Q2 2023 Wabash National Corporation Earnings Call
Ladies and gentlemen, thank you for standing by today's conference will begin in a few minutes to allow as many participants as possible.
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Hello, and welcome to the second quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad. If you wish to withdraw your question again press Star one well now turn the conference.
Over to Ron raise 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 we hope 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 dotcom.
Please refer to slide two in our earnings deck for the company's safe Harbor disclosure addressing forward looking statements.
Hand, it off now with the breadth.
Thanks, Ryan Good morning, everyone and thanks for joining us today I'm pleased to announce another quarter of record financial results, which I believe is attributable to the successful execution of our strategic vision.
After it sounds like a broad portfolio of first to final mile product solutions, we transformed our organization from fragmented business units tend to wind one wall Bash now capable of providing customers and suppliers with support across the breadth of their businesses.
One of your organization pretty crucial commercial aspects such as our pricing methodology, our ability to offer comprehensive longer term agreements to reduce friction for our customers as we tackle the most significant challenges in transportation logistics and distribution.
This collaborative approach is also reflected in our agreements with key strategic supplier partners showcasing the progress we have made in establishing stronger ties with the broad set of stakeholders.
Our Wabash structure, and our Wabash management system allow us to provide focus on organic growth, where we have successfully re imagine our manufacturing footprint, allowing us to add highly efficient dry van capacity, making exciting upgrades in cold chain capability to the use of structural composites as well as work to conduct a broad ecosystem of partners to help them.
Average innovation to improve logistics network efficiency through our innovative trailers as a service or SaaS offerings.
Actually throughout our organization, we have ingrained the importance of growing our exposure to recurring revenue through our parts and service business.
<unk> continues to achieve steady growth as a vital component of our overall strategy as we leverage the strength of Wabash brands to achieve our rightful share in parts and services.
Appointment of our strategic initiatives has led to meaningful structural improvements within our business and this remarkable pace of progress has been made possible by our dedicated employees.
We are fully committed to the belief that higher levels of employee engagement drive improved financial performance and increasing volumes with execution, but most importantly, we have the opportunity to lift up the lives of our employees.
This drives our conviction that further investment in our people our people processes and workplace will further accelerate our objectives.
Create sustainable value for all of our stakeholders.
I am personally excited to embark with my Wabash team on a journey to become a workplace where every employee receives the respect they deserve an environment that enables them to be their best self and gain the support required to lift up their lives and the lives of their families.
<unk> presented a variety of challenges to our workers over the last few years, and we want Wabash to be a place for everyone.
Everyone can common thrive at places, where we work together to achieve big things of the company and also a place where we work to achieve great things for each other.
Every one of our employees deserve to the best we can offer them and there must be a place where any and all who want to be part of the Wabash team are wanted welcome and enabled to become part of a truly inclusive culture accentuated by the diversity of all of our people.
To address this we are initiating new project teams dedicated to implementing programmatic solutions and systemic changes that will have a positive impact on the lives of our employees.
This investment in our people and the elevation of our internal expectations aligns with our moral responsibility and values as leaders and also serves the best interest of Wabash, our customers partners shareholders and our communities through the acceleration of our strategic vision and increasing sustainability of value creation.
I will now transition into our Q2 financial performance.
Regarding our second quarter performance, we are thrilled to have achieved quarterly records for revenue operating income and earnings per share.
These remarkable results not only serve as a testament to our strategic progress, but also raise the bar for what we assume peak earnings can be for our company.
It is noteworthy that these outstanding figures were obtained on annual shipment volumes, we expect to be roughly 20% below maximum capacity in our transportation solutions segment.
Furthermore, our parts and service segment continues to demonstrate steady growth and we anticipate will continue to increase as a percentage of our overall portfolio overtime.
Turning our attention to market conditions and backlog, we observed a strong shipment activity outpaced new orders in the second quarter, which is not surprising.
<unk> declines of about 20% was in line with average seasonality for the quarter.
The industry data has shown order cancellations have played a modest role within the softness in net order activity during the second quarter as carriers have been grappling with difficult market conditions for some time now.
However, I think the belief still widely held a freight markets had likely hit bottom and opportunity lies ahead as seasonality through peak season. This year could usher had improving conditions.
Because we entered this breakdown cycle with clear and present supply constraints within transportation equipment demand is headed and so far I do believe that trends in the coming months and particularly peak season will be an important indicator of how demand is likely to progress into 2024.
Continued difficult market conditions could be challenging for equipment demand, while bouncing rates could signal an upturn of framework.
Over the longer term, we maintain our belief that our core markets are benefiting from secular trends such as power driver shortages and re shoring.
