Q4 2023 Wabash National Corp Earnings Call
Participants
Ryan Reed; VP of IR; Wabash National Corporation
Brent Yeagy; President & CEO; Wabash National Corporation
Mike Pettit; SVP & CFO; Wabash National Corporation
Michael Shlisky; Analyst; D.A. Davidson & Co.
Justin Long; Analyst; Stephens Inc.
Jeff Kauffman; Analyst; Vertical Research Partners
Presentation
Operator
Standing by, and welcome to the Wabash Fourth Quarter 2023 earnings.
I would now like to welcome Ryan of Investor Relations to begin the call. Brian, over to you.
Ryan Reed
Thank you.
Good morning, everyone, and thanks for joining us on this call. With me today are Brent EOG, President and Chief Executive Officer, and Mike Pettit, Chief Financial Officer.
A couple of items before we get started.
First, please note this call is being recorded. I'd also like to point out that our earnings release, a slide presentation supplementing today's call and any non-GAAP reconciliations are available at IR.one Wabash.com.
Please refer to Slide 2 in our earnings deck for the company's safe harbor disclosure. Addressing forward-looking statements. I'll hand it off now to Brent.
Brent Yeagy
Thanks, Ryan, and good morning, everyone, and thanks for joining us today. 2023 has been a year in which we've substantially exceeded the financial performance in any year of the Company's history. I'd like to congratulate the Wabash team on the significant achievements beyond our financial accomplishments. I'm even more excited about the strategic progress we have made during 2023 and how it positions us to generate even stronger performance going forward for our employees, our customers and our other stakeholders and thinking about our strategic accomplishments in 2023, I'd like to emphasize the theme of connections, relationships and networks. Our journey began with enhancing the core of our business through greater connection with our customers. The transformation to be a more customer-centric organization has been a pivotal change. We created more points of connection with our customers with enhanced driving capacity, greater focus on parts and services as well as innovative offerings like trailers out of service style, Wabash to add recurring longer term value beyond our initial transaction, these advancements have not only deepened our customer engagement, but have also enriched our collaborations with suppliers and technology partners by gaining a more profound understanding of our customer problems and their opportunities. We are now able to share valuable insights with our suppliers. Our technology partners and other parties that can contribute to customer success. The power of bringing our ecosystem together for our customers enhances our collective ability to elevate performance through the cycle. We have solidified specific partnerships with HDI. and the frontline group, which is enabling Wabash to grow recurring revenue within the transportation, logistics and distribution ecosystem. Our Wabash parts joint venture with HTI. rapidly establish significant distribution capabilities that allow our dealer network efficient access to our comprehensive portfolio of aftermarket parts. Certainly group is now playing a crucial role in advancing our digital capabilities, which aim to revolutionize the online experience for our dealers, traditional and nontraditional suppliers of both parts and services and a broad set of customers spanning across the vast transportation and logistics landscape. We've also made a commitment to deepening our relationship with our employees. We appreciate the strong employee engagement enable superior financial performance. Our focus is on cultivating and work environment and a culture that keeps respect for our employees front and center by empowering them to constantly bring their best selves to work and an atmosphere that drives an openness for change and innovative spirit. This commitment to a high-performance culture is not just about achieving corporate goals. It's about fostering a sense of unity of purpose for every individual feels respected and valued and part of something bigger with every day that goes by Wabash its margin, its role as a visionary leader with the capability to address the opportunities with an increasingly complex transportation, logistics and distribution ecosystem. Our strategy very much intends to harness our expanding ecosystem to create enhanced value for all Engage parties as we contemplated the strategic positioning we've attained in most recent years. Emerging set of capabilities will continue to scale over time to ensure we accelerate effectively, we have made the decision to shift our organizations, enhance our focus on bringing our longer term strategy plans to life in December, Dustin Smith transition from Chief Strategy Officer to Chief Operating Officer, and Christine Lazar, the Chief Administrative Officer. Dustin has been instrumental in our strategy refresh and will now lead our operations through this vital phase. His role will focus on the deployment of operational manufacturing capabilities required to foster growth in our business, Chris, that has led our Legal and People support functions over the past few years as Chief Administrative Officer to ensure we possess the required capabilities and business processes to act on our business in a manner that drives respect for people to the highest achievable levels, a culture that embraces change and the capacity to scale our business to new levels of performance. Our team is excited about these changes, and I'd like to extend my congratulations to Dustin and Christine on their new roles.
