Q2 2019 Earnings Call
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Good morning, Maverick Conference I'd number please.
Hi, Yes. It is 7848 058.
Okay.
Matt the spelling of a first and last name please.
Sure I mean, the A.T.H.R.I. Andrew Harrison is there are so hard.
Your company name.
I see our way.
And that was our eighth.
Yeah, Hey, I he already.
Okay. Thank you I'm joining you know.
Right.
Thank you.
Okay.
<unk> results in the context of the last nine months, we have seen operating margins improve as we tackle the raw material headwinds supplier disruptions in labor challenges that weighed on the company's financial results during the second quarter of 2018.
Our actions to recover price and blue suppliers suppliers stability and transform the business systems across Wabash national have allowed us to offset our operating challenges and expand consolidated margins by 10 basis points versus a strong margin quarter.
Experienced in Q2 of 2018.
Moving now to capital allocation, our primary focus remains on repaying debt, which we have acted on it in the quarter.
We have also funded our dividends repurchase shares a continued funding capital expenditures to maintain and grow the business.
Going forward deliberate deployment of cash to further strengthen our balance sheet, while continuing to return capital to shareholders.
Remains the core of our current capital allocation strategy.
We've made tremendous progress in 2019 I'd like to thank everyone Bash employee for their hard work perseverance and dedication to our company. We look eagerly to tackle the road ahead and continue our mission to create a stronger more diverse and powerful Wabash national.
I will now address our outlook for 2019.
We continue to see the basic us macroeconomic fundamentals such as GDP retreat retail sales consumer confidence and industrial production supporting a positive outlook for the remainder of 2019.
The demand for bond a mile related products has been robust as we continue to expand customer relationships in the space improved relative delivery performance and broaden how we how we serve diverse and growing bottom, while transportation logistics and distribution markets.
DPG continues to strengthen and demand for its products and visibility runs to the end of the year within the tank trailer business its largest business unit.
Demand for commercial trailer products has remained strong in 2019 with backlogs full for the remainder of the calendar year.
Given our strong revenue and operating performance during the second quarter. We are pleased to increase our guidance for 2019 full year adjusted earnings per share by five cents raising the mid point to $1.65.
We are also raising and tightening our full year EPS guidance from $1.58 to $1.72.
At the midpoint of the range, we would demonstrate year over year earnings per share growth of approximately 14%.
As we look to our future we remain well positioned to meet our 2021 financial expectations that we communicated earlier this year.
With a very strong balance sheet are more diverse and powerful portfolio of businesses and your relentless focus on implementing our Wabash management system across our entire corporation.
Again, we look forward to the future.
With that I'll ask Jeff to provide additional color on both our second quarter financial performance in the third quarter outlook.
Jeff.
Thanks, Brent and good morning, everyone.
Let's I'll start on slide four on a consolidated basis second quarter revenue was $626 million, an increase of $13 million or 2.2% year over year.
Revenue came in at the high end of our prior guidance as a result of strong customer demand within final mile products.
As well as growth within diversified products.
Consolidated new trailer shipments for approximately 15000 units during the quarter.
While new trailer shipments were at the midpoint of our second quarter guidance revenue was at the high end of our guidance as a result of increased average selling prices as we have recovered manufacturing cost increases from the prior year.
Additionally, diversified products group as well as fundamental products, both contributed strong non trailer revenue during the quarter.
In terms of operating results consolidated gross profit for the quarter was $88 million or 14% of sales.
Gross margin increased by 10 basis points year over year as a result of successful efforts to stabilize the company supplier base balancing price and cost as well as the execution of the Wabash management system for long term structural improvements.
The company generated operating income of $48 million and operating margin of 7.6% during the second quarter.
This compares to the second quarter of 2018 adjusted earnings per share of 49 cents per diluted share and represents an increase of 14% over the prior year quarter.
Excuse me.
Sta for the quarter, excluding amortization was $35 million or 5.6% of sales.
Somewhat lower than our expected full year percentage of sales due to the seasonally stronger revenue during the second quarter.
Operating EBITDA for the second quarter was $61 million or 9.7% of sales.
Intangible amortization for the second quarter was $5.1 million roughly consistent with the prior year period and in line with our expectations.
Interest expense for the quarter totaled approximately $7 million a modest decrease over the prior year as a result of the retirement of our convertible bond debt in the second quarter of 2018.
Which was partially offset by the slightly higher interest expense on our floating rate term loan debt.
We recognized income tax expense of $10.6 million in the second quarter. The effective tax rate was 25.6% slightly lower than anticipated as a result of discrete items.
