Wabash National Corporation (NYSE:WNC) Q4 2022 Earnings Call Transcript

Wabash National Corporation (NYSE:WNC) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Good morning, my name is Chris, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Wabash Fourth Quarter 2022 Earnings call. I would now like to hand the conference over to Ryan Reed, Senior Director, Investor Relations. Please go ahead.

Ryan Reed: Thank you. Good morning, everyone. Thanks for joining us on the 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.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 thank you for joining us today. Because we’re wrapping up a record quarter on top of a record year, while starting another calendar year with very bright prospects, it feels like an ideal time to review our strategic choices and recall how we’ve arrived at this juncture where our company is performing very well in the midst of soft freight market conditions. Rewinding the last several years, we’ve added critical new legs to the stool that have enabled Wabash to grow in capability and performance. The addition of truck bodies to the Wabash portfolio has positioned the company to serve customers across product classes and also, maybe more importantly, broadened our perspective and allowed our team to get closer to trends and transportation, logistics and distribution like the disruption to logistics models caused by e-commerce and home delivery, rapid growth in cold chain or trends in power only brokerage.

I am delighted that those who were part of that decisions still surround and support me in my current role as CEO. Our organizational journey has taken us from a siloed product-centric approach to a customer-centric model that prioritizes ease of doing business across our suite of products and services. This model has brought us closer to our customers, evidenced by the commercial progress we’ve made over the last 18 months. The deployment of the Wabash Management System philosophy has given us the process driven and problem solving culture that was required to meet the challenges of a dynamic environment we find ourselves in today. One of the key process improvements derived from the use of our management system tools has been our long-term agreement construct, a new vision of supply chain engagement and the rapid deployment of recurrent revenue generating initiatives.

The modification of our pricing construct to a pass-through model allows us to better serve our customers with transparent pricing. Our improved pricing construct also forms the groundwork for our longer-term agreements which would have been unworkable under a fixed price construct. These longer-term agreements prioritize capacity for our customers to be able to forward conviction around their equipment needs to engage in collaborative multiyear demand planning. Beyond removing these strategic customers from the annual game of musical chairs for some customers are inevitably left without a seat at the table, these strategic relationships will be additive as we collaborate on product development and R&D efforts to jointly address unmet equipment needs.

We are very pleased to have an innovative organization like JB Hunt as our inaugural partner. As we demonstrate the visionary leadership required to structurally improve relationships with major customers, we have successfully attracted the attention of key industry suppliers. As our 10-year supply agreements with both Hydro and Ryerson show, suppliers recognize the moves Wabash is making and are aligning with us to combine our respective strengths in order to support our customers. As our organization continues to leverage its – more streamlined collaborative structure to create value for customers, shareholders and our communities, a major strategic focus is our parts and service initiative. Quickly spinning up Wabash Parts, our parts distribution joint venture to developing innovative new offerings like trailers as a service for the power only brokerage space, we’re excited for the potential to grow this more recurring revenue business that will act as a synergistic support mechanism for our transportation equipment.

Our Board of Directors has been incredibly supportive of the organization evolution and the Board has continued to keep pace with us by adding new directors with capabilities that will further support Wabash in strategic direction. After the September edition of Trent Broberg, CEO of Acertus, an automotive logistics-as-a-service platform, our Board welcome Sudhanshu Priyadarshi as our newest Director. Mr. Priyadarshi is a global finance and operations leader with extensive experience in the tech, logistics, e-commerce, retail, consumer packaged goods and pharmaceutical industries in the U.S., Asia and Australia. He currently serves as Chief Financial Officer for Keurig Dr Pepper and previously served in roles at Vista Outdoor, Flexport, Walmart, Cipla and PepsiCo. We’re excited to continue driving our strategy forward with the support and contributions of all of our Board of Directors.

Moving onto our fourth quarter financial performance, our team delivered record EPS of $0.84, which exceeded our expectations for the quarter. Between the increased volumes and improved pricing, revenue increased 37% from the same quarter last year to an all-time record of $657 million. Profitability also continued to sequentially strengthen as we achieved 14.4% gross margin and 8.8% operating margin. I like to call out that our operating margins expanded by 680 basis points relative to the same quarter last year. For 2022 as a whole, I believe we’ve demonstrated improvement across any indicator of financial performance you can look at. We’re very encouraged as our strategic choices shine through to enhance financial performance capped by record revenue of $2.5 billion and record EPS of $2.25.

Moving onto market conditions and our backlog. We are mindful of freight rates that have been indicative of the ongoing correction in freight markets. For numerous reasons, we have not seen this reduction in rates impact underlying trailer demand. Between cyclical and structural influences, we agree with third-party forecasters that equipment demand is likely to remain strong. With under buys in prior years and supply chain remaining as a constraint into 2023, implied demand for this year is still very likely to outstrip supply just on those specific factors alone. Adding structural influences like the demand from formation of trailer pools to support drop and hook activity or power only brokerage, and we believe substantial scarcity remains in the marketplace, that’s before we consider what would be another significant tailwind for trailers coming from the ramp of autonomous as that technology continues to advance.

