Q3 2020 Wabash National Corp Earnings Call
National Earnings Conference call.
At this time, all participants and we know they said Oh email.
After the speaker's presentation, there will be a question and answer session.
Ask a question during that time, you'll need to press star one on your telephone.
I would now like to hand, the call center over to your first speaker for today Mr., Ryan <unk> director of Investor Relations. Thank you. Please go ahead.
Thank you Ed.
Good morning, everyone. Thanks for joining us on this call.
With me today are Brent Yeagy, President and Chief Executive Officer, and Mike <unk>, Chief Financial Officer.
A couple of items before we get started first 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 any non-GAAP reconciliation for all available IR Dot Wabash National Dotcom.
Refer to slide two in our earnings deck for the company's safe Harbor disclosure addressing forward looking statements.
I'll now hand, it off to Brent to get US started with his life.
Thanks Ryan.
Morning, everyone and thank you for joining us today.
Like to start by getting some high level perspective on the last eight months and highlight why within Wabash National were so positive about what we've been able to demonstrate through this challenging time and why we feel confident about the companys prospects going forward.
From the beginning of the Cobas pandemic I've watched people come together to embrace the deliberate changes necessary to adapt to the new environment, we find ourselves in.
Our people have worked tirelessly across our operations to continue safely producing equipment to satisfy customer demand. We're also adapting to organizational and operational changes necessary to align our internal structure into our revised strategy.
Process comes down to the dedication and talent of our people, which speaks to the positive and collaborative culture, we work to foster every day.
As I previously mentioned, the health and safety of our people as our top priority and on that front. We're very pleased with the incidence of workplace spread of coping which has been extremely limited.
At the onset of Kobin, we were faced with multiple.
No.
Our team has methodically work through to keep.
Our people safe and then ready for the company, but the growth is inevitably coming fall into crop year.
Thanks to our product portfolio diversification customer conditioning and improved business processes, we've achieved financial performance across the broad array of metrics that is night and day different from previous trough period performance for Wabash National.
The three quarters of 2020, we have limited decremental margins to the mid teens generated positive EPS and produce meaningful free cash flow.
We have leveraged than the natural disruption during coping to rapidly reorganize our business to be more had to be more agile internally to ensure account flows to the areas of highest need without being constrained by organizational barriers.
At the same time, we restructured ourselves in a way that makes it easier to do business with for our customers.
I crossed our portfolio first part a mile products.
And all these benefits come with the opportunity to eliminate $20 million of redundant costs in our new structure.
Hey task, we completed during the third quarter.
We entered this downturn with a well positioned balance sheet and a further short out which we have further shored up.
Somebody you know said say improved.
Our capital structure with a pre financing of our <unk> term loan.
Which means our nearest debt maturity from 2022 to 2025.
Sitting onto our customers there has been a very bifurcated experienced among the customer groups during during among our customer groups during 2020.
So I thought it might be helpful to spend a moment to walk through the forces that various segments of customers have been feeling as it relates to demand conditions for simplicity will break customers into two distinct buckets those at our professional and those that capitalize on and well capitalised freight carriers and those that are not.
Professional freight carriers have done a truly an admirable job of keeping critical goods moving.
Throughout our country during the very uneven times earlier, this year and even now when carrier capacities.
To move freight is stretch that.
Break carriers in general have seen market conditions rebound very nicely throughout the course of 2020 and are well positioned to continue to refresh their equipment.
Our second set of customers encompasses nonprofessional freight carriers. These customers move goods, primarily for delivery to the end customer as an ancillary piece of their business, whether it's a flower shop, a dry cleaner or an appliance store delivery is a necessary component of their business, but not their main business. This is where covid has had a more negative.
Related impact, which is primarily focused on our final mile segment.
These businesses tend to deliver has an auxiliary part of their business and many of these customers may not have been classified as a central businesses. During the state mandate of Lockdowns as such demand and the final mile segment has remained below breakeven levels in 2020.
Remain optimistic about demand trends and find them, while going forward as we've seen ecommerce accelerate as a percentage of retail sales this year.
The weakness that we've seen in demand for fond of my equipment. This year will reverse overcoming years as these customers who are most harshly impacted by covid get their feedback underneath them.
We are also directly experiencing the reality that our customers are looking forward to leverage the opportunities presented by the further disrupted acceleration we've seen at home delivery since the onset of Covid.
Straight up.
Across the vast array of manufacturers in 2021.
Before closing I'd like to say a few words about our new organizational structure.
By being in place we have seen the early benefits experienced throughout many aspects of our company.
As I mentioned on our last call we have pivoted our strategy.