Moving on to our financial performance during the fourth quarter of 2023, we achieved earnings per share of $1.7. This brings our full year earnings to $4.81 per share, surpassing our 2025 EPS goal set in 2022 by 39%. While favorable market conditions supported this achievement, we firmly believe in the sustainability of our execution as well as the repeatability of this level of financial performance. We are showing higher levels of financial performance through all phases of the cycle, and we are confident that when the market conditions strengthen for our customers, we will achieve financial performance that exceeds 2023.
Turning our attention to market conditions and backlog. New order activity during the fourth quarter allowed our 12-month backlog to increase sequentially to $1.6 billion during more normalized mid-cycle environment is typical to see new order activity stretch into the first quarter of the year as we expect to see in 2024 with freight rates having contracted for now 24 months, we're watching capacity exit the transportation space. Moreover, as macro destocking activity, a base business historically alleviated pressure that we've seen on the manufacturing sector. In addition to these corrective factors, the combination of a relatively strong labor market, sustained consumer spending and cooling inflation supports the likelihood of an economic soft landing, particularly considering potential interest rate cuts on the horizon, it seems clear that the transportation space has already experienced a lengthy recession and although industry participants likely be shy about making bold predictions about timing of a rebound. Freight downcycle seems unlikely the last of the entirety of 2024 Wabash is well prepared to accelerate as the winds of the market shift to our back and drive us forward.
Moving on to our financial outlook, we're initiating 2024 guidance with revenue in the range of $2.2 billion to $2.4 billion with EPS of $2 to $2.50. While this outlook is a moderation from our 2023 performance, it's important to note that the midpoint of our 2024 EPS guidance is in line with our results from 2022 and will be tied to the second-best annual financial performance in the Company's history, which was easily the best results achieved during a period of declining revenue. At no time in Wabash its history have we had the balance sheet strength, the strategic vision and the collective will to decisively continue our programmatic march through the headwinds of a difficult market.
In closing, 2023 has been a year of both record financial achievements and strategic advancements for Wabash. And this progress has readied us to deploy enhanced operational and manufacturing capabilities to support organic growth generated by the multitude of connections Wabash can make through our ecosystem, most immediately leveraging digital transformation to connect the footprint of 78 dealer locations to create greater ease of customer access across the network to equipment, parts and services in the more immediate term, we expect to leverage our steady backlog to demonstrate our ability to post record downturn financial performance as the freight market downturn transitions into an upswing. We are well prepared to capitalize on the potential market improvements anticipated in 2025 and beyond.
With that, I'll hand it over to Mike for his comments.
Mike Pettit
Thanks, Brent, for Gary. With a review of our quarterly financial results in the fourth quarter, consolidated revenue was $596 million. During the quarter, we shipped approximately 10,075 new trailers and 4,075 truck base. Gross margin was 18.2% of sales during the quarter, while operating margin came in at 10.3%. This represents year-over-year improvement of 380 and 150 basis points respectively.
Operating EBITDA for the fourth quarter was $76.8 million or 12.9% of sales, which was a 230-basis point improvement versus the fourth quarter of the prior year. Finally, for the quarter, net income was $50.4 million or $1.7 per diluted share.
From a segment perspective, Transportation Solutions generated revenue of $547 million and operating income of $74.6 million or 13.6% of sales. Parts and Services generated revenue of $55.2 million and operating income of $10.1 million or 18.4% of sales year to date, operating cash flow was $319 million, reflecting our strong financial performance for the fourth quarter, $115 million of operating cash flow compared to $30 million of CapEx and $2 million of expenditures for revenue generating assets resulting in free cash flow generation of $100 million during the quarter.
I'd also like to call out that full year free cash flow generation amounted to $216 million, even in a year when we invested a record of over $100 million of capital in our business. Net leverage on trailing 12-month operating EBITDA was 0.6 times. And during the fourth quarter, our credit rating was upgraded by Moody's, which followed another upgrade by S&P earlier in the year.
