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Wabash National (NYSE:WNC)
Q3 2019 Earnings Call
Nov 06, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, ladies and gentlemen, and welcome to the Q3 2019 Wabash National earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ryan Reed, director of investor relations. Please go ahead.

Ryan Reed -- Director of Investor Relations

Thank you, Laurie. Good morning, everyone, and thanks for joining us on this call. With me today are Brent Yeagy, president and chief executive officer; and Jeff Taylor, chief financial officer. Couple items before we get started.

Please note that this call is being recorded. I'd also like to point out that our earnings release, slide presentation complementing today's call and any non-GAAP reconciliations are all available at ir.wabashnational.com. Please refer to Slide 2 in our earnings deck for the company's safe harbor disclosure statement addressing forward-looking statements. I'll now hand it over and ask that you please refer to Slide 3 as Brent gets us started with his highlights.

Brent Yeagy -- President and Chief Executive Officer

Thanks, Ryan. I'd like to begin by saying that we're pleased to report our strong 2019 performance continued through the third quarter. Sales reached a third-quarter record of $581 million. That represents 5% top-line growth as compared to the previous year's third quarter, with each business unit providing strong top-line contributions.

Wabash achieved operating margins of 6.6% during the third quarter, which represents a 140-basis-point improvement versus the same quarter just one year ago. Our commercial organization has done an exceptional job of recovering the cost pressures we felt last year as evidenced by average selling prices that are up in excess of $2,000 per trailer. Within operations, we continue to work across our supply chain to improve overall network stability and on-time delivery performance. In addition, we continue to improve our internal management systems to drive enhanced tracking and visibility paired with enhanced sales and operations planning processes to create better overall execution of our business.

Our book has helped mitigate the impact created by continued stress supply chain and will continue to drive ongoing improvement in Wabash operational performance as we become even more responsive to our customer. At the same time, we've been focused on embedding the Wabash Management System into our culture and utilizing a growing set of enterprise lean tools and new business systems to drive breakthrough improvement across the company. We are engaged in value stream mapping and kaizen activities in several areas of the business to further drive profitable growth. At this time, we have teams employed in multiple truck body manufacturing locations, our tank manufacturing sites in Mexico and Wisconsin, as well as several areas in our front office.

I'm encouraged by the progress we have made since the beginning of our Wabash Management System journey in mid-2018. And I'd like to thank our employees for their hard work in helping us achieve these results. However, I'm most encouraged by growing understanding within Wabash that our Wabash Management System is not just about reducing cost. It's truly about enabling profitable growth and advancing the strategy of our business for our people, our customers and our shareholders.

So let's move on to the performance of our individual strategic business units. The Final Mile Price business delivered $114 million of revenue in the third quarter, which represents 30% growth versus the same quarter of last year. That pace of growth within Final Mile Price business continues to exceed our expectations, and we remain focused on the deployment of our enterprise lean tools within FMP's commercial and operational processes to further enable ongoing profitable growth within that business. Two additional highlights from the quarter to mention are the following.

In the quarter, we announced the opening of our upfitting parts and service location in Tampa, Florida, which complements existing upfit parts and service locations in Cleburne, Texas and Griffin, Georgia. The Tampa location will enhance our truck body penetration within the Florida market, as well as position us to grow in the area of medium and light-duty body and van upfitting solutions. This effort reflects our continued execution of our strategy to create additional revenue growth and market presence within the broad Final Mile space. The second highlight is the operational improvement within our Goshen, Indiana truck body manufacturing location, where year-over-year production has increased over 20% coupled with a 30% improvement in manufacturing productivity.

As a result of these improvements and a strong focus on overall execution, Final Mile Products achieved 4.1% operating margin during the quarter, which is a 580-basis-point improvement from the third quarter of 2018. Year to date through the end of the third quarter, Final Mile Products has increased operating EBITDA by $8.5 million, or by 54%. This reflects our overall commitment and execution to driving ongoing profitable growth within the dynamic markets that make up the Final Mile space for Wabash National. I will now move on to our diversified products and group of businesses.