Which now centers around being the first to final mile equipment provider to customers and the transportation logistics and distribution markets.
Our product portfolio has grown over time, and we felt that a meeting that there was a meaningful opportunity for improvement by moving from a product centered organizational structure to a customer centric model that prioritizes ease of doing business for customers, who may want to buy across our portfolio and also conveys benefits from these closer customer linkages.
As we evaluate evaluate product improvement and innovation activities.
While the structure is still very new IC early wins coming from this approach, both internal and external to Wabash national.
Internally I see that talent is flowing to projects the highest priority for Wabash national not necessarily the highest priority within a given segment the elimination of Sps silos has enhanced our collaboration and the speed at which we're able to collaborate within ourselves and with our customers.
We've been able to move faster and our new structure, even as many of our employees continue to work remotely access.
Externally the way our commercial team has been empowered to engage customers across our portfolio is in the very early days as we work through the first large deal season with this within this organizational structure, but the conversations occurring with customers have a different tone and we believe we are positioning ourselves well as a strategic partner for our customers rather than just.
The traditional basic supplier relationship.
Let me close by saying.
That I've learned more about the resilience of our people and our portfolio during 2020 than any other year.
The last eight months have been a true challenge and our company has responded exceedingly well.
Myself and my team are focused on the longer term and the creation of value for our shareholders as well as near and long term interest of our customers and our people.
However, we do seek to achieve a fair valuation based on our breakthrough performance demonstrated during a time that is significantly tested the business that we have created.
I understand that historically the modest multiple on our EPS or EBITDA has certainly been influenced by Wabash nationals difficult performances during prior trough periods.
Our historical trough performance is something that we've been diligently working on over the last decade, and we feel strongly that we improved a lot through 2020.
Agile and purposeful cost management, leading the decremental margins in mid teens subs.
Substantially positive EBITDA and free cash flow generation and maintaining our dividend through.
Through this trough all serve as proof Wabash national as create a structural and foundational improvements and its operating model and its business processes.
All of this has been achieved by doing what works for our customers and our people as we continue to evaluate opportunities to strengthen our value proposition, while enhancing our financial performance in both cycle troughs and peaks and all phases in between going forward.
Lastly, I'd like to mention that we've been working hard to all the distractions that.
That have come with Cove, it to put Wabash National's first sustainability report on the board, which we look to issue in December.
Environmental social and governance topics or something that we've been focused on internally for some time and it's time that our public disclosures caught up with our internal efforts because we have a great story to tell.
I have a hard time thinking of many other companies that are so unique we incentivized by the opportunity to make our products more environmental friendly.
That products that positively impact the sustainability of our food chain as well as eight and the productions of medicines vaccines foodstuffs and everyday living.
From Wabash Nationals, beginning we've been focused on helping our customers achieve improved fuel economy by taking weight out of our products will also making them more durable by lead by leading immaterial technology innovation within our industry.
We look at socially quality and the opportunity to leverage a diverse workforce not only is the right thing to do but as a business imperative that generate superior ideas that enhance business decisions and also serve as a competitive differentiator.
This also allow this also flows into the governance has enhanced diversity on our board of directors has certainly enhance the range of perspectives of our directors, which has been useful in the short term as our board has been generous with their time, helping us navigate through 2020 and also in the long term as we have nailed down our refreshed strategic.
Quick direction.
As I've mentioned, we have a great story to tell when it comes to CSG.
And I am truly excited about the resources that we put behind telling it going forward.
With that I'll hand that over the Mike for his comments.
Thanks, Brett I'd like to start off I gave you some color on our third quarter financial results on a consolidated basis third quarter revenue was $352 million with consolidated new trailer shipments of approximately 8450 units during the quarter.
Revenue is fairly steady with the prior quarter and improved as the quarter progressed.
Third quarter GAAP gross margin was 12.3% of sales during the quarter, while operating margin came in at 2.4% on a GAAP basis or 2.7% on a non-GAAP adjusted basis.
Third quarter gross and operating margins were the strongest as the fourth quarter of 2019.
The improvement in operating margin was made possible by our cost savings efforts that is structurally reduce our EPS DNA footprint.
Compared to compared to the third quarter of last year as DNA expenses reduced by about $6.2 million or about 18% when adjusting for expenses associated with our new term loan debt facility, which we closed in Q3.
Although some of the year over year reduction in SSG and able to shave the reduced incentive compensation and other onetime actions.
We would still expect 2020, onest DNA to be $15 million less than 2019 ill.
Ill address that more in more detail in a minute.
Consolidated decremental margins in the third quarter were very good at 13%.
Operating EBITDA for the third quarter with $24 million or 66.8% of sales fine.
