Good day, and thank you for standing by, and welcome to the Wabash National Corporation Second Quarter 2021 Earnings Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Ryan Reed. Please go ahead.

Thank you, Faye. 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. 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 to Brent for his highlights.

Thanks, Ryan. Good morning, everyone, and thank you for joining us today. I'd like to start by mentioning how pleased we were by second quarter results. The manufacturing environment continues to be challenging for everyone involved, but I feel Wabash National is navigating well in this environment. Second quarter operating profit and EPS came in above our expectations as we executed on the manufacturing side, while controlling our cost structure. I now want to step back and discuss our ability to execute in this environment. We are witnessing a new and heightened level of collaboration and coordination amongst our employees as we navigate possibly the most difficult external environment I've seen in my career. With our new organizational structure, our supply chain, manufacturing and sales teams now work across our businesses to disseminate information and direction more effectively and with higher velocity than ever before. We are delighted, but not surprised because it was our intent to drive this level of management system improvement when we realigned our organization to drive functional excellence as well as a higher level of focus on our customers to expand our entire portfolio of first to final mile. Speaking of our portfolio, I'd also like to congratulate our team on successfully divesting the Extract Technology business at the end of the second quarter. Wabash's acquisition of -- at Walker Group Holdings in 2012 brought a handful of businesses enter our portfolio, most notably, tank trailers and process systems. Extract was also included in that deal and is a leading provider of containment and aseptic systems for the pharmaceutical, healthcare, biotech and chemical markets. Although Extract is an excellent business, our strategy is now squarely focused on the transportation, logistics and distribution industries. As such, our best owner review concluded that we should look to…

Thanks, Brent. I'd like to start off by giving you some additional color on our second quarter financial results. On a consolidated basis, second quarter revenue was $449 million with consolidated new trailer shipments of approximately 11,590 units during the quarter. Gross margin was 12.4% of sales during the quarter. Operating margin came in at 5% or 4.6% on a non-GAAP adjusted basis. As Brent mentioned, these margins were somewhat above our expectations for the quarter as a result of continued strong cost control. Operating EBITDA for the second quarter was $35 million or 7.8% of sales. This is an EBITDA margin that is consistent with margins generated prior to the pandemic. Finally, for the quarter, net income was $4.3 million or $0.24 per diluted share. On a non-GAAP adjusted basis, EPS was $0.21. From a segment perspective, commercial trailer products generated revenues of $296 million and operating income of $32.3 million. Diversified products group generated $77 million of revenue in the quarter with operating income of $5.8 million or $4 million on a non-GAAP adjusted basis when we take out the gain on the sale of Extract Technology. Final mile products generated $81 million of revenue during the second quarter. Customer demand remained considerably stronger than industry production would show. While labor challenges have been part of the course in this business, supply disruptions have been greater as chassis OEMs have taken unplanned downtime to adjust our capacity to chip shortages and we would expect these chip-related chassis headwinds to continue for the rest of 2020. FMP experienced an operating loss of $3.2 million but a gain at $1.3 million of EBITDA. Because of FMP's heavy and increasing amortization burden, EBITDA provides a more stable measure of progress and more -- and a more relevant measure of impact on…

[Operator Instructions]. Your first question is from Justin Long from Stephens.

So the quarter was better than expected. But with the full-year guidance not changing when you strip out the divestiture that implies the second half outlook has may be moderated a bit. I just wanted to clarify what's changed from that perspective? It sounds like most of that is material cost increases, but is there anything else that's driving that maybe that -- a potential chassis issue, if you could give an update there, given some of the data points we've seen in the industry?

Yes. I would say that the main headwind by far is material. So, the team has done a really good job of offsetting as much of the material cost as possible through pricing increases and some of our inherent processes such as hedging will delay some of the material cost increases that we're going to see in the second half of the year. That's a big part of what you see in terms of the margin compression from first half to second half. I think you overlay that with an opportunity that may have been to offset some of that material cost increase with additional volume, it's just not going to be possible in businesses like FMP as you mentioned from chassis. There's a final supply of chassis we're going to get. So, what we would have thought we might have been able to get some additional volume, we're just not going to be able to do that now with the chassis constraints. The demand exceeds our supply of certain commodities and it's not just chassis, as well as fall on refrigerated trailers.