Turning to capital allocation, during the fourth quarter, we utilized $20 million to repurchase shares, invested $13 million in capital expenditures and $2 million of expenditures for revenue-generating assets and paid our quarterly dividend of $4 million. For the full year, we invested $98 million in capital expenditures, $6 million in expenditures for revenue generating assets and allocated $67 million to repurchase shares while returning $60 million to shareholders via our dividend.
Stepping back on share repurchases, specifically, I'd like to call out that we've reduced our share count by approximately $25 million shares from the high-water mark on share count in 2014. This equates to reduction of about 35% of our share count since 2014. Looking over the last five-year period, we've repurchased $8.5 million shares or about 50% of shares over that time period. Our capital allocation focus continues to prioritize capital expenditures above our annual maintenance CapEx spend of $20 million to $25 million.
In order to support our organic growth initiatives, we are committed to maintaining our dividend. And then we anticipate continuing to evaluate opportunities for share repurchases as we have demonstrated the past five years and M&A.
Moving our outlook for 2024, we expect revenue of $2.2 billion to $2.4 billion with a midpoint of $2.3 billion. This outlook is supported by a meaningful 12-month backlog, has continued to see new order activity in January, we continue to expect truck body tank trailers and parts and services to serve as stabilizing forces in 2024 as market conditions remained stronger in those businesses relative to dry vans. Additionally, these businesses have and will continue to benefit from organizational focus and execution and trailers and truck bodies have both experienced improved volumes as we add on the business through our Wabash Management System. Additionally, parts and services is receiving considerable organizational strategic focus as we seek to grow the segment's revenue by 20% in 2024 to continue building eight broader base of recurring revenue and, of course, pull through the accretive margins that come with it.
From an operating income perspective, we expect to generate $163 million at the midpoint or approximately 7%. This resulted in an EPS outlook of $2 to $2.50 per share with a midpoint of $2.25 per share. I'd like to mention that in 2024, we expect to see about $6.5 million of expenses for our Wabash marketplace joint venture run below operating income since we announced the JV with burn rate group on our Q3 call, we had named sensor R&D as Managing Director of the Wabash marketplace. It comes with a diverse leadership background, scaling tech within large businesses. And we're thrilled to have him lead an entity charged with rapid growth and digitally enabled recurring revenue.
Moving on to capital deployment expectations for 2024. We anticipate traditional capital investment to be between $70 million and $80 million in 2024 as a result of planned expenditures to support our strategic growth initiatives. We also expect to invest in CapEx that will be immediately revenue-generating through our trailers as a service program. As a reminder, we do breakout investment and test separately, and we'll continue to give visibility to our capital allocation to that program as it grows at this point, we expect our investment in that program to grow year over year and we'll give more specific guidance as you anticipate a full year figure comes into focus. As a reminder, it's typical for Q1 to be our lowest quarter in terms of revenue and EPS generation. Our expectation is for first quarter revenue to come in between $500 million and $550 million dollars and for EPS to be between $0.45 and $0.5 a share.
In summary, I'm extremely proud of our Wabash team for generating 2023 results that exceeded our 2025 financial plan.
Two years ahead of schedule.
This achievement is a testament to our team's dedication and strategic execution.
Looking ahead, we expect to maintain this momentum with improved financial performance at all phases of the cycle as we focus on our strategic growth initiatives to provide more sticky revenue in verticals that reinforce and complement our core equipment business as we enter 2024, which we expect to be a year of transition. We're pleased to demonstrate our resilience through less robust market conditions and continue pushing forward with strategic growth to position the Company to surpass 2020 three's financial performance as the freight market inevitably recovers.
I'll now turn the call back to the operator, and we'll open it up for Q&A.
Question and Answer Session
Operator
(Operator Instructions) We'll now take a moment to compile our roster.
Michael Shlisky, DA. Davidson.
Michael Shlisky
Good morning. Guys, and thanks for taking my questions on.
Can you talk a little bit about some of the to the other for trailers for 2024 being meaningfully down the cost cutting. I know I am surprised then you also you have mentioned there could be a recovery in the works. If you look at some industry forecasters are saying that in 2025 trailers could be almost a opposed, not back to where it was back in back into 2023, just one year away here. I'm curious if you could tell us if you agree with that statement, could it be a complete snapback in 2025? And can you comment on, you know, as long as rates or other metrics kind of get better by the summer, whether you can confidently said that's going to happen? Or do you need to see other things happen like interest rates, et cetera?
