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spk07: Ladies and gentlemen, thank you for standing by and welcome to the Wabash First Quarter 2023 earnings call. I would now like to turn the call over to Ryan Reed, Senior Director of Investor Relations. Please go ahead.
spk05: Thank you and good morning, everyone. We appreciate you joining us on this call. With me today are Brent Yagey, President and Chief Executive Officer and Mike Pettit, 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.onewabash.com. Please refer to slide two in our earnings deck for the company's safe harbor disclosure addressing forward-looking statements. I'll hand it off now to Brent.
spk06: Thanks, Ryan. Good morning, everyone, and thanks for joining us today. We are extremely pleased with our record first quarter results. Importantly, these results highlight the last four years of hard work we've undertaken to effect structural improvement in our business in the lead up to this moment in time. Customer portfolio reshaping, a significant redesign of our organization and reporting structure, a new customer-centric go-to-market approach, including an improved pricing construct and long-term customer agreements, matched on the sourcing side with retooled and relationship-based strategic agreements with key suppliers. We have reimagined our production capacity and are also acting to increase our recurring revenue exposure by achieving our rightful share in parts and services, having already laid the groundwork through our parts and distribution joint venture. All managed through a purposely crafted lean-based management system and a strategic deployment process that mutually act on the business each and every day, to drive execution and bring our strategy to a measurable reality. My team and I believe strongly that the changes made to date have significantly brightened the future prospects of our company. Our way of managing the business does not rest, and we have more work to do and opportunities to harvest. While progress is easily indicated by our first quarter performance, what really drives long-term value is the fact that our management system works to benefit customers, suppliers, employees, and communities and shareholders together. During the first quarter, we continued our steady pace of execution against our strategy. As I've mentioned before, we see our industry-leading dealer network as a meaningful competitive advantage that is unique in our industry. Our dealer network is also a key enabler to the success of our parts and service initiative. Ultimately, we succeed by facilitating our dealer success and in order to ensure optimal alignment of our collective incentives, We launched our ambassador program for our dealer partners during the first quarter. We believe this is a foundational step to sustaining the impressive rates of growth we've shown in our recurring revenue parts and service business. Also during the first quarter, we continued to advance our trailers as a service program by launching a subscription service with Loadsmith, a digital broker founded by a team with significant shipping and transportation industry experience. This relationship builds on our initial trailers as a service relationship with Freight Bonnet, which was our initial trailers as a service customer and their relationship has provided a great learning and market exploration opportunity. We believe we can continue to help remove waste from the logistics system with trailers as a service while also building a flywheel that pulls on many areas of our parts and service offerings. Trailers as a service is an excellent example of how our dealer network helps us with national scale to provide service support within this program while we create new opportunities for our dealers to help them broaden their revenue base. Finally, following considerable heavy lifting by our employees and partners, our Lafayette-based South Plant is now ready to begin initial production of dry van trailers. Production is beginning at low levels as we run off and validate all processes and as we develop the workforce on the new and exciting equipment in the facility. Having personally walked the new line and reviewed the new processes several times over the last 30 days, I'm pleased to say that this will be our most modern plant and certainly our most efficient capacity. What is also very clear is that this new dry van capacity provides us with the opportunity to upgrade our legacy dry van manufacturing assets for both capacity and efficiency. Meaningful upgrades were not previously possible given the year-in and year-out burden our legacy facility felt, running three shifts even at mid-cycle levels. This is a key reason we decided to make this capacity investment, and we're very pleased with the outcome. Our backlog has served as another proof point of our strategic progress, making a step change during the fourth quarter of last year as long-term customer agreements entered the picture. Our backlog remained very strong at $3.1 billion during the first quarter. Strong shipment activity modestly outpaced new orders in Q1, which was not a surprise. While we have somewhat limited visibility on real-time demand conditions given the strength of our backlog field, we follow macro conditions like everyone else and certainly pay attention to the commentary of our customers. With a backdrop of an aggressive Fed and recent