Wabash National Q3 2023 Earnings Call Transcript

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October 25, 2023

There are 7 speakers on the call.

Operator

Like truck bodies, tank trailers and parts and services. Together, these segments are poised to contribute significantly with the potential to generate around $200,000,000 of gross profit in 2024. To be clear, that figure excludes the contribution from dry vans and it alone surpasses our consolidated gross profit performance in years like 2020 2021, reflecting the robust potential within truck bodies, tank trailers and parts and services. Profit. In conclusion, I'm thrilled to check off a meaningful long term financial target more than 2 years ahead of schedule.

Operator

I'm also pleased to be able to raise our full year guidance again this year, but even more excited about what our 2023 financial performance signals for years to come. We have a very strong and capable team that has generated our record 2023 performance and we believe we're still in the early innings of realizing the full capability of our remade company. Profit. Perhaps surprisingly, I'm also enthusiastic about our prospects for 2024. For over 3 years, we've been exploring the potential of our 1st to Final Mile, 1 Wabash plan, dollars designed to transform the company's cyclicality.

Operator

As we look ahead to 2024, we're poised to showcase the continued progress we've achieved in stabilizing Wabash's historical earnings volatility. Wabash occupies a prominent position as an industry leader in transportation equipment and is positioned at the epicenter of an increasingly complex ecosystem of participants within transportation, logistics and distribution. We are actively collaborating with Firmware to bring value to this ecosystem by crafting a digital marketplace capable of uniting these diverse stakeholders to address industry challenges. We firmly believe that this initiative will define the next chapter in our journey to change how the world reaches you. It's an exciting time and we're eager to continue shaping the future of the industry alongside our partners and stakeholders.

Operator

I'll now turn the call back to the operator, and we'll open it up for questions.

Speaker 1

And your first question comes from the line of Justin Long from Stephens. Your line is open.

Speaker 2

Thanks and good morning.

Speaker 3

Margin. Good morning, Justin.

Speaker 2

So maybe to start, I was wondering if you could help us understand the positive impact you saw from material margin in the Q3? And then as we move into Q4 and early next year, how you see that progressing?

Speaker 3

Yes, we did see some positive sourcing related material cost impact in Q3, I'll call it non commodity related that some of that will continue into Q4, some will not. And that was a partial driver to our fee versus our original guide. So I would expect a little bit of a step down into Q4 in our material margin, which is embedded in our guidance, but not a ton. So we would expect to maintain some of that, bursting benefits that we got. But you will see a little bit of a step down from the show margin perspective.

Speaker 2

Profit. Okay. And would you expect that to normalize in the first and second quarter next year? Or At what point will we get to kind of a more normalized manufacturing margin level?

Speaker 3

Yes. Q4 will be a, I would say, a much closer to what we'd expect to see in 2024 from a margin perspective. But we obviously still have a lot of work to do from a backlog fill perspective before we can give any official guidance. So we didn't give guidance for 2024 yet. So I can't say that will be the exact margin profile, but Q4 will be closer to what we'd expect to see in a run rate level.

Speaker 2

Profit. Okay, understood. And maybe following up on what you just said, you gave some helpful puts and takes for 2024 and Totally under appreciate that the macro environment makes forecasting challenging. But how are you thinking about the range of potential outcomes for the business in 2024. And maybe you could speak to how you're managing sources based on that range.

Speaker 2

I heard you say, at one point that you took some targeted downtime at one of your facilities in the Q3. But profit. Just curious if you could comment on the range for 2024, if you have any thoughts there and how you manage resources to that range?

Speaker 3

Absolutely. I'll start and I'll let Brent maybe take the resource part of the other question. But we clearly believe that we're going to see some nice order inflow in Q4, which is not uncommon. We in some of the prepared remarks, we mentioned that If you go to the pre COVID days, the majority of your backlog flow going into year end in Q4 was not an abnormal thing. We're getting back to that calendarization of order fill.

Speaker 3

We feel pretty good about what

Operator

we can deliver in Q4 and

Speaker 3

then going into 2024. And also that's a very much a dry van specific comment. As I mentioned, we have a lot of other revenue streams that We feel our fill line will provide a lot of support in 2024. And those are the parts and tank trailer and truck body we talked about. So it's a wide range, which is why we didn't give a formal guidance.

