Q2 2022 Wabash National Corp Earnings Call
Okay.
Hello, and welcome to Wabash second quarter 2022 earnings call at this time I would like to turn the call over to Ryan Reed for opening remarks and introductions.
Thank you and good morning, everyone. We appreciate you joining us on this call with me today are Brian <unk>, 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 our investor site at one Wabash Dot com.
Please refer to slide two in our earnings deck for the company's safe Harbor disclosure addressing forward looking statements I will now hand, it off to Brent. So he can get us started with his highlights.
Thanks, Ryan good morning, everyone and thanks for joining us today.
We have a strong quarter and outlook to discuss but I'd like to start by recapping. The investor meeting we held on May 19th to reiterate our strategy growth goals and financial targets, we've made meaningful changes to our organization, which began with re imagining our purpose vision and mission as we seek to change how the world reaches year narrowing our focus to the transportation.
<unk> logistics and distribution industries provided us with the charterer to change our organization to be more customer centric and practices from R&D to price development.
How we interface with the customer right.
Re segmenting, our external reporting structure and rebranding our company our external manifestations of several years of purposeful change in internal growth inside our company.
I believe our organization is now ideally designed to execute on our base business, while leveraging growth initiatives across cold chain E Commerce and logistics disruption in parts and services.
By 2025, we anticipate revenue of $3 billion operating EBITA margin of 11% and earnings per share of $3 50.
We look forward to updating you on the progress we make on the strategic initiatives that move us closer to these financial targets and our purpose of changing how the world reaches you.
One exciting update I'd like to spend some time on today relates to our parts and service initiative.
Earlier this month, we announced our trailers as a service with Freightliner to support their power only offering.
Previously spoken about how trailer pools and power only offerings are eliminating waste from the transportation ecosystem.
By using trailers to optimize driver side, but also to allow trailer drop and hook operations to permeate much deeper into the fragmented and in the carrier space.
Our partners at Freightliner, our efficiently connecting shippers with carriers utilizing drop trailers and they expect to meaningfully scale. This offering as our business continues to grow.
Our trailers as a service program provides partners like freight data with the access to trailers, that's critical and growing our business, while connecting them with robust maintenance and repair network underpinned by our recently announced Wabash parts distribution joint venture.
We're excited about the opportunities to continue scaling this program in the marketplace.
The financials from our trailers as a service initiative will run through our parts and service segment, and we will be additives to our ambition of increasing the amount of our business that comes via a recurring revenue model.
Moving onto our second quarter financial performance, our team generated revenue that exceeded our initial expectations and EPS within the range of our prior outlook.
Between increased volumes and improved pricing revenue increased over 40% from the same quarter last year to an all time record of $643 million.
Profitability also continued to sequentially strengthened as we began shipping 2022 backlog, which recovers cost increases experienced during 2021.
As pleased as we are with the second quarter, we still see opportunity to do even better in the second half of the year and beyond.
Moving to market conditions, we spent time with investors during visits and road shows during the quarter and we appreciate the prevailing concerns about the macro environment.
Our management team watches a variety of macro leading indicators, which I think with most fairly be described as mixed right now.
Credit has tightened although it's not constrained.
Consumer sentiment has weakened although the labor market and retail sales remained very strong.
Supply shortages persist in the industrial sector, rather, although industrial production and durable goods demand remained strong.
All of this is to say that we appreciate the warning signs in the broader environment that said the reality that we have at present is that we have seen no cancellations within our order backlog and we are experiencing strong 2023 quote demand and very productive 2023 demand discussions with our strategic customers.
Which has allowed us to open our 2023 order book.
Just to tie a couple of things together here I believe that there are a few different factors combining to create a less cyclical environment for our business under any sort of impending economic stress.
First as we have covered in discussion to power, one and expanding use of drop and hook trailers are being used in new and interesting ways in order to create efficiencies and the transportation logistics and distribution industries.
Creation of these trailer pools resulted in immediate tailwind to demand and ongoing increases to the rate of replacement.