Diversified products group delivered revenue of $93 million during the third quarter after adjusting for the sale of the AVTE business, aviation and truck equipment. The overall top line was up slightly. We're very encouraged that the diversified products business has continued to drive year-over-year operating margin improvement. DPG's third-quarter reflects 220 basis points of adjusted margin expansion in the quarter and reflects active deployment of key Wabash Management System elements, specifically the growing use of sales and operations planning coupled with improved commercial processes.

In addition, they have increased the rate of deployment of enterprise lean tools to improve key areas of operational performance. Now we'll move on to commercial trailer products. Commercial trailer products' revenue was $380 million during the third quarter, a 3.3% increase over the previous year's quarter. CTP operating margin was 9.6%, representing an 80-basis-point improvement versus the prior year's quarter as a result of successful efforts to counter cost challenges experienced in 2018.

CTP continues to execute on its innovation strategy to further differentiate its products and provide unmatched value to our customers. CTP is currently commercializing Cell Core technology across its dry van product lines for 2020, as well as the added benefit of flush mount integrated logistics to provide unmatched customer value in terms of weight savings and enhanced cargo securement flexibility. Both features received high levels of customer interest at the very recent North American Commercial Vehicle Show in Atlanta. In addition, CTP is actively preparing for a launch of its Fresh and Transcraft Eco flatbed product for 2020 product as well in order to continue to execute better-than-market growth within that business.

On the operational front, CTP has deployed Six Sigma resources within our Wabash wood products operation to improve what is already record performance levels. I'll end by saying that CTP is well-positioned for the next market period of the trailer cycle and continues to strengthen the talent, systems and products that will carry it forward to breakthrough performance into the next market upswing. We're now going to cover our backlog and market conditions. Overall backlog ended the third quarter at approximately $800 million.

As reports have shown, backlogs have come down as expected within the various trailer market segments as the 2020 order season takes on a more traditional order pattern, a pattern where October is the beginning of the order season. As expected, we have seen commercial trailer quote and deal activity increase significantly over the past several weeks of October, currently supporting the forecast range provided by ACT and FTR. In addition, our tank trailer and FMP truck body backlogs sit at equal or greater levels than at this time last year. It is too early to provide a detailed view of 2020.

However, our outlook is consistent with industry forecasters and we look forward to providing more detail on the 2020 outlook during our year-end call. Let's move on to capital allocation. Our primary focus remains repaying debt. In the quarter, we reduced our debt by $15 million and look to continue that pace into the fourth quarter.

We also funded our dividend and repurchased $9 million of shares. In addition, we've been able to properly fund the necessary capital investments to operate the business and invest in the future. Going forward, deliberate deployment of cash to further strengthen our balance sheet will remain a core part of our capital allocation strategy while continuing to invest in our business and returning capital to the shareholders. As I close out my call, I want to mention that we were pleased to see so many of the investment community at the North American Commercial Vehicle Show last week.

It was a great opportunity for Wabash to show the breadth of our product lines that span from the first to the final mile, as well as how we seek to differentiate our products to innovate materials and design. To further drive our pace of innovation and technology discovery, we have recently consolidated our product and technology research, development and discovery efforts and centralized those resources to form a new Wabash product innovation group, which will be led by Robert Wade and will report directly to me. Innovation is at the heart of Wabash National, and we're increasing our commitment through action to provide breakthrough solutions for our customers from the first to final mile. The transportation distribution and logistics industry is rapidly changing, and we want our customers to have ongoing confidence that Wabash National will be there with solutions that will help them win in their space during these transformational times.

