WABASH NATIONAL Corp Q3 FY2022 Earnings Call

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wabash Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Thank you. Ryan Reed, Senior Director, Corporate Development and Investor Relations, you may begin your conference.

Thank you, and good morning, everyone. We appreciate you joining us on the call. With me today are Brent Yeagy, President and Chief Executive Officer; and Mike Pettit, Chief Financial Officer. Before we get started, please note this call is being recorded. I'd also like to point out that our earnings release, the slide presentation supplementing today's call, and any non-GAAP reconciliations are available at ir.onewabash.com. Please refer to Slide 2 in our earnings deck for the company's safe harbor disclosure addressing forward-looking statements. I'll now hand it off to Brent so he can get us started with his highlights.

Thanks, Ryan. Good morning, everyone, and thanks for joining us today. We have a strong quarter and outlook to discuss, but I'd like to start by reviewing the exciting progress we've made in advancing our strategy over the past quarter. Our team has continued to execute on changes that are building the structure for Wabash to change how the world reaches you. During the third quarter, Wabash added 2 important partners to our industry-leading dealer network. Bergey's Truck Center and Alliance Trucks are both located in the Northeast and fill a critical gap in the Wabash network by providing the type of high-level expertise and service our customers desire to support their businesses in this rapidly changing logistics environment. We are very excited to welcome them to the Wabash family, and I believe this is another proof point of how we see our dealer network as a critical enabler of our strategy going forward. From a product brand standpoint, we announced the launch of our Acutherm portfolio of solutions for intelligent thermal management with superior thermal capability through the use of advanced materials and enhanced structural integrity enabled by breakthroughs in system design. Acutherm solutions are positioned to provide enhanced thermal management performance over a wide range of use environments and applications. The Acutherm product line shows our commitment to developing innovative cold chain solutions that ultimately will span beyond the transportation, distribution, and logistics landscape. The overarching Acutherm brand umbrella encompasses our innovative EcoNex technology, which offers lighter weight paired with thermal advantages that do not require sacrifice of structural integrity. In August, we announced a $20 million investment to be made in our manufacturing capacity by 2023 to produce EcoNex. These efforts have Wabash well positioned to generate an incremental $125 million of cold chain revenue by 2025. I'd also like to say a few words about our recently held stakeholder conference called Ignite. Held in late September, Ignite was created to foster powerful collaboration between our suppliers, dealers, customers, and other innovative partners with expertise and experience in spaces like digital brokerage, electrification, cold chain, autonomous vehicles, regulatory forces, sustainability, and social awareness and changing logistics models. With Wabash acting as the connective tissue between these diverse constituents, this conference provided a peek into the future of what our company is working to create as we continue to build an ecosystem of innovative partners to help us bring forward-looking solutions to the transportation, logistics, and distribution space. At this event, we announced a new partnership with Feeding America, which builds on our decade-long history of supporting food banks and our local communities. As a Feeding America corporate partner, we look forward to working alongside some of our customers and suppliers as well as other global businesses in the fight to end hunger. Wabash's contributions to Feeding America are dedicated to supporting mobile food pantry programs, which increase access to food in underserved areas and require equipment like Wabash's refrigerated truck bodies to keep the program running. We're excited to add this new partnership to a growing list of corporate responsibility efforts that positively impact our world. Before I move on, we also had the opportunity at our Ignite conference to recognize 34 of our top suppliers for excellence and performance during 2022. Although it has been a challenging year to maintain stability of supply throughout the whole of the industry, I believe our supply chain has worked diligently to ensure that Wabash receives supply commensurate with the strength of our product portfolio and our vision of the future. I also believe that we have done well to structure a supply base that is overwhelmingly centered in North America, insulating us from the geopolitical and port issues seen elsewhere. Finally, on the strategy front, I'd like to mention that we welcomed a new director to our Board in September. Trent Broberg is the CEO of Osiris, an automotive logistics as a service platform. Trent previously spent time at truststop.com, Real Time Freight LLC, and Swift Transportation. We look forward to the contributions Trent is able to pull from his extensive experience with major carriers as well as with digital