Additionally, we're coming off of two solid years of constraints across the transportation equipment complex, which is fresh in the minds of equipment users as we have seen and we are still experiencing dialing back trailer purchases during times of economic uncertainty is a recipe to ensure that your box out of participating in the prosperous tie.
Statistically short bouts of uncertainty.
Even if the overall consumer spending does pull back the long term trend on E. Commerce is well established and has shown the ability to maintain and even continue to expanding through economic uncertainty.
The structural changes to logistics models required by continued growth in E. Commerce will continue to utilize more transportation equipment as passenger vehicle miles are replaced by commercial vehicle lines and finally, let me reiterate that we showed in 2020, while bashes capability of managing through significant cyclicality and we have only improved.
That capability over the past two years.
We will continue to closely monitor the economy I think it's important for the investment community to more fully understand the unique and secular demand environment, we see before us by looking beyond the traditional measures and headlines and more of what Wabash is creating in terms of strategic portfolio management and moves to capture the benefits of a changing logistics.
<unk>.
As a reminder, the trailer industry has a strong seasonal pattern of ordering activity and which OEM backlogs build during the second half of the calendar year, then burn off through the first two calendar quarters the.
The second quarter typically sees the most pronounced weakness with industry backlogs contracting by about 15% on average over multiple decades.
As such the fact that our backlog remained flat at $2 3 billion from Q1 to Q2 is a purposeful outcome. We're very pleased with our backlog ending Q2 also represented a 71% increase versus the same period last year.
Given our in line Q2 results and the visibility provided by our strong backlog, we are comfortable maintaining our 2022 EPS outlook of $1 19.
In closing we're excited to have the opportunity to fully articulate our strategy growth initiatives and updated financial targets at our May investor meeting.
Paying full respect to the prevailing macro uncertainty our conversations with customers regarding both 2023 as well as long term agreements remain very positive.
We continue to work on increasing recurring revenue through our parts and service business with trailers as a service being another tangible example of how we can engage with the marketplace differently to capture more of the value that our products create for the transportation logistics and distribution ecosystem.
More immediately I'm pleased with our execution so far in 2022 and look forward to updating you on our early thoughts of 2023 as those figures come into sharper focus over the next one to two quarters with that I'll hand, it over to Mike First conference.
Thanks, Brian I'd like to start off by providing some additional color on our second quarter financial results consolidated second quarter revenue of 643 million, new trailer and truck body shipments of approximately 13670 3970 units respectively.
Thats approved across the board in the second quarter and as Brent mentioned this helped us achieve record quarterly revenue during the second quarter.
Gross margin was 12, 1% of sales during the quarter, our operating margin came in at five 6%.
Operating EBITDA for the second quarter was $50 million or.
Or seven 8% of sales.
This was another quarter of margin improvement as we began fully shipping our 2022 backlog.
We expect margins to continue improving during the back half of the year as some of the costs inherent in ramping to achieve record revenue stabilized going forward.
For the quarter net income attributable to common stockholders was $22 6 million or <unk> 46 per diluted share.
From a segment perspective transportation solutions generated revenue of $596 million and operating income of $48 million.
Parts and services generated revenue of $50 million and operating income of $8 $1 million I'd like to call out that adjusting for businesses included in last year's themselves that are no longer part of our portfolio revenue growth in our parts and service segment was approximately 25% as <unk> initiatives.
Distribution JV, while <unk> continues to progress.
Year to date operating cash flow was $83 million.
We achieved a meaningful release of working capital during the second quarter driven by a reduction in accounts receivable.
While payables moved higher.
Our second quarter operating cash resolve combined with Capex equates to over $100 million of free cash flow generated during the second quarter.
Our target for 2022 capital spending remains between 80 and $90 million as we remain on track with our strategic capacity expansion and the conversion of our Lafayette based south plant for wafer capacity to drive and capacity.
Even with our increased growth Capex budget, we expect to generate over $75 million of free cash flow in 2022.
With regard to our balance sheet, our liquidity or cash plus available borrowings as of June 30 was $298 million with a $138 million of cash and cash equivalents and approximately $160 million of availability on our revolving credit facility.
