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Edited Transcript of WNC earnings conference call or presentation 25-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Wabash National Corp Earnings Call

LAFAYETTE May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Wabash National Corp earnings conference call or presentation Tuesday, April 25, 2017 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, COO and Director

* Jeffery L. Taylor

Wabash National Corporation - CFO and SVP

* Mike Pettit

Wabash National Corporation - VP of Finance and IR

* Richard J. Giromini

Wabash National Corporation - CEO and Director

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Conference Call Participants

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* Albert Brad Delco

Stephens Inc., Research Division - MD

* Jeffrey Asher Kauffman

Aegis Capital Corporation, Research Division - Analyst

* Joel Gifford Tiss

BMO Capital Markets Equity Research - MD and Senior Research Analyst

* Steven Lee Dyer

Craig-Hallum Capital Group LLC, Research Division - Partner and Senior Research Analyst in the Equity Research Department

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Presentation

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Operator [1]

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Hello, and welcome to the First Quarter 2017 Wabash National Earnings Conference Call. My name is Eric, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Mike Pettit. Please go ahead, sir.

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Mike Pettit, Wabash National Corporation - VP of Finance and IR [2]

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Thank you, Eric, and good morning. Welcome everyone to Wabash National Corporation 2017 First Quarter Earnings Call. This is Mike Pettit, Vice President of Finance and Investor Relations. Following this introduction, you will hear from Dick Giromini, Chief Executive Officer of Wabash National; and Brent Yeagy, our President and Chief Operating Officer, on results for the first quarter, the current operating environment and our outlook for the remainder of 2017. In addition, Jeff Taylor, our Chief Financial Officer, will provide an overview of our financial results. At the conclusion of the prepared remarks, we'll 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 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's my pleasure to turn the call over to Dick Giromini, CEO.

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

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Thanks, Mike. I'll begin by saying that the first quarter proved to be an excellent start to 2017 and we feel well positioned to deliver and exceed on the full year commitments outlined 3 months ago during our 2016 year-end call.

Commercial Trailer Product's demand activity remains strong and the Diversified Products Group recovery is beginning to take hold in the markets that had demonstrated weakness over the past 18 months. Overall, in the first quarter, we continued to generate very strong margins in the business, accompanied by record first quarter operating cash flow and further strengthening of our balance sheet. We remain solidly positioned with ample resources to, one, fund our internal capital needs to support both organic growth and productivity improvements; second, to assure continued reduction of our debt obligations; third, to return capital to shareholders; and finally, selectively, but more actively, pursue strategic acquisitions. Truly a great position to be in.

On the growth and capital allocation front, we're excited to announce the acquisition of a fully-equipped manufacturing facility in Little Falls, Minnesota to serve as the primary site for production of our proprietary molded structural composite panels as well as serve as a flexible launch facility for final assembly of molded structural composite truck bodies and MSC thermal refrigerated trailers. I, again, welcome our new Little Falls associates to the Wabash National team. We closed on the facility transaction earlier this month, and have already begun the process to convert mold capabilities to our needs. By year's end, we anticipate further investment of approximately $7 million in the operation to expand panel manufacturing capacity, bringing our total capital investment to $10 million in Little Falls.

We also had the opportunity to showcase the latest product technology in our expanding line of final mile and home delivery product offerings at the NTEA Work Truck Show in Indianapolis last month. Featuring honeycomb cored DuraPlate panels, our new lightweight truck body offering will provide customers with best-in-class weight payload and durability performance characteristics, relative to current product competitive offerings, leveraging our industry leadership in material science development and application. Additionally, we continue our proactive efforts to identify key strategic acquisition targets that we believe can create sizable shareholder value. We remain committed to this objective, and are confident we will successfully identify assets that will allow us to utilize our strong financial position to accelerate our growth and diversification efforts, while leveraging our strong competencies in manufacturing execution, sourcing and innovative engineering leadership, to assure strong long-term value creation.

Lastly, as we continue to generate free cash flow comfortably in excess of our organic capital requirements, we further expanded our commitment during the quarter to provide attractive return of capital to shareholders as we announced an additional $100 million share repurchase authorization from our Board of Directors as well as paying the first quarterly dividend of 2017 back in January.

