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.

And what we said and we’ll call the readout of the script is that we need to see how peak season plays out. If it plays out in just a moderately successful manner then I think we’re in good shape to maybe be a little bit better than what – from a Wabash perspective, what FTR and ACT are forecasting. So we are positive, but at the same time we have a pragmatic look at it.

Operator: Thank you. Your next question comes from the line of Mike Shlisky of D.A. Davidson. Please go ahead.

Mike Shlisky: Yes. Hi, good morning, and thanks for taking my question. To follow-up on your answer there Brent, just to follow-up on your answer there Brent, those same forecasters, at least back research is saying that at 2024, in 2025 and for several years after, we’re right back up to 300,000 plus trailers again, back where it is basically in 2023. Can you comment on, is that an appropriate – is that – would that be more of like a – is like – is the future level more of an average replacement year going forward given fleet size increases and interest in keeping the fleet relatively fresh going forward as opposed to the past, where it was 250, 270? And are there any drivers beyond 2023 or 2024 that are regulatory in nature that are also going to provide an additional sales boost at any point that you know of?

Brent Yeagy: Well, I’ll take the last piece. I’m not going to say right now that there are additional – we’ll call it, regulatory secular factors that are going to build in, I think the full effect of the total regulatory environment just continues to add pressure to the ability to efficiently move product or freight in the United States, which is going to pressure asset numbers to rise over time with from a trailer to tractor ratio. So that more of a general, I don’t think there’s anything uniquely new in that. When we think about 2025 and 2026, I am in a position to absolutely support the general position that we’re going to move right back into a point of scarcity, where demand will exceed supply moving into 2025.

I completely believe that is the case with just a moderate recovery from a freight standpoint specifically with the customers that we entertain. And a lot of that is those secular drivers that we have called out trailer pools, nearshoring, so on and so forth. We’re not seeing capacity being added in the market. The supply base is not adding a huge amount of capacity, but they are getting better, which would be enabling. But so I think scarcity is on the horizon, which is an important for how we manage the business. And if I had to say anything, I think ACT and FTR have still not fully factored in those secular factors in what trailer demand will actually be in outgoing years.

Mike Shlisky: Got it. And to follow further on that then, so if the current run rates for 2023 are kind of roughly where more average years are going forward, maybe not in 2024, but even then it could actually still happen. What’s your confidence level about repeating $4.50 or so of EPS in any future year where 300,000 failures for the industry are produced?

Mike Pettit: I think in an environment of scarcity, Wabash has reset the bar as to how we should be looked at going forward. Remember, we said it in the script, we’re still producing 20% less, now that’s factoring our surge volume coming into play, which is the additional dry vans, 10,000 plus dry vans plus any other improvements that we make in the business between now and then to gain extra capacity. So I would say, again, we are well positioned to meet or exceed, and that still doesn’t take into account the relative growth we’re seeing in the other aspects of the business and further growth. Remember, we’re running a 20% improvement in revenue NOI performance relative to our parts and service business. That’s going to be compounding in those later years as well. So I think anyone who thinks that our current performance is somehow a unique kind of unicorn year, I think is missing the story.

Operator: Thank you. Your next question comes from the line of Morgan Weisberg of Vertical Research Partners. Please go ahead.

Morgan Weisberg: Hey guys, thank you for taking my call. If you could just touch a little bit up on the ramp up of the refrigerated product and basically how that is advancing and where you guys see the production run rate today, and where do you expect it to be in the next, let’s say, six months and 12 months?

Brent Yeagy: Yes. So we’re going to put this in the context of full cold chain revenue, because when we think about our structural composite investments and increasing of capacity, it spans from – in that all first to final mile suite of products. And when we think about cold chain revenue, I’ll go a little further than 12 months, so we’ll say 12 months to 24 months. You could say, we’re in a place where we can foresee potentially doubling our cold chain revenue from where it sets today and, call it late 2025, mid-2026 based off of the investments that we we’ve made to date. So we feel very good about how we will capitalize going forward in a market that is ridiculously dynamic and growing in ways that we are well suited to fed.

Morgan Weisberg: Great to hear. Thank you.

Operator: Thank you. Your next question comes from line of Felix Boeschen of Raymond James. Please go ahead.

Felix Boeschen: Hey, good morning, everybody.

Brent Yeagy: Hey, Felix.

Mike Pettit: Hey, good morning.

Felix Boeschen: Hey, I was curious if we could talk about the parts and services business, obviously very good quarter, and I think Mike, last time we had talked about growing 20% plus for the year. I guess two questions. Number one, can you talk about the driving factor of the growth in that business? And then two, if you can update that view on 20% plus, or maybe I missed it, that, that that would be helpful.

Mike Pettit: Yes. So we’re seeing a lot of strength and contribution to that performance across all the different drivers within parts and services. But I think the newest piece that we’ve talked about is our e-commerce platform is just coming online literally as we speak that will help provide a really good experience to our dealers through our Wabash Parts business that we’ve been growing Wabash Parts over the last year, but we have continued to invest in it over the last 12 months. And we are starting to get some real tangible digital tools to support the front end, which we believe will continue to propel that growth through the rest of this year. In terms of the 20%, I would say we’re going to do that plus in 2023, and there’s no reason to believe that we can’t maintain that growth into 2024 as well.

