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Edited Transcript of WNC earnings conference call or presentation 31-Jan-18 3:00pm GMT

Q4 2017 Wabash National Corp Earnings Call

LAFAYETTE Feb 1, 2018 (Thomson StreetEvents) -- Edited Transcript of Wabash National Corp earnings conference call or presentation Wednesday, January 31, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent L. Yeagy

Wabash National Corporation - President, COO & Director

* Jeffery L. Taylor

Wabash National Corporation - Senior VP & CFO

* Richard J. Giromini

Wabash National Corporation - CEO & Director

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Conference Call Participants

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* Albert Brad Delco

Stephens Inc., Research Division - MD

* Brady Cox

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Michael Shlisky

Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst

* Steven Lee Dyer

Craig-Hallum Capital Group LLC, Research Division - Managing Partner & Senior Research Analyst

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Presentation

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Operator [1]

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Welcome to the Fourth Quarter 2017 Wabash National Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

And I will now turn the call over to Mr. Jeff Taylor. Sir, you may begin.

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Jeffery L. Taylor, Wabash National Corporation - Senior VP & CFO [2]

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Thank you, Vanessa, and good morning. Welcome everyone to the Wabash National Corporation 2017 Fourth Quarter and Year-end Earnings Call. This is Jeff Taylor, Chief Financial Officer.

Following this introduction, you will hear from Dick Giromini, Chief Executive Officer, and Brent Yeagy, President and Chief Operating Officer, on the results for the full year and fourth quarter, the current operating environment and our outlook for 2018. In addition, I will provide an overview of the financial result. At the conclusion of the prepared remarks, we will open the call for questions from the listening audience.

Before we begin, I'd like to cover 2 brief items. First, please note that this call is being recorded. Second, as with all of these types of presentations, this morning's call contains certain forward-looking information, including statements about the company's prospects, earnings per share guidance, the industry outlook, backlog information, financial condition and other matters. As you know, actual results could differ materially from those projected in the forward-looking statements. These statements should be viewed via the cautionary statements and Risk Factors set forth from time-to-time in the company's filings with the Securities and Exchange Commission.

With that, it is my pleasure to turn the call over to Dick Giromini, CEO.

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Richard J. Giromini, Wabash National Corporation - CEO & Director [3]

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Thanks, Jeff. I'll begin by saying that we're pleased overall with the company's 2017 performance as we successfully established a new stronger foundation for further growth to the current year and beyond.

The addition of the Supreme truck body business was a key accomplishment as it not only adds immediate revenue and profit opportunity but also provides significant diversification into a high-growth segment driven by the ever-increasing adoption of e-commerce. To say that we're excited about our future prospects would be an understatement.

Operationally, following our fifth consecutive record year of profitability in 2016, a small reset was seemingly inevitable at some point. That said, despite a somewhat more challenging year for parts of our core businesses, we're nonetheless proud of the team's efforts in overcoming many of the headwinds faced throughout the year leading us to the strong finish in the fourth quarter that positioned us for new levels of success in 2018. Faced with a much lower backlog entering the year, due in most part to hesitancy by customers to place orders leading up to the 2016 presidential election, we got off to a slower start than originally anticipated and planned for. However, despite a few headwinds such as the somewhat tighter and more competitive landscape, higher material costs and a tighter labor market, we successfully delivered a year of historically solid financial performance.

As we progress through the year, order conversion increased for vans, while recovery of the tank trailer market remained somewhat muted in contrast to what we had expected at the beginning of the year. The impact of commodities was a headwind for most of the year as raw material pricing for our base commodities increased greater than anticipated as we progressed through 2017.

If I step back to tell you both sides of the ledger, it was a good productive year with the benefits from our investments to improve our operational productivity and cost structure are evident when compared to historical performance. And the addition of Supreme to our Final Mile products is a key strategic move for the company will resonate ever more loudly as the months pass moving forward.

With that, I'll update the progress to some of our strategic growth initiatives and our 2017 full year company performance before I hand off to Brent to discuss our operational results in more detail.

If you recall a year ago, I discussed our intentions to accelerate the evaluation of strategic acquisition targets, in effort to create sizable shareholder value and strategically accelerate topline growth of the company. This focus paid off as evidenced by the completion of the Supreme acquisition in the third quarter of 2017. I stated at the time and remained convinced that this acquisition was the best-fit asset that we had evaluated in the past several years.

Supreme is a major player in the growing Final Mile space and now makes Wabash a significant participant in that arena as well. Since closing on the acquisition just 4 short months ago, we've further enhanced our knowledge and understanding about Supreme and now believe even more strongly in the tremendous growth potential of the Final Mile equipment space and the truck body business with Supreme as part of the Wabash family.

As we discussed previously, we expect to generate at least $20 million of annual run rate cost synergies in this business within 5 years with further significant upside potential from revenue synergies. After these first 4 months, we're on track with our integration process and synergy targets.

In the organic growth arena, we've made significant progress in developing and commercializing several new products, including the next generation of refrigerated truck bodies and van trailers using molded structural composite technology or MSC. The purchase of the Little Falls, Minnesota facility in April of 2017 to produce MSC and MSC thermal panels was a major step forward for this growth initiative. Since the purchase was finalized, we invested $7 million in the facility to add or modify equipment to support MSC production, began the ramp-up of panel production capabilities and initiated the assembly of 53-foot MSCT refrigerated van trailers. While still in field evaluation mode, we are on track to complete our first 100 units by mid-2018 and now are on target to produce and sell our 200 refrigerated MSCT van trailer by year-end. With expanded commercialization of this product offering on a limited volume basis, effective for January of 2019. Customer feedback has been extremely positive with more and more potential customers expressing interest to add this new technology to their fleet.

