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Edited Transcript of WNC earnings conference call or presentation 31-Oct-18 2:00pm GMT

Q3 2018 Wabash National Corp Earnings Call

LAFAYETTE Nov 8, 2018 (Thomson StreetEvents) -- Edited Transcript of Wabash National Corp earnings conference call or presentation Wednesday, October 31, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent L. Yeagy

Wabash National Corporation - President, CEO & Director

* Jeffery L. Taylor

Wabash National Corporation - Senior VP & CFO

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Conference Call Participants

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* Albert Brad Delco

Stephens Inc., Research Division - MD

* Jeffrey Asher Kauffman

Loop Capital Markets LLC, Research Division - MD

* Michael James Baudendistel

Stifel, Nicolaus & Company, Incorporated, Research Division - VP & 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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Good day, ladies and gentlemen, and welcome to the Q3 2018 Wabash National Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Jeff Taylor. You may begin.

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

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Thank you, Demetrius, and good morning, everyone. Welcome to the Wabash National Corporation 2018 Third Quarter Earnings Call. I'm Jeff Taylor, Chief Financial Officer. And Brent Yeagy, President and Chief Executive Officer is also on the call today. Brent will discuss the overall company performance for the quarter as well as the progress we are making in our strategic initiatives, the current operating environment and our outlook for the remainder of 2018. I will then review the financial results. 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. And 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, adjusted earnings per share guidance, the industry outlook, backlog information, financial conditions 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 Brent Yeagy.

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Brent L. Yeagy, Wabash National Corporation - President, CEO & Director [3]

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Thanks, Jeff. Before we get into prepared remarks, I'd like to discuss Wabash's recent loss of an industry icon, mentor and friend. Rod Ehrlich, a Co-Founder and our Chief Technology Officer, recently passed. Rod inspired a culture of innovation that lives on within Wabash National, its products and hundreds of associates, who inspired to find new ways to serve our customers. His legacy is visible to all as you travel our nation's highways and walk the hallways with our next generation of innovators and leaders. He is and will always be Wabash National.

Moving on, Wabash has recently been named as an IndustryWeek top 50 manufacturer for the fourth consecutive year. It is an honor to be named to the list in any given year, but to be named to the list for 4 consecutive years is a tremendous recognition. It is a reflection of the hard work and dedication from all of our Wabash National associates across the company as well as the improvement of our business as we execute our strategy to grow and diversify.

With that, let's discuss the company's third quarter performance. As stated in our October 12 preliminary earnings release, the third quarter was a difficult quarter for the company. All 3 of our reporting segments faced increased operating pressures, which negatively impacted our financial results. While the third quarter result did not meet our expectations, we are actively addressing the issues as quickly as possible. Overall, in the third quarter, new trailer shipments of 15,150 units were 850 units below the midpoint of our shipment guidance range, which also caused consolidated revenue to fall below our revenue guidance range. Total new trailer shipments and revenues were below our prior guidance due to the customers' inability to pick up units as a result of a tight freight market and delays in chassis delivery impacting our production and shipments within our Final Mile Products segment.

On the cost side of the business, higher commodity and component costs impacted the quarter result as raw material costs continue to escalate as a result of a strong demand from industry manufacturers, tight supply within our supply base and import tariffs, which would have increased the price of domestic suppliers.

Supplier disruptions increased significantly during the quarter in all 3 of our business segments. Most notably, the Final Mile Products segment was impacted by chassis delivery during the quarter resulting in production and labor inefficiencies as well as shipment delays. The magnitude of chassis delivery impact was significantly greater than historical norms due to the combined effects of logistics availability and production delays within chassis OEMs. We are working hard and hand-in-hand with the chassis manufacturers to increase visibility of supply and adapting our scheduling methods to manage. We are happy to report that early results are showing positive impact.

Commercial Trailer Products and Diversified Products experienced a sharp increase in supplier disruptions during the quarter as well, which peaked in August and moderated in September. Overall supplier disruptions, excluding chassis, increased more than 50% on average across the company sequentially from the second quarter. To date, we have seen an improving level of supply chain stabilization, but remain cautious and actively engaged with suppliers to continue to mitigate future impact.

Lastly, labor availability and turnover continued to create operating cost pressures at many of our locations as unemployment remains low and demand for skilled labor remains high. While we have taken steps to attract and retain skilled associates, including increasing hourly wages, accelerating pay increases and paying bonuses to attract associates, labor availability and turnover remains high. While we have a base full of associates that are stable, it is difficult to increase manning given the current labor market. As we've discussed in the past, there is a cost and productivity impact of constantly training new employees. These labor cost pressures resulted in higher levels of overtime and lower productivity, which we believe will continue through Q2 of 2019. We are making changes to ship patterns, manufacturing line utilization and demand scheduling to better balance and manage labor availability into the future to lessen the impact experienced to date.

