Earnings Call Transcript - WNC Q2 2025

Operator, Operator

Thank you for standing by. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wabash Second Quarter 2025 Earnings Call. 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 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.

Jacob Page, Chairman

Thank you, and good morning, everyone. We appreciate you joining us on this call. With me today are Brent Yeagy, President and Chief Executive Officer; Pat Keslin, Chief Financial Officer; and Mike Pettit, Chief Growth Officer.

Brent L. Yeagy, CEO

Thanks, Jay. Before we dive into the quarter, I want to take a moment to thank our incredible team. Things continue to be challenging across the industry, and I'm continually inspired by the dedication, resilience, and heart our employees bring to their work, whether it's supporting our customers, helping each other, or finding new ways to move the business forward. Their efforts are what keep Wabash strong, and we're truly grateful. As we reflect on the second quarter, the broader market dynamics we observed earlier in the year have largely persisted. Economic conditions remain softer than anticipated at the start of 2025, with customers continuing to report increased hesitation in capital decision-making. The slowdown is creating a ripple effect across the industry, contributing to more cautious behavior and tempered activity levels. Industry analysts have continued to lower their forecast for the remainder of the year, and for this quarter, we saw additional confirmation as several carriers revised their CapEx plans downward. These trends reflect a transportation market environment that remains under pressure rather than any product-specific or segment-driven softness. While the current climate brings headwinds, it also highlights the strategic foresight behind the way we have reshaped Wabash over the past several years. Our organizational structure was intentionally designed to support agility and resiliency through the economic cycles. In our Transportation Solutions business, we're proactively managing costs to align with reduced demand. At the same time, we're maintaining momentum in parts and services, which once again delivered year-over-year revenue growth this quarter. This continued outperformance in parts and services reinforces our confidence in its role as a key driver of long-term stability and growth. By integrating these offerings more deeply with our equipment solutions, we believe we're laying the foundation for a more balanced business that can perform through varying market conditions. Even in a softer environment for equipment demand, our parts and services business continued to deliver growth in Q2. I want to highlight a couple of wins from the quarter that speak to the momentum we're building. First, congratulations to our upfit team for another record quarter. Their efforts continue to drive significant growth as we are on pace to almost double units year-over-year. We also made meaningful progress with our Trailers as a Service and preferred parts network initiatives, both of which continue to gain traction as we expand our offerings. Mike will share more details shortly, but these developments are strong indicators of how parts and services are helping bring greater balance and resilience to the broader Wabash portfolio as we scale. We continue to monitor inflationary pressures across our supply chain. While our 95% domestic sourcing and U.S.-based manufacturing footprint have helped insulate us from some of the volatility others are experiencing, we're not entirely immune to cost increases, particularly in key inputs and services. To date, we've been successful in holding off on price adjustments, and we remain focused on operational efficiency and cost discipline to offset as much pressure as possible. However, based on the current trajectory, we expect that pricing for 2026 orders will need to be adjusted to reflect the rising cost environment. As always, we're committed to communicating transparently with customers and providing as much lead time as possible. We're continuing to deliver the value and reliability they come to expect from Wabash. Now to briefly touch on the ongoing legal matter stemming from a 2019 motor vehicle accident. In April, we filed a notice of appeal and posted the necessary appeal bond as we continue to pursue all available legal options to achieve a more reasonable outcome. We want to reiterate that we stand firmly behind the safety and integrity of our products and remain confident in our ultimate legal position. Turning to the broader market environment. Demand remains muted across the trailer industry. Industry forecasters have continued to revise their outlook downward, and recent updates now suggest that 2025 shipment volumes will fall well below basic replacement demand. This prolonged softness is reflected in our own backlog, which declined to approximately $1 billion at the end of Q2. While that's not unexpected given the current landscape, it's clear that customers continue to take a wait-and-see approach to capital spending. For now, we've undertaken a reassessment of 2025 and now expect midpoints of $1.6 billion in revenue and negative $1.15 of adjusted EPS. Even with the revised guidance, we still expect to be near free cash flow breakeven for 2025, excluding our capital investments in Trailers as a Service. While our order book for 2026 is not yet open, we're actively engaged in conversations with customers and preparing quotes for next year's demand. Based on those early discussions and current industry forecast, we're cautiously optimistic that 2026 will reflect a return to growth. Of course, the outlook assumes relative stability in the broader environment. If we avoid further deterioration in business and consumer sentiment, we believe 2026 has the potential to align with current growth expectations. As always, we'll continue to monitor market signals closely and stay in close alignment with our customers as planning progresses.