Speaker 3

But we would expect to see any reduction that happens from the trailer order that you're seeing from ACT FGR, we would expect we would not see that big of a drop in revenue for sure based on income of the support we have in our other value streams and we'll have a lot more color and context around what we'll see from dry vans at the year end call. Growth?

Speaker 4

Yes. So Justin, when you think about it from just a you're primarily talking about hourly headcount, shift structure and so on. I think the way that we see it is that, you got to look at Q3 and Q4 of 2023 to bridge the entire story. We specifically are managing this current period of time to position our overall headcount to support How we see the first half of twenty twenty four playing out and making sure that we're in a great position to react to an increase in demand as we go into the tail end of 2024 and absolutely into 2025. So what does that actually mean?

Speaker 4

What that means is specifically for our dry van operation, we believe we can stay solidly on 2 shift operation throughout the year with the ability of using over time to flex with, we'll just say, opportunistic changes in demand in the early part of the year and give us a nice solid baseline that we can grow and prepare for 2025 in the second half of the year. We think the market has the potential to be able to do that income, even sitting in with the clarity issues we have today. To Mike's point on the rest of the business, specifically tanks, truck bodies and parts, We're actually in a position where we are maintaining if not growing headcount in those aspects of the business in 2024 to meet the known market drivers and demand that we have on the table today. So we are still what I would say net net in a great position in terms of how do we think about having an active and robust resource management outlook going into 2024.

Speaker 2

Okay, very helpful. Thanks for the time. Income. Thanks, Justin.

Speaker 1

Your next question comes from the line of Mike Schliske from D. A. Davidson. Your line is open.

Speaker 5

Hello, and thanks for taking my question. Yes. Can we start off, there's one topic I didn't mention for 'twenty four and that was the reefer business. I know that's in a bit of a transition at the moment. Can you update us on the transition to Minnesota for that business and dollars, the case of how that might ramp up next year and or in 2025?

Speaker 4

Yes. So when we think about our cold chain product lineup. We want to make sure we talk about it in the total lineup, not just on reefer vans. We're going to be in a nice place in 2024 where we think we can actually be additive in the total amount of cold chain revenue and overall product output in 2024. That's a combination of a relative amount of maintaining, if not slightly growing on our EcoNEXT reefer van, but also pulling through additional parts and service revenue.

Speaker 4

And we are now seeing an opportunity with EcoNEXT medium duty truck bodies that we've been able to establish a foothold spend in 2023. That's an area of potential expansion for us in 2024.

Speaker 5

Got it. Profit. And then just taking a step back on 2024, it sounds like you're already calling a trough. And I guess I'd like to know your confidence that 2024 will in fact just be a single year downturn, a single year trough. Is spending about $25,000,000 which we think about by the regulations or just where you think Richter Haire currently that make you feel like it will just be a single year?

Speaker 4

Yes. I think when you look I mean, first off, my team knows well as I do, we still have yet to unfold income, what will happen in the world around us, both globally and domestically. So I can't speculate on what might happen. But what I will say is that if we can keep to 1 worst case 2 bad rate changes, I think we're in a decent place for us to anticipate that overall freight has the ability of recovering to a degree that allows the strongest players in the industry to move forward with their growth, we'll call it aspirations in in strategic direction in 2025. Those happen to be the customers we tend to do business with based on the backlogcustomer portfolio we create.

Speaker 4

We're in conversations with those customers to understand how they view 2025. That's more important. That's about how we view it, it's more about how they view it. They view it as a 2025, I would say differently. The tail end of 2024 should start to be able to give them the confidence to lean into 2025 as they look to gain market share while everyone else is somewhat still reeling from the trough that we're in right now.

Speaker 4

So that's why Wabash is so pointed in preparing itself to be ready at the call it earliest notice to respond to that demand signal when it comes. We think that will actually come a little bit ahead of what the overall market will be signaling based off the customers that we do business with.

Speaker 5

Outstanding. Let me just squeeze one last one in here. Can you update us on the impact of the UAW strike profit on orders of your business. I guess on the truck body side, has there been chassis supply issues? Has it been exacerbated over the last couple of weeks?

Speaker 5

On the trailer side, are you getting the sense that some of the fleets are holding off on ordering because they're not sure if there will be excess capacity if there's no auto parts or components and autos themselves being shipped around the country?