Finally for the quarter GAAP net income was $3.9 million or seven cents per diluted share non-GAAP. Adjusted net income was $4.7 million or 99 cents per diluted share.
From a segment perspective commercial trailer products performed very well with revenues of 227 million and operating income of $19.7 million.
CTP detrimental margin during the third quarter was about 11%, which is a phenomenal results achieved through purposeful cost control.
Average selling price for new trailers within CTP was just about 27000, which represents a 1% increase versus Q3 of 2019.
Diversified product groups generated 72 million of revenue in the quarter with operating income of 4.2 million.
DPG decremental margin was also very favorable at 14% year over year in Q3.
As we discussed in our last earnings call final mile products continues to operate below breakeven volumes at cobalt has impacted demand in this segment differently than other end market.
SMP generated $55 million of revenue during the quarter with an operating loss of $4 million generating detrimental margins of just 16% during the quarter.
FM piece third quarter EBITDA was a loss of 400000.
Gross margin of 8.8% does represent a 490 basis point improvement from Q2, and a 920 basis point improvement from Q1.
Focus manufacturing cost control drove improvement gross profit on the gross profit line and we will see significant improvement in segment EBITDA as revenue increases in 2021.
Year to date operating cash flow was $107 million and we invested roughly 14 million via capital expenditures, leaving 93 million of free cash flow.
We are now targeting 20 to 25 million in capital spending for 2000 for 2020, a slight increase from previous guidance as better visibility and strong cash generation have allowed us to progress with some near term opportunities to reinvest in the business.
With regard to our balance sheet, our liquidity or cash plus available borrowings as of September Thirtyth was $383 million with 216 million of cash and 167 million of availability on our revolving credit facility, which is fully untapped.
In terms of working capital approximately $49 million was freed up during the third quarter with a reduction in accounts receivable and an increase in payables combining to drive that change.
We continue to make good progress on our efforts to free resources from noncore assets, while timing is difficult to pin down on many of these items. We have successfully closed on the sale of our Columbus, Ohio branch location the.
The closure occurred in Q4 of 2020 and this is indicative of our shift in strategy as we close up as we closed our last remaining retail trailer sales location.
We look forward to provide any more thorough update on our strategic growth initiatives on our year end conference call.
With regard to capital allocation during the third quarter, we utilized $10 million to pay down our high yield notes invested 2.8 million in capital projects and paid our quarterly dividend of $4.3 million.
As I mentioned earlier like discussing capital expenditures, our improved near term visibility and demonstrated strong cash generation, our capital and our capital allocation focus is now shifting to increase reinvestment in the business through growth Capex.
While also continued to continuing to prioritize maintaining our dividend and more accurately evaluate opportunities for debt reduction and share repurchase.
Moving to the debt structure.
We successfully refinanced our term loan during the third quarter.
This eliminates a 2022 maturity and pushes it out to 200 to 2027.
The new debt facility is also covenant light with noble with no material financial covenants.
So while we reduce the balance on our high yield notes by 10 million during the quarter, our new term loan was upsized by $50 million compared to the prior facility resulted in a small total debt increase of $5 million during the quarter.
We would expect to resume our trend of lowering our total net debt in the near term. It is also important to note that our net debt at that our net debt level that $250 million actually decreased by 75 million versus Q2 and $110 million year over year. This is the lowest net debt level Wabash is recorded as a 2017.
Looking forward to the fourth quarter of 2020, we expect revenue to pick up slightly relative to Q3, we expect year over year decremental margins in the mid teens for the fourth quarter as we continue to benefit from cost savings actions taken and conduct in conjunction with our strategic reorganization, though decrementals are unlikely to be as low as Q2 and Q3.
With Fourk with furlough activity now in the rearview mirror.
With slightly increased interest expense of approximately $6 million to $6.5 million in the fourth quarter, we expect EPS to be around breakeven levels in Q4.
We referenced 2021 with regard to growth in our backlog and the actions, we're taking to ready ourselves for a year of volume growth.
While it's still too early to give formal guidance on what we expect for next year, we would like to mention a few items that should help in modeling 2021.
Starting with market conditions.
Third party forecasters expect total trailer production to increase on a percentage basis anywhere between the low teens to low 20% range in 2021.
We believe a percentage increase in the middle of this range should be appropriate for our revenue.
As material costs have been on the increase and labor cost is most certainly not indicative of 10% unemployment, we do expect to show moderately higher pricing in 2021 in order to offset these cost headwinds.
With regard to our $20 million cost reduction target. We're excited about the structural savings we've been able to achieve as part of our strategic organizational realignment and the external benefit that that accompany a new customer centric structure.