On a positive note, we continued to experience strong demand in all 3 of our business segments, and it was a strong revenue quarter with consolidated revenue of $553 million, the second highest revenue quarter in the company's history, only falling short of the record set last quarter. This level of revenue generation is directly attributable to the continued strong demand in Commercial Trailer Products and the improving demand in Diversified Products and the strong growth in our Final Mile Products segment. On that note, the Final Mile business has grown revenue approximately 20% in the first 9 months of this year as compared to last year. We do not feel that further ramp of the business is required, therefore, allowing labor in our supply chain to further stabilize going into 2019. I will let Jeff, in future discussion, talk about the financial results, but now I'd like to move into some of our strategic initiatives.

We continue to deploy capital into development and commercialization of our next generation of engineered materials. DuraPlate Cell Core, which provides substantially -- substantial weight savings while maintaining superior performance characteristics, is progressing as planned. We are poised to deploy capital in Q4 of 2018 to provide production scale for Cell Core technology. We're taking orders now for 2019 dry vans utilizing this new and exciting technology. The development of the molded structural composite refrigerated van trailer continues to meet all performance and commercialization expectations.

By the end of 2018, we've already accumulated over 1 million miles of molded structural composite technology exposure on our nation's highways. That number is growing quickly, and the feedback and performance have been nothing but exciting. We continue to expect to build between 100 and 120 molded structural composite refrigerated trailers this year. As exposure miles continue to accumulate, we're obtaining very valuable data and feedback from our launch partners, which is being used to further refine and enlarge the value proposition of this technology. Concurrently, we're increasing manufacturing assembly capacity for molded structural composite truck bodies. Both molded structural composite products, the 53-foot van and the truck body, are expected to deliver substantial benefits, such as reduced operating costs and extended asset life to our customers. So with numerous patents and patents pending as well as numerous trade secrets that cover material chemistry, panel design and structural configuration, we are very excited about the sustainable value-creation capability of this technology.

The third quarter marked the 1 year anniversary of the Supreme acquisition and the formation of the Final Mile Products business unit. We're excited about building a business platform to take advantage of the undeniable change on delivery, e-commerce and global logistic models.

As we have said, when we started this journey, the first investments we're going to make would be in the areas of environmental health and safety, workplace organization and employee facilities to ensure the business reflected the values of this corporation. I'm proud to say that we're well on our way to achieve this objective.

Second, we said, we would discuss on a -- we would discuss identifying productivity in projects, including introducing mixed model manufacturing into these operations. The team has now systematically launched OpEx initiatives across the Final Mile Products footprint, including new -- 2 mixed model manufacturing lines, with more on the way. We repeatedly stated that these investments would be offset in year 1 by early synergies coming largely from purchasing synergy. We're exactly where we expected to be, and going forward, we'll leverage the benefit from our ongoing OpEx activity as we build the infrastructure to support increasing levels of Final Mile-related growth.

Now I'll give a short regulatory update. Tariffs remain at the top of our watch list. We continue to monitor a steady stream of tariff update from Washington and assess any potential effects of the -- on our businesses as this plays out. Although vast majority of our raw materials are purchased domestically, some secondary components may be sourced on a global level as such be subject to tariffs, particularly the latest round of tariffs. We continue to proactively manage as much of the risk as possible using every lever available to us, including increasing pricing of our products, managing our supply base and expanding our commodity hedging program. While this impact continues to be monitored due to the fluid nature of the situation, Wabash National's broad customer base has been notified that the company will not absorb these costs and intends to adjust pricing accordingly for both new orders and our existing backlog into 2019.

To finish my remarks before I turn the call over to Jeff, let me share our outlook on the market and expectations for the balance of the year in 2019. I will start by saying that while we have many challenges this quarter, there have also been many positive and favorable developments, particularly within our key markets that've been somewhat overshadowed. I will now get into those developments. When looking at the broader economy, GDP continues to reflect strength, but with slower growth in 2019 as compared to 2018 as the Fed continues to push rates higher, while trade and tariff issues continue. Consumer confidence is high and expected to stay there, while housing surge rebounded in August and September from the low in June and July. Overall, the economy feels solid, and GDP levels close to 2.5% annually for 2019 will be a very healthy level for our markets.

At the micro level, carrier profitability continues to be strong with many of our publicly traded fleets reporting record or near record earnings of this quarter. Contract and spot rates for carriers remain high, but are moderated to levels experienced in midsummer, while the truck tonnage continues at a high level. Current full year expectations have remained strong as FTR maintains its forecast of 310,500 units produced in 2018 and ACT is slightly more optimistic forecasting an all-time record of 320,850 units to be produced this year.