Speaker 4

Yes. I'll take the last part of the question first. I don't really believe yet we are seeing a significant impact in any type of 2024 order behavior based off of what's going on with the current state of the UAW strike. I'm not going to quote them all, but I think there's a series of metrics out there, at least that I've been exposed to and say that we haven't really even seen Truly material impacts of the UAW strike in terms of real freight impact. We also know that it's not a what I call full strike yet.

Speaker 4

It's more of an iterative process that they're going through.

Speaker 3

So I

Speaker 4

don't think it's material yet in any decision making and I don't think it would be until we get into or something into the Q1 or the last that long. And even then, it might be somewhat limited to the carriers of which it really does impact, profit. It's not a high item on that front from a risk management standpoint for Wabash's demand profile. Profit. When we think about it from a truck body standpoint, we've had limited impact and we probably will see what I would call limited incremental, incremental is not the right word, sporadic impact in 2023 that we're able to maneuver around.

Speaker 4

That is a nuisance, but I wouldn't call it a headache. If this were to get into 2024, so this is again a Q1 protracted more full. We'll see a larger amount of impact, but we had we've got enough lead time, with good or bad because of the way they've done this with the incremental nature of how they're rolling this out, not taking them all to their needs right at the moment. We have plenty of time to adjust in how we demand plan to fill the first half of the year to move away from the chassis pool, big three supply line of businesses. There is enough other out there specifically during the first half of the year that we're able to maneuver accordingly.

Speaker 4

So while it may operationally change how we do demand management, At this point, I would not see it being a material impact on the actual output of Wabash.

Speaker 3

Yes. I think just to add, Brent mentioned in there, but just to double click on it. We do have a pretty significant percentage of our truck body build is medium duty and not dependent on the Detroit 3. Profit. There's a lot of our mix that isn't impacted at all.

Speaker 5

Great, perfect. Guys, I appreciate the color. I'll pass it along. Thank you. Thanks, Mike.

Speaker 5

Profit.

Speaker 1

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

Speaker 6

Hey, guys. Congratulations. Yes. Thank you for the view. So profit.

Speaker 6

I hear your message,

Operator

which is

Speaker 6

respite in 2024, you're seeing the numbers already. Profit. We're going to use that rest to make our business stronger. We're going to have a better bottom. You talked about the big announcement today in parts and service as well and that will be a bigger piece of the pie.

Speaker 6

So two questions here. Number 1, you've seeded a little share over the last year because you took the factory down to do the transition for the dry vans, you move reefer up to Minnesota. So you're on track to do about 45,000 trailers this year, give or take, teen percent or so next year, I don't know what the real number is going to be, that you could potentially still be making about 45,000 trailers as you ramp up refer and you ramp up this new capacity in dry, given some of your market opportunity or am I thinking about that wrong?

Speaker 4

Jeff, as always, you've asked very astute questions. What I would tell you is that I'm going to correct one thing now. Okay. The ramping up of our dry van manufacturing and the transition of refurbished really has had no real impact on what I would call a literal market share as we think about 2022, 2023, what I would call in any gross material way that affects 24 at all, Right.

Operator

I

Speaker 4

know there's some math in between, but it really doesn't. When we think about market share in 2023, profit. This is much more about a deliberate management decision to drive pricing to maintain pricing in the second half of the year based off of the level of demand and security that's been caused by the overall freight conditions. We felt as an organization as the premium supplier into the market that maintaining pricing was paramount as we move into the order season for 2024. Profit.

Speaker 4

It also just happened to match the level of capacity smoothing that we needed to do to prepare for 2024. And so there'd be no reason to chase pricing in order to run up against a hard stop and then an inefficiency hit going into 2024. That would not be the smartest business moves on the planet. So when we think about market share in 2024, I think you're absolutely in the ballpark of the market share is inherently available for us as we adjust our pricing to still be premium in the market, still be at a much higher level than what we've seen over past cycles, profit will be in a nice place that we can maintain plus or minus probably in that range that you're alluding to with the capacity that we'll have on the ground starting 2024.

Speaker 6

Okay. Thank you. And then just following up on that. And I want to follow Mike's question is 2024 just a single backward year and of course none of us know. But I'm thinking about this big EPA mandate out there for the fleets in 'twenty seven, which means you probably get a tractor pre buy of some kind in 'twenty six.