Felix Boeschen: Okay. Awesome. That’s helpful. And then I appreciate the new disclosure around trailer as a service from a CapEx perspective. Could you maybe directionally talk about how big or how big of a spending bucket you think it might become into 2024 and some of the returns we should be thinking about?

Mike Pettit: Yes. We’ll continue to update. It’s not – as you can see from the disclosure, it’s not huge today. We would expect to do a little bit more on the second half than we’ve done so far. But it’ll still be relatively modest. As we go into 2024, we would like to start to think about annually doing 2,000 plus trailers into that pool and you can kind of get a swag on what that would be from a capital expenditure perspective. But as we continue to develop our platform that we’re working on to really connect that trailers as a service physical asset with the aftermarket sales and support and we can – and we’re able to find the right level of customer connection, we might continue to increase that. So whether that’s 2024 or 2025, but there’s more than just the capital allocation component of the trailers as a service, there’s also the digital [ph] component that we’re bringing to life simultaneously.

And that will – when those two come together, that’s when you’ll see the investment pick up in our trailers as a service offering.

Brent Yeagy: Yes. I want to double down on that. Felix, the actual – I’ll call inquiry for participation in a trailer as a service offering from potential customers far exceeds what we’ve demonstrated so far. Again, we take a – excuse me, a programmatic approach to how we’re doing this. And as Mike alluded to, once we reach a certain inflection point where the business model, the methods that which the services provided, and then internal digital capabilities meet, which could be as early as call it mid-2024, we’ll be in a completely different position to talk about how we would scale that through additional deployment of capital to make that more material and late 2024, 2025 and beyond. We’ll just – we just need to wait until we get that sewn up and then we’ll be able to kind of blow it up accordingly.

Felix Boeschen: Okay. Got it. And then just my last one, but you mentioned doubling cold chain revenue over the next, I’m going to call it two years. What’s the base of cold chain revenue today that we should be thinking about?

Mike Pettit: Today as we sit here, it’s somewhere between $100 million and $200 million of revenue kind of a runway basis, Felix.

Felix Boeschen: Okay. Awesome. Really appreciate it. Thanks, guys.

Brent Yeagy: Thanks, Felix.

Operator: Thank you. And your next question comes from the line of Mike Shlisky of D.A. Davidson. Please go ahead.

Mike Shlisky: Yes. Hi, thanks for taking my follow-up question. Actually I have two. First, there was – been some headlines the last few weeks about a large fleet of trucks that may be facing bankruptcy. They seem to have gotten over some humps here that may or may not make it all the way through. And another company in the parcel group has kind of also achieved some labor piece recently after quite a bit of questions there as well. I’d be curious if a large, I guess on the one hand, if a large fleet were to go out of business or be liquidated in any way, how would that affect Wabash’s business? And secondly, that large parcel customer or that large parcel fleet that just recently got piece in it with their labor force. Do you know of any changes to their contract that may impact either your truck body business or your trailer business?

Brent Yeagy: Great question. Let me start out by saying obviously, we wish no ill will on any carrier out there. However, the reality of our customer base does not expose us at in any way shape or form to that carrier population. It is natural during the spot rate and cost inflationary market that carriers are facing right now that we will go through a – we’ll call it a purging of the far end of the carrier spectrum. Those carriers at many cases really confound spot rates to begin with. The customers that we have look at this as a very advantageous scenario. And they would tell you that they applaud and are – we’ll say pleased with the culling of the herd, which allows them to grow market share more profitably and to think about what a more stable back half of or more profitable 2024 and 2025 will look like.

That’s why they’re positioning their asset purchases accordingly, its why they’re positive. In the context of a large carrier that may or may not go bankrupt, that would only from a Wabash perspective be a tailwind into how we think about as early as Q4 of 2023 all the way through 2024 as carriers continue to reposition to take advantage of the hole in the market that will be created.

Mike Shlisky: Okay. Okay. And then just want to touch on the truck body business secondly, just give us since that’s the outlook for that business, so the next couple quarters how well booked do you feel you are in that business and pricing wise, there are some orders that might be a bit dated at this point and some chassis supply delays. We’ve been able to re-price those orders once the chassis finally gets to you. And have you had any pushback from customers who don’t want any who refuse to pay higher prices?

Brent Yeagy: What I would say is that we are in good shape relative to the priced in environment of our truck body backlog, and we are very pleased with the strength of the backlog and the ongoing nature of demand that is arguably well into 2024.

Mike Pettit: And we’ve seen really nice sequential and year-over-year growth profit generation from that revenue stream. And we’d expect that to continue to just add to what Brent said.

Brent Yeagy: There’s nothing about that it is not a point of strength going forward.

Mike Shlisky: Got it. I’ll leave it there. Thank you so much guys.

Brent Yeagy: Thanks, Mike.

Operator: There are no questions at this time. I would now like to turn the call over to Ryan Reed for closing remarks.

Ryan Reed: Hey, thanks, everybody for joining us today. We appreciate it. We look forward to following-up during the quarter. Have a good day.

Operator: This concludes today’s conference call. You may now disconnect.