banking issues complicating the macro picture, I believe the consensus view has shifted somewhat from a freight market rebound during the second half of 2023 to a view where most are hoping to see some positive trajectory return by year end. Clearly, spot rates have been under pressure since the beginning of 2022. That said, the vast majority of our customers, both direct and indirect, are tied to contract rates, which tend to be more stable. Contract rates have certainly experienced some pressure due to the overarching imbalance in freight demand and capacity as the ongoing inventory correction plays out. In this environment, it's natural that customers will diligently manage their capital spending We believe trailers will remain a relative priority if carriers and shippers know the long-term pain it creates to allow their fleet age to step up. Between trends like power only, nearshoring, persistent driver shortages, and so on, we feel that our space is structurally very well situated. We also know that our carefully selected customer base is well capitalized, remains profitable, and is positioning for long-term growth. As we progress through the year, we will continue to provide candid commentary on what we see from market conditions. In particular, our line of sight to a strong 2023 remains clear. With a very strong Q1 on our books, we are raising our 2023 earnings per share to a range of $4 to $4.50. Whether you're a member of the investment community that has followed Wabash for many years, or maybe only a few quarters, I hope you recognize our underlying pace of strategic progress and improvement in overall execution all the same. We are acting on this company to strengthen its business fundamentals and those changes have become increasingly clear through the strategic milestones we've achieved as well as the strength of our financial results over the last couple of years. The acceleration of results from our strategic efforts is the key takeaway I hope you are left with when evaluating our first quarter and future prospects. I think it's fair to say that most financial models do not have law bias generating our 2023 EPS guidance of $4.25, even at peak levels. I also think it's important to point out that the implied trailer production and our financial outlook remains in the range of 20% below our maximum capacity, suggesting peak earnings levels that are significantly in excess of our current guidance. And that's before we figure in any accretion from continued execution of known as well as upcoming strategic improvements in their business. I'd like to close by thanking our team members who have not only underpinned our quarterly execution, but more importantly, their belief in our strategic direction has and continues to push the impressive rate of change seen within Wabash. With that, I'll hand it over to Mike for his comments.
spk04: Thanks, Brent. Starting off with a review of our quarterly financial results, consolidated first quarter revenue was $621 million, with new trailer and truck body shipments of approximately 11,780 and 3,815, respectively. Shipment activity fell within our expected range as Q1 tends to experience the weakest shipment seasonality for trailers of any quarter during the year. Gross margin was 18.7% of sales during the quarter, while operating margin came in at 11.3%. These figures exceed our expectations due to the combination of material cost surprises and a downside and operational efficiency in the form of improved labor cost per unit and lower variable conversion cost per unit. Additionally, a previously anticipated contributor to some of the margin improvement comes from the ramp down of our conventional refrigerated van production paired with our previously communicated expectations for strong performance within our tank trailer business. Tank trailer production was up 29% year over year in Q1. Operating EBITDA for the first quarter was $82 million, or 13.3% of sales, which amounts to a doubling of EBITDA margins relative to the first quarter of last year. We're clearly very pleased with our ability to demonstrate this level of both EBITDA generation as well as underlying improvements relative to our margin history. Finally, for the quarter, net ACOM attributable to common shareholders was $51.2 million, or $1.04 per diluted share. From a segment perspective, Transportation Solutions generated revenue of $578 million and operating income of $87 million. Parts and Services generated revenue of $47 million and operating income of $9.2 million. Year-to-day operating cash flow was $69 million. Even in the context of significant capital expenditures of $31 million, the company still generated $38 million of free cash flow during the first quarter. With respect to our balance sheet, our liquidity, which comprises both cash and available borrowings, was $410 million as of March 31st. We finished Q1 with a net debt leverage ratio of 1.2 times. With regard to our capital allocations during the first quarter, we invested $31 million in capital projects, utilized $14 million to repurchase shares, and paid quarterly dividends of $4.6 million. Our capital allocation focus continues to prioritize organic growth via capital spending, while also maintaining our dividend and evaluating opportunities for share repurchase alongside of bulk on M&A opportunities. Moving on to our outlook for 2023. I'm very proud of how our team has