Now let's take a look specifically at first quarter results. Net sales were historically strong for our first quarter at $363 million on shipments of 10,900 units, just below our prior guidance, due strictly to timing of customer pick up. Conversely, first quarter build levels totaled approximately 13,450 units, in line with our build expectations for the quarter and consistent with typical build-to-ship ratios during the first quarter of a year. Operating income for the first quarter was $30.3 million, representing the second highest first quarter in the company's history, only surpassed by the first quarter of '16, and notably exceeding the same period in 2015, when shipment levels were 31% higher. So, excellent execution by that team. Operating margin came in at 8.3%, also the second highest first quarter, behind only 2016, with a decrease year-over-year primarily due to lower build and shipment levels within CTP in 2017. Overall, a solid start to the year, with strong margins and a favorable demand environment that appears to be strengthening further than what we anticipated at the year-end call, and another strong quarter of cash generation, registering over $62 million of operating cash flow in the first quarter. Without question, a nice beginning to the year.

With that, I'll ask Brent to provide some detail on results for each of our reporting segments. Brent?

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

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Thank you, Dick. First, I'd like to congratulate the team on some key milestones and our growth and diversification efforts in the first quarter. Our acquisition of the Little Falls manufacturing facility and the introduction of our honeycomb DuraPlate truck body at the NTEA show, both highlight the progress we continue to make on our innovative material technologies and the steps we're taking to diversify into a more stable, higher-margin earning stream. We continue to enhance collaboration across the enterprise and are prioritizing opportunities for accelerated cost reduction in many areas of the business. These include expansion of Shared Services, further supply chain efficiencies and manufacturing process optimization by leveraging our Wabash Management System, as we continue to target operating overhead and SG&A savings of $10 million annually at current revenue levels over the next 2 years.

With that, let me get into some business specifics for the first quarter. I will start with the Diversified Products Group or DPG, which includes our tank trailer business, aviation and truck equipment, process systems and our composites business. Overall results in the segment continue to reflect soft but improving market conditions in many of the end markets served by DPG. Q1 revenues were $90 million, an increase in both year-over-year and sequential comparisons, while delivering operating income of $4.6 million. Margins for the first quarter were generally in line with expectations with gross margin at 19.6% and demonstrating a solid level of improvement from the fourth quarter. As stated, the tank trailer business is beginning to experience somewhat stronger demand in certain end markets, while the food dairy beverage markets within our tank trailer business have continued to see reasonable stable demand, we are beginning to see an uptick in activity in chemical and the oil and gas markets, resulting in slightly higher backlogs for both liquid and dry bulk tanks.

As communicated on our last call, while we do not expect a near-term return to the record-setting demand levels seen in 2014 and '15, we do expect to see continued improvement from this business unit as we progress through the year, driven by improving quoting order activity, cost optimization actions and improved pricing environment.

In our aviation and truck equipment business or AVTE, facility rationalization and labor optimization have begun to demonstrate improvement. We completed the closure of our Findlay, Ohio facility in February and have now consolidated all operations into one manufacturing location in Kansas City, Kansas. These actions will provide continued opportunities for us to improve our cost structure and leverage overheads. While we have taken out over $2 million of annualized cost in this business, work remains to bring this business to acceptable levels of performance. Nevertheless, we are executing our improvement plan and the operations have been solidly cash flow positive as they implement lean business principles. In our process systems business, which produces isolators, downflow booths and mobile clean rooms for the pharmaceutical industry, along with stationary silos and mixers for the food, dairy and beverage industry, we have continued to see stronger quote activity that has led to orders and backlog levels we have not experienced in the past 2 years. We continue to look for opportunities to grow this business.

The Wabash Composites business continues to perform very well as it advances the development of new material technologies that will be key to their future growth. The potential to incorporate honeycomb DuraPlate panels in existing and new products provides an exciting platform for future growth. Product sales into the final-mile space continue to be robust as demand for truck body panels and decking systems remain strong. Q1 performance was very strong, with revenues and margins showing improvement in sequential and year-over-year comparisons.

In summary, we are confident that we are taking the proper steps to return the DPG business segment to acceptable levels of performance, and the first quarter results demonstrate this improvement. We are continuing to see improvement in the market dynamics facing this business, and we expect 2017 to show slightly stronger performance in Q2 and Q3. As we move through 2017, we expect to return to our historic norms in gross margin or 21% to 25% by the second half of the year.