For Wabash in 2018, we're maintaining our new trailer shipment guidance of 60,000 to 62,000 trailers. Taking into account the current market conditions for each of our businesses, a moderation of commodity cost inflation, similar labor conditions and a reduction in supplier disruptions to a level more consistent with the second quarter, we expect sequential improvement in margins for the fourth quarter, and we are reiterating our recently updated non-GAAP adjusted EPS guidance of $1.50 to $1.55 per diluted share.

Looking ahead to 2019, the outlook remains strong based on a continuing robust economy, a strong trailer demand forecast from both trailer industry forecasters and growing secular demand for Final Mile Products driven by an increase in consumer appetite for online retail and home delivery. ACT and FTR are forecasting total trailer production for next year of 308,200 units and 305,000 units, respectively. While both forecasts are down slightly from this year, it is nevertheless an exceptionally strong level of trailer demand. The strong outlook is further supported by the trailer -- the recent trailer orders over the last several months. Net orders in September was an all-time record high for the industry at more than 58,000 units following monthly record orders in both July and August. Furthermore, our backlog has increased significantly, both sequentially and year-over-year.

Consistent with record trailer order levels as well as a strong economy driving robust market demand across all of our business segments, backlog at the end of the third quarter was $1.3 billion, up 80% year-over-year inclusive of Final Mile Products and last year's backlog and reflecting a backlog increase in each of our business segments.

With that, we expect 2019 to be another strong year for Wabash National with both top and bottom line improvements in the company on a consolidated basis. The markets we serve in all 3 strategic business segments will remain on solid ground and improve fueled by a strong macroeconomy. We will continue to invest in productivity improvements to optimize our cost structure and operations and our corporate functions, while maintaining the deployment of the Wabash management system across our company. We will continue to invest in developing and commercializing new products and new businesses, specifically growing the Final Mile Products business and commercializing the molded structural composite technology. With a sharper focus on executing the most critical impactful initiatives, we are currently projecting 2019 full year adjustings (sic) [adjusted] earnings per share to be in the range of $1.60 to $1.80. At the midpoint of the range, we would demonstrate year-over-year earnings per share growth of approximately 12%.

With that, I'll ask Jeff to provide additional color on both our financial performance and the fourth quarter outlook. Jeff?

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Jeffery L. Taylor, Wabash National Corporation - Senior VP & CFO [4]

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Thank you, Brent. On a consolidated basis, third quarter net revenue was $553 million, an increase of $128 million or a 30% year-over-year, which is the second best quarter for the company in terms of consolidated revenue.

Net sales increased for both Commercial Trailer Products and Diversified Products Group compared to the prior year quarter in addition to the favorable impact of adding the Final Mile segment. All segments contributed to the strong revenue for the quarter.

Consolidated new trailer shipments were 15,150 units during the quarter, below our shipment guidance. Third quarter build levels totaled approximately 15,500 units, consistent with our expectations.

Components, parts and service revenue was $35 million in the quarter, down slightly from $37 million in the prior year quarter, primarily as a result of lower sales at our branch locations as we continue to transition company-owned branch stores to independent dealers.

Equipment and other revenue was $117 million in the quarter, up $88 million compared to the third quarter of 2017, primarily due to the addition of the truck body sales in the Final Mile Products segment. Overall, non-trailer-related revenues for the current quarter totaled $152 million or 28% of our total revenue. The growth in non-trailer revenue is due to the inclusion of Final Mile Products and other organic initiatives.

In terms of operating results, consolidated gross profit for the quarter was $65.2 million, up $4.2 million or 6.9% year-over-year, which was attributed to the addition of Final Mile Products last year, offset by material cost inflation as a result of strong demand and tight supply as well as import tariffs impacting both import and domestic material pricing, labor inefficiencies caused by the tight labor market and supplier disruptions, which negatively impact productivity and result in higher amounts of labor, including adding shifts on nights and weekends, all of which were experienced across the operating segments. As a result, consolidated gross margin of 11.8% decreased 250 basis points year-over-year due to the challenging operating environment.

Let me add a little more color on the 250 basis point change in gross margin. Approximately 50% of the change is related to increased raw material and component cost inflation. Approximately 20% is related to labor productivity -- labor and productivity cost, including the labor constraints and supplier disruptions, which includes chassis availability. Another approximately 20% is related to research and development cost for our strategic growth initiatives, most notably molded structural composites and the remaining 10% is related to mix effects compared to the prior year period. Excluding the impact of onetime noncash impairment charge of $12 million associated with our Diversified Products reporting segment, the company would've generated operating income of $28.5 million, a year-over-year decrease of $6.8 million or a 19%. Excluding the impairment charge, operating margin would've declined 310 basis points compared to the prior year, consistent with our gross margin change.

Additionally, operating EBITDA for the third quarter was $41.9 million or 7.6% of revenue, a very healthy level.

