Wabash National Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 24, 2024

Key Takeaways

  • Wabash has refocused on its core transportation and logistics markets with a customer-centric strategy, expanding its parts and services business to drive higher-margin recurring revenue.
  • The company recorded a $462 million non-cash charge in Q3 after a jury verdict on a 2019 accident, and it is pursuing appeals and legal remedies.
  • Wabash lowered its full-year 2024 guidance to roughly $1.95 billion in revenue and about $1.25 EPS due to softer dry van demand and capacity adjustments, though it expects 2025 EPS to exceed 2024.
  • Strategic partnerships, including a 10-year steel supply agreement with Steel Dynamics, JVs with HDI and Fernwey for parts distribution and digital enablement, and a trailers-as-a-service deal with Kodiak, bolster supply chain resilience and recurring revenue opportunities.
  • In Q3, Wabash delivered $464 million in revenue, shipped 7,585 trailers and 3,630 truck bodies, achieved 12.1% gross margin and reported adjusted EBITDA of $34 million (7.4% of sales) with EPS of $0.19.
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Earnings Conference Call
Wabash National Q3 2024
00:00 / 00:00

There are 7 speakers on the call.

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 Third Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the conference over to Ryan Reed. You may begin.

Speaker 1

Thank you, and good morning, everyone. We appreciate you joining us on this call. With me today are Brent Yaege, President and Chief Executive Officer Pat Cafflin, Chief Financial Officer and Mike Pettit, Chief Growth Officer. Before we get started, please note that this call is being recorded. I'd also like to point out that our earnings release, slide presentation supplementing today's call and any non GAAP reconciliations

Speaker 2

are

Speaker 1

all available at ir. 1wabash.com. Please refer to Slide 2 in our earnings deck for the company's Safe Harbor disclosure addressing forward looking statements. I'll hand it off now to Brent.

Speaker 3

Thanks, Ryan. Good afternoon, everyone, and thank you for joining us. Let's start out by level setting that our adjusted Q3 financial results largely align with our prior expectations. Before we get into the details on the quarter, I'd like to provide some strategic updates and address how we see the path of our growth continuing to unfold. To set the stage, I want to step back and reflect on the last few years of our journey to change the growth and performance trajectory of Wabash, highlighting how we've reached our current position and where we see the company headed.

Speaker 3

When I assumed the role of CEO, our strategy of becoming a more diversified industrial was no longer serving us well. While the fundamental rationale behind it to address dry van cyclicality was sound, especially after the challenges of the 2,009 financial crisis, it has become clear that some of the most promising megatrends were happening within our core markets of transportation, logistics and distribution. We needed to refocus closer to home. Expanding our equipment portfolio to complement our core dry van product line created greater value and an opportunity for deeper relationships with our customers, but we hadn't fully capitalized on that potential. The pandemic provided an opportunity to quickly restructure both our organization and the go to market strategy with the latter shifting from a product centric model to a more customer centric one where we could expand the definition of how value could be created.

Speaker 3

By streamlining access to multiple equipment types through a single commercial point of contact, we created significant value for our customers. This shift has brought us closer to our customers, enabling us to jointly plan for the future and foster innovation. It also gave us further insight into what their deeper problems and business needs were beyond the products we make and the solutions we provide at the time. We are now able to position our total portfolio of transportation solutions as a more resilient set of revenue streams. The value of a deeper customer relationship gives us reason to engage more strategically with our supply chain to enhance the manner which business can be conducted, allowing for more resilient responsiveness and willingness to collectively serve the customer.

Speaker 3

Suppliers recognize Wabash's efforts to improve the industry status quo and are aligning with us, combining strengths to provide even greater benefits to our customers, particularly within the next industry upcycle. Our reimagined manufacturing capacity will also be a key asset in this regard. Our increased resiliency and improved responsiveness will allow us to outperform as compared to previous cyclic upturns. One major area of strategic focus has been our parts and service initiative. For years, this opportunity was overlooked in our previous drive for diversification.

