Wabash National Corporation (NYSE:WNC) Q2 2022 Earnings Conference Call July 27, 2022 11:00 AM ET
Company Participants
Ryan Reed – Director-Investor Relations
Brent Yeagy – President and Chief Executive Officer
Michael Pettit – Chief Financial Officer
Conference Call Participants
Justin Long – Stephens Inc.
Michael Shlisky – D.A. Davidson
Felix Boeschen – Raymond James
Operator
Hello, and welcome to Wabash Second Quarter 2022 Earnings Call.
At this time, I would like to turn the call over to Ryan Reed for opening remarks and introductions.
Ryan Reed
Thank you, and good morning, everyone. We appreciate you joining us on this call. With me today are Brent Yeagy, President and Chief Executive Officer; and Mike Pettit, Chief Financial Officer. Before we get started, please note that this call is being recorded. I’d also like to point out that our earnings release, the slide presentation supplementing today’s call and any non-GAAP reconciliations are available at our investor site at onewabash.com. Please refer to Slide 2 on our earnings deck for the company’s safe harbor disclosure addressing forward-looking statements.
I’ll now hand it off to Brent, so he can get us started with his highlights.
Brent Yeagy
Thanks, Ryan. Good morning, everyone, and thanks for joining us today. We have a strong quarter and outlook to discuss, but I’d like to start by recapping the investor meeting we held on May 19 to reiterate our strategy, growth goals and financial targets. We’ve made meaningful changes to our organization, which began with reimagining our purpose, vision, and mission as we seek to change how the world reaches you.
Narrowing our focus to the transportation, logistics, and distribution industries provided us with the charter to change our organization to be more customer-centric and practices from R&D to product development to how we interface with the customer. Re-segmenting our external reporting structure and rebranding our company are external manifestations of several years of purposeful change and internal growth inside our company.
I believe our organization is now ideally designed to execute on our base business, while leveraging growth initiatives across cold chain, e-commerce and logistics disruption and parts and services. By 2025, we anticipate revenue of $3 billion, operating EBITDA margin of 11% and earnings per share of $3.50.
We look forward to updating you on the progress we make on the strategic initiatives that move us closer to these financial targets and our purpose of changing how the world reaches you.
One exciting update, I’d like to spend some time on today relates to our parts and service initiatives. Earlier this month, we announced our trailers as a service with FreightVana to support the power-only offering. We’ve previously spoken about how trailer pools and power-only offerings are eliminating waste from the transportation ecosystem, not only by using trailers to optimize drivers time, but also to allow trailer drop and hook operations to permeate much deeper into the fragmented ends of the carrier space.
Our partners at FreightVana are efficiently connecting shippers with carriers utilizing drop trailers, and they expect to meaningfully scale this offering as their business continues to grow. Our trailers as a service program provides partners like FreightVana with the access to trailers that’s critical in growing their business while connecting them with a robust maintenance and repair network underpinned by our recently announced Wabash Parts distribution joint venture. We’re excited about the opportunity to continue scaling this program in the marketplace.
The financials from our trailers as a service initiative will run through our parts and service segment and will be additive to our ambitions of increasing the amount of our business that comes via a recurring revenue model.
Moving on to our second quarter financial performance. Our team generated revenue that exceeded our initial expectations and EPS within the range of our prior outlook. Between increased volumes and improved pricing, revenue increased over 40% from the same quarter last year to an all-time record of 643 million. Profitability also continued to sequentially strengthen as we began shipping 2022 backlog, which recovers cost increases experienced during 2021. As pleased as we are with the second quarter, we still see opportunities to even better in the second half of the year and beyond.
Moving to market conditions. We spent time with investors during visits and roadshows during the quarter, and we appreciate the prevailing concerns about the macro environment. Our management team watches a variety of macro leading indicators, which I think would most fairly be described as mixed right now.
Credit has tightened, although if not constrained. Consumer sentiment has weakened, although the labor market and retail sales remain very strong. Supply shortages persist in the industrial sector, although industrial production and durable goods demand remains strong. All this is to say that we appreciate the warning signs in the broader environment. That said, the reality that we have at the present is that we have seen no cancellations within our order backlog, and we are experiencing strong 2023 quote/demand and very productive 2023 demand discussions with our strategic customers, which has allowed us to open our 2023 order book.
