WABASH NATIONAL Corp Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Wabash National Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Operator Instructions. I would now like to hand the conference over to your first speaker for today, Mr. Ryan Reed, Director of Investor Relations. Thank you. Please go ahead.

Thank you, Ann. Good morning, everyone. Thanks for joining us on this call. With me today are Brent Yeagy, President and Chief Executive Officer; and Mike Pettit, Chief Financial Officer. A couple of items before we get started. First, please note that this call is being recorded. I'd also like to point out that our earnings release, the slide presentation supplementing today's call and any non-GAAP reconciliations are all available at ir.wabashnational.com. Please refer to slide two in our earnings deck for the company's Safe Harbor disclosure addressing forward-looking statements. I'll now hand it off to Brent to get us started with his highlights.

Thanks, Ryan. Good morning, everyone, and thank you for joining us today. I'd like to start by giving some high level perspective on the last eight months and highlight why within Wabash National we are so positive about what we've been able to demonstrate through this challenging time, and why we feel confident about the company's prospects going forward. From the beginning of the COVID pandemic, I've watched our people come together to embrace the deliberate changes necessary to adapt to the new environment we find ourselves in. Our people have worked tirelessly across our operations to continue safely producing equipment to satisfy customer demand, while also adapting the organizational and operational changes necessary to align our internal structure to our revised strategy. This process comes down to the dedication and talent of our people, which speaks to the positive and collaborative culture we work to foster every day. As I previously mentioned, the health and safety of our people is our top priority. And on that front, we're very pleased with the incidents of workplace spread of COVID, which has been extremely limited. At the onset of COVID, we were faced with multiple unknowns. Our team has methodically worked through to keep our people safe and then ready for the company for the growth inevitably coming following a trough year. Thanks to our product portfolio diversification, customer conditioning and improved business processes, we have achieved financial performance across a broad array of metrics that is night and day different from previous trough period performance for Wabash National. In the three quarters of 2020, we limited detrimental margins to the mid-teens, generated positive EPS and produced meaningful free cash flow. We have leveraged the natural disruption during COVID to rapidly reorganize our business to be more agile internally, to ensure talent flows to the areas of highest need without being constrained by organizational barriers. At the same time, we have structured ourselves in a way that makes us easier to do business with for our customers, who buy across our portfolio of first to final mile products. And all these benefits come with the opportunity to eliminate $20 million of redundant costs in our new structure, a task we completed during the third quarter. We entered this downturn with a well-positioned balance sheet and we have further shored it up. Some might even say improved. We strengthened our capital structure with a prefinancing of our term loan, which moves our nearest debt maturity from 2022 to 2025. We have proven that Wabash National is a more resilient company than in prior cycles, a result we look to continue to improve upon in future cycles, as we raise both trough and peak levels of our performance. While we're proud of what we've accomplished thus far in 2020, we are even more excited about how we have positioned ourselves going forward. Agile financial performance has allowed us to retain the core talent within our organization, so that we can hit the ground running as market demand improves. Industry forecasts currently show an increase in total trailer demand in 2021. Wabash National is taking appropriate steps to be able to serve our customers in that environment by evaluating our shift structures in various locations. That said, the labor market is unlike anything that we've seen before; a 10% rate of unemployment now feels more like a 3% rate of unemployment. For a multitude of reasons, labor has become exceptionally difficult to find for many companies. So we are taking diligent steps to serve our customers to the fullest extent possible in 2021 knowing that there are likely to be some headwinds to full utilization of physical capacity as our customers and our suppliers all navigate this very unusual labor market together. We remain in close contact with our supply base, particularly as it pertains to their ability to ramp into a growth year. At this time, the supply chain understands the demand outlook and is preparing to the fullest extent possible for increased volumes. Our suppliers will face the same struggles for labor as Wabash National, but we have continued to improve our supply chain, and we are confident that we are better positioned than our competition. Moving on to our customers, there has been a very bifurcated experience among the customer groups during 2020. So I thought it might be helpful to spend a moment to walk through the forces that various segments of customers have been feeling, as it relates to demand conditions. For simplicity, we'll break customers into two distinct buckets: those that are professional and well-capitalized freight carriers and those that are not. Professional freight carriers have done an admirable job of keeping critical goods moving throughout our country during the very uneven times earlier this year and even now when carrier capacities to move freight are stressed. Freight carriers in general have seen market conditions rebound very nicely throughout the course of 2020 and are well positioned to continue to refresh their equipment. Our second set of customers encompasses non-professional freight carriers. These customers move goods primarily for delivery to the end customer as an ancillary piece of their business, whether it's a flower shop, a dry cleaner or an appliance store; delivery is a necessary component of their business, but not their main business. This is where COVID has had a more negative related impact, which is primarily focused on our Final Mile segment. These businesses tend to deliver as an auxiliary part of their business and many of these customers may not have been classified as essential businesses during the state mandated lockdowns. As such demand in the Final Mile segment has remained below breakeven levels in 2020. We remain optimistic about demand trends in Final Mile going forward, as we've seen e-commerce accelerate as a percentage of retail sales this year. The weakness that we've seen in demand for Final Mile equipment this year will reverse over coming years, as these customers, who are most harshly impacted by COVID, get