Wabash National Corporation (NYSE:WNC) Q2 2023 Earnings Call Transcript

Wabash National Corporation (NYSE:WNC) Q2 2023 Earnings Call Transcript July 26, 2023

Wabash National Corporation misses on earnings expectations. Reported EPS is $0.46 EPS, expectations were $1.31.

Operator: Hello, and welcome to the Wabash Second Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I’ll now turn the conference over to Ryan Reed. Please go ahead.

Ryan Reed: Thank you, and good morning, everyone. We appreciate you joining us on this call. With me today are Brent Yeagy, President and Chief Executive Officer; and Mike Pettit, Chief Financial Officer. Before we get started, please note 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 available at ir.onewabash.com. Please refer to Slide 2 in our earnings deck for the company’s Safe Harbor disclosure addressing forward-looking statements. I hand it off now to Brent.

Brent Yeagy: Thanks, Ryan. Good morning, everyone, and thanks for joining us today. I’m pleased to announce another quarter of record financial results, which I believe is attributable to the successful execution of our strategic vision. After assembling a broad portfolio of first to final mile product solutions, we transformed our organization from fragmented business units to an aligned One Wabash now capable of providing customers and suppliers with support across the breadth of their businesses. By aligning our organization, we have improved crucial commercial aspects such as our pricing methodology, our ability to offer comprehensive longer-term agreements and reduce friction for our customers as we tackle the most significant challenges in transportation, logistics, and distribution.

This collaborative approach is also reflected in our agreements with key strategic supplier partners showcasing the progress we have made in establishing stronger ties with a broad set of stakeholders. Our One Wabash structure and our Wabash Management System allow us to provide focus on organic growth where we have successfully re-imagined our manufacturing footprint, allowing us to add highly efficient dry van capacity, make exciting upgrades and cold chain capability to the use of structural composites, as well as work to connect a broad ecosystem of partners to help leverage innovation to improve logistics network efficiency through our innovative trailers as a service or task offering. Additionally, throughout our organization, we have ingrained the importance of growing our exposure to recurring revenue through our parts and service business.

The segment continues to achieve steady growth as a vital component of our overall strategy as we leverage the strength of the Wabash brand to achieve our rightful share in parts and services. The deployment of our strategic initiatives has led to meaningful structural improvements within our business and this remarkable pace of progress has been made possible by our dedicated employees. We’re fully committed to the belief that higher levels of employee engagement drive improved financial performance and increasing levels of execution, but most importantly, we have the opportunity to lift up the lives of our employees. This drives our conviction that further investment in our people, our people processes, and our workplace will further accelerate our objectives and will create sustainable value for all of our stakeholders.

I’m personally excited to embark with my Wabash team on a journey to become a workplace where every employee receives the respect they deserve, an environment that enables them to be their best self and gain the support required to lift up their lives and the lives of their families. The world has presented a variety of challenges to our workers over the last few years, and we want Wabash to be a place where everyone, I mean everyone can come and thrive a place where we work together to achieve big things as a company and also a place where we work to achieve big things for each other. Every one of our employees deserves the best we can offer them, and we must be a place where any and all who want to be part of the Wabash team are wanted, welcome and enabled to become part of a truly inclusive culture accentuated by the diversity of all of our people.

To address this, we are initiating new project teams dedicated to implementing programmatic solutions and systemic changes that will have a positive impact on the lives of our employees. This investment in our people and the elevation of our internal expectations aligns with our moral responsibility and values as leaders, and also serves the best interest of Wabash, our customers, partners, shareholders, and our communities through the acceleration of our strategic vision and increasing sustainability of value creation. We’ll now transition into our Q2 financial performance. Regarding our second quarter performance, we are thrilled to have achieved quarterly records for revenue, operating income, and earnings per share. These remarkable results not only serve as a testament to our strategic progress, but also raise the bar for what we assume peak earnings can be for our company.

It is noteworthy that these outstanding figures were obtained on annual shipment volumes we expect to be roughly 20% below maximum capacity in our Transportation Solutions segment. Furthermore, our Parts & Service segment continues to demonstrate steady growth and we anticipate it’ll continue to increase as a percentage of our overall portfolio over time. Turning our attention to market conditions and backlog, we observed a strong shipment activity outpace new orders in the second quarter, which is not surprising. The sequential decline of about 20% was in line with average seasonality for the quarter. As industry data has shown, order cancellations have played a modest role within the softness and net order activity during the second quarter, as carriers have been grappling with difficult market conditions for some time now.

