Q1 2023 Wabash National Corporation Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Wabash first quarter 'twenty to 'twenty three earnings call I would now like to turn the call over to Ryan Reed Senior director of Investor Relations. Please go ahead.
Thank you and good morning, everyone.
We appreciate you joining us on this call with me today are Brent <unk>, President and Chief Executive Officer, and Mike Pettit, Chief Financial Officer.
Before we get started please note that this call is being recorded.
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 Dot one Wabash Dot com.
Refer to slide two in our earnings deck for the company's safe Harbor disclosure addressing forward looking statements.
And it often out of breath.
Thanks, Ryan and good morning, everyone and thanks for joining us today.
We are extremely pleased with our record first quarter results.
These results highlight the last four years of hard work, we've undertaken to affect structural improvement in our business and the lead up to this moment in time.
Portfolio reshaping a significant redesign of the organization and reporting structure, our new customer centric go to market approach, including an improved pricing construct and long term customer agreements matched on the sourcing side retooled and relationship based strategic agreements with key suppliers, we've re imagined our production capacity.
Today and are also acting to increase our recurring revenue exposure by achieving our rightful share in parts and services, having already laid the groundwork for 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 had 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.
Progress is easily indicated by our first quarter performance.
Really drive 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.
I had 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 showed 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 wordsmith digital broker founded by a team with significant shipping and transportation industry.
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This relationship builds on our initial trailers as a service relationship with Freightliner, which was our initial trailers has a service customer and the relationship has provided a great learning and market exploration opportunity. We believe we can continue to help remove waste from our logistics system with trailers as a service while also building a flywheel that pulls.
There are many areas of our parts and service offerings trailers.
First 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 Lafayette South plant is now ready began 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 a new and exciting equipment in the facility.
First of all walk the new line reviews of new processing several times over the last 30 days I am 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.
Minimal upgrades were not previously possible get into year end and year out burden, our legacy facility sale 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 are.
Our backlog is third 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.
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 filled with all of the 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 returned 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 the capital spending we believe trailers will remain a relative priority as 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 as 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 are 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 base and strategic progress and improvement and overall execution.
Hey.
We are acting on this company to strengthen this business fundamentals and no 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 not have Wabash generating our 2023 EPS guidance of $4 25, even at peak levels.
Awesome thing, 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.
<unk> peak earnings levels that are significantly in excess of our current guidance and thats before we figure in any accretion from continued execution of known as well as upcoming strategic improvements in our business.
I'd like to close by thanking our team members did 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 wood.
With that I'll hand, it over to Mike for his comments, thanks, Brett 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 11780 and 3815, respectively.
That activity fell within our expected range at Q1, <unk>, starting with the weaker shipments 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 a level 3%.
These figures are clear expectation due to the combination of material cost surprises to the 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 coming from the ramp down of our conventional refrigerated van production paired with our previously.
<unk> 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 margin relative to the first quarter of last year.
Clearly very pleased with our ability to demonstrate this level of both EBITDA generation as well as underlying improvements relative to our margin initiatives. Finally first quarter net income attributable to common shareholders was $51 $2 million or $1 <unk> per diluted share.
Several perspective transportation solutions generated revenue of $578 million and operating income of $87 million.
Parts and service has generated revenue of $47 million and operating income of $9 2 million.
Year to date operating cash flow was $69 million.
Even though the concept 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 four.
$410 million as of March 31, we finished Q1 with a net debt leverage ratio of one two times.
With regard to our capital allocation during the first quarter, we invested $31 million of capital projects.
$14 million to repurchase shares and pay 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 bolt on M&A opportunities.
Moving onto our outlook for 2023, I am very proud of how our team has executed again media as we achieved a record quarter and are already able to pull through guidance increased 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 service and strategic initiatives as we fully anticipate to achieve greater than 20% growth for the third consecutive year in 2023.
Combined with a 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.
Wall-to-wall Dash first to final mile portfolio as more levers than has ever had previously in an uncertain trade 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.
Set yet another quarterly EPS record.
The second quarter, often represents a seasonal high of our financial performance in the back half of 2023 will likely sequentially step down at some of the cost tailwind as we saw in Q1 normalized.
However, just to level set even though at 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 am 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 market continued to seek balanced 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 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.
I'll now turn the call back to the operator, and we'll open it up for questions.
The floor is now open for your questions to ask a question at this time. Please press star one on the telephone keypad. If at any point you would like to withdraw from the queue. Please press star one again.
We'll be provides the opportunity to ask one question and one further follow up question.
We will now take a moment to compile a roster.
Our first question comes from the line of Justin Long from Stephens. Please proceed.
Thanks, Good morning, and congrats on a great quarter and outlook.
Thanks, Jonathan.
Maybe to start on that point it looks like the upside in the quarter and the outlook really came as a function of more positive outlook for operating margins and.
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.
<unk>. So I'm just curious how much of this is material cost versus cost initiative other cost initiatives.
And other items.
Yes, it's a little bit of all of the above adjusted we executed really well in the in the first quarter.