Finally for the quarter GAAP net income was $31 million or 56 cents per diluted share.
This compares to the second quarter 2018, adjusted EPS of 49 cents per diluted share and represents an increase of 14% over the prior year quarter.
Let's move on to look at the segments slide five commercial trailer products.
Second quarter, net sales were $401 million, which represents a $1.6 million or 0.4% decrease year over year on new trailer shipments of 14250 units.
New trailer average selling price or ASP increased over the prior year period by more than $2000 per unit on pricing actions to mitigate the impact of higher material and operating costs.
Commercial trailer products recorded gross and operating margins of 11.7% and 10% respectively.
Operating margin was down 10 basis points compared to the prior year period, primarily due to product and customer mix.
Diversified products group Slide six produced net sales of $97 million a year over year increase of $2.9 million or 3.1% for the second quarter, primarily driven by an increase in tank trailer shipments.
And average selling prices as well as growth in our process systems business.
As Brent mentioned diversified products was able to generate the solid rate of revenue growth. Despite the divestiture of the aviation in transportation equipment business in mid January which represents a mid to high single digit percentage point drag on dpgs year over year growth.
Diversified products posted gross margin of 20.7% and operating margin of 9.2% during the second quarter.
The 450 basis point improvement in operating margin as compared to the prior year period was driven by factors such as product mix and progress made on pricing costs, but also the longer term initiatives tied to successful implementation of the Wabash management system.
Final mile products Slide seven net sales for the second quarter totaled $135 million.
Driven by strong market conditions as well as demand from customers, who appreciate the operational and technology advantages Wabash brings to the truck body market.
Gross and operating margin for the second quarter were 15.8% and 6.8% respectively.
The 150 basis point contraction in ETF NPS operating margin versus the same quarter a year ago was a result of product mix higher employee related costs and higher amortization expense versus the same quarter last year.
Slide eight shows the walk to free cash flow conversion on a year to date basis.
With operating cash flow of approximately $61 million roughly $15 million has been invested via capital expenditure, leaving $46 million of free cash flow.
Which converted at 101% of net income year to date through the second quarter.
Moving onto our balance sheet and capital allocation strategy.
Our liquidity or cash plus available borrowings.
As of June Thirtyth was $307 million or 13% of trailing 12 month revenue.
With regard to capital allocation during the quarter, we deployed $15 million for debt reduction on the term loan.
And invested $8.2 million in capital projects.
Additionally, we returned $15.6 million of capital to shareholders.
At the end of the quarter, we had approximately $89 million remaining under our share repurchase authorization.
Net working capital finished the second quarter up about $14 million from the prior quarter, primarily as a result of a decrease in accounts payable.
Working capital ended the quarter at 8.8% of trailing 12 month revenue.
We finished the second quarter with leverage ratios for gross and net debt at 2.6 times and 1.9 times respectively.
Our outlook for margin remains consistent with our prior guidance.
Asked DNA as a percent of revenue is expected to be slightly above 6% 2019.
We are currently estimating the effective tax rate for each of the remaining quarters to be approximately 26% to 27%.
Which would bring our full year effective tax rate to approximately 25%.
Given the lower effective tax rate during the first half.
Full year capital spending is expected to be higher in 2019 compared to previous years as we continue to support the pipeline of productivity projects and new product commercialization identified across our business segments.
In total we estimate 2019 capital spending to be between 35 and $40 million.
As Rick mentioned, we are pleased to be able to raise the midpoint of our full year EPS outlook by five cents to $1.65.
As a result of our strong financial performance in the second quarter.
With two quarters in the books, we're also narrowing our full year EPS guidance range to $1.58 to $1.72.
With our final mile business now a significant part of the portfolio, it's clear that Wabash national seasonality profile has been influenced by the addition of this business and due to normal seasonality, we expect to see a step down in sales and margins heading into the third quarter.
Our expectation is for third quarter revenue to come in between $570 million to $600 million.
With new trailer shipments of 14000 to 15000 units.
Moving on to total company profitability, we expect operating margin in the third quarter of 2019.
The increase in the range of 130 basis points to 170 basis points from the third quarter of 2018.
In summary, we're pleased with the strong start to the year as demand remains robust and our progress on short term operating performance has combined with longer term margin initiatives to generate year over year improvement.
We continue to generate strong free cash flow conversion and we'll proceed with our balanced capital allocation strategy that prioritizes debt payment, while continuing to invest in the business and maintaining our dividend.
As we laid out at our Investor day, we're excited for the longer term opportunities we have to continue building on our achievements.