With cost actions completed our analysis shows that the savings should split roughly 75% from SDMA and 25% from Cogs.
It's also important to clarify that the $5 million per quarter run rate savings will flow through a relatively cleanly and Q4 of this year, but.
But because of furlough activity and other onetime reductions has significantly reduced our SGN a base in 2020, we do lose a basis for a clean year over year comparison, our best estimate at this time is for $125 million to $130 million of SGN expense in 2021, and we will update this on our next call as we finalize our look forward into next.
Last year.
While we're talking about both incremental and decremental margins for the company being in the 20% range on a normalized basis.
The base on which we are calculating incremental margins for 2021, well has considerable furlough savings included which will serve to depress incremental margins.
We are targeting incrementals in the mid to high teens as we look forward to growing revenue and operating income in 2021.
With the changes to our debt structure, we expect total interest expense to be $20 million to $26 million in 2021 or about $6.5 million per quarter.
From a cash perspective, it's normal for working capital become a use of cash as volumes grow throughout the business as inventories expands and accounts receivable increase.
We continue to look for opportunities to drive structural improvements to working capital, though in the short term, we expect working capital consumed 25 to 35 million of cash in 2021.
In closing I'm proud of the financial results, we've achieved and more importantly, our focus on keeping our people safe and the rapid actions, we took to protect our business our third quarter builds upon the strong financial performance. We've shown during this on even time.
Decremental margins have been excellent we have positive EPS through the first three quarters and our free cash flow generation has not only been exceptional that has meaningfully raised the floor relative to prior drop performance.
As our backlog improves and we achieved better visibility into future market conditions, we look forward to ramping up capital expenditures to support our future growth initiatives, while maintaining our dividend and becoming more active with debt reduction and share repurchase.
With that I will turn the call back to Dan and we'll open up for questions.
Thank you.
Mind, you May ask your question you will need to place in.
The number one on your toes.
Yeah. Its star one I will tell the story.
Please standby lubricants borrow the Cuban nave asking.
Our first question comes from the line of Justin Long from Stephens. Your line is now open.
Thanks, Good morning, and congrats on the quarter.
Thanks, Justin.
So Mike all the commentary on 2021 was really helpful. I wanted to circle back to what you said on incremental margin. So it sounds like next year.
There will be in that mid to high teens range, just because of the tobin related comps, but beyond that has the framework for 25% incremental margin changed at all given some of the structural initiatives that you've implemented this year.
Yes, yes.
Reaffirmed the first prior year comment or question is yes, the there will be lower in 2000, and because of the furlough activities. The onetime actions and because we have a structural cost reduction I would expect them to improve as you look at 2022 compared to 2021 and that want to break out exactly how much that would be we'll continue to give guidance as we go forward, but you would expect to see what.
We've talked about 20%, 20% plus incrementals because of the savings should be achievable as we go into 2022.
On the I would say is we've got $20 million.
Savings run rate it goes into 21 2021, but we're far from done working on our business as we move into 2022 in 2023, and we'll talk more about that in calls as we continue to execute on that plan.
Okay, Great and then I wanted to circle back to the final mile as well and I was wondering if you could help unpack some of the commentary in the prepared remarks on the customer mix there.
Any way to help us think through how much of that business is tied to essential customers versus non essential and any thoughts about the revenue that we need to see in that segment in order to get that business to breakeven.
Yeah, Justin I'll take the first half of the question Michael follow up so when we look at the the general custom for customer groupings that we serve.
Well over 50% of the total customers fall into that non professional carrier grouping.
Whether they run through a lease or rental group.
Group or whether they buy direct from from Wabash national or or through a dealer.
The vast majority is by far impacted by Kobin.
And bluntly the majority that move through the sort of so for our quarter, our big lease channel whether it be Ryder Penske are also going to be impacted primarily by cobot as well. So it is it is a significant is a very significant portion of the final mile group and.
Somewhat goes when we put the companies together that.
That we've acquired since 2012 from a diversification standpoint.
I think we're having things play out in somewhat like like we should have and what I mean by that is in this specific set of situation to dry van business has been relatively steady we've been able to perform based on the conditions on the ground in this case the final mile group.
Be impacted by a out of the Blue Black Swan pandemic has a disproportional impact right. That's it it sounds like it's a negative but it really it goes to diversification going forward. So I don't expect the next drop to have a pandemic attached to it. It's just the reality of what we have today.
So yes in terms of the.
Breakeven adjusted I think it kind of depends on which line of the income statement I'll look at but we were real close to breakeven EBITDA in Q3, a $55 million of revenue and S&P.