With regard to capital allocation during the second quarter, we invested $12 million in capital projects utilized $5 million to repurchase shares and paid our quarterly dividend of $4 million.
Our capital allocation focus continues to prioritize organic growth via capital spending while also maintaining our dividend and evaluate opportunities for share repurchase alongside bolt on M&A opportunities.
Moving onto our outlook for 2022 through the first half of the year, we have executed on our expected revenue margin improvement and we remain on track for financial performance to continue to step up into the second half.
Given that our second quarter performance was in line with our expectations. We are pleased to maintain our guidance for 2022.
We expect revenue of $2 5 billion in.
And EPS of $1 90 per share.
Full year 2022 operating margins are expected to be approximately 6% at the midpoint and we continue to believe that progress toward our 11% EBITDA margin goal will be evident relatively early in our journey to reach our 2025 financial targets.
Relatedly what item I'd like to call out is that we modified our long term incentive plan to add an ROIC component in this year's proxy disclosure, we have taken meaningful steps to shape our portfolio to fit our strategy over the last few years and our organization is aligned that generate higher returns as we execute our strategic initiatives.
Turning back to our 2022 guidance, we continue to assume that presence supply chain conditions persist for the remainder of 2022.
I'd also like to point out that the volumes and run rates implied by our 2022 outlook would set up the company nicely for continued record performance in 2023.
Turning to the third quarter, we expect revenue in a range of $620 million to $660 million and EPS of <unk> 55 to.
60, <unk> for the quarter.
In conclusion, I believe we show an excellent progress in the second quarter as Brent mentioned at the outset. We were pleased to have the opportunity to tell our strategic story at our May investor meeting and having spoken with multiple investors. During the second quarter I was excited by the more strategic nature of our conversations Valerie update on our growth.
Initiatives and financial targets.
I believe we said an interesting juncture in the company's history.
Todd highlighted by the combination of ample near term opportunity and the right long term strategy and initiatives.
Against a backdrop of share valuation at discount they love ash, they bygone era.
Being fully mindful of potential near term economic uncertainty I believe the last few years to highlight a couple of things.
First our ability to rapidly respond to changing market conditions and furnished meaningfully positive free cash flow during a time of economic volatility.
Second the substantial demand for transportation equipment that can be created by short periods of uncertainty, resulting in the ballooning of pent up demand, which is still working its way through the system from 2020.
There are some flavors in our 2022 and longer term outlook and we look forward to sharing more with you as we continue making progress on our strategy.
With that I'll now turn the call back to the operator, and we'll open it up for questions.
At this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad.
We will now take our first question from Justin long with Stephens.
Thanks, and good morning.
Morning.
Maybe to start with the question on trailer deliveries there was a pretty decent step up here in the second quarter relative to the first quarter. So I was wondering if you could talk about your expectation for deliveries in the back half of the year and what's getting baked into the guidance and then maybe how.
<unk> capacity ramp as we get into early next year with the additional capacity youre, bringing on.
Hi, Justin Thanks for the question.
Generally I think if you in our implied guidance of $2 5 billion for the year you.
You would expect roughly a flattish delivery guide for Q3 and Q4 versus what we just delivered in Q2.
And I think implied in that which I want to highlight again, we had a we had a huge ramp from Q1 to Q2.
Sequentially up 17, 18%, which is the largest sequential increase that we've seen from.
During the Covid period, so both golden periods I think that the.
Good Testament to what we were at a level now we believe that.
We can now have good visibility to deliver those same levels into the second half of the year. Then you go into 2023.
We obviously got our capacity switch out fraud refer to dry at our South plant Lafayette campus coming online, which we've guided to roughly 10000 units gross take out the four or five of the reverse. So you can you can add that into the 2023 mix.
I think you put those together you get a really nice.
Nice view as to what can be some pretty strong EPS generating quarters in 2023 with the run rate we are delivering right now plus the capacity at our Southland, Yes, I would add just a little bit more color far from guidance, let me stress far from guidance.