Delivering superior insulation and greater than 25% improvement, plus 50% increase in floor load rating, this product is a true industry game changer for refrigerated goods transportation that will lead to significant market share growth opportunities for our refrigerated trailer and truck body businesses.

With that, I'll give a brief high-level summary of the full year financial results while Brent and Jeff will provide additional details in their comments.

New trailer shipments totaled 55,050 units for a full year 2017, approximately 600 units above the midpoint of our previous guidance range. Revenue was $1.77 billion for the full year with gross margin at 14.8% only trailing 2015 and 2016 in performance. This strong gross margin performance was driven by continued strong van trailer demand, solid operational execution as well as the benefit of our diversification into higher-margin businesses.

Operating income and operating margin were $130.8 million and 7.4% as reported, but after adjusting for onetime acquisition-related expenses, operating income and operating margin would have come in at $145.8 million and 8.3% respectively.

When it was all said and done, we delivered adjusted earnings per diluted share of $1.38 for the year exceeding expectations previously communicated of $1.33 to $1.37 per share, driven predominantly by stronger than anticipated shipments during the fourth quarter.

In regards to return of capital to shareholders, we recently announced an increase in the quarterly dividend by 25% to $0.075 per share or $0.30 annually at our December board meeting. Those payments went out this past week. Additionally, we repurchased approximately 3.5 million shares for $70 million during 2017. This brings our 3-year total for share repurchased to $207 million for roughly 13.7 million total shares representing a basic share count reduction of approximately 17%.

The overall company performance this past year further validates our long-term strategy and continues our progress to grow profitably and diversify the business in order to create meaningful and sustainable shareholder value.

With the Supreme acquisition, we've taken another step change in the diversification of the company to further enhance margins, ensure more stable earnings stream and leverage our existing assets, including our strong balance sheet to take advantage of macro growth trends such as home delivery and urbanization, which are driving growth of the Final Mile market.

Before I hand off to Brent, let me share with you our views regarding prospects for the current year. We continue to believe the demand environment for trailers overall will remain healthy as fleet age, regulatory compliance requirements such as the ELD implementation, a strong economy and customer profitability all support a continuation of a strong and extended trailer cycle. Adding to this belief is the significant turnaround in demand for both our platform and tank trailer businesses leading to the strongest backlog in more than 2 years for those businesses along with very strong order intake in the fourth quarter for our core van business. And industry forecasters are increasingly bullish as FDR just recently increased their projections for 2018 and 2019 to 290,000 units and 295,000 unit -- trailer units, respectively. When combining those factors with the addition of the Supreme truck body business, impact of the new Tax Cuts and Job -- Tax Cuts and Jobs Act of 2017 and the effects of cost and productivity improvement initiatives throughout the business, you have a great recipe for success.

Speaking of the recently passed Tax Cuts and Jobs Act, there's been a lot of chatter in the media about the effects of the bill for corporations. For Wabash National, the reduction in the corporate tax rate, combined with other features of the bill will provide a net reduction in our overall income tax rate of approximately 10% resulting in an effective tax rate in the range of 25% to 27%. Jeff will provide more details later. Obviously, this will provide a meaningful increase in available funds to support the business in many ways, including wage and benefit enhancements, investment in the business, and return of capital to shareholders.

For one, it enabled us to increase associate wages for 2018 at levels well beyond what we would've normally been able to do, with increases nicely exceeding market for our U.S.-based hourly workforce along with increased starting rates -- increased top rates and an acceleration of the time to reach top rate for each grade level or classification.

On average, workforce annualized straight-time wage increases of greater than $1,700 were awarded excluding additional earnings opportunities related to the acceleration rate of increases. With annual bonus opportunities already in place at all our locations, we felt strongly that larger wage increases would be more meaningful for our associates as those increases will continue for the long run as well as better position Wabash in today's competitive labor market. Also staying true to our one Wabash value, these wage increases are an addition to enhancements and benefits that were made for our new Supreme associates to bring them on par with the rest of the Wabash family.

Taking all of this into consideration, when assessing our forecast for 2018, as it stands today, we expect to ship in the range of 56,000 to 60,000 trailer units along with 22,000 to 24,000 truck body units for a consolidated revenue range of $2.05 billion to $2.15 billion.

While the first quarter will be slower out the gate due to timing of shipments and normal seasonal costs and effects of weather, with trailer shipments expected to be in the range of 11,500 to 12,500 units. That pace will accelerate quickly beginning in the second quarter and throughout the balance of the year.

Based on those and other demand and cost assumptions, we now project full-year earnings of $1.86 to $2.02 per share -- per diluted share. And as we have done in recent years, we'll update projections as we proceed through the year.

With that, I'll now turn the call over to Brent Yeagy, President and Chief Operating Officer. Brent?

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Brent L. Yeagy, Wabash National Corporation - President, COO & Director [4]

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Thanks, Dick, and good morning, everyone. As Dick highlighted, it was a solid year for the company. I am pleased to say that all 3 of our business segments are making progress and executing their strategic and operational plans.