Speaker 3

We now recognize that growing this higher margin recurring revenue business is a core element to balancing the cyclic nature of demand for transportation equipment. We're excited about the potential in parts and services, not just as a revenue driver, but as a critical support mechanism to maximize the lifecycle of our equipment. We continue to drive the core aspects of this growth journey and are increasingly excited about unmet needs we are uncovering through our enhanced customer relationships. Our partnerships with HDI and Fernwey Group are instrumental in this growth. The Woldash Parts joint venture with HDI rapidly established extensive distribution capabilities, providing our dealer network and fleet customers with efficient access to a broad portfolio of aftermarket parts.

Speaker 3

Meanwhile, our Link JV with the Fernway Group is enhancing our digital capabilities, providing us the capability of engaging our customers differently and engaging in solutions to problems in different ways. The ability to revolutionize how our dealers and our suppliers and customers experience the Wabash brand through the solutions we provide and the manner which we provide it within the vast transportation logistics landscape. We have positioned the company well for this next chapter where the continued investment and development of capabilities were increased to scale profitable growth for the company. To further refine our focus, we made some key organizational changes.

Speaker 2

Mike Pettit, formerly CFO, has been both

Speaker 3

a thought leader and internal catalyst for our parts and service growth. Recognizing that we needed to free him from his day to day CFO responsibilities to allow him to fully focus on the mission to accelerate the scale of our achievements, Mike will now serve as Chief Growth Officer, overseeing parts and services, digital enablement and engineering. Collectively, these areas of the business will be leveraged in a manner to bring our purpose of changing how the world reaches you to life at scale. Let me turn the call over to Mike for his first update as Chief Growth Officer. It's all yours, Mike.

Speaker 2

Thanks, Brent. Before diving in, I'd like to mention that while I genuinely enjoyed my time as CFO, I'm excited about my new position and the focus it provides to more consistently drive growth through the organization. On the topic of growth, one of the ways Wabash is leading within the transportation, logistics and distribution industries is by leveraging our ecosystem to navigate shifts and seize emerging opportunities. As a market leader in transportation equipment, Wabash sits at a unique crossroads collaborating with suppliers, dealers, carriers, shippers and technology providers. These partnerships allow us to tackle complex challenges that no single entity could solve alone.

Speaker 2

While we're still early in this process, in October, we hosted our 2nd gathering of Key Oak Ecosystem Partners at our Ignite conference, bringing together over 300 attendees. This gathering really demonstrates our commitment to transforming what was once viewed as a basic supply chain into a collaborative ecosystem capable of solving broader challenges together. There are already a couple of proof points I'd like to highlight. First, we recently signed a 10 year strategic supply of Bimler Steel Dynamics, a leading North American steel producer. This agreement strengthens our supply chain, ensuring priority access to critical components like steel coils and cross members during periods of high demand.

Speaker 2

This will help us meet customer needs even during times when other manufacturers may face constraints. This agreement with Steel Dynamics adds to similar ones with Keyesville, Ryerson and Rockland Flooring, position Wabash as a leader in supply reliability and operational excellence. Secondly, our trailers as a service partnership with Kodiak, a leader in autonomous truck technology is another significant step forward. Our TAS program provides Kodiak with a flexible solution, offering access to a fleet of reliable trailers via subscription that includes maintenance, repair and managed care support. This allows Kodiak to focus on developing autonomous technology, while Wabash handles the logistics of trailer utilization, uptime management and maintenance through our managed care services.

Speaker 2

This brings together a unique technology partner and Wabash dealer service capabilities supplemented by a growing managed care network with Wabash acting as a connective tissue to create value for all parties. Our team is excited by these partnerships and we are just getting started. We have been laying the foundation for growth in 2024 that we believe will prove to be transformative for Wabash in the next couple of years as we look forward to continuing to create these opportunities by leveraging our position in the transportation, logistics and distribution ecosystem. With that, I'll hand the call back over to Brent. Thanks, Mike.

Speaker 2

Many of you

Speaker 3

on this call know Mike and his passion for Wabash and the strategic direction we are following.