Executing on our strategy and becoming a stronger more resilient company.
We appreciate your interest and support for Wabash National and look forward to having the opportunity to communicate further progress on our financial goals throughout 2019 and beyond.
I'll now turn the call back to resi and we'll open it up for questions. Thank you.
Ladies and gentlemen, if you have questions at this time. Please press Star then number one on the telephone keypad.
Again, ladies and gentlemen, if you have questions at this time.
Press Star and the number one on the telephone keypad.
Thanks, Good morning, and congrats on the quarter.
Thank you Justin for initiate it.
Despite that trailer shipment outlook going down can you talk about what was apparently upwardly revised within the guidance that more than offset the weaker trailer delivery number.
Yes, Hi, Justin. This is this is Jeff I'll comment on those two two pieces there.
We did pull down the high end of the.
Trailer shipment guidance range I think that that's consistent with outlooks for the second half of the year and consistent with the thank you effectively continuing to perform at the at the level. We did in Q2 for the remainder of the year. So we feel like Thats.
Consistent with what we delivered up to this point and and with the outlook outside as well.
In terms of.
The performance of the business overall, obviously, our strong second quarter performance was included in our.
The decision to increase our outlook for the full year.
And thats the Thats the biggest piece of it weve maintained our outlook for the second half.
From a profitability in a performance perspective.
Okay, Great and Jeff you gave some color on margins the margin level you expect in the third quarter, but is there any color you can provide by segment on how you expect margins to progress sequentially over the back half of the year.
I think if you it will be consistent with performance we've seen across the three segments.
Over the past few years, there is seasonality in the individual business units and once again CTP is going to continue to perform.
Consistent with where they are they will have some mix some some higher direct channel mix coming in the second half of the year, which will slightly impact their margins.
Final mile products generally have seasonality there generally strongest in the in the second quarter and then you'll see them.
Because of seasonality pull back slightly in Q3, and Q4 and then DPG also exhibits at times, a similar pattern of behavior. So we feel like.
The guidance that we've given is very consistent with past performance and and what we expect for the businesses for the next two quarters.
Okay, Great and then lastly quickly you mentioned on your leverage multiples today, but any updated thoughts on where you see leverage ending this year and maybe any initial thoughts on leverage at the end of next year.
We want to continue to.
To move to decrease our leverage we're very comfortable with where our leverage is we're also very comfortable with our balance sheet and liquidity that we have in the business today.
But we will continue to work on that I think from a from a debt reduction perspective at this point in time and I would.
Comment that this is something that we actively manage but at this point in time I think our full year debt reduction would be in the $30 million to $50 million range and that should give you.
An example of where we want to be at the end of the year.
Thank you.
Well welcome aboard thanks.
Great.
Your line is open.
Thank you good morning, guys.
Good morning, Dave.
Oh.
Just kind of curious as we look forward to 2020 I know it sounds like most manufacturers of non open order books, yet, but we're getting closer just maybe some color on where you are with that and.
More generally speaking what you're hearing from from customers just around appetite into 2020, given the 19 is pretty well booked up.
Sure State as Brent I'll take that one.
Specifically, the trailer business, where CTP will see the order book up order book open up.
And more of that traditional early to mid September and then move through the balance of the second half of the year more of a traditional.
Order book start as Weve experienced over the last 10 to 15 years.
And why.
I think it's simple.
The we were experiencing.
In the headlines we're experiencing a level of deceleration in the market. They are taking a time now right now in the in the mid summer to understand what their capital needs will be so we're going to move to more of a traditional period off peak demand levels, we know that.
And theres nothing surprising about that and it fits in line with how we see the market in 2020.
In relationship to where a CCN FDR, we think the world is lining up to their expectations.
I'll talk specifically around our larger customers, which were an active dialogue with relative to 2020, I would say again its a stable.
Perspective on their part these are fleets that are still maintaining high levels of cash generation.
Still relative high levels of operating margin.
They are not.
Concerned necessarily about their ability to purchase equipment.
They are just trying to hone it down right now what their exact expectations will be so again I'd say, it's generally in line with what we see 2020 to base as we expected and we're not surprised.
David Thanks, that's very helpful. Brian .
And then my other one just obviously you had mentioned it as well as some some cancellation levels flaking in the industry and you had indicated you are not seeing the same level just curious any color around that as stewards of this specific customer or to that is that is not yours is that a is that up is that a product line. What what are you sort of give to account for that.
A little bit higher.
In the June .
Timeframe.