executed to begin the year as we achieved a record quarter and are already able to pull through a guidance increase due to our strong financial performance during the first quarter and continued robust backlog. We expect revenue of $2.9 billion, and we are increasing our outlook for EPS to $4 to $4.50 per share from a midpoint of $2.85 previously. As I mentioned on the last call, we continue to expect to see strong growth out of our parts and services strategic initiative as we fully anticipate to achieve greater than 20% growth for the third consecutive year in 2023. Combined with the sustainable strength we're seeing in our tank trailer business, which we expect will set an all-time record this year, and improving chassis flow to feed our truck body business, I believe our portfolio is well situated to sustain the strong financial performance we're in the process of demonstrating this year. Our one Wabash first to final mile portfolio has more levers than it has ever had previously in an uncertain freight environment. Thinking about the quarterly cadence of our outlook, assumed in this guidance is that Q2 strengthened sequentially from Q1 to a range of $1.30 to $1.50 per share. We set yet another quarterly EPS record. The second quarter often represents the seasonal height of our financial performance, and the back half of 2023 will likely sequentially step down as some of the cost tailwinds we saw in Q1 normalize. However, just to level set, even with the second half of the year stepping down from the first half, we still expect it to be the strongest second half in the company's history. In conclusion, I'm very pleased to report such a strong quarter on the way to another record year for Wabash. Record financial performance is one thing, but when these achievements are viewed as indicators of strategic progress and business transformation, the results are even more exciting. Clearly, great markets continue to seek balance between demand and capacity, and we're monitoring that situation closely. However, we believe our performance shows a new level of execution during a period of market strength. and we expect to raise the bar on financial performance during any phase of the cycle that we're given. This resiliency, coupled with an exciting growth strategy, enables us to be more confident in our longer-term growth and performance than at any time in our company's history.
spk08: I'll now turn the call back to the operator, and we'll open it up for questions.
spk07: The floor is now open for your questions to ask your questions this time, please press star one on your telephone keypad if at any point you'd like to withdraw from the queue, please press star one again. You will be provided the opportunity to ask one question and one further follow up question will now take a moment to compile our roster. Our first question comes from the line of Justin Long from Stevens. Please proceed.
spk00: Thanks. Good morning, and congrats on the great quarter and outlook.
spk03: Thanks, Justin.
spk00: Maybe to start on that point, it looks like the upside in the quarter and the outlook really came as a function of a more positive outlook for operating margins. If I go back to the fourth quarter and look at the sequential change in operating margins, there was about a 250 basis point improvement sequentially in the first quarter. Is there any way you can kind of bridge us to the key drivers of that? Because revenue actually came down a little bit sequentially. So I'm just curious how much of this is material costs versus you know, other cost initiatives you've put in or other items?
spk04: Yeah, it's a little bit of all of the above, Justin. We executed really well in the first quarter. And one of the things that you don't see in the revenue number is some of our production numbers. We are continuing to see improvement in the supply chain. Our procurement group has done a very good job executing and getting us the parts we need to produce trailers. and truck bodies. We're seeing some nice truck body recovery I mentioned with planting trailers. So all those things have led to a sequential and year-over-year, significant year-over-year improvement in our margins. And those improvements, we believe, are sustainable as we look at the rest of 2023, which gave us the confidence to take up our full year guidance.
spk06: Yeah, Justin, this is Brent. I think we also have to look at it beyond what I think most people think of as a dry van lens. and then apply everything that Mike said across all the other sub elements of revenue generation. So we saw a really nice strength, both top side and bottom side of tanks, platforms, truck bodies, aspects, multiple aspects of parts and services. So it was truly an on-hand all hands on deck contribution which we see that being somewhat not affected by some of the kind of issues that we're seeing on the drive-in side which gives us confidence as we go forward as well got it that's helpful and is there anything you can share in terms of the operating margin
spk00: cadence on a quarterly basis that's baked into the guidance as we look ahead to 2Q in the back half?
spk05: Yeah, Justin, it's Ryan. So, you know, sequentially we're going to look for things to step up in Q2 and then, you know, along with kind of our broader guidance for, you know, one half versus second half, we'll look for slightly, you know, stepping down operating margins in 2H. Okay.