We remained focused on enterprise-wide deployment of the Wabash management system to accelerate improvements within Diversified Products and Final Mile products as well as continue to further optimize commercial trailer products. With that, let me get into the business specifics for both full year and the fourth quarter.

Let's start with our Diversified Products Group or DPG, which includes our composites, tank trailers, process systems and aviation and truck equipment businesses. New trailer shipments for the full year were approximately 2,250 units, up approximately 150 units over the prior year despite the continued soft demand environment for tank trailers. Full-year DPG revenue was $361 million, up approximately 2.5% over the prior year. Full-year gross margin was 19.4% down approximately 210 basis points from the prior year, impacted primarily by higher commodity costs. Operating income and operating margin were $20.4 million and 5.6% respectively for the year.

In the fourth quarter, DPG welcomed Kevin Page to the team as its Group President. I'm excited with what Kevin has accomplished with the DPG team in a short time as he [drives] greater level of accountability and sustained execution.

Within DPG, we continue to see small incremental improvement each quarter in this segment as a result of slowly improving market conditions along with the impact of actions we took during the past 12 months to align our cost structure with market conditions.

In the fourth quarter, DPG generated revenue of $92 million, the strongest since the second quarter of 2016 with a gross margin of 19.7%. Operating income of $5.5 million representing an improvement of $4.4 million year-over-year was primarily driven by improved performance within our tank trailer and process systems businesses.

Within the tank trailer business, we are experiencing incremental improvement in revenue and margins as the industry slowly recovers and our cost optimization actions take hold. While not yet robust, tank trailer backlog has nonetheless grown to its highest level in 2 years providing confidence going forward.

Tank trailer shipments in the fourth quarter of 2017 were at the highest levels since 2015 with industry forecasters projecting further improved demand for liquid tank and dry bulk trailers in 2018. So while there is still a long way to go before we attain a full recovery, I'm encouraged by the direction we are heading as we entered into 2018 with our highest tank trailer backlog again since 2015.

In our AVTE business, performance improvement actions including facility consolidation, labor optimization and inventory reduction efforts have all contributed to create a more stable, predictable operating environment. Backlog has increased nicely over the past 6 months driven by a focused commercial effort providing much-needed support to the top line. We are now in a much improved position to take advantage of the operational improvements made to date. That said, there still remains a significant gap in performance to the expectations and we will continue our efforts accordingly.

Our process systems business, which manufactures processing and storage equipment for the food, dairy and beverage markets as well as the pharmaceutical and life science markets continues to see healthy demand for its product offerings. With backlogs out an average of nearly 5 months at year-end. With continued progress and implementation of lean initiatives yielding improved productivity and increased velocity, we expect to realize improvement in operating income performance year-over-year.

Our Wabash Composites business delivered a solid fourth quarter with year-over-year improvement in many key performance metrics including revenue, gross profit, operative margin and operating income. The composite's team is currently focusing on finalizing the development of new panel technologies for both commercial trailer products and Final Mile products. The first new technology is a modified DuraPlate composite panel, which is lighter weight while still providing excellent structural performance within specific applications for both the van and the truck body markets. We have allocated capital in 2018 to provide high-volume automated capabilities to support full commercialization of this new DuraPlate panel offering.

The second new technology is the ultralight honeycomb composite panel offering that we have discussed previously. Now nearing commercialization readiness, the composites' team will display a truck body utilizing the honeycomb panel technology at the NTEA Work Truck Show in Indianapolis this March.

In closing, for DPG, we are looking forward to 2018 and expect our DPG team to deliver improved performance on stronger operating conditions for most end markets.

Now let's discuss commercial trailer products. It was a solid year for commercial trailer products with approximately 52,800 units shipped in 2017 while having to navigate the headwinds of rising commodity costs. Full-year revenue was $1.35 billion down approximately $158 million from the prior year largely driven by decreased shipments of new trailers. Gross margin was 13.6% down 320 basis points from the prior year primarily due to lower volume and higher commodity costs. Operating income and operating margin were $152 million and 11.3% respectively.

Fourth quarter new trailer shipments exceeded 15,500 units with revenue of $386 million, up slightly year-over-year. CTP's gross margin of 12.2% was slightly down on a sequential basis primarily due to a higher than expected mix of direct channel business along with the continued operational startup costs related to the build-out and ramp-up of the molded structural composite facility in Little Falls, Minnesota as well as continued molded structural composite product development costs.

In the quarter, labor cost continued to be a headwind but began to subside as the quarter progressed. Operating income was $40.1 million for the quarter and the operating margin was 10.4%. Industry orders for November and December were very strong and as a result, the CTP backlog increased significantly reaching its highest level since early 2016. The strong backlog, improving economic outlook and strong fourth quarter industry orders all lead us to expect commercial trailer products to deliver another strong year in 2018. An improving pricing environment for commercial trailer products will be partially offset by higher commodity cost and labor rates. As typical, the first quarter will be the most challenging from an overall profitability perspective as lower shipment volume and labor hangover effects early in the quarter are expected to put slight pressure on margins. Beyond the first quarter, we expect volume and margins to pick up significantly as we progress through the remainder of the year.

Now we'll discuss Final Mile products. Having completed our first quarter with Supreme now part of the Wabash family, we remain very excited about the acquisition and our strong market position in the Final Mile space. With tremendous cooperation and collaboration between all parties, the integration timeline and milestones are on track or ahead of schedule in all areas of the business, with significant progress already being made in leveraging supply chain cost optimization opportunities.