and technology applications within the transportation management space. Lastly, with our Board of Directors' support, we amended our asset-backed lending facility, increasing the total credit facility to $350 million and creating additional liquidity of up to $125 million. I'll let Mike give more details here, but the increased liquidity gives us even more optionality as we move forward with our Trailers as a Service offering as well as other investments required to move our strategy forward. Moving on to our third quarter financial performance, our team delivered record EPS of $0.73, which exceeded our initial expectations for the quarter. Between increased volumes and improved pricing, revenue increased 36% from the same quarter last year to an all-time record of $655 million. Profitability also continued to sequentially strengthen as we achieved a 14% gross margin and an 8.1% operating margin. Our operating margins expanded by 430 basis points relative to the same quarter last year. Moving to market conditions, I'm not trying to add to the debate on macro conditions. It is important to mention that implied demand for our products is so far above industry capacity that even if implied demand is reduced by a macro event, we suspect that it will result in what we would consider a good year for the industry. Additionally, we have already learned in 2022 that supply chain conditions do not magically get better with the turn of the calendar year. As our industry continues to be constrained into 2023, this actually smooths demand in the future years. When you layer in the structural changes and demand coming from digital brokers, power-only solutions, and the growth of trailer pools more generally, we continue to feel very confident in our longer-term financial targets into 2025. Our backlog remains very strong at $2.3 billion, especially considering our strong record revenue coming out of the backlog during Q3. For anyone concerned that our backlog didn't continue to go up during the quarter, don't be. It's critical to explain that the way we are filling our backlog has changed. Although our backlog is open, this is not a first-come-first-served construct. We intentionally curate our 2023 backlog to center around important strategic conversations with customers who are interested not only in buying across the Wabash First to Final Mile portfolio of solutions but also interested in collaborative demand planning and securing capacity for a period that looks beyond the given year. As you all know, we have undergone substantial organizational change over the last 2 years to create the right structure to enable this type of strategic progress, and we are beginning to reap the benefits of our One Wabash organizational structure as long-term customer agreements come into focus. I fully expect to have updates to share with you on that front in the coming weeks and months. Once again, our backlog remained at $2.3 billion in Q3, and that is a purposeful outcome that we're very pleased with. Our backlog ending Q3 represents approximately a 20% increase in the same period last year and also implies $1.7 billion of orders for 2023. Cancellations across the business remain effectively nonexistent. As I mentioned before, with near and present constraints to industry production meeting implicit demand, it's difficult to foresee a scenario where carriers meaningfully reduce their trailer purchases, knowing how many years it can take to make up for that on the other side as well as the opportunity cost of missing out on the hot market conditions that have historically followed periods of weakness. Given our exceptional Q3 results and the visibility provided by our strong backlog, we're excited to raise our 2022 EPS outlook to $2.15. There are multiple ways of backing into a reasonable 2023 outlook based on our 2022 performance. We'll save 2023 guidance for our Q4 call because our backlog speaks for itself. However you arrive at your thoughts for 2023, we're likely to substantially outpace our 2022 performance as well as any EPS figure from the prior decade. I also think it's reasonable to point out that with 2023 arriving in about 2 months and no clear return path to pre-COVID supply chain conditions, demand may easily continue to push from 2023 into 2024, which may insulate our industry from some of the broader macro concerns. I hope that the execution against our strategy is becoming clear. It has required a lot of heavy lifting behind the scenes to structure the organization to enable our strategy. But we're here and it's gratifying to be in a phase where I can see progress quarter in and quarter out. We continue to engage an impressive array of strategic partners to help us move faster in our journey to bring innovative solutions to the transportation, logistics, and distribution industries. Product demand remains robust, evidenced by our strong backlog, and we remain well-suited in case the environment diverges from our expectations with a very strong balance sheet and excellent operators who generated $104 million of free cash flow during the turbulence of 2020. I'd like to close by thanking our team members who have executed extremely well to help us achieve record quarterly EPS and, more importantly, an accelerating pace of strategic progress. With that, I'll hand it over to Mike for his comments.