I kind of probably becoming fully confident that we'll have a big increase here and next year.
Brent Yeagy
Yes, Michael, great question. And obviously no one has a complete crystal ball into what 2025 will be, but I'll attempt to unpack it from our point of view, I think absolutely there are initial signs within the market that it is beginning to heal and correct itself, and those should become much more measurable. And I would say Verge on materiality in the results of our customers, probably by mid-summer. Now that clearly is that that is that hinges on continuation of the prevailing thought that we'll see interest rates actually the reduce in, I will say after March, based on the most recent feedback from the Fed. I think we want obviously, that means that the current status quo from a geopolitical standpoint doesn't materially change in that time period. But I think the things that the US economy is acting on sets us up for a much better 2025. Now I think the definition of a snapback is still needs to be unpacked and can we see and should we see a material a significant demand difference in 2025? I believe that to be the case or is it a step function change moving in to necessarily those first few months of 2025.
I would I would probably pull back a little bit on that.
But I think what you will see is a signal I think we had we were sitting in a position to have a different perspective on the market going into '25. I think you'll see that robustness built throughout 2025. I think it can be material and we are planning our business based off of that being the most probable outcome at this moment.
Michael Shlisky
Thanks so much going for that color on.
Maybe I can follow-up with a question for Mike.
Then.
I mean, on the free cash outlook for '24, you've kind of Novartis to giving us a lot of the pieces here already, but I'd be curious about working capital. If you're if you're fairly confident that the company that come to see some increases in '25 versus '24 on Newfield on like just trying to keep a pretty high level of working capital to end the year it to kind of end the year here yet.
Mike Pettit
There will obviously depend on the seasonality you would see in the demand profile of what happens working capital at year end. But we would expect, obviously, with a little bit of a of a revenue step back from '23 to '24, we'd expect to see that we are the same or slightly less working capital in 2024. So it should be an enabler to free cash flow, we tend to see that. So we would expect another strong year of free cash flow in 2024, dependent on what we need to do to ramp up in the '25, but we would not expect to see an increase in working capital of '25 snapback really early in the year yet.
Brent Yeagy
And I think it's a mix of factors. There is the the reduction in working capital going into 24. There will be some relative increase to prepare for '25, but at the same time, you have to integrate in their supply chains are getting better. We're moving away and more and more from the increased safety stock draws. So there's a lot to integrate there. So I echo, Mike, there's a lot of factors that go in that says it really shouldn't be a big deal moving into '25.
Michael Shlisky
Great. And maybe one last one for me. About reefers in '24 and '25. I didn't hear much about that in your prepared comments. I know you've got the new launch in Minnesota going and other new products launching. Can you maybe update us if that's what you think because it will be a material driver to help stabilize business in '24 and a real growth driver for '25, just us you've kind of got time, I guess how that how that stuff might rollout.
Brent Yeagy
I think every aspect of our strategic product portfolio will be a driver in 2025. As we do that. I don't think it's just on the reefer side. It will continue to be a growing part of our overall portfolio as well as we'll see it from dry vans. We will see platform pick up significantly from where it will be in 2024 truck bodies are going to be coming off of a very stable environment with a growing demand profile and '25 with parts and services just complementing at all. So I feel pretty good about all those different product lines and service capabilities in '25, PSI gratifying to have it.
Mike Pettit
There's two pieces that are important and Brett head on. And then just to reiterate the growth we'll see in '25, but there's also a stabilizing effect we're seeing in '24, which reefers definitely it checked. That box was the solar done Minnesota into the truck body parts. It takes it really has helped provide stabilization in their earnings profile.
Michael Shlisky
Yes, great.
I appreciate the color, and I'll pass along.
Brent Yeagy
Thank you.
Thanks, Mike.
Operator
Justin Long, Stephens.
Justin Long
Thanks and good morning. Maybe the start with the question on the guidance. You provided the outlook for the first quarter. Mike, obviously a pretty big step down from an earnings perspective versus what we just saw in the fourth quarter? I know there's some seasonality, but I was just curious if you could speak to kind of any other drivers sequentially that are causing that pressure in earnings? And as you think about the quarterly cadence of EPS over the remainder of the year, is 2Q to 4Q, do you think that cadence will third quarters are pretty similar or is this a ramp over the course of the year? Is there any more color you can give us on that front capture I'll start with that first.