back on their feet. We are also directly experiencing the reality that our customers are looking to leverage the opportunities presented by the further disruptive acceleration we've seen in home delivery since the onset of COVID. As with most cycles, the segments that follow the harvest also rebound the quickest. And we believe we've seen early indications of demand firming up in the Final Mile segment for 2021 with an additional strong focus on forthcoming years of needed innovation and equipment needs. Moving onto our backlog for context; large deal season tends to start in the August time frame give or take with committed orders being placed September through January. So there is a strong seasonal component to ordering activity specifically in our vans business. For the last five years, we've experienced normal seasonal declines in backlog from Q2 to Q3, as the bulk of these orders were placed in Q4 within those periods of years. In 2020 we've seen a 37% increase in our backlog from Q2 to Q3. The rapid order intake is indicative of strong freight market conditions as we enter into 2021. We have seen our market share expand as expected in 2020 because of the regularity of our specific customer portfolios' order patterns and the inherent strength and implicit demand for our premium product portfolio. This goes to validating our strategic premise that we possess products of choice within the markets we choose to play in. Our ability to expand share from the high teens to mid-20% range has been aided by the availability of physical and supply chain related capacity that was constrained in 2018 and 2019. As we look forward to 2021, we seek to position our first to final mile portfolio as the one-stop solution for our customers. We're making moves to address our manned capacity for increased output knowing that labor rather than physical capacity is likely to be the most significant constraint across a vast array of manufacturers in 2021. Before closing, I'd like to say a few words about our new organizational structure. By being in place, we have seen the early benefits experienced throughout many aspects of our company. As I've mentioned on our last call, we have pivoted our strategy, which now centers around being the first to final mile equipment provider to customers in transportation, logistics and distribution markets. Our product portfolio has grown over time and we felt that there was a meaningful opportunity for improvement by moving from a product-centered organizational structure to a customer-centric model that prioritizes ease of doing business for customers who may want to buy across our portfolio and also conveys benefits from these closer customer linkages as we evaluate product improvement and innovation activities. While the structure is still very new, I see early wins coming from this approach both internal and external to Wabash National. Internally, I see that talent is flowing to projects that are of the highest priority for Wabash National, not necessarily the highest priority within a given segment. The elimination of SBU silos has enhanced our collaboration and the speed at which we're able to collaborate within ourselves and with our customers. We've been able to move faster in our new structure, even as many of our employees continue to work remotely. Externally, the way our commercial team has been empowered to engage customers across our portfolio is in the very early days as we work through the first large deal season within this organizational structure. But the conversations occurring with customers have a different tenor, and we believe we're positioning ourselves well as a strategic equipment partner for our customers rather than just a traditional basic supplier relationship. Let me close by saying that I have learned more about the resilience of our people and our portfolio during 2020 than any other year; the last eight months have been a true challenge, and our company has responded exceedingly well. Myself and my team are focused on the longer term and the creation of value for our shareholders, as well as the near and long-term interests of our customers and our people. However, we do seek to achieve a fair valuation based on our breakthrough performance demonstrated during a time that has significantly tested the business that we have created. I understand historically the modest multiple on our EPS or EBITDA has certainly been influenced by Wabash National's difficult performances during prior trough periods. Our historical trough performance is something that we've been diligently working on over the last decade, and we feel strongly that we proved a lot through 2020. Agile and purposeful cost management leading to decremental margins in the mid-teens, substantially positive EBITDA and free cash flow generation and maintaining our dividend through this trough, all serve as proof that Wabash National has created structural and foundational improvements in its operating model and its business processes. All of this has been achieved by doing what works for our customers and our people, as we continue to evaluate opportunities that strengthen our value proposition, while enhancing our financial performance in both cycle troughs and peaks and all phases in between going forward. Lastly, I'd like to mention that we've been working hard through all these distractions that have come with COVID to put Wabash National's first sustainability report on the board, which we look to issue in December. Environmental, Social and Governance topics are something that we've been focused on internally for some time and it's time that our public disclosures caught up with our internal efforts because we have a great story to tell. I have a hard time thinking of many other companies that are so uniquely incentivized by the opportunity to make our products more environmentally friendly. They are products that positively impact the sustainability of our food chain, as well as aid in the production of medicines, vaccines, foodstuffs and everyday living. From Wabash National's beginning, we've been focused on helping our customers achieve improved fuel economy by taking weight out of our products. We're also making them more durable by leading in material technology innovation within our industry. We look at social equality and the opportunity to leverage a diverse workforce not only as the right thing to do, but as a business imperative that generates superior ideas that enhance business decisions and also serve as a competitive differentiator. This also flows into governance; enhanced diversity on our Board of Directors has certainly enhanced the range of perspectives of our Directors, which has been useful in the short term as our Board has been generous with their time helping us navigate through 2020 and also in the long term as we have now defined our refreshed strategic direction. As I've mentioned, we have a great story to tell when it comes to ESG, and I'm truly excited about the resources that we've put behind telling it going forward. With that, I'll hand it over to Mike for his comments.

