Jeffery Taylor - Senior VP & CFO Richard Giromini - CEO Brent Yeagy - President, COO.

Brad Delco - Stephens Steve Dyer - Craig-Hallum Mike Baudendistel - Stifel Mike Shlisky - Seaport Global.

Welcome to the First Quarter 2018 Wabash National Earnings Conference Call. My name is Christine, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Jeff Taylor.

You may begin. .

Thank you, Christine. And good morning. Welcome to the Wabash National Corporation 2018 First Quarter Earnings Call. This is Jeff Taylor, Chief Financial Officer. Joining me today are Dick Giromini, Chief Executive Officer; and Brent Yeagy, President and Chief Operating Officer.

Dick and Brent will discuss the results for the first quarter, the current operating environment and our outlook for the remainder of 2018. In addition, I will provide an overview of the financial results. At the conclusion of the prepared remarks, we will open the call for questions from the listening audience.

Before we begin, I'd like to cover two 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, adjusted earnings per share guidance, the industry outlook, backlog information, financial condition and other matters.

As you know, actual results could differ materially from those projected in the forward-looking statements. These statements should be viewed via the cautionary statements and risk factors set forth from time-to-time in the company's filings with the Securities and Exchange Commission.

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

Thanks, Jeff. Let me start by saying that we're pleased to have delivered all-time record topline results for our first quarter, driven by strong overall demand environment, greater-than-anticipated new trailer shipments of 13,200 units, and further supported by the revenue delivered from our recently expanded Final Mile business.

The strong start to the year has us now well positioned to deliver on our updated increased full year company guidance for revenue and earnings. I'll speak more about that later.

Backlog, overall, grew once again, reaching record levels of $1.3 billion, including a significant sequential backlog increase of 40% within the Diversified Products segment, resulting in its highest level since 2015 and a 50% sequential increase in backlog for the Final Mile segment, including units built but not yet picked up.

Additionally, trailer orders received during the quarter within our Commercial Trailer segment remains strong, leading to its third highest first quarter backlog on record and up $169 million or 22% year-over-year.

That, combined with our continued development and commercialization in new products and technology, and significant focus on capital investment and productivity growth and integration projects has positioned us well for continued success.

As anticipated and previously discussed, continued raw material inflation, along with normal seasonally higher operating costs, all impacted margins throughout the quarter.

In addition, expenses related to the continued investment in the development and ramp up of our proprietary molded structural composite or MSC operation in Little Falls, Minnesota, along with continued development of our proprietary Cell Core and honeycomb panel technologies impacted results by roughly $2.7 million in the quarter.

While unfortunate that these seem to all come to a head at the same time, we need to recognize that this is temporary in nature and is a standard part of doing business in the industrial manufacturing space, especially when growing and diversifying your business as we are. The real test is how we deal with and address these opportunities.

And I'm pleased with the steps taken by the business unit teams and our functional support teams to enable a quick return to significantly enhance performance, moving forward.

As a result of the many actions already taken, along with those currently underway, our expectations are that this past quarter will prove to be, by far, the low watermark of performance for the year as the combination of higher shipments, lower operating costs driven by efficiency gains and repricing actions already taken to offset the impact of material cost increases will all help to ensure strong results throughout the balance of the year.

Let me explain why. First and foremost, consistent with past years and further supported by our record backlog, build and shipment levels will be significantly higher during the current quarter and the balance of the year, driven largely by the number of operating days during each quarter and the seasonal needs of our customers.

These will significantly drive both revenue and absorption levels. Second, the resulting margin pressure experienced in the first quarter in large part, related to third and fourth quarter material cost increases was already anticipated as our backlog turned over.

As you will recall, and as discussed from time-to-time, the quote to order, to build, to ship and revenue recognition time frame can span several months. That can lead to the occasional disconnect and margin anticipated at time of quote versus at the time of material procurement and subsequent build.

So as a standard practice, we take actions to forward lock certain materials, including aluminum and steel, upon receipt of a signed order from customers to mitigate as much of this volatility as possible. However, during more volatile cost fluctuation periods such as now, even that strategy can be impacted.

To counter this, repricing actions were taken throughout this past quarter to address and offset a good portion of the material cost increases that would be realized within the remaining backlog.

These actions taken will yield an excess of $6 million of improved margin through the balance of the year with additional pricing actions in place to assure optimized pricing for any new orders accepted going forward.

These pricing actions coupled with higher shipment volumes and expanded commodity hedging initiatives underway will protect and enhance margins through the remainder of 2018, along with establishing a strong pricing base for the 2019 order season.

Third, to support the strong backlog, staffing additions were made throughout various locations across the business to support the increased orders for both trailer and non-trailer products across multiple product lines.

These additional labor resources impacted results by approximately $3.5 million in the quarter, spread across all three business units.