Michael N. Pettit, Chief Growth Officer

Thanks, Brent. Over the past couple of years, we've talked about turning parts and services into a steadier, higher-margin engine within Wabash. The first half of 2025 proves we are continuing to deliver on that strategy. Parts and Services sits squarely between our First to Final Mile equipment portfolio and the connected support that keeps those assets running day in and day out. Think of this expanding Parts and Services segment as the connective tissue that combines our equipment portfolio with best-in-class partners across distribution, digital, maintenance, and repair. Together, we're not only moving faster, we're layering in entirely new forms of customer value, creating durable improvements in Wabash's financial performance. In the second quarter alone, the segment grew 15% sequentially and 8.8% year-over-year, while seeing EBITDA margins return to the high teens, right where we believe this business can perform on a sustainable basis. Keep in mind, this has all been done right into the teeth of a very difficult market backdrop, showing this growth is indeed structural and will provide stability for the enterprise for years to come. One of the clearest proof points behind the parts and services momentum is our upfit business. Our upfit offerings let us deliver fully tailored equipment in just a couple of weeks, combining the scale of truck body production with the deep customer intimacy that defines parts and services. To put hard numbers around that, last year, we completed approximately 1,100 upfit units. This year, we doubled first quarter throughput to 406 units and added another 556 in the second quarter, bringing the year-to-date unit count to 962 units. On top of that, we are opening two new upfit centers, one in Northwest Indiana and another in Atlanta, giving us capability in two strategic markets and putting us on pace to exceed 2,000 units in 2025 while setting the stage for significantly more growth in 2026. Trailers as a Service or TaaS, is another example of Wabash extending our manufacturing and distribution leadership through business model innovation. We continue to sign shippers, carriers, and brokers across North America, many of whom bundle the trailer itself with preventative maintenance, telematics, nationwide uptime support, and repair management. The result, customers focus on moving freight while Wabash handles the trailer, which maximizes customer value and efficiency. As mentioned in the first quarter, our acquisition of TrailerHawk accelerated the technology road map inside of TaaS. In June, we rolled out version 1.2 of the TrailerHawk app, enabling shippers to reserve capacity directly on the platform while tracking assets in real time. Coming in the back half of the year, our predictive analytics alerts and automated tracking and billing capabilities that turn raw data into actionable, measurable savings. We have been continuing to prepare our physical and digital capabilities for the eventual market upturn, and we'll be ready to ramp TaaS when our customers require it. Over the past year, we've also pushed hard on expanding our preferred partner network, or PPN. We brought Dan Millar on board to lead this effort in September of 2024, a parts industry veteran with over 25 years of experience, and in less than a year, we're already seeing significant results. With our world-class dealer group at the backbone, the network is extending our reach so that we can grow parts distribution, accelerate repair turnaround and provide the services and infrastructure that underpins TaaS. Our North Star target is 300 points of service and parts distribution, and today, we're well on our way. The addition of 29 locations in the first half of 2025 has grown our network to over 110 locations with more coming online every month. Each new location strengthens our network and provides aftersales support for our customers. Financially, the rationale behind scaling parts and services couldn't be clearer. While the freight market has continued to put pressure on equipment orders in Transportation Solutions, parts and services continues to deliver secular growth, stabilizing earnings through the cycle. As this segment expands, its higher margins will play an ever larger role in Wabash's bottom line and cash flow generation. But more importantly, we're winning because we found new ways to serve our customers, innovative solutions that extend value far beyond the original equipment sale and well into the life of the asset. With that, I'll hand the call back to Pat for his comments.