Thanks, Brent. I'd like to start off by giving you some color on our third quarter financial results. On a consolidated basis, third quarter revenue was $352 million with consolidated new trailer shipments of approximately 8,450 units during the quarter. Revenue was fairly steady with the prior quarter and improved as the quarter progressed. Third quarter gross margin was 12.3% of sales during the quarter, while operating margin came in at 2.4% on a GAAP basis or 2.7% on a non-GAAP adjusted basis. Third quarter gross and operating margins were the strongest since the fourth quarter of 2019. The improvement in operating margin was made possible by our cost savings efforts that have structurally reduced our SG&A footprint. Compared to the third quarter of last year, SG&A expense was reduced by about $6.2 million or about 18% when adjusting for expenses associated with our new term loan debt facility, which we closed in Q3. Although some of the year-over-year reduction in SG&A was achieved through reduced incentive compensation and other one-time actions, we would still expect 2021 SG&A to be $15 million less than 2019. I'll address that in more detail in a minute. Consolidated decremental margins in the third quarter were very good at 13%. Operating EBITDA for the third quarter was $24 million or 6.8% of sales. Finally, for the quarter, GAAP net income was $3.9 million or $0.07 per diluted share. Non-GAAP adjusted net income was $4.7 million or $0.09 per diluted share. From a segment perspective, commercial trailer products performed very well with revenues of $227 million and operating income of $19.7 million. CTP's decremental margin during the third quarter was about 11%, which is a phenomenal result achieved through purposeful cost control. Average selling price for new trailers within CTP was just about $27,000, which represents a 1% increase versus Q3 of 2019. Diversified Product Group generated $72 million of revenue in the quarter with operating income of $4.2 million. DPG's decremental margin was also very favorable at 14% year-over-year in Q3. As we discussed in our last earnings call, Final Mile Products continues to operate below breakeven volumes, as COVID has impacted demand in this segment differently than other end markets. FMP generated $55 million of revenue during the quarter with an operating loss of $4 million generating decremental margins of just 16% during the quarter. FMP's third quarter EBITDA was a loss of $400,000. Gross margin of 8.8% does represent a 490 basis point improvement from Q2 and a 920 basis point improvement from Q1. Focused manufacturing cost control drove the improvement on the gross profit line, and we will see significant improvement in segment EBITDA as revenue increases in 2021. Year-to-date, operating cash flow was $107 million and we invested roughly $14 million via capital expenditures leaving $93 million of free cash flow. We are now targeting $20 million to $25 million in capital spending for 2020, a slight increase from previous guidance as better visibility and strong cash generation have allowed us to progress with some near-term opportunities to reinvest in the business. With regard to our balance sheet, our liquidity, our cash plus available borrowings, as of September 30 was $383 million with $216 million of cash, and $167 million of availability on our revolving credit facility, which is fully untapped. In terms of working capital, approximately $49 million was freed up during the third quarter with a reduction in accounts receivable and an increase in payables combining to drive that change. We continue to make good progress on our efforts to free resources from non-core assets. While timing is difficult to pin down on many of these items, we have successfully closed on the sale of our Columbus, Ohio branch location. The closure occurred in Q4 of 2020, and this is indicative of our shift in strategy, as we closed our last remaining retail trailer sales location. We look forward to providing a more thorough update on our strategic growth initiatives on our year-end conference call. With regard to capital allocation during the third quarter, we utilized $10 million to pay down our high yield notes, invested $2.8 million in capital projects and paid our quarterly dividend of $4.3 million. As I mentioned earlier while discussing capital expenditures, our improved near-term visibility and demonstrated strong cash generation, our capital allocation focus is now shifting to increased reinvestment in the business through growth CapEx while also continuing to prioritize maintaining our dividend and more actively evaluating opportunities for debt reduction and share repurchase. Moving to the debt structure; we