In addition, we're continuing to advance our ramp-up of our molded structural composite or MSC technology for both our truck body offerings and our refrigerated van trailers with increased staffing at our Little Falls, Minnesota operation. Naturally, this results in temporary labor inefficiencies as the new associates learn their jobs.

As typical in any new technology, product or manufacturing volume ramp up, there is a cost of investment and a learning curve period of lower productivity that results in higher cost per unit at the outset that will improve as we progress through the balance of the year.

Not only will we realize the financial benefits in this year as TAT times and velocity improve, but we'll be set up well for a strong 2019. So strong volume to drive revenue and absorption, material costs addressed and productivity improvements being realized beginning this quarter.

It's certainly my hope that you are now as excited as we are about the prospects for the rest of this year and next. On the investment for growth front, we're excited to showcase three of our advanced material technology products at the American Trucking Associations Technology & Maintenance Council, or TMC, exhibition in March.

These trailer and truck body product offerings utilize our proprietary MSC composite panel technologies, which furthers our efforts to dramatically change the product's form and function, by adding strength, increasing thermal efficiency and saving weight.

We also debuted our DuraPlate Cell Core dry van that is up to 350 pounds lighter than a standard DuraPlate trailer equally equipped. This product has been in development and active field testing for the past four years and will now be made available for fleets to place orders during the upcoming 2020 model year.

These products, utilizing advanced proprietary technologies, along with our MSCT refrigerated trailer that is already undergoing extensive field testing and set for phase and commercial launch for the 2020 model year will provide tremendous market share growth opportunities in the years ahead.

Finally, integration activities continue within our Final Mile product segment, specifically related to our Supreme Industries acquisition completed this past September. Progress remains on track and in many areas, ahead of schedule.

To our overall synergy plan, which included generating a minimum of $20 million of annual run rate cost synergies alone within the first five years, excluding revenue and related profit growth opportunities that will also be realized throughout the period.

SG&A and material cost reductions are ahead of plan and operating expense and sales synergies are also tracking well.

While a portion of the ongoing annualized savings from these initiatives will be initially offset, by onetime expenses related to site and process improvement investments occurring throughout 2018, progress is on schedule and the savings will be visible in 2019.

Examples of these one-time investments include facilities improvements at the manufacturing locations and upgrading safety practices and equipment to Wabash National standards.

Other investments are longer term in nature, such as introducing mixed model lean manufacturing methodologies and capability across the Supreme footprint to improve both productivity and overall manufacturing flexibility.

Nevertheless, I am very impressed by the progress that Mike Pettit and his team have made to date and the positive attitude of our Final Mile associates.

As both production and shipments increased during the second and third quarter seasonal peak periods for the Final Mile business, we will realize the benefits and increase revenue and profit within the segment. Before I hand it over to Brent, let me share our views about the market and expectations for the balance of the year.

As you know, we continually assess the state of the broader market in both the macro and micro levels. At the macro level, GDP remains strong, consumer confidence is high and housing starts continued to climb. Just to highlight a few key indicators.

At a more micro level, carrier profitability is strong, spot rates are at elevated levels, truck tonnage, load availability and truck utilization are off the charts and quote and order activity are on a path to set all-time records.

ACT and FTR are both extremely bullish in their views of the overall demand for trailer equipment, with FTR to forecast 305,000 units of production while ACT is now forecasting an all time record of 320,000 units to be produced this year.

The one caveat to all this will be the ability for the supplier community to support this elevated level of demand for the industry. Here at home, we now sit on record backlog levels, supporting an improved pricing environment and allowing for more clarity in our prospects for the balance of the year.

When taking in all of the above factors, including the expected process and productivity improvements throughout the operations, we would now expect to see Wabash National shipments in the 58,000 to 62,000 unit range or an increase of 2,000 units from our prior guidance.

That said, in terms of earnings with our revised shipment guidance, we now expect to deliver full year 2018 GAAP EPS in the range of $2.01 to $2.13 and 2018 adjusted non-GAAP EPS of $1.94 to $2.06. This represents an increase of approximately 3% from the midpoint of our previous range.

Near term, for the second quarter, we now expect total shipments to be in the range of 15,500 and 16,500 trailer units for the quarter. Jeff will provide additional insights regarding the second quarter in his comments a little later. With that, I'll ask Brent to provide details on the results of each of our reporting segments.

Brent?.

ATA's Truck Tonnage Index was 111.2 in February, up 7.7% and is projected to climb with support from a growing economy. March dry van spot rates were up 31% from March of 2017 levels and dry van contract rates were up 10.7%, leading to improved fleet profitability and demand for more equipment.

FTR projects strong year-over-year rate increases through most of 2019 as ELD and driver shortages work to constrain fleet capacity. Current ACT and FTR forecasts reflect historically high demand levels that rival and may exceed the record years of 2015 and '16.