I will now address our outlook for 2019. With just one quarter to go, we are increasing our full-year earnings per share by $0.02 to $1.67 at the midpoint. Given our strong financial performance during the quarter, we are also tightening our full-year EPS outlook to a range of $1.64 to $1.70 per share. At the midpoint of the range, we would demonstrate year-over-year earnings-per-share growth of approximately 16%.

Our financial results for the third quarter of 2019 have demonstrated the effectiveness of the initiatives we've put in place over the last year, as well as the cultural changes that are under way. We're excited to continue showing progress over the coming years, but also focused on finishing up this year strongly. With that, I'll turn the call over to Jeff for additional color on both our financial performance and the fourth-quarter outlook. Jeff?

Jeff Taylor -- Chief Financial Officer

Thanks, Brent, and good morning, everyone. Turning to Slide 4. On a consolidated basis, third-quarter revenue was $581 million, an increase of $28 million, or 5% year over year. Consolidated new trailer shipments were approximately 14,450 units during the quarter.

In terms of operating results, consolidated gross profit for the quarter was $78 million, or 13.4% of sales. Gross margin increased by 160 basis points year over year as a result of successful efforts to drive process improvements to address operational challenges during the second half of last year, as well as execution of the Wabash Management System for longer-term structural improvements. The company generated operating income of $38 million, and operating margin of 6.6% during the third quarter. Selling general and administrative, or SG&A, for the quarter, excluding amortization, was $34 million, or 5.9% of sales.

Operating EBITDA for the third quarter was $51 million, or 8.7% of sales. Intangible amortization for the third quarter was $5.1 million. Interest expense for the quarter totaled $6.7 million, a modest decrease over the prior year as a result of our continued debt reduction activities. We recognized income tax expense of $7.4 million in the third quarter.

The effective tax rate for the quarter was 22.6%, lower than our ongoing rate of 26% to 27% as a result of an R&D tax credit taken during the quarter. Finally, GAAP net income was $25.5 million, or $0.46 per diluted share. This compares to third quarter of 2018 adjusted earnings per share of $0.29 per diluted share and represents an increase of 59% over the prior-year quarter. With that, let's move on to look at the segments, beginning with CTP, or commercial trailer products, on Slide 5.

Commercial trailer products' third-quarter net sales were $380 million, which represents a $12 million or 3.3% increase year over year, on new trailer shipments, 13,700 units. New trailer average selling price, or ASP, increased over the prior year by more than $2,000 per unit on pricing actions to mitigate and recover the impact of higher material and operating cost. CTP reported gross and operating margins of 11.6% and 9.6%, respectively. Operating margins improved 80 basis points compared to the prior-year period due to cost recovery efforts in addition to product and customer mix.

Moving to Slide 6. Diversified products group net sales were $93 million, a year-over-year decrease of $9 million, or 9% for the third quarter, driven by the sale of the aviation and trick equipment business in mid-January, which represents approximately a 10 percentage point drag on DPG's year-over-year growth in the third quarter. DPG posted gross margin of 19.4% and operating margin of 7.7% during the third quarter. The 220-basis-point improvement in operating margins as compared to the adjusted non-GAAP operating margin in the prior-year period was a result of cost recovery efforts, as well as operational and productivity cost improvements driven by the Wabash Management System.

On Slide 7, final mile products' net sales for the third quarter totaled $114 million, driven by strong market conditions, as well as demand from customers who appreciate the operational and technology advantages Wabash brings to the truck body space. Gross and operating margin for the third quarter were 14.8% and 4.1% respectively. The 580-basis-point expansion in FMP's operating margin versus the same quarter a year ago was a result of higher volume, cost recovery, and improved operational efficiency. Slide 8 shows the walk to free cash flow conversion on a year-to-date basis, with operating cash flow of approximately $76 million, roughly $22 million has been invested via capital expenditure, leaving $54 million of free cash flow, which converted at 76% of net income year to date through the third quarter.