However, I think the belief is still widely held that freight markets have likely hit bottom. An opportunity lies ahead of seasonality through peak season this year could usher in improving conditions. Because we entered this breakdown cycle with clear and present supply constraints within transportation equipment, demand is held in so far. I do believe that trends in the coming months and particularly peak season will be an important indicator of how demand is likely to progress into 2024. Continued difficult market conditions could be challenging for equipment demand, while bouncing rates could signal an upturn in freight markets. Over the longer-term, we maintain our belief that our core markets are benefiting from secular trends such as power only, driver shortages, and reshoring.

In particular, reshoring is displaying quantifiable progress as of late, as evidenced by the significant increase of 77% in construction spending on manufacturing facilities in the United States. In May compared to the same month the previous year, this trend is exciting as it indicates the ongoing reorganization of supply chains post-COVID. We believe it’s reasonable to expect that greater North American manufacturing output will result in some mix shift from intermodal to both truck bodies and trailers over time. Overall, our focus remains on executing our strategic initiatives while assisting our customers through the challenges of the current market and being fully prepared to support their needs once the freight market inevitably rebounds.

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Moving on to our financial outlook with two consecutive record quarters – two record quarters of telling confirmation of progress that comprised our first half of 2023, we are raising the mid-point of our full year 2023 EPS guidance to $4.45 from $4.25. We recognize that the macro environment is complex, but by concentrating on what is within our control, we’ll continue working towards greater collaboration with customers and suppliers, continuing to grow our set of product solutions and innovative service offerings while providing world class post-sale support from our parts and service business to increase our base of recurring revenue. Lastly, I would like to express my appreciation to all of our team members, who have achieved the best quarter of financial performance in our company’s history and continue to propel the remarkable pace of strategic change within the organization.

With that, I’ll hand it over to Mike for his comments.

Mike Pettit: Thanks, Brent. Beginning with a review of our quarterly financial results, in the second quarter, our consolidated revenue was $687 million. During the quarter, we shipped approximately 11,825 new trailers and 4,025 truck bodies. Given some of the mixed signals we see in the market environment, we made the decision to modestly slow our rates of production by removing Saturday shifts at our main trailer facility. This accounted for new trailer shipments coming in slightly below what we might have expected one quarter ago. In doing this, we have maintained all full-time production employees in order to ensure our ability to respond to the potential for a near-term demand improvement. Gross margin was 22% of sales during the quarter while operating margin came in at 15%.

These figures remained strong due to a combination of favorable factors including material cost benefits and mixed benefits. As previously mentioned, stronger performance from our tank trailer and truck body businesses paired with the ramp down of our conventional reefer van production and had anticipated positive impact on our margins. In fact, we delivered approximately $25 million of year-over-year gross profit improvement from the combination of tanks, truck bodies, and parts in the second quarter. In the second quarter, we achieved very strong operating EBITDA of $117 million or 17% of sales. This performance more than doubled our EBITDA margin compared to the second quarter of last year. We take great pride in our ability to generate this improvement relative to our margin history.

Finally, for the quarter, net income attributable to common stockholders was $74.3 million or $1.54 per diluted share. From a segment perspective, Transportation Solutions generate revenue of $631 million and operating income of $116 million. Parts and services generate revenue of $62 million and operating income of $12.9 million. Year-to-date, operating cash flow is $146 million, reflecting our strong financial performance. Even in the context of significant growth investment via capital expenditure of $28 million, the company generated $49 million of free cash flow during the quarter. Turning to our balance sheet, our liquidity, which comprises both cash and available borrowings was $441 million as of June 30. We finished Q2 with a net debt leverage of 0.9 times.

This is our lowest leverage ratio since 2017. With regard to capital allocation, during the second quarter, we invested $24 million in capital projects and $3 million in revenue generating assets for our trailers as a service platform. We utilized $14 million to repurchase shares and paid quarterly dividends of $3.8 million. Going forward, we have decided to maintain a separate breakdown of our investment in trailers as a service with the expenditures for revenue generating assets category on our cash flow statement. We recognize the nature of this capital expenditure differs from our historical practices, and we believe it’s important to offer additional insights into our progress on this business model innovation to serve the evolving needs of our customers.

Our capital allocation focus continues to prioritize capital expenditure above and beyond our annual maintenance CapEx spend of $20 million to $25 million in order to support our organic growth initiatives. We are committed to maintaining our dividend, and then we anticipate continuing to evaluate opportunities for share repurchases alongside of both on M&A. Moving on to our outlook for 2023, I’d like to express my immense pride in the outstanding performance delivered by our team during the first half of this year. We achieved two consecutive record breaking quarters, which is a testament to the dedication and hard work of our entire organization. In order to put some historical context around our EPS generation, I’ll mention that the cumulative first half results of 2023 surpassed the best year in the company’s history.