One dynamic that needs to be considered is our supply base's ability to supply the entire industry at these higher demand levels due to the combination of high trailer and tractor demand, coupled with nationally low unemployment levels.

It is material availability that we may see as the limiting factor for the entire trailer industry and potential headwind that could keep 2018 for being a new record year for the industry. This will dampen the fleet's ability to increase capacity and therefore, will continue to place upward pressure on freight rates well into 2019.

I am now going to shift and provide a short update on molded structural composite technology initiatives. This initiative remains a major focus for Wabash National and is a key element of our growth strategy within Commercial Trailer Products and Final Mile products.

We remain steadfast in our belief that our patent pending molded structural composite technology will have broad applications in both the dry and refrigerated truck body markets as well as refrigerated trailer space. Exciting times in Little Falls, Minnesota and throughout Wabash National accordingly. I'll now provide a short regulatory update.

As previously discussed, the greenhouse gas regulations introduced in 2016 are presently under review with the EPA, which will ultimately determine whether the rule actually goes into effect. The Phase II greenhouse gas rules were initially set to require compliance beginning in January of 2018.

The Truck Trailer Manufacturers Association filed a petition in U.S. Court of Appeals seeking a review of the rule as it relates to the authority of the agencies to regulate trailers under the Clean Air Act.

In addition, the Truck Trailer Manufacturers Association also filed for a stay to suspend enforcement of the rule to allow time for the EPA and NHTSA to reconsider the trailer provisions. In October of 2017, the Court of Appeals granted the motion to stay the greenhouse gas rule as it applies to trailers.

Ultimately, while compliance is on hold, the final impact of the -- on the trailer industry will not be known until the final rule has been made. In December of 2017, the California Air Resources Board or CARB unveiled their own proposal for new greenhouse gas standards for medium and heavy-duty trucks and trailers that operate in California.

It is likely that CARB's adoption of these regulations will require fleets to equip trailers with fuel-saving technologies outlined in the EPA Phase II greenhouse gas rules starting in the 2020 time frame. We will continue to monitor the CARB rule making as it moves forward.

Also, the Federal Motor Carriers Association issued a mandate that allows carriers -- or that all carriers must install electronic logging devices or ELDs by December 18, 2017. And the enforcement commenced effectively April 1, 2018. Industry estimates on carrier productivity losses as a result that -- result of ELDs range from 3% to 10%.

We believe this really is likely to have a more significant impact on capacity than anticipated and may ultimately drive increased demand for new trailers, as carriers attempt to recover lost productivity.

While industry estimates vary, it is likely that approximately half the industry utilized ELDs prior to the new mandate, meaning that a good portion of owner operators and small carriers will either adopt the new technology, shut down or be acquired in 2018.

To recap, as our results represent, we continued to execute at a high operational level, which coupled with a robust market - with robust market conditions and the deployment of new technology, well positions our business to deliver a very solid 2018 and beyond. I will now turn the call over to Jeff to discuss some additional financial details. .

Thanks, Brent. And good morning, everyone. As we've stated, we are pleased with the first quarter performance as it represents a solid start to the year and more importantly, we are very excited about the growth in our backlog and strong outlook for the remainder of 2018.

While first quarter margins were impacted by raw material inflation, labor ramp-up costs and development costs for new products and panel technologies, these investments have positioned us to execute on the strong demand environment in 2018 and beyond as well as continue our development and commercialization of new products with breakthrough performance.

With that, let's turn to the financial results for the quarter. On a consolidated basis, net revenue achieved the first quarter record at $491 million, an increase of $129 million or 36% compared to the first quarter of last year. Net sales increased for both Commercial Trailer Products and Diversified Products on a year-over-year basis.

In addition, to the very favorable impact of adding the Final Mile segment as a result of the Supreme acquisition, all contributed to the record revenue for the quarter. Consolidated new trailer shipments were 13,200 units during the quarter, above our shipment guidance.

First quarter build levels totaled approximately 14,750 units, also exceeding our expectations for the quarter. And it's typical for builds to significantly exceed shipments in the first quarter of the year.

Components, parts and service revenue was $38 million in the quarter, down from $44 million in the prior year quarter, primarily as a result of lower sales at our branch locations as we continue to transition company-owned branch stores to independent dealers. This decrease was partially offset by stronger aftermarket sales and CTP.

Equipment and other revenue was $103 million in the quarter, up $75 million compared to the first quarter of 2017, largely due to the addition of truck body and equipment sales in the Final Mile product segment.

Overall, non-trailer-related revenues for the current quarter totaled $142 million or 29% of our total revenue, which is a new all-time record for non-trailer revenue. This increase is due to the inclusion of Supreme and our other organic initiatives to grow in our non-trailer products area.

In terms of operating results, consolidated gross profit for the quarter was $64.1 million, or 13.1% of sales. While gross margin decreased 330 basis points year-over-year, primarily due to material and labor cost headwinds, gross profit increased $4.8 million from 2017.