Moving on to our balance sheet and capital allocation plan. Our liquidity or cash plus available borrowings as of September 30 was $288 million, or 12% of trailing 12-month revenue. With regard to capital allocation during the quarter, we utilized $15 million for debt reduction, invested $7.2 million in capital projects. Additionally, we returned $13.2 million of capital to shareholders via the quarterly dividend payment of approximately $4.4 million and share repurchases of $8.8 million.

At the end of the quarter, we had $80 million remaining under our current share repurchase authorization. Networking capital finished the third quarter up $28 million sequentially with a decrease in accounts payable primarily driving that move. Working capital ended the quarter at 9.9% of trailing 12-month revenue. We finished the third quarter with leverage ratios for gross and net debt at 2.4 times and 1.8 times, respectively.

Moving on to Slide 9 with our fourth-quarter outlook. Our outlook for margin remains consistent with our prior guidance. We continue to expect between 50 and 150 basis points of full-year 2019 gross margin improvement. SG&A as a percent of revenue is expected to be slightly above 6% in the fourth quarter.

Brent mentioned the centralization of our product innovation group. As a result of this change, we expect approximately $1 million per quarter to shift from cost of goods sold to general and administrative on the income statement for the fourth quarter and going forward. We are currently estimating the effective tax rate for the fourth quarter to be approximately 26% to 27%, which would bring our full-year tax rate to approximately 24%, given the lower effective rate during the first three quarters. Full-year capital spending is expected to be higher in 2019 compared to previous years as we continue to support the pipeline of productivity projects and new product commercialization identified across our business segments.

In total, we estimate 2019 capital spending to be between $30 million and $35 million. Our expectation for fourth-quarter revenue is to come in between $570 million to $600 million with new trailer shipments of 14,000 to 15,000 units. Moving on to total company profitability. We expect operating margin in the fourth quarter of 2019 to step up in the range of 200 to 250 basis points from GAAP operating margins in the fourth quarter of 2018.

In summary, we are pleased with our year-to-date performance and our progress on initiatives that have generated the substantial margin expansion seen during the third quarter. Particularly, the gross and operating margin improved in all three business segments on a year-over-year basis. We continue to generate strong free cash flow, and we'll proceed with our balanced capital allocation plan that prioritizes debt repayment while continuing to invest in the business and returning capital to shareholders. And lastly, our commitment to position the business for profitable growth continues to unfold with purposeful action as we continue to grow our ability to work on our business for the future while executing it today.

Thank you for your interest and in support of Wabash National. Now with that, I'll turn the call over to Laurie, and we'll open it up for questions.

Questions & Answers:


Operator

[Operator instructions] We have a question from the line of Justin Long from Stephens. Please ask your question.

Justin Long -- Stephens Inc. -- Analyst

Thanks. Good morning. So maybe to start with the question on 2020. I know you're not giving specific guidance today, but obviously it seems like we'll be facing a tougher in-market environment.

How should we think about the relative performance of your CTP segment's top line to industry trailer production? Based on how you're thinking about the market strategically, I'd love to get your thoughts around should you be in line with the market, should you be better, should you be worse? Any help on that front would be appreciated.

Brent Yeagy -- President and Chief Executive Officer

Yes. I mean, as we said, we'll give further guidance at the year-end call. I think I'll start with the market itself. And as we said earlier, where our CTP sits right now from a deal closure standpoint, quote activity level, again, is indicative of the forecasted production and shipment levels that you would see reflected in ACT and FTR as we said here today.

I think there is, bluntly, some strength in the dry van segment that I think is emerging. That can be offset somewhat by some weakness in the platform in refrigerated markets as the rest of the year and the order season pans out. Net-net, I think CTP is well-positioned from a product standpoint, from a customer mix standpoint, who's active and who's not in the market that we'll see for 2020. So I would say I'm generally pleased with where they're at, and I think they'll have a relatively good year for the market that will unfold.