Speaker 4

We are lucky to have

Speaker 3

a leader like him to drive our strategic growth forward and we look forward to seeing him thrive in this new role. I'm equally excited for Pat Kesselman to take the duties of CFO and work directly with Mike and I to achieve our strategic goals. After spending 15 years at Honeywell in various finance roles, Pat joined Wabash and has progressed through several leadership positions, most recently as VP of Finance. I have worked directly with Pat since he joined Wabash in 2017 and I know that he has what we need as we move into this next chapter of the company. Moving on to our Q3, you'll see a significant divergence between our GAAP and non GAAP financial results due to the impact of a September 2024 jury verdict.

Speaker 3

As we previously shared, a St. Louis jury found Wabash liable for $12,000,000 in compensatory damages and $450,000,000 in punitive damages in connection with a 2019 motor vehicle accident. This incident involved a passenger vehicle traveling at a high speed with an unobstructed view that struck the back of a nearly stopped 2,004 Wabash trailer. While we booked a non cash charge during the quarter related to this verdict, we believe the damages are normally high and the verdict is not supported by the facts or the law. Among other things, and despite precedent to the contrary, the jury was prevented from hearing critical evidence in the case, including that the driver's blood alcohol level was over the legal women at the time of the accident and neither the driver nor the passenger was wearing a seat belt was also kept from the jury.

Speaker 3

There will be post judgment proceedings before the court enters a final judgment for the purpose of appeal. But in the meantime, we are working closely with our external legal counsel, accounting and insurance firms and we'll be evaluating all available legal options. We will continue to share updates as appropriate. Wabash continues to stand firmly behind the quality and safety of our products. This will not stop us from continuing to challenge ourselves to create new and innovative products and do what we can to contribute to safer roads.

Speaker 3

Turning to our backlog and financial outlook, total bookings at the end of the Q3 totaled just over $1,000,000,000 This compares to about $1,300,000,000 at the end of Q2. As we've expected, the dry van large deal season is pushing to the latter stages of normal seasonality in 2024 and we anticipate the flow of new orders to increase in Q4 and into early Q1 of 2025. With the dry van picture for 2025 yet to be fully developed, we feel that's prudent to adjust capacity in our Vans facility in order to ensure we are optimizing our current labor structure for now and for what we expect to be a medium term improvement. In the areas such as truck bodies, we are thoughtfully increasing incrementally to prepare for a positive 2025. Our parts and service revenue streams continue to add capability and we will have both a broader and deeper set of offerings as we enter into the New Year and continue our march to higher levels of growth in this key area of the business.

Speaker 3

For now, the rebalancing of our Q4 dry van demand and capacity necessitates that we lower our full year revenue outlook to roughly $1,950,000,000 and an EPS to approximately $1.25 While it's too early to quantify expectations for 2025, I do believe our 2025 EPS performance can exceed that of 2024. We look forward to providing more detail on our Q4 call. Finally, I'd like to touch on capital allocation priorities as we move forward, Reiterating that the significant legal charge in the Q3 was non cash, we remain well positioned to invest in the company's strategic growth initiatives with a focus on funding parts and service growth. We believe our current dividend is competitive with our peer set and we expect to continue evaluating between potential returns we can generate via repurchases compared to M and A. In closing, we believe by adjusting our operations to align with the current market reality, we are optimizing our future earnings power.

Speaker 3

We have made significant changes throughout the company to increase Wabash's customer value creation and we believe the company is well positioned to grow our parts and services revenue streams, which will complement the transportation solutions side of our portfolio to further enhance our value proposition to customers and our financial performance to shareholders. Our ecosystem approach to grow value is showing early signs of success and the company's new organizational structure is designed to accelerate and create focus on how we build our collective future. With that, I'll hand it over to Pat for his comments.

Speaker 4

Thanks, Brent, and good afternoon, everyone. I'm excited to be here and honored to step into the role of CFO. Mike has been an excellent mentor and I look forward to building on his accomplishments. As we continue transforming Wabash into a visionary leader in connected solutions for the transportation, logistics and distribution industries, I'm eager to work with all our stakeholders. Beginning with a review of our quarterly financial results, in the Q3, our consolidated revenue was $464,000,000 During the quarter, we shipped approximately 7,585 new trailers and 3,630 truck bodies.