The company also generated operating income and margin of $25.7 million, and 5.2%, respectively. Excluding onetime acquisition-related items for Supreme, operating income for the quarter is $26.6 million. In addition, operating EBITDA for the first quarter was $39 million or 7.9% of revenue.

At the segment level, Diversified Products Group produced net sales of $95 million in the quarter, an increase year-over-year of $5 million, primarily driven by growing demand for our tank trailer products.

EPG gross margin was 18.2%, reflecting a year-over-year decrease of 140 basis points, driven primary by pricing pressures within tank trailers, material cost increases and labor inefficiencies due to ramping up manufacturing headcount to meet stronger demand levels in tank trailers.

Commercial Trailer Products or CTP, net sales were $327 million which represents a $53 million or a 19% increase year-over-year on new trailer shipments of 12,650 units.

New trailer average selling price, or ASP, was down year-over-year due to our product mix with fewer refrigerated trailers and higher truck trailers compared to last year, but partially offset by price increases in response to higher raw material costs.

CTP, once again, reported strong margins with gross and operating margins of 11.2% and 9% respectively.

Gross and operating margins were generally in line with seasonal expectations, yet were down both year-over-year due to higher raw material cost, labor increases to ramp up production on stronger market demand and development costs for molded structural composites manufacturing expensed during the quarter.

Final Mile products net sales for the first quarter totaled $75 million, gross profit and gross margin for the quarter were $11.5 million and 15.3%, respectively. Excluding nonrecurring acquisition and integration-related costs, gross profit and operating margins for the first quarter were 16.1% - $16.1 million and 2%, respectively.

Truck body margins are expected to improve significantly as price increases to offset material cost inflation, take hold and productivity improves in the coming quarters. Selling, general and administrative, or SG&A, excluding amortization for the quarter was $33.5 million or 6.8% of revenue.

For the full year, we expect SG&A as a percent of revenue to be flat year-over-year at approximately 6% of revenue. Intangible amortization for the quarter was $4.9 million, up $0.4 million from the prior year through the inclusion of the Supreme acquisition and is expected to be approximately $20 million for the full year 2018.

Other income for the first quarter totaled $7.9 million as the company transitioned 2 northeast branch locations to independent dealers and sold 2 other unutilized properties, owned by Wabash or Supreme.

Interest expense for the quarter totaled $7.5 million, a year-over-year increase of $4.5 million due to additional interest on the high-yield unsecured notes added to the capital structure in the third quarter of 2017, partially offset by the lower amount of convertible notes outstanding.

$0.7 million of our reported interest expense is non-cash and primarily relates to accretion charges associated with the convertible notes.

We recognized income tax expense of $4.8 million in the first quarter, the effective tax rate for the quarter was 18.6% due primarily to the accounting treatment of stock-based compensation, including a onetime discrete benefit of approximately $1.9 million. Our full year effective tax rate is expected to be in the range of 25% to 27%.

Finally, for the quarter, net income was $21.3 million or $0.35 per diluted share.

On a non-GAAP adjusted basis, after adjusting for nonrecurring net gains of $4.4 million, on the sale of former branch locations, partially offset by expenses related to acquisition and integration expenses of Supreme Industries, our adjusted earnings were $16.9 million or $0.28 per diluted share.

In comparison, GAAP and adjusted earnings for the first quarter 2017 were $20.2 million and $19.5 million, respectively. GAAP and adjusted EPS for the first quarter of 2017 were $0.32 and $0.31 per diluted share, respectively. Let's move to the balance sheet and liquidity.

Networking capital finished the first quarter up, about $38 million, sequentially, due to our normal seasonal production ramp, and up $58 million from prior year due to the addition of the Supreme business.

As a percent of revenue, the working capital balance is in line with expectations of 12.2%, and we expect this working capital metric to remain generally flat for the balance of the year.

Capital spending was approximately $6 million in the first quarter, and we reiterate our full year capital spending estimate to be between $40 million and $50 million depending on the implementation timing of several large projects.

In regards to our convertible bond debt, we took the opportunity to purchase $9 million of principal value with a cash outlay of approximately $17 million during the quarter.

On May 1, and subsequent to the first quarter end, the remaining $35 million principal value of convertible notes matured and were settled in cash for the full amount of approximately $63 million. Our liquidity or cash plus available borrowings as of March 31, was $322 million or approximately 17% of trailing 12-months revenue.

Our continued focus on free cash flow has allowed us to maintain liquidity at a healthy level, our first priority for capital allocation. In addition to funding our organic growth initiatives and other capital allocation priorities such as share repurchase, quarterly dividends and debt reduction.

We finished the first quarter with leverage ratios for gross and net debt at 2.9 times and 2.1 times respectively. While Dick shared our view on the full year, I wanted to provide some additional color on the second quarter.