But.
If you think about relatively flat shipping levels coming off of Q2 for the remainder of the year.
Capacity continuing to shore up the given capacity that we have which will somewhat ramp all year from a production standpoint, we should be selling at a decent finished goods level at the end of the year and you can imagine that the jumping off point.
In the first quarter will be improved from the first quarter of 2022, but it's still generally below is shipping quarter of the year. So that has to be factored in and then you can think about Q2.
Between having a decent finished goods.
Good production rate in the first quarter, alright jumping off of the fourth and then starting to see the impact of Serge you get a feel for what will be happening from that flow through in the first half and then that all flows through in the third and fourth quarter of 2023.
Got it that's helpful. Bryan I wanted to circle back to some comments you made earlier in the call around trailer pools obviously.
Seeing a lot of momentum in discussion on that topic is there any way you could ballpark the percentage of your trailer deliveries. This year that you feel like are coming from this secular theme and any thoughts on where that percentage could go as we move into 2023 and beyond.
Yes, so I think part of it is and how we theres different ways that you can classify trailer pools.
And then one of the things we're finding is as we talk to all the players will call. It traditional truckload that are moving into digital brokerages and then you move to the other extreme of the continuum, where you've got truly innovative.
Digital brokers really focused on power only I E <unk> Donna on the other end there are different ways to answer that question, but if I take the full continuum JV hot and everyone else.
I would say from a trailer shipment standpoint, you are roughly looking at.
10, 15% of what we do could be classified moving into some type of trailer pool application the largest being J B Hunt at this point and then there are some other.
Smaller emerging players for <unk> being one of them that will pick up more in the second half of the year and then we'll increase that a little bit more going into 2023.
Okay, Great and last one from me it sounds like the order book for 2023 was recently opened so I was curious if you had any initial indications on pricing that you could share.
Yes, what I would say is that we may say it this way we have been.
Successful in 2022.
Passing along an appropriate level of inflationary cost cost increases with margin.
And of the backlog, so far and we've done that in a very good way what I would say is that we still have additional inflation that we need to factor into our pricing, we've done that and part and parcel with opening up to 2023 backlog. We wouldn't have opened it up if we didn't feel we would be successful in executing that.
And I would say that you can take from the backlog increase that we've done.
We've met our expectations and our ability to pass along pricing at an acceptable level.
Okay. Good to hear I appreciate the time.
Thank you. Thank you.
Next we have Mike Lisowski with D. A Davidson your line is open.
Yes, Hello, guys. Good morning can you hear me okay.
Yes, good morning, good morning.
Perfect. Thank you Ed maybe I can start off with a follow up on that last question.
You've continued to suggest that you've got a nice balance with margins planned 2023, given that your long term.
Look.
So kind of just what have we've been on.
The margin front.
Sounds good.
Pricing are there any other areas factors.
Would you be looking for in 2020, so why margins should be.
Step up over 2022.
Other things you've got going on.
Hey, guys. Thank you.
Well, let me first I mean, obviously with the addition of surge and the ability to absorb overhead throughout.
2023, but into the second half of 2022.
As a margin tailwind.
As we continue to ramp the business too.
When we.
As we reached the end of 2022, we'll be at the tail end of the additional manpower that we generally have to add throughout the business.
That does two things will be done with the inefficiency curve for the most part as we enter 2022.
Alright, the second quarter of 2023, and we will be able to start pulling back from some of the overtime that we use right now to buffer that.
The last.
One I would say it really comes to play in in the second and third quarter of 2003 is that the workforce that we will be moving to surge is an already multi year experience trailer building workforce. So we should have a much better job.
<unk> the convert those trailers on that new production line at a much higher level of initial ramp efficiency than what we would see under a more traditional shift AD or line setup with new people. So those are the most fundamental reasons.
We should see margin tailwind going into 'twenty, three and then there's a whole host of initiatives inside the business that will buffer that accordingly, and one other one other big one then there is the we will we would expect to get better chassis flow in 2023, which should help the truck body product line.