Yes. I think that's the important piece is not to get hung up on any one supplied material. By far, what every manufacturer in this industry and many industries are dealing with is just the inflationary pressures that we feel across the supply base and that's really the conversation. There is no one supply chain element that you can head on and say, if we could do this, volume would begin to just come falling from the trees. That's not going to happen. We are increasing production through the second half of the year because we manage it better than we believe our peers. That doesn't mean that we're not impacted across the board with daily supply chain issues. This is really an inflationary conversation in terms of our first half to our second half of the year.

Understood. That's helpful. And maybe I could shift next to the capacity addition. Brent as you think about this decision strategically to add capacity in 2023. Can you just talk about your comfort in doing that? I mean, obviously that cycle right now is extremely strong, trailer demand is high, where we are in 2023, is a bit more of an unknown, but is there anything that you can share in terms of just longer-term relationships with customers, commitments that they've made that might support this capacity addition and the return on if CapEx investment?

Yes. I think the easiest way for us to be thinking about it both here at Wabash National and on the call is that the implicit demand for Wabash National dry vans has grown over the last 10 years by actions that we've undertook and we saw that dry van market share expansion in 2020 when we are relieved from what we call it industry demand constraints. Right? So our capacity exceeded industry demand. We grew market share accordingly while preserving price. When we look at how we believe the industry is now growing. Right? It is growing over the last 10 years that's without really debate, we've seen the peaks get higher. We've seen them extend. The market has shifted, Wabash has shifted accordingly. So, when we think about this dry van capacity addition, we're not playing a cycle, we're not looking to capitalize on a given cycle, this is taking advantage of a structural shift and a clear unmet need for our customers that we are sizing this capacity for. We're not sizing it for what we think the overall industries is doing, we're sizing it for what we talk to our customers about and how they look at their long-term three, five, seven year demand cycles and their communication of unmet need for our product. That's how we look at it, that's why we are very confident in that. This is an excellent investment in the business.

One point to add too, even at mid-cycle volume levels, our existing dry van manufacturing footprint works a tremendous amount [Technical Difficulty].

Cost of adding this capacity. And Mike, how does this change the incremental and decremental [Technical Difficulty].

As we move forward, the all-in cost is in the $60 million to $70 million already [Technical Difficulty] we would still expect to be able to be cash flow positive second half of this year and for full year 2022. So this is an investment that is funded through free cash flow and we'll still be able to be positive and generate really good returns on the installed capacity.

Your next question is from Jeff Kauffman from Vertical Research.

Thank you very much and congratulations on a solid quarter. Just a couple of detailed questions here. In the P&L for DPG, it looked like other operating expense was only about $6 million, normally that'd be about $9 million. Is that because the gain on sale was taken to get numbers and not division?

The gain on sale was on DPG business, Jeff.

Okay.

As we continue to ramp up in '21 going into '22. So there is, we had a tailwind on our base currently installed capacity as we get the manpower required to run in 2022. Then you'll add the volume on top of it for 2023.

Yes. We are necessarily talking about the more simple and traditional increases in throughput and capacity and other aspects of the business that are additive to how we believe we will perform in 2022 and beyond.

Okay. And thinking about the refrigerated business, you are making refrigerators out of a different location, I believe basically out of the refrigerated business for about a year while these changes occur?

So, what we will be doing is we'll be utilizing the effective capacity at conventional reefers for a -- which is called, we'll call it the majority of 2022. We'll begin ramping that down in the mid-year timeframe. Simultaneously, we will be ramping up assembly capacity for our MSC all composite reefer in an alternative location and that will be early, what I would call, more grassroots capacity additions and then simultaneous to all that, we will be talking about what the future capacity model will be for all composite refrigerated vans in 2023 and beyond.

Okay. And would you say. I think, I heard Mike say we're still thinking 8% operating margins when we get out to 2023. So, now you're saying 8% on the higher volume numbers. So, in effect, it's the guidance increase in terms of profit dollars in the year 2023. Is that the right way to think about it?

Absolutely. Jeff, yes. Yes. And we think, as I mentioned, the mix inherent in there on the drivers of the reefer is an enabler to achieve 8% for sure.

Everything that we're doing inside the organization. Jeff is about maximizing profitable growth, first and foremost, and all the actions are summing up to that reality.

Okay and then just one more and then I'm good. So, you mentioned the CapEx increase for this year. How should I think about CapEx as I look out to '22 and '23. Do we still have this elevated $55 million, $60 million spend rate next year? Does it start to come back down toward a more historical level or is there a new historical level since we'll have new facilities and new locations?