Based on the strong market demand and seasonal pickup in volume for all of our businesses, we expect consolidated revenue of $600 million to $630 million in the second quarter.

Additionally, we expect the margin performance to improve in all of the business segments driven by higher volumes, improved labor efficiency and as more favorable pricing begins to take hold offsetting raw material cost increases. Overall, we expect incremental gross margins of 21% to 23%, sequentially.

In summary, we are very pleased with the company's overall strong performance in the first quarter, particularly, with a record first quarter revenue.

Despite material cost and labor headwinds, we generated solid levels of gross profit and operating income and we are well positioned with a record high backlog, a solid balance sheet, strong industry outlook for the full year ahead and beyond and our continued commitment to improve the business performance while focusing in growing shareholder value in everything we do.

With that, I'll turn the call over to Dick for some additional comments. .

Thanks, Jeff. As you all are aware, I'll be stepping down from my role as CEO at the end of the day on Friday, June 1. So this is my final earnings call.

I wanted to take this opportunity to express my sincere thanks to each of our analysts and all of our investors for your support these past 16 years of my time here at Wabash National and most notably, for these past 11 plus years that I've served as CEO. It's been a privilege and honor to lead our company and to get to know so many of you.

Your support of me and of Wabash has been much appreciated. I also want you to know that the company and all of you will be in good hands come June 2, when Brent Yeagy takes over the reins, stepping in as our President and CEO.

He's a strong leader with a solid team ready to take Wabash to higher and higher levels of performance in the months and years ahead. With that, I'll turn the call back over to the operator and we'll take any questions. .

Thank you [Operator Instructions] Our first question is from Brad Delco of Stephens. Please go ahead..

Good morning, gentlemen. And Dick, congratulations on the fantastic job over the course of your career..

Hanks, Brad. I appreciate it..

Maybe first high level question, how do you think about how your position versus your competitors if we do see anything with - from a steel or aluminum perspective with the tariff discussion? Any thought on what incremental cost that may be for a trailer for you relative to your competitors?.

Brad, this is Brent. At this point, I wouldn't say that we are in a disadvantaged position in any way, shape or form. We generally believe that our risk management strategies are advanced as compared to the bulk of our competition.

We understand where our backlog has set and due to the nature of the customers and when they order, that tends to put us in an advantaged position relative to how tariffs are affecting us today and into the future.

I also think that due to the fact that we are the pricing leader within the industry, I think we're out ahead of our competition and driving pricing within the market which will just be advantageous for us not only in the back half of 2018, but definitely as we move into 2019..

Okay.

But when I think about -- there is one trailer manufacturer that's been -- seems like aggressively taking a lot of share and growing quite rapidly, do you feel like you're in a better position versus them based upon where they're located and maybe where they're sourcing some of their materials, maybe specifically, some of the composite materials?.

No, we understand that. I would say that if anything with the tariffs that are related to coil and some other actions that are taking place related to, we'll call it regulatory barriers that are being put, specifically on composite panels, we may actually be in an advantageous position going forward on that account. We... .

I just wanted to make sure I was thinking about that correctly..

Yes, absolutely. And then, the last thing I would say is that as we just executed in the market as a whole, relative to all of our competition but specifically to the one that, I think, you're referring to, we are sitting relatively well positioned in our competitive position across all the different competitors, specifically, that one.

And what we're seeing across the board is the beginning of pricing recovery as a result of our competition moving with us in the market..

Got you. And then, that probably leads me into, maybe, the second question for Jeff. So this is supposed to be the low watermark on CTP gross margins.

If I recall correctly, I thought you said margins should be closer to flat from fourth quarter, which were around 12.2%, this was 11.2%? What maybe was more of a headwind than you expected in the first quarter? And I know you guys commented a lot on why you think margins improved sequentially but if you can sort of maybe address what was -- what you think specifically you're going to do to -- I don't know, to see a sequential improvement and to the extent you can give us?.

Yes. Certainly, Brad. So let me -- first of all, my comment last quarter was we expect margins for CTP to be similar as they were in the fourth quarter. So we're -- I would characterize where we came out for the quarter is within my view of where similar is.

We certainly knew that, sequentially, volume was going to step down, so I'm not surprised that margin went from 12.2% to 11.2% from fourth quarter to first quarter. As we look ahead, we feel very, very confident that the volumes are going to pick up. We've seen that ramp up. We've seen the strong quote and order activity.

Our backlog has increased as a record high for the company, third highest first quarter level, overall. We know that some of the labor inefficiencies from bringing labor on in the first quarter is going to get efficient and more productive.

We feel confident that, that's going to help improve margins as we go through the quarter, in addition to the leverage effect from having higher volumes. And then, as we move through 2018, we do expect that pricing will continue to eat away at the material increases that we've seen up to this point.

And so that combination of factors is what leads us to feel good about the remainder of 2018, but certainly as we move into the second quarter..