I would expect that it would take about 20 million more in that call it $75 million quarter 300 million a year to get to breakeven on the NOI line, but at that level, we would have pretty solid EPS positive EBITDA and EPS, because we run quite a bit of amortization from the acquisitions through that BNL. So you could see a situation where is generating cash even if it's not.
While the profitable and on the line.
Okay.
That helps and then just one last quick one Mike you mentioned the working capital changes you anticipate next year, but in the fourth quarter.
Do you anticipate any major changes in working gap, yes.
Now on to start ramping in Q4 for 2021. So you would expect to see probably use of working capital in Q4.
I would say it would be in the $20 million to $30 million range would be a good rule of thumb in Q4, as we ramp into 2021.
Okay, Great I'll leave it at that congrats again thanks.
The.
Thank you. Our next question comes from the line of Brian Jones from Craig Hallum. Your line is now open.
Good morning, guys and congrats on the nice bounce back in the business recovery results. Thank you good morning.
Anything you can say so we've seen a very nice recovery in orders, maybe you can comment on backlog order trends customer conversations et cetera in October kind of post quarter.
Well I mean, we finished the the end of the third quarter with was approximately $1 billion in backlog you've seen the order intake as represented by HCT and FDR for the month of September the what I would say is that the the internal activity in October.
The discussions that we're having continued to have with customers are I would say generally in line with what September represented.
I think if you draw a connection to the working capital increase that you see in the fourth quarter.
I think we can look at 2021 and absolutely being a.
Relatively significantly improved year from 2020.
The only caveat I've got to that is we're all going to play through the supply chain and labor constraints that we will we will all work through as a group of manufacturers through the first half of the year.
And that's one of the reasons, we want to not give guidance until we somewhat see where we're at in the next three months.
All right. Good and then just on on final mile for 2021 expectations, you mentioned trailer production kind of the industry forecasters low teens to low twentys good kind of midpoint, there directionally is that a decent.
Benchmark for FMT, you're going to have an easier comp, but also sounds like some greater headwinds longer headwinds. There. So just the puts takes directionally. If you can comment there would be great.
Yes, I think Thats I think the general range that we gave for the trailer industry is going to be similar.
For truck bodies year over year, we will see as you mentioned, we will have favorable comps on 2020, but we also have.
So we'll have a lot better flow of chassis is in that business in 2021, and we had in 2020 so nice.
Nice improvement in that business on the top line is certainly expect.
Good last one for me and then I'll turn it over just in FMT, you commented kind of on the non professional.
Customer mix being well over 50% can you break out that segment, what is and I know, it's difficult, but kind of partial ecommerce delivery, which maybe some of the smaller classes have a bigger mix up but what percent of truck bodies goes to that versus.
Whether it be flowers or dry cleaners, or the other kind of mix of customer base. There. Thanks, Adam that's a little bit more difficult to do because.
We don't necessarily know exactly what's going to be moving through our large leasing and rental channels that fall into that.
It would be it would be a full cycle.
A wild guess at this point and there is a lot of moving pieces that go into it.
Analogy.
Or Ics experience I can give you to get you to the complexity of it is just from personal experience and some of our research is that we are seeing a significant portion of Ryder penske related equipment showing up in.
E commerce related deliveries.
To fill voids that are present today with existing assets.
So whether it be Amazon Expo or whatever big and bulky you're trying to get delivered.
We're saying that equipment moving into that space that did we will when that order came in we bill for it that it necessarily have an ecommerce sticker on the side of it absolutely not so.
It's difficult to say, but it's probably higher than Mike any estimate I would give you.
Fair enough difficult question I appreciate the commentary you guys. Good luck.
Right.
Thank you. Our next question comes from the line of Jeff Kauffman from <unk> capital markets. Your line is now open.
Thank you good morning, and congratulations everyone.
So just a couple nuance things you talked about the SGN any savings yet there was a sequential jump of almost $5 million in ESG in a on only about 13 or $14 million total sales jump.
No I understand there might have been some debt financing costs in that number but can you help me back into that sequential increase a little bit yes, or the sequential increase Jeff is almost 100% driven by all of the furlough activity. We had in Q2. So we had a significant number of one timers in Q2 on the EPS.
In airline as a reminder, we took the whole company down for four weeks most of that was in Q2.
Last week was the last week of June starting June 29, and some of that spilled into Q3, but that's a bit different and that's what we've tried to we've really tried to lay out how much of this we think is structural versus onetime actions I would estimate that our total business there somewhere in the $25 million range of one time cost reduction actions that we saw in 2000.
