Wabash National Corporation
Q4 2015 Earnings Call Transcript

Published: 3 Feb 2016

[Operator:]

Welcome to the Q4 2015 Wabash National Earnings Conference Call. My name is John. I’ll be your operator for today’s call. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded now. And I’ll turn the call over to Mike Pettit.

[Michael Pettit:]

Thank you, John, and good morning. Welcome everyone to the Wabash National Corporation 2015 fourth quarter and full-year earnings call. This is Mike Pettit, Vice President of Finance and Investor Relations. Following this introduction, you’ll hear from Dick Giromini, President and Chief Executive Officer of Wabash National on the highlights of 2015 and the fourth quarter, the current operating environment and our outlook for 2016. After Dick, Jeff Taylor, our Chief Financial Officer, will provide a detailed description of our financial results. At the conclusion of the prepared remarks, we’ll open the call for questions from the listening audience. Before we begin, I’d like to cover two brief items. First, please note that this call is being recorded. Second, as with all of these types of presentations, this morning’s call contains certain forward-looking information including statements about the company’s prospects, the industry outlook, backlog information, financial conditions and other matters. As you know, actual results could differ materially than those projected in the forward-looking statements. These statements should be viewed via the cautionary statements and risk factors set forth from time to time in the company’s filings with the Securities and Exchange Commission. With that, it’s my pleasure to turn the call over to Dick Giromini, President and CEO.

[Richard Giromini:]

Thanks, Mike. I’ll begin by saying that we are obviously extremely pleased with the company’s 2015 performance, as it marked the sixth consecutive year of revenue and operating income growth and the fourth consecutive year of record revenue and profitability. 2015 was a year of outstanding execution and of setting the stage for the future with some exciting growth initiatives. Before addressing financial results in detail, I’d like to highlight a few initiatives that contributed to another record-setting year. 2015 provided a year with a strong overall demand environment, as industry shipments set a record and finished 14% above 2014 levels. True to their word, our Commercial Trailer Products business led the way by exhibiting their ability to remain laser-focused on the three main near-term drivers of success for their business

[Jeffery Taylor:]