Just to tie a couple of things together here, I believe that there are a few different factors combining to create a less cyclical environment for our business, under any sort of impending economic stress.
First, as we have covered in the discussion of power-only and the expanding use of larger truck, trailers are being used in new and interesting ways in order to create efficiencies in the transportation, logistics and distribution industries. The creation of these trailer pools results in immediate tailwinds to demand and ongoing increases to the rate of replacement.
Additionally, we’re coming off with 2 solid years of constraints across the transportation equipment complex, which is fresh in the minds of equipment users. As we have seen and we are still experiencing dialing back trailer purchases during times of economic uncertainty is a recipe to ensure that you’re boxed out of participating in the prosperous times that typically follow short bouts of uncertainty.
Even if overall consumer spending does pull back, the long-term trend on e-commerce is well established and has shown the ability to maintain and even continue expanding through economic uncertainty. The structural changes to logistics models required by continued growth in e-commerce will continue to utilize more transportation equipment as passenger vehicle miles are replaced by commercial vehicle miles.
And finally, let me reiterate that we showed in 2020 Wabash’s capability of managing through significant cyclicality, and we have only improved that capability over the past 2 years. We will continue to closely monitor the economy, and I think it’s important for the investment community to more fully understand the unique and secular demand environment, we see before us by looking beyond the traditional measures and headlines and more of what Wabash is creating in terms of strategic portfolio management and moves to capture the benefits of a change in logistics landscape.
As a reminder, the trailer industry has a strong seasonal pattern of ordering activity in which OEM backlogs filled during the second half of the calendar year, then burn off in the first 2 calendar quarters. The second quarter typically sees the most pronounced weakness with industry backlogs contracting by about 15% on average over multiple decades. As such, the fact that our backlog remains flat at $2.3 billion from Q1 to Q2 is a purposeful outcome, we’re very pleased with. Our backlog ending Q2 also represented a 71% increase versus the same period last year. Given our in-line Q2 results and the visibility provided by our strong backlog, we are comfortable maintaining our 2022 EPS outlook of $1.90.
In closing, we’re excited to have the opportunity to fully articulate our strategy, growth initiatives and updated financial targets at our May Investor Meeting. Paying full respect to the prevailing macro uncertainty our conversations with customers regarding both 2023 as well as long-term agreements remain very positive. We continue to work on increasing recurring revenue through our parts and service business, with trailers as a service being another tangible example of how we can engage with the marketplace differently to capture more of the value that our products create for the transportation, logistics and distribution ecosystem.
More immediately, I’m pleased that with our execution so far in 2022 and look forward to updating you on our early thoughts of 2023 as those figures come in sharper focus over the next 1 to 2 quarters.
With that, I’ll hand it over to Mike for his conference.
Michael Pettit
Thanks, Brent. I’d like to start off by providing you some additional color on our second quarter financial results. Consolidated second quarter revenue was $643 million with new trailer and truck body shipments of approximately 13,670 and 3,970 units, respectively. Shipment has improved across the board in the second quarter. And as Brett mentioned, this helped us achieve record quarterly revenue during the second quarter.
Gross margin was 12.1% of sales during the quarter, while operating margin came in at 5.6%. Operating EBITDA for the second quarter was $50 million or 7.8% in sales. This is another quarter of margin improvement as we began fully shipping our 2022 backlog. We expect margins to continue improving during the back half of the year as some of the cost inherent are ramping to achieve record revenue stabilize going forward.
Finally, for the quarter, net income attributable to common stockholders was $22.6 million or $0.46 per diluted share. From a segment perspective, Transportation Solutions generated revenue of $596 million and operating income of $48 million. Parts and services generated revenue of $50 million and operating income of $8.1 million.
I would like to call out that adjusting for businesses included in last year’s results that are no longer part of our portfolio. Revenue growth in our parts and service segment was approximately 25% as initiatives such as distribution JV Wabash partners continues to possess.
