WABASH NATIONAL Corp Q1 FY2022 Earnings Call

Good morning. My name is Stephanie, and I will be your conference operator today. I would like to welcome everyone to Wabash's First Quarter 2022 Earnings Call. Thank you. Ryan Reed, Director of Investor Relations.

Thank you. Good morning, everyone. And thanks for joining us. 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 presentations supplementing today's call, and any non-GAAP reconciliations are also available at our investor site at onewabash.com. Please refer to Slide 2 in our earnings deck for the company’s Safe Harbor disclosure addressing forward-looking statements. Just a quick reminder, that registration is open for our May 19 Investor Meeting on our investor website. We’re looking forward to the opportunities to address the changes we made in support of our new strategy and how those changes facilitate our longer-term outlook. I'll now hand it off to Brent.

Thanks Ryan. Good morning, everyone. And thank you for joining us today. We have a solid first quarter and a bright outlook to discuss, but I'd like to start with a plug for our recently issued 2021 corporate responsibility report. And at the onset I’d like to clarify that I see this as much more than just a report that ticks a box. Corporate responsibility is core to our strategy, and I'm proud of the progress made across our organization with the stewardship of our corporate responsibility team, which is made up of a cross-functional group of high performing individuals at various points in their careers. This approach to efficiently allocating talent to grow our capabilities within our strategic initiatives like corporate responsibility is one example of how we maximize the impact our organization is capable of making with our One Wabash approach. This team brings to life our commitment to changing how the world reaches you and makes an outside impact to drive positive change for our organization and our stakeholders. Wabash understands the role of sustainability and social responsibility in shaping the way we bring our purpose to life. It shapes important elements like engineering solutions that allow our customers to minimize their environmental impact or building a corporate culture that embraces diversity and inclusion. We are deeply committed to being leaders in making the world around us better. Moving to updates on our growing portfolio of engineering solutions, we are very pleased with the reception of our truck body products at the recent Work Truck Show in Indianapolis. We displayed a range of truck body solutions, including dry bodies featuring DuraPlate technology, as well as two different refrigerated solutions posting our proprietary EcoNex technology. Feedback on our product lineup was very positive. And this year we provided our first large scale opportunity to show off a Refresh Wabash branding. Our message to customers has been that our branding Refresh is meant to be the finishing touch on a holistic pivot within our company to be more customer-centric and organizationally simpler, creating the broadest and easiest transportation solutions provider to do business with. This is a message that customers have embraced. We are seen as that visionary leader who can collaborate with customers and create differentiated solutions that solve their greatest challenges in a rapidly changing transportation, logistics, and distribution landscape. To that point, we are launching a nationwide partnership program to apply our engineering expertise in support of alternative powered vehicles. Many of our truck body customers have interest in gaining exposure to electric vehicles within their fleets and we believe that the EV segment offers a step change in the mobility technology available for customers to achieve their operational environmental goals. We also believe that Wabash is ideally situated to create value within the evolving ecosystem by providing innovative truck body solutions to help facilitate EV adoption. Wabash’s truck body offering for alternative powered chassis features lightweight composite technology designed to offset battery weight, reduce corrosion susceptibility while embedding aerodynamics and enhancing aesthetics to complete a look and feel consistent with modern cab designs on alternative powered vehicles. Although Wabash’s platform is non-exclusive and chassis agnostic, we have developed an excellent, collaborative relationship with the team at an undisclosed company, and we are working with them to jointly develop a prototype vehicle as we prove out our concepts. We also have active discussions with other EV OEMs. And given some of the ongoing challenges with ICE chassis, we believe additional chassis suppliers will be positive for customers as well as our manufacturing cadence. The degree and rate of change of battery and EV chassis design requires us to take an open platform approach to ensure we are properly aligned with technology development over the long run. To lock into any one design or battery solution would be shortsighted and create undue risk. Lastly, we're excited to launch a new technology alliance with Clarience Technologies that is focused on trailer