Thanks, Dick, and good morning, everyone. Let me start by saying, that we are obviously pleased with the fourth quarter and full year results. All areas of the business contributed to achieving the financial records, which Dick previously mentioned. Our results truly highlight the high level of execution we have demonstrated over the past several years, but especially during the last five quarters, as well as the progress we’ve made to grow and diversify the company. Before discussing the financial results for the quarter and full year, I’d like to comment on our recent capital allocation activities. In the fourth quarter, we purchased 1.6 million shares for $18.8 million and completed the $60 million share repurchase authorization approved by our Board in December 2014. And we are pleased to announce another 100 million two-year share repurchase program. These actions not only highlight our commitment to increasing shareholder value through return of capital, but they also demonstrate our continued confidence that Wabash has a sustainable earnings stream and future cash flows that make these activities possible. In keeping to our balanced approach to capital allocation, we also entered into commitments to repurchase 54 million of face value of convertible notes reducing our total indebtedness, while maintaining ample liquidity to fund all of our capital allocation priorities. We feel these decisions will reward our shareholders and de-risk our business, all while maintaining flexibility and sufficient resources to proactively grow our business into new and existing markets, both organically and strategically. With that, let’s turn to the financial results. On a consolidated basis revenue for the quarter was $544 million, an increase of $16.2 million or 3% compared to the fourth quarter of last year. This represents an all-time record for quarterly consolidated revenue. This year-over-year improvement in revenue is attributable to improvements in our Commercial Trailer Products segment. Consolidated new trailer shipments were 16,950 units during the fourth quarter, exceeding our trailer guidance on stronger-than-expected customer pickups supported by favorable weather conditions. Sequentially, consolidated revenue increased $12 million or 2%, driven by higher new trailer shipments in our Commercial Trailer Products segment. CTP net sales were $413 million, which represents a $35 million or 9% increase year-over-year. This growth was driven by an increase in new trailer shipments, 16,100 trailers shipped in the fourth quarter of 2015 compared to 15,750 trailers shipped in the prior-year period as well as increases in selling prices. New trailer average selling price or ASP increased by over $1,300 per unit. The ASP change was attributed to customer and product mix, including a smaller percentage of converter dollies which carry a lower ASP. On a sequential basis, net sales for Commercial Trailer Products increased $26 million or 7% on 600 additional new trailer shipments. Diversified Products’ net sales of $106 million decreased on a year-over-year basis by $17 million and sequentially by $14 million, primarily related to fewer tank trailer shipments after a very strong third quarter. Sales for our Retail segment at $37 million decreased year over year and sequentially by 23% and 12% respectively. Retail revenues were negatively impacted by the new trailer sales on lower supply and partially offset by increases in parts and service revenue. Looking at our various product lines, new trailer sales increased $13 million or 3% from the prior year on 16,950 units. This year-over-year increase was driven primarily by higher van and platform trailer shipments as well as improved pricing and mix within the Commercial Trailer Products segment. Components, parts and service revenue was $39 million in the quarter, an increase of $3 million or 9% from a year ago, driven on increased sales in Wabash Composites and Retail. Equipment and other revenue on a year-over-year basis decreased by $3 million to $41 million in the quarter. This decrease was primarily driven by lower sales in the process systems business unit within Diversified Products. Finally, used trailer revenue came in at approximately $10 million on 550 units, an increase $3 million from the same quarter a year ago. Used trailer sales remained lower than historical norms, due to continued tight supply in the used trailer market. In terms of operating results, consolidated gross profit for the quarter of $87.8 million or 16.2% of sales, which represents $25.1 million or 430 basis-point increase year over year. The increase in gross profit and gross margin was primarily driven by improved margins in Commercial Trailer Products, but reflect strong execution and solid margins in all of our business segments. On a full-year basis, gross profit for 2015 was $303.4 million or 15% of revenue, an increase of $70.8 million and 250 basis points. This significant year-over-year improvement truly highlights the progress we’ve made in executing our plan to grow margin through improved pricing, operational efficiency and supply chain optimization. With that, let’s look at the segments in more detail. Commercial Trailer Products gross profit improved by $27.7 million in the fourth quarter or 90% compared to the prior-year period, driven by higher new trailer shipments and improved margin profile. Gross margin increased 600 basis points compared to the prior-year period, due to pricing gains as well as continued improvements in our manufacturing cost. Production during the quarter was 14,250 units, up approximately 800 units compared to the prior-year quarter. Sequentially, gross margin increased by 60 basis points or $6 million, primarily as a result of increased shipments and improved pricing. On a full-year basis, Commercial Trailer Products gross profit increased $82 million or 430 basis points on a $215 million increase in revenue, which represents a 38% flow-through margin. Diversified Products’ gross profit decreased $1.6 million in the fourth quarter or 6% compared to the prior-year period, driven by a decrease in new trailer shipments by approximately 250 units. Gross margins, however, improved by 200 basis points, highlighting the focus and effort from the DPG team to maintain margins in a demand environment exhibiting headwinds in some product areas. Sequentially, gross profit was down slightly by 40 basis points or $3.9 million, primarily as a result of fewer builds in the fourth quarter versus third quarter comparisons. For the full year, gross profit from this segment was $98.8 million, a decrease of $4.5 million; however, gross margin improved by 90 basis points to 23.1%, reflecting solid operating performance throughout 2015. Lastly, the Retail segment’s gross profit in the quarter decreased $0.3 million, however, gross margin improved by 210 basis points year over year, driven by a growing contribution from our parts and service sales and customer site service locations. Sequentially, gross profit declined $0.9 million and gross margin declined by 70 basis points on lower revenue. For the full year, gross profit is down $0.9 million, largely due to new trailer shipments and was partially offset by increased profit from parts and service. On a consolidated basis for the fourth quarter, the company generated operating income of $54.7 million, an increase of $20.5 million or 60% year over year. At 10.1% of sales, operating margin was 360 basis points higher than the prior year’s performance and exceeding our 10% corporate objective, driven primarily by significant improvements in CTP. Sequentially, operating income was lower by $1.7 million, primarily driven by higher seasonal cost experienced in the fourth quarter as well as the impact of $1.1 million one-time non-cash impairment charge from intangibles associated with discontinued trade names in the DPG segment. For the year, operating income was $180.4 million, an increase of $58 million or 47%. This represents a new record for operating income and demonstrates the improvements the company has achieved in the core trailer business as well as the benefit of a more diverse set of businesses, products and markets. Selling, general and administrative, or SG&A, excluding amortization, for the quarter was $26.8 million or 4.9% of revenue. SG&A finished the year at 5% of revenue and was consistent with our guidance for 2015. For 2016, SG&A is again expected to be approximately 5% of revenue. Intangible amortization for the quarter was $5.3 million, essentially flat with the prior quarter and down about $0.2 million from prior year periods. Full year intangible amortization for 2016 is expected to be approximately $20 million. Interest expense for the fourth quarter consists primarily of borrowing costs totaling approximately $4.8 million, a year-over-year decrease of $0.5 million, primarily due to the refinancing of our term loan and revolving credit facilities. $1.2 million of our reported interest expense is non-cash and primarily relates to the accretion charges associated with the convertible notes. The commitments made to repurchase $54 million in face value of convertible notes will effectively lower our interest expense, including a portion of the non-cash accretion expense by approximately $3.5 million in 2016 to approximately $16 million for the year. We recognized income tax expense of $16.6 million in the fourth quarter. The effective tax rate for the quarter was 33.2%, lower than expected, largely due to the permanent extension of R&D tax credits approved by Congress in December, and bringing our full year tax rate to 36.1%, slightly below our prior guidance. We estimate that the full-year 2016 tax rate will be approximately 37% or slightly below. Finally, for the quarter net income was $33.3 million or $0.50 per diluted share. On a non-GAAP adjusted basis, after adjusting for expenses related to the impairment of intangibles and early extinguishment of debt, net income was $34.1 million or $0.51 per diluted share. In comparison, adjusted earnings for the fourth quarter 2014 were $19.1 million and $0.27 per diluted share, representing 89% earnings per share growth year over year. For the full year, the company reported net income of $104.3 million or $1.50 per diluted share for 2015. On a non-GAAP adjusted basis, after adjusting for the gains related to the transition of the company’s former retail branch locations, partially offset by expenses related to the early extinguishment of debt and impairment of intangibles, net income was $103.4 million or $1.49 per diluted share as compared to $63 million or $0.89 per diluted share in 2014, a year-over-year improvement of 67% for adjusted earnings per share. In addition, operating EBITDA for the fourth quarter was $68.6 million, a year-over-year increase of $22.5 million or 49%. Sequentially, operating EBITDA increased slightly by $0.6 million. For the full year, operating EBITDA reached record levels for the company, at $229.5 million, a 36% increase over 2014. With that, let’s move to the balance sheet and liquidity, net working capital increased by $22 million in the fourth quarter, primarily due to an increase in accounts receivable, as we saw very strong shipments in the last two weeks of the year. We expect net working capital to be flat to down slightly in 2016. Capital spending was $8.3 million in the fourth quarter, and $21 million or 1% of revenue for the full year, which was slightly below our expectations, largely due to project timing. We continue to be very excited about our pipeline of productivity and growth projects that are contributing to our expanding margins. In 2015, we completed productivity projects that are expected to reduce future cost by approximately $5 million annually. For 2016, we expect full-year capital spending to be between $25 million to $30 million. The higher level of capital spending reflects a robust pipeline of growth and productivity projects, which are expected to produce a healthy return as well as support growth of the top and bottom line. Our strong free cash flow allowed us to maintain adequate liquidity, our top priority for capital allocation, in addition to funding our organic growth initiatives, and capital allocation priorities. And liquidity or cash plus available borrowings, as of December 31, was $348 million or 17% of revenue; an increase of $58 million from prior-year level. Our leverage ratios for gross and net debt are 1.4 times and 0.6 times respectively. In summary, we are very pleased with the company’s strong performance for the fourth quarter and the full year. We established new company records for full-year revenue, gross profit and margin, operating income and margin, as well as operating EBITDA. We further strengthened our balance sheet during the year by increasing liquidity, reducing debt and decreasing our leverage, in addition to being overall good stewards of the company’s capital and returning capital to shareholders via stock buyback. As we enter 2016, the overall business remains strong; we are well positioned to start the year. We have a very strong backlog of $1.2 billion, which is approximately $100 million in this time last year. Industry forecasters are both projecting strong demand, significantly above replacement levels in 2016 and beyond. We believe that the core trailer business still has significant runway ahead and potentially the strongest and longest trailer cycle the industry has experienced. Notably, we also expect to see higher revenue growth rates from our non-trailer product lines including truck bodies, Wabash Composites, and parts and service. These organic growth initiatives highlight our strategy to further grow and diversify outside of dry vans. Thank you. And, I’ll now turn the call back to John and we will take any questions that you have.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Alex Potter from Piper Jaffray.