Now let's look at the segments. I'll start with Commercial Trailer Products, or CTP. Net sales were $368 million, which represents a $29 million or 8% increase year-over-year on new trailer shipments of 14,450 units. New trailer average selling price, or ASP, was up year-over-year due to an increased market demand and better pricing in response to raw material cost. Additionally, it is worth noting that our flatbed product, which includes both our Benson and Transcraft brands, had another tremendous quarter with 38% increased volume year-over-year. In total, Commercial Trailer Products recorded gross and operating margins of 10.6% and 8.8%, respectively. Gross and operating margins were down year-over-year due to higher raw material cost, labor increases to ramp up production on a stronger market demand, supplier disruptions and our investment in development cost from molded structural composites manufacturing expense during the quarter. Operating income of $32.5 million decreased by $8.3 million or 20% sequentially, consistent with gross profit.

Diversified Products Group, or DPG, which includes our composites, tank trailers, process systems and aviation and truck equipment businesses. Third quarter revenue was $102 million, an increase of 15% year-over-year. Overall, top line results in this segment reflected improving marking -- market conditions, resulting in increased demand primarily within our tank trailer business. Gross profit and gross margins were $17 million and 16.6%, respectively. The gross margin was impacted by material and component cost inflation, labor inefficiencies from a tight labor market and supplier disruptions. Excluding the onetime noncash impairment charge, operating income would've been $5.6 million for the quarter.

Final Mile Products. Delivering another strong revenue quarter, Final Mile Products' net sales for the third quarter totaled $87 million, which is the result of a strong demand environment in the truck body market and improved throughput in many of our Final Mile manufacturing facilities. Gross profit was $9 million and operating income was negative $1.5 million due to a challenging operating environment, including material and labor issues similar to Commercial Trailer Products and Diversified Products Group in addition to significant disruptions caused by late chassis deliveries during the quarter. Final Mile Products had gross and operating margins of 10.3% and negative 1.7%, respectively.

Selling, general and administrative, excluding amortization for the quarter, was $31.7 million or 5.7% of revenue. We expect SG&A as a percent of revenue to be approximately 6% for the full year. Intangible amortization for the quarter was $4.9 million, flat sequentially, and expected to be approximately $20 million for 2018.

Interest expense for the quarter totaled $7 million, a year-over-year increase of $3.9 million due to additional interest on the high-yield unsecured notes added to the capital structure in September of 2017 as related to the Supreme acquisition, partially offset by lower interest cost from the retirement of our convertible notes in the second quarter of 2018.

We recognized income tax expense of $5.3 million in the quarter. The effective tax rate for the quarter was 53.4% due to the discrete tax changes incurred related to the deductibility of executive compensation. Excluding this discrete tax item, the tax rate for the third quarter would've been 22.5%.

For the quarter, net income was $4.7 million or $0.08 per diluted share. On a non-GAAP basis, our adjusted earnings were $16.5 million or $0.29 per diluted share. In comparison, GAAP and adjusted earnings for the third quarter of 2017 were $18.9 million and $21.2 million, respectively. GAAP and adjusted EPS for the third quarter of 2017 were $0.30 and $0.34 per diluted share, respectively.

Let's move to the balance sheet and liquidity. Net working capital finished the third quarter at levels consistent with both previous quarter and prior year period at approximately 10% of revenue. We anticipate working capital to remain generally flat for the balance of the year based on our full year outlook, with the potential for a normal seasonal reduction at year-end.

Capital spending was approximately $9 million in the third quarter, and we anticipate our full year capital spending to be approximately $35 million depending on the implementation and timing of several large projects.

Our liquidity or cash plus available borrowings as of September 30 was $271 million or greater than 12% of trailing 12 months revenue. Our continued focus on free cash flow has allowed us to maintain liquidity at a healthy level, our first priority for capital allocation.

Through our authorized share repurchase program, we purchased approximately $23 million worth of shares in the third quarter. Also, we paid our quarterly dividend, which currently has a dividend yield of approximately 2.25% at current stock price levels.

We finished the third quarter with leverage ratios for gross and net debt at 2.7x and 2.1x, respectively.

While Brent shared our view on the full year, I wanted to provide some additional color on the fourth quarter. Based on the strong market demand and seasonality, we expect consolidated revenue of $570 million to $605 million in the fourth quarter. Additionally, we expect the margin performance to improve across all of the business segments, driven by strong volume, improved productivity, with fewer supplier disruptions, and as our pricing actions begin to take hold, offsetting raw material cost increases.

In summary, it was a challenging quarter for the company as a whole. We did not perform to the level we expect. Nevertheless, it was a strong quarter in many respects, particularly from a historical perspective. It was the second best quarterly revenue in the company's history, reflecting the continued strong demand in our core businesses in addition to the strong growth of the Final Mile business, driven by secular growth of online retail and home delivery. Both trends, we expect to continue.

Despite higher input cost, we generated solid levels of gross profit, operating income and operating EBITDA. The balance sheet and liquidity are strong, with a modest level of leverage. The outlook across all of our business segments remained strong, and the backlog supporting our outlook is at an all-time high.