Year-to-date, operating cash flow was $83 million. We achieved a meaningful release of working capital during the second quarter, driven by a reduction in accounts receivable, while payables were higher. Our second quarter operating cash result, combined with CapEx equates to over $100 million of free cash flow generated during the second quarter. Our target for 2022 capital spending remains between $80 million and $90 million, as we remain on track with our strategic capacity expansion and the conversion of our Lafayatte-based South plant from reefer capacity to dry van capacity. Even with our increased growth CapEx budget, we expect to generate over $75 million of free cash flow in 2022.
With regard to our balance sheet, our liquidity or cash plus available borrowings as of June 30 was $298 million with $138 million of cash and cash equivalents, and approximately $160 million of availability on our revolving credit facility. With regard to capital allocation during the second quarter, we invested $12 million of capital projects, utilized $5 million to repurchase shares and paid our quarterly dividend of $4 million.
Our capital allocation focus continues to prioritize organic growth via capital spending while also maintaining our dividend and evaluating opportunities for share repurchase alongside bolt-on M&A opportunities.
Moving on to our outlook for 2022. Through the first half of the year, we have executed our expected revenue and margin improvement, and we remain on track for financial performance to continue to step up into the second half. Given that our second quarter performance was in line with our expectations, we are pleased to maintain our guidance for 2022. We expect revenue of $2.5 billion and EPS of $1.90 per share. Full year 2022 operating margins are expected to be approximately 6% at the midpoint, and we continue to believe that progress towards our 11% EBITDA margin goal will be evident relatively early in our journey to reach our 2025 financial targets.
Relatedly, what item I’d like to call out is that we modified our long-term incentive plan to add an ROIC component in this year’s proxy disclosure. We have taken meaningful steps to shape our portfolio to fit our strategy over the last few years. And our organization is aligned on generating higher returns as we execute our strategic initiatives.
Turning back to our 2022 guidance. We continue to assume that present supply chain conditions persist through the remainder of 2022. I’d also like to point out that the volumes and run rates implied by our 2022 outlook we’ve set up the company nicely for continued record performance in 2023.
Turning to the third quarter. We expect revenue in the range of $620 million to $660 million and EPS of $0.55 to $0.60 for the quarter.
In conclusion, I believe we show an excellent progress in the second quarter. As Brent mentioned at the offset, we were pleased to have the opportunity to tell our strategic story at our May investor meeting and having spoken with multiple investors during the second quarter, I was excited by the more strategic nature of our conversation following an update on our growth initiatives and financial targets. I believe we set an interesting juncture in the company’s history, a time highlighted by the combination of ample near-term opportunities and the right long-term strategies and initiatives, all against a backdrop of share valuation that discounted Wabash of a bygone era.
Being fully mindful of potential near-term economic uncertainty, I believe in the last few years have highlighted a couple of things. First, our ability to rapidly respond to changing market conditions and produce meaningfully positive free cash flow during a time of economic volatility.
Second, the substantial demand for transportation equipment that can be created by short periods of uncertainty, resulting in the balloon-in a pent-up demand, which is still working its way through the system in 2020. We are strong believers on our 2022 and longer-term outlook, and we look forward to sharing more with you as we continue making progress on our strategy.
With that, I’ll now turn the call back to the operator, and we’ll open it up for questions.
Question-and-Answer Session
Operator
[Operator Instructions] We will now take our first question from Justin Long with Stephens.
Justin Long
Maybe to start with the question on trailer deliveries. There was a pretty decent step up here in the second quarter relative to the first quarter. So I was wondering if you could talk about your expectation for deliveries in the back half of the year and what’s getting back into the guidance? And then maybe how capacity ramp as we get into early next year with the additional capacity you’re bringing on?
Brent Yeagy
Justin, thanks for the question. Generally, I think in our implied guidance of $2.5 billion for the year, you would expect roughly a flattish delivery guide for Q3 and Q4 versus what we just delivered in Q2. And I think implied in that, which is I want to highlight again, we had a huge ramp from Q1 to Q2. Sequentially up, to 18%, which is the largest sequential increase that we’ve seen from — during the COVID period, so — post-COVID period.