Thanks, Brent. Starting off with a review of our third quarter financial results. Consolidated third quarter revenue was $655 million with new trailer and truck body shipments of approximately 13,365 units and 4,115 units, respectively. Shipment activity remains strong relative to ongoing supply chain unevenness and combined with our pricing construct that quickly recovers commodity price increases, we achieved record quarterly revenue during Q3. Gross margin was 14% of sales during the quarter, while operating margin came in at 8.1%. This is a year-over-year improvement of 340 and 430 basis points, respectively. Operating EBITDA for the third quarter was $68 million, or 10.4% of sales, which is a 350 basis point improvement versus the third quarter of last year. This was yet another quarter of margin improvement as we are seeing the intended impact of regaining input cost inflation experienced in 2021 as well as some stabilization in cost inherent in ramping facilities to achieve record revenue. During our 2019 Investor Day, we laid out an operating margin target of 8%. Despite many challenges thrown at us by a global pandemic, I am very pleased to exceed that threshold in our third quarter, and we are projecting to achieve that in Q4. Finally, for the quarter, net income attributable to common stockholders was $36.2 million or $0.73 per diluted share. From a segment perspective, Transportation Solutions generated revenue of $612 million and operating income of $63 million. Parts and Services generated revenue of $47 million and operating income of $7.7 million. Year-to-date operating cash flow was $72 million, and I believe we have ample opportunity to reduce working capital going forward. With capital spending continuing to build throughout the year, our target for 2022 capital spending remains between $80 million and $90 million, as we are on track with our strategic capacity expansion and the conversion of our Lafayette-based south plant from reefer capacity to dry van capacity. Even with our increased growth CapEx budget, we expect to generate over $75 million of free cash flow in 2022. Our liquidity, which comprises both cash and available borrowings, was $350 million as of September 30. During the third quarter, we increased the size of our asset-backed lending facility to $350 million, creating immediate additional liquidity of $100 million and up to $125 million depending on our asset base. We also extended the maturity of our ABL out to 2027, reinforcing our patient debt structure. This added liquidity provides us with more optionality in how we accelerate our strategic initiatives, specifically our Trailers as a Service platform. With regard to capital allocation during the third quarter, we invested $20 million in capital projects, utilized $11 million to repurchase shares, and paid a quarterly dividend of $4 million. Our capital allocation focus continues to prioritize organic growth via capital spending while also maintaining our dividend and evaluating opportunities for share repurchase alongside bolt-on M&A opportunities. Moving on to our outlook for 2022. I'm very proud of how our team has executed this year as we pull through yet another guidance increase due to our strong financial performance during the third quarter. We expect revenue of $2.5 billion and are increasing our outlook for EPS to $2.15 per share from $1.90 previously. This guidance implies that Q4 looks relatively similar to Q3 from an EPS perspective. As you can see from this slide, we are on pace to meet or exceed all facets of our financial outlook for 2022 as it was laid out at our investor meeting in May of this year. Our strong execution in 2022 gives us an increased level of confidence in achieving the longer-term financial targets we have issued for 2025. As Brent mentioned, we will offer formal guidance for 2023 on our Q4 call. However, there are a few points I'd like to highlight. First, we expect 2023 to show meaningful progress towards all our 2025 financial goals. Given our Q3 performance and Q4 guidance, that appears to be a very reasonable assumption. Secondly, we are launching our dry van capacity addition in the first quarter of 2023. Like all significant capacity additions, this will come with a volume ramp that will see lower volume early in the year and a much greater volume later in 2023. This will also mean that we will see a bit more margin pressure in the first quarter versus the rest of 2023, which is already the typical seasonal cadence. Lastly, I would expect 2023 to be a year when you will start to see the consistent margin and growth profile of our Parts and Service segment. We remain very excited about the growth prospects of this business, along with recurring revenue that it provides. In conclusion, I'm very pleased to report such a strong quarter on the way to having a record year for Wabash. I'm excited to see how our team is executing on our strategy and also pleased with the moves we've made with our balance sheet to financially support the strategy. Our backlog is as strong as it's ever been, and the changing more collaborative nature of filling our backlog is likely to generate more proof points over the coming quarter of how we are structurally improving the foundation of our company. With that, I'll now turn the call back to the operator, and we'll open it up for questions.

And your first question comes from Justin Long from Stephens.

Congrats on the quarter. I guess to start with the performance in 3Q and the guidance for 4Q, things are playing out better than you expected in the second half of the year. I wanted to see if you could provide some more color on what specifically is driving this upside just because the cake was kind of baked from a trailer pricing perspective. So I'm assuming this is all operational, but I would love to get more detailed thoughts on what's driving the upside.

Yes. As you mentioned, we're expecting Q4 to align with Q3. Much of this is attributed to the stability in our unit production across all operations and manufacturing facilities. I wouldn't say we're completely back to where we need to be, which is why we're remaining cautious about 2023. We intend to keep an eye on the broader landscape. However, it has clearly reached a level of stability that has enabled us to achieve some reductions in conversion costs, which is reflected in Q3 and Q4.