With the addition of the Final Mile segment, we now have 3 business segments with more diversification than ever before, in addition to significant growth drivers from the Final Mile business and new products currently being commercialized, specifically DuraPlate Cell Core and molded structural composite refrigerated vans and truck bodies.

Lastly, we remain committed to executing our corporate strategy with a focus on growing shareholder value in everything we do.

Finally, I've one quick announcement before I turn the call back to the operator for questions. We have moved our Investor Day event to February 28, 2019, and still plan to host the event in New York City. We will send out a save-the-date reminder in the near future.

I'll now turn the call back to Demetrius, and we'll begin the question-and-answer session.

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Questions and Answers

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Operator [1]

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

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

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First question, just on the challenges you saw in the first quarter. I just think it would be helpful if you could just sort of address when some of those challenges became more obvious to you guys, because you gave us an update in late July with expectations of sequential improvement in margins across, I think, all 3 of your business lines? And then we were also caught by surprise. So how do we know we have good visibility here for fourth quarter and into '19? And any color you could provide there would be helpful?

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Jeffery L. Taylor, Wabash National Corporation - Senior VP & CFO [3]

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Yes. Brad, let me start, and then Brent can obviously add to it. In terms of when, from a visibility perspective, it really became apparent to us was later in the quarter, and I'll talk first about supplier disruptions. We've been operating with a normal level of supplier disruption given the strong industrial production, the strong demand that we've seen in trailers over the last couple of years but 2018, in particular, as well as tractor demand which, as you know, shares many of the same supplier base as we do. And so from a supplier base, the past utilization has been very high. They haven't added capacity in several years, certainly, I think since the last downturn to any great extent. And so that puts stress on the supplier base this year but, in particular, we saw it manifest itself in Q3. For us, supplier disruptions really increased significantly in August and August was also the peak month we've seen for supplier disruptions. And in the couple of months since then, we have seen it improve from the peak that we saw in August, but for supplier disruptions, they're very difficult to predict ahead of time and you generally know about them when they occur. And while I'm saying that, I also want to tell you that we are taking proactive steps to increase our visibility for supplier disruptions. We are definitely increasing the contact and touch points that we have with our supply base in order to try to get an earlier warning on that issue as well as increasing our monitoring internally. We will also look at adjusting safety stock levels internally to help offset some of those disruptions and the impact they had on our operating performance in the quarter.

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

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Brad, what I would add to that is from a -- just a shipment perspective, that's something that really would not have become evident to us until really the latter half of August, beginning of September as we saw our van shipments begin to trail precipitously at that point based on just a slowdown in customer pickups. We've seen that now rebound as we've entered into the fourth quarter as we've seen the -- our customers, our largest customers really begin to pick up the pace as they position assets going into the fourth quarter in anticipation of a strong freight environment as well as preparing for the Christmas holiday. Now that supplier disruption had a, we'll call it, a negative synergistic effect with our state of labor. If you think about the fact that we're trading on just a, we'll call it, a baseline of labor through the organization, just nature of the environment that we're in, and if you think about the discontinuities that get created within the manufacturing environment when you're hit with a quick uptick in disruption, that inefficiency then grows significantly. So that all came to a, we would say, came to a head in that late August, early September time period. What's positive is that we saw a market decrease over the course of September in supplier disruptions and we've seen it further improve to more like Q2 levels as we've entered into the month of October and arguably into the month of November. So that gives us some clarity as to how the environment is impacting us and how we can feel comfortable in our forward projections for the fourth quarter.

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

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Okay. And then 2 follow-ups, if you don't mind. With regards to the backlog you have, it seems as if a lot of your suppliers or maybe just the trailer industry suppliers are really unsure about input cost for 2019, and so it sounds like some of the orders here in the trailer industry are sort of committed volumes with sort of unknown price. Is that a fair assumption? Or do you feel like your suppliers have given you clear indications of what input cost will look like or what your cost will look like in 2019?

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

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Yes. The way I would characterize that right now is, I would -- I'd say, it's an undeniable truth that there is a -- it is not an easy environment to understand what future costs may be. We are getting through some of the very strong relationships that we have with suppliers, a good understanding of where they sit. They're working with us very diligently to understand how they may be impacted by future tariff-related cost pressures. While we may not know and nor does the industry know, I would say, broadly, the industrial market doesn't know exactly where cost will end up over the course of 2019, what we can begin to do and what we have done, we've given our customers notice that we intend to pass along in real time all tariff-related price increases going forward. We've sent a letter out and have begun face-to-face communication across our entire customer base to hedge that risk and to let them know our intended intent to pass that cost straight through. In addition, we've increased the amount of what I would call contractual resetting of price based on periodic increases in cost throughout the 2019 time period to further hedge that risk due to that unknown, all right. So there are things that -- while we may not have certainty as to costs, there are things that we can do to begin to hedge that risk. The last one I would talk about is that we are further expanding our hedging program so that we can take a, we'll call it, a fuller bite at the rest that's left on the table in terms of our largest material cost and which is a commodity component of the our total cost of materials.