The U.S. Q1 is typically the lowest quarter of the year and the normal seasonality for us. And so we're going to see that you obviously see a step up in the other three.
Brent Yeagy
And right now with the caveat we want to see one 25 is going to really start to pull.
But for now, we believe the calendarization of earnings in Q2 to Q4 will be relatively flat, maybe a little higher and and in Q2, but for the most part, I think is going to relatively flat in the last three quarters of the year and then the step down from Q4 to Q2 Q1, again, not uncommon. We see that a lot. It can be it can be a low time for Seasonale seasonal time for demand. There's going to be a little bit of little bit of year-over-year pricing in their Q4 to Q1 of volume. Seasonality is the biggest driver.
Okay.
Justin Long
That's helpful. And I guess kind of building on that question. One thing that you've talked about strategically and I think, Brent, you mentioned this on the last call is that your plan is to maintain headcount in this environment and despite trailer production moderating and doing so that puts you in a better position to respond to the next upturn. So is there a way to think about that financial implications of that and what kind of cost or earnings headwind is this year and the near term paying you might be taking for the longer-term gain?
Brent Yeagy
Yes. So we've driven it this way. When we think about headcount across the business, it is not one answer across the board. We have some aspects of the business, such as with truck bodies that will be adding headcount and versus trailers, are we looking at holding head count and we're holding head count in a manner which it is now is underutilized or not utilized labor. We've been able to secure sales and a backlog and are filling in order to utilize that labor in a standard efficiency way. And so right now, there would be little to no what I would call detrimental impact from a labor cost standpoint within our margins. Most of the rightsizing of Drive and capacity has been through shifting volume to the added capacity that we brought online and then taking out yield as our third, our third shaft leveling the plant on a two-shift operation and then what workforce we have shed has been on the temporary side, again, leaving our full-time workforce in.
Yes.
Mike Pettit
The only thing I'd add to that is if you think about it as we believe this is more of a short-term thing.
There's there's some downtime in the plant as opposed to mass layoffs and plant. So that's we're taking will normalize in that cost, as Brent mentioned, by taking some temporary downtime because we believe it's going to come back or trying to maintain that. That's how we handle that without having a significant cost change.
Brent Yeagy
And then there's the added upside of how we manage the workforce today. And then throughout 2024, as we bring more, we'll get more efficient, higher throughput manufacturing capability for dry vans at scale with added demand and prepare for 25. And I really want to say allows us to utilize the headcount that we have in a really efficient way and not have to take on as much of the headcount inefficiency as we move into and throughout 2025, right? So it's really not about accepting added cost right now, it's about building capability to defer and prevent inefficiency in outer call periods and years.
Okay. That's really helpful. And I guess lastly for me, I think the act forecasts have maybe been tweaked a little bit for 2024 on trailer production, but just based on the order season that you've seen thus far, I'm curious if you still feel those act forecasts are again, best guess at this point.
And then just real quickly on the guidance, Mike, curious if that includes any impact from buybacks now the guidance does not include the impact of buybacks, but that is part of that forecast.
I think we feel like that's generally in the ballpark.
Yes, the customer behavior, customer sentiment, forward-looking views that they provide us are really right in line with where they were even at the quarter call and are reflective of the general market. I think ACT has is as right as they can be based on the market.
No.
Okay. Great. Thank you so much for the time.
Mike Pettit
Thanks, Jeff.
Operator
Jeff Kauffman, Vertical Research. Partners.
Brent Yeagy
Please go ahead.
Jeff Kauffman
Hey, good morning, everybody, and congratulations on a lights-out 2023. I guess I want to follow up on the last question a little bit first and then maybe talk about some of these these other new businesses or new focuses.
So in terms of looking at the guide, I know we got to set the bar somewhere and so the ACT Research forecast has trailers come in down about 20% for the year. Now you had 44,000 trailers give or take this year on, but I would argue your production probably shouldn't come down in line with the industry because you were out about 10,000 trailers were at the capacity and dry and you were also out I don't know, 25 hundred trailers in capacity and reefer is you were switching that to the other facility. So in theory, as that capacity starts to come back, your production should not be down as much as the industry. So when I look at the implicit 2.2 to 2.4 billion in revenue that you are putting out there, I can do my own math, but it implies to me that you've got trailers coming down about 10% on the transportation solutions business. Is that a fair way to think about it? Or am I thinking about something wrong? And then how do you look at 24 and think about?