Got it. And thinking about next year, I know you're not giving specific guidance at this time, but from an industry perspective, I think ACT's forecast out there is for about 300,000 trailers next year in terms of production. I wanted to see how you feel about that estimate based on the demand you see today and the supply chain moving into next year? Also, if there's any color you could provide on trailer pricing into next year, particularly given what's gone on with commodity prices here recently?

Yes, Justin, I'll take that one. This is Brent. I'll start with the pricing side of it. In general, we see pricing still generally in line with Q3 and Q4 when you look out through 2023. We are still going to have some settling of commodities, but at the same time, we're going to have offsetting inflation on individual components and labor and other things that are factored into our variable pricing construct for how we look and manage our portfolio for 2023. With $1.7 billion in the backlog for effectively 2023, we're knowledgeable on what the pricing is going to do and what customers are willing to spend. One of the reasons we opened up our backlog earlier than the rest is because the demand for our product is unique, and the long-term agreements that we're working on resonate with the market. In terms of supply chain and what's going on with demand, there is a lot to integrate with that. Taking everything into consideration, I think ACT FTR's general forecast is in the appropriate range for what 2023 should be, barring some unknown thing that's not on the table right now. The supply chain in general is going to constrain industry growth across the board, which will moderate '23 and protect '24 a little bit. Because of that, carriers and our customer base in general are concerned about taking a time out in '23 because they may not be able to make that up in '24 and '25. So we feel pretty good about those estimates, barring any unforeseen macroeconomic issues.

And your next question comes from the line of John Joyner from BMO Capital Markets.

So stocks actually do go up on good results. So that's good to see.

Every once in a while, it does work that way.

Regarding your discussions, you touched on this a little bit already, but discussions with large carriers around longer-term agreements, how long do these agreements run? Are there opportunities for them across kind of your product lineup? And also are there Parts and Services opportunities with them?

Yes. So great question. The way we look at long-term deals is very inclusive of all product lines and service lines that we offer through our One Wabash set of product and service portfolio options. We generally look at 2 to 3 years in length. Obviously, these are tailored to the individual customer. We specifically lead with our first-to-final-mile contract, as everything that we do is based off that as it's core to our current strategy. When you look at those customers, embedded into that is the ability for sales as they want to move more from a truck body perspective and some are entering from a dry van perspective and so on. But every customer we engage with has opportunities for platforms, tanks, truck bodies from dry to refrigerated and parts and service. That allows them to be in the funnel to be considered for a strategic long-term agreement.

That's very good color. Just one more question. Regarding the conversion at your South plant in Lafayette, how do you see that ramping up? And when do you expect to reach full line run rates?

Yes. I would say mid-next summer is when I expect us to reach full line rates. We will hit job 1 in Q1 as planned, and we'll ramp through Q1 and into Q2. I would say exiting Q2 into Q3 sometime we’ll hit full line rate. In my prepared remarks, I made the comment about Q1, where we’ll see that normal ramp costs typically associated with adding capacity where you’ll have people but not full output. Therefore we’ll see some of that in Q1, but I expect by the second half of 2023 we’ll be at full capacity addition in our South plant.

Your next question comes from the line of Mike Shlisky from D.A. Davidson.

I wanted to touch on your truck body business. You're seeing volumes creep up quarter-by-quarter for basically a year. Can you update us on the chassis supply situation in that business and the demand situation in that part of your business?

So I'll start with the chassis supply. Chassis supply began to improve early in the quarter. That progress has continued, and that's beginning to translate into improved build rates, which relates to improved conversion costs as we see the noise drop out of the system. We take a measured approach in how we schedule truck bodies knowing that there is still inherent instability. Therefore, it's a prove-it-and-then-ramp-it philosophy. With that said, we are seeing enough coming forward with chassis stability to begin to scale truck bodies in a meaningful way while we control conversion costs.

From a demand perspective, is there still plenty of demand in that part of your backlog?

Yes. The truck body market has been inherently underserved, both pre- and post-pandemic. That is just starting to really unfold as chassis become available. We have ample demand. That's why we take a diligent approach to how we schedule it and what we are going to take going forward to manage that constructively.

Can I clarify just a bit further there? The pricing on chassis, is that also seeing margin increases? Are you getting some of the same pricing dynamics that you see in your main dry van business? Is that pricing going to have similar dynamics in 2023?