So I think that’s a good testament to what we — we’re in a level now, we believe that we can now have good visibility to deliver those same levels in the second half of the year. Then you go into 2023, obviously, we’ve got our capacity switch out from reefer to dry at our South plant Lafayette campus coming online, which we’ve guided to roughly 10,000 units gross take out the 4 or 5 of the reefers. So you can add that into the 2023 mix. And I think if you put those together, you get a really nice view as to what can be some pretty strong EPS generating quarters in 2023 with the run rate we’re delivering right now, plus the capacity that are somewhere.
Michael Pettit
Yes. I would add just a little bit more color far from guidance, let me stress far from guidance. But if you think about relatively flat shipping levels coming off of Q2 for the remainder of the year, capacity continuing to shore up of the given capacity that we have, which will somewhat ramp all year from a production standpoint, we should be sitting at a decent finished goods level at the end of the year.
And you can imagine that the jumping off point in the first quarter will be improved from the first quarter of 2022, but it’s still generally lower shipping quarter of the year. So that has to be factored in. And then you can think about Q2 between having a decent finished goods, a good production rate in the first quarter, right, jumping off of to the fourth and then starting to see the impact of surge, you get a feel for what will be happening from a flow-through in the first half and then that all flows through in the third and fourth quarter of 2023.
Justin Long
And Brent, I wanted to circle back to some comments you made earlier in the call around trailer pools, obviously, seeing a lot of momentum and discussion on that topic. Is there any way you could ballpark the percentage of your trailer deliveries this year that you feel like are coming from this secular theme? And any thoughts on where that percentage could go as we move into 2023 and beyond?
Brent Yeagy
Yes. So I think part of it is how we — there’s different ways that you can classify trailer pools. And that’s one of the things we’re finding as we talk to all the players, we’ll call it traditional truckload that are moving into digital brokerage and then you move to the other extreme of the continuum where you’ve got truly innovative digital brokers really focused on power only, i.e., FreightVana, on the other end, there are different ways to answer that question.
But if I take the full continuum, J.B. Hunt and everyone else, I would say, from a trailer shipment standpoint, you’re roughly looking at 10% to 15% of what we do could be classified moving into some type of trailer pool application, the largest being J.B. Hunt at this point. And then there are some other smaller emerging players FreightVana being one of them that will pick up more in the second half of the year, and then we’ll increase that a little bit more going into 2023.
Justin Long
And last one for me. It sounds like the order book for 2023 was recently opened. So I was curious if you had any initial indications on pricing that you could share?
Brent Yeagy
Yes. What I would say is that we say it this way, we’ve been successful in 2022, passing along an appropriate level of inflationary cost, cost increases with margin into the backlog so far. And we’ve done that in a very good way. What I would say is that we still have additional inflation that we need to factor into our pricing. We’ve done that in part and parcel with opening up 2023 backlog. We wouldn’t have opened it up if we didn’t feel we would be successful in executing that. And I would say that you can take from the backlog increase that we’ve done, we’ve met our expectations and our ability to pass along pricing at an acceptable level.
Operator
Next, we have Mike Shlisky with D.A. Davidson.
Michael Shlisky
Maybe I can start off with a follow-up on the last question. You continue to suggest that you’ve got a nice balance to the margin trend in 2023, given your long-term outlook and still kind of somewhere half way on the margin front. And you kind of give decent pricing there. Are any other areas of factors we should be looking for in 2023 as to why margins should be on a step up over 2022? Is it just the new capacity or other things you’ve got going on, we should be hearing from you.
Brent Yeagy
First, I mean, obviously, with the addition of surge, the ability to absorb overhead throughout not only 2023, but in the second half of 2022 is a margin tailwind as we continue to ramp the business. Two, as we reach the end of 2022, we’ll be at the tail-end of the additional manpower that we generally have to add throughout the business. And those 2 things will be done with the efficiency curve for the most part as we enter 2022 — I’m sorry, second quarter of 2023, and we’ll be able to start pulling back from some of the overtime that we use right now to buffer that.