spk00: Well, I guess as a follow-up to that, if I look at your second quarter guidance, at the midpoint, you're talking about $1.40 in EPS. And if I just take the midpoint of the full year guidance and kind of run that through to the back half, it implies closer to $0.90 a quarter in the back half, which is a pretty substantial step down sequentially. Can you just give a little bit more color on what's driving that? Because it feels like You've got a lot of visibility in production. You've got a lot of visibility in price. Obviously, we're seeing margin upside today. So I just wanted to better understand what's causing that deceleration.
spk04: I think we're taking a pragmatic view of the second half of the year, Justin. We have great visibility to Q2. And as you mentioned, we have a really good backlog. But we're in an environment that's evolving quickly, and we're just taking a view to say we have an opportunity in July to update in the second half. But we've put guidance out there for the full year that we feel confident we can hit, and we'll see how the second half unfolds after we get through Q2. But we broke out Q2 guidance specifically to kind of show what we can see most clearly, and then we would expect the operating margin improvement that we talked about from a throughput perspective, build rates that continue into the second half. But there's other variables, including input costs, that we're continuing to watch, and we'll update Q2, or excuse me, second half as we get through Q2.
spk06: Yeah, I would just reiterate, Mr. Brent, I'd reiterate that, yeah, we have great visibility of the second quarter. We have very good visibility of Q3 and Q4, and we'll have a substantial substantially improved visibility in just the next, what I would say, 60 to 90 days. And that's going to give us the opportunity to address kind of that pragmatic nature of how we've guided in the second half of the year. And you can interpret that as you will.
spk08: Understood. Thanks for the time and congrats again. Thanks, Justin.
spk07: Our next question comes from the line of Mike Schliske from DA Davidson. Please proceed.
spk02: Good morning, and thanks for taking my question. Can you give us a sense, maybe the last month or so, Brent, kind of what have the order trends been from your core customers, I guess, from two perspectives? Have you gotten any additional large kind of multi-orders that you've been talking about that you've already booked with Shabby Hunt and a few others, and also just kind of regular everyday orders? How has that been going? I'm kind of curious if anyone has taken a real pause on even calling people back at this point.
spk06: Yeah. So from a long-term agreement perspective, we're exactly where we expected to be at this point in time. We have met kind of our initial tranche of long-term agreements. We're working on our second group for the 24-25 period. and we'll be entering into the 25 extension, so people that signed up for 23-24, we'll be adding the 25 extension here in the next 90 to 120 days exactly per the plan. Our long-term customers still remain extremely positive when you think about a 24-25 period, especially those that are aligned with substantial growth on their part. So we see no let-back on that. When and bluntly we have substantial interest that we won't necessarily take into account in signing up for long term agreements because we have a very tight strategic filter which we use. So we have more demand than we're going to allocate capacity for that. Great place to be from a general demand standpoint. So like we said, it's across the business. We have some really stable aspects, tank trailer, truck bodies. We see that actually being extremely stable, if not increasing, as we look at outer quarters. When we think about refrigerated, that's a market for us to make with the products that we're bringing to bear. So we're somewhat insulated from that. And then on the dry van side, I would say we are where we should be in a normal cycle. At this point, you're not going to have a lot of order intake because these are not for long-term agreements. It's typically to a 12-month cycle and you're full. So there's not a lot of conversations that we're having at this point. We remain full. So that order season will open up, you know, when we get into the late summer, early fall, and then we'll look at 2024 at that time.
spk02: Okay, okay. Another question has to do with margins and some of your comments there, Brent. Actually, it was Brent, yeah. Looking at 10% margins, 10.5% margins this year, and you said that you're basically not really at your full capacity. In other words, you could go higher, where you could go more, and of course lower if things were to go lower from here. I'm kind of curious, is the 10.5% a new kind of midpoint range going forward? Do you feel like in the future average year, you know, the 10% plus margin level is kind of where you should be and we can adjust up or down from there based on the broader cycle? Or is there some aspects where you've gotten some temporary pricing for a couple of quarters here and that might be kind of pushing things a bit on the higher than normal end?