Now, let's discuss the results of the Commercial Trailer Products segment or CTP, consisting of our dry and refrigerated van products, platform trailers, dry and refrigerated truck bodies, retail parts and service and wood flooring operations. This segment continues to successfully execute its optimization strategy with an ongoing commitment to deliver strong margins, operational excellence and leadership in product innovation. The first quarter proved to be another strong quarter for CTP. Revenue was solid for the first quarter at $275 million, and the profitability delivered in the segment was, again, impressive. Gross and operating margins of 15.3% and 12.2%, respectively, represent the second-highest first quarter margins in this segment's history, and drove $33.4 million of operating income. We continue to expect another very strong year for Commercial Trailer Products in 2017. As discussed on our year-end call, we expect CTP to deliver very healthy gross and operating margins in 2017, and we continue to project approximately a 200 basis point compression in gross and operating margin from 2016 record levels on a full year basis.

Now let's discuss some updates in CTP strategic initiatives. The CTP team's entry into the truck body market in order to take full advantage of the future growth in the final mile and home delivery space is taking hold. Dry truck body products assembled within our final mile manufacturing facility continue to be positively received by end customers and a growing number of indirect channel providers. With a promise to provide innovative and robust products and improved responsiveness taking root, we will continue expanding our indirect distribution channel. Q1 was our strongest quarter ever in truck body shipments, and we expect the truck body business to contribute over $10 million of revenue this year. We continue actively developing our patent-pending proprietary molded structural composite technology, and we believe we will have broad applications in both dry and refrigerated truck body markets as well as the refrigerated van trailer space. Our acquisition of the Little Falls manufacturing facility provides the needed capacity and capabilities we require to take the next step forward and increasing the scale of our molded structural composite commercialization efforts in both truck bodies and refrigerated trailers. In support of these efforts, we displayed our molded structural composite refrigerated trailer at the American Trucking Association Technology & Maintenance Council in Nashville this past February, and we are targeting to have 100 units on the road by mid-2018. CTP continues to demonstrate progress in improving an already best-in-class indirect channel. With a growing list of strong dealer partners and a proven ability to leverage this channel, we believe this initiative will continue to drive sales growth within the channel in the years to come.

Now I'd like to provide an update on some regulatory items that pertain to Wabash National. As previously discussed, the U.S. EPA and NHTSA released new greenhouse gas regulations in August of 2016 in an effort to reduce fuel consumption and production of carbon dioxide from heavy-duty commercial vehicles, including both trucks and trailers. At this moment, there are review processes underway, both in Congress and within the agencies themselves, that will ultimately determine whether this rule goes into effect. In addition, the Truck Trailer Manufacturers Association has filed a petition in the U.S. Court of Appeals to review this rule as it relates to the authority of the agencies to regulate trailers under the Clean Air Act. While we prepare for compliance with the new greenhouse gas rule, we'll also continue to monitor these activities. We are also monitoring the reaction from the fleets in response to the Federal Motor Carrier Safety Administration's mandate that all fleets must install Electronic Logging Devices or ELDs by December of 2017. We believe that eventually this mandate will cause significant capacity tightening, improved pricing dynamics within the industry and ultimately will lead to stronger trailer demand for new trailers. However, our present assumption is that this impact to equipment purchases will not be fully experienced until 2018 and is believed that it's one of the main reasons we are slightly more cautious with our 2017 trailer projections. The other major regulation that warrants mentioning is the potential for renewed interest in adopting a standard for longer pup trailers increasing the length from 28 feet to 33 feet. While this change would provide a demand boost for manufacturers of pup trailers and the progress of this initiative is worth monitoring, we do not believe this change will take place in a time frame that will influence 2017 trailer projections.

To recap, we are accelerating our efforts to drive common practices and leverage shared growth opportunities in final mile, advanced composites and distribution. These actions, combined with a strong demand environment for Commercial Trailer Products and improved outlook for Diversified Products, gives us great confidence in our outlook for this year and beyond.

I will now turn the call over to Jeff to discuss some additional financial details.

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Jeffery L. Taylor, Wabash National Corporation - CFO and SVP [5]

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Thanks, Brent, and good morning, everyone. We're very pleased with the overall performance of the business in the first quarter, including the improving margins delivered by Diversified Products Group as compared to the fourth quarter.