[Alexander Potter:]

Yes. Hi, guys. I was wondering if you could comment a little bit, first of all on additional capacity coming online elsewhere in the trailer industry, kind of the timing of that, the expected impact of that, whether you think that might impact pricing. Just heard rumbling throughout, I guess, the supply chain that capacity might be increasing. I was wondering if you could comment.

[Richard Giromini:]

Yes. There is a - there are four active capacity increase initiatives that are going on competitively. One of those is in operation that will be going in for refrigerated trailers in Mexico, and then the balance are for dry van equipment. So utility has a facility that they are putting in place in Mexico. Great Dane is taking a facility, converting it over to create some additional dry van capacity. Vanguard started late last year, with a groundbreaking, to put a facility in Georgia, to build van trailers, dry van trailers. And Hyundai has made some expansions in Mexico to their operations. All-in, we’ve heard varying estimates ourselves, anywhere from a total capacity addition to the industry of anywhere between 30,000 units to as high some estimates claiming 50,000. I think the number will be little bit low that based on just what we’ve heard out there. It’s important to note that prior to the most recent recession, there were about - as we transitioned through the recession there were about 50,000 units of capacity effectively removed from the industry. So it’s - I look at it saying, okay, it’s going to be a little bit more like what we experienced from an environment, a competitive environment, prior to the recession than what we experienced since the recession. So based on our estimates and what we know to-date, the total capacity currently in industry is around 300,000 units. And I think the industry is stretched to be able to do those. An excessive amount of overtime was taken on across the industry this past year to produce the 310,000 to 315,000 units are sold that were produced this past year, so effectively 300,000 or less is the true five-day capacity in the industry. This will bring it up into that 332,000 to as high as potentially 350,000, which would about equal what we faced prior to the downturn. So that’s about where it’s at. We don’t expect to see any impact from the additional capacity until we would get to later part of the year, as some of these starts to ramp up. And probably more of an impact for 2017 market order season will probably start to reflect some of that as we see what the impact is.

[Alexander Potter:]

Okay. Very good, that’s really helpful. So, I guess, between now and then, it sounds like we should be pretty safe, assuming these pretty healthy pricing levels for the trailers that you’ve been - in CTP that you’ve been getting of the last couple of quarters.