applications, including new advanced connectivity applications that will be essential as electric and autonomous vehicles come to market. As a first step, the Road Ready advanced trailer telematics system will become standard equipment on all Wabash dealer stock trailers. Our new strategy and vision continue to drive focus on solutions for the transportation, logistics and distribution markets. With strategy enabling and customer aligning changes in our organizational structure, we are accelerating our internal rate of change and focusing our development activities on innovative products and services that will create value for our targeted set of customers. You will notice that many of these developments within our portfolio link back to the environmental aspect of our corporate responsibility focus. We are intent on providing solutions that allow our customers to move forward with sustainable products that aid in their operational effectiveness while also building out after-sales solutions to support these products. Moving on to our first quarter financial performance, our team continued to work diligently to generate revenue and EPS that exceeded our initial expectations. Importantly, hiring activity has increased, allowing us to ramp our production rates at a measured pace in line with our expectations. Between increased volume and approved pricing, revenue increased nearly 40% from a year ago. Profitability also strengthened as we began shipping the 2022 backlog. I was pleased to see margin improvement each month throughout the quarter. Moving to market conditions, first, I think it's important to address that we find the invasion of Ukraine to be a heartbreaking situation for many individuals and families that have been affected. We certainly hope that the end of this horrific violence will soon be forthcoming. As those who follow our company know, our revenue exposure to Europe is effectively zero post the divestiture of Extract Technology in 2021. It's also important to mention that our supply chain is highly leveraged towards North America with no exposure to either Russia or Ukraine. In addition, we continue to reduce our exposure throughout our supply chain to China and other Asian countries. This is part of a strategic pivot initiated in response to 2018 tariff changes, all part of building a strategically resilient and robust supply chain that supports a first and final mile portfolio of products. We estimate that 95% of our Tier 1 spend is within North American resources and over 80% of our Tier 2 and Tier 3 remain solidly in North America. From a macro and market perspective, we keep our eyes on a variety of short-term indicators. While trucking spot rates have declined in recent weeks, we, as well as other market participants, have recognized for some time that relief from all-time-high spot rates will be reasonably expected. That said, as we've seen across many aspects of the post-COVID business cycle, trends don't necessarily follow traditional norms and I think it's important to distinguish that although rates have come off of peak levels, they still reside in very healthy territory. It also is important to recognize that substantial trucking capacity is tied to contract rates, which tend to be more stable over time. As we speak to customers, they remain extremely confident in their ability to continue to operate properly in the current environment. Our customers are committed to allocating capital to refresh their equipment as well as planning for incremental capacity as trailers continue to provide compelling economics. We continue to believe that structural changes driven by e-commerce-related logistics disruption, the entry of new customers for trailers, and the emergence of larger trailer pools will drive an extended positive demand backdrop over the next several years. As a reminder, the trailer industry has a strong seasonal pattern of ordering activity in which OEM backlog spills during the second half of the calendar year before burning off in the first two calendar quarters. The strength within our customers' businesses from first to final mile has been well reflected in our backlog, which stood at a first quarter record of $2.3 billion, representing a 50% increase versus the same period last year. 2023 backlog development is coming into view as robust conversations are taking place in an interesting and constructive manner with those customers that lead the pack in logistics, innovation, and growth. Given the visibility provided by our strong backlog, aided by a more certain margin structure given our updated advanced pricing methodology, we're pleased to raise our 2022 EPS outlook to $1.90. In closing, our new strategy is being enabled by supporting organizational changes. Our journey to change how the world resolves issues continues to press forward as we add to our portfolio of solutions with development driven by the intersection of sustainability and customer needs. Meanwhile, the beginning of 2022 was marked by great execution by our team and our solid backlog enables the confidence necessary for an increased EPS outlook of $1.90 in 2022. With that, I'll hand it over to Mike for his comments.