The last one, I would say it really comes to play in the second and third quarter of ’23, is that the workforce that we’ll be moving to surge is an already multiyear experienced trailer building workforce. So we should have a much better opportunity to convert those trailers on that new production line at a much higher level of initial ramp efficiency than what we would see under a more traditional shift add or line set up with new people. So those are the most fundamental reasons. We should see margin tailwind going into ’23. And then there’s a whole host of initiatives inside the business, but we’ll buffer that accordingly.
Michael Pettit
And one of the big one that’s in there is the — we would expect to get better chassis flow in 2023, which should help the truck body product line be just an accretive initiative for us next year. So those are the items. And obviously, we’re doing a big — our implied guidance has a pretty nice step up in the second half of ’23 versus first half ’23, so where a lot of heavy lift at year end obviously will kick in.
Michael Shlisky
I wanted to also ask about the supply chain as well. Just get to the — I mean there’s an answered question, but — can you hear me, okay? I’m sorry.
Brent Yeagy
Yes. We hear you.
Michael Pettit
Yes. We’re good.
Michael Shlisky
I was wondering if you can tell us about what initiatives you’re competing with on supply chain? Clearly, your business is doing quite well, got great backlog, probably several to come. Other areas in the economy are not doing so well. Do you think if other areas in the economy have a little bit of weakness here that might be a benefit to your supply chain and the ability to get some even better margins to do?
Brent Yeagy
That’s a great question. I would say this, I think the overall trailer and freight-related industries are going to have nice demand tailwinds going into ’23, that are going to buffer us all significantly. I think other aspects of the economy that you’re alluding to are going to suffer some type of more secular recessionary environment. And if we see generally a greater availability of labor in the market, that is going to dramatically help the overall extended supply chain, specifically for our industry. As that seems to be the primary factor for domestic suppliers is that labor issue.
So anything we see there the softening of labor tension is going to increase the overall efficiency of the supply chain. And what we would see out of that is we’re doing pretty good compared to our competition. And I’d say relative peers in managing our supply chain. We are far from noise free, but we’ll stay better than the rest. It just adds to the — or it would subtract from the noise that we have, which would relate or translate into some level of labor and through the efficiency through the back.
Michael Shlisky
If I can add one more here. Mike, I appreciate your comments about how the house of stock is being valued on similar sort of bygone era, I think you said. I guess I’d be curious — as you look to your 2025 numbers, are you seem more confident now then when you first announce them. Do you have any down years in the forecast between now and then or is it challenging given what you know about the cycle, where the customers are looking at — that will not be the case now in 2025?
Michael Pettit
Yes. That’s obviously difficult to predict, Mike. But what I would say is anything we’re seeing now we wouldn’t expect a big enough pull back that it would put the 2025 targets in general. So based on how we’ve run the facilities, the South plant capacity exchange from reefer to dry. And our general One Wabash initiative we believe will allow us to be resilient if there is a economic pullback in the ’23, ’24 and still be able to maintain the ’25 targets. So that the ’25 targets are based on kind of mid-cycle level volumes, but we feel pretty good that we can maintain and be able to.
Brent Yeagy
Yes, I would add just a little bit more. We looked at a range of scenarios over the next couple of years. And I’d say as long as we are able to maintain a healthy clip purposeful capital deployment, which we’ve laid out in ’23 and ’24, then we’ll set the stage for ’25 from a business enablement standpoint, couple that with the continuation of moving the portfolio to the appropriate strategic spot and then the internal work we do with digitization and the work with parts and service. There’s nothing that says that even if there is a lull, even a moderate lull in between that we aren’t in a position to execute the ’25.
Operator
Your next question comes from Felix Boeschen with Raymond James.
Felix Boeschen
I was hoping to start, Brent, I think in the beginning, you talked about starting to take 2023 orders. And you also said you’re having more strategic longer-term discussions with customers around capacity. I was curious if you could elaborate maybe on the latter comments. Were you implying about maybe locking in some capacity for multiyear periods? I’m just kind of trying to think through those dynamics.
Brent Yeagy
Yes. So we have — I won’t go into all the particulars Felix because that’s somewhat proprietary in how we are doing this, it is different than the rest. What I would say is that we have a tier approach to how we are building in our backlog is very strategic in the manner at which we’re doing it. It’s not just open the order book and let the quotes flow that would be like the rest. What we are doing is feeding it with very core strategic indirect channel business as we try to make sure that we have a dealer first mentality, and those are very — what I want to say, very specific inside of the indirect channel, won’t say more than that.