Yes. Brad, this is Dick. I can't emphasize strongly enough how confident we are and how good we feel about the year as it progresses, going forward. With the actions that have been taken by the organization relative to pricing to offset some of the headwinds that we've seen on material costs.

And really driven significantly by the significant increase in demand as we progress through the year in relation to what we experienced in the first quarter is going to make a tremendous impact on both top line and bottom line for the organization..

That's why Jeff shared what we felt - we calculate as the incremental flow through margins, going forward. Just to give you some little bit more guidance on it for folks..

Mid 21% to 23%? So an incremental revenue between first and second quarter, we should expect 21% to 23% flow-through to gross profit dollars? Is that right? Is that how I interpret what you said?.

That is correct..

And then maybe just one other point of clarification.

When you say, raw material headwinds, are you talking about steel, aluminum, HDPE, wood or does that include components? Because I've always felt like the components were maybe more challenging for you guys to pass through, and that's where you could get sort of caught with some raw material pressure or material pressure? So I want to make sure I understand what you mean when you say raw material..

Generally, Brad, I think we use the more generic and expanded view that you said there which would include components in the definition of, when we say raw materials, unless we specifically call out one of the raw materials like steel or aluminum or something like that.

And I think in general, we look at both of those as raw material inputs going into the products..

Okay. I just wanted to make sure. Thanks, guys. Again, Dick congratulations..

Thanks, Brad..

Thank you. Our next question is from Steve Dyer of Craig-Hallum. Please go ahead..

Thanks. Good morning. My congratulations and good luck to you, Dick..

Thanks, Steve..

Just with respect to the pricing actions, it sounds like most of it has sort of been focused on recouping some of the raw material price increases.

As you look sort of into the next order season, later this fall, I know that's a little bit away but do you anticipate being able to take some price above and beyond just raw material just given the demand and the industry tightness?.

Yes, this is Dick. Steve, no. I tried to make that statement in my formal comments. But the actions that have been taken previously were mainly to address some repricing actions for backlog that was already in the books and planning to be built as we proceed through the current quarter and the rest of the year.

As new orders were coming up as opportunities, the teams have proactively gone and adjusted pricing to tie to what the market demand is out there now. So there has been multiple actions taken. So the $6 million that both Jeff and I quoted and maybe Brent had comments about it also, was specifically addressing the existing backlog at the time.

So any new opportunities that have come up and continue to come up are being priced consistent with what the strong market demand is. And as I stated in my comments, establishing a strong base for 2019 calendar year pricing, which would imply orders or quotes that are coming through and will be coming through that will affect the 2019 calendar year.

Brent, do you want to add to that?.

Yes, I would just say very plainly that the pricing actions that we have taken to date as well as we'll take into the future specifically, for any fourth quarter open production. And then as we move into 2019, have a very focused on and acting on taking additional margin plus recovering raw materials. And we're acting on that right now.

The market allows that to occur. There is no argument to that. And it's a very similar game plan that we used in 2015 that worked very well for us..

Yes, as I - this is Dick, again. As I have stated numerous times over the past several years, volume leads margin. So 2017 demand environment was softer than '15, '16. It did not present the kind of opportunities. In fact, there was pressure, downward pressure on pricing during that period.

What we have been seeing in the past several months now is a much stronger environment. So the volume has come and now the margin, or AKA [ph] pricing opportunities, follow.

And so we're in that same type of environment, a very similar environment that what we experienced as we were getting into the 2016 pricing season, which was the second half of 2015, and into 2016, which led to some very attractive margin opportunities then and it's very similar in nature today and those were the comments that Brent shared a little earlier.

.

Yes, that's helpful. I was going to say it reminds me of the 2015, '16 setup.

I guess, that brings up kind of the question of what kind of a -- the industry unit number is your guidance for this year based on because it seems to be some differing opinion between some of the forecasters and some of the manufacturers and the component manufacturers, as to sort of what the industry will bear this year in terms of a number?.

Yes, as we stated, you've got -- FTR is out there at 305,000 total units produced and ACT has recently come out with a 320,000 unit produce number. I should clarify for folks, ACT always would report in the past shipments, while FTR has consistently been forecasting production units.

ACT, a couple of months ago, shifted over to standardized production. So both ACT and FTR now report production, so they're in line there. What the challenge is, is can the supplier community meet those kind of demand requirements and that's the challenge that everyone knows.

We know, back in 2015 and '16 time frame, trying to meet the kind of demand that the industry had at that time was stressing the supplier community, and we're seeing some of those same challenges. Fortunately, Wabash is given, in many cases, preferential treatment, if you will, on supply.

So we have not seen as much of a challenge as some of the smaller players are contending with. But there can be interruptions when you get into this kind of strong overall demand environment. And that's what we're trying to allude to a little earlier.

Brent, you want to add to that?.