We continue to strive to grow and diversify the company, and we are benefiting from actions taken over the past several years with this aim in mind. The company will continue to push into new products and new markets in order to continue the transformation into a more diversified industrial manufacturer. Before discussing the results for the quarter in more detail, I'd like to comment on recent capital allocation activities, specifically, our return of capital to shareholders. We announced in February an additional two-year $100 million share repurchase authorization that demonstrates our continued commitment to return capital to shareholders. To that end, in the first quarter, we repurchased approximately 700,000 shares of stock for $12.4 million or about $18 a share. Additionally, we returned approximately $3.9 million of capital to shareholders through the dividend payment in the first quarter. Also, in the spirit of continuous improvement of our capital structure, we successfully completed an amendment to reprice our senior secured term loan credit agreement. And as a result of this amendment, the term loan will be priced at LIBOR plus 275 basis points, with no LIBOR floor. This compares to the previous pricing of LIBOR plus 325 basis points, subject to a minimum LIBOR floor of 100 basis points. We presently have approximately $189 million of outstanding debt on the term loan. At current interest rates and borrowing levels, this repricing will reduce our annualized cash interest costs by approximately $1 million. In terms of our efforts to maintain a return of invested capital of greater than 20%, we once again had a very strong quarter, and as we continue to actively manage the asset base of the business.

Net working capital was a highlight for the quarter with a reduction of approximately $30 million from the fourth quarter. In addition, we closed on the sale of our Miami retail branch, reducing our plant property and equipment as we transition that sales territory to an independent dealer. We continue to remain laser-focused on the efficient deployment of capital, as we not only grow the business, but also assess the effectiveness of our existing operations.

With that, let's turn to the financial results for the quarter. On a consolidated basis, revenue was $363 million, a decrease of $85 million or 19% compared to the first quarter of last year. Consolidated new trailer shipments were 10,900 units during the quarter, slightly below our shipment guidance. Components, parts and service revenue was $44 million in the quarter, up $5 million from 2016 levels primarily due to stronger sales in Wabash Composites, increasing aftermarket sales in CTP and partially offset by lower sales at our branch locations, as we continue to transition select company-owned branch stores to independent dealers. Equipment and other revenue decreased $4 million on a year-over-year basis, primarily due to lower sales in our AVTE business.

In terms of operating results, consolidated gross profit for the quarter was $59.4 million or 16.4% of sales. While gross profit was down $20.2 million from 2016, gross margin decreased only 140 basis points year-over-year and consolidated gross margin was up 90 basis points sequentially. The company also generated operating income and margin of $30.3 million and 8.3%, respectively. Trailing 12-month operating margin of 10.5% is in excess of our corporate objective of 10%. In addition, operating EBITDA for the first quarter was $41.9 million with trailing 12-month operating EBITDA of $235 million or 13.4% of revenue.

At the segment level, Diversified Products Group or DPG, produced net sales of $90 million in the quarter, an increase year-over-year of $4 million, primarily driven by Wabash Composites. Diversified Products Group gross margin was 19.6%, and improved sequentially as expected. Commercial Trailer Products net sales were $275 million, which represents an $89 million or 25% decrease year-over-year on new trailer shipments of 10,400 units. New trailer average selling price or ASP was relatively flat in sequential and year-over-year comparisons when adjusting for mix. Commercial Trailer Products once again recorded very strong margins with gross and operating margins of 15.3% and 12.2%, respectively. While down in year-over-year and sequential comparisons, nevertheless, CTP delivered their second-highest ever first quarter in terms of gross and operating margins, which resulted in operating income of $33.4 million. Selling, general and administrative, excluding amortization for the quarter, was $24.6 million or 6.8% of revenue. For the full year, we expect SG&A spending levels to be flat or down slightly year-over-year, as we continue to look for optimization opportunities in the business. SG&A, excluding amortization, is expected to finish below 6% of revenue on a full year basis. Intangible amortization for the quarter was $4.5 million, down $0.5 million from the prior year. Interest expense for the quarter totaled $3 million, a year-over-year decrease of $1.1 million, primarily due to the lower number of convertible notes outstanding. $0.5 million of our reported interest expense is noncash and primarily relates to accretion charges associated with the convertible notes. We recognized income tax expense of $8.4 million in the quarter. The effective tax rate for the quarter was 29.5%, due primarily to changes in the accounting treatment of stock-based compensation contained within ASU 2016-09. This impact will make our full year tax rate approximately 35.0% to 35.5%, as we expect the remaining 3 quarters in 2017 to have an effective tax rate of approximately 36.0% to 36.5%. Finally for the quarter, net income was $20.2 million or $0.32 per diluted share. On a non-GAAP adjusted basis, our adjusted earnings were $19.5 million or $0.31 per diluted share, after adjusting for the net gain of $0.7 million on the sale of our WNTC retail locations, partially offset by charges related to the early extinguishment of debt in connection with the company's amendment to its term loan credit agreement and some AVTE site consolidation expenses. In comparison, GAAP and adjusted earnings for the first quarter of 2016 were $27.5 million and $27.8 million, respectively, and GAAP and adjusted EPS for the first quarter of 2016 was $0.42 per share.