[Richard Giromini:]

Yes. We feel very good about where we are at. The majority - in my comments, the majority of the $1.2 billion of backlog sits in the CTP business. So the backlog is very solid, feedback we get from customers has no indications of any pullback by customers, no indications of any intention to reduce or cancel. In fact, quite the opposite, we have had a number of customers already and are only one month into the calendar year. We’ve had a number of customers come back and indicate that they will be needing additional equipment this year. So they’re trying to get those - that word out to our folks early, because they don’t want to lose what remaining available slots may be available as we progress into the latter part of the year. So we’re hearing similar kind of stories within CTP that we are hearing from customers at this time last year, about actually needing additional equipment. So we don’t see any indication on the part of customers to do any kind of pull-back within the Commercial Trailer Products side. And so pricing is solid. So we expect excellent margin performance by the business throughout the year.

[Alexander Potter:]

Okay. Very good. Thanks a lot, guys.

[Operator:]

Next question is from John Mims from FBR Capital Markets.

[John Mims:]

Hey, good morning, guys. Thanks.

[Richard Giromini:]

Hey, Jeff.

[John Mims:]

So, Dick, could you walk through - I missed a little bit there. Could you walk through the details of the road construction in Lafayette and the headwinds there?

[Richard Giromini:]

Sure.

[John Mims:]

I just want to make sure I picked that up.

[Richard Giromini:]

Yes. That’s a great question, John. We have been having conversations with the city for quite some time as they have been looking at highway improvements throughout the area. And it is now becoming our turn to feel some impact from what’s going to happen. So the main highway that travels right in front of our main dry van manufacturing facilities will begin to be impacted later this quarter as they release and get started with their contractor to improve the road systems, the road - the highway both north and southbound going in front of the facility. And it will impact the crossroads also going through. So there’s some rerouting that is being planned. We are working closely with the city to assure that we have good access and egress from the property. But even with all the best of planning and dialogue there’s going to be some level of disruption as they change from lane to lane and change direction of traffic and go from two lanes down to one lane or four lanes down to two lanes. So we have built into our plan some disruption and that’s what my comments were all about. And that will start later this quarter and progress throughout the balance of the year. So the 3,000 number is an upside number, upside being maximum, that we anticipate as far as how many units that we could have produced that we will not produce, because we will be taking some downtime in the middle of the year as there’s some highway transitioning work that needs to be done, which will inhibit the ability to access the highway for a short period. So there’s some of that - those assumptions in our plan. So we’re trying to be, let’s say, as conservative as we can on the commitments that we are making to customers. So we’re just not selling out certain slots during certain part of the year to anticipate that. We intend to continue to work as closely with the city on the planning to try and mitigate as much of that. So potentially could be an upside to it, but we want to make sure that we were being prudent with our planning, so that we don’t send a wrong message to the investment community, but importantly, that we don’t commit to customers and not be able to deliver. Something we prided ourselves on is doing what we say we’re going to do, and that’s what we built the plan that way.

[John Mims:]

Sure. That’s really helpful. Thanks. And I got the 13,000 to 14,000 shipments for first quarter. But did you give a full-year number with - including the 3,000 kind of reduction?

[Richard Giromini:]

Yes. So the - yes, just to clarify, the total full-year trailer shipment number is 60,000 to 62,000 trailers.

[John Mims:]

Okay. Okay, yes. Thanks. I’m not sure how I missed that. Perfect. Now, that’s helpful. And on the margin improvement and how this - if you’re kind of flat, maybe slightly down from a shipment standpoint, but the EPS guidance is ticking up and it’s kind of above where people were expecting. How much of the margin improvement is from continued pricing versus from buying better from this kind of favorable commodity market versus just pure operational improvements?

[Richard Giromini:]

Well, it’s a mix of all of the above, John. As we - those are three key areas of focus for us. The team has done a great job of pushing on the pricing front to get the proper value for our product. So that’s reflected in the performance that we’ve been able to deliver throughout 2014 and 2015, and reflected in our backlog for 2016. That’s stable. That’s already locked in and that’s a significant part of that $1.2 billion of backlog that we talk about. But there’s no question that a portion of that is being able to retain margin associated with a more favorable commodities market. So there is the material impact that is reflected in our projections. And then, of course, the great work that’s continuing to be done on the factory floor with productivity and velocity improvement initiatives. And that’s were a good portion of our CapEx investment has been made over the last couple of years, and again, plan for this year to continue that momentum, and continue to optimize productivity, and get as much out of the operations we can with current staffing and ship staff levels.

[John Mims:]

Right. Okay. Good. That’s helpful. Then, one last one, and I’ll turn it over. The $100 million buyback, I think it’s a great signal. It’s a great use of cash. Historically, as you have - as we’ve talked about buybacks and whatnot, you’ve put your first priority towards M&A or the potential to expand through acquisition and continue to diversify. This big step up in the buyback, is that is a signal that those - there’s not - those opportunities aren’t quite as attractive as maybe they were a couple years ago earlier in the cycle or is it more of a function of you’ve got more cash than you know what to do with, and you can serve both buckets?