On the operating cost savings that would flow, but seeing some suggestions on that operating costs that would say that hit in 2020 that won't repeat in 2021, which is why we tried to kind of break out how much we think structural versus one time.
Okay, and when you gave the guidance of 125 million to 130 and SGN I in 2021, you're talking about both line items right. The selling expenses line and the DNA line Yep Yep. Okay. So so the consolidated number you are forecasting 125 to 130 next year based on what you know today at ASCO.
Correct Okay.
Okay can I kind of walk through the thoughts I know, it's too early to forecast, but I just want to follow the math here on 2021. So you you said, there's a range of improvement from the mid teens to the mid 20% range you'd kind of take the middle of that just for argument's sake. So if I take the AC.
T data and bumping up 20%, that's implying about 230 235000 units give or take if I take a look at your normal market share of the total.
It would be about 18% of that give or take a little less than that right now.
It would imply something between 41 and 42000 units to the company next year.
Is that sound like too big a number because that would imply you're raising production from about 8000 units a quarter right now to probably in the 10 to 11000 unit range for next year.
I would say Jeff on the numbers that you have linked together there that math probably holds true in the way that you described.
Okay, and it's not your forecast I'm, just thinking out loud with what's out there.
Logical flow of numbers, Okay. Great can you give us an update on your progress with the new products or we can talk about the the new product up in Minnesota, We could talk about the implementation of some of the new duraplate products, bringing to market can you just kind of give an update on where you are with that did covert delay any of the.
That and where are we on the rollout of some of these new products. Yeah. So we have a fully commercialized launched our sell core product.
In 2020, and we have substantially penetrated.
And changed over from standard we'll call. It the replay sidewalls into the enhance sell core panel through a large portion of our customer base and.
And that was that was a fairly easy pull through and has met our expectations. Accordingly, there's a host of other smaller improvements within the band business itself, but I won't go into but we're generally pleased with what went on there when we look at molded structural composites the technology.
I would say Cove. It has had some impact on we'll call it innovation pull through on the Reefer vans standpoint, two reasons. One just its just a generally depressed reefer market and not not necessarily in the middle of a pandemic that asset managers are looking to.
Okay put their neck out there with new and innovative technology, the discussions and the pilots continue to be.
The president.
We are approaching 6 million miles on the road. So we are exponentially growing exposure.
So the interest is still there the market doesn't necessarily give us the absolute best.
Situation right now, we think thats going improve going forward specifically.
With the drive towards sustainability.
Within the Reefer space, we're getting a substantial amount of inquiries.
Really coming off of the zero emission MSC product band that we put out in California, which I think is generally people are aware of it that has kicked off a flurry of activity both within the van business and within final mile products about our ability to provide truly sustainable.
And innovative refrigerated products using a combination of technologies.
So we're pretty excited about that and I can't get into the customers that we're talking to but.
But but it is exciting on where we're at with that the other thing that were doing is were we are more fully moving the molded structural composite technology into a final mile products platform.
To serve that space as we look to strategically grow a cold chain.
Market share a slight revenue over the next couple of years. So that has been generally well received we think thats going to be an easier place.
To conquest and convert accordingly, and we're kind of moving some assets. There we think thats the I'll call. It the soft underbelly of where we can.
Grow exposure to product that others added Brent mentioned it there, but the introduction of that technology into our new customer centric. The organizational design is a nice pairing there because you've got a a technology that plays across our whole portfolio of first to file mile products now you have a sales organization.
And that's that's designed to sell across that whole portfolio products. Yeah. It's it is the one of the Premier examples of when you take the well.
We'll call it the invisible.
Communication barriers.
That exist in a segmented organizational design.
And you.
Occult modernize it to look at it for the customer all of a sudden those technologies now become truly capable being scaled and talked about in every aspect of our customer portfolio. So.
It is really exciting about the feedback we're getting right now.
In terms of zero emission sustainability modus rush composites, so core Pat just to just keep going right and it is.
We're pretty pleased with where we're at right now.
Okay. Thank you for that answer one last question.
Mike you had talked a little bit about capex working capital change dividends kind of the focus on that next year and then you kind of threw out a treasury stock again, and we havent had any of that since first quarter I guess, just kind of thinking through after all that you mentioned, it's kind of implying about three.
30 to 35 million in cash for debt pay down and Treasury stock next year do you look at the targeted net debt level on an absolute dollar basis do you look at it more as a function of debt to EBITDA in deciding where you want to be in.
Hey, you know kind of I'm thinking more about treasury stock here is is your thought just to get back to more of an anti dilutive purchase or.
Do you think.
You know, maybe a little bit more aggressive like you were in the previous years.