Let's move on to the balance sheet and liquidity. Net working capital finished the first quarter down about $30 million from the fourth quarter and $53 million from the prior year. The improvement is driven largely by our AVTE consolidation efforts and branch transition activities, and also aided by lower revenue in sequential and year-over-year comparison. We expect working capital to stay within a normal range in total for the balance of the year. Capital spending was $3 million in the first quarter, and we now expect our full year capital spending to be between $30 million to $35 million, depending on the timing of project implementation. Our investment in the Little Falls manufacturing facility to ramp up supply of our molded structural composite material and to take the next step in this important growth initiative represents the primary driver to the year-over-year increase in capital spending.

Our liquidity or cash plus available borrowings as of March 31, was $379 million or over 20% of trailing 12-month revenue. The continued strong free cash flow allowed us to maintain liquidity at a very healthy level, our first priority for capital allocation in addition to funding our organic growth initiatives, such as the Little Falls acquisition and other capital allocation priorities, such as dividend payment and share repurchase. We finished the first quarter with leverage ratios for gross and net debt at 1.0x and 0.1x, respectively.

In summary, we're very pleased with the company's overall strong performance in the first quarter. We generated strong levels of gross profit and operating income as well as record levels of operating cash flow for our first quarter. We strengthened our balance sheet again, by leveraging favorable capital markets and opportunistically repricing the term loan debt as well as returning capital to shareholders through our reinstated dividend and share repurchase activities. Furthermore, we continue to demonstrate our commitment to prudent capital management and return of capital to shareholders by the newly authorized share repurchase program.

I'll now turn the call back to Dick, where he'll give some detailed commentary on the outlook for the remainder of 2017. Dick?

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Richard J. Giromini, Wabash National Corporation - CEO and Director [6]

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Thanks, Jeff. So let me give you some views on the market and the prospects for the remainder of 2017. We certainly remain confident that overall demand for van trailers and Commercial Trailer Products business will be historically strong throughout the year and possibly beyond. This belief is based on a number of factors that continue to be positive trailer demand drivers, and remain consistent with what I've been stating for the past several years. These factors include an excessively aged driving population remaining from the significant industry under buy during the period of 2008 through 2010. A regulatory environment, including CSA and hours of service, influencing both driver and carrier behaviors and leading to the continued need and desire to refresh equipment. And finally, load capacity that is expected to tighten in the second half of 2017 as freight rebounds and regulatory drivers such as ELDs constrict industry capacity, providing further support for 2018.

On the order front, the 2017 order season has shown continued strength in trailer orders. Our backlog is at a seasonally strong $863 million overall as of the end of the first quarter and up $61 million sequentially from the fourth quarter, and represents the strongest backlog level since first quarter of last year and the third strongest first quarter in the past 15 years, only surpassed by the prior 2 years. This backlog represents approximately 7 months of build volume overall on average. While very strong backlog levels remain for dry and refrigerated van trailers, other product lines, including tank and platform trailers, have continued to experience shorter than desired but improving backlogs.

While 2017 will likely reflect a pullback in overall demand from the record level of 2015 and the historically strong 2016, we nonetheless continue to expect another strong year overall for our industry, with order levels well above replacement demand. The 2 primary industry forecasters continue to monitor and adjust their projections, now reflecting a narrow 2% gap in views on the relative strength for 2017. ACT is now forecasting trailer shipments of 274,600 units, while FTR has just adjusted their projections upward this past Friday, with trailer builds of 268,800 units projected for this year. While we maintain our long-held view that overall demand will be solid in 2017 driven by the factors mentioned earlier, we will remain more measured at this time in our optimism surrounding 2017 shipments until we get a firmer handle on actual timing that fleets feel the need to place additional orders as a result of the ELD mandate. That said, however, based on direct customer feedback along with quote and order activity, we do anticipate a somewhat stronger environment than was projected at the year-end call in early February, and we now expect to see Wabash National Shipments in the 52,000 to 56,000 unit range or an increase of 1,000 units from our prior guidance. Obviously, we'll continue to monitor the demand environment throughout the period to assess whether any further adjustments are warranted. So in terms of earnings with our revised shipment guidance, we now expect to deliver full year 2017 EPS in the range of $1.44 to $1.56 earnings per share versus our prior guidance of $1.40 to $1.55 per share. Specifically, for the second quarter, we would anticipate significantly stronger shipments in the second quarter than what was seen in the first quarter, and we are expecting total shipments to be between 13,500 and 14,500 units for the quarter.