Our new Final Mile leadership team is comprised of the many of the legacy Supreme leaders in addition to some experienced members of the Wabash National team. This blend of leadership talent will enable us to maintain a momentum generated by Supreme over the past few years while also increasing the pace of integration and growth as part of Wabash National.

We are projecting a strong year in 2018 with top and bottom lines exceeding 2017 as well as financial expectations that are in line or better than our acquisition modeling. The acquisition will be EPS accretive this year and will provide healthy free cash flow as the Final Mile products business has set its sights on future growth in this dynamic marketplace of Final Mile and home delivery.

Now I'll provide a short regulatory update. As previously discussed, the greenhouse gas regulations introduced in 2016 are presently under review with the EPA, which will ultimately determine whether this rule actually goes into effect. The Phase 2 greenhouse gas trailer rules were initially set to require compliance beginning in January of 2018. The Truck Trailer Manufacturers Association filed a petition in the U.S. Court of Appeals seeking review of the rule as it relates to the authority of the agencies to regulate trailers under the Clean Air Act. In addition, the Truck Trailer Manufacturers Association also filed for a state of suspend enforcement of the rule to allow time for the EPA and NHTSA to reconsider the trailer provisions. In October of 2017, the Court of Appeal's granted the motion to stay the greenhouse gas to rule as it applies to trailers. Ultimately, while compliance is on hold, the final impact on the trailer industry will not be known until the final ruling has been made.

In December of 2017, the California Air Resource Board or CARB unveiled their own proposal for new greenhouse gas standards for medium- and heavy-duty trucks and trailers that operate in California. It is likely that CARB's adoption of the regulations, currently scheduled to take place in February -- at a February 2018 meeting will require fleets to equip trailers with the fuel-saving technologies outlined in the EPA Phase 2 greenhouse gas rules. We believe the likely start will be in the 2020 time frame. We will continue to monitor the CARB rulemaking.

Also, the Federal Motor Carrier Safety Administration or FMCSA issued a mandate that all carriers must install electronic logging devices or ELDs by December 18, 2017, with enforcement to commence effective April 1, 2018. Industry estimates on carrier productivity losses as a result of ELDs range from 3% to 10%. We believe this really is likely to have a more significant impact on capacity than anticipated and may ultimately drive increased demand for new equipment as carriers attempt to recover lost productivity. While industry estimates vary, it is likely that approximately half the industry utilized ELDs prior to the new mandate meaning that a good portion of owner-operators in small carriers will either adopt the new technology, shut down or be acquired in 2018. As our results represent, we continue to execute our business at a high operational level coupled with improved market conditions our operations are well-positioned to deliver a very solid 2018.

Now I will turn the call over to Jeff for his financial review.

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Jeffery L. Taylor, Wabash National Corporation - Senior VP & CFO [5]

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Thanks, Brent. I will echo the previous comments that we're pleased with the performance of the company in 2017 as it was another strong year with significant progress toward our long-term strategic goals. Fourth quarter results were strong as shipments were at the top end of our previous guidance, in Diversified Products Group's performance continued to improve with operating income increasing for the fourth consecutive quarter. Continued execution in our operations and business functions across the company is reflected in our overall results again for this year.

Before discussing the results for the quarter in more detail, I'd like to comment on our capital allocation activities. We continue to prioritize return of capital to our shareholders. Specifically, in the fourth quarter, we returned approximately $4 million of capital to shareholders through our regular quarterly dividend payment and we repurchased approximately 1.4 million shares of stock for $28 million.

For the full year, we continue to execute our balanced capital allocation strategy as we opportunistically paid down $4 million of convertible bond debt, paid a full year of regular quarterly dividends in excess of $15 million, funded productivity and growth projects in both CTP and DPG, repurchased 70 million of common stock and accelerated our corporate growth strategy by completing the acquisition of Supreme, all while maintaining liquidity levels at $300 million for the majority of the year. We continue to remain focused on the efficient deployment of capital to areas with the highest returns and strategic importance in support of our corporate target to meet or exceed 20% return on invested capital annually.

To that end, we recently transitioned 2 of our Pennsylvania Wabash National trailer center retail branches to an independent dealer. With that, let's turn to the financial results for the quarter.

On a consolidated basis, revenue was $543 million, an increase of $81 million or 18% compared to the fourth quarter of last year. Consolidated new trailer shipments were 16,150 units during the quarter at the high-end of our shipment guidance range on strong customer pickups.

Components parts and service revenue was $31 million in the quarter and $155 million for the full year, both in line with 2016 levels as lower revenue for our branch locations and the continued transition of our company-owned retail stores to independent dealers were offset by stronger full-year demand for Wabash Composite products and an increase in parts sales from CTP's aftermarket parts initiative.

Equipment and other revenue was $98 million for the fourth quarter, an increase of $65 million from the previous year due to the inclusion of Supreme, partially offset by lower sales in our AVTE business. Overall, non-trailer related revenues for the current quarter totaled $129 million or a 24% of our total revenue as the acquisition of Supreme and our various organic initiatives continue the growth of our non-trailer products.

In terms of operating results, consolidated gross profit for the quarter was $72.9 million or 13.4% of sales. Gross profit was up $1.4 million from 2016, however, gross margin decreased by 210 basis points as DPG and CTP experienced increased material costs and the effects of a tight labor market. The current quarter was also negatively impacted by the one-time acquisition-related expenses for Supreme. Excluding these items, gross profit and gross profit margin for the fourth quarter would have been $76 million and 14.2%, respectively.