Margin accretive initiative.
Initiatives for US next year. So those are those are the items and then obviously, we're doing a big implied guidance is a pretty nice step up in the second half of 'twenty two versus desktop.
Where a lot of heavy lifting to connect with the year end and at Odyssey.
But kick in.
Got it got it that's great color.
I'd also ask about the supply chain as well just get the medicines, an unfair question, but.
Can you hear me, Okay Im sorry.
Okay perfect.
I was curious can you tell us about what initiatives you are competing with.
Supply chain clearly your business is doing.
Well, we've got great basketball, it's probably some more to come.
Other areas of the cargo not doing so well what do you think if other areas of the economy has a little bit of weakness there.
It might be a benefit to your supply chain and the ability to get some even better margins.
We will.
It's a great question, just one I know yes.
I would say this.
I think the overall trailer and freight related industries are going to have nice demand tailwind going into 'twenty three.
And that are going to bear for us all significantly.
Other aspects of the economy that youre alluding to are going to suffer some type of.
More secular recession recessionary environment, and if we see generally a.
Greater availability of labor in the market.
That is going to dramatically help the overall extended supply chain.
Specifically for our industry as that seems to be the primary factor for domestic suppliers.
Is that labor issues, so anything we see there and a softening.
Labour attention is going to increase the overall efficiency of the supply chain.
And what we would see out of that as well.
Doing pretty good compared to our competition and I would say relative to peers and managing our supply chain. We are far from noise free, but we will say better than the rest.
It just adds to the or it would subtract from the noise that we have which would relate to translate into some level of labor and throughput efficiency through the vac.
Okay, that's fair.
Ask one more here.
I appreciate your comments about it.
Perhaps that's being evaluated.
So much raw basket of a bygone era I think you said.
I guess I'd be curious.
As you look to your 2025 numbers you seem confident you'll get back maybe the first to announce them.
Do you have any down years in the forecast between now and then.
And given what you know about the cycle what your customers are looking at that will not be the case.
And 2025.
Yes, that's obviously difficult to predict Mike, but what I would say is anything we're seeing now we wouldn't expect a big enough pullback that would put the 2025 targets and Jeff So based on how we've run the.
Facilities.
South plant.
At the exchange.
Refer to dry.
Our general one Wabash initiatives, we believe will allow us to be resilient. If there is a base pay an economic pullback in the 'twenty three 'twenty four and still be able to maintain a 25 targets. So that's about 25 charters are based on mid cycle level volumes, but we feel pretty good that we can obtain from now on.
Yes, I would add just a little bit more.
We looked at a range of scenarios over the next couple of years and I'd say as long as we are able to maintain a healthy clip purposeful capital deployment, which we've laid out in 'twenty three and 'twenty. Four then we'll have set the stage for 25 from a business enablement standpoint couple that with the <unk>.
<unk> of moving the portfolio to the appropriate receipt strategic spot and then the internal work, we do with digitalization and the work with the parts and service. There is nothing that says that even if there is a lull even a moderate level in between that we arent in a position to execute from 'twenty five.
Okay. Okay, all right I appreciate the color I'll pass it along.
Thanks, Mike.
Your next question comes from Felix <unk> with Raymond James Your line is now open.
Hey, good morning, everybody.
Alright.
Hey, I was hoping to start Brian I think in the beginning you talked about.
Starting to take 2023 orders and you also said youre, having more strategic longer term discussions with customers around capacity.
I was curious if you could elaborate maybe on the latter comments.
Were you implying about maybe locking in some capacity for <unk>.
Multiyear periods I'm, just kind of trying to think through those dynamics.
So we have I won't go into all the particular speedweeks because that's somewhat proprietary and how we are doing this it is say different than the rest what I would say is that we have a tiered approach to how we are filling in our backlog.
It is very strategic in the manner, which.
We're doing it is not just opened the order book and let the quote flow.
That would be like the rest.
What we are doing is seeding it with very core.
Strategic indirect channel business as we try to make sure that we have a dealer first mentality.