Justin Long -- Stephens Inc. -- Analyst

OK. And maybe as a follow up to that, from a cost perspective, can you talk about what you're doing to adjust to next year's market? And on that note, Jeff, it would be helpful to get your thoughts around the run rate for G&A as we get through this year and into next year. Just curious how much you can pull back on that front.

Brent Yeagy -- President and Chief Executive Officer

Yes. So I'll take the first part of it. I would say from a cost standpoint, specifically the variable cost perspective of it, labor and, you could call it, general conversion, we've been doing a very active and dynamic sales and operations planning process for the last 18 months. And with that is planned capacity adjustments not on a clip event type situation like maybe some of our competition's going through.

But we've been purposely planning it and adjusting it over the course of the last 18 months. So with that said, as we look at 2020 at this point, we're able to basically meet what I would call work asset production levels without significant changes to our direct labor content, meaning that we can flex with overtime accordingly without making real structural changes to our operating environment. So we're pretty linear in how we manage variable costs going into this next period, so I think we're pretty well-positioned there.

Jeff Taylor -- Chief Financial Officer

Yes. And Justin, on the G&A side, we do have levers that we can manage there. I would tell you that as we sit here today and look forward to 2020, I think we have decent visibility into the first half of the year. But we're in a more normal order season here that's going to be really pick up in Q4 and then extend into Q1, so we'll know a little better as we get into the year-end call maybe what more of the full year is going to look like.

On a G&A perspective, though, I would say that I talked about that we are going to move some cost out of cogs into G&A. I think that'll drive G&A as a percent of revenue up slightly next year and that we'll manage that overall spend in the context of the environment we're in, making sure that we're also investing for the long-term growth of the business. And probably have more guidance on that on the next call.

Justin Long -- Stephens Inc. -- Analyst

OK. And one last, final question on free cash flow conversion. You were in the mid-70s this quarter, I guess, year to date. Any update on how we should be thinking about that metric going forward?

Jeff Taylor -- Chief Financial Officer

Yes. I think where you see it historically perform. I mean, we were at 76% this quarter. We've been up 100% or just above 100% for some period of time.

That's a pretty reasonable range for us. I think in the fourth quarter, typically we do generate a little extra free cash flow in that quarter as working capital tends to come down at year end. And so I think in general it should be in that range.

Justin Long -- Stephens Inc. -- Analyst

OK. Great. I'll leave it at that. Thanks for the time.

Jeff Taylor -- Chief Financial Officer

Thanks, Justin.

Operator

Your next question comes from the line of Steve Dyer from Craig-Hallum Capital. Please ask your question.

Ryan Sigdahl -- Craig-Hallum Capital Group LLC -- Analyst

Hey, guys. Ryan Sigdahl on for Steve. So you've talked some about 2020 and expecting similar to what the industry forecasters, ACT, and FTR, are forecasting. What are their current expectations for builds in 2020?

Brent Yeagy -- President and Chief Executive Officer

Well, you have to reconcile one's doing shipments, the other one's doing build. But the general industry is somewhere in the 265,000 to 275,000 range as we sit here right now on a relative level. And obviously it breaks down by the various product segments accordingly.

Ryan Sigdahl -- Craig-Hallum Capital Group LLC -- Analyst

And it was kind of asked earlier, but do you think you can maintain or take market share in that environment given your preplanning and what you see?

Brent Yeagy -- President and Chief Executive Officer

Yes. Going all the way back to our investor day this previous February, we're positioning all the businesses to look to grow better than the market. Right? So we are going to and have positioned the business to look to execute that in 2020. Remains to be seen what the price to volume relationship will be, and we still have to work through the remainder of this order season to really understand how we'll be positioned to do that.

But in general, yes. I mean, we're looking to execute on the enhanced product commercialization that we have going on, what we're doing with advanced materials, and then ultimately trying to drive the business toward profitable growth. We'll look to do that within the market that we're given.