[Richard Giromini:]

Well, I wouldn’t frame it exactly as you did, but it’s more of the latter, John. We are very confident in what we’ve done with the business and where we’re going with the business. Two or three years ago, we certainly weren’t generating the kind of performance in the business that would end up generating the kind of cash that we have to work with today. As a result of the success we’ve had, we’ve been able to aggressively reduce the debt load that we have in the business and still generating additional cash over and above that which gives us more flexibility to do more things with the business. So we have not backed off on our interest in looking at acquisitions that make sense. I’ve said repeatedly in the past that, we will continue to be strategic in our growth initiatives, but selective. And that meaning that, we will look at a lot of opportunities to add to the business, but we’re not going to acquire for acquisition sake or diversify for diversification sake. It’s all going to be done that make sense to continue to increase value for shareholders with those actions. In the meantime, we have opportunities because of the amount of cash that we have been generating to do other things like share repurchase that will reward shareholders in the near-term as we go forward, as we continue to evaluate other growth opportunities, whether they’re organic growth opportunities like our entry into the truck body markets which we believe will provide significant growth opportunity and profit contribution for the business as we proceed over the next two, three, four years, and also in the form of share repurchase. So we just have a lot more flexibility to do more at this time than we could have done two or three years ago.

[John Mims:]

Yes, it makes sense.

[Jeffery Taylor:]

Yes, and, John, this is Jeff. Just said differently and to echo Dick’s comments there, I mean, we’re very pleased with the allocation of capital that we did in 2015. In terms of the share buyback, we did the full $60 million. So from an authorization perspective, it’s a step up. We were previously authorized for $60 million over two years. The new authorization is a $100 million over two year. But we did complete the full $60 million in 2015, and so if you just flat line the $150 million over two years, it’s relatively flat and consistent. We also want to maintain the balanced approach we’ve taken and continue to pay down some debt which we - you saw us do that in the fourth quarter. We executed $19 million purchase of convertible notes with commitments for another $35 million to be completed here early in 2016. But we feel like we really have the capacity to take advantage of all avenues of capital deployment including strategic acquisition when we find the right opportunity.

[John Mims:]

Sure. That makes sense. So congratulations on the good quarter and I’ll turn it over. Thanks.

[Richard Giromini:]

Thanks, John.

[Jeffery Taylor:]

Thank you.

[Operator:]

Next question is from Mike Shlisky from Seaport Global.

[Michael Shlisky:]

Hey, guys, good morning. I don’t want to get too far ahead of myself, but I do want to ask a question about 2017. Some of the forecasts from ACT and FTR do have a decline in the market in 2017. And, I guess, my question is, does some of your organic growth opportunities, your truck body business et cetera, does some of the growth that you’ll be getting from that, do you think that can partially or even fully offset any kind of a broad trailer [indiscernible] decline we see in 2017 or is it still going to be a little bit in the early stages by that point?

[Richard Giromini:]

Well, there is no question that we will benefit from a partial offset of any deterioration in demand that may occur in 2017. I think it’s too early to state that there will be a significant deterioration. The resiliency of the trailer market has already exceeded what most forecasters or prognosticators would have said, analysts, so on and so forth, about what the demand environment would have been for 2015 and what the demand environment has now showing its head for 2016. So it’s a little bit early to call it the end for 2017. At some point, obviously, if we keep calling the end, it’s going to happen, so somebody is going to be able to say that they were first to call the slowdown in trailer. But there is clearly a dislocation or disconnect between Class 8 truck demand and trailer demand, that supports that industry. And based on my comments earlier, based on discussions we have with customers, they clearly have intentions to continue to address the aging fleets, trailer fleets that they have. They have excessively aged equipment. I commented in my formal comments that there remains more trailers in the system that exceed 15-years-old than there were prior to the downturn. So we’ve not even caught back up to the level of age profile that existed prior to the downturn. So there’s still pent up demand that needs to be addressed in the trailer industry. I don’t know that that is going to all be recovered in 2016. I think there’s more likes to it. Even if we look at what the ACT Research projections are, while they decrease in 2017, 2018, 2019. They are still at very substantial levels of the 260,000 trailer units a year, which are historically very, very strong demand levels for the industry. So we’ll see, but the organic place we have getting into supporting needs in that truck-body space that services more in the Class 5 through 7 market is clearly going to provide some level of offset to what may be happening in the Class 8 space.

[Michael Shlisky:]

And just to be clear, as that business kind of starts to ramp, hopefully, by 2017 that should be equivalent or higher margin business than your core dry van market, correct?

[Richard Giromini:]

Yes. That’s a good assumption.

[Michael Shlisky:]

Okay, great. I have only one other question and that was on 33-footer issue from the highway bill. I was wondering, if you can give us just little more detail about what happened there and it ended being stricken from the final bill that was passed?