The company generated operating income and operating margin of $35.3 million and 6.5%, respectively. In addition, operating EBITDA for the fourth quarter was $51 million bringing 2017 full-year operating EBITDA to $189 million or 10.7% of revenue.

At the segment level, DPG produced net sales of $92 million on -- a year-over-year increase of $6 million for the quarter primarily driven by an increase in tank trailer shipments and higher average selling prices. DPG gross margin was 19.7%, in line with expectations. The 390 basis point increase as compared to the prior year was mostly driven by market dynamics and the impact of increased shipments and pricing as well as the favorable impact of cost containment steps, which was partially offset by material cost increases. CTP net sales were $386 million, which represents a $7 million or 1.7% increase year-over-year on new trailer shipments of 15,500 units. New trailer average selling price or ASP, decreased sequentially by approximately $300 on our product mix biased towards lower-priced equipment such as LTL pup trailers and fewer higher-priced refrigerated van trailers. We expect ASP and margins in the first quarter to be similar to the prior quarter.

CTP, once again, recorded strong margins with gross and operating margins of 12.2% and 10.4%, respectively. Operating margin was down 280 basis points compared to the prior-year period, and margins were down sequentially in line with seasonal expectations as we produced fewer trailers and had fewer operating days than in the third quarter.

Final Mile products net sales for the fourth quarter totaled $70 million. Gross profit and gross profit margin for the fourth quarter were $8.1 million and 11.6%, respectively. Excluding nonrecurring acquisition and integration related costs, gross profit and operating margins for the fourth quarter were 17.6% and 3.9% respectively. Truck body demand continues to be strong as backlog increased approximately 33% compared to the prior year.

Selling, general and administrative or SG&A, excluding amortization for the quarter was $32.3 million or 5.9% of revenue. For the full year, SG&A finished at 5.9% of revenue and SG&A as a percent of revenue is expected to remain flat year-over-year at approximately 6%.

Intangible amortization for the quarter was $4.3 million, down about $0.6 million from the prior year and was $17 million for the full year. We expect intangible amortization to be approximately $20 million for 2018 inclusive of the effect of the Supreme acquisition.

Interest expense for the quarter totaled approximately $7.3 million, a year-over-year increase of $3.6 million due to the addition of $325 million high-yield unsecured notes to our capital structure for the Supreme acquisition. Full-year interest expense was $16.4 million and we expect interest expense in 2018 to be approximately $28 million. This quarter, we've recognized a one-time tax benefit associated with the adjustment for the company's net deferred tax liability as a result of the enactment of the Tax Cuts and Jobs Act totaling approximately $20 million and a reversal of reserves for an uncertain tax position of $13 million. Inclusive of these adjustments, our effective tax rate for the full year was 9.1%.

Looking forward, we are estimating the 2018 full year effective tax rate will be in the range of 25% to 27%, a year-over-year reduction of approximately 10% driven entirely by corporate tax reform. Finally, for the quarter, net income was $49.4 million or $0.80 per diluted share. On a non-GAAP adjusted basis, after excluding one-time tax benefit, outlined previously, and adjusting for nonrecurring expenses totaling $6.6 million, primarily related to acquisition and integration expenses of Supreme Industries, as well as charges incurred related to the closing of former branch locations, net income was $22.3 million or $0.36 per diluted share. In comparison, GAAP and adjusted earnings for the fourth quarter 2016 were $23 million and $24.2 million respectively. GAAP and adjusted EPS for the fourth quarter 2016 were $0.36 and $0.38 per share -- per diluted share respectively.

Let's move to the balance sheet and liquidity. Networking capital finished the fourth quarter down about $45 million from the prior quarter on strong accounts receivable collections and overall working capital management throughout the year in reduction of working capital. We finished 2017 with net working capital levels down $10 million as compared to year-end 2016 levels, a significant achievement considering current period balances are inclusive of the working capital from Supreme.

Capital spending was $11 million in the fourth quarter and $26 million for the full year or 30% higher than recent years as our previously discussed growth initiatives require a more substantial investment in plant, property and equipment. We expect full year capital spending to be significantly higher yet again in 2018 as free cash flow from tax reform provides additional opportunity for us to more aggressively approach the full pipeline of productivity and growth projects identified across all business segments. In total, we estimate 2018 capital spending to be between $40 million and $50 million as several large projects are planned.

Our liquidity or cash plus available borrowings as of December 31 was $361 million or 20% of 2017 revenue and generally in line with levels we maintained throughout 2017. Our continued strong free cash flow allowed us to maintain liquidity at a healthy level, our first priority for capital allocation. In addition to funding our organic growth initiatives and other capital allocation priorities, such as share repurchase, quarterly dividends and debt reduction. We finished 2017 with leverage ratios for gross and net debt at 2.9x and 1.9x respectively.

In summary, we were very pleased with the company's overall strong performance in 2017. We generated solid levels of gross profit, operating income, operating EBITDA and free cash flow. We also allocated significant levels of capital in 2017 to return our capital to shareholders through our existing share repurchase program, our dividend payments in addition to investments made in the growth of the business both through organic initiatives along with key acquisitions. We begin 2018 with a strong backlog, a solid industry outlook for the year ahead and we remained focused on executing at a high level across the company.