ABTS reflected that in their numbers and thats in dry vans refrigerated platforms predominantly a little bit in tanks.
Why are we saying that well specifically in dry vans and and platforms as a spot rate phenomenon.
And thats affecting some of the smaller.
We will call it customers out there.
And you are seeing that get reset as people try to understand what their.
Market needs will be in 2020, as well as a volume material costs. So.
I think it was when we look at that dynamic we were we were expecting that and from a broad industry standpoint.
But its opposite of how we manage our backlog.
We manage our backlog.
And a much more prudent manner, our our dealer base is stronger which minimizes the effect of the small and medium size customer pulling back.
We manage the robustness of upper mortar differently as a publicly traded company and the strength of the portfolio that we've created over the last seven plus years within CTP allows our larger customers to be more stable has been always part of the plan and it's positive that we're seeing and experiencing exactly what we have designed to happen. So that's I guess that's the.
The long and short of it.
That's great. Thanks, a lot guys.
Thank you Steve.
Hey, guys does it go on.
Adjusted morning.
I Wonder if you can.
Give us a little color on the parts of the diversified products group that are a little bit a little bit stronger like where is the strength is it chemicals or or just a little color on what's going on there.
Well, there's we've got three major areas that we look at within our diversified products group, we have our tank trailer business our process systems.
And our Wabash composites. So again, it's a very diversified group the covers multiple end markets.
It would be wise called the diversified products group. So when we look at the relative margin strength.
Across the organ across that specific organization and strengthen all parks.
Weve, they've all implemented the areas of the Wabash management system, those allow them to execute better.
They debt that has given not only what I would call shop or generation of margin, but I think from a commercial activity, we're seeing dynamics and execution at a higher level. So we're driving margin across all three at this point now specifically from a topline standpoint to drive and flow through.
Tank trailers has executed very well in terms of.
What I would say growing better than the market in 2019, and they really have executed on all cylinders in that regard and thats a reflection of the strength of the team that Dave Hill with and tank trailers is put together, Dave Nick within our process systems group is ex executing.
In an outstanding fashion and understanding is sales and operations planning and pricing in a global food dairy and beverage market and Wabash composites specifically.
His understanding their input cost at a much higher level and has allowed that to translate margin accordingly.
Is there a lot more to go in that business as we look over.
I guess thats going to be a big driver of your 2021 goals is that fair.
Yes, what I would say is that all of our businesses have opportunities to drive higher levels of performance as we as we implement all the aspects of the Wabash management system and a long journey to go as we increase performance so to be able to narrow it down on exactly how fast they can unlock and grow those organizations as somewhat of a moving target.
But yes, we would we would we are going to be some ups and downs relative to the seasonality specifically was a diversified products.
But it is our intent that over the at least the period that we've communicated we'll go out to 2021.
Yes, they have the opportunity to.
Two on a same same volume for the sake of discussion.
Continue to grow operating margin accordingly, if they continue on this path and perform and take advantage of the opportunities in front of us.
And then and then last I'd be behind the.
Sort of the whatever you want to call it the uncertainty of of customers and in the Summertime can you just remind us the dynamics like the big structural.
Picture you know the age of the fleet in the replacement demand and kind of what the.
When you look out kind of two to five years, what some of the big drivers are from a structural standpoint. Thank you.
Yeah, I'd say that.
Great question lots of parts to that and I'll try to be a St as I can.
I would say in the near term when I say near term lets say 24 months, obviously the macroeconomic reality.
Both.
Well caught national and global are going to shape. How these next two years turnout.
And that's what we're watching specifically things can turn on a dime.
And just just being very candid up or down depending on what happens with trade policy bed.
On election, that's around the corner all those things can.
Can be net favorable if they turn out a certain way with certain timing.
Vice versa.
Depending on how those go they could add somewhat of a negative impact and that is a much more.
Harder situation understand where at what that really means.
And I'm not going to try to put odds on any of that right now.
We're going to manage our business based on what we control and whatever the market throws at us we're going to be able to do it net better than we do today.
Thats kind of how do we position it.
In terms of how we look we'll call it above that for a.
General replacement within the van business, specifically is going to be somewhere in that 200 in 15 to 230000 units, we think that has shifted up.
For various reasons everything from the spec.
Realities today versus what it was 10 years ago.
Where do we see that in the change in asset light management within the fleet.
As a result, so we think there's some things going on there and then just the population will come.
Big pieces that go with it and so while this thing called the dynamic change in logistics distribution and transportation.
That's going on right now the bigger than just final mile and I think thats going to drive.