And those are very.
What I want to say very specific inside of the indirect channel.
I'll say more than that when we go to next year that is the working at a handful of customers that we think are well positioned.
For the next half decade.
And those are discussions that are multi year in design multifaceted and they go beyond dressed trailer.
Access to trailer capacity, but also move into advanced R&D development as well as parts and service linkages as to what that value proposition is.
And so thats the next tier of that we're working on to add to the backlog and then we will move into the next grouping of strategic customers that should round out the backlog for 2023 very specific across the entire creation of the 'twenty three backlog.
Got it that's helpful color and then I was hoping to follow up on sort of the new product development standpoint, we haven't talked a ton about at this call, but I'm curious if you could comment on the eco next ramp as you see it right now and then secondly last year you had talked about a walk in cargo van I'm.
If you could update us on the status there.
Sure.
First on the well.
We're rebranding.
It is the accu therm.
Refrigerated bandwidth Eco next technology.
We continue to have.
Better than expected results in the validation of that product with our customers with over 50 million miles on the road.
Well above $50 million at this point.
We are moving forward with capacity additions the next phase.
That will be a 2023 2024.
I would say at this moment demand far exceeds what our initial capacity adds will be as we look to maintain a level of scarcity and controlled launch.
As we scale this up one to maintain premium pricing too to make sure that the physical manufacturing process meets a premium product expectation.
And then as we move through that we'll look at what the next phase of capacity adds will be so we have a multiyear strategy lined out as to how we will do that this is a slow as fast and slow is purposeful in what we're trying to.
But we are we are balancing.
<unk>.
Extended and higher than expected desire for the product with moving in a prudent and planned way.
Okay.
Oh, and then got it.
Any color on their cargo then yes, the cargo van.
We have a prototype in hand that we visually review just the other day. It has made its way to a.
One or two significant customers in the space that we think.
Our highly interested to broaden their portfolio of available product to meet their growth needs. So.
So we are very pleased with where we sit at this moment in time.
And that is something that we firmly believe that we will have prototypes and will go extended small volume prototype production and 23 to meet initial market validation needs.
Possibly the chance of getting scale up in the second half of 'twenty three 'twenty four.
Got it got it and then just my last one is more for Mike, but Mike You mentioned next year, you would expect better chassis flow, which should be margin accretive on the truck body book Im.
Curious if you could maybe update us on what Youre seeing today on the ground. It seems like production is still fairly constrained, but any update maybe versus what you expect a one H versus two agents would be helpful.
Yes, we would expect I would say the second quarter, specifically didn't see a significant improvement.
But we believe we're starting to see some early indicators that the second half.
It could be better than the first half and definitely feel that the 2023 volumes will be much improved so I would say too early to say, we're seeing a lot of improvement on the ground, but we do we're seeing enough to have confidence that we will fulfill the orders we have a pretty full backlog in that product line that will fulfill the orders.
Half of the year and continue to step up the profitability to where that business is improving.
We do know that more volume for it to really step up a gear as far as the margin, but it is definitely improving and as soon as we get the chassis flow we will see some some nice some nice profitability company truck line.
Thanks, just a follow up on the previous question one of the items that we didn't talk about was our light duty refrigerated product.
That we have with a.
A significant grocery to kroger to be specific that also continues to go well and we'll be looking to broaden that into additional points.
<unk> revenue in the future both within Kroger, and then modifications to the product design to allow it to be applicable to other users that continues to go well and then our traditional.
Truck body like product that uses eco next technology. We are also adding capacity there because we've had better than expected.
Customer.
Reviews, there, which will help us grow within our cold chain area.
As we get more and more users starting to understand the role of efficiency within that space very much like our band customers would see.
Got it I appreciate the time I'll stop there.
Thanks Vivek.
There are no further questions at this time, Mr. <unk> I'll turn the call back over to you.
Thanks, Angela and thanks, everyone for joining us today look forward to following up during the quarter.
Good day.
This concludes today's call you may now disconnect.
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Okay.
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Okay.
Yes.
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