In particular re shoring is displaying quantifiable progress as of late as evidenced by the significant increase of 77% and construction spending on manufacturing facilities in the United States.
In may compared to the same month the previous year. This trend is exciting as it indicates the ongoing reorganization of supply chains post Covid. We believe it's reasonable to expect that greater North American manufacturing output will result in some mix shift from intermodal to both truck bodies and trailers overtime.
Overall, our focus remains on executing our strategic initiatives, while assisting our customers through the challenges of the current market and being fully prepared to support their needs once the freight market inevitably rebound.
Moving on to our financial outlook with two consecutive record quarters, two record quarters in telling confirmation of progress that comprise our first half of 2023, we are raising the midpoint of our full year 2023, EPS guidance to $4 45.
$4 25.
We recognize that the macro environment is complex, but by concentrating on what is within our control.
We will continue working towards greater collaboration with customers and suppliers.
Continuing to grow our set of product solutions and innovative service offerings, while providing world class post sales support.
Parts and service business to increase our base of recurring revenue.
Lastly, I would like to express my appreciation to all of our team members, who have achieved the best quarter of financial performance in our company's history and continue to propel a remarkable pace of strategic change within the organization with that I'll hand, it over to Mike for his comments. Thanks.
Thanks, Brian beginning with a review of our quarterly financial results in the second quarter, our consolidated revenue was $687 million.
During the quarter, we shipped approximately 11825, new trailers and 4025 truck bodies.
Given some of the mixed signals, we see in the market environment. We made the decision to moderately slower rates of production by our aluminum Saturday shifts that are main trailer facility.
This accounted for new trailer shipments coming in slightly below what we might have expected one quarter ago.
In doing this we are maintaining all full time production employees in order to ensure our ability to respond to the potential for a near term demand as we.
Gross margin was 22% of sales during the quarter, while operating margin came in at 15%.
These figures remained strong due to a combination of favorable factors, including material cost benefits and mix benefits.
As previously mentioned stronger performance from our tank trailer and truck body businesses paired with the ramp down of our convention I'll refer band production and had anticipated positive impact on our margins.
In fact, we delivered approximately $25 million of year over year gross profit improvement from the combination of tanks truck bodies and parts in the second quarter.
In the second quarter, we achieved very strong operating EBITDA of $117 million or 17% of sales.
This performance more than doubled our EBITDA margin compared to the second quarter of last year, we take great pride in our ability to generate this improvement relative to our margin history.
Finally third quarter net income attributable to common stockholders was $74 3 million or $1 54 per diluted share.
From a segment perspective transportation solutions generated revenue of $631 million and operating income of $160 million.
Parts and services generated revenue of $62 million and operating income was $12 9 million.
Year to date operating cash flow of $146 million.
Reflecting our strong financial performance, even in the context of significant growth investment via capital expenditure of $28 million.
The company generated $49 million of free cash flow during the quarter.
Concerning our balance sheet, our liquidity, which comprises both cash and available borrowings was $441 million as of June 30.
We finished Q2 with a net debt leverage of <unk> nine times. This is our lowest leverage ratio since 2017.
With regard to capital allocation during the second quarter, we invested $24 million of capital projects and $3 million in revenue generating assets for our trailers as a service platform we.
We utilized $14 million to repurchase shares and pay quarterly dividends of $3 8 million.
Going forward, we have decided to maintain a separate breakdown of our investment and trailers as a service with the expenditures for revenue generating assets category on our cash flow statement.
We recognize the nature of this capital expenditure differs from our historical practices and we believe it's important to offer additional insights into our progress on this business model innovation to serve the evolving needs of our customers. Our capital allocation focus continues to prioritize capital expenditure above and beyond our annual maintenance capex spend at <unk>.
$25 million in order to support our organic growth initiatives.
We are committed to maintaining our dividend and then we anticipate continuing to evaluate opportunities for share repurchases alongside of bolt on M&A moving onto our outlook for 2023 I'd like to express my immense pride and the outstanding performance delivered by our team during the first half of this year, we achieved two consecutive record breaking quarters, which is.
A testament to the dedication and hard work of our entire organization.
In order to put some historical context around our EPS generation I'll mention that the cumulative first half results of 2023 surpassed the best year in the company's history.
Our financial outlook now contemplates revenue in a range of $2 6 billion.
$2 8 billion.
And we are increasing our outlook for EPS to $4 25 per share to $4 65 per share with a midpoint of $4 45.
This compares to previous EPS outlook midpoint of $4 25 per share.
As I mentioned on the last call. We continue to expect to see strong growth out of our parts and services strategic initiatives as we anticipate to achieve greater than 20% growth for the third consecutive year in 2023.
