Wabash National Q1 2024 Earnings Call Transcript

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April 24, 2024

There are 7 speakers on the call.

Operator

Good day, and welcome to the Wabash National Corporation First Quarter 20 24 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. And finally, I would like to advise all participants that this call is being recorded. Thank you.

Operator

I'd now like to welcome Ryan Reed, VP, Corporate Development and Investor Relations to begin the conference. Ryan, over to you.

Speaker 1

Thank you, and good afternoon, everyone. We appreciate you joining us

Speaker 2

on this call.

Speaker 1

With me today are Brent Yeagy, President and Chief Executive Officer and Mike Bienvens, Chief Financial Officer. Before we get started, 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. 1wabash.com. Please refer to Slide 2 in our earnings deck for the company's Safe Harbor disclosure addressing forward looking statements.

Speaker 1

I'll hand it off now to Brent. Thanks, Ryan. Good afternoon, everyone, and thanks for joining us today. Beginning with the Q1 of 2024, our revenue and income fell slightly short of our expectations due to slower customer pickups of equipment. I'd like to emphasize that particularly for a year of weaker demand, Q1 tends to be seasonally weaker.

Speaker 1

Additionally, the size of our products necessitates that we rely on customers to pick up their equipment before we are able to recognize revenue. That said, our production outstripped shipments during the Q1, so the delta versus our anticipated quarterly revenue and the associated income will flow into subsequent quarters during 2024, particularly Q2. As we'll discuss later, our financial outlook for the year remains unchanged. From a strategy perspective, we continue to enhance our network of 78 dealer locations. Through our marketplace joint venture, we launched the initial version of our Wabash marketplace in the place in the Q1.

Speaker 1

Collaborating with leading technology and logistics providers, the platform seeks to deliver customer centric solutions to an integrated partner ecosystem that sets new industry standards for parts, services and trailer capacity. The ultimate objective of the Wabash marketplace is to develop a comprehensive end to end digital platform that transforms the experience for dealers, customers and suppliers. Utilizing advanced technology and connectivity, we aim to streamline the supply chain experience, making it more efficient, connected and user friendly. Dealers and customers will benefit from improved access to a wide range of parts and services, with a particular focus on our trailers as a service or task capabilities and the expansion of our Wabash parts distribution network. The marketplace has significant potential for growth as the team focuses on opening up opportunities for additional value added offerings.

Speaker 1

Also, our Wabash Parts Distribution JV is reaching an initial stage of maturity that will facilitate meaningful growth in 2024. Of course, the synergy between our comprehensive first to final mile equipment portfolio, Wabash Parts and the Wabash marketplace and our parts and services segment more broadly affirms our position in this market as we seek to add more value for our customers by supporting equipment through the course of its life cycle. Confidently investing in strategic growth initiatives during a down year in the trailer industry marks a new chapter for Wabash, one that we have not previously had the opportunity to explore. As we gain more clarity on 2024, it's important to emphasize the resilience of our portfolio that has grown over the last decade. We see relative stability in customer demand for our truck bodies and tank trailers, which helps mitigate the anticipated decline in dry van demand this year.

Speaker 1

In addition to benefiting from strategic customer relationships with best in breed participants in trucking, logistics and retail, our expanded and diversified equipment portfolio not only enhances our stability through market cycles, but also provides a stronger foundation for layering on strategic growth. This backdrop positions us well to capitalize on market shifts and continue our innovation and leadership in the transportation, logistics and distribution industries. As we continue to advance our strategic objectives, a vital component is fostering higher levels of employee engagement, which we believe leads to enhanced execution and improved financial performance. At Wabash, we are dedicated to building a culture that embodies our core values and emphasizes respect for individuals. In line with this commitment, we have established a culture council, a multi year initiative aimed at addressing critical aspects of our organizational environment.

Speaker 1

These include our work environment, working relationships, well-being and community, growth and autonomy, flexibility and consistency, and systems and processes. To bring these areas to life, we have formed cross functional teams tasked with implementing changes that positively affect all employees and creating an environment where everyone can succeed. These teams represent various functions and geographical locations, ensuring a wide range of perspectives and ideas are being represented across the teams. This investment in our people and elevation of our internal standards not only aligns with our leadership responsibilities and values, but also advance the interest of Wabash, our customers, partners, shareholders and our communities through the acceleration of our strategic vision and increasing sustainability of value creation. Moving on to market conditions, while our customers continue to experience a challenging freight environment, we have seen important leading indicators like the ISM index rising above 50, indicating expansion returning to the manufacturing sector.