successfully refinanced our term loan during the third quarter. This eliminates a 2022 maturity and pushes it out to 2027. The new debt facility is also covenant light with no material financial covenant. So while we reduced the balance on our high yield notes by $10 million during the quarter, our new term loan was upsized by $15 million compared to the prior facility, resulting in a small total debt increase of $5 million during the quarter. We would expect to resume our trend of lowering our total net debt in the near term. It is also important to note that our net debt level of $250 million actually decreased by $75 million versus Q2 and $110 million year-over-year; this is the lowest net debt level Wabash has recorded since 2017. Looking forward to the fourth quarter of 2020, we expect revenue to pick up slightly relative to Q3. We expect year-over-year decremental margins in the mid-teen for the fourth quarter, as we continue to benefit from cost savings actions taken in conjunction with our strategic reorganization. Those decrementals are unlikely to be as low as Q2 and Q3 with furlough activity now in the rear view mirror. With slightly increased interest expense of approximately $6 million to $6.5 million in the fourth quarter, we expect EPS to be around breakeven levels in Q4. We've referenced 2021 with regard to growth in our backlog and the actions we have taken to ready ourselves for a year of volume growth. While it's still too early to give formal guidance on what we expect for next year, we would like to mention a few items that should help in modeling 2021. Starting with market conditions, third-party forecasters expect total trailer production to increase on a percentage basis anywhere between the low teens to the low 20% range in 2021. We believe a percentage increase in the middle of this range should be appropriate for our revenue. As material costs have been on the increase and labor cost is most certainly not indicative of 10% unemployment, we do expect to show moderately higher pricing in 2021 in order to offset these cost headwinds. With regard to our $20 million cost reduction target, we're excited about the structural savings we've been able to achieve as part of our strategic organizational realignment and the external benefits that accompany a new customer-centric structure. With cost actions completed, our analysis shows that the savings should split roughly 75% from SG&A, and 25% from COGS. It's also important to clarify that the $5 million per quarter run rate savings will flow through relatively cleanly in Q4 of this year. But because furlough activity and other one-time reductions have significantly reduced our SG&A base in 2020, we do lose a basis for a clean year-over-year comparison. Our best estimate at this time is for $125 million to $130 million of SG&A expense in 2021. And we will update this on our next call, as we finalize our look forward into next year. While we're talking about both incremental and decremental margins for the company being in the 20% range on a normalized basis, the base on which we are calculating incremental margins for 2021 will have considerable furlough savings included, which will serve to depress incremental margins. We are targeting incrementals in the mid to high teens as we look forward to growing revenue and operating income in 2021. With the changes to our debt structure, we expect total interest expense to be $20 million to $26 million in 2021 or about $6.5 million per quarter. From a cash perspective, it's normal for working capital to be a use of cash as volumes grow throughout the business, as inventory expands and accounts receivable increase. We continue to look for opportunities to drive structural improvements to working capital. Though in the short term, we expect working capital to consume $25 million to $35 million of cash in 2021. In closing, I'm proud of the financial results we've achieved, and more importantly, our focus on keeping our people safe and the rapid actions we took to protect our business. Our third quarter builds upon the strong financial performance we've shown during this uneven time. Decremental margins have been excellent. We have positive EPS through the first three quarters, and our free cash flow generation has been exceptional and has meaningfully raised the floor relative to prior trough performance. As our backlog improves, and we achieve better visibility into future market conditions, we look forward to ramping up capital expenditures to support our future growth initiatives, while maintaining our dividend and becoming more active with debt reduction and share repurchase. With that, I'll turn the call back to Ann, and we'll open up for questions.