We're now projecting to generate over $150 million of free cash flow in 2023 in a year, where we have continued to invest heavily in our future growth in vans Eco next and recurring revenue.
Our financial outlook, we expect third quarter earnings per share in the range of <unk> 90.
Two a gallon <unk> 10 per share as we see a bit of a seasonal step down from Q2 to Q3 and some of our revenue streams.
We also anticipate gross margins moving toward the mid to high teens during the second half with the reset of some of the material margin drivers we've enjoyed during the first half.
Even with the second half of the year stepping down from the first half we still expect it to be a stronger second half in the company's history.
In conclusion, I'm very pleased to report such a strong quarter as it progressed towards achieving a record year for Wabash. Our team remains dedicated to advancing our long term vision, while executing effectively on our strong backlog.
I also want to express my excitement and commitment to our mission to focus on the lives of all of our people.
The company and leadership team that loses its value. This is another aspect of our strategy that will positively impact all of our stakeholders.
With regard to our near term opportunities with freight market finding better equilibrium between capacity and demand. We look forward to a more normal peak season this year for our customers.
We continue to position ourselves to support our customers' demand across our comprehensive first to final mile portfolio of equipment parts and services as end market conditions recover.
We're well prepared for what comes next and excited for the next chapter of our journey to change how the world reaches you.
I'll now turn the call back to the operator, and we'll open up for questions.
So I'd like to ask question Press Star one on your telephone keypad, if you would like to remove yourself from Q simply press Star One again, just one moment for your first question.
Your first question comes from the line of Justin Long of Stephens. Please go ahead.
Thanks, Good morning, and congrats on the quarter.
Thanks, Jonathan.
So maybe just start with the guidance revenue the revenue outlook came down operating margin guidance went up by about 150 basis points. When you think about that raise and the operating margin guidance how much of that would you attribute to <unk>.
Material margin coming in better than you expected versus.
Some of the other items you mentioned Mike mix.
Yes, a lot of it is.
A lot of it is mix and some performance we've seen in some of.
The other revenue streams, we've alluded to a couple of times around tank trailers.
Truck truck bodies, and also parts and services, we're getting more confidence to put some of those.
So those projections margin projections into the second half of the year. There is a little bit of that material margin, but I would say primarily some of those other.
Revenue stream that we feel some confidence into put it into our margin guidance for the second half of 'twenty three Justin Let me put an exclamation point on that we feel really good about the kind of the holistic nature of our revenue streams of Wabash right now.
And to Mike's point, we feel increasing levels of comfort of building that into the forward projections is that strength is coming alive for us and thats, reflecting in our numbers accordingly.
Understood and then secondly, I wanted to ask about trailer production you mentioned that you have.
Things a little bit in the second quarter, hopefully, we see it pick up going forward, but any color you can provide on second half expectations for trailer production versus the first half and then I'd love to get your thoughts on 2024 as well.
How youre thinking about the market relative to the third party forecasts out there today from ICT.
Sure yes so.
And in terms of from a from a shipment perspective, we would expect similar in the second half to the first half as you mentioned, we did we did take some over time out of the system in Q2, and we would expect that over time, most likely stay out you might see a little less production, but a similar type of revenue generation shipment number we did.
In Q2 with with some sold finished goods ready to go in the early part of the second half. So that's kind of how your box a little lower production.
With that with a very similar shipment rate. So we don't expect it to be a big step down as I said, we expect it to be more of a normalization and I think we're going to have a nice ability to be able to have a very steady controlled build through Q3 and Q4.
Yes, Jeff I'll take the second part of that question.
While batches in a very unique position and how it evaluates 2024, and what are the forecasts whether it be from FTR ACP.
The reason for that is the nature of the customers that make up our portfolio. We've used the word curated.
A good word for it.
It allows us to be positioned with customers that are really contemplating how they will leverage 2024 of the grow their business.
And thats not necessarily equal across the entire body of customers that built up in ACTH FTR forecast.
So we sit here right now in a place where if we take our customers at face value.
Look at a relatively stable.
Well positioned in 2024.
However, we're also going to be pragmatic about how we evaluate that and it's early to call that sitting here today.
And what we said and we will keep the readout of the script is that we need to see how peak season plays out.
If it plays out and just a moderately successful manner.
And I think we're in good shape to achieve.
You may be a little bit better than what from a Wabash perspective, what SCR and AC tier forecasting. So we are we are positive but at the same time, we have a pragmatic look at it.
Thank you. Your next question comes from the line of Mike Zaremski of D. A Davidson. Please go ahead.