Okay.
Well, I got 10,000 trailer capacity units, a newly made that I'm going to bring back and they've got reefers are going to bring back. And how do you think about bringing that capacity back to the market?
So yes, Jeff, I would say your I'd say the thesis you're presenting is we'll call it in the ballpark of correctness, but we absolutely are growing market share as we sit here today in 2024 as we keep our relative trailer production in line with our existing headquarters. And so we're able to do that, maintaining a price leading position in the market, which is a very nice place to be at the same time, bringing on we'll call it 10,000 units of thought capacity gain in the dry van business. And so we are doing the work today to build a backlog and a set of customer relationships that you can think about across the entire drive and manufacturing system, the ability of and taking that demand and we think the demand itself will allow will be there without being real strain on the pricing environment and 25, which is a big deal, right? So we're leading price we think there's going to be a market that allows that prices sustain maybe even grow a little bit and able to do it in an efficient way in 25 and so we see that cap capacity being able to be utilized very efficiently. And we want our manufacturing strategy here is not to run the business at 105 hundred and 15% on a straight time capacity. We want to run it at a much more efficient place going forward while maintaining a pricing environment that is most advantageous and meeting the strategic needs of those core customers that call Wabash home. So there's a lot of things going together there, but it sets up for 2020 sets up well for 2025 and beyond.
Okay.
And when do you think we start to see that push on the refrigerated on the trailer side with the new product?
Great question.
I think it's still materializing over the next 24 to 36 months. We are again adding additional capacity and that capacity seems to be being utilized Well, based off of the backlog, we see in 2024, which is going to pressure us to add additional capacity. But that capacity is we require some new manufacturing technology that's in the process of being developed so those two things have to go inside, but we are absolutely establishing more and more every day the value proposition for the pricing that we believe that that product deserves as long as that continues to go down.
That path again will be pressure to add capacity and outgoing years industry reminders that just trailers seeing and truck bodies.
And we're seeing some growth in the truck body space. And we think there's other segments of truck body that e-commerce will play well and hope to bring to market soon.
And I know and I'm glad Mike said that because I'm going to ask about even looking internally at what we want to frame it as and it's really about cold chain technology scaling. It's not really about reefer vans per se. And to Mike's point, we're seeing opportunities that compete for capacity now in terms of total return to the business that makes for interesting capacity allocation discussions right. Okay.
And then one last one, if I can. So separate from the manufacturing business, you have the parts and service business, you brought on some partners to help push growth in that area, is that a business that you think should grow in a industry environment that may be taking a respite in 24 before it moves forward in 25?+ 26? Or is this more of a investment year in parts and service capability before we go back to higher industry volumes?
Mike Pettit
Yes, not. We believe we can continue to grow with your staffing services.
And we we remain very confident in our Investor Day target of $300 million revenue by 2025 and that business. So we just finished it to 2021 to 2023. So that glide path to 300 or require us to grow in 2014 and grow again in 25. But we believe we've got it quite a bit of runway just to capture some market that really what is Wabash is rightful place to play in the industrial aftermarket space, and we're bringing that to bear in 2020 for which we believe we can why ways we can grow in an otherwise softer demand environment.
It is just, I guess, Paramount to understand, Jeff, as we continue to grow in parts and services, we're not we're not doing it in the same old blocking and tackling way, right competing, I would say, to cope with equal capability. The way that we're attacking the market is really going after it the unserved areas quite underserved way, which allows us some some blue ocean capabilities to grow.
Brent Yeagy
And that's all on purpose and you need to jump into the pool of everyone else.
We define a new floor.
So I will thank you for your insights and congratulations on a fantastic year.
Thanks, Jeff.
Operator
There are no further questions at this.
Brent Yeagy
Hi.
Operator
Well with our earlier.
Brent Yeagy
Thanks, everybody, for joining us today.
Ryan Reed
Look forward to following up with you during the quarter.
Operator
Concludes today's call. You may now disconnect.