Speaker 6

It may even start in 'twenty five. And we all know that Unfortunately, in that situation, even if truck P and L is better, you may get a crowding out of capital for trailers, maybe, maybe not, right, who knows. But I'm just thinking about the shape of industry demand for the next few years. 'twenty four, we're going to get a respite. 'twenty five, we probably still see a little bit of a respite in

Operator

the early part of the year, then it starts

Speaker 6

to get better. But then we start running into this tractor buying requirement that a lot of customers are going to have. How do you think the shape Okay. Trailers works over the next couple of years. I know it's anybody's guess, but I'm just curious your point of view.

Speaker 4

Yes, I think it's a more complicated question than what is the one generic shape of how the market will play out based on the factors that you've thrown out there. There's a potential for some level pre buy out there based on the facts on the ground, marginally yes. Does it affect every fleet in the same way? No, it does not. Those customers, we say it differently, those carriers and users of tractors and trailers who have to make discrete choices about how much capital they can deploy may very well have to fall into the category of what do I buy.

Speaker 4

Wabash specifically doesn't market or sell to those customers that are in a capital position that have to actually make that level of, We'll call it specific choice. We tend to sell to those customers that will have ample capital to be able to maintain a more balanced asset base and reminding everyone that we never the 300,000 plus trailers all said and then were not bought from 2020 all the way through to 2023 and we called into that somewhat, but that's still going to be out there. Fleets are not going to be those that are well capitalized, well managed with a keen eye on operational costs are not going to want to get further behind on their trailers even with a pre buy hanging out there. So we need to indicator to those customers, we're going to be I think somewhat buffered from any effect. And so when I think about the curve, I think that curve will be different based off of different segmented parts of the overall buying community.

Speaker 6

Profit. Thank you for that. One last question, if I can, this one for Mike.

Operator

Mike, you mentioned that capital spending this year is going

Speaker 6

to be about $70,000,000 or $80,000,000 higher than what would be maintenance CapEx because some of these growth opportunities, which I think is great. It's great that you have that growth project out there. So given your current slate of growth projects, profit. How should we be thinking about the right amount of CapEx as I look out to 2024 and 2025 and just some of the projects that you have that you're spending on right now?

Speaker 3

Yes. It's difficult to say exactly what 2024 will be because as you know, we're doing a lot right now and kind of depending on some of the year end spend that can change the 'twenty four number somewhat. But I would expect to see 'twenty four to be down 10% to 20% from what we saw in 2023. 2023 will be the high point of CapEx for the foreseeable future. But we will have we have growth projects, highly accretive growth projects that we will have in 2024 and 2025 that will exceed what you may have seen historically from Wabash, but it won't be to the 2023 levels.

Speaker 6

Yes, and growth is a good thing. I'm just curious how to think about the next 2 to 3 years of modeling since you do have these growth projects to spend on. That's helpful. Thank you. Well, congratulations guys.

Speaker 6

Thanks for your time.

Speaker 4

Thank you. I appreciate it. Thanks, Jeff.

Speaker 1

And there are no further questions at this time. I will now turn the call back over to Ryan Reif for some closing remarks.

Speaker 4

Thanks, Rob, and thanks, everyone, for joining us today. We look forward to following up during the quarter. Have a great day.

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Key Takeaways

  • $200 million of gross profit is projected in 2024 from truck bodies, tank trailers and parts & services—excluding dry vans—and alone surpasses the company’s consolidated gross profit in 2020 and 2021.
  • The company hit a long-term financial target more than two years ahead of schedule, raised its full-year guidance again, and delivered record 2023 performance while emphasizing it remains in the “early innings” of its transformation.
  • The “1st to Final Mile” initiative, including a digital marketplace partnership with Firmware, is designed to stabilize earnings volatility and integrate transportation, logistics and distribution stakeholders.
  • Q3 benefited from non-commodity material sourcing improvements, and while a slight margin step-down is expected in Q4, that quarter’s margins are anticipated to approximate the run-rate for 2024.
  • Management views 2024 as a trough year but expects steady Q4 order inflows; dry vans will operate on a two-shift basis with flexible overtime and other segments will maintain or grow headcount to meet demand.
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Earnings Conference Call
Wabash National Q3 2023
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