Photo by Rodrigo Abreu on Unsplash

Turning to our backlog, total bookings ended the fourth quarter at approximately $3.4 billion, up sequentially by approximately $1.1 billion from the end of Q3 despite an outflow of record revenue. This implies net order inflow of $1.7 billion during Q4. And for full transparency although not announced until January, our long-term agreement with JB Hunt and a to be announced additional agreement are reflected in this backlog figure. Given the addition of multiyear orders, we are adding disclosure on the portion of our backlog we expect to ship within the next 12 months. Ending Q4, that subset of our backlog was $2.8 billion which implies somewhere in the range of $600 million worth of orders that reside beyond 2023. Given the excellent visibility provided by our backlog, we are initiating our 2023 financial outlook with a revenue range of $2.8 billion to $3 billion and an EPS range of $2.70 for $3.

I’d like to reiterate that we are looking at 2023 as a year where we can achieve significant revenue, operating income and EPS generation even if the supply chain shows no improvement. As our backlog indicates, we do have the upside to our outlook if supply chain conditions improve. I’d like to conclude my comments by reiterating my excitement for the pace of strategic progress that we’ve been able to achieve. This is a testament to abate and level of engagement of our Wabash team who has trusted in our organizational and strategic moves and is executing incredibly well on our day-to-day business while driving structural improvements in the fundamentals of the business. With a record backlog and evidence throughout 2022 of great execution on margins, we are positioned to set a new bar for the financial performance during 2023.

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

Mike Pettit: Thanks Brent. Starting off with a review of our fourth quarter financial results. On a consolidated basis, fourth quarter revenue was $657 million with new trailer and truck body shipments of 13,310 and 3,250, respectively. As Brent mentioned, this was yet another quarter of record revenue generation for the company. Gross margin was 14.4% of sales during the quarter while operating margin came in at 8.8%. This represents year-over-year improvement of 550 and 680 basis points, respectively. We feel that our margin structure really hit its stride during the second half of 2022 as supply chain surprises reduced and cost inherently ramping facilities stabilized. Operating EBITDA for the fourth quarter was $69.8 million or 10.6% of sales, which is a 580 basis point improvement versus the fourth quarter of the prior year.

Finally for the quarter, net income was $41.5 million or $0.84 per diluted share. From a segment perspective, Transportation Solutions generated revenue of $611 million and operating income of $57 million or 11% of sales. Parts & Services generated revenue of $49.6 million and operating income of $7.9 million or 15.9% of sales. I’d like to call out the growth in our Parts & Services segment was about 20% year-over-year when adjusting for revenue from a business that was divested in mid-2021. Year-to-date, operating cash flow was $124 million, a strong net income was supplemented by more efficient inventory in the fourth quarter as we are able to lead our inventory levels as the supply chain continues to strengthen. Moving to capital expenditure, the timing on some payments from our dry van expansion disbursed from 2022 to 2023 and that CapEx underspend relative to our expectations for 2022 will be reflected in our 2023 CapEx spending.

As I’ve mentioned, relative to our meaningful cash flow generation in 2020 followed by a significant ramp in working capital during 2021, I think it’s important to take a longer-term view on what continues to be strong free cash flow generation through the cycle. That said, I believe that the measure of a healthy company is not simply maximizing annual free cash flow but purposely investing in the business when presented with the opportunity to generate significant returns that are in the best interest of long-term build. Wabash is also committed to delivering ROIC over the cycle that both significantly exceed our cost of capital but also exceeds our historical performance. We are now in a period where accretive organic investment opportunities exist, and as a result, we would expect to see CapEx as a percent of revenue in the range of 3% to 4% of revenue over the next couple of years.

With regard to our balance sheet, our liquidity which comprises both cash and available borrowings was $401 million as of the end of the quarter. Turning to capital allocation. During the fourth quarter, we invested $50 million in capital projects, utilized $10 million to repurchase shares and paid our quarterly dividend of $4 million. For the year, we invested $57 million in CapEx, $31 million for share repurchases at an average price of $17.55 a share and returned $60 million to shareholders via our dividend. As stated earlier, our capital allocation focus continues to prioritize organic growth via capital spending, while also maintaining our dividend and opportunities for share repurchases alongside of M&A. Moving onto our financial guidance for 2023, we expect revenue of $2.8 billion to $3 billion with a midpoint of $2.9 billion.