Thanks, Brent. I'd like to start off by providing some additional color on our first quarter financial results. Consolidated first quarter revenue was $547 million with new trailer and new truck body shipments of approximately 11,695 and 3,540 respectively. As a reminder, shipments tend to be the weakest in the first quarter, and we actually delivered a slight sequential step-up from the fourth quarter. Additionally, trailer build rates improved significantly in Q1, and we built approximately 800 more units than we shipped. Taken together, this build and shipment data gives us confidence in the trajectory for the majority of the year. Gross margin was 10.6% of sales during the quarter, while operating margins came in at 3.7% and were generally in line with our expectations. Operating EBITDA for the first quarter was $36 million or 6.6% of sales. As Brent mentioned, from a margin perspective we saw improvement throughout the quarter as early months in Q1 were impacted by shipments from our 2021 backlog that spilled over into 2022. Shipment margins noticeably improved as we moved through the quarter and transitioned fully to a 2022 backlog mix, and we are excited about the flow-through impact of this mix going forward. Finally, for the quarter, net income was $12.1 million or $0.24 for diluted share. From a segment perspective, transportation solutions generated revenues of $502 million and operating income of $32 million. Parts & Services generated revenue of $47 million and operating income of $6.8 million. We also continue to believe our Parts & Services segment has started charting a path of sustainable growth during 2022, and we'll continue prioritizing the expansion of recurring revenue. Year-to-date operating cash flow is negative $35 million. Working capital continues to be elevated through the first quarter. However, we do expect a release of working capital as we fully ramp up and approach our installed capacity level around midyear. Our current target for 2022 capital spending is between $80 million and $90 million as we continue to make progress with our strategic capacity expansion and the conversion of our Laveya-based south plant from reefer capacity to dry van capacity. Even with our increased growth CapEx budget, we expect to be solidly free cash flow positive in 2022. With regard to our balance sheet, our liquidity, or cash plus available borrowings as of March 31st, was $203 million with $73 million of cash and cash equivalents and approximately $130 million of availability on our revolving credit facilities. I'd like to point out that our refinance debt structure is now effectively pulling through over $1 million quarterly in year-over-year interest savings. With regard to capital allocation during the first quarter, we utilized $5 million to repurchase shares, and our quarterly dividend was $4 million while investing $10 million in capital projects. Our capital allocation focus continues to prioritize reinvestment in the business through growth CapEx while also maintaining our dividend and evaluating opportunities for share repurchase alongside bolt-on M&A opportunities. Moving on to our outlook for 2022. We continue to expect improvement in both revenue and margin performance particularly through the first half. The continuing strength in our backlog coupled with successfully adding approximately 300 production employees for the second quarter in a row allows us to increase our 2022 outlook. We expect revenue of $2.5 billion, which would set a new record level for the company. Additionally, we expect EPS of $1.90 per share, which would meaningfully exceed the recent highs achieved in 2019, despite building lesser unit volumes as we continue to ramp our operations through 2022 compared with 2019. Full year 2022 operating margins are expected to be approximately 6% at the midpoint, and we are well on our way to achieving our 8% operating margin target by 2023. While we did see some improvement in the supply chain in the first quarter, I'd like to reiterate that this guidance continues to assume that present supply chain conditions persist for the remainder of 2022. We expect second quarter revenue in the range of $600 million to $640 million, and EPS of $0.45 to $0.50 per share for the quarter. In conclusion, the first quarter was an excellent start to an exciting year. Our One Wabash team has done an excellent job of embracing strategic and organizational change while at the same time answering the call and significantly ramping the business in a very difficult operating environment. While there is still much work to do, at this point we are very well positioned to deliver a strong 2022. I'll now turn the call back to the operator, and we'll open it up for questions.

Your first question comes from Mike Shlisky with D.A. Davidson. Your line is open.

Yes. Hello. Good morning, guys.

Hello, Mike.

I wanted to start asking about your pricing on new trailers. Great job in the quarter. You got some really strong pricing. I think you're in excess of $37,000. Could you maybe tell us if you were able to fully offset price costs in the quarter? And if there's any kind of downside risk to prior year unlock there is perhaps some maneuvering manufacturing inefficiencies there or call you can provide on the price cost would be appreciated?

Yes. So Mike, any of the price costs that weren't covered in Q1 is due to some backlog that we had that slipped from 2021 to 2022. We talked about that a little bit in the last call. So we did have some of those units that would have compressed the material margin in Q1, but that is behind us now. The pricing is relatively flat. The way you're going to see now is a full mix of 2022 priced units going into the next three quarters and that's why we feel really good about our implied margin uplift and our full year guidance.