I'll now turn the call back to Vanessa and we'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have our first question from Brad Delco with Stephens.

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Albert Brad Delco, Stephens Inc., Research Division - MD [2]

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Dick, if you could -- so great backlog here obviously. To the extent you can, can you give us some color on the makeup of that backlog? Is this large fleets coming in and placing big orders of these smaller customers. Any kind of detail you can give would be helpful.

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Richard J. Giromini, Wabash National Corporation - CEO & Director [3]

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Well, as normal during the fourth quarter, typically see a lot of the large fleet orders coming in and that certainly was true in the fourth quarter, a very strong order intake. Brent, would you like to add any color to that?

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Brent L. Yeagy, Wabash National Corporation - President, COO & Director [4]

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Sure, Dick. Yes. Dick's absolutely right. The order season was front-end loaded with our larger direct accounts as we would normally expect. I think what we would've seen or what we saw was a relatively robust first level indirect pull or sorry, direct pull but what we've been pleasantly surprised with is that the indirect channel specifically within the van business has also presented us with some nice order opportunities as well as robust quote flows. So it's really a good balance between all the channels within commercial trailer products.

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Albert Brad Delco, Stephens Inc., Research Division - MD [5]

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Okay, great. And then, another one. Can you remind us -- I think we're seeing some improvement in DPG but to the extent you can comment, how much exposure do you have in the energy market? And what are you seeing there if anything?

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Brent L. Yeagy, Wabash National Corporation - President, COO & Director [6]

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Well I -- as we've said in the past, we do have a small amount of exposure to the energy market but it is not a truly significant part of our channel design or the products that we produce. What we are generally more exposed to is the sanitary, the food, dairy and beverage market, which is a major part of our business. The other part is more of the general chemical. Now that has some relative exposure to oil and gas on the fringe but we're really limited to what our exposure is on that front.

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Richard J. Giromini, Wabash National Corporation - CEO & Director [7]

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Yes, just to put a little number around it, Brad. When we first acquired the Walker businesses, which are part of DPG, that number would range between 2% and 3% of the total business. So with the addition of Supreme to the family now, that number is even a little lower so 1.5% to 2% is the likely range so very, very minimal impact. If the market really sparks and get stronger, then we play a little bit in it because of the excess demand but it's not something that we're dependent on.

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Albert Brad Delco, Stephens Inc., Research Division - MD [8]

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Okay, great. For some reason, I had in my head it was closer to 10% but I appreciate you refreshing me. And then maybe for Jeff, can you tell us what tax rate you were using previously for the earnings guidance you gave last quarter versus what you're using today? I'm assuming you're using the midpoint of the 25% to 27% range, but just curious.

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Jeffery L. Taylor, Wabash National Corporation - Senior VP & CFO [9]

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Yes, Brad, the prior tax rate -- the prior guidance would have been using a 36% effective tax rate for the corporation. And so the current guidance, you can use the midpoint of the range at 26% and consider that 26% plus or minus 1% on either side and that's the 25% to 27% guidance.

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Albert Brad Delco, Stephens Inc., Research Division - MD [10]

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Okay. And then I apologize maybe last one if I can squeeze it in. I think you mentioned that the MSC was putting a little bit of drag on CTP margins. Can you quantify to the extent you can what type of drag that's put on gross margins in CTP?

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Jeffery L. Taylor, Wabash National Corporation - Senior VP & CFO [11]

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Yes. I don't want to put a hard number on it, Brad, but we continue to invest in the build-out in particularly the ramp-up of that facility as -- and as the production continues to increase there, then we'll continue to invest in that but it's something I'm not prepared to quantify today in a hard number.

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Operator [12]

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Our next question comes from Mike Shlisky with Seaport Global.

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Michael Shlisky, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [13]

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I guess I kind of want to follow on Brad's question there. I kind of want to ask kind of flat out here. It looks like most of your guidance increase is due to the tax rate. Can you maybe tell us if you -- do you feel substantially better at the end of January then you felt at the end of October about 2018 or are things solid but haven't really changed much since that time?

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Richard J. Giromini, Wabash National Corporation - CEO & Director [14]

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No, actually, I mean we provided the guidance on the last call getting out in front of it we were -- we felt very good about where the market was. So we came out with a reasonably strong guidance at that point. We have enhanced it as the last 3 months have come and passed as we're starting to see the order intake dramatically improve from what it was 3 months ago and that was -- well those are the comments that I shared at the time. While there is a good percentage of the increase tied to the tax reform, there is increase in the range that we provided over and above what the impact of the tax reform would be, and we increased our unit guidance for the year. Obviously, if the demand continues and orders continue to remain strong and we see continued strength in the tank trailer side of the business, there's opportunity to further enhance but at this point in time, we're comfortable with what we provided. But it certainly does include some element of increase in what our projections are.

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Michael Shlisky, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [15]

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Okay, got it. Can we also review the story around market share in 2017? If I'm looking at my numbers right, it looks like share may have been down a little bit. You did gain back perhaps some in the fourth quarter. Can you comment on whether that is true directionally and what you've got planned for '18 to hopefully make -- get some of that share back going forward?