One of the things that you don't see in the revenue number as some of our production numbers, we are continuing to see improvement in the supply chain.
<unk> group is doing a very good job of executing.
The parts, we need to produce.
<unk> and truck bodies were seeing some nice.
First variety recovery I mentioned with planned tank trailers. So all those things have led to.
Sequential and year over year significant year over year improvement in our margins and that's that those 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. Yes. Justin. This is Brian I think we also have to look at it beyond.
What I think most people think of us as a dry van lens and then apply everything that Mike said.
Across all of the other sub elements of revenue generation. So we saw.
Really nice strength, both top and bottom side of tanks platforms truck bodies.
Aspects multiple aspects of parts and services. So it was truly an on hands 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 dry van 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 cadence on a quarterly basis.
And the guidance as we look ahead to two <unk> in the back half.
Yes, Justin it's Ryan so sequentially, we're going to look for things to step up in Q2 and then.
Along with kind of our broader guidance for one half versus second half will look for slightly.
Stepping down operating margins in two age.
Okay.
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, and 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 90 cents a quarter and 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.
And price, obviously, we're seeing margin upside today, so I just wanted to better understand what's causing that deceleration.
I think we're taking a pragmatic view of the second half of the year, Jonathan we have greater visibility to Q2 and as you mentioned had a really good backlog.
But we're just we're in an environment, that's evolving quickly and we've taken a view to say we have opportunity in July and up in the second half, but we've put guidance out there for the full year that we feel confident we can hit.
And we will.
We'll see how 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 build rates to continue into the second half, but there is other variables.
<unk> input costs that were continuing to watch and we will we will update Q2 or excuse me the second half as we get to 32.
I would just reiterate this Brent I would reiterate that.
Yes, we have great visibility of the second quarter.
Very good visibility of Q3, Q4, and we will have a substantial substantially improved visibility and just the next what I would say 60 to 90 days and thats 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 you can interpret that as you will.
Understood. Thanks for the time and congrats again.
Thanks, Jonathan.
Yeah.
Yes.
Our next question comes from the line of Mike <unk> from D. A Davidson. Please proceed.
Good morning, and thanks for taking my question.
Can you give us a sense over the last month or so brands kind of wonder if the order trends been.
Some of your core customers I guess from two perspectives have you gotten any additional large kind of multi year or is it you've been talking about the very Brooklyn, J B Hunt and a few others and also just kind of regular everyday words.
That been going.
Curious if anyone who has taken a real pause uneven calling people back at this point.
Yes.
So from a long term agreement perspective, or exactly where we expected it to be at this point in time.
<unk>.
Net kind of our initial tranche of long term agreements we are working on our second.
Volume grew for the $24 25 period.
We'll be entering into the 25 extension. So people have signed up for 'twenty three 'twenty four we will be adding the 25 extension here in the next 90 to 120 days exactly per the plan.
Our long term customers are still remain extremely.
Positive.
Think about a 24% 25 period, especially those that are aligned with substantial growth on their part. So we see no went back on that.
When and bluntly we have substantial.
Which is where interest is that we won't necessarily take into account.
And 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 what we said it's across the business, we have some really stable aspects tank trailer.
Truck bodies, but we see that actually been extremely stable if not increasing as we look at outer quarters. When we think about refrigerated thats 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, we are not going to have a lot of order intake. Because these are not for long term agreements, which typically to a 12 month cycle for full.
So theres not a lot of conversations that we're having at this point we remain full so that order season will open up when we get into the late summer early fall.
And then we'll look at 2024 at that time.
Okay. Okay.
My other question has to do with margins in some of your comments there Brent.
Yes, it actually was Brent yes.
Looking at 10% margins have one 5% margins. This year and you said that you're basically not really at full capacity in other words. It could go higher way to build more of course, lower if things were to go lower from here.
Im curious is the 10, 5% a new kind of midpoint range going forward do you feel like.
Future average year, 10% plus margin level is kind of where you should be and we can adjust up or down from there based on the on the on the Bora cycle or there are some aspects where you have gotten some temporary pricing for a couple of quarters here that might be kind of pushing things a bit.
On the higher higher than normal then.
Yes, 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 of Wabash pulling through right. So that process validation and 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.
Lot of things working together.
That's one of the reasons, we could as we look forward.
We can confidently say that we have accelerated the pace of change in output within the business.
And as.
As all of you know we're at levels now basically are already at or above what we guided to in 2025. So.
There is a step change improvement that we believe are solid.
So if you 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 <unk> performed with us.
And then you can adjust that based off of where you're at where you believe we are 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'd be my qualitative answer might be anything else you would add to that no. I think you hit on it pretty well, Brian I would add and Bryan said in his prepared remarks, and you you alluded to it Mike and that is there.
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 tailwind, we think we'll get and truck body and as we mentioned the chassis flow is improving we'll get we'll get.