Speaker 1

While surveys of inventory levels at shippers suggest abating headwinds from destocking that have been working against the freight market over the last couple of years. While these positive indicators have yet to meaningfully translate into improved freight conditions, we are optimistic that improvements may be on horizon when you pair the strengthening macro backdrop with the amount of capacity that has left the transportation industry since the market downturn began in early 2022. Thinking beyond the current rate cycle, we remain bullish on our core markets benefiting from secular trends like power only, persistent driver shortages and the resurgence of near shoring activity within North America. Shifting focus to our backlog. At the close of the Q1, we had a total of $1,800,000,000 in orders with $1,500,000,000 of that figure expected to be shipped in the next 12 months.

Speaker 1

Both figures were lower by roughly $100,000,000 sequentially, but it's important to note that with over $500,000,000 in revenue for the quarter, the relative stability of our backlog implies that we continue to see meaningful volumes of new orders. Moving to our financial outlook, with the benefit of further visibility provided by our sizable backlog, we are reiterating our full year 2024 guidance of $2,300,000,000 of revenue and a midpoint of $2.25 of EPS. In closing, we are capitalizing on the opportunities presented by the market environment in 2024. With a diverse portfolio of 1st defined and mild equipment and a growing parts and service business, Wabash is positioned with unprecedented strength paired with minimal leverage at this stage of the freight cycle. I believe our ability to maintain focused execution on our unique organic growth projects underscores the strength of our strategic positioning for the future.

Speaker 1

We are actively working to deepen relationships with our dealers, suppliers and customers as well as engaging with interesting new players within the transportation, logistics and distribution landscape. Simultaneously, we are committed to fostering a culture of continuous improvement within our own employee experience, ensuring that we remain well equipped to act on our strategy. We are confident that this approach will not only enhance our financial performance at all points in the cycle, but also enable Wabash to sustainably grow our level of value creation for all stakeholders. With that, I'll hand it over to Mike for his comments.

Speaker 3

Thanks, Brent. Beginning with a review of our quarterly financial results. In the Q1, our consolidated revenue was $515,000,000 During the quarter, we shipped approximately 8,500 new trailers and 3,690 truck bodies. As Brett mentioned, we saw some delays in customer pickups of equipment during the Q1 and we do anticipate the opportunity to recognize revenue on these finished goods in subsequent quarters, including 2nd quarter. Gross margin was 14.8% of sales during the quarter, while operating margin came in at 5.7%.

Speaker 3

In the Q1, we generated operating EBITDA of $46,000,000 or 8.8 percent of sales. Finally, for the quarter, net income attributable to common stockholders was $18,200,000 or $0.39 per diluted share. From a segment perspective, Transportation Solutions generated revenue of $470,000,000 and operating income of $44,000,000 Parts and Services generated revenue of $49,000,000 and operating income of $10,500,000 Year to date operating cash was an outflow of $17,000,000 reflecting what is typically a back ended quarter of shipments in Q1. Concerning our balance sheet, our liquidity, which comprises both cash and available borrowings was $389,000,000 as of March 31. We finished Q1 with net debt leverage ratio of 0.9 times.

Speaker 3

On capital allocation, during the Q1, we invested $19,000,000 in capital projects, utilized $16,000,000 to repurchase shares and paid quarterly dividends of $4,200,000 Our capital allocation focus continues to prioritize capital expenditures above and beyond our annual maintenance CapEx spend of $20,000,000 to $25,000,000 in order to support our organic growth initiatives. We are committed to maintaining our dividend and then we anticipate continuing to evaluate opportunities for share repurchase alongside of bolt on M and A. Moving on to our outlook for 2024, we are reiterating guidance of a revenue range of $2,200,000,000 to $2,400,000,000 with a midpoint of $2,300,000,000 and an EPS range of $2 to $2.50 per share with a midpoint of $2.25 We believe this outlook is well supported by a stable backlog and new order flow that continued at a reasonable pace during the Q1. We continue to see truck body, tank trailers and parts and services as stabilizing forces within our portfolio in 2024 as market conditions remain stronger in those businesses relative to drive ins. In particular, we anticipate year on year growth in parts and services to accelerate as we move through 2024.

Speaker 3

Thinking specifically about our Q2, our expectations for revenue to come in between $550,000,000 $600,000,000 and for EPS to be between $0.50 $0.55 per share. Moving on to capital deployment expectations for 2024, we anticipate traditional capital investments to be between 75 $1,000,000 $85,000,000 in 2024 as a result of planned expenditures to support our strategic growth initiatives. We also expect to invest in CapEx that will be immediately revenue generating through our Trailers as a Service program. We anticipate investment in that program will be back half loaded and we will give more specific guidance as the figure comes into focus, but we would expect at least 1,000 units in 2024. In conclusion, I'm excited about 2024 as we take the opportunity to demonstrate what we believe is an improved through the cycle financial profile for the company.