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Albert Brad Delco, Stephens Inc., Research Division - MD [7]

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Okay. That was good color. And then last real quick one, if you can. I mean, you guys know that I'm really interested in this one, but any feedback you're getting in your pilot program with MSC from your customers? And when do we expect the order book to start building for that?

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Brent L. Yeagy, Wabash National Corporation - President, CEO & Director [8]

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Yes. So I would say, we -- first off, we are actively engaged right now in looking at filling what we believe is our targeted demand/targeted capacity utilization for 2019. Now that is something we'll talk about in more detail at, specifically, the Investor Day in February of 2019. We have a much more broader perspective that we'll share. What I'll tell you is that we feel very confident that we have the capacity installed to be able to meet the expectations that we have to take a significant step forward in production, i.e., shipment of molded structural composite technology in 2019. That includes not only on the van side of the business but also on the truck side of the business now -- sorry, truck body side of the business now. With positives -- with further positives, and I want to reiterate, there are 1 million miles on the road right now, we're getting a significant feedback in, we'll call it, building, anticipation and expectation for what this product can provide. We've expanded the number of dealers that we're talking to and they're expanding the number of people that they are putting in queue as we tell the story of what is possible with this technology. So we're in a good place right now and understanding what the pent-up demand for, we'll call it, first look of this product. And we will be matching that to our intended increase in production accordingly. We'll tell that story more in February.

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Operator [9]

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And our next question comes from Jeff Kauffman with Loop Capital Markets.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [10]

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Couple net questions. Can you talk a little bit about the impairment charge at DPG? It seems like revenues are on the way up, margins are getting better. Is it -- was it a write-down of a business unit entirely? What caused the impairment?

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

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Yes. Jeff, I'm not going to say a whole lot about it, but it was not a write-down of an entire business unit. As you know, we're required by accounting regulations to constantly monitor the carrying value of the assets on our balance sheet and we got into situation in this one where we felt like that the long-lived assets needed an impairment, and so we took the impairment in the quarter. It was related to goodwill and intangibles for our business. And we haven't disclosed what business it is.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [12]

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Okay. And finally, with the Final Mile business, clearly the chassis disruptions, revenues were down about $35 million sequentially. That business is still relatively new to us. Can you give us a better idea of what you think the normal 2Q to 3Q and 3Q to 4Q seasonality in that business should be? And then as supplier deliveries come back, should we kind of expect a larger-than-expected seasonal movement in that business?

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Jeffery L. Taylor, Wabash National Corporation - Senior VP & CFO [13]

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Yes. Jeff, I think for the business as a whole, the normal seasonality that you should expect to see is that it generally is going to be strongest in the second quarter. If you look at Supreme as a public company prior to the combination with Wabash, they generally peaked in the second quarter and then -- but they also -- some of that was because of the large lease demand. And so that would also carry over somewhat into the third quarter. And then you see, generally, Q4 and Q1 at more modest levels, not peak levels in the seasonal profile there. So overall, that's what I think the shape of the seasonality looks like.

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Brent L. Yeagy, Wabash National Corporation - President, CEO & Director [14]

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What I would add to that is, I think, that's an accurate perspective relative to the historical norms within that business. I do want to stress that as -- from a go-forward standpoint, while we believe in general that historical norm will carry forward, we are actively working to smooth that demand curve for this business as reflective in Q3 and Q4 from a forward-looking perspective. It's not a great situation from a labor stability standpoint and overall planned efficiency standpoint to operate a business that way. From Q2 to Q3, for the Final Mile Products business in 2018, I think it's important to understand that chassis disruptions, which impacted 20% of overall production, i.e., shipments, as we get that more stabilized in outgoing years, we'll start to see a moderation of that depth from Q2 to Q3 as we actively manage the demand curve going forward. Ultimately, that's one of the ways we unlock the value in this business on a full year basis and that's something we're actively working to do.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [15]

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Okay. Brent, one or two other nets and I'll get back in line. So we're coming off at $0.54 second quarter, your normal seasonality wouldn't be that different. Is it fair to say that the combination of these issues may have cost you as much as, say, $0.20 of earnings in the quarter?

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Jeffery L. Taylor, Wabash National Corporation - Senior VP & CFO [16]

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Well, I think the issues we identified were what caused the 250 basis point decline in gross margin, so it dropped that down to the EPS line and the answer is, yes, it was primarily driven by the factors we've talked about.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [17]

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Okay. So a silly question then. If you're going to finish the year around $1.50 in earnings and maybe $0.20 to $0.30 impact from these issues, many of which should abate as we get into 2019, why do you think you're only going to earn about $0.10 to $0.20 more on average in 2019? I understand tariffs is some of this, but generally, these are costs that should go away. What else is weighing on that 2019 outlook?