Yeah. So on the on the net debt, we do look at it from a net debt to EBITDA and what I will tell you is if you look at where we're at right now $250 million and put the the range of numbers that we've been talking about for 2021, you got a pretty healthy level of net debt to EBITDA in 2021, So we feel pretty good about our loan.
Average ratios and then we start looking at when we when we look to buy stock we look at that from a perspective, what we think the valuation of the company is going forward, including how.
How we think that we can perform in the next several years and so we have we have as we look at 2021 as the market starts to firm up we start to have visibility, we'll evaluate where we think we stand and how we can grow continue to grow cash not just in 2021, but in 2020 to a friend's mentioned a lot today about.
2021 is going to be we're still in a cold it world. So manpower becomes challenging to people and to do what we need to do so we'll continue to evaluate and as we as we as we get confidence in our ability to to add capacity and look to market in 2022, and I'll play into our into our discounted mass so to speak of share repurchases.
And those could become attractive.
Based on what we see over the next 18 to 36 months now Jeff you don't mind I wont take your question a little bit further.
And just to point out that when you look at the balance sheet I know you do.
And how is relatively constructive at this point in the strength that possesses you know that sound balance sheet like those coming out of the trough has never existed in any recent history with Wabash National didn't exist in 2001 and two it didn't exist in 2010, right and you know how the company has performed.
They are the ability of doing interesting things with a balance sheet. That's been constructed very diligently over the last couple of years gives us the ability to accelerate.
New phase earlier in the end, we will call it the cycle.
Truly look at building the company at a different pace. The Navy how previous drops have allowed us to do.
We're excited about what that story will be as we go through the next couple of years and the way that will leverage that balance sheet going forward Wabash has never been in such an advantageous position as it is right now.
So I guess loaded for bear is my interpretation, that's a great answer thank you.
Thank you and again congratulations thanks.
Thanks, Jeff.
[laughter].
Thank you and next question comes from the line of Phil expulsion from Raymond James.
Thank you Jason.
Hey, Thanks, good morning, everybody or good morning.
Hey, Brent I was hoping you could flush out the comments around lack of labor availability, maybe a little bit more can you maybe walk us through how you guys are thinking about adjusting your capacity into 2021 as it stands right now and then as you are talking with customers or carriers are worried at all about locking in build slots at this point just.
Just any sort of color there would be helpful.
Yeah, I'll start with the latter I think in general we do see across the industry a concern about the timely availability of product throughout the first three quarters of.
2021.
I think our customers have.
And through this type of ramp up multiple times, whether it's 17 18 14 15 right. Both Bordeaux five. These these we know what this looks like.
Is that we are aware that after trough, we see a precipitous decline.
High level acceleration in demand so.
It is a it is a very.
Delicate balance and making sure that we serve the customers and the best possible way you have them equipment that they need when they want it now for us it's not a physical capacity issue and generally what we're going to find that from a labor standpoint labor issues for us are necessarily as much an internal.
Problem.
We'll call it in the first half of the year is much more of labor within the supply base.
Supply base has to move first to enable owing right OEM manufacturers. The initial labor influx goes there and they've been ramping now for well call. It six weeks right as orders begin that can't come in rough rough cut capacity planning begins the change and they're bringing shifts online right now.
We'll be watching how those shifts come online through the end of this year and through the first quarter of 2021, and that's the constraint that will be basing our labor off of right. So that we do manage our costs right.
From a variable cost standpoint to meet what we believe the constraint within the industry will be.
For us, we'll be looking to increase capacity roughly through the entire year.
The supply chain will get their legs underneath them. The question will be where that will be but as an industry. We will be ramping all year, because we do expect 2022 to be generally higher in 2021, I think thats fair.
From a general consensus standpoint, that's safe to say so our build rate we look to climb accordingly. So we have two things we have to or a couple of things I have to deal with we have to deal with an inherent.
Co good related.
We'll call it impact one available workforce only available workforce, meaning the workforce that is installed of Wabash national right. So we're going to work through we all are going to work through all manufacturers going to work through that through the winter months to see what that looks like all right and the more cobot effect, we have as a general manufacturing industry.
More drain we're going to have on available labor in the plant.
Coupled with that we have to understand what's going to happen with any stimulus package that may or may not come about in the first quarter post election.
And what that does relative to enhance unemployment benefits that may or may not occur and what that does to the workforce.
And.
It's why we really need to get through the next.
Got two quarters to get a clean view of what labor availability will be for Wabash national.
Really from the mid summer going into the second half of the year, we fully expect to add shifts and wrap all year moving into 2021, and I think what you're going to find we're going to do it in a much more diligent precise manner to manage the variable costs in a way that provides superior performance.