Speaker 3

Additionally, Wabash currently enjoys the most significant potential for strategic growth in the company's history by pursuing our parts and service adjacency and we're eager to demonstrate our capacity to grow the top line of this business to allow us to become a more meaningful contributor to

Speaker 2

our portfolio as a whole.

Speaker 3

As an industry leader in transportation equipment, positioned at the epicenter of an increasingly complex ecosystem of participants within the transportation, logistics and distribution industries, we have a unique opportunity to unite diverse stakeholders to address industry challenges via Wabash Marketplace Digital Platform as well as the Wabash Parts Distribution Business. And we look forward to updating you on the progress of this initiative. We firmly believe that this area of strategic growth will define the next chapter in our journey to change how the world reaches you. I'll now turn the call back to the operator and we'll open it up for questions.

Operator

And your first question comes from the line of Mike Slusky of D. A. Davidson. Your line is open.

Speaker 4

Yes. Hello. Thanks for taking my questions. So I guess I wanted to ask first about some of the pickup and logistical issues that might have changed things from the Q1 to the Q2 or elsewhere during the year. I'm curious, was this an industry wide phenomenon?

Speaker 4

Was it just an issue with Wabash and post COVID having to get folks to Indiana to get their trailers and other people didn't have that issue if they're based elsewhere in the country? Just curious to see if this is something that we should be thinking about that everyone's facing or is it just a strictly Wabash issue?

Speaker 1

Yes, Mike. I mean, as we said in the release and on the actual, call it, narrative we put out there. I mean, this is a normal type of situation that our industry feels across the board at any time that we are in, not only the Q1 of the year, but when compounded by being in a down year relative to dry vans. This is a normal and customary type of issue to have. So everyone is feeling it throughout the overall industry at this point and is in general is to be expected in terms of weak pickups as people are working to understand what needs to be put in service at this time of the year.

Speaker 1

So while we're a little short in what those expectations are, the phenomenon itself is a normal and customary industry fact.

Speaker 4

Okay. Okay. Thanks for that. I also want to ask about trailer as a service. Mike, you outlined a couple of details there.

Speaker 4

I understand that maybe we don't want to get into actual numbers and guidance per se. I mean, you did mention at least 1,000 units. But just how do we start to model that out? Do we model that as 1,000 units of sales, 1,000 units 1,000 units per unit inventory with some rental attached to it or leasing revenue attached to it? I'm not sure like what to put in my current model and what's in current guidance as far as that business is concerned.

Speaker 2

Yes. So from a P and L perspective, Mike, it will show up as a lease type expense. You wouldn't see a full unit of revenue recognition like you would a ship unit. It will be a leasing type model. So you'll see a monthly expense, see the monthly revenue and then associated expense.

Speaker 2

From a cash flow perspective, you'll see it show up and we break it out in our statement of cash flows as a revenue generating asset and it will be separate from our normal plant, property and equipment. So you can see as those units get put into service, it will show up on that line in our cash flow statement.

Speaker 4

Okay. Maybe one last one for me. I guess, I just had some thoughts, Brandon, about what you think has to improve in the market to see orders go up from current levels? I mean, I guess we've had one large or a few large bankruptcies happen over the last 12 months. They had largely older units that probably didn't get back in the market used market, sorry.

Speaker 4

I'm curious whether if there is capacity exiting the market today that might improve the high demand between, trailers and loads, whether some of those units exiting the market will be much newer and some of that used equipment may end up taking away from new over the next couple of quarters?

Speaker 1

Yes, Mike. I think what needs to happen is already happening. And I think the what is always been evident within our industry is that when it is most confusing, when there are mixed kind of at a level of most mixed signals is when the market is actually beginning to make the improvements that it needs to get on the path of the upswing, right? So we are seeing gross manufacturing activity begin to move in upward direction. We're seeing capacity leave the market.

Speaker 1

We're seeing imports continue to improve. The things that need to be happening are happening. Now and what they don't have a real time effect on freight and the spot market. That's going to happen incrementally over the course of the next 6 months as it should for where we're sitting right now. So everything still winds up for the, I'll say, market forecasts that are out there by ACT and FTR, there is really no deviation from the forces that drive that.

Speaker 1

And it's exactly what should be happening, the setup for the estimates for 2025. It's already in play. Nothing new needs to happen. I think from a one thing that gets questioned is the what is the Fed going to do from an interest rate standpoint. The forces in play are already in play.