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Brent L. Yeagy, Wabash National Corporation - President, COO & Director [16]

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Yes, this is Brent Yeagy. Yes, we had a little bit of variation around market share in 2017 as Dick alluded to the CTP business got a somewhat of a slower start than anticipated, based on the order makeup in the Q3, Q4 time of 2016 for 2017. As we've progressed throughout the year, we've continued to make inroads relative to market share but we're doing that in a purposeful way and as we stated on previous calls, managing margin over volume. Now as we went into the November, December time frames, what I will share with you is that we are well-positioned for 2018 relative to our place in the market. We're taking our fair share and as I've alluded to in previous comments, we're in a good position going into 2018.

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Michael Shlisky, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [17]

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Okay, got it. One last one for me, I just -- a bit of detail on the guidance, your interest forecast for '18 and I guess I want to ask about the share count as well on the guidance. Does your outlook include any share purchases and does it include the convert that comes due I think in around middle of the year?

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Jeffery L. Taylor, Wabash National Corporation - Senior VP & CFO [18]

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So let me start with the second part of that first. Yes, it does include the convertible notes maturing in May of 2018. And I think it's May 1 to be exact. And so we're anticipating -- taking those shares or those bonds off the table and retiring them completely. We expect to settle those bonds in cash and that's the plan that we have built in today. So that obviously will remove some of the dilution that is in the share count today. In terms of the interest expense for the full year, it's just a roll up of all of the debt instruments so the new high yield bonds we have, the existing term loan, taking the converts out and then rolling all of that up.

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Operator [19]

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And our next question comes from Steve Dyer with Craig-Hallum.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division - Managing Partner & Senior Research Analyst [20]

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You guys have touched on this a little bit I guess in the call and in the Q&A as you noted kind of November, December were enormous order months, a couple of the biggest on record, if I'm looking back correctly. How much of that I guess do you feel like was large orders or large fleet orders, pent-up demand, a response to the tax changes and sort of I guess, indicative of how things might be going forward? And how much of that do you just feel like is a front-end loaded order season I guess. So just trying to kind of figure out if the orders are not -- are or aren't indicative kind of, of how you expect kind of Q1 to play out from an order perspective?

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Brent L. Yeagy, Wabash National Corporation - President, COO & Director [21]

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Well, what I would say right now is -- this is Brent Yeagy, is I think as we entered into the 2018 order season, we obviously picked up momentum from what our first signals were in the September time frame to when national orders are coming in and we'll call it the start of the November time frame. Did propose tax really have a part to play in that? Absolutely, I believe it did, but what I will tell you is we're seeing quote and order quote activities that support something greater than just a front-end loaded order season. So we are optimistic as to how orders will continue to flow in over the course of the next few months of the general trailer order cycle.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division - Managing Partner & Senior Research Analyst [22]

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That's very helpful color. I guess looking at the cost side, you've talked about raw materials being a headwind over the last year looks like they will be again this year. Can you maybe remind us a little bit about your ability to hedge it and sort of how your contracts look like and what you feel like your opportunity to pass along price increases kind of as the year goes on or maybe even in this order season looks like?

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Jeffery L. Taylor, Wabash National Corporation - Senior VP & CFO [23]

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Yes, good morning, Steve. This is Jeff. In terms of our hedging program, it's consistent with what it's been for some time now. As you know, we hedge when we get a firm order into the backlog and so a signed order where the customer will go in and hedge the raw materials -- the commodity raw materials for that order for the duration of the agreement. In terms of the ability to protect all raw materials, 70% of our cost of goods is materials and we can protect about a little more than half of that overall raw material exposure so we got about 70% of the materials are hedged in the backlog. So we do have some exposure there in terms of some of the components, which have commodity material content in them and making sure that we can manage through that. And we will work with our suppliers to get protection on that piece as well to the extent that we can.

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Richard J. Giromini, Wabash National Corporation - CEO & Director [24]

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And just to add a little color to the other part of your question on what the environment is to go out and be able to cover those costs in the marketplace with pricing, with the -- with a very, very strong backlog that always presents much better opportunity to go out and recapture any inflationary pressures related to materials. So the significant increase in backlog that goes out much further than what we faced last year at this point in time, provides a much better opportunity for Brent and his team to be able to go out and be successful in covering that and more. Brent, did you want to add anything to that?

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Brent L. Yeagy, Wabash National Corporation - President, COO & Director [25]

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No, I would just echo that the pricing and demand environment that we have, give us a different playing field than where we sat at this time, last year and our ability to recover materials. We've aligned the team to be able to act on that and we feel generally positive that we're going to be successful recovering, we'll call it a portion, preferably a larger a portion of that material cost inflation throughout the year.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division - Managing Partner & Senior Research Analyst [26]

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Okay, great. And then lastly for me, you guys talked about a big increase, a fairly big increase in CapEx in using a lot of your savings to serve accelerate growth opportunities. Do you have the ability to be a little bit more specific on what you guys are thinking about just in terms of the CapEx increase this year?

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Brent L. Yeagy, Wabash National Corporation - President, COO & Director [27]

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Well, we're not going to quantify it necessarily by project but I would tell you that there is -- a significant amount of that is investing in new product technologies as we were -- talked about with the new panel development and commercialization within DuraPlate. We're continuing to invest within our molded structural composites facility and then we've got multiple line-specific productivity improvements that we have within commercial trailer products, process systems and now within the tank trailer business that we've enlarged our ability to deploy and execute a more aggressive productivity based capital deployment.

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Jeffery L. Taylor, Wabash National Corporation - Senior VP & CFO [28]

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And let's not forget Final Mile products as well.

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Brent L. Yeagy, Wabash National Corporation - President, COO & Director [29]

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And within Final Mile products as well.