Our financial outlook now contemplates revenue in a range of $2.6 billion to $2.8 billion, and we are increasing our outlook for EPSs to $4.25 cents per share to $4.65 per share with a midpoint of $4.45. This compares to a previous EPS outlook midpoint of $4.25 per share. As I mentioned on the last call, we continued to expect to see strong growth out of our parts and services strategic initiative, as we anticipate to achieve greater than 20% growth for the third consecutive year in 2023. We’re now projecting to generate over $150 million of free cash flow in 2023 in a year, where we have continued to invest heavily in our future growth and vans, EcoNex and recurring revenue. In our financial outlook, we expect third quarter earnings per share in their range of $0.90 to a $1.10 per share as we see a bit of a seasonal step down from Q2 to Q3 in some of our revenue streams.

We also anticipate gross margins moving toward the mid to high teens during the second half with the reset of some of the material margin drivers we’ve enjoyed during the first half. Even with the second half of the year stepping down from the first half, we still expect it to be the strongest second half in the company’s history. In conclusion, I’m very pleased to report such a strong quarter as we progressed towards achieving a record year for Wabash. Our team remains dedicated to advancing our long-term vision while executing effectively on our strong backlog. I also want to express my excitement and commitment to our mission to focus on the lives of all of our people. As a company and leadership team that lives its values, this is another aspect of our strategy that will positively impact all of our stakeholders.

With regard to our near-term opportunities, with freight markets finding better equilibrium between capacity and demand, we look forward to a more normal peak season this year for our customers. We continue to position ourselves to support our customers demand across our comprehensive first to final mile portfolio of equipment, parts and services, as end market conditions recover. We are well prepared for what comes next and excited for the next chapter of our journey to change how the world reaches you. I’ll now turn the call back to the operator and we’ll open it up for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Justin Long of Stephens. Please go ahead.

Justin Long: Thanks. Good morning and congrats on the quarter.

Brent Yeagy: Thanks, Justin.

Justin Long: So maybe to start with the guidance, revenue – the revenue outlook came down, operating margin guidance went up by about 150 basis points. When you think about that raise in the operating margin guidance? How much of that would you attribute to material margin coming in better than you expected versus some of the other items you mentioned like mix?

Mike Pettit: Yes. A lot of that is – a lot of it’s mix and some performance we’ve seen in some of the other revenue streams we’ve alluded to a couple times around tank trailers, truck bodies and also parts and services. We’re getting more confidence to put some of those projections – margin projections into the second half of the year. There’s a little bit of material margin, but I would say primarily, it’s some of those other revenue streams that we feel some confidence into – putting into our margin guidance for the second half of 2023.

Brent Yeagy: Justin, let me put an exclamation point on that. We feel really good about the – kind of the holistic nature of our revenue streams at Wabash right now. And to Mike’s point, we feel increasing levels of comfort of building that in before projections as that strength is coming alive for us and it’s reflecting in our numbers accordingly.

Justin Long: Understood. And secondly, I wanted to ask about trailer production. You mentioned that you paused things a little bit in the second quarter, hopefully, we see a pickup going forward. But any color you can provide on second half expectations for trailer production versus the first half. And then I’d love to get your thoughts on 2024 as well and how you’re thinking about the market relative to the third party forecasts out there today from ACT.

Brent Yeagy: Sure. Yes. So in terms of – from a shipment perspective, we would expect similar in the second half to the first half. As you mentioned, we did take some overtime out of the system in Q2 and we would expect that overtime to most likely stay out. So you might see a little less production, but a similar type of revenue generation shipment number. We did in Q2 with some sole finished goods ready to go in the early part of the second half. So that’s kind of how you box a little lower production with a very similar shipment rate. So we don’t expect it to be a big step down, Justin. We expect it to be more of a normalization, and I think we’re going to have a nice ability to be able to have a very steady controlled bill through Q3 and Q4.

Mike Pettit: Yes, Justin, I’ll take the second part of that question. Wabash is in a very unique position in how it evaluates 2024 and what are the forecasts, whether it be from FTR or ACT? The reason for that is the nature of the customers that make up our portfolio, we’ve used the word curated, it’s a good word for it. It allows us to be positioned with customers that are really contemplating how they will leverage 2024 to grow their business. And that’s not necessarily equal across the entire body of customers that build up an ACT or FTR forecast. So we sit here right now in a place, where if we take our customers at face value, we can look at a relatively stable well positioned 2024. However, we’re also want to be pragmatic about how we evaluate that and it’s early to call that sitting here today.