[Richard Giromini:]

Yes. Well, it’s - anytime you are talking about extending the length of equipment from - in this case, from 28 feet to 33 foot. And these things - these trucks run as doubles, twins, so you’re really extending the length of that whole vehicle combination by 10 feet. That creates concern by some parts of the market. So the safety advocates raised a lot of concern about - safety concerns on the highway of having that combination - equipment 10 feet longer on the highway. And the assumption being that it’s going to be more difficult to drive and maneuver these on crowded highways so on and so forth, and could cause increases in safety issues, accidents and all that. That said the counterargument is that they actually pull better. And testing by with some pilot units over the last year or two, some in the LTL business would argue that they actually pull better, because they have longer wheelbase and they pull smoother and it’s actually easier for drivers to drive, which makes it safer. You reduce the number of pieces of equipment on the highway, because you’re able to haul more with a more concentrated footprint. So you get one out of every six of these twin sets out, if you’re using 33s instead of 28s, which decreases congestion on the highway for the same amount of material being hauled. A lot of positives, you reduce greenhouse gas emissions, so it should be favored and supported by environmentalists. So there’s a lot of positives that come with it and the obvious one is 18% increase in productivity immediately by those who utilize these 33-footers, which should actually help not only benefit the companies, but actually benefit consumers, since they will actually benefit from lower costs to transport goods. There’s a lot of good things. It just wasn’t the time to try and push through the transportation bill to get it in place, because it was just one other - and there were number of things removed from the bill. I am quite confident based on scuttlebutt you hear in the industry that the efforts will be renewed to try and get that approved at some point, but it may take another year or two before it gets in.

[Michael Shlisky:]

Okay, perfect. Thanks, appreciate it.

[Operator:]

Next question is from Mike Baudendistel from Stifel.

[Michael Baudendistel:]

Thank you. Just I wanted to ask you, along the lines of one of the other questions. Do you have any revenue impact for the newer products in 2016 or 2017?

[Jeffery Taylor:]

Not at this time, Michael. We haven’t disclosed that.

[Michael Baudendistel:]

Okay. And when you think about the customer, your customers that have been most active in the marketplace, I mean, some of the publically traded carriers have seemed to have scaled back their purchase of equipment. Have you seen that also? Is it been more of the large fleets that have been placing those orders or more medium and small fleets?

[Richard Giromini:]

No, we have not seen any change in order behavior by our customer base. And 60% plus of our customer base, I guess, it would fall into that large category with the balance in the middle market space. But we don’t see any behavior changes on what their - the quantities of trailers that they intend to buy or have already placed orders for. My comments earlier about customers already coming back to us tend to be larger fleet saying, they are actually going to need additional equipment for different contracts that they picked up, dedicated contracts versus special runs. So at this point in time, I don’t know what we’ll see as we progress through the year, but at this point in time, it seems to be very favorable environment continuing in the minds of the fleets that we deal with. And they continue to be very profitable and they’re putting that cash to work. We have heard comments. And just like you, we stay up on what we see in the press, media and all, that there are intentions by some customers to pull back on their Class A tractor investments this year, but they are not saying that about our trailer needs.

[Michael Baudendistel:]

Okay. And I also wanted to ask you, you think last year when you’re producing trailers at such high levels that you’re - you had to run some weekend shifts, some overtime shifts. I mean, does that’d be less true in 2016 with some improvements in efficiency and does that help with labor cost efficiencies?

[Richard Giromini:]

Yes. That’s part of the comments and why we are confident to provide the EPS guidance that we have for 2016 that we actually expect to be able to improve on what –the great results we had in 2015. And part of that is the productivity improvements that we’ve seen throughout the business that were leveraged as we are progressing through the year. So there will be less overtime needs throughout the year to be able to produce the product that we’re talking about and lot of velocity improvements in the factories. And it’s not just here in Lafayette, where our main dry van refrigerated van operations are, but as I stated in my formal comments, that the DPG business, within the tank trailer business, notably have made significant improvements despite some lower quote and order activity in that business and less backlog. They’re getting some tremendous results in margin performance and profitability driving through the organization, because of implementation of lean and six sigma initiatives. And they are doing a great job. So, it’s throughout the business and that’s why we have the confidence with the momentum that we saw throughout 2015, the confidence to be able to provide that kind of guidance. Strong backlog combined with solid pricing environment that we have in the backlog and the productivity initiatives, all those combined gives us great confidence for this year.

[Michael Baudendistel:]

Great. Also I wanted to ask you on DPG segment, the tank trailer business. I mean, everyone is concerned about the impact of lower energy prices and lot of what you do there is food and other liquids. Can you just remind us how much of - what percentage of revenue DPG is exposed to energy?

[Richard Giromini:]

Oh gosh, DPG strictly from the energy side, if you look at their adjusted - now, DPG, I’m going to separate out the old Walker business, because DPG includes Wabash Composites in there also, which is not part of the acquisition. I know there is a lot of confusion out there that DPG is the acquisition and it’s not. There is a significant component of it that is completely separate from and just it is consolidated in with DPG. The tank trailer business makes up a little under 50% of the total of that business, maybe 45% or so. And that’s the part of it and within that business, we’re talking of the Walker, the former Walker business, it was around 12%. And when you look at the total business for the company, it’s less than 3%, 2%to 3% is all that - when we look at what is directly sold into oil and gas it’s only 2% to 3% of our total $2 billion business. So I think that kind of puts it more in perspective. It’s minimal direct impact to our business. We do plan it. We took advantage of it when - it’s a real peak and valley kind of a demand environment. We took advantage of it for a while when there was some strength and we built some water haulers, and we were in the frac tank business for a while and we got crude oil tankers that we build and we can sell into that. But is - we have such flexibility with our assembly lines within the tank trailer business that will shift from product to product based on what the strongest demand is, and that’s a real benefit to the business. So what they’re doing, as we do see less demand for that space and we’ve seen impact from that on the chemical side demand, that they just have been flexing their businesses and moving product around to keep businesses running or taking overtime out, eliminating any weekend business and idling operations as I commented. The Brenner Tank facility we needed for excess demand for a while that we put here in Lafayette. We were been able to idle that out. So that’s one of the offsets of that. But not a lot of direct oil and gas influence. We get impacted indirectly because the environment and we talked about this in the past, because competitors, who may be more dependent on oil and gas, will try and shift into other products that then make it a little bit more competitive environment out there. So we get probably more indirect impact than we do direct impact.