spk06: Yeah, great question. So I'll start it off. Mike can fill in the blanks. So when I think about operating margin potential going forward, let me just kind of start at the top. The performance that we see right now is truly based off of the changes that we've made at Wabash pulling through, right? So we have process validation in the work that we've done very clearly. It's not just taking advantage of a moment in time. It is the purposeful output of a lot of things working together. And that's one of the reasons, as we look forward, we can confidently say that we have accelerated the pace of change and output within the business. And as all of you know, we're at levels now that basically are already at or above what we guided to in 2025. There is a step change improvement that we believe is solid. So if we look at the outer quarters, the qualitative answer is yes, we are making a step permanent change in the relative operating margin that we would experience at any point in a given cycle, substantially better than any past cycle that Wabash has performed with it. and then you can adjust that based off of where you're at or where you believe we're at in the cycle and the rebound. But wherever we're at, we're going to outperform any previous expectations that are on the books, and I would say that in a very measurable way. So that would be my qualitative answer. Mike, anything else you would add to that?
spk04: No, I think you hit on it pretty well, Brent. I would add, and Brent said in his prepared remarks, and you alluded to it, Mike, and that is that I think one of the things that people miss is we are still somewhat below, relatively significantly below our peak output from pre-pandemic levels before you add in full capabilities of surge. That will obviously give us some additional margin expansion opportunity, as well as tailwinds we think we'll get in truck body. As we mentioned, the chassis flow is improving. sequential and year-over-year improvement. So there's obviously some operating performance, operating leverage that we can drive to the bottom line. There's a lot more to it than just that, obviously, from pricing and cost. It comes from materials. But we do believe that we have the setup to perform better at any point in the cycle than Wabash has ever done in this system.
spk06: The entire strategic framework that we're working under is purposely designed to not have this thing leaning on a one-legged stool called pricing. Because we know that is entirely two variable, you know, cycle to cycle, period to period. Everyone's got to take into account that as we go through the next four to five quarters, we're going to have other aspects of the business continue to grow in their revenue contribution. And they all effectively add to the operating margin of the business based off of how they perform today and expectations going forward. So we have a lot of things that are going to be additive at an increasing pace as we move into the next two years of performance.
spk02: Outstanding. Brent and Mike, I'll leave it there.
spk08: I appreciate the discussion. Thanks, Mike. Thanks, Mike.
spk07: Our next question comes from the line of John Joyner from BMO Capital Markets. Please proceed.
spk03: uh thank you thank you for squeezing me in uh which i guess is better than getting squeezed out um so first how uh how how are you thinking because bring you just kind of touched on this a little bit right in terms of the uh the operating margins in your 2020 2025 goal so how are you thinking about those long-term targets now that 2023 eps and and profitability is is comfortably above those objectives for 2025?
spk06: Well, pretty bluntly, I'm drawing up new ones at this point in time, and we're socializing them across the company right now as part of a rolling strategy process. And so I would say we have a pretty good eye on what we think those revisions will be. And what we'll see probably, I'll say, in the next couple quarters is or we're probably going to come out with additional guidance relative to 2026 to make sure the street is fully aware of what those are. And at that point, we'll expand the contribution of the various elements that are going to lead into that. We're going to give 2024 a little bit more time to settle so we make sure we get a good starting point. But there was a question a couple calls ago where someone said, you know, how does 24 fit into your strategic plan? What if there's a downturn? And the answer is even more, can be more strongly said today. Regardless of what happens in 24, based on what we see, we are in an outstanding position to beat our 2025 targets. You can look at that as just where we're standing right now and build upon it. So we're in a pretty good place right now.
spk03: Okay, excellent. And then maybe just one more quick one, I think, here. In the release, you called out the strength in tank trailers and truck bodies. Could you offer some more color around these product lines and what you're referring to?
spk06: Well, without giving total specifics, our tank trailer business has basically hit an all-time volume level in production in the context of the last five years. a substantial improvement. I mean, Mike, what's the actual for tank trailers?
spk04: It was up 29% year over year.