Okay. Was there something else?

No.

Okay. I want to ask, sorry, yes, I wanted to ask separately maybe about your 2023 order books. I don't – you didn't, I wasn't sure if it was fully clear on your comments. Are the order books actually open for 2023 at this point? And you know, if your competitors are open at this point?

Mike, most of our competitors haven't even fully opened up their 2022 yet. The conservativeness that they're using to manage demand, we've been much more bullish in our approach to 2022 demand, especially with the variable pricing that we've put in place that's working extremely well. A follow-up to your previous question is that we saw very clean results in the month of March that really showed the flow-through of pricing, and we're starting to see the improved efficiency with the labor that's been brought in over the last two quarters. So we feel very good about our outlook. Now, when you talk about 2023 demand, we are sitting with a very robust set of 2023 customers that are looking to begin to populate 2023 right now. While the books aren't officially open, we are diligently working on some longer-term agreements and some strategic customer demand that we think we will be able to discuss on the second quarter earnings call. The books will probably open up a little bit earlier than they did for even 2022 to meet the demand as we specifically shape how we want our demand profile to look in 2023. We feel very good about how that is setting up for us right now. We're in a bit of a different position, in that some of the players that are more robust, have longer-term growth needs, are talking to us ahead of the curve, while some are just trying to figure out 2022; they're working with us on 2023.

That's great color. I want to throw one more question out there, and that is, I think I've seen some questions from some folks kind of discussing the argument about whether what we're seeing right now is a cycle upturn or a structural change in trailers and how trailers are sold and kind of what they're being used for these days? And you implied in your press release that there are some trailers being used in new and interesting ways. Can you comment on whether you think we're seeing right now? Is it more just a positive cycle tend to high rates? Or is it more drop in – more other ways to use trailers? And does that change the kind of long-term view on what the average replacement year might look like next time we have one?

Yes. We absolutely subscribe to the fact that there are structural changes in logistics across the board driven by the broader effect of e-commerce creating friction and dysfunction from first to final mile. Most people think about that as being at the final mile end of the spectrum and they fail to realize how that goes upstream and distresses through mid to the first mile. As a result, that friction continues to drive a higher tractor-trailer ratio across that entire spectrum of assets. Not just in truckload, not just in first mile, but we're talking middle mile all the way to the first mile. So we are seeing both private fleets who are really looking to grow their capability or their internal fleet structure to manage their supply chain and logistics costs ramping up their purchases strategically over the next three to five years. We also see the rise of digital brokers and larger traditional truckload companies moving into the brokerage space with conviction, really looking at trailers as the critical link to make their business model work. When we talk to some of the forecasters that leverage backward-looking models to predict the future, they are missing this demand—this structural force in terms of how 2023, 2024, and 2025 are going to pan out. There's too much going on out there in a disruptive world of logistics to just do the old style spot market math and look at basic breaks in seasonality to think that you've got the whole picture. And those customers that we're talking to right now about 2023 to 2025 are very convinced that regardless of what happens with freight, they are going to be buyers in the market because they're solving a different problem.

And just maybe can you clarify what the average year looks like once all these new customers or these different customers are up and fully running here?

Now, that's a great question. I think the math is still out on that. But I believe when you look at kind of what we've done in a historical mid-cycle year, I think you're talking somewhere in the 15% to 20% missing demand, looking at historical models. And I think that's a conservative statement. I'm doing heavy discounting based on the rhetoric that we see from customers. It's still early, and I hope to be wrong in that. That's actually a much greater need than what I'm stating right now.

Great. I appreciate that. As well as we are now into the quarter see you in a few weeks. Thank you.

Thanks, Mike.

Your next question comes from Felix Boeschen with Raymond James. Your line is open.

Hey, good morning, everybody.

Hey, good morning, Felix.

Hey, Mike, maybe this is best for you. But I was curious if you could comment maybe on the monthly margin progression you alluded to. Two questions on that: was March the first, I'm going to call it clean quarter of sort of new variable pricing model on the trailers? And if you would provide maybe a margin run rate at the end of the quarter, I think that'd be super helpful to conceptualize?