Thank you. Operator Instructions. Our first question comes from the line of Justin Long from Stephens. Your line is now open.

Thanks. Good morning and congrats on the quarter.

Thank you, Justin.

So Mike, all the commentary on 2021 was really helpful. I wanted to circle back to what you said on incremental margin. So it sounds like next year they will be in that mid to high teens range just because of the COVID-related comps. But beyond that has the framework for 25% incremental margins changed at all, given some of the structural initiatives that you've implemented this year?

Yes. Just to reaffirm the first part of your comment or question, yes. They will be lower in 2021 because of the furlough activities and one-time actions. And because we have a structural cost reduction, I would expect them to improve as you look at 2022 compared to 2021 and I don't want to break out exactly how much that would be. We'll continue to give guidance as we go forward. But you would expect to see what we've talked about—20% plus incrementals—because the savings should be achievable as we go into 2022.

Yes. And the one thing I would say is we've got to $20 million savings run rate. It goes into 2021 before far from done working on our business as we move into 2022 and 2023. And we'll talk more about that in the calls as we continue to execute on that plan.

Okay. Great. And then I wanted to circle back to final mile as well. I was wondering if you could help unpack some of the commentary in the prepared remarks on the customer mix there. Any way to help us think through how much of that business is tied to professional customers versus non-essential. And any thoughts about the revenue that we need to see in that segment in order to get that business to breakeven?

Yes. Justin, I will take the first half of the question, Mike will follow-up. So when we look at the core customer groupings that we serve, well over 50% of the total customers fall into that non-professional carrier grouping. Whether they run through a lease or rental group or whether they buy direct from Wabash National or through a dealer, the vast majority is by far impacted by COVID. And bluntly, the majority that move through our big lease channel, whether it would be Ryder or Penske are also impacted primarily by COVID as well. So it is a very significant portion of the final mile group. And it somewhat goes when we put the companies together that we've acquired since 2012 from a diversification standpoint, I think we're having things play out somewhat like we should have. And what I mean by that is in this specific situation, the dry van business has been relatively steady. We've been able to perform based on the conditions on the ground. In this case, the final mile group may be impacted by an out-of-the-blue black swan pandemic and that has a disproportional impact. That sounds like it's a negative, but really it goes to diversification going forward. So I don't expect the next trough to have a pandemic attached to it. It's just the reality of what we have today.

Yes. In terms of breakeven, Justin, I think it kind of depends on which line of the income statement you want to look at, but we were real close to breakeven EBITDA in Q3 at $55 million of revenue in FMP. I would expect that it would take about $20 million more than that, call it $75 million a quarter, $300 million a year to get to breakeven on the operating income line. But at that level, we would have pretty solid positive EBITDA and that's because we run quite a bit of amortization from the acquisition through that P&L. So you could see a situation where it's generating cash even if it's not yet profitable on the operating income line.

Okay, that helps. And then just one last quick one. Mike, you mentioned the working capital changes you anticipate next year, but in the fourth quarter, do you anticipate any major changes in working capital?

Yes. We're going to start ramping in Q4 for 2021. So you would expect to see probably use of our working capital in Q4. I would say it would be in the $20 million to $30 million range would be a good general thumb in Q4 as we ramp into 2021.

Okay, great. I'll leave it at that. Congrats again.

Thank you.

Thank you, Justin.

Thank you. Our next question comes from the line of Ryan Sigdahl from Craig-Hallum. Your line is now open.

Good morning, guys, and congrats on the nice bounce back in the business and recovery results.

Thank you, Ryan. Good morning.

Anything—so we've seen a very nice recovery in orders—anything you can comment on backlog order trends, customer conversations etc. in October kind of post quarter?

We finished the end of the third quarter with approximately $1 billion in backlog. You've seen the order intake, as represented by ACT and FTR for the month of September. The internal activity in October and the discussions that we're continuing to have with customers are generally in line with what September represented. And I think if you draw a connection to the working capital increase that you see in the fourth quarter, I think we're going to look at 2021 absolutely being a significantly improved year from 2020. The only caveat I have to that is we're all going to play through the supply chain and labor constraints that we will work through as a group of manufacturers during the first half of the year. And that's one of the reasons we want to not give guidance until we somewhat see where we're at in the next three months.

Good. And then just on final mile for 2021 expectations. You mentioned trailer production industry forecast versus low teens to low 20s; directionally, is that a decent benchmark for FMP? You're going to have an easier comp, but also it sounds like some greater headwinds and longer headwinds there. So just to put stakes directionally if you can comment there would be great?