Yes, what I would add is I would bridge that with your first question. As Dick alluded to, with the supplier-related issues within the industry, demand could actually be in that 320 range. But production feels much more like the 305 number plus or minus 3,000 to 5,000 units, give or take.

And that's very similar to what the supply base was capable of doing during the 2015 time frame. Supply base hasn't added any substantial capacity during the last several years. And if anything, it's stressed even further with the added truck demand and record low unemployment or employment availability might be a better way of saying it.

So what we - what I think could be anticipated to a degree is that, that demand is going to flow into 2019 and allow for an improved environment relative to pricing during that period, just as there's a relative scarcity of production so....

Again, similar to - this is Dick, again. Again, similar to what we experienced in '15 and '16 as volume flowed into the following year when capacity was limited from a supplier community. .

Got it. And then lastly for me and I'll jump back in the queue. I know how much you guys love the cycle question, but it seems to be kind of a constant worry or pushback among investors.

We've had a pretty good run here, but it still seems like, I guess, like 2019 sets up to be an extremely favorable year, if for no other reason other than -- it seems like you guys are pretty much booked through this year. There is still sort of plenty of pent-up demand.

So any color just on sort of how you're feeling about, I guess CTP and Final Mile in particular over the next call it, 2, 3 years?.

That's a long perspective. Certainly in CTP, our views are consistent with what you just shared. We certainly believe 2019 will continue to be a strong year of demand for the CTP part of the business, the van part of the business.

On the Final Mile side, I still continue to strongly believe, as we've discussed in the past, it's a tremendous growth industry, e-commerce, Final Mile, home delivery, all of those factors driving tremendous growth for equipment, double-digit growth year-over-year. I may have shared in the last call maybe -- if I didn't, I will share it now.

Just as an example, Cyber Monday, this past year, ended up having year-over-year growth of 17.8%, that's a tremendous increase in folks getting more and more comfortable with ordering online and having those items delivered. And that's again, going back, that's what attracted us as we studied the markets, the emerging trends some years ago.

That's what ended up attracting us to get into the truck bodies space and then ultimately, attracted us to acquire the Supreme business to help take that to the next level and give us a presence in effectively now all classes of product that we can participate in, and continue to grow with it. .

Thanks, guys..

Thank you. Our next question is from Mike Baudendistel of Stifel. Please go ahead..

Thank you, and congratulations Dick. I just wanted to ask you - because the Final Mile segment is still a little new to us, I mean if you could talk a little bit about the margin trajectory, I mean -- I think Jeff said that it looks like those margins improved significantly over the course of the year.

But just how you think about sort of a normalized margin for that business..

Yes. Michael, this is Jeff. So we've certainly -- I mean, in the first two quarters, we've had that business. We've tried to report the -- obviously, the GAAP margins. But then, we also tried to adjust those for acquisition and integration costs that have been flowing through the P&L. Most of that has come through in the first two quarters.

So going forward, hopefully, it would be a little cleaner. We certainly see -- when Supreme was managing that business, the business operated at a gross margin that was north of 20%. And certainly, our view is that business will return to and should perform at that level going forward.

And so not saying that next quarter, it's going to be there, but this is a very strong quarter with the pickup in fleet season for the business, overall. And then obviously, longer term, as we grow the business and capture synergies, then we'll look for continuing to grow and expand the performance there. .

Yes and what I would echo, and then add to is, again, we'll see labor inefficiencies continue to reduce as we ramp up the business. We'll see purchasing synergies begin to flow through on a more substantial basis as we move through the year. Other manufacturing-related synergies will exceed implementation costs as we move forward throughout the year.

And we talked about being able to see that as we come into 2019. So we feel very positive that we'll see that point be in the margin as we move forward property throughout 2018. .

Great. Thank you. Just wanted to ask you also -- can you give us some sense of how many build slots are open for the remainder of the year in terms of dry vans and reefers, I mean, the industry data makes it seem like it's pretty close to full. And I know there is uncertainty related to suppliers and so forth.

But any thoughts there just to help us frame expectations for orders for the remainder of the year?.

What I would say is that the industry in general has pressure to begin to fill in the first quarter of 2019, as we sit here today.

We're working diligently to not only use the labor that is brought into the business to make it as efficient as possible, but we're also looking to create as many additional folk slots as we possibly can specifically in the second half of the year.

Time will tell as to either one, we can execute on that and two, can the supply base actually meet the increased expectations? And it's yet to be determined what the constraint will be but I think, we've already alluded to our largest concern is the supply base and we'll work to that constraint, manage cost and capacity accordingly.

Safe to say though, the entire industry is focused on 2019 right now as to filling in that backlog..

Okay.

So you've opened -- if I'm interpreting this correctly, you're opening the order books for 2019 earlier in a year than you typically would?.

I think we're seeing pressures across the industry. Some competitors are moving forward with that. Wabash is taking a much more measured approach as we manage our customer base, and that's really all I want to say to that today..