Patrick Keslin, CFO

Thanks, Mike. Beginning with a review of our quarterly financial results. In the second quarter, our consolidated revenue was $459 million. During the quarter, we shipped approximately 8,640 new trailers and 3,190 truck bodies, slightly better than expectations, resulting in revenue on the top end of our $420 million to $460 million guidance range, gross margins of 9% and breakeven adjusted operating margins. As a reminder, the adjusted non-GAAP numbers reflect the removal of items related to the Missouri legal verdicts. In the second quarter, adjusted EBITDA was $16 million or 3.6% of sales. Finally, adjusted net income attributable to common stockholders was negative $6.1 million or negative $0.15 per diluted share, beating expectations due to slightly higher revenue and cost containment actions throughout the quarter. Moving on to our reporting segments. Transportation Solutions generated revenue of $400 million and operating income of $13 million. Parts and Services generated revenue of $60 million and operating income of $9.1 million. We view the sequential and year-over-year revenue growth in the Parts and Services segment as particularly positive. Despite challenging market conditions, we have been able to execute on our strategy of building out more resilient and recurring revenue streams to our Parts and Services segment. Year-to-date operating cash flow was negative $16.1 million as timing of revenue within the quarter created a drag on working capital in Q2. Regarding our balance sheet, our liquidity, which comprises both cash and available borrowings, was $312 million as of June 30. We finished Q2 with a net debt leverage ratio of 6.2x. On capital allocation, during the second quarter, we directed $6 million to traditional CapEx, invested $0.7 million in revenue-generating assets to support our Trailers as a Service initiative, utilized $10.4 million to repurchase shares, and returned $3.4 million to shareholders via our quarterly dividend. Our capital allocation priorities remain disciplined and growth-oriented. We continue to invest above our $20 million to $25 million annual maintenance CapEx to support organic growth initiatives. At the same time, we remain committed to our dividend and we'll evaluate share repurchases and strategic bolt-on M&A opportunities in a balanced return-driven framework. I'll provide additional color on our 2025 capital deployment plans shortly. Moving on to our guidance for 2025. We are reducing our revenue outlook to approximately $1.6 billion and EPS to a range of negative $1 to negative $1.30. From previous midpoints, this represents a reduction of roughly $200 million in revenue and $0.55 of EPS. Ongoing economic uncertainty continued to weigh on our customers' capital expenditure plans and contribute to a softer overall market environment. In Q2, third-party trailer forecasts dropped by roughly 13% for 2025, and our updated guidance reflects this sentiment. The most significant changes from our prior outlook come from a reduction in volumes within Transportation Solutions, flowing through to a decrease in gross profit equivalent to about $0.80 in EPS versus our prior guidance. This is partially offset by continued cost containment actions taken that recoup approximately $0.25 of EPS. In a continued environment of soft demand, our ability to stay agile and disciplined in cost management remains critical. I'm proud of how our teams executed in Q2. They responded quickly and effectively, delivering strong progress on our cost containment initiatives. We expect the same level of focus and execution to carry on in the second half of the year. As for the third quarter, our updated guidance implies third quarter revenue of $390 million to $430 million and EPS of negative $0.20 to negative $0.30. Moving on to capital deployment expectations for 2025. Given the updated outlook, we have reduced our anticipated traditional capital investment to be between $30 million and $40 million. As mentioned on previous calls, our capital expenditure plans are flexible, and capital outlays will continue to adjust as the market dictates. The same goes for the rest of our capital allocation priorities. I would say that generally, we have flexibility regarding how we allocate capital in 2025, depending on how market conditions evolve. While our first half free cash flow, excluding investment in Trailers as a Service, was negative $31 million, we expect to be near breakeven by the end of the year as we rightsize working capital to the current needs of the business. While 2025 has brought its share of challenges, we remain focused on disciplined execution and advancing our long-term strategy. Our teams have shown strong resilience and sound judgment, particularly in managing costs and maintaining a healthy liquidity position to navigate the current environment. As we work through this cyclical trough, history reminds us that the rebound often comes stronger than expected. We're positioning the business to be ready when that inflection point arrives, when market conditions stabilize and businesses regain the confidence to reinvest.

Mike Shlisky, Analyst

Brent, can you provide an update on what you're currently monitoring regarding the trailer cycle in 2026? What needs to occur for order rates to increase? Are you considering the possibility that some participants might be exiting the trailer fleet market, potentially reducing competition and improving rates and volumes for those that remain? Please share the two or three key indicators you are observing right now.

Brent L. Yeagy, CEO

Yes, that's a great question. When we consider 2026, the key factor seems to be the reduction of market capacity, which is the primary aspect we're focusing on based on the forecasts provided by third parties at this time. Our customers are also reflecting this perspective; they are seeing enough capacity beginning to exit the market, assuming there are no significant changes in the environment. This allows them to consider capital deployment in line with these expectations, meaning they are aiming to return to a replacement level of capital investment while addressing the deficit created by underbuying in recent years. This is the main aspect we are currently observing. Additionally, we are also monitoring the essential freight-producing subsectors of the market, which could serve as a more significant positive trigger that we are all hoping for to really transform the outlook moving forward.

Mike Shlisky, Analyst

I want to follow up on that question, Brent. Broadly speaking, do you feel that the industry is managing to accomplish more with fewer assets these days? Has there been an increase in efficiency over the past few years, possibly due to AI or more effective load boards? Can you provide any insights on whether the national fleet is shrinking as a result of technology rather than changes in freight volumes?

Brent L. Yeagy, CEO

No, I don't have any insights at this moment indicating that there is a significant movement towards efficiency in the market through technology implementation. I would say the existing inefficiencies still outweigh the efficiencies being created. This doesn't imply that there aren't improvements being made within the fleets or that platforms being developed lack potential. However, when considering all the current developments and the disruptions in logistics, it seems to be more of a market-related issue. Therefore, I do not anticipate that, as the market progresses over the next few years, there will be a negative impact on efficiency gains. That is not how I see the situation right now.

Mike Shlisky, Analyst

Got it. And maybe just lastly, can you give us just a little bit more detail on the parts and service growth? That was pretty impressive. I am curious, do you think the trajectory that that business is on that you've still got growth tailwinds into 2026 and what might be behind that, whether it's offerings or expanding the network, etc.?

Michael N. Pettit, Chief Growth Officer

Yes, we touched on that a bit. Upfit is a significant part of our strategy. Our parts initiative, which we've been working on for about three years, is starting to gain traction with our PPN expansion. We believe the second half of the year can improve by 20% compared to the first half, which we expect to positively impact our top-line revenue, and we anticipate growth continuing into 2026. We see a long runway ahead of us and are just beginning. While we are coming off a lower base, we are now reaching meaningful levels on both top and bottom lines that are beginning to drive the enterprise forward. This momentum will continue as we progress, following our resegmentation in 2021. At this point, we are beginning to see sustainable growth at levels that will significantly impact our performance.