Okay. I think that's reasonable. The general range that we gave for the trailer industry is going to be similar for truck bodies year-over-year. We will see favorable comps in 2021. But we also will have a lot better flow of chassis in that business in 2021 than we had in 2020. So nice improvement in that business and the top line is certainly expected.

Good. Last one for me, then I'll turn it over. Just in FMP, you commented on the non-professional customer mix being a little over 50%. Can you break out within that segment what percent goes to e-commerce delivery versus other types of customers like flower shops, dry cleaners, appliance delivery? I know it's difficult, but any sense of that mix would be helpful?

That's a little bit more difficult to do because we don't necessarily know exactly what's going to be moving through our large leasing and rental channels that fall into that. It would be a tough call, and there are a lot of moving pieces that go into it. The only analogy or experience that I can give you to the complexity of it is from personal experience and some of our research: we're seeing a significant portion of Ryder and Penske related equipment showing up in e-commerce related deliveries to fill voids that are present today with existing assets. So whether it would be Amazon, XPO or other large e-commerce deliveries, we're seeing that equipment moving into that space that when that order came in, we may not have necessarily built it with an e-commerce ticker on the side of it. So it's difficult to say, but the e-commerce portion is probably higher than some estimates might indicate.

Fair enough. Difficult question. I appreciate the commentary, guys. Good luck.

Thanks, Ryan.

Thank you. Our next question comes from the line of Jeff Kauffman from Loop Capital Markets. Your line is now open.

Thank you. Good morning and congratulations, everyone.

Thanks, Jeff.

Thank you.

So just a couple nuanced things. You talked about the SG&A savings yet there was a sequential jump of almost $5 million in SG&A on only about $13 million or $14 million total sales jump. I understand there might have been some debt financing costs in that number. But can you help me back into that sequential increase a little bit?

Yes. The sequential increase is almost 100% driven by all of the furlough activity we had in Q2. We had a significant number of one-timers in Q2. As a reminder we took the whole company down for four weeks—most of that was in Q2. The last week was the last week of June; some of that spilled into Q3, but that's a big difference. And that's why we tried to lay out how much of this we think is structural versus one-time actions. I would estimate in our total business there are somewhere in the $25 million range of one-time cost reductions that we saw in 2020 on the operating cost side that will not repeat in 2021, which is why we tried to breakup how much we think is structural versus one-time.

Okay. And when you gave the guidance of $125 million to $130 million in SG&A in 2021; you're talking about both selling expense and G&A lines?

Yes, yes.

Okay. So the consolidated number you're forecasting $125 million to $130 million next year based on what you know today.

That is correct.

Okay. Can I kind of walk through the thoughts—I'm not asking for a forecast, but just to follow the math here on 2021. So you said there is a range of improvement from the mid-teens to the mid 20% range; take the middle of that. If I take the ACT data and bump it up 20% that's implying about 230,000 to 235,000 units. If I take a look at your normal market share of the total, it would be about 18% of that, which would imply something between 41,000 and 42,000 units to the company next year. Is that sound like too big a number because that would imply you're raising production from about 8,000 units a quarter right now to probably in the 10,000 to 11,000 unit range for next year?

I would say on the numbers that you have linked together there that math probably holds true and the way that you described it.

Okay. And it's not your forecast, I'm just thinking out loud with what's out there.

Yes. It's a logical flow of numbers.

Okay. Great. Can you give us an update on your progress with the new products? We can talk about the new product up in Minnesota, we can talk about the implementation of some of the new DuraPlate products being brought to market. Could you give an update on where you are with that? Did COVID delay any of that? And where are you on the roll out of some of these new products?

We have fully commercialized and launched our Cell Core product in 2020, and we have substantially penetrated and converted from standard DuraPlate sidewalls into the enhanced Cell Core panel through a large portion of our customer base; that was a fairly easy pull through and it met our expectations. There are a host of other small improvements within the van business itself that I won't go into, but we're generally pleased with what went on there. When we look at molded structural composites, the technology—I would say COVID has had some impact on innovation pull-through in the reefer van standpoint for two reasons. One, just a generally depressed reefer market and not necessarily in the middle of a pandemic where asset managers are looking to put their necks out there with new and innovative technology. The discussions and the pilots continue to be present. We are approaching 6 million miles on the road with the technology, so we are exponentially growing exposure. The interest is still there, the market doesn't necessarily give us the absolute best situation right now. We think that's going to improve going forward specifically with the drive towards sustainability within the reefer space. We're getting a substantial amount of inquiries coming off of the zero-emission MSC product van that we put out in California, which has kicked off a flurry of activity both within the van business and within final mile products about our ability to provide truly sustainable and innovative refrigerated products using a combination of technologies. We're pretty excited about that. I can't get into the customers that we're talking to, but it is exciting where we're at with that. The other thing that we're doing is we are more fully moving the molded structural composites technology into a final mile products platform to serve that space as we look to strategically grow cold chain market share and revenue over the next couple of years. So that has been well received and we think that's going to be an easier place to convert, and we're moving some assets there. We think that's the soft underbelly of where we can grow exposure to product.