Speaker 4

Gross margin was 12.1 percent of sales during the quarter, while adjusted operating margin came in at 3.7%. In the 3rd quarter, we generated adjusted EBITDA of $34,000,000 or 7.4 percent of sales. Finally for the quarter, adjusted net income attributable to common stockholders was $8,600,000 or $0.19 per diluted share. Adjusted EPS generation for the quarter was slightly short of our prior quarterly outlook range. However, I'd like to mention that we did incur higher than expected legal expense of $1,400,000 or $0.02 of EPS in connection with the St.

Speaker 4

Louis legal verdict. We did not include these costs in the non GAAP adjustments made for Q3 as they may be recurring while we move forward to find an acceptable resolution to the matter. Moving on to our reporting segments, Transportation Solutions generated revenue of $416,000,000 and operating income of $29,000,000 Parts and Services generated revenue of $52,000,000 and operating income of $8,300,000 Year to date operating cash generation was $36,000,000 with sequential working capital trends in Q3 being incrementally helpful to operating cash. Regarding our balance sheet, our liquidity, which comprises both cash and available borrowings was $405,000,000 as of September 30. We finished Q3 with net debt leverage ratio of 1.5 times.

Speaker 4

On capital allocation, during the Q3, we directed $15,000,000 to traditional CapEx, invested $1,400,000 in revenue generating assets via our trailers as a service initiative, utilized $18,400,000 to repurchase shares and paid quarterly dividends of $3,500,000 Our capital allocation focus continues to prioritize capital expenditure above and beyond our annual maintenance CapEx spend of $20,000,000 to $25,000,000 in order to support our organic growth initiatives. As Brent mentioned, we are committed to maintaining our dividend and we will continue to evaluate opportunities for share repurchase alongside of bolt on M and A. Moving on to our guidance for 2024, we are reducing our revenue outlook to approximately $1,950,000,000 and EPS to roughly $1.25 From previous midpoints, this represents a reduction of $150,000,000 in revenue and $0.30 of EPS. The most significant changes from our prior outlook come from reduced revenue stemming from level loading of line rates as well as some step up in G and A related to increased legal expenses as our team works to address the aforementioned jury verdict. Our updated guidance implies 4th quarter revenue of $425,000,000 to $450,000,000 and modestly positive Q4 EPS.

Speaker 4

Moving on to capital deployment expectations for 2024. We anticipate traditional capital investments to be between $70,000,000 $80,000,000 in 2024 as a result of planned expenditures to support our strategic growth initiatives. We also expect to continue with a modest level of investment in CapEx that will be immediately revenue generating through our trailers as a service program. While we expect to have a more complete picture of 2025 by our Q4 call, we continue to believe that we have opportunity to generate stronger adjusted financial performance in 2025 relative to 2024. As the dry van market troughs and we achieved improving performance from our truck body, tank trailer and parts and services businesses, we believe 2025 adjusted EPS can eclipse that of 2024.

Speaker 4

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

Operator

Thank you. The floor is now open for questions. And your first question comes from the line of Jeff Kauffman with Vertical Research. Please go ahead.

Speaker 5

Thank you very much and congratulations on a tough environment. I want to take a look bigger picture kind of. We know the market is slowing down right now because of the pressure on industry P and L that's out there. We know that trailers are getting hurt a little harder than trucks just because fleets are nervous about 2,007 EPA and they're holding on to their truck purchasing commitments for the year. As you talk to your customers about 2025, a lot of the truckload earnings calls I've heard companies are saying, hey, we may spend less than 25 than we are in 24.

Speaker 5

What have your customers told you so far about their 25 intentions versus their 24 intentions? And ACT Research just reduced their forecast for 25 below 24. What parts of your customer base are seeing the greatest pressure versus what parts of your customer base are actually holding in pretty well despite the environment?

Speaker 3

Thanks, Jeff. Complicated question, complicated answer. In the past, it would be much more enabled to give very discrete answers relative to the segments that make up our customers. The way I would explain it today is that it is varied amongst customers regardless of segment. So while there I'll use LTL, while there is relative a more relative robust environment for the LTL players, We have some LTL players that are holding the level of volume that they gave in 2024.