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Operator [30]

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Our next question is from Brady Cox with Stifel.

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Brady Cox, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [31]

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I want to dig into Supreme a little bit. I know you mentioned you're on track or maybe ahead of pace for the integration. Can you just talk about what major items you're working on right now in the process and after digging into the business a little more, what you think may be the biggest opportunities are for where you can add value sort of immediately or quickly to the business?

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Richard J. Giromini, Wabash National Corporation - CEO & Director [32]

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Within the integration that we really do within Wabash National, material cost synergy is really the #1 issue on our list. It is -- we'll call it of significant scale and falls within our unique capabilities as an organization. So that's first and foremost and we're on track and in some cases ahead of schedule on that front. Next is going to be just simple, I say simple but is going in and understanding the velocity and manufacturing constraints at the line level. So we've got talent deployed to optimize that concurrently with material cost savings. And then you've got the next level of relatively certain public company costs that we're able to take out of the business. So those kind of line out the first 3 areas that we're tackling first.

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Brady Cox, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [33]

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Great. That's helpful. And then you talked about revenue synergies as well in the prepared remarks. Can you just elucidate that a little bit and tell us maybe what your strategy is and how you might bring your scale or customer relationships or quality reputation to bear to help grow the Supreme business?

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Richard J. Giromini, Wabash National Corporation - CEO & Director [34]

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Sure. So from a revenue synergy standpoint, we are contacting all the major customers within Supreme. We've been able to complete that and in articulating a message of how we bring new levels of innovation and technology to bear to solve their problems and create value within their business. That's being received very favorably and concurrently to our normal or are based, we'll call it operational synergies, we're putting together parallel plans to take advantage of that deployment of innovation within our product. We're not initially at a position to articulate what those revenue synergies would be in terms of amount or calendarization. Part of that is just the discovery process of how far, how fast we can move as we move through the integration. So first and foremost, it's really about the deployment of innovation and technology that we've leveraged from our commercial trailer products business or Wabash Composites into their product. And then ultimately, we'll look at other areas within the broader Final Mile space that we can inquisitively investigate and then deploy resources and plans to be able to grow using Supreme as a platform as we build out Final Mile products.

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Brady Cox, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [35]

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Got it. And maybe just sort of a more tactical question on the outlook for that business that you know you guys guided the 22,000 to 24,000 units, can you just help us a little bit with what that means maybe roughly in revenue terms or what that -- how that compares to their shipment -- the shipment total for last year maybe?

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Jeffery L. Taylor, Wabash National Corporation - Senior VP & CFO [36]

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Yes, Brady, what we've -- what we said around revenue in general is that if you look at the medium duty truck forecast it's supposed to grow 4% to 5% year-over-year. E-commerce or home delivery growth rates, Final Mile growth rates are in the double digits 10-plus percent and we certainly over time, see that business growing certainly above what you would have for the medium duty and in between that and the e-commerce growth rate and as we attain leverage and revenue synergies longer-term, then we potentially see upside from there.

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Brady Cox, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [37]

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Okay. And then I'm just going to sneak one more in on capital allocation. Obviously, you guys, you've initiated a regular dividend, you've been buying shares more aggressively, you just completed an acquisition and I know you're increasing CapEx pretty significantly at least for 2018, in longer term how do you view your priorities for capital allocation and where maybe the best investments are for Wabash considering what should be really strong free cash flow in the next couple of years?

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Jeffery L. Taylor, Wabash National Corporation - Senior VP & CFO [38]

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Yes, so you're absolutely right about the strong free cash flow. The free cash flow yield is I think 9.4% and typically, I think that's on the high end of our peer comparison group. So the cash flow generation continues to be very strong as we look at our balance capital allocation plan, it's consistent with what we've talked about before and obviously, we say liquidity is our number one priority there. Liquidity is very healthy and we're well-positioned to be able to pay off the convertible notes, which will be a significant use of cash in the second quarter of this year. And that really plays into, as we look at the other priorities for capital allocation of debt reduction, funding the dividend, strategic growth within the company and investment both through organic initiatives and potentially other strategic growth or acquisition opportunities and then share repurchase. So we feel like the company is very strong, generating extremely strong cash flow and that we have the ability to continue to impact each of those areas and we'll get that balance worked out as we go through the year but obviously, with the converts coming due, debt reduction will be something that will play a bigger role this year. Obviously, we'll continue to fund the dividend. And then we'll evaluate the bottom 2: strategic growth and share repurchase, as we go.

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Operator [39]

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I see no further questions in queue. I will now turn the call over to Dick Giromini for closing remarks.

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Richard J. Giromini, Wabash National Corporation - CEO & Director [40]

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Thank you, Vanessa. In closing, I'd like to again, compliment our whole team for their efforts during this past year. It proved to be an intensely busy year, navigating an erratic and unpredictable market while taking on the added task to bring the Supreme acquisition across the finish line. Resulting in establishing a new stronger foundation for further growth and success in the current year and beyond. As always we'll continue to be strategic but selective in pursuing additional opportunities to grow our business and to seek out ways to increase returns and value for all shareholders while assuring that the proper balance between risk and reward is considered in all decisions. Thank you all for your interest and continued support of Wabash National Corporation. Jeff, Brent and I look forward to speaking with all of you again on our next call. Thank you.

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Operator [41]

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And thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating and you may now disconnect.