[Michael Baudendistel:]

Great. That’s great detail. And then the last one for me, I just wanted to see how much of share repurchases is baked into your 2016 guidance. Are we seeing this more or less repurchased ratably or would you do an upsized portion, sort of having it frontloaded, given the state of the balance sheet?

[Jeffery Taylor:]

Thanks for the question, Michael. We don’t talk about what our plans are in terms of what we’re going to do and when we’re going to do it for share repurchase. Obviously, that would put us at a disadvantage out there to take opportunistic advantage of the marketplace. But there is a portion of the share repurchase that’s baked into next year. I won’t quantify that at this time now.

[Michael Baudendistel:]

Sure. Thanks very much.

[Jeffery Taylor:]

You’re welcome. Thank you.

[Operator:]

Next question is from Jeff Kauffman from Buckingham Research.

[Jeffrey Kauffman:]

Hey, guys, congratulations.

[Richard Giromini:]

Hey, Jeff. Thanks.

[Jeffrey Kauffman:]

Hey, I just want to get a little bit more detail on how we should be thinking about from a modeling perspective as some of these new businesses come online, because if we’re looking at average ASP in the CTP division, but we got truck body units and we have other new products coming along, just kind of thinking about how to model going up forward. So you’re giving unit guidance at 60,000 to 62,000. But I’m assuming you’re not putting truck bodies in there or some of these other smaller lower revenue per unit new products even if the margins are better.

[Richard Giromini:]

That’s quite accurate. We have elected at this point to exclude any of that as we ramp that up. Again, it’s much like some of the comments we’ve had in the - we’ve shared in the past relative to what we experience in the tank trailer space. The variability of selling price on the truck bodies depending on how they’re speced out can range from as low as $11,000 to as high as $23,000, $24,000. The average on a, let’s just say, a typical mix and we can’t really predict what the mix will look like, is in our modeling internally, in our dialogues, around $16,000 per unit that we would expect to see. So it’s certainly not up in those the $24,000 kind of aggregate number that you see in the - for the semi-trailers themselves. And then, over the - we’ve looked at the space. And we believe that the addressable market for us, when you look at the total 5 through 7 space, Class 5 through 7, that is made up of about, I’ll call it 200,000 units, is probably in that 40,000 unit neighborhood. And that’s the addressable space. We think we can get our fair share of that. And if we just use the kind of shares that we enjoy in the commercial trailer space, around the 20% market share space, that would put those numbers somewhere around 8,000 units. So from a planning standpoint, we think that is a very achievable level over these next four, five year period. So this is long-term plan, as we ramp up, gain recognition, get our products out in front of folks, that’s why I talk about the TMC exhibit that will take place in Nashville. That’s opportunity to get in front of key players from our customers that will see the kind of product we produce and make available to the market relative to what’s out there in the market today. So that gives you a little bit of guidance on what they’ll do for us and you kind of run the numbers and that gets us north of $100 million kind of a business that we think we can play just from that one initiative. And then there’s all the other things we’re doing that, that we’re trying to evaluate on how much we can do, to start driving toward that goal of growing our business between now, our Wabash 2020 initiative to take this business and grow it and a good portion of that is going to come from these types of organic growth initiatives.

[Jeffrey Kauffman:]

That was incredibly helpful. And, I guess, from our purposes, modeling rather than try and throw some unit assumption and yield assumption into the general CTP is probably easiest just to keep this as its own line item until it gets to be of some size. Jeff, real quick, I just wanted to check a detail with you. Did you say 37% tax rate for 2016?

[Jeffery Taylor:]

Yes, 37% or slightly below.

[Jeffrey Kauffman:]

Okay. And as you’re paying down these convertible notes, how should I think about modeling interest expense for 2016 and 2017?

[Jeffery Taylor:]

Yes, I gave comment there about the commitment we have for $54 million of principal value. That would lower our interest expense by about $3.5 million on an annual basis. So that’s what we have commitments to buy at this point in time. Now, so I think you can use that as the impact as you’re remodeling.

[Jeffrey Kauffman:]

Okay. Well, wonderful. Well, listen, congratulations. It was a terrific year and best of luck this year.

[Richard Giromini:]

Thanks, Jeff.

[Jeffery Taylor:]

Thanks.

[Operator:]

Next question is from Joel Tiss from BMO.

[Richard Carlson:]

Hey, guys, this is actually Richard Carlson for Joel Tiss.

[Richard Giromini:]

Hi, Richard.