Speaker 1

It's already factoring in where the Fed is at right now. So if the Fed waits until let's just say Q4 to have an interest rate reduction, that is not going to probably materially affect the forces that will drive the upswing into 2025. So I think the play is set, it's been called, it's happening. It just needs to work itself out over time.

Speaker 4

Got it. I appreciate the color, Brent. I'll pass it along. Thank you.

Speaker 1

Thanks. Thanks, Mike.

Operator

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

Speaker 5

Thanks and good morning.

Speaker 2

Good morning, Justin.

Speaker 5

So I guess getting back to the delayed pickup of trailers, is there any way to quantify what that headwind was in the Q1 versus your expectation to just help us think through the catch up we could see in the Q2? And then as you just take a step back and look at trailer shipments over the balance of the year, is there any color you can provide on the quarterly cadence that is reflected in the guidance?

Speaker 2

Yes. I would say that generally the disconnect we saw between our guidance and Q1 results was largely that delay in pickups that we had. And then you see some of that stepping into Q2, obviously, with a little higher revenue and EPS guidance in Q2 versus Q1. We would expect the back half to continue to see moderate increases in revenue and EPS, but not significant. So obviously, you can do the calendarization with our full year guidance.

Speaker 2

But we will see that pretty good step up from Q1 to Q2, which really does encompass that slight pickup mix that we had. And then a little further firming in Q3 and Q4 to set up for what Brent just mentioned, what we think will be a much stronger 2025.

Speaker 1

Yes. Just to put I'll put some additional color to it. Most of the gap in pickups were in January early to mid February. And then we saw pickups dramatically improve as we moved into the tail end of the Q1. And then kind of, I would say, continuing on that pace as we move into the 2nd quarter.

Speaker 1

So that piece of it has generally abated. And that timing of that gap in January February kind of really is about fleets really trying to understand what is the operating environment that they're working into for the first half of the year. Where do they need to move trailers to, because remember when they pick them up, they're putting them into service and routing the areas to create revenue. So they're waiting to see where that's going to be. And then once they know, they move and we saw that happen, right?

Speaker 1

And then it just flows from there.

Speaker 5

Okay, got it. That's helpful. And I guess along similar lines, I was wondering if you could talk about the cadence of operating margins that you're expecting over the balance of the year. If I look at the Q1, you were a touch below 6%. The guidance for the full year is around 7%.

Speaker 5

So that implies we need to be above that level to kind of average up. So just wanted to get some more color on the cadence you're expecting and what will drive that improvement sequentially through the year?

Speaker 2

Yes, I think it's largely going to follow the volume I described earlier because that's what's holding it down below 7%. So we held our full year at 7% and finished Q1 at 5.7%. And that's largely a fixed overhead contribution margin impact of a little lower revenue number in Q1 that we expect will naturally grow as we move into Q2 in the second half of the year. The other thing that we talked about in our remarks is we expect parts and services to continue to perform well this year and grow in the second half of the year. That will also be a tailwind to our margin performance as we get into the second half as parts and service delivers an outsized margin component of our business compared to the OE side.

Speaker 5

Got it. And I think the last one for me along those lines, 2 other areas you've talked about historically as being areas of resiliency in addition to parts and service or the tank trailer business and the truck body business. So I'm curious if you could talk a little bit more about what's getting baked into the 2024 guidance for those two segments. Are you expecting growth in those areas? Yes, we

Speaker 2

would expect that year over year growth in truck bodies for sure. Q1 was a little bit some of the things we discussed on the trailer side, we were very specific in our trailer commentary, but it also pertains a bit to truck body shipments. We're a little bit weaker than we hoped in Q1 for truck body. But we do expect to see some pretty nice sequential step ups for the truck body business. So we should see shipments increase year over year in that business, which has always been saying that that's a while all of our OE products participate in the broader transportation and logistics industries.

Speaker 2

And so there is some cyclicality, it's less cyclical than we've seen in the dry van business. And we would actually expect to see a little bit of growth in truck by this year. Tanks is we'll see we won't see growth in tanks year over year this year, but we'll see less of a pullback in tanks than we saw in dry vans. And I think to circle back to conversations we've had on these calls, tanks, truck bodies and parts and services really formed 3 legs to a stool of stable earnings, more stable earnings than what we have in our more classic dry van business at Wabash. And we're excited to continue to show that off this year.

Speaker 2

So while they all participate in an industry that has cycles, they tend to be less cyclical than we see in dry vans.