Got it. That’s all I have. Thank you..

Thanks, Michael..

Thank you. And our last question is from Mike Shlisky of Seaport Global. Please go ahead..

Good morning, guys. I wanted to ask about the repricing actions. I mean, I imagine those were some very tough conversations to have with some of your customers.

I was kind of wondering if you can give me a sense of how they took those kinds of requests and whether that's been an action that you think other companies have taken in the industry, that help soften the blow with Wabash?.

Well, what I can tell you first, is that Wabash led and first out of the gate in any level of pricing action relative to new trailer quoting as well as repricing any backlog that was in the system. Some of our competition has followed suit accordingly. As you alluded to, some of those conversations are not the most pleasant in the world.

But I think, what we have done and have shown the fruits of building relationships, deep relationships, with some of the most strategic customers in the industry. We're very transparent with them and we've been having this conversation leading up to this moment.

So we had a high degree of success in passing along those costs once we were able to make that argument, and that's reflected in the number that we have shared as well as the actions that are -- we're continuing to take as we fill in the backlog in '18 and move into 2019..

Okay. I also wanted to ask about the overtime cost you've had and additional labor cost here. If I think about other employers in the Lafayette area, other big employers that are industrial, I always got the sense that they're actually having a very solid year themselves, some of the bigger machinery and material makers over there.

How confident are you that there is an appropriate number of people to build all of your trailers for 2018, given that the other people out there in the town are actually seeing some pretty strong trends themselves?.

That's a great question. And first, let me remind everyone that we have operations all across the country that we're executing to add labor; we're ramping effectively all locations at this point.

In our previous call, we talked about benefit and compensation actions that we took at the end of 2017 to set up our ability to attract and retain additional labor in anticipation of a strong environment.

We are very pleased in our execution as to the vast majority of labor required to meet the demand requirements that we see for 2018 and 2019 are substantially already in place and our levels of retainment had generally met our expectations as we sit here today.

While there's some additional labor that we'll add in the second quarter, we are substantially complete in that labor influx. So we feel pretty good in where we sit right now..

This is Dick. Our HR staffing and recruiting team have done an outstanding job of putting a really structured process in place to improve the ability to identify, interview, vet and then actually extend offers in a very efficient fashion and we've been very successful with that over the past several months..

Okay. And then, I wanted to also ask about the reefer business. You did mention that you had a lower average selling price because of a few reefers in the quarter. But this seems very strong orders in that category. There seems to be a secular shift going on to more fresh food deliveries across the U.S.

So I was kind of curious, is your backlog a little bit more skewed toward that category going forward? And can you give us a sense as to how that might work for 2019? If that keeps on going throughout next year, with some of your new products gotten kind of coming out there, is there a chance we would see some good share gains starting in 2019?.

So let me impact that question a little bit. First, the ASP impact that we saw in the first quarter was just relative to some transient mix issues with reefer volume compared year-over-year was somewhat down.

Overall, we're in a position where we think that we -- what we know that we believe we're picking up market share in specifically, refrigerated vans in 2018. That's reflected in our longer-term guidance.

Specifically, related to the phenomenon with more retail delivery of food-related products, that's not just a van-related issue that's probably more primarily focused on our S&P or Final Mile products group, which is seeing a significant amount of pressure for increased demand for our refrigerated-related product.

And we're acting on that and that's part of our longer-term growth strategy. Coupled with the deployment of molded structural composite technology, which we think provides substantial value for those entering into that retail delivery space as well as enhanced operating performance for those that are already in it.

So we're clearly positioning for that and yes, we should start to see some relative impact to revenue growth in 2019 and beyond relative to our ability to serve that market..

I was just going to say, Michael. Yes, this is Jeff. The reefer volume was just down slightly Q1 over the prior year. It's within normal variation and as Brent said, we expect our reefer volume and market share to improve this year. So it's nothing to be concerned about. .

Super.

And just so I know, if you sell one of those units, is the actual chiller [ph] unit a pass-through to you? Or do you -- can you make any profit on that as you deliver it?.

We typically purchase the refrigeration unit directly from one of those companies that supply those. So on the majority of the equipment we sell, we sell the trailer and then the refrigeration unit is purchased by the customer from one of the other suppliers.

Occasionally, we will source a refrigeration unit and that's generally a pass-through, we charge for the handling and installation of the equipment but there is not a significant mark-up on that..

Okay, got it. Perfect. Thank you. And Dick, all the best. Thank you..

Thanks, Mike..

Thank you I will now turn the call back over to Dick Giromini for closing remarks..

Well, thank you for your interest in and support of Wabash National Corporation. Brent and Jeff certainly look forward to speaking with all of you again on our next call. Thanks again to all of you for your support of me. It's been a great run and I have absolutely enjoyed every moment of it. Thank you..

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