This outlook is supported by our significant backlog fill while remaining reasonable in our expectations for the production activity ongoing supply chain constraints will allow. We are on track in Q1 to complete equipment installation and begin system sale of dry van capacity addition. Like all significant capacity additions, this will come with a volume ramp that will see lower production rates in the first half of the year and then greater volume later in 2023 as we become more efficient and our expanded production benefits from the support of our recently announced supply agreements with Ryerson and also Hydro. From an operating income perspective, we expect to generate $218 million at the midpoint or 7.5%. This resulted in an EPS outlook of $2.70 to $3 per share with a midpoint of $2.85 per share.

I like to reiterate that our guidance continues to assume that supply chain constraints continue to persist. As Brent mentioned, we believe our backlog enforce that there is clear upside opportunity to our 2023 financial outlook, should supply chain and conditions improve. We also look forward to another year of strong growth within our Parts & Services segment which generated accretive operating margins. We expect capital spending to be between $90 million and $100 million in 2023 as a result of planned expenditures from our dry van expansion, EcoNex capacity expansion as well as the previously mentioned dry van expansion payments that pushed from Q4 to Q1. We also expect to invest in CapEx that will be immediately revenue generating through our trailers service program.

Our evaluation of the best way to finance the expansion of trailers as a service is ongoing and not included in our traditional CapEx guide, but we expect to take small bites at using our balance sheet in the short-term. With less than $10 million earmarked for the first half of 2023, we will continue to call this out separately for transparency. I would like to remind everyone that it is typical for Q1 to be our lowest quarter in terms of revenue and EPS generation. In 2023, this seasonality will be compounded by the cost to ramp our new dry van capacity. Our expectation is for the first quarter revenue to come in between $600 million and $640 million and for EPS to be between $0.40 and $0.50 per share. I like to sincerely thank our Wabash team for their remarkable efforts in generating record revenue and EPS in 2022.

This year was a major pivot point as we accomplished our 2022 financial goals laid out at our 2019 Investor Day, and we also took a meaningful step achieving our 2025 target of $3 billion in revenue, 11% EBITDA margins and $3.50 a share of EPS. We’re excited to take another significant step for those financial targets in 2023. More importantly, the Wabash team took a giant leap in our cultural transformation that will enable us to move even faster in 2023 and beyond. We entered 2023 as a transformed and rebranded company, representing the first to final mile portfolio that is unmatched in our industry and powered by a team that is inspired and driven by our purpose 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: Our first question is from Justin Long with Stephens. Your line is open.

Justin Long: So Brent, maybe to start with the comment you made about the long-term agreements. Obviously, you’ve announced the agreement with JB Hunt, it sounds like there was another one that was reflected in the backlog and we might hear more about that customer at some point. But if you were to look at those two agreements collectively, is there a way to help us think about how much of a contribution that had to the backlog this quarter and maybe you could talk about additional momentum with some of the LTAs beyond these first two?

Brent Yeagy: Yes, thanks Justin. When we think about long-term agreements, we’re looking in general in 2023 and somewhat growing in 2024 and have that be about 20% of our overall backlog. And with the capacity gains, and if you go through the full vision, possibly being as far as 30% of our backlog in 2024 that gives you a ballpark of what we’re shooting for, and that still gives us enough room within our supply plan to meet other customers’ requirements. In terms of thinking about it in our Q4 reported backlog, I would just frame it as a substantial add and is generally reflective of what you see in the ’04 backlog and you can extrapolate that into ’03.

Justin Long: Okay, that’s helpful. And to get to that 20% of the backlog, are these first two LTAs getting close to that or do you need additional LTAs in order to do that. I guess going back to the comment on additional momentum with other customers on this front? I’d love to get more color.

Brent Yeagy: We’d love to pick up and have an ongoing conversations at least two more that we would like to be coming to conclusion with in the first half of 2023. And then we’re also looking at what we can do to expand the concept of long-term demand fulfillment to our dealer body especially around those dealers and their customers that are well positioned to take advantage of the market going forward.

Justin Long: Very helpful. And maybe I’ll shift my next one for Mike, when I look at the revenue guidance at the midpoint, it’s up about $300 million relative to last year, any additional color you can give us on the key components of that growth and maybe what you’re expecting for revenue growth for trailers versus truck bodies versus parts and service?

Mike Pettit: Yes. So I would say, first and foremost, it’s across the board. We’re seeing growth in the traditional dry van business that I talked about. In some part from some of our long-term agreements, but we’re also seeing growth in some of our less talked about value streams like tank trailers, we believe 2023 can be the best year in tank trailer history for Wabash, which is an important point, we’re going to see significant growth in our truck body business on the revenue side in 2023 as well. And we would expect parts and services to grow in generally the same magnitude of what we saw from ’21 to ’22 which was 20% as I mentioned in my remarks, we’ll see similar growth in ’22 and ’23, so it really is across the board and we’re really excited about all the value streams that are growing, but we’re going to see it in parts and services and we are extra excited about.

We do believe that revenue provides a more recurring, repeatable profile and it is very synergistic to what we do on the Transportation Solutions front.