I'll just add that the introduction of that technology into our new customer-centric organization design is a nice pairing because you've got a technology that plays across our whole portfolio, first to final mile products. Now, you have a sales organization that's designed to sell across that whole portfolio of products.

It is one of the premier examples of when you take the invisible communication barriers that exist in a segmented organizational design and modernize it to look at it for the customer. All of a sudden those technologies now become truly capable of being scaled and discussed in every aspect of our customer portfolio. So it is really exciting—the feedback we're getting right now on zero emission, sustainability, molded structural composites, Cell Core panel is very positive and we're pleased with where we're at.

Okay. Thank you for that answer. One last question. Mike, you talked a little bit about CapEx, working capital change, dividends, focus on net debt next year and then you mentioned share repurchase again. We haven't had any since the first quarter. I guess just thinking through after all that you mentioned, it's implying about $30 million to $35 million in cash for debt pay down and treasury stock next year. Do you look at the targeted net debt level on an absolute dollar basis or more as a function of debt to EBITDA in deciding where you want to be? And on share repurchases, is your thought to get back to more of an anti-dilutive purchase or be more aggressive like in previous years?

So on net debt, we do look at it from net debt to EBITDA. If you look at where we're at right now, $250 million and put in the range of numbers that we've been talking about for 2021, you've got a pretty healthy level of net debt to EBITDA in 2021. So we feel pretty good about our leverage ratios. When we look to buy stock, we look at that from a perspective of what we think the valuation of the company is going for including how we think that we can perform in the next several years. We have to look at 2021 as the market starts to firm up and we start to have visibility; we'll evaluate where we think we stand and how we can continue to grow cash not just in 2021, but in 2022. Brent mentioned a lot today about 2021—we're still in a COVID world, so manpower becomes a challenge and getting people in to do what we need to do; so we'll continue to evaluate. As we get confidence in our ability to add capacity and look to the market in 2022 that will play into our math for share repurchases and those could become attractive based on what we see over the next 18 to 36 months.

Jeff, when you look at the balance sheet and how constructive it is and the strength that it possesses, that sort of balance sheet coming out of a trough has never existed in recent history at Wabash National; it didn't exist in 2001 and 2002, it didn't exist in 2010. The ability to do interesting things with the balance sheet that's been constructed very diligently over the last couple of years gives us the ability to accelerate and do things earlier in the cycle and truly look at building the company at a different pace than previous troughs have allowed us to do. We're excited about what that story will be as we go through the next couple of years and the way that we'll leverage that balance sheet going forward. Wabash has never been in such an advantageous position as it is right now.

So I guess loaded for bear is my interpretation. That's a great answer. Thank you. Guys, thank you, and again, congratulations.

Thanks, Jeff.

Thank you. Next question comes from the line of Felix Boeschen from Raymond James. Your line is now open.

Hey, thanks, good morning, everybody.

Good morning, Felix.

Good morning.

Hey Brent, I was hoping you could flush out the comments around lack of labor availability a little bit more. Can you walk us through how you guys are thinking about capacity into 2021, as it stands right now? And then as you're talking with customers, are carriers worried at all about locking in build slots at this point? Any color there would be helpful.