Speaker 3

We have other customers that are signaling, waiting on the sidelines at least for the time being to figure out what the market going to do. And we have some that are having conversations about how they would add additional units throughout the year if the market warrants. So it's just in the LTL, it's a varied landscape. And I would say the truckload is very similar there. We have small and medium sized players are still in the same position that they were really at in the 1st and second quarter of 2025.

Speaker 3

That has not changed, which all goes into ACT and MTR's revised numbers. There are some larger players that are, again, maintaining their level of buy, where they have a more rigidpurposeful replacement cycle and they do not want to get behind like they have in the past. And there are some that are either again waiting on sidelines or holding off to assign more clarity to their purchasing decision, which is why we see it pushing in the cycle. It is a very customer independent decision making process right now, not a broad brush application of what the market is or it isn't.

Speaker 5

Thank you for that answer. If I can come at it a different way more from the company side, I think the forecast this year depending on who you talk to is for about 235,000 units this year. If you look at the production forecasts for on a quarterly basis, that may dip all the way down to kind of 180,000 unit annualized rate over the winter months and then maybe bounce back to kind of a 230,000 or 240,000 in the summer months. How do you manage for that kind of volatility? And then with the pricing model having changed where you made that switch a couple of years ago, should we be thinking about operating margins moving with volume differently than they have in the past?

Speaker 3

That's a multipart answer. Let me start on the first part and then I'll let others chime in. First off, I think the ACTFTR estimates for 2025 are absolutely in the ballpark for the world that we're experiencing right now. From

Speaker 1

a and I'll go a little further with

Speaker 3

the question than maybe what you asked. The pricing from a pricing standpoint, the pricing that we are that we have experienced, just to round out our dry van backlog for 2024, we feel is indicative of how we will start out 2025. So we feel like that's a relatively clear data point, that we can bridge off of and probably the Street can bridge off of. From a dynamic nature, Jeff, we've been doing this for 20 plus years. So in the world of dynamics, this isn't as bad as what we've experienced in the past.

Speaker 3

So well within our capability of managing and we manage it better today than we ever have. But the capacity reductions that we allude to with the revised guidance that we gave are the moves that we're making right now to right size to create a better, let's call it, net margin profile over the next 6 months with an eye on how do you preserve a level of dynamic capability to obviously take advantage of whatever the market gives us. So that's what I would say from a narrative qualitative standpoint. And I'll look to Pat,

Speaker 4

if you have any other color? Yes. Brent hit it with the pricing where we expect the levels that we're at right now to flow into 2025. To answer your question specifically about operating margins now relative to what we've seen in the past, so it's a past trough times, we would expect to see an improvement there given what we've been able to do with pricing. So hopefully that answers your

Speaker 2

question, Jeff. Yes. And what

Speaker 3

I would add is that you really have to integrate in the improved position of where we set with our truck body business. You have to add in the additional parts and service on top of what is a better starting position at this point in a trough from a dry van perspective compared to any time we've had in our history. Yes.

Speaker 2

We have a more diverse set of revenue streams than we've ever had during a trough environment like this, which will help performance in a down year.

Speaker 6

All

Speaker 5

right. And well, thank you very much. And I want to congratulate you for hiring a Indiana Hoosier as your CFO.

Speaker 3

It just shows you we're capable of anything.

Operator

Your next question comes from the line of Mike Schlosky with D. A. Davidson. Please go ahead.

Speaker 6

Yes. Hi, good afternoon and thanks for taking my questions.

Speaker 1

Hey, Mike.

Speaker 6

Maybe to follow-up on that hey, just to follow-up on that last answer you gave. If you've got volumes that are flat and a little bit down next year on the trailer side, does the mix change, now that you've ramped up your new facility, there's a mix change between what you're producing your new and your old? And is there a margin tailwind just as you may have learnings as that's been open for a year and you've gotten your processes together? Is there any kind of positive there for 2025?