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

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Yes. Jeff, I think our full year adjusted EPS guidance of $1.50 to $1.55, if you look at our third quarter year-to-date adjusted EPS numbers of $1.06, were higher than $0.10 to $0.26 EPS in Q4.

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Operator [19]

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(Operator Instructions) And our next question comes from Mike Baudendistel with Stifel.

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Michael James Baudendistel, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [20]

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Just wanted to ask you, what has the customer response been to going back in your backlog and asking for higher prices on those pieces of equipment? And to your knowledge, are your competitors doing the same thing?

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

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So we took a round at increasing, we'll call it, material-related price increases or pressures in 2018. I would say that we had a greater than 50% to 70%, we'll call it, positive response to those activities. I think it's kind of an undoubtable fact that price is going up, cost is going up, customers understand that. We're just in the midst of going around from a -- from the tariff-related letter that we just sent out. We're engaging customers right now, and we're taking generally a stronger position even than what we did in 2018. So again, this is a pseudo regulatory-related pressure. Our customers understand that. They're dealing with it in other ways. We feel confident that we will be able to recover a significant portion -- a very significant portion of that amount going forward in 2019.

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Michael James Baudendistel, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [22]

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Okay. And then maybe just to think about in other way, I mean, how much of your $1.3 billion in backlog would you say, given those pricing actions, are now at a margin that would be sort of a normalized margin?

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Brent L. Yeagy, Wabash National Corporation - President, CEO & Director [23]

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What I would say right now in general, and we'll add further color as we move into further calls, is that we've already taken a substantial price increase across the board as we priced the backlog for 2019. And I would say that we have, and I think it's reflected in the guidance that we've given for 2019 accordingly, that we have a level of visibility to the margin of our backlog going forward, and it encompasses, again, a significant amount of price recovery to date. In addition to that, we have the added protections of increased pricing recover mechanisms to further protect that backlog, and we're telling our customer base that any tariff-related costs that may have not been priced in at the time of the original deal, so remember that there is a substantial amount of backlog that was taken in July, August and early September prior to the release of the 301 tariffs, anything that's not priced in there, we're very upfront telling our customers that we'll be adding that to the price of the trailer. I hope that answers your question.

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Operator [24]

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And we have a follow-up question from Jeff Kauffman.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [25]

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So regarding the 5 issues that you spoke about, the labor inefficiencies, the raw material issues, supplier deliveries, the chassis availability and the customer pickup, I think you addressed a majority of those in terms of timing. I'm assuming the labor efficiencies, it's a hiring and training and productivity issue that last into, I think, you said second quarter '19. You've addressed the raw material issues. Can you -- and I think you hit on customer pickups. I thought I heard a number 1,800 units. I don't know if that was the right number, but can you address where you are on the delayed customer pickups? And when you believe you'll be back where you need to be?

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Brent L. Yeagy, Wabash National Corporation - President, CEO & Director [26]

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What I would tell you right now, Jeff, is that we are -- we've kicked off the fourth quarter in line with expectations relative to customer pickups. And again, I think based on conversations with our customers, they fell behind through their own internal expectations of the repositioning and uptake of assets in the third quarter. So for them to hit their revenue targets, they're highly motivated to get product off our lots and into service. And we're seeing that reflected in their pickup rates today.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [27]

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All right. So you think maybe we're where we need to be as we finish fourth quarter, hopefully?

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Brent L. Yeagy, Wabash National Corporation - President, CEO & Director [28]

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I would say, it's trending that way. We have a quarter in front of us. We have -- we need to see and understand, we've 2 more months to play out, but all indications right now based on what we know indicate, again, that they are motivated to do it.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [29]

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All right. And a couple other OEMs had cited Hurricane Florence as an issue with some of the suppliers that were in that region, the Southeast U.S. but, as mentioned, that's getting a little bit better. Can you talk about kind of how disruptive the supplier delivery issue and the chassis availability still is to your business as we sit here at the end of October? And what your hope is in terms of when much of that will be resolved?

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Brent L. Yeagy, Wabash National Corporation - President, CEO & Director [30]

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Sure. Hurricane Florence, I would not say, had a material impact on our supplier disruption-related issues. Our issues are really based off of the precipitous increase in production from Q1 to Q3, both in the trailer and the tractor-related industry, really coming to a head in August, coupled with a lack of logistics capacity in some cases for some of our specific chassis manufacturers as they moved chassis at a large number to the overall mounting facilities or mounting factories. When we think about how supplier disruptions look to us today, I would say, as we sit here in October, it has reached -- it is at a level that is more like what we saw in Q2. So we have absolutely seen a material reduction in disruptions as we sit here today. And we have no reason to believe that they will specifically spike going into the rest of the fourth quarter. There is nothing on the table that says that should happen barring any black swan event that we can't necessarily understand, got it. But what I'll tell you, again, is that what we are seeing and how we are executing is reflective of a much different supplier disruption environment, akin to second quarter of 2018.