Jeff Taylor -- Chief Financial Officer

Yes. And I think maybe it's important to make this point here at this time when you ask about ACT and FTR and their numbers. And obviously, we're coming off a record year this year. And really, the industry itself is moving to more normalized and sustainable levels.

And while it's down year over year, they're not down to a level that is really unattractive for the industry. There's strong volume in the industry overall. It should be a good market overall for the trailer industry in that 265,000 to 275,000 total trailers. And so just wanted to make that point on the call.

Ryan Sigdahl -- Craig-Hallum Capital Group LLC -- Analyst

And just one final question on that and then I'll move on. So you mentioned expecting to take market share and still to be determined on price versus volume. Previously, it seemed like you guys were more focused on margins and that was the bigger focus. Now, has that shifted a little bit with the enhanced products and trying to go after some more market share here? Or is it still similar to what it was before?

Brent Yeagy -- President and Chief Executive Officer

Yes. And it's always a balance, right? And it's no surprise based on what we've been saying for the last three to four years that we've continued to position the business to be stronger, to really invest in innovation to differentiate products. And as we move into this phase of the cycle, we're obviously going to look to flex that as we move into this next market period. Now, we're going to do that smartly.

And we're going to maintain price leader status as we do that. So it is a dynamic balance, but that is the game plan, to try to maximize that relationship and utilize the investments that we made over the last three to four years to go out and grow our business.

Ryan Sigdahl -- Craig-Hallum Capital Group LLC -- Analyst

Great. Moving along to Final Mile, FMP segment. Another really, really strong quarter there. Congrats on that.

Given your current capacity, what's the utilization today? And then, do you think you have enough existing capacity today to support similar-type growth rates over the next few quarters and years?

Brent Yeagy -- President and Chief Executive Officer

Yes. So as we look at the growth rates that FMP has seen, and we've seen 30%, 40%, 50% growth rates on various quarters, and we've said that that exceeds our expectations. It does, and we think that relative to the markets that we will be given, we can continue a relative level of growth through the period. The capacity that we have is really untapped.

When we talk about deploying the Wabash Management System, that's really what we're talking about. And it's in the original thesis when we purchased the Supreme assets back in 2017, is that there was ample capacity within the existing five locations that we had. They were effectively working in a suboptimal one-shift orientation. We are still predominantly working in a one-shift orientation with 30%, 40% to 50% growth across the business with only limited second shift capacity utilization at this time.

So yes, we have the physical brick and mortar to grow this business at the rates that we would see over the next several years.

Jeff Taylor -- Chief Financial Officer

Yes. And I would add to that that I wouldn't think of it only as just truck body growth. And we talked about the opening of the Tampa facility for upfitting parts and service. And there's opportunity for us to grow into those adjacent markets within Final Mile Products as well.

And that'll be areas where we'll look to grow further in the future also.

Ryan Sigdahl -- Craig-Hallum Capital Group LLC -- Analyst

And last one for me, then I'll turn it over. So it looks like the new trailer shipment guidance was reduced by 1,500 units at the midpoint for this year. Can you elaborate on what segment or product categories that was related to?

Jeff Taylor -- Chief Financial Officer

First of all, I'll tell you that we're still within the original range we gave. So we may have lowered at the midpoint, but we're within the overall range that we've been talking about for a few quarters here. So not inconsistent with that, it's just normal variation in our business. I think that if you think about it by segment, it's going to be relatively close to what the breakout between CTP and DPG is on the trailer side of it.

Brent Yeagy -- President and Chief Executive Officer

Yes. That's exactly how I would have framed it. I think it's pretty equally spread across all the businesses, and there's not one single one that's dragging that down in any way, shape or form. And to reiterate, it's going to stay to guidance.

We're just tightening it up a little bit and taking into account the market conditions that we've got, what freight activity is and being prudent in what we think that should be.

Ryan Sigdahl -- Craig-Hallum Capital Group LLC -- Analyst

Great. Thanks. Good luck.