In summary, we're certainly pleased to have delivered another in a long string of strong quarters, driven by continued exceptional execution, strong performance from the CTP segment and improving results from the DPG segment. However, not wanting to rest on any of these accomplishments, we continue our focused efforts to drive ongoing improvements throughout the business, develop new opportunities to grow our top line and margins and capitalize on macro growth trends.

With that, I'll turn the call back over to the operator and we'll take any questions. Eric?

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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 Steve Dyer from Craig-Hallum.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division - Partner and Senior Research Analyst in the Equity Research Department [2]

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You touched a little bit on M&A at the beginning of the call. I was wondering if you could give a little bit more color about sort of some of the things you're looking at or at least general areas and how you've -- you've done a good job of sort of repositioning the company away from dry vans. But any color there as to maybe timing or general areas you're looking at or focusing on?

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

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Sure, a great question, Steve. As we continue to look at expanding and diversifying the business, we -- what we want to do is assure that we have critical mass in the areas of the business that can truly make a difference for us. So our efforts in the final-mile arena where we certainly are excited about that area in entering that market, growing that market and seeing that market opportunity continue to grow. So we'll continue to look at that as an opportunity to expand and grow the business. We also see our Wabash Composites business as an area that has a tremendous upside opportunity. It's been very successful for us. We've done it all organically to this point, but we see that as an opportunity to mine the fields if you will, and see if there are opportunities to expand that more quickly. And then, the third area is in our process systems business. We see opportunities there to expand there. So those would be the 3 general areas. Other than that, we're not at a position to be able to provide any other specifics at this point in time.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division - Partner and Senior Research Analyst in the Equity Research Department [4]

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Yes. That's helpful and understood. And can you remind us may be, I guess, last cycle what your sort of peer exposure to dry vans was versus where it is now?

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Richard J. Giromini, Wabash National Corporation - CEO and Director [5]

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The dry van business -- in 2016 we ended up, because of the strong year that we had on volume, relative to it, it actually ended up -- back in a 2005 time frame, it was around 77% approaching 80%, and I believe we ended up last year, because of the strong disproportionate percentage of about 64%. The prior year, we've gotten it down to 52%, but because of the strong demand and volume -- it's just a mix issue, but it's moving in the right direction. As I've stated in some of our earlier discussions, we'd like to get the, I'll call it the dependency on the dry van segment, to approximately 1/3 of our business, somewhere in that, call it 35%, but if we can get -- even if it's 40%, we're very happy. It decreases the narrow dependency on it. So that's what some of the acquisition efforts will help to effect.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division - Partner and Senior Research Analyst in the Equity Research Department [6]

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And then lastly from me and I'll jump back in the queue. Can you remind us a little bit about your exposure to commodities? I think they've been, at various points, headwinds and tailwinds. Sort of where are we now, and I'm assuming, there's some certain assumption baked into your guidance as to what they'll mean this year?

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

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Yes, I'll just give you some framework for it. We go out into the market and take forward positions on aluminum and on steel. So we mitigate risk up or down. Once we get firm orders from customers is when we go out and take those positions. In total, when we look at what exposure, we cover and protect about 70% of the input costs on materials for a build. So we do have some exposure to variability in market pricing on certain commodities, but the aluminum and steel are the ones that we have the best protection on. Brent, would you like to add anything?

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Brent L. Yeagy, Wabash National Corporation - President, COO and Director [8]

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I think that pretty much sums it up, Dick. There's a small amount of our backlog that's still open to commodity fluctuations, it continues to decrease. And right now, when we look at materials, we're seeing it maybe at a tipping point, where it may actually recede somewhat throughout the year. So maybe we reductions in tailwinds there.

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Operator [9]

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And the next question comes from Jeff Kauffman from Aegis Capital.