I'll start with the latter. I think in general we do see across the industry a concern about the timely availability of product throughout the first three quarters of 2021. Our customers have been through this type of ramp-up multiple times; we know what this looks like. There is a precipitous climb and high level acceleration in demand after a trough. It is a delicate balance to make sure we serve customers with the equipment they need when they want it. For us, it's not a physical capacity issue. From a labor standpoint, the initial labor constraint in the first half of the year will be much more within the supply base. The supply base has to move first to enable OEM manufacturers; the initial labor influx goes there, and they've been ramping now for several weeks as orders begin to come in and rough capacity planning begins to change and shifts are brought online. We'll be watching how those shifts come online through the end of this year and through the first quarter of 2021 and that's the constraint that we'll base our labor assumptions on so that we manage our costs from a variable cost standpoint to meet what we believe the industry constraint will be. For us, we'll look to increase capacity roughly through the entire year. The supply chain will get their legs under them. The question is where that will be. But as an industry we'll be ramping all year. We do expect 2022 to be generally higher than 2021 based on consensus. We will be adding shifts and ramping all year, and we'll do it in a more diligent and precise manner to manage variable cost and provide superior performance. We also have to manage COVID-related impacts on the available workforce in our plants and watch what any stimulus package and enhanced unemployment benefits might do to workforce availability. We really need to get through the next two quarters to get a clean view of labor availability for Wabash National for the mid-summer going into the second half of the year.

Okay. That's very helpful. I really appreciate that. And I was just wondering if we could circle back on final mile for just a second. It sounds like from a margin perspective you guys are improving core efficiency sequentially. I know engineering inefficiencies were a problem a few quarters ago. Could you give an update on where that stands or is it mostly just the volume problem dragging down results? Any additional color would be helpful.

Today, the predominant factor in FMP performance is the COVID impact on the top line. That will take care of itself. We have substantially addressed the engineering capacity and capability within FMP. We have shifted top resources into that group to structurally change it, and we have made significant, measurable improvement in the last two quarters. You see that primarily in variable cost reduction enabled by manufacturing. When engineering is working well and on time and material and labor flows are more effective, that drops right to the variable cost line. We are seeing that occur as expected.

Okay. That's helpful. And then just last one for me, maybe for Mike. You referenced getting back to more growth CapEx levels. Can you clarify what that growth component may incorporate? Is that mostly around new product launches?

Yes. It could be new product launches. It could be facilitating production in existing locations for new products and that will probably be the biggest driver of CapEx versus R&D developing the products. For example, if you wanted to build a molded structural composite truck body, it could require some CapEx allocation. So things like that could drive CapEx and would be a good example of a growth CapEx item we could look at in 2021 and 2022.

Okay. Thank you. I appreciate it.

Thanks, Felix.

Thank you. Next question comes from the line of Joel Tiss from BMO. Your line is now open.

Hi guys, how's it going?

Good. How are you?

All right. So a lot of the questions have been kind of focused on the volume side, and I just wonder if you can give us a couple of the other pieces on the structural change side. I'm thinking more like actions you've been taking to improve your gross margins over time, pricing power—are you closer to your customers and is there more potential to get more pricing than just wage and raw material cost increases? Can you give us that side of the equation a little more?

Let me try to put a couple of things together without giving too specific an answer. With the organizational restructuring to create one experience for our customers and to remove friction, we're looking deeply at our finance organization to enable our commercial group. We're actively working through a revised commercial structure to facilitate a one-Wabash approach to selling, specifically around customers where we can provide substantial value. When we restructure we put together our Wabash management system with key initiatives, which we call annual improvement priorities, to work on things like pricing methodology coupled with enhanced demand planning. All of those things in a ramp year go to maximizing price and maximizing profit in any rolling period. The restructuring, combined with these initiatives, is intended to create a better business outcome and you're seeing early indications in 2020. We'll continue that into 2021 and beyond. There is no single initiative; our system is based on interlocking changes to create impact.

Okay. That makes a lot of sense. Another one: can you give a little characterization on the increase in the backlog? I know you said it's normally Q4, this time it was Q3—was that nervousness from customers or are customers expecting more demand going forward and wanted to get a jump on reordering?

When you see a 30% change in spot rates going from Q2 to Q3 that gets the attention of professional carriers. Our portfolio is structured to serve the most professional carriers. When they see that type of environment and look out and believe that it could last 18 to 24 months depending on who you talk to, their buy signal is pretty literal. They typically do early capital budgeting in July and with that environment they're willing to pull the buy signal in the August–September timeframe. Is it panic? Not necessarily. That initial pull is prudent and well thought out. Later, as build slots begin to fill, we do see urgency and some customers saying they need to secure slots. We're starting to experience that and are working through it accordingly. The initial September order activity represented real decisions.

All right. That's awesome. Thank you so much.

Yes. Thanks, Joel.

Thank you. And now I will turn the call back to Mr. Ryan Reed.

Thanks, Ann. And thanks, everyone, for joining us today. We look forward to following up with you during the quarter. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.