Yes. I don't want to give specific guidance out to 23 day, but I'll say '22 will be elevated like '21 to finish the capacity installed and then we'll look at '23. I don't see it being elevated forever over the next 5 years. Over the next 2 years, we will need additional capacity to not only do the dry van from reefer swap that we've mentioned, but also to install the MSC capacity that we're going to need in 2023. Yes.

Your next question is from Felix Boeschen from Raymond James.

I was kind of hoping to stay on the 8% up margins in 2023. It feels like you're around 4% for the full year in 2021 and I understand there is a couple of [indiscernible] cost items in there as we think through labor, maybe raw material supply chain, even premium freight. Maybe two parts and I'm not looking for exact guidance, but can you help us understand how you would expect margins to kind of ramp into 2022 on the way toward that 8%? And then is there a cost, yes, maybe we'll start there.

Yes, absolutely. I think the first and foremost is the material cost headwind we are seeing in 2021. So, let me frame that for the people on the call, it's about $120 million of total cost increases we've seen from a material perspective in 2021. Now, the team has done a very good job of offsetting a large percentage of that, is to how we were able to maintain our guidance through the year. That will be fully priced into our 2022 backlog and that's what's opening up here over the last couple of weeks and in the next couple of weeks. That accounting for all of the inflation that we've worked really hard to offset in 2021 will be fully baked into 2022 and that will be the number one improver from the margins that you're thinking about going from the high 3% to 8%. We're going to get a big pop in the trailer market from that. Also obviously as you mentioned, as we're ramping the facilities, there's a lot of off standard labor costs that are hitting all year, a lot of that will be behind us. Those are the two biggest enablers as well as the full-year effect of volume those we ramp through 2021 as we've applied in our guidance will be coming out at a much higher rate. So, those are the items that will really lead to the increase and that should just accelerate in 2023 where we're confident we can hit 8%.

And I would add on the pricing side of it, if you look at the script and you create it again, we talk about the backlog that being fully open. It is safe to say we have tested the market and understanding what price can be in '22 coming out of the gate. We know absolutely how we have raised necessary pricing to offset costs for the fourth quarter, as we lead end of 2022. So, we feel good that the market will allow appropriate pricing to manage this business going forward, offsetting materials accordingly.

From a pricing perspective, now that we know what we're looking at going into 2022, it is much easier to stay ahead of it than what it was in 2020 going into 2021 and that's the number one reason we have high degree of confidence that we'll see margin expansion in 2022.

Right. Okay that's helpful and that's kind of exactly where I was going with this line of questioning. And so I'm curious and just on the $120 million raw material headwinds, that's a gross number? Do you have a net number for us after you've repriced some of the backlog, I'd presume.

Yes, I'm not going to give you the net, but I'll say that we repriced the majority, the vast majority in order for us to maintain guidance do what we have to had done that, but clearly have not gotten at all and -- but we've gotten a bit...

I would echo a substantial portion far beyond industry norm and far beyond anything Wabash National has executed in the past.

Okay. That's helpful and then just to be clear on your pricing comment and understanding you haven't fully opened the slots for 2022 yet, but whatever that net raw material headwind will be in 2021 off the gross $120 million, would you basically assume that to net up is zero into next year and that's the year-over-year benefit.

That would be assuming there is no additional pricing for demand. Yes, that would be the net benefit, that would be I would say the minimum net benefit, would be that delta, but I think there's other opportunities to price for our products in 2022.

And I want to make it very clear that we are pricing for the total environment.

Okay, very helpful. Okay. And then I had a different one. This is more on the capacity expansion. So, obviously, you feel that there's been a shift sort of in the trailer market from the demand perspective, that's not a cycle comment, but in and through cycles, you'll be able to kind of produce at that new level. I'm curious as you look at maybe the rest of the industry. Have you seen anybody else come out and really try to add capacity during this time or do you think that 5% that you would be adding to industry capacity is sort of your expectation over the next couple of years?

Yes. I think we would feel very confident that the 5% capacity add that we've done, it will be in that again with intrinsic demand for the products that we have. The unmet need, I think it's safe to say the unmet need for Wabash National dry vans throughout the last 3 to 5 years of market performance exceeds the 10,000 units that we are putting in place. So, we feel pretty comfortable that we will still have conversations with customers about their unmet need even going forward.