Yes, hi, good morning, and thanks for taking my question.
To follow up on your answer there.
Can you just just to follow up on your on your answer there Brent.
So same forecasters at least act research is saying that that's 2024 and 2025 and fulfill a years. After we're right back up to 300000, plus trailers back where it is basically in 2023.
Can you comment on is that an appropriate is that would that be more like this.
This assumes a level more of an average.
Placement year going forward given fleet size increases in interest in keeping the fleet relatively fresh going forward as opposed to the passenger was $2 50 to 70.
And are there any drivers beyond 'twenty three 'twenty four that are regulatory in nature that are also going to.
Providing additional sales boost at any point did you know.
Well I'll take the last piece I am not going to say right now that there are.
Additional we'll call it regulatory set.
Secular factors that are going to build in the fall.
The effect of the total regulatory environment just continues to add pressure.
Two the ability to efficiently move product or.
Freight in United States, which has been a pressure asset numbers to rise overtime.
With from a trailer to tractor ratio. So that's more of a general I don't think theres anything uniquely new in that.
When we think about 25 and 26.
And are positioned absolutely support the general position that we're going to move right back into a point of scarcity, where demand will exceed supply moving into 2025 I completely believe that is the case with just a moderate recovery from a freight standpoint.
Specifically with the customers.
We undertake.
And a lot of that as those secular drivers that we have called out trailer pools near short shoring, so on and so forth.
We're not seeing capacity being added in the market the supply base is not adding.
Huge amount of capacity, but they are getting better which would be enabling.
So I think scarcity is on the horizon, which is important for how we manage the business.
And if I can say anything I think ACG and FTR has still not fully factored in the secular factors and what trailer demand will actually be an outgoing years.
Got it so Paulo further on that then so if the current run rates for 2020, if they are kind of roughly where.
Our average years are going forward, maybe not in 2024, but even then.
So still happen what's.
What's your confidence level about repeating for 50 years or so.
<unk> of EPS.
Future year with.
As for the industry.
Produced I think in an environment of scarcity wabash's reset the bar as to how we should be looked at going forward remember we said it in the script, we're still producing 20% less now thats factoring our search volume coming into play which is the additional dry vans 10000, plus drive ends.
Plus any other improvements that we're making the business between now and then to gain extra capacity.
I would say again, we are well positioned to meet or exceed and.
And that still doesn't take into account the relative growth we're seeing in the other aspects of the business and further growth we were running at 20% improvement in revenue and.
NOI performance relative to our parts and service business.
That can be compounding in those later years as well so I think anyone who thinks that that our current performance is somehow a unique kind of uniform year I think is missing the story.
Thank you. Your next question comes from the line of Morgan Weisberg vertical Research partners. Please go ahead.
Hey, guys. Thanks for taking my call.
Yes.
Could you just touch a little bit up on the ramp up of the refrigerated product and basically how that as a bad thing and where do you guys see the production run rate today, and where do you expect it to be in the next let's say six months and 12 months.
Yes, so we're going to put us in the context of the full cold chain revenue because when we think about our structural composite investments and increasing our capacity expands.
It spans from first to final mile suite of products and when we think about cold chain revenue I'll go a little further than 12 months. So, let's say 12 months to 24 months.
You could say, we're in a place where we can foresee.
Essential doubling our cold chain revenue from.
For more access today.
Call. It late 'twenty five mid 'twenty six.
Based off of the investments that we've made today. So we feel very good about how we will capitalize going forward in a market that is ridiculously dynamic any growing in ways that we are well suited to the fed.
Great. Thank you.
Thank you. Your next question comes from the line of.
The motion of Raymond James Please go ahead.
Hey, good morning, everybody.
Thanks, Alex.
Hey.
Was curious if we could talk about the parts and services business, obviously, a very good quarter and I think Mike last time, we had talked about growing 20% plus for the year I guess two questions number one can you talk about the driving factor of the growth in that business and then two if you can update that view on 20% plus or maybe I missed it that'd be helpful.
Yes, so we're seeing a lot of.
Strength in <unk>.
Contribution to that performance across all the different drivers within parts and services, but.
It could newest piece that we've talked about.
Our our.
E Commerce platform is just coming online literally as we speak that will help provide a really good experience to our dealers through our wildlife starts.
Business that we've been we've been growing while Nash parts over the last year, but we have continued to invest in over the last 12 months a year starting to we're starting to get some some real tangible digital tools to support the front end, which we believe will continue to propel that growth through the rest of this year.
The 20% I would say, we're going to we're going to do that plus in 2023 and there is no reason to believe that we can maintain that growth into 2024 as well.