Yes. We clearly saw a step up in margin as we went through Q1, and I don't know if March was 100% clean yet because we're still working through it, as we've got build-shipment dynamics. So even things we build early in the quarter may not ship until late in the quarter. But April was clean. That gives us a pretty good view of the margin that we would expect in Q2, which is, and plan our guidance that those operating margins will be at levels that are right back in line with where they were pre-pandemic. Don’t forget, one of the things that I think people miss is that while we've got our price and material cost margins lined out now, we've accounted for all the material costs that came in the great inflations of 2021. But we are still ramping the facilities pretty aggressively, so we are seeing ramp costs with people coming on, and I mentioned that we've added 300 people for two quarters in a row, which is fantastic progress but that comes with some cost with manpower training and upskilling and just churn. So we'd expect some of that to be in Q2 as well and that's why I really point to, again, a huge step up from Q1 to Q2 and EPS that we've implied in our guidance. You'll see a smaller step up, but it'll still be there in Q3 and Q4 largely due to the stabilization we will achieve within our operations.

And I would also add on top of that, Mike – as Mike said, we're talking about margins going through the year that are pre-pandemic levels. Pre-pandemic, we were running effectively at 100% capacity. Obviously, Mike's point, we were void of those variable cost pressures with ramping, and everything goes with that inefficiencies. But today we will still be throughout most of the year, depending on your product line, 15% to 20% below absorption levels that we saw during that period. Our implied guidance for unit count is still significantly below 2019 levels, which I don't want to get too far ahead of us since I mentioned 2023, but it gives us a lot of confidence in the runway we see over the next couple of years. Yes, so there's a lot of positive structural changes that we've accomplished over the last couple of years that will continue to show as we raise the proverbial water level with production that'll flow out.

Okay. Super helpful. And then maybe this is a good segue into my second question. But I'm really curious if you could talk about Wabash, your internal capacity. I know you guys have onboarded quite a few employees over the last, call it three quarters. But I'm curious how you’ve seen you guys stacked up today and sort of how much more there is to come to sort of adequately lead, what still feels like super strong demand right now?

Yes. We had a really good last, I'd say six to 10 weeks of onboarding across the business, really picked up in the middle of Q4 and has been strong since, and that's without having to make any real further adjustments in wages or benefits to make that happen. We feel really good about where we're at in terms of bringing labor on board. We are right on target for where we need to be with labor at this stage of the game, feels very good. That labor is in place to meet the guidance that we've set out at this stage, or we wouldn't have done it. We still think, if the supply chain continues to stabilize and improve, which is a positive sign, the labor market looks like it's there for us to continue to ramp throughout the year. We will generally know that our truck body business is seasonal, so that's always an up-and-down exercise, but the other aspects of our trailer solutions group will be effectively running at full capacity across the board as we enter 2023.

Okay. Helpful. And then Brent, maybe a bigger picture question for you. You alluded to this earlier already in the call, but obviously it seems that April, March spot rates frankly have slowed quite a bit. And historically trailers do correlate significantly with the health of the overall truckload market, i.e., pricing. The trailer pool phenomenon seems very unique this cycle. I'm curious if you could expand a little bit more on how you think this might impact your customer mix through cycles, if any at all, and any sort of margin implications you would see with that?