When we go to next year, that is the working at a handful of customers that we think are well positioned for the next half decade. And those are discussions that are multiyear in design, multifaceted and they go beyond just trailer — access to trailer capacity but also move into advanced R&D development as well as parts and service linkages as to what that value proposition is. And so that’s the next tier that we’re working on to add to the backlog. And then we’ll move into the next grouping of strategic customers that should round out the backlog for 2023, very specific across the entire creation of the ’23 backlog.
Felix Boeschen
And then I was hoping to follow up on sort of the new product development standpoint. We haven’t talked a ton about it this call, but I’m curious if you could comment on the EcoNex van as you see it right now? And then secondly, last year, you had talked about a walk-in cargo van. I’m curious if you could update us on the status there.
Brent Yeagy
Sure. First, on the — we’re rebranding is the [Accutherm] refrigerated van with EcoNex technology. We continue to have better-than-expected results in the validation of that product with our customers with over 50 million miles on the road, well above 50 million at this point. We are moving forward with capacity additions, the next phase that will be a 2023-2024.
I would say, at this moment, demand far exceeds what our initial capacity add will be as we look to maintain a level of scarcity and controlled launch, right, as we scale this up, one, to maintain premium pricing two, to make sure that the physical manufacturing process meets a premium product expectation. And then as we move through that, we’ll look at what the next phase of capacity add will be.
So we have a multiyear strategy lined out as to how we will do that. This is a slow is fast and slow is purposeful and what we’re trying to do. But we are balancing the extended and higher-than-expected desire for the product with moving in a prudent and planned way.
Felix Boeschen
And any color on the cargo van?
Brent Yeagy
Yes. The cargo van, we have a prototype in hand that we visually reviewed just the other day. It has made its way to a 1 or 2 significant customers in this phase that we think are highly interested to broaden their portfolio available product to meet their growth needs. So we are very pleased with where we sit at this moment in time. And that is something that we firmly believe that we’ll have prototypes, and we’ll call extended small volume prototype production in ’23 to meet initial market validation needs with possibly the chance of beginning to scale up in the second half of ’23 and ’24.
Felix Boeschen
And then just my last one is more for Mike. But Mike, you mentioned next year you would expect better chassis low, which should be margin accretive on the truck body book. Curious if you could maybe update us on what you’re seeing today on the ground. It seems like production is still fairly constrained. But any update maybe versus what you expect on 1H versus 2H, would be helpful.
Michael Pettit
Yes. We would expect — I would say the second quarters specifically didn’t see a significant improvement. But we believe we’re starting to see some early indicators that the second half could be better than the first half and definitely feel that the 2023 volumes will be much improved. So I would say too early to say we’re seeing a lot of improvement on the ground. But we do — we’re seeing enough to have confidence that we will fulfill the orders. We have a pretty full backlog in that product line, and we’ll be able to fulfill the orders in half of the year and continue to step up the profitability. So we — that business is improving. We do need a little more volume for it to really step up a gear as far as the margin, but it is definitely improving. As soon as we get the chassis flow, we’ll see some nice profitability come through by ’23.
Brent Yeagy
Felix, just to follow up on the previous question. One of the items that we didn’t talk about was our light duty refrigerated product that we have with a significant grocer, Kroger, to be specific. That also continues to go well, and we’ll be looking to broaden that into additional points of revenue in the future, both within Kroger and then modifications to the product design to allow it to be applicable to other users, that continues to go well. And then our traditional truck body like product that use EcoNex technology, we are also adding capacity there because we’ve had better-than-expected customer reviews there, which will help us grow within our cold chain area. As we get more and more users starting to understand the role efficiency within that space, very much like our van customers would see.
Operator
There are no further questions at this time. Mr. Reed, I’ll turn the call back over to you.
Ryan Reed
Thanks, Angela, and thanks, everyone, for joining us today. We look forward to following up during the quarter. Have a great day.
Operator
This concludes today’s call. You may now disconnect.
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