Okay. That's very helpful. I really appreciate that and and I was just wondering if we could circle back on final mile for just a second.
It sounds like just from a margin perspective, you guys are improving and when I say core efficiency gains sequentially. I know engineering inefficiencies were kind of a problem a few quarters ago could you kind of give us an update on where that band or is it mostly just a volume problem right now kind of being dragged down by the non professional mix just as.
Any additional color there would be helpful.
I would say that today, what we're looking at is primarily just the the.
Cobot impact on the top line right now is probably the predominant factor in S&P performance that will take care of itself we have some.
Very substantially address the engineering capacity.
And through capability within S&P, we have shifted top resources into that group to structurally change and we have made significant improvement very measurable improvement in the last two quarters up that had where we see that occurring primarily is in variable cost reduction enabled.
Manufacturing, that's really the primary measure when we look at.
The ability of win win engineering is working well and on time.
Material flows and labor flows more effectively that drops right to the variable cost line and we see that occurring just as we thought we would.
Okay. That's helpful. And then just last one from me maybe for Mike Mike you referenced getting back some more growth capex levels can you clarify sort of what that growth component, what maybe incorporate is that mostly around new product launches.
Yes, it would it could be new product launches it could be facilitized seen existing locations.
Locations for new products would probably be the biggest driver of capex versus like an R&D developing the products, but some of the products that Brent and I mentioned that are coming to market.
Yeah. If you if you wanted to build a MSC truck body. It will require some capex that location, so things like that could drive that would be a good example, the growth capex item that we could be looking at 2021 22.
Okay. Thank you I appreciate it.
Thanks Bill.
Thank you next question comes from the line as Joe what seats from BMO. Your line is now open.
Hey, guys How's it going.
Hello.
All right. So a lot of the questions you've been kind of focused on the volume side and.
And I just wonder if you can.
Give us a couple of the other pieces on the sort of the structural change side and I'm thinking more like like actions that you've been taking to improve your gross margins over time.
Pricing power is there a little bit more because you're closer to your customers is there a little more potential to get more pricing than just a wage and raw material cost increases and stuff like that can you give us just kind of that side of the equation a little more thank you.
Yeah, let me try to put a couple of things together there.
Without getting what I would call.
Two specific an answer so well the organizational restructuring that were doing to create one experience for our customers right really remove friction.
We are looking deeply at both we've looked at our finance organization in order to enable our commercial work or commercial group we.
We are actively involved and working through a revised commercial structure.
To facilitate a one wabash approach to selling specifically around customers that we think we provide substantial value and they provide substantial value to us. So when we do something like that coupled with what we call our Wabash management system, we have income.
In conjunction key initiatives, which we call annual improvement priorities are to work on things like.
Pricing pricing methodology.
Pricing methodology, coupled with enhanced demand planning all of those things specifically on a ramp year go to the maximization of price in the maximization of profit.
Going into any rolling period, so when we restructure we put all those things together to create a better business outcome right and you are say early indications rights in 2020, we will look to continue that into 21 22 and beyond as we wrap it all together.
There is no one initiative. It is the our system is based on interlocking changes to create impact.
Okay that makes a lot of sense.
Yeah, sorry that was Ah, yes that was mostly what I was trying to get at and Oh. Another one just can you give a little characterization on that the increase in the backlog I know you said, it's normally fourth quarter. This time its third quarter is that nervousness from from the customers or is that.
Customers are expecting you know a lot more demand going forward and and so they want to get a jump on on on reordering well I think anytime you see 30% changes in spot rate is going you know second quarter third quarter, you get the attention of the professional carriers right. So.
And bluntly, we our portfolio's been structured to have the most professional other professional carriers. So when they see that type of environment and then they look out I believe depending on who you talk to that that can last for 18 four to 18 to 24 months, depending on who you talk to thereby signal is pretty literal.
At that point and I can see it early so what you're sitting there in the July August timeframe. They are typically doing their cap early capital budgeting in July so they kind of know what they need to do and if with that type of environment. They are willing to pull the buy signal in the August September timeframe.
Is it panic is that no not necessarily that is a that initial poll is very prudent very well thought out.
Initial buying decisions now.
Now what comes later when you get into you know as as build slots begins to be.
Still there right now we start to get a little bit of oney or God I need to get slot right and we're starting to experience that a little bit right. So we're working through that accordingly, but it's that initial September number was was real decisions going on.
All right that's awesome. Thank you so much.
Bill.
Thank you and now I will turn the call that Tim is Steve Riney.
Thanks, Dan and thanks, everyone for joining us today look forward to following up with you during the quarter have a great day.
Yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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