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Jeffrey Asher Kauffman, Aegis Capital Corporation, Research Division - Analyst [10]

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You answered a little bit of my question with respect to acquisition candidates. But I guess at the end of the day, having too much cash could be almost as much an issue as having too little. The cash balance is growing, and it looks as if more cash is going to be generated throughout the year. There's no question that you're giving back more than adequately to shareholders. But give us a sense that there's a pretty good use for this building cash pile?

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Richard J. Giromini, Wabash National Corporation - CEO and Director [11]

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Yes. Well, that's -- as we shared in our comments and as we announced previously, one of the opportunities that we saw was to increase the share repurchase opportunities and, as you know, we announced an expansion of our share repurchase by another $100 million authorization from our board and, of course, the initiation at the end of this past year with a dividend. So those are 2 opportunities, and then the third, we do have more capital investment in the business going on with a lot of productivity improvement initiatives. We've talked about those in the past, and that's why the projections for CapEx spend is higher this year than it has been in any of the previous years in recent times. So that's going to help the business from a performance and productivity standpoint. And finally, the whole -- what I discussed with Steve, and shared just a few moments ago, is the focus on trying to find worthwhile candidates that may -- would make good additions to the business, that can add value both near-term and long-term for all shareholders.

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Jeffery L. Taylor, Wabash National Corporation - CFO and SVP [12]

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Jeff, this is Jeffery, and let me just complement Dick's comments there too with a couple of comments around uses of cash. As you know, we have increased our CapEx spending for our organic growth initiatives within the company. We're very excited about those initiatives, and in particular, the acquisition at Little Falls and the manufacturing capacity we're going to add there for molded structural composite panels. So that's also going to be a use of cash. And I guess the other thing I have to remind you is, in terms of the balance sheet, within the next 13 months, the convertible notes will come due and we certainly want to be in a position to retire those convertible bonds, either before or at maturity, and so that will be a pretty -- that'll be a significant cash flow within the next 13 months for the company as well.

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Jeffrey Asher Kauffman, Aegis Capital Corporation, Research Division - Analyst [13]

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Assuming that's the change in the current debt due is the movement of those convertible notes into current debt?

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Jeffery L. Taylor, Wabash National Corporation - CFO and SVP [14]

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It is. They were reclassified as current this past quarter, as a result actually of triggering the convert option. So those bonds are now convertible at the holders election that move those into current. They would have moved naturally into current status in May of this year anyway. So...

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Jeffrey Asher Kauffman, Aegis Capital Corporation, Research Division - Analyst [15]

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Okay. And then just 1 follow-up question. You mentioned, you were starting to see some green shoots in some areas of tank trailer demand. We had been hearing that there'd actually been a pretty rapid tightening in refrigerated or temperature-controlled trailing demand with some of the new food safety requirements that went in, in early April. Have any of your customers in the refrigerated area spoken to you about that? And do you sense any tightening in that market? Could that be an opportunity for Wabash?

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

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Jeff, this is Brent Yeagy. What I would say right now is, no, I don't believe we're hearing anything from our customer relative to a tightening market relative to food safety. We've actually been -- that's actually something that we've been monitoring over the last 3 to 6 months to better understand that. And no, I don't necessarily believe that that's a large opportunity for us going forward.

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Operator [17]

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And our next question comes from Brad Delco from Stephens.

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Albert Brad Delco, Stephens Inc., Research Division - MD [18]

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Brent, this may be for you or Dick. I know you guys have commented on seeing about 200 basis points of margin degradation in CTP gross margins, first quarter probably seemed like it would be one of the toughest comps, because I know you had some of that road work impacting margins a year ago, and you performed better than that in the first quarter. So can you just remind us why you think you'd see 200 basis points of margin degradation this year?

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Brent L. Yeagy, Wabash National Corporation - President, COO and Director [19]

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Yes. This is Brent. Well, I think couple of things. One, when we look at year-over-year comps in Q2 and Q3, we had a significantly higher volume in 2016, that's one. Two, we're seeing the flow-through of some material cost inflation relative to where we quoted trailers late in 2016. Those were 2 of the primary reasons. So there'll be some lumpiness in the mid-summer months. And then, as we kind of move throughout the year, we'll see some of that begin to trail off.

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Jeffery L. Taylor, Wabash National Corporation - CFO and SVP [20]

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Yes, Brad -- and this is Jeff. I think what you saw in Q1 was actually the layering in of those commodity prices and the effect of the timing of some of the hedges we had in place. They were able to protect us some in Q1. And you'll see a little more of that flow through in Q2, and that's the premise of some of the guidance as well.

