baked into our numbers, and then there's always the potential for upside. We don't necessarily bake that all into our guidance, because nor do we bake in all the risk, right. We need those projects that help offset and countermeasure other things that will happen in the course of an operating year. So we have a lot going on we've expanded the work that we're doing, from what we saw in 2018 and 2019. As we're in this period, now that we've got a little bit of – and this is kind of a gift that we get with a little bit reduced demand, we can get into some of the operations that maybe we couldn't in the past and do some work. And those have been planned out for a period of time and will engage in that 2020. We'll see the fruits of that most of that really in 2021, 2022 is a rewrite the up cycle up. And that's a big part of our strategy going forward. That is something Wabash National has not been able to execute in the prior, we'll call it relative downturn periods. And people need to keep an eye on that in terms of how we're going to perform over the next three years and our position going forward.

That's great. And then last, can you just give us a little bit of a benchmark on the FMP loss in the first quarter? Is it going to be similar to fourth quarter or better or any help you can give us there? Thank you.

That specific guidance Joel, we will say that we expect it to improve as we go through the quarter. And I would definitely expect Q1 to be weaker than Q1 of 2019. But I'll leave it at that. We're seeing improvement as we move through Q1 today.

Okay, thank you very much.

Thanks Joel.

Last question is from Jeff Kaufman from Loop Capital Markets. Line is open.

Thank you very much. Good morning, gentlemen. How are you?

Good.

Good morning Jeff.

Okay, so just a couple of mop up questions here. You gave us the revenue outlook for 2020. You told us you were going to pick up market share. I can't remember, did you give a vehicle range for 2020?

Yes, so the vehicle range is – sorry, I don't have that in front of me right here. I think it's 58,000 to 62,000. But let me double check that and I'll get back to you offline.

For 2020 and the 58 would include Final mile, I guess.

Sorry, I've got slides here. No, we really didn't share our guidance, sorry, 49,000 to 53,000.

Okay, that's that sounds a little better. Okay, so actually, if we take that against, let's call it the midpoint of ACT and FTR 250. That's implying almost a 200 basis point market share gain, no?

That would hold. That's correct.

Okay. Just want to make sure we're on the same page. Thank you. And how many – how much did you say was left on the repurchase? I was writing as quick as I could, but I didn't get the number.

Yeah, 69 million.

69 million. Okay, thank you. Okay, let me let me shift gears on Final Mile because obviously, I think that was the big surprise relative to expectations. So do you – when you look at this, Mike or Brent, is this an issue where the industry acted in a way you didn't anticipate? Or is this more of a growing pain and this kind of happens from time to time in the fourth quarter, and it just caught us off guard.

I was I would say it was more of a growing pain Jeff, where you had a business that was growing rapidly through 2018, 2019, but simultaneously putting in business process improvements that we believe will bear fruit over the long term that got hit with a shift in the market more from a mix and demand profile perspective and overall weakening, that kind of got the business in a position where they we're struggling to flow products as well as they had earlier there.

So this would be something that once you resolve what you need to resolve at your end, your view on the ultimate profitability or the ultimate opportunity is no different.

The long term view of the performance of a business and not changed at all.

Okay, so this – when you're saying it's a change in product mix, it's not that the market is shifting, it's just that the fourth quarter caught you off guard is what you're saying.

The specific mix in the fourth quarter caught us up right. Yeah, to be very operational, when you talk about it, this business, you're doing discrete capacity planning, typically two to three months in advance based on order flow into that business. And you're having to make decisions on how you're going to operate in that. It's built in differently than how we had positioned the business. And it affected not only the top floor, but the average order size affected everything from engineering to supply chain, just simply in average order size phenomenon. It just came out that way. Alright, so it'll take care of itself as we move through the year.

Okay and then final question. You mentioned there's a lot of exciting new product coming to market in 2020. Can you give us an idea of the timing of different product introductions to the year? I think you said a little more back half loaded. But when are some of these products coming out and are they going to be visible at the truck shows and things like that early in the year is going to be something where we see more of this toward the end of the year?

Yeah. So the bulk of the commercialization efforts are launched. They will phase in throughout 2020. We've launched our new procreated core DuraPlate panel, we have active orders that was pulled really in the fourth quarter, open up for sales and 2019 to fill in to the 2020 backlog that has – what to say met our expectations in terms of product adoption behind of that an innovative piece. It's also a market enhancing opportunity for CTBT. We've continued – we've just launched our new revised Eagle II platform trailer. And that is now active for orders right now and will gain momentum throughout the year. We've got a handful of smaller innovation items within our tank trailer business. More destructive composites, specifically the refrigerated trailer is going through additional revisions right now to broaden the addressable market for that product that we'll see in the second half 2020. And we're doing additional things with more fresh composite truck bodies to enlarge it's a clickable market in 2020. That's going to be a second half of the year phenomenon. Mike, am I missing anything?

Okay, great guys. Congratulations and thank you.

Thanks Jeff.

Thanks Jeff.

I am showing no furniture questions at this time. I would now like to turn the conference back to Mr. Reed.

Thanks, Katrina 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 call. Thank you for your participation and have a wonderful day. You may all disconnect.