Okay Awesome. That's helpful. And then I appreciate the new disclosure around trailer as a service from a capex perspective.
Could you maybe directionally talk about how big or how big of a spending bucket you think it might be commented into 2024 and some of the returns we should be thinking about.
Yes, we'll continue to update its not as you can see from the disclosure is not it's not huge today, we would expect to do a little bit more on the second half.
And we've done so far but it will still be relatively modest.
As we go into 2024.
We would like to start to think about annually doing.
2000, plus trailers into that pool, and you can kind of get it.
A swag on what that would be from a capital expenditure perspective, but as we continue to develop our platform that we're working on to really connect that trailers and the service physical asset with the aftermarket sales and support and.
And we can and we were able to find the right level of.
Customer connection we might continue to increase that so whether that 'twenty four 'twenty five but there is more than just their capital allocation component of the drillers and service. There is also the digital component that we're bringing to life simultaneously and that will on those two come together. That's when you see the investment pickup in our drillers answers I want to double down on that.
The actual.
I'll call inquiry for participation in a trailer as a service offering.
From potential customers far far exceeds what we have demonstrated so far.
We take a pragmatic excuse me a programmatic approach to how we're doing this.
And as Mike alluded to once we reach a certain inflection point, where the business model the methods of which the services provided and then internal digital capabilities, which could be as early as mid 2024 will be in a completely different position to talk about.
How we would scale that through additional deployment of capital to make that more material.
Late 'twenty four 'twenty five and beyond.
We're just we just need to wait until we get that signed up and then we'll be able to kind of blow it out accordingly.
Okay got it and then just my last one, but you mentioned the doubling cold chain revenue.
Over the next call it two years.
Sure.
Whats the base of cold chain revenue today that we should be thinking about.
Today as we sit here.
It's somewhere between.
One in $200 million of revenue kind of on a run rate basis.
Okay also really appreciate it thanks guys.
Thanks, Dave.
Thank you and your next question comes from the line of Mike <unk> of D. A Davidson. Please go ahead.
Yes, hi, Thanks for taking my follow up question.
Actually I have two.
First there has been some headlines last few weeks of a large leader.
Trucks that may be facing bankruptcy is seen.
As we have gotten over some humps here, they may or may not make it all the way through.
And another company in the fossil group is kind of also achieved some labor piece recently after a quite a bit of a question there as well I'd be curious if a large I guess.
On the one hand largely were too.
Where would you go out of business or it'd be liquidated in any way how would that affect <unk> business and secondly that large parcel customer diverse parcel fleet that just recently got piece of it with their labor Force do you know of any changes to their contract in may.
Impact either your truck body business or your trailer business.
Great question.
Let me start out by saying, obviously, we wish no ill will on any carrier out there.
However, the reality of our customer base does not expose us.
That in any way shape or form to that carrier population.
It is natural.
During the spot rate and cost inflationary market that carriers are facing right now that we will go through a we'll call it a purging of.
The far end of the carrier spectrum.
Those carriers that many cases really confound spot rates to begin with.
The customers that we have look at this as a very advantageous scenario.
And they would tell you that they applaud.
We will say pleased with the calling of the herd.
Which allows them to grow market share more profitably and to think about what a more stable back half of our more profitable.
<unk>, 4% and 25 will look like that's why they're positioning their asset purchases accordingly, it's why they're positive and.
In the context of a large.
Carrier.
That may or May not go bankrupt.
That would only from a Wabash perspective.
A.
Tailwind into how we think about.
As early as Q4 of 'twenty three all the way through 'twenty four as carriers continue to reposition to take advantage of the hole in the market that will be created.
Okay. Okay.
Just wanted to touch on the truck body business secondly.
Just give us.
The outlook for that business over the next couple of quarters.
How well booked you feel you are in that business and pricing wise there.
There are some orders that might be a bit of data at this point to subtract supply delays, we were able to reprice those orders once the chassis on the guests to you.
Had any pushback from customers, who don't want to choose.
Curious to pay higher prices.
What I would say is that we are in good shape relative to the priced in environment of our truck body backlog.
And we are very pleased with the strength of the backlog and the ongoing nature of demand that is.
Arguably well into 2024, and we've seen really nice sequential and year over year gross profit generation from that revenue stream and we'd expect that to continue to just add to what Brad said.
There's nothing about that is not a point of strength going forward.
Got it I'll leave it there. Thank you so much guys.
Thanks, Mike.
There are no questions at this time I would now like to turn the call over to Ryan Reed for closing remarks.
Hey, thanks, everybody for joining us today, we appreciate it we look forward to following up during the quarter have a good day.
This concludes today's conference call you may now disconnect.
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