Yes. The spot rate is obviously something that is most sensitive to those carriers that are at the smaller size end of the spectrum. Those are the ones that most people allude to. They're going to have the most trouble with spot rates. Our customers – our strategic customers, the vast majority of the customers we sell to are much more protected and are harvesting off of great contract rates right now. When you talk to them, they are very bullish in what they'll be able to do with contract rates and stabilizing those within a good range of profitability going into 2023 at this stage. So when we look at spot rates fluctuating at this level specifically for drive ends, we're going to see that possibly at the tail end of the dealer exposure. At the same time, we can't keep stock trailers on the yard at dealers right now because they keep moving. So we have seen nothing in terms of any impact of spot rates on the buying decisions of customers that we cater to. I think some of our competitors may be more exposed to that because they're not a premium product. But we cater to a different group of customers, and we've been planting our portfolio to be more robust for exactly this reason, so that we outperform the market regardless of what's happening. Now, related to trailer pools and others, those customers that are going to be impacted by spot rates are going to move to something. Those trucks and those drivers will go somewhere, and we think that's even going to further embolden the power-only model that's being created, which is going to put more fuel into trailer pool buying. It's just going to again embolden digital brokers and truckload groups moving into digital brokerages to further fund their trailer pool creation over the next three years. So we've got a different type of virtuous cycle being created in the buying habits and the business model structure of trucking, and I think people miss that. Wabash is best positioned to take advantage of this, and we're doing it right now in the discussions with those customers as we bring this to an executable outcome.

Got it. Very helpful. If I could just sneak one more in, I'm just curious if you could talk about third-party chassis supply, as it relates to your truck body book. If anything has sort of changed there, getting incrementally better, worse, sort of expectations through the rest of the year?

Yes. Chassis up until about five weeks ago were still pretty choppy. We have started to see incremental improvement with specifically lighter-duty chassis coming off the line at several older providers. The medium-duty are still tough. The feedback we get is that those should begin to relieve itself going into, I’d say mid- to end of the second quarter, and all that is in line with our expectations and guidance that we put to the street. I think this is going to be a different type of truck body year across that specific industry segment where chassis will actually improve quarter-over-quarter throughout the year, which will create a different demand/revenue output than what we've seen in the last five to ten years. I think that's an important point when you look at modeling steps up that we've guided to through the year. We believe that the truck body shipment number and Q1 was the low point of the year for sure. As Brent mentioned, we're starting to see better flow. So that's going to provide a natural tailwind for us as we go to Q2 into Q3 because we are starting to see some improvement. It did come off of a very low Q1 this year. But we have the backlog; we have a very strong backlog in that business. We just got drastic flow. We've got truck bodies picking up all year. You have overhead absorption. It's going to improve all year. You’ve got stable variable pricing, which is a new fact for what we've got. We've got the variable costs that will continue to come back in line as friction and inefficiency leaves the business. So we feel really good as you look at how this year pans out, and then as we kind of sprint into 2023, we're in a really good spot right now.

Thank you. I appreciate it.

Thanks.

Your next question comes from Justin Long with Stephens. Your line is open.

Thanks. Good morning, and congrats on the quarter.

Hi, thanks, Justin.

Thanks, Justin.

I wanted to start with the question on the guidance specifically around SG&A. So, I think you're expecting SG&A to be 5.5% to 6% of revenue now for the full year. You were previously expecting something that was closer to the mid-6% range. So, could you give a little bit more color on what's driving that? And just thinking about it from a high level, revenue guidance went up, SG&A percentage went down, but the operating margin guidance was unchanged. So, can you just kind of help me think through that and maybe what the offset to lower SG&A was?

Yes. So a lot of that from the SG&A perspective, obviously SG&A tends to be a bit more thick. As revenue went up, we see a little bit less percent of that SG&A as a percentage of revenue. Also, Q1 numbers delivered a pretty good continued cost control with SG&A that we've talked about for the last couple of years. Our One Wabash initiative has really driven some nice efficiency through our corporate operations, and that continues to pay some dividends. We essentially guided to that from that to flow through to the full year. On the operating margin side, I would just say, as Brent mentioned, the backdrop is so positive for Wabash right now that we are taking a measured approach to how much cost it may take to ramp the facilities, because we are going to invest in the people and necessary equipment to be able to hit a very strong demand environment for the rest of 2022 and into 2023. We don't know exactly when that stabilizes, whether it's mid-year or later in the year, but all that is implied in our guidance. As we hit those full line rates, which we're still ramping to, then you'll start to see that operating margin start to expand again, but it's really us making sure that we are accounting for all the necessary costs related to the ramp that's ahead of us and along our way.

Okay, great. And I guess following up on that point, is there any color you can give us on the expected ramp in trailer deliveries on a quarterly basis over the rest of the year? And thinking about 2023, is everything with the capacity addition plan still intact?