Got it. Okay. That's very helpful and then just, this is the last one for me, but I think in your opening remarks, you mentioned cold chain and upfitting has 2 major initiatives. I presume that's on the Final Mile side. I was just wondering if you could maybe give us some color around what percent of the Final Mile both in kind of in-house today and maybe what you're refrigerated split is as a percent of total book?

I think, first off, I want to take a step back from that. And when we think about a bidding in the universe that we play in from first to final mile, we don't necessarily see it limited to just coming off of the traditional final mile called revenue base. We think there are emerging opportunities in first middle and to a degree, I'm sorry, now a final and middle, but also on first mile based on where logistics is going. So, it is really need to be easily looked at total book of business. Now, specific to your question, I'd say roughly, we captured somewhere north of 20% of the product that we've produce today passes through some level of Wabash National upfitting. Whether it'd be at the coupled site or at the primary final assembly factory. We would grow off of that accordingly. We are expanding that thought to middle mile product which we traditionally thought of as a CTP revenue base, but we see that now emerging as logistics continues to change. That's different than maybe how we thought about parts and service five, 10 years ago with the traditional branches and service offerings that we had for CTP. This is a different model and it is because logistics is changing. And can you touch on the cold chain question again to make sure I answer that specifically.

Yes. I was just curious because I know you do some refrigerated bodies and final mile. I was just curious what the updated split was as a percent of total book that's refrigerated and final mile?

Yes. Okay. From a revenue perspective today, it's just 15%-ish, 15%, but it's not yet optimized. I think what's important to know when we talk about cold chain, we're talking about that cold chain from first to final mile even outside the core transportation markets and MSC will play, not only in our refrigerated trailers but also in refrigerated truck bodies and inserts and there's lots of opportunities on the horizon for us to really grow that percentage. It's a low percent today. The product hasn't been at differentiating point, but will be with MSC and we're just at the early stages of growing that book of business with MSC truck bodies. It's an opportunity not just in trailers but truck bodies.

Yes. We really have to think about again cold chain, like upfitting. Cold chain now have to be thought of encompassing all of our, we'll call it traditional revenue streams. And we have to manage it because our customers now span accordingly. Right? So, even when we talk about MSC, we talk about it as an enabling technology. It's not a product in and of itself, it's an ingredient. So, when -- as we make moves with reefer bands, you can expect that simultaneously we'll be making moves to scale up integration and value-creating opportunities by broadening that ingredient into our final mile related books of businesses as well and that capacity that we add, those dollars spent will not reside and create value just in one P&L, but multiple P&Ls going forward. That's how we create synergy in our first to final mile application, one Wabash organization.

We do you have a follow-up question from Jeff Kauffman from Vertical Research.

Mike, can we go back to that $120 million cost increase for 2021. When I think about what that would mean on a per unit basis, am I dividing that by the full year assumed production or just your per site production in the second half of the year? I guess one leads me to an increase of about $2500 a trailer that seems low. The other leads me to about $5000 a trailer that seems high. I'm just trying to figure out how to think about ARPPU forecasting as we're heading into 2022?

Yes. So what's important to know, Jeff, is that is -- so that's across our whole book of business, but there is, you're not going to able to get it to box. That's the actual increase we saw incremental to what our hedging programs would have offset. So, the actual cost increase is more than that, but we were able to see through some of our programs with our fixed pricing, with our suppliers or hedging, we're able to blunt some of that. That's the actual impact we saw in the 2021 calendar year that we had to go out, back out to our customer base and trying to offset. We didn't have to offset things that we already have hedged. So, that's why you can't get the number to box.

There's some research that's out there, Jeff, where there's estimates in that $6,000 to $8,000 range.

I think one of those pieces was ours. Yes.

That is indicative of the environment, yes, the industry is facing.

The total cost increased far exceeds $120 million, the $120 million is the piece of the team in the year 2021 had to offset and that's what's important.

And that wouldn't have been in our implied guidance when we went out earlier in the year and that's -- that means we were able to offset the vast majority of that to maintain guidance. So, the total cost is more than $120 million.

Yes, no, that's helpful, because we had calculated the $6,000 to $8,000 increase and these numbers are coming in lower. So, I was trying to bridge the gap. Thank you.

Yes. I think you're pretty close, Jeff. Yes.

There are no further questions at this time. I will turn the call back over to Ryan Reed.

Thanks, Faith. Thanks everyone for joining us today. I look forward to following up during the quarter. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.