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Albert Brad Delco, Stephens Inc., Research Division - MD [21]

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Okay. And maybe just to clarify. So margins were 130 bps worse in the first quarter. I think your outlook for volumes probably gets better throughout the remainder of the year, which means on a year-over-year basis, I think your trailer volumes are down 25% in the first quarter. I don't imagine you'll see another quarter with that kind of down volumes. So it seems like most of it would be material then, as opposed to fewer volumes being the driver of gross margins?

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Jeffery L. Taylor, Wabash National Corporation - CFO and SVP [22]

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It's both, Brad. I mean, if you go back and look at last year's volumes in the second and third quarter, those were very strong volume quarters for us and you've heard our guidance for Q2 this year. So you can see the volume pull back that we'll experience there, and then, obviously, the commodity piece is the rest of it.

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Albert Brad Delco, Stephens Inc., Research Division - MD [23]

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Okay. And then, maybe Dick for you. Can you talk about or give us an update on where twin 33 stand? I know I feel like there's more talk about it, and what opportunity it may have for you?

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

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Yes. As we -- as Brent shared in his comments, we do not expect to see anything in the near-term regarding 33s. There's still a lot of opposition for 33s out there. The TCA has a group that they're opposed to the 33s for myriad reasons. One, they do believe that they've played the safety concern but they also believe that it could cause customers to expect to pay the same amount per mile and for increased loads. And so they would not get any return from investment in the longer equipment. So it's a complicated matter. Obviously, FedEx and UPS, Amazon is now part of it, all in favor of going to the 33s. We have not changed our belief that it's a -- it certainly is a positive for the industry, for just about everybody involved. It reduces congestion on the highway. Environmentalists should be happy. It reduces greenhouse gas emissions, because you reduce the number of power units that would be required to haul the same amount of goods. Lot of factors, and it should actually help consumers on price inflation for actually transporting those goods. So there's a lot of good factors. Testing of 33s has shown that they actually haul better, so it makes them actually safer to pull because of the longer wheelbase. So a lot of positives, but from an actual approval to go to 33s through Washington, I don't think you'll be seeing anything in the near term, and that's why we have not put anything into our plans in '17 for it, nor do we expect anything -- any impact from it in 2018.

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Operator [25]

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And our next question comes from Joel Tiss from BMO Capital Markets.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD and Senior Research Analyst [26]

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Any reason to raise your corporate objective of 10% operating margins? It sounds like the direction you're going in is all higher than where we are now?

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Richard J. Giromini, Wabash National Corporation - CEO and Director [27]

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Well, longer term, we'll -- we certainly will be revisiting. We've had to revisit goals and objectives that we've set over time on a number of occasions because of performance from the businesses. So we'll -- obviously, we'd be taking a look at that as we go forward at some point.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD and Senior Research Analyst [28]

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And then can you give us a little sense of kind of what's going on in the competitive landscape? What kind of pricing discussions you're having with your customers, and maybe the pricing that's been baked into the backlog. Just a little sense of what's happening there.

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

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This is Brent. Note, Jeff alluded to that, ASP are specifically in the van business have been relatively flat now. We've been able to handle from a net pricing basis a portion of material cost inflation. We're seeing, what I would call, competitive pressures that are in-line with the guidance that we've given in terms of our financial output of the company. We're not seeing anything different. Nothing is changing, really, at this point. It meets that -- trying to falls within our expectations. Within the chemical segment of tankers, we are having a little bit more pressure within there with some of the moves that our competitors are making. But again, still generally falls within the expectations that we have within our financial outlook.

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Operator [30]

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We have no further questions at this time. And I would now like to turn the call over back to Mr. Dick Giromini for closing remarks.

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Richard J. Giromini, Wabash National Corporation - CEO and Director [31]

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Thank you, Eric. Well, so while we've certainly come a long way as a company, but we've certainly not exhausted our opportunities, and we'll continue to be strategic but selective in pursuing opportunities to grow our business. In addition to the organic growth initiatives already underway, we'll continue 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.

In closing, we're pleased to have delivered another strong quarter with strong margins, a supportive demand environment and a continued focus on execution. Thank you for your interest in and support of Wabash National Corporation. Mike, Brent, Jeff and I look forward to speaking with all of you, again, on our next call. Thank you.

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Operator [32]

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Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.