Wabash National Corp posted record second-quarter net sales, boosted by strong demand for trailer and a best-ever quarter for the Final Mile business and the recently acquired Supreme Industries. And, as always, the publicly traded trailer manufacturer’s earnings report and subsequent discussions with investment analysts provide broad insight into the transportation equipment market, including operational strategies and outlooks.
First, the basics from the Wabash P&L:
• Q2 net sales of $613 million, a 41% increase from prior year
• Gross profit and operating income increased 26% and 19%, respectively
• Backlog increased 51% to $1.2 billion
• Full-year 2018 guidance for new trailer shipments of 60,000 to 62,000 trailers
The results reflect strong growth in all three Wabash strategic business segments (Commercial Trailer Products, Diversified Products, and Final Mile Products), explained CEO Brent Yeagy—and he expects an even stronger second half of 2018.
As for performance, Wabash shipped 16,300 trailers in the quarter, as forecast. Truck body shipments were strong in the quarter due to expected seasonal demand from large customers, which is expected to subside in the third quarter.
Backlog likewise remained seasonally strong at the end of the second quarter, finishing at $1.2 billion. The backlog increased 51% year-over-year with the addition of Supreme, and was up 35% excluding the impact Final Mile Products or Supreme.
The “top line” results also bode well for 2019. When it comes to the bottom line, however, Wabash continues to work through many of the same challenges from the first quarter.
“This includes material cost inflation driven by trade and tariff activity out of Washington, a continued tight labor market driven by an 18-year low in national unemployment, and supplier constraints for key materials and components leading to supply disruptions,” Yeagy said. “As trailer rates continue to settle across the industry we should see broader improvement in supply stability as we move through the balance of 2018. As we exit the mid-summer period labor pressure will historically subside.”
To address these “headwinds,” Wabash is offsetting the tariff-related inflation by “aggressively pricing the impact” into products, the results of which will impact the fourth quarter and continue into 2019.
“The updates from Washington regarding trade and tariffs seem to be changing weekly, if not more frequently. We are actively monitoring these events and the possible effects on our business as this plays out,” Yeagy said.
He noted that the majority of Wabash’s materials and components are sourced domestically, so the direct impact to tariffs to Wabash is not significant. However, the tariffs have caused domestic cost inflation, specifically for steel and aluminum, which impacts the 30% of materials and components Wabash is not able to hedge.
Indeed, with the order book already open for 2019, Wabash is taking steps to manage pricing this volatility, explained Senior Vice President and CFO Jeff Taylor.
“We are absolutely, in talking with our direct customers, looking at adding additional risk protection frameworks in terms of material inflation, both in the period between quote and hedging, as well as various mechanisms to recover inflationary pressures throughout the life of the bill,” Taylor said. “Those discussions are ongoing right now. We believe our competitors are also beginning to follow suit and having similar conversations with customers as well, as they look to negotiate what we’ll call a challenging inflationary environment. Time will tell, but we think that the market is setting up to allow that to occur.”
In terms of absolute pricing, Taylor declined to provide “hard numbers,” but added that Wabash is looking at not only covering the material inflation costs, but is also looking to recover margin—and is pricing accordingly.
Trailer demand and orders have remained strong for the past several months, continuing the momentum from the first quarter and supporting a “robust trailer outlook” for the back half of 2018 and for 2019, Yeagy noted. Truck body demand also remains strong as well with year-over-year improvement in backlog, “reinforcing our belief in the growing secular demand for Final Mile and Middle Mile goods movement supported by increasing e-commerce and home delivery activity.”
“Customer sentiment is bullish, really across the board,” Yeagy said.
At the macro level, GDP remains strong, consumer confidence is high and housing starts continue to climb, Yeagy noted. At a micro level, carrier profitability is strong, contract and spot rates for carriers are at elevated levels, truck tonnage is at or near record levels, load availability and truck utilization are off the charts and quote and order activity are on a path to set all-time records.
Likewise, industry forecasters are “extremely bullish” in their views of the overall demand for trailer equipment, and the trailer demand outlook for 2019 continues to be strong. ACT and FTR forecast trailer production next year to be 298,200 units and 300,000 units, respectively.
“While there isn’t a lot of clarity beyond 2019, ACT and FTR continue to forecast strong demand above replacement levels for the foreseeable future,” Yeagy said. “Given the strong market conditions, there are few headwinds that could impact 2018 outlook and constrain the industry from producing at the current forecasted levels. Specifically, we expect the challenges experienced in Q2—distressed supply base, material cost and inflation, and a tightening labor market—to continue throughout the remainder of 2018.”
Final Mile products established a quarterly record for revenue of $121 million, the best in the 40-year history of Supreme, Yeagy noted.
“We clearly see the Final Mile business segment as the source of both top- and bottom-line growth as we align the business with the unquestionable market trends and changes in logistics models that are occurring within e-commerce, retail, and home delivery markets,” he said.
To that end, Yeagy explained that Wabash is taking a “more focused and deliberate approach” to the Supreme integration than in previous acquisitions, and remains on track to achieve the target of $20 million in annual run-rate synergies within five years.
“As planned, we are investing significant capital into the business. In fact, we have already committed $5 million of capital projects to improve manufacturing capability,” Yeagy said. “We will see that investment increased throughout 2018 and beyond as we have the ability to further streamline, de-bottleneck, and improve process capability to enhance profitability and further grow the business. We’re already seeing the benefit many areas as witnessed by record output in the second quarter, and more benefits will be realized as the productivity projects are completed.”
Regarding the lingering uncertainty over whether trailers will be removed from the EPA’s Phase 2 greenhouse gas rule, Yeagy reported that Wabash products already comply with the first round of requirements and the company also has products in the pipeline to meet later, more strict requirements. So whether or not the rule is changed “would not affect that in any material way.”
“Whether there is a greenhouse gas rule or not, we’re going to market products that add value to customers,” Yeagy said. “While we may not have the regulatory push in terms of being a market driver, we will still look to add those value-added features and sell those value-added features to those customers that demand them.”
As for product development, Yeagy reported the company has completed the first phase of upgrading its manufacturing operation for DuraPlate Cell Core panel production, and continues to move forward with trailer and truck body commercialization efforts in 2019. Wabash Honeycomb Core technology is in the early stages of development and proceeding “as expected,” with pilot quantities of the material scheduled for product validation and testing in 2019.
Wabash also continues to move forward on the commercialization of its molded structural composite technology in both refrigerated vans and refrigerated truck bodies, on track to have 100 MSC refrigerated van trailers in active testing in 2018. The MSC truck body initiative “has progressed faster than originally expected” with over 100 units in the field “and gaining momentum,” Yeagy added. He also reported Wabash has allocated additional resources to speed the development and commercialization of both product lines.