spk06: 29% year over year with room to continue to expand. As we go into 24, we added capacity to our plants in Mexico, continued this improvement in our plants in Fond du Lac and New Lisbon. So with extending some of our customer-centric commercial strategy into the tank business with good reward, and we've seen efficiency gains just within the business itself. Truck bodies, you know, we have been working through the chassis constraint for multiple years. We're now at a point where that is beginning to abate. Now that gives us a runway for, you know, class one through class six primarily growth over the next two years. We're seeing that begin to pick up. And we're seeing the inefficiency caused by the overall supply chain disruption diminish. And that's been a significant drain on margins in that business for three years. All that's just at the extreme early innings that will allow, gives us a nice pale wind going over the next two, I'll say next couple years.
spk04: And correct by you, you're seeing mid-teen to almost 20% improvements in production rates. You can't Our production exceeded our shipments for truck bodies in Q1. So we're seeing some nice pull-through there, as Brent mentioned, with some supply chain disruption easing. And that gives us a nice tailwind, along with tank trailer and also parks and services, too. All should be a nice benefit to the overall margin profile of the enterprise going forward.
spk03: Okay, excellent. That's impressive. Appreciate the time. Thanks, John. Glad we could squeeze you in.
spk07: Our final question comes from the line of Felix Boshin from Raymond James. Please proceed.
spk01: Hey, good morning, everybody. Congrats on the quarter. Thanks, Felix. Hey, I was hoping we could follow up on the dry van capacity expansion. And I'm just curious if you could comment on sort of the anticipated build rate increases through the year within that expanded capacity. And then just secondly, Mike, I imagine there's just some startup costs associated with ramping capacity. I don't know if you could talk about that, maybe what's in the numbers and how you expect that to track.
spk04: Yeah, there is. So, effectively, the line will launch here in Q2. In the next couple weeks, really, we'll start to see some production. So there will be some startup costs in the early first half of the year in Q2, but not anything above what we've guided to. We saw some in Q1, which we talked about at the year-end call. And then what you'd expect to see is significant improvement in line rates through the end of the year. But still, we finished the year in that facility at approximately a third to half of what a full output profile would look like for that plant. So the full benefit of that capacity would be felt in 2024. So there's very little output in Q2, pretty good ramp in Q3, and then we'll be close to full line rate in Q4. Still dependent on exactly when we add second shifts and things like that. That will be a decision we make as we get a little bit closer, but you'll see a full impact of that facility, which we've previously said it'll be a net improvement to what we did before, 5,000 units from the reaper plant into next year.
spk01: Okay, got it. That's helpful. And then just I wanted to follow up on the strong gross margins in the quarter. I know you talked about sort of input costs coming down as well as efficiency going up. I don't know if you could size those two buckets for us. But then my bigger picture question for the second half of the year is, I know you changed the way that you price your dry van trailers. Could you maybe just talk about how you're thinking about that raw material margin into the back half of the year of maybe things somewhat normalized, just kind of trying to think through the puts and takes here?
spk04: Yeah, so generally speaking, we had, you know, we talked about the production. It was a lot. When you have a quarter like we had, it was a lot of factors that contributed to it. We did see 10% to 12% production improvement in our drive-in trailers. I was earlier, we had high teens output improvement in truck bodies, a little better supply shortage. So that all really led to the conversion cost increase. And we did see some normalization of the price with the material cost. And into the second half of the year, that's one of the reasons we're keeping a A keen eye on how the material cost is going to settle, some of our input costs. They are coming off of a bit of a high in 2022. We don't think it'll have a huge impact to margins, but it could have an impact to ASPs as material costs come off their highs. So that's one of the reasons we've stayed somewhat pragmatic and conservative in our second half commentary to see what that looks like. Generally speaking, we wouldn't expect to see significant margin impact from input cost. That was the whole intent of our variable pricing construct that we launched.
spk08: Got it. I appreciate it. Thanks for the time. Thank you.
spk07: I would now like to turn the call over to Ryan Reed for closing remarks.
spk05: Thanks everyone for joining the call today. We appreciate the participation. Look forward to following up.
spk07: Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.
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