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Operator [31]

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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 [32]

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The industry guys, FTR and ACT are obviously sort of forecasting a bit of a step back, very minor, next year. And I think you have indicated that you expect your consolidated revenue and EPS actually both to be up next year. So as you think about your ability to outperform as that, you feel like the components of that being, is it pricing, is it taking share in dry vans or is it really kind of more centered around Final Mile outperformance just in your ability to sort of all-in-all outperform the industry expectation?

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Brent L. Yeagy, Wabash National Corporation - President, CEO & Director [33]

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Well, thank you very much. I think it's a great question. I think what we said right now is that we feel comfortable that we have taken a very large step forward in the recovery of pricing-related pressures or costing-related pressures from 2018 to 2019, that's number one and that's a huge lever for us. The second is based on our order intake to date, reflective in our backlog, we are -- have -- we've significantly leveraged what I believe is market share as we move into 2019, right. And while we want to manage and grow the business, we also feel we're doing it in a way that fits within the capacity that we have installed to date, right. So I think we're in a position where we can actually improve pricing relative to material cost recovery. We're also in a position where we can leverage and install manufacturing base without any substantial ramp to this period, which gives us the ability to optimize the business, and based on the backlog, to actually pick up some incremental share accordingly, that's specifically in the van business. And I think you can see by the backlog numbers and just the continued performance of our Final Mile Products business that they're in a position where they have absolutely grown their business accordingly. We think they can continue to do that in 2019, and with the work that we've done from adding capacity really through productivity improvements on the line using mixed model scheduling and lean methods, they're positioned also to execute at a much higher level reflective in the EPS range that we've given.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division - Managing Partner & Senior Research Analyst [34]

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Okay. That's helpful. And then you obviously have a good visibility in the order book at this point in time and pricing and so forth. As you've had sort of price increase discussions as well as this recent tariff letter, are you seeing any sensitivity around order numbers, in other words, if somebody wanted 1,000 trailers at a certain price, as that price moves up, are you finding it elastic, are they cutting the numbers or do they just sort of view that as a cost of doing business and overall demand doesn't change, cancellations are still relatively small?

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Brent L. Yeagy, Wabash National Corporation - President, CEO & Director [35]

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Yes. I would say, as the order book is unfolded, there has been somewhat of an elasticity of price. They have been willing to pay the price that we have generally been asking for. We've raised price significantly. We'll be talking more about that at a different time accordingly, and customers continued to generally order at the level that they had initially indicated, meaning, they're not cutting their actual order volume as a result of the price increases. But as a general statement, obviously, there are a handful of customers that may have moderated their buy, but overall, I think they understand what has to happen in this type of environment and also have to realize that many of these carriers are sitting on record profitability. They have the capital and the wherewithal and a market that they need the assets. So it's a good market to push through our price increase right now.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division - Managing Partner & Senior Research Analyst [36]

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Got it. Last one for me, and then I'll move along. The chassis availability issue on the Final Mile side seems to be fairly pervasive in the industry and a lot of the commentary does not suggest there's necessarily going to be a quick fix for it, is that generally what you're seeing as well?

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Brent L. Yeagy, Wabash National Corporation - President, CEO & Director [37]

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I would change that a little bit. I think, if you look at, we'll call it, just chassis production or Class 8 production, in general, I mean, the Class 8 is just a surrogate. I know it's a microcosm of the multiple classes of vehicle, but when I think about it from a supply base standpoint, very precipitous increase in total demand, trailer, truck, chassis, however, you want to frame that from first quarter to third quarter. Overall, not only in the trailer industry but also within the truck industry, there's somewhat of a moderation, more of a level of demand between now and the second quarter of 2019. So when you talk about suppliers, they're not necessarily in a position to add additional capacity, plant, property and equipment, but they have reached the level of, we'll call it, installed labor capacity that will benefit them over the course of the next 3 to 4 quarters. So we should see some improvement. They're indicating that in our conversations that they're in a better position to be able to respond. Does that remove all supplier disruptions? No, but it does lessen the risk of what we may have seen in the fourth quarter where we think it really just peaked in the context of their plants.

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

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Yes. And then Steve, we do expect some level of impact there from chassis availability, but not to the extent we saw in the third quarter.

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Operator [39]

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That concludes our Q&A portion of today's call. I would now like to turn the call over to Brent Yeagy.

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Brent L. Yeagy, Wabash National Corporation - President, CEO & Director [40]

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Thank you for your interest and support in Wabash National Corporation. Jeff and I look forward to speaking to you again on our next call. Thank you.

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Operator [41]

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Ladies and gentlemen, thank you for attending today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.