Speaker 3

Again, complicated question relative to the market. First off, I would say that Wabash has the ability of, I would say, being in a better position relative to the demand that we generate in 2025 even with, they'll call it, flat industry levels from 2024 to 2025. And so we will look to capitalize on that and we believe we can do that with the pricing that we've got. The mix that we will that you tend to get or just as your absolute level of volume by mix has a limiting effect on how you utilize your assets most effectively in this type of environment. So we will not expect to necessarily get the full effect of the new capital, but we will get a level of positive impact by having it up and running.

Speaker 3

And it should be running at a full per ship volume throughout 2025. And so we'll see a full year contribution of that, which should be helpful. And then we are actively working as we looked at kind of outstrip or not outstrip, but to outperform the demand environment, we are specifically looking and trying to tailor that demand to fit where we can most effectively build it.

Speaker 6

Okay. Okay. Makes sense. And I hopped on a little bit late. So if the next two questions are have been asked and answered, please just tell me to talk with you later on it.

Speaker 6

One asked about the parts and service business. I was a little bit surprised, you didn't see substantial growth in that business given your efforts that you've made. You rolled out the new portal, I think over the last few months. I guess I'd like to just get a feel for whether your efforts are bearing fruits and all we're seeing is just the effect of just a sluggish market broadly, but your efforts, you feel confident that you'll see some growth there over the next few quarters?

Speaker 2

Yes. And

Speaker 3

on the scripted aspect of the call, we've alluded to the fact that we are very confident that the foundational elements that we have put in place plus what is coming online or what has come online in the last few months and what will be coming online in the next months after that, give us a great position relative to 2024 going into 2025. The relative dip, not really dip, but I would just say, more sluggish performance, right, still grew when you think about where we were. It's a tough market out there at this moment and nothing that we're not immune to that. And parts and services are not immune from simply demand characteristics of a market like this, but they are absolutely more resilient than most of our revenue streams. And I think that's showing in our numbers.

Speaker 3

So that's proving out. And with that, just having stability in the market will provide a tailwind in 2025 as compared to 2024. When customers are trying to figure out one quarter to the next, is it going to get better or worse, that makes for delayed buying decisions and incomplete buying decisions and maybe not optimal. Just stability, regardless of the level, will help our parts and service business.

Speaker 5

Yes. I think it's important to remember too, Mike, there's

Speaker 2

a lot of different revenue streams that roll up in the parts and services. And a lot of what you alluded to, we're seeing some nice growth and progress in, but we do sell some into the OE space from component parts for the Wabash. You can actually see that in

Speaker 6

our press

Speaker 2

release where you'll see some weakness in some of those parts. As Brett mentioned, the initiative itself is much more resilient than the base business. You can see that. It's driving the stability that we thought it would, but it still does operate within the overall freight landscape. It has seen a lot of softness this year.

Speaker 3

Yes. So I guess it would be more just more specific. The retail side of our parts and service, pretty good, pretty happy with. What we directly provide in terms of part components that are directly consumed, which are directly related to OEM demand, they're in the same place the rest of our business is in.

Speaker 6

Okay. Got it. Got it. I also maybe my last question. I also appreciate your commentary that there's a good chance for growth in earnings next year even if there's no tremendous growth in the drive end business.

Speaker 6

But you alluded to also there have been some reductions to the drive end forecast and who knows there could be more to come. It could be the other direction, but it could see an additional step downward. I'm just curious, can you maybe ask like maybe ballpark for us kind of what is the max amount that maybe the broader trailer market can be down for Wabash to still have a flat to up year in earnings for 2025?

Speaker 3

I'm not sure. I think that would be going beyond our ability right now to give that type of bottom floor guidance. I would be hesitant to do that as I sit here right now. There's absolutely room for that to occur, but I do not necessarily there's a lot of factors to integrate in answering that question. I would say we would expect to

Speaker 5

see growth in parts and services. We'd expect to see growth in truck body And so

Speaker 2

that would offset some softness in revenue, but not breaking down the specific unit count.

Speaker 6

Okay. That's totally fair. I appreciate the answers. I'll pass it along.

Speaker 3

Thanks, Mike.

Operator

That concludes our Q and A session. I will now turn the conference back over to Ryan Reed for closing remarks.

Speaker 3

Thank you very much

Speaker 1

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

Operator

That concludes today's call. Thank you for joining. You may now disconnect.

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