Yes, it is. The revenue increase will align with the EPS guidance we provided. We gave guidance for Q2, but I would suggest that Q3 and Q4 will be relatively stable. You can expect around 20 or so in the second half of the year divided between those two quarters. However, if we normalize the output rate for Q3 and Q4, and add in surge volume on top of that, considering the net refrigerated mix, you will see an additional $5,000 in the output rate for Q3 2024. This positions us for a strong EPS profile in 2023.

I want to add a little bit more additional color around that. We are very confident and delighted with the progress we've made with search implementation. With the reviews we've had with equipment providers and the timeline we've got, we are really sticking to that first, kicking it off early in the first of 2023. We feel very good about that. Customer expectations and demand, we are able to utilize that based on the conversations we're having, are exactly what we thought it would be. Everything just seems to be in sync right now. On top of that, and we've alluded to—we're ramping our conventional reefer business to make room to convert that plant to drive-ins. The work that we've done with EcoNex, which is our proprietary composite solution that has a specific application in refrigerated trailers and truck bodies, continues to grow at an astounding rate. So that naturally is pressuring us to look at how we can bring capacity online in a more, let's call it, early and effective manner, which is very positive for us that we're working through right now. The characteristics and value that it creates are really resonating with customers, and they see how from a sustainability standpoint, it makes real sense for them to do this at a substantial scale. So, everything we're looking at between capacity expansion and new product introduction is really in sync right now with our expectations.

Great to hear. And last quick one from me, are buybacks factored into this updated guidance for 2022?

They are not.

Okay. That's all I've got. I appreciate it.

Thanks, Justin.

Your next question comes from Jeff Kauffman with Vertical Research Partners. Your line is open.

Thank you very much. Hey guys, congratulations. Terrific quarter.

Thanks, Jeff.

So, a couple of bigger picture questions here, one detailed question. My detailed question is if I look at the operating income by division, there is the Transportation Solutions, there is Parts & Services, and then there is Eliminations and Other. And normally that runs about a $12 million to $13 million rate per quarter. This quarter, it was in the $18 million range. I've gone through the release trying to figure out anything weird that would've driven it up. So, is $18 million the new run rate? Was there something that flushed that caused that to be so large this quarter? And should I think about $12 million to $13 million as kind of the normal run rate? Could you help me understand that?

Yes, sure. No, it's not going to be as high as $18 million, Jeff. There are a couple of things that ran through in Q1. There were some of our rebranding costs that were through there. We've also got some internal operations efficiency teams that are working to continue to rent facility that are more variable, more one-time type costs that are running through the P&L into Q1. So those are two big drivers that will normalize and bring it back closer to what you've seen historically.

Okay. And is that going to be more of a later this year thing, or is most of this impact local to 1Q? I'm just thinking about how to model 2Q, 3Q after the year.

Pick the middle for Q2, and then it gets back to more normalized levels in Q3, Q4.

Okay, awesome. And then in terms of modeling trailer deliveries, I've got the actual data, I've got an idea what your normal shares are in each quarter, but because of the shutdown of refrigerated production to bring on the dry vans next year, is there going to be more of an anomaly in the 2Q to 3Q seasonality or 3Q to 4Q, or have we prebuilt those trailers for customers? And we'll still be delivering even though we might not be producing.

I don't think we'll see any abnormal seasonality. I think for the most part, as we ramp, we know Q1 is always a tough shipment quarter because typically the equipment isn’t really needed that early in the year, but we build it. And I mentioned in my comments that we built more than we shipped. As we get to Q2 and Q3, you tend to see those build shipments normalize. I would expect pretty normal—I'm going back to kind of normal pre-pandemic seasonality for the rest of the year. So, I don't expect anything abnormal from seasonality perspective right now.

Yes. I'd expand on that and say even in 2023, as we shift and grow capacity, it still shouldn't have any dramatic effect. The same seasonality on a higher base should still generally apply.

Yes, Jeff we're within a percentage point or so of our normal seasonality on a quarter basis.