Operator

[Operator instructions] We have a question from the line of Jeff Kauffman from Loop Capital Markets. Please ask your question.

Jeff Kauffman -- Loop Capital Markets -- Analyst

Thank you very much. Good morning, and congratulations. Quick question for Jeff. It looks like inventories are up relative to the direction of receivables here.

Is that just timing between new order flow versus current production and we should see working capital get a little bit better as the -- or more of a source of cash than use of cash as we normalize in the industry?

Jeff Taylor -- Chief Financial Officer

That's exactly right, Jeff. I would say that inventory is within normal variation of what we see relative to production in shipments. Production in the quarter was 14,900 units. So we produced a couple hundred units more than we shipped.

And obviously, as we move into the fourth quarter, usually we'll pull inventory down by the end of the year. I think inventory levels will represent that. So nothing outside of normal variation happening there in any of the three components of networking capital.

Jeff Kauffman -- Loop Capital Markets -- Analyst

OK. And then sometimes in third quarter it's just busy and customers can't pick up the trailer units. I saw the guidance on the trailer shipments changing a little bit. But did we have any of that issue with pickup and timing of units?

Brent Yeagy -- President and Chief Executive Officer

Yes. I'll go back to freight dynamics. There were some headwinds relative to freight availability going into the July timeframe, end of June, beginning of July, continuing to the first couple weeks of August. And when that occurs, because our customers pick up anywhere from 70%, 80% of the trailers that we produce, when they're not moving it makes it harder for them to come up and pick up trailers.

So we saw a little bit of lag during that period. And then as we saw freight continue to unlock in late August going into September and continuing into October, we've seen shipment rates pick up accordingly, right in line with what we would expect.

Jeff Kauffman -- Loop Capital Markets -- Analyst

OK. You gave unit guidance on CTP and the units in DPG. Can we think about where the unit count is for Final Mile if we look at it maybe on an annual basis instead of the quarterly? Where are we looking to come in at on Final Mile units for 2019 at this point?

Jeff Taylor -- Chief Financial Officer

Yes. Jeff, we haven't given that guidance at this point in time, so I don't have a number in front of me to give on the call here today. We'll certainly take that into consideration in terms of making sure that we can communicate and help the street understand the performance and the investors on that business unit. But I think as we continue to grow and diversify that business, truck body is a component of it.

But also upfitting parts and service will grow there as well. And so revenue may be a better way to look at that business overall when you think about modeling that. And obviously we gave total company revenue guidance for the fourth quarter.

Jeff Kauffman -- Loop Capital Markets -- Analyst

OK. Last question. Pricing was up a lot this year on units, but a lot of that was following the big increase in raw materials we saw about a year ago. Could you give us an update on where raw material costs are trending as we close this year heading into 2020 and your hope on industry pricing as we begin to, I guess we use the term normalize, in terms of industry demand?

Brent Yeagy -- President and Chief Executive Officer

Sure. Jeff, as you know, we're hedged out for the backlog that we have, really, through the end of 2019, and hedged partially for what we've committed to already in the backlog for 2020. When we look at the overall materials curve, we see steel and aluminum. I think there's a level of softness as we're entering into that period right now.

We'll see it really go through mid-2020. It may recover a little bit in the second half of 2020, long past the closing of the order season for 2020. So yes, it provides us somewhat of an opportunity from a material margins standpoint. We'll look to execute that and lock it in with our existing hedging practices accordingly.

The market will define how much of that we're going to be able to capture accordingly. And we're at the early stages of backlog bill. We'll know a lot more at the year-end goal.

Jeff Kauffman -- Loop Capital Markets -- Analyst

OK. Well, thank you very much, and congratulations.

Brent Yeagy -- President and Chief Executive Officer

Thank you, Jeff.

Operator

We have no further questions at this time. I will turn the call over back to Ryan Reed for his closing remarks.

Ryan Reed -- Director of Investor Relations

Thanks, Laurie, and thanks