What we've seen is a very similar price cost recovery in the second half in the truck body product line that you're seeing in the vans product line. Just to avoid confusion, the chassis cost itself is not in our P&L, but the truck body piece is. That piece is seeing price dynamics where we've been recovering the inflation of 2021. We would expect the same price cost construct to continue into 2023 in both the truck body and the vans business.

Great. That's great color. Can I squeeze one more in? Your comments on curating the backlog. I know what that means, but when you say you're curating the backlog, is it an effort to book multiyear orders, to figure out the right production schedule, or to find the best margin orders? Can you give us a little more color?

Yes, I would say it’s a comprehensive look at all the variables that you just mentioned. The business systems we've put in place over the last 2 to 3 years under a One Wabash system allow us to integrate those variables into what’s strategically important to the customer, the first-to-final-mile strategy, and maximizing conversion costs. Their ability to help us manage in an inflationary environment has unique demand needs. We consider all that to curate or optimize what we bring into our backlog. It’s much different from a first-come-first-served, who speaks the loudest version of filling in a backlog.

Your next question comes from the line of Felix Boeschen from Raymond James.

Congrats on the results. A quick follow-up for Mike on the capacity expansion. Understood 1Q might have some relative margin pressure as you're still ramping those volumes. But can you remind us on mix implications on margins as you're doing more dry van versus conventional reefers throughout the year? Just trying to square that away with the comments on margin trajectory.

Yes. It’s going to be multifaceted. As we ramp up and produce more units, you'll actually see better margins with dry vans due to the conversion cost improvements we're capturing with it. However, that won't be probably in the first half of that particular facility. You'll see more of that in the second half of the year. The one area we will compress a bit is ASPs because dry vans typically come with lower ASPs than refrigerated trailers, so you'll see some ASP compression from a mix perspective, but we wouldn’t expect margin compression due to the capacity change.

It feels like, broadly from an industry perspective, more traditionally asset-light companies are leaning into owning trailers or garnering trailer capacity. Can you frame how your trailer customer mix might look different in '23 and '24 versus pre-COVID levels?

The easiest way to frame it is that there was little to no digitally enabled light asset trailer pool before the pandemic. There were discussions, but not actual demand pulls. As we exited the post-COVID phase into mid-2021, we began seeing real demand signals. For '23, '24, and '25, we see that as a potentially meaningful demand for dry vans and possibly other products that will build over time. We are still trying to understand the Trailers as a Service suite of models we'll employ. If I had to put a general idea on it, it will become closer to significant in 2024, while we'll still be seeding it in 2023, so I wouldn't call it significant yet.

If I could sneak one more in, demand seems to be outstripping supply in the dry van piece for various reasons. Do you see anyone adding any incremental capacity such as yourself?

No, not in any meaningful way. Everyone is still working through getting labor to manage the capacity that's currently installed right now. The difference for us is that we're converting existing labor into meaningful capacity. That’s the unique difference for us at this moment.

That’s a key point. We wouldn’t have done it if we didn’t have installed capacity already because the supply chain is the constraint. We're able to increase output without necessarily adding more components to the industry at this time.

Your next question comes from the line of Jeff Kauffman from Vertical Research Partners.

I apologize in advance as I have 2 conference calls going on at the same time here, so I just jumped on. I might have missed some of these comments. Your share of the trailer sales in the quarter dipped by about 100 basis points versus last quarter. Can we attribute most of that to the shutdown of operations that you have going on while you're reconfiguring the South plant?

That's part of it. The other part is we have an extremely deliberate build and operations planning process based on what the supply chain can do to manage conversion costs and waste. What we produced and shipped in the quarter reflects what is optimal based on those conditions.

Shifting focus to the progress on the manufacturing changeover. What is the latest update on timing? Are you still looking on time? In that $2.3 billion backlog, is there a part of that backlog that just isn't being booked right now because you're not done with the conversion? Or are you taking orders for those slots at the new South campus?

We are on target relative to redeploying that facility with job 1 in the first quarter and meaningful ramp planned. We’re completely on schedule. In terms of how we manage the backlog, no, we are not holding back our backlog waiting to see what’s going on in terms of capacity. What we are doing is managing it to maximize profitability and strategically. The timing and way we fill the backlog is based solely on that process.

Thanks, Rob, and thanks, everybody, for joining us today. We look forward to following up during the quarter.

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