Everything from asset mix to asset growth that traditional models don't necessarily take into account, we see that right now within our efifteen business, where the growth that we're experiencing far exceeds anything that you could proxy off of medium duty.
Chassis.
Type of economic output, and we think thats going to grow and continue diverged that's why we've positioned the business accordingly so.
I hope Thats, given some color feel free to ask a follow up if needed.
No. That's that's awesome. Thank you so much.
Thanks Joel.
Again, ladies and gentlemen, if you have questions at this time. Please press Star then one number one on the telephone keypad.
Question comes from the line of Jeff Kauffman.
Loop capital markets.
Thank you very much well good morning, and congratulations everyone.
I was wondering if you can give me an update on what's going on with molded structural composite.
I did notice that.
The Capex guidance did seem to come down a little bit.
So I guess as a follow up to what's going on with MSC.
If there was a reduction in capital spending where is it coming from.
Thanks, Jeff So I would just say <unk> the capital spending reduction has little to nothing to do with motors trucks composites are there was nothing planned in the near term or from a capital deployment quarter that project, it's mainly more of a timing.
Available resource phenomenon at this point in terms of how we want to deploy capital.
So it's just a change in our overall plan right. Okay terribly specific about it that's correct the.
From molded structural composite standpoint, what I would tell you right now I mean this again is a it's still a pre commercialization item or doing a significant amount of field validation now as we're on the path to have over a million miles on the road by the end of the year. The initial feedback coming out in various points of validation for product has been on the road really throughout 2018 and into 2019 has exceeded our expectations in terms of thermal efficiency air leakage off gassing, so on and so forth right as demonstrated by real thermals with real validated testing.
Not no wish list there.
We continue to refine the design of the base product not necessarily the most preferred composite technology itself that is proving out the space, it's more making sure that we validate the the application specific designs within the product to move into a commercialization phase and that can only be done with time.
So what we're going to we're continuing to increase every day the amount of product on the road and that's going to grow at the pace at which it grows that is not being constrained necessarily by customer demand, it's being constrained by Wabash national to meet the requirements of a properly positioned.
What we call design verification process. Because this is a long term play. This is based is has the potential for a structural change within the reefer market and how Wabash National plays that we are not going to go fast.
For the sake of short term gains. This is a long term investment and we're acting accordingly.
Okay. Thank you and just one follow up you mentioned in your answer to Joel Tiss.
About how.
Broader term longer term you were seeing changing specs in the industry. So I would just kind of curious can we differentiate how.
The structural shift in trailer specs is occurring versus are you starting to see any change in trailer specs.
Given what we're seeing kind of a slightly weaker truck environment.
Well, let me try to unpack that.
So when I think about trailer specs and journal I'm old brings us with with Fido model products as well because this is not one ecosystem people need to understand that.
These are not too different businesses. This is one now connected logistics change with a set of Disruptors, it's moving through all three phases first middle and final mile.
So let me put that let's put that aside for a second I'll come back to the other thing that we're seeing in terms of specs.
We we start talking about this five years ago on most say when we took the roadshow out is that we saw real change and and asset management.
Methods coming out of the downturn, where wabash and not really industry play towards that 10 to 12 year.
Replacement cycle, when we'll just pick a dry van.
Other products are different but would that not terribly different across the board but.
Going from that 10 to 12 year engineered or longer to more of a one that was in the five year range.
Right matching warranty cycles and asset turns more like a truck.
Right.
We've seen that that started again 2910 11.
Thousands and thousands of trailers were changed their spec.
Accordingly big fleets.
Hi volumes.
Well, there's still that group that maintain that 10 to 12 year.
Right. So we saw that change and we're going to we have to figure out exactly how that affects replacement values. As these things are kind of coming through their next cycle do.
With the shorter life, maybe going on on round too when you think about a 10 year period and then you also have the tenant twelves that'll be coming due going into this next like all this is going to kind of flush out in the middle of some economic uncertainty lot going on there.
On top of that you've got the disruption changes where.
Things like lift gates are popping up at higher and higher percentages, both on the S&P side and are the fundamental product side as well as on the.
The.
Truck side, as we go to shorter and shorter hauls.
Different applications logistic models are changing.
You are saying different specs begin to come through in terms of more flexible assets in general.
The shift is underway and in real life right now.
That helps.
Yeah, no that was fantastic well, that's all I have congratulations and thank you.
Yep Thanks, Jeff.
There are no further questions at this time.
I will now turn the call back to Ryan.
Thanks Rusty.
And thanks, everyone for joining us today, we'll look forward to following up during the quarter.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.