Speaker 1

Yes. The ability to see the overall resiliency can be evident in a set of markets that we have today where it's much more secular in nature, where different forces are affecting different sub segments differently. We're not experiencing a 2,009 event. We're not experiencing a macro type of negative set of forces that affect all different groups simultaneously. This is segment based courses, which really allows us to leverage the resiliency of the portfolio.

Speaker 5

Okay, great. I'll leave it there. Thanks for the time.

Speaker 2

Thanks, Justin.

Operator

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

Speaker 6

Thank you very much. Hey, congratulations everybody. A couple of modeling questions. I want to get back to the units that were not picked up on time. I mean this happens every now and then.

Speaker 6

It just is what it is. Let's just say for argument's sake that number was $500,000,000 in the Q1. I don't know what the number is and you guys haven't thrown one out. But would we normally see something like 2 thirds of it in the following quarter and then the third of it maybe in the Q3? How does this typically work when we have this happen?

Speaker 6

It doesn't all happen in 2Q necessarily, right?

Speaker 1

No, Jeff. You've been doing this long enough to know how it works. And I would say that is a generally good approximation for how the world works.

Speaker 6

All right. And then, ASP was pretty strong, a little stronger than I was looking for both in truck bodies and in trailers, which is great. But I would assume with raw material costs coming down that ASP levels off a little bit. Could you give us an idea of what trailer ASP might have looked like without the mix issue of tanks being a little bit stronger and give us a feel for what was driving the higher truck body ASP?

Speaker 2

Yes, I would say I'll start with trailers. I would say, if you think about, obviously, we have a long backlog business. So the price that shows ASP that shows through in the revenue for the quarter comes in at all different times over the last year or so. So you would see some ASP reduction as we go through 2024. I think you'll see volume increase in ASP come down as we go through the year.

Speaker 3

For truck buys, there can

Operator

be some mix in that business.

Speaker 3

But generally speaking, I think it

Speaker 2

just represents what we've been saying, a more stable borderline strong demand environment in that business that was able to have pricing stability. So I wouldn't expect as much of a pricing move in truck bodies as we go through the year. But for trailers, you will see a step down as we go through Q2 in the second half of the year.

Speaker 1

And just general commentary, Jeff, is that and I would just say pricing across all the segments minus maybe platform trailers. The overall pricing resiliency has, I would say, met in some cases exceeded our expectations for the market that we're in. I think a big part of that is we're seeing the actual value of the product shining through and the nature of the portfolio changes that we've made and kind of channel movement really starting to have an impact on pricing, which mutes the effect of just more of a doggy dog pricing environment that you might expect in the past. We're just doing a little better in how we manage it.

Speaker 6

Okay, great. And as you mentioned, Brett, I've seen these things a bunch of times, but sometimes you forget. And lastly, very impressive margins in parts and service. The gross margins were pretty strong, but the operating margin flow through was a lot better than I expected, which is fantastic. Is 21%, which I don't remember seeing on an operating margin basis, is this a new level that we've reached because of what's changed in parts and service?

Speaker 6

And is this more sustainable? Or was there something that helped that number a little bit in 1Q?

Speaker 2

Yes. I wouldn't guide to something over 20%, Jeff. We've been saying high teens upwards of 20%, and that's I would maintain that. So we had a really strong margin performance in that revenue stream in Q1. And while it is outsized compared to the rest of the portfolio, I wouldn't want to model something above 20% going forward.

Speaker 2

While that may be something we can do down the road in a few years, for now, I would still say high teens up to 20% in the business.

Speaker 6

Okay. And then final question. You talked a little bit about how Trailers as a Service is going to be accounted for. Could you just could I ask you to go back and repeat what you said because I wasn't entirely clear. You talked about the lease expense and the revenue.

Speaker 6

I wasn't really sure where that's going to show up?

Speaker 2

So the from a revenue perspective, you will see how many months in service the unit is in the field that will show up as the lease revenue coming through. And it will and then the capital expense will show up as a revenue generating asset on our statement of cash flows.

Speaker 4

So Jeff, that will come

Speaker 2

to parts and services. Yes. Is that your question?

Speaker 6

Okay. That was my question. Yes.

Speaker 2

Parts and services. It comes to parts and services, yes,

Speaker 6

sorry. Okay, awesome. Well, congratulations, challenging environment, solid results. Best of luck. Thank you.

Speaker 1

Thank you. Thanks, Jeff.

Operator

There are no further questions at this time. So I'd like to hand back to Ryan.

Speaker 1

Thanks, Gavin. Thanks, everybody, for joining us today. We'll look forward to following up during the quarter. Have a great day.

Operator

That does conclude our conference for today. Thank you for participating. You may now all disconnect.

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