[Richard Carlson:]

I just wanted to ask about the DPG segment. You mentioned that the headwinds will be a little higher in the first half of the year versus the second-half. Similar to last year, so more on a year-over-year basis, how would you - how can we think about that for modeling?

[Richard Giromini:]

Overall, pretty comparable on a full-year basis to what we experienced in 2014. We think that while there will be some headwinds, because of the decreased backlog, it will pick up as we progress through the year based on the recent increase in quote activity. The problem is you have a delay, when you get the quotes from the time you get those converted orders and then you get the designs completed and then you actually get the materials in place and you get the build. And that’s why it really does reinforce that it’s going to look a lot more similar to last year in that regard. I think the productivity improvements in those type actions that I talked about with consolidation, Kansas City operations and all, I think on a profit contribution to the business, when we look at it from that standpoint, should be pretty comparable to what we expected. So typically, third quarters are generally strong quarters for the business that we don’t see any reason for that to be different this year. But the first-half is where a lot of the question marks remain for us as we work through some of this stuff.

[Jeffery Taylor:]

Yes. I agree with Dick’s comments, the first-half will be weaker. And I think similar to CTP the first quarter is probably the weaker of the two quarters for the DPG business in the first-half of this year. So that will be it. Second quarter of 2015 was a little lower on the revenue line last year. I think that will flip this year. It will be first quarter consistent with the rest of our business.

[Richard Carlson:]

Thanks for the color for that and definitely thank you for taking the call so late. One last one, I know this has been kind of asked multiple times, but if we just look at the backlog that’s in there now, how is the mix and the pricing on a year over year basis there? Just trying to figure out, it seem like we’ve heard a lot about the dollies earlier last year. So it seems like it would be favorable going into the New Year, just trying to get a feel for how that’s currently set up?

[Richard Giromini:]

Yes. It’s pretty much the same kind of it. If you were thinking about mix, it will be pretty similar to 2015. There has been very, very good strength for orders from the very large fleets who have a lot of the older equipment in their fleet. So they’re still playing catch up. So they’ve been placing orders. So it’s higher percentage than what we would have expected if we were to go back two, three years ago, when we would’ve thought that the mix would be more of 55/45. It’s north of 60/40, closer to 70/30, I believe as what we’ve seen in some quarters. I don’t see any change in that from a mixed standpoint. But despite all that, regardless of what the mix is, the team has done a marvelous job of continuing to drive gross margin improvement. I know everybody gets hung up on mix and thinking that if the mix is shifted more to the indirect channel you’re going to get a lot higher margins. Well, the team has certainly taken on the challenge of making sure that the margins have continued to improve despite what the mix is. So…

[Richard Carlson:]

Okay. Thanks guys and congrats on a wonderful year.

[Richard Giromini:]

Thanks.

[Operator:]

We have a question from Kristine Kubacki from Avondale Partners.

[Kristine Kubacki:]

Hey, good morning, guys. Digging deep here as lot of the questions have been answered. But I was just wondering, I don’t know if you can comment on this, but obviously, it’s been a story over the last month or two is that, Amazon looks to be entering the space in a pretty big way, and there has been some comments about 6,000 trailer orders. What can you tell us about that, where they are, is it something you’re bidding on? Is it - just a little color there if you can.

[Richard Giromini:]

Yes, there’s certainly some activity that’s going on with Amazon. I actually drove by a yard-full off the highway of Amazon detailed trailers. So there is activity going on there. I will only say this, that Amazon is a very aggressive company. And with that, they getting into the business, they will not have an understanding of the value-proposition, their longevity, durability, reliability of the products that they may be investing in. And so that would imply - I’m going to fill in some blanks for you - that will imply that there are going to be strictly price buyers at this point as they enter. And we’re not - we don’t play that game. So we’ll see where that goes, as they proceed into to this and the success they have. But if - what you may end up seeing is folks who are willing to play the price game getting in. And we’ll stay with customers who value the premium product that Wabash manufactures and provides. And I think that will end up telling the story over time.

[Jeffery Taylor:]

And the innovation that we bring…

[Richard Giromini:]

Yes, yes.

[Jeffery Taylor:]

…and the flexibility to be able to work with our customers to develop equipment that meets their needs and the people that value that.

[Kristine Kubacki:]

I really appreciate that color. Thank you very much and congratulations on a good year. Thank you.

[Richard Giromini:]

Thanks, Kristine.

[Operator:]

We have no further questions. I’ll now turn it back over to Dick Giromini for closing remarks.

[Richard Giromini:]

Thank you, John. So, while much has been done, opportunity certainly abound. We’ll continue to be strategic, but selective, in pursuing opportunities to grow our business; in addition to the organic growth initiatives already underway. We’ll continue to be responsible stewards of the business, to assure that the proper balance between risk and reward is considered in all decisions. And in closing, we continue to be well positioned this year to deliver another strong year, 2016, with a strong backlog, solid demand environment and a number of new products launching in 2016. Thank you for your interest and support of Wabash National Corporation. Mike, Jeff and I look forward to speaking with all of you again on our next call. Thank you.

[Operator:]

Thank you, ladies and gentlemen. That concludes today’s conference. Thank you for participating, and you may now disconnect.