Okay. And if we do the math, I know one of the callers earlier talked about the ASP per trailer in the quarter. Could you break that down? Like, was there a mixed difference? It seems like tank trailers did a little bit better in 1Q than they have in the few years. I know one of your competitors was talking about curtailing some flatbed production because of aluminum allocations. I guess kind of put this into one big question. Are you benefiting from any of these competitive shortages in the market? And is that affecting the mix which might be impacting the ASP in some way, shape, or form?

First off, I'd say across the board, we are in a very advantageous position relative to any industry-related supplier shortfalls. Everyone is impacted to a degree, but we are definitely in a preferential place in terms of our position with the supply chain. I wouldn't say that we've had any major significant changes in the mix that would affect the math that you're doing. The vast majority of the weighted math is the rise in ASP of dry vans. Now while we've addressed inflation across all of our products, the leverage point is by far dry vans, and we are working through our ASP math on a consolidated basis.

Okay. And then one last question, if I can. And thank you for that. Brent, you were talking a little bit about EVs, AVs, and smart trailer technology and changes in the marketplace. Clearly to the extent that this became an industry requirement, I would think it would benefit Wabash in a big way. But can you talk a little bit about some of the trailer configuration changes that are probably going to be necessary, say if I go out three to five years, whether it's EPA related? Or explain to us a little bit maybe how smart trailer technology would be necessary to work with autonomous vehicles or electric vehicles? Just give us a sense of that advantage.

Yes. So let me come back to when we talked in the very first part of the earnings call, we discussed corporate responsibility and sustainability as a key part of our strategy. This rolls into your question. With the centralized R&D group and product development group that we have that was put in place about a year and a half to two years ago, it was all with the ideas that you're talking about in mind. We clearly see that the need for advanced technology facilitates changes in trailer design to accommodate everything from added weight in the tractors, battery weight, auxiliary batteries, and more fuel efficiency, to better thermal dynamics which are all aspects in changes in overall transportation system design, including trailers, truck bodies, tanks, and arguably, flatbeds. What you'll see over the next three to five years is that the intersection of different technologies will require a change of state and system design. I think, you're probably going to see it in about three to four years from now. But you'll see the leading edge of it. That's some of the conversations we are having with our long-term strategic customers who do the advanced product planning that allows them to bring EVs and other alternative energy systems online. Now, when you think about autonomous, I’m shifting gears a little bit, and the overall operational sensing that is required to facilitate that, that's part of sustainability, it's part of solving a driver shortage, so on and so forth—all pressured by the regulatory scheme that's out there, that puts friction into the system. If you're going to get to a Class 3 or 4 system for autonomy, you need at least a Class 3 to make any economic sense to solve these problems, and arguably it needs to be a Class 4. That requires a total system design to bring the sensing up to a certain level. That's why we partnered with Clarience Technologies. Not to give away exactly what the solution is, but to bring that big part of that ecosystem together, so we can bring all the parties together to solve that problem. We're not racing right now to produce small-scale sensing devices that many of our competitors are out there trying to do. We're positioning ourselves to solve a much bigger problem to bring this type of technology into the market. We also see this as being a key part of EV adoption because the dynamic mileage calculations, to manage range and battery selection are going to require the trailer to be a huge part of that calculation. We're working on how best we can facilitate that, to ensure that we become the trailer of choice, because that’s going to be a key aspect of understanding if I can use an EV power unit for a specific lane or route. So, Jeff, we are making significant strides with a much bigger picture in mind than many others in our industry.

No, and I guess to the point, if you are a major company and we know who is out there testing it. And this is where you are thinking of going in three to four years, you need a trailer partner who is working on it now. This isn't something you can just turn on a dime two, three years from now.

Absolutely right. We have some of the best partners and R&D staff, and I would say not only in our industry but much beyond our industry, who are working on this, along with some great third parties that we're partnered with. We have a much bigger vision of how we play in this market in the upcoming future.

Awesome. Well, looking forward to Investor Day. And thank you for your answers.

Thanks, Jeff.

There are no further questions at this time. Mr. Reed, I turn the call back over to you.

Thanks, Stephanie. Thanks everybody for joining us today. We'll look forward to following up.

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