Sequential and year over year improvement. So there's obviously some operating performance operating leverage that we can we can drive to the bottom line. There's a lot more to it than just that obviously from a pricing and cost that comes from materials, but we do believe that we have the setup to perform better at any point in the cycle than <unk> ever done and this has been the entire strategic framework.
That we're working under is purposely designed to not have this thing leaning on a one legged stool coal pricing.
Because we know that is entirely too variable.
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 there.
<unk> 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.
Outstanding Brent and Mike I'll leave it there I appreciate the discussion.
Thanks, Mike Thanks, Mike.
Our next question comes from the line of John Joyner from BMO capital markets. Please proceed.
Thank you. Thank you for squeezing me in which I guess is better than getting squeezed out.
So.
First how are how are you thinking because bring you just kind of touched on this a little bit right in terms of the the operating margins in your 2000 22025 goal.
So.
How are you thinking about those long term targets now that 2023, EPS and profitability is comfortably above that those objectives for 2025.
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 the year.
Are they a rolling strategy process and so we I would say we have a pretty good eye on what we think those revisions will be at what we will see probably I'll say in the next couple of quarters 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 those various elements that.
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 couple of calls ago, where someone said how does 24 fit into your strategic plan. What if there is a downturn in the answers even more.
Can be more strongly said today, regardless of what happens in 'twenty four based on what we see we are in an outstanding position to.
Beat our 2025 targets that is just where we're standing right now and build upon it. So we're in pretty good place right now.
Okay excellent and then maybe just one more quick one I think you are.
In the release you called out the strength in tank trailers and truck bodies, maybe could you offer some more color around these product product lines and what youre referring to.
Well without yet total specifics our tank trailer business is has basically hit an all time volume levels and production.
In the context of the last five years, a substantial improvement I think Mike what's the actual.
For tank trailers that was up 29% year over year, 29% year over year with room to continue to expand as we go into 'twenty four we added capacity to our clients in Mexico continued its improvement in our plants and funded back into Lisburn, so with with extending some of our core customer centric.
<unk> strategy and of the tank business with good reward Ed we've seen efficiency gains just within the business itself.
Bodies.
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.
Our class one through class six primarily growth over the next two years, we're seeing that begin to pick up in.
And we're saying the inefficiency caused by these overall supply chain disruption diminish and that's been a significant drain on margins in that business for three years.
All of that is just at the.
The extreme early innings that will allow it gives us a nice tailwind going over the next to Nick I'll say next couple of years and truck.
<unk> soon.
Mid teens.
<unk> had almost 20% improvements in production rates.
Our production exceeded our shipments for truck values in Q1, but we're seeing some nice nice pull through there the as Brent mentioned with some supply chain.
Disruption easing and that gives us a nice tailwind along with tank trailers alpha parts and services to all should be a nice benefit because the overall margin profile of the enterprise going forward.
Okay excellent so impressive I appreciate the time.
Thanks, John .
Yes.
Our final question comes from the line of Felix <unk> from Raymond James. Please proceed.
Hey, good morning, everybody and congrats on the quarter.
Thanks Luke.
Hey, I was hoping we could follow up on the dry van capacity expansion.
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 is just some startup costs associated with ramping capacity I don't know if you could talk about that maybe.
Maybe what's in the numbers and how you expect that to track.
Yes, there is.
So.
Effectively the align will launch here in Q2.
In the next couple of weeks really will start to see films in production.
There'll be some startup costs in the early.
First half of the year in Q2, but not not anything above what we've guided to we saw some in Q1, which we talked about at year end call.
And then what you would expect to see a significant improvement in line rates through the end of the year, but still we finished the year.
And that facility at approximately a third to half of what a full output profile would look like for that plant for the full benefit of that capacity royalty felt in 2024 or so very little output in Q2.
Pretty good ramp in Q3, and then it will 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 youll see a full impact of that facility, which we've previously said.
Well it'll be a net improvement to what we did before to 5000 units from the river plant into next year.
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 as I know you've <unk>.
<unk> the way that you price your dry van trailers could you maybe just talk about how youre thinking about that raw material margin into the back half of the year, maybe think somewhat normalized just kind of trying to think through the puts and takes here.
Yes, so generally speaking yes.
<unk> had.
We talked about the production.
It was a lot and when you have a quarter like we had it was it was a lot of factors that contributed to it we did see 10% to 12% production improvement in our dry van trailers I alluded to earlier we had.
High teens output improvement in truck bodies.
A little better supply surety, so that all really led to the conversion cost increase and we did see some normalization of the.
Price with that with the material costs and into next year into the second half of the year. That's one of the reasons, we're keeping a keen eye on what everything how it's going to 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 cost come off their highs. So that's one of the reasons we stayed somewhat.
<unk> and conservative in our second half commentary to see what that looks like but generally speaking we wouldn't expect to see significant margin impact.
Impact from.
Input costs that was the whole intent.
Our variable pricing construct that we've launched.
Got it I appreciate it thanks for the time.
Thank you.
I would now like to turn the call over to Ryan Reed for closing remarks.
Thanks, everyone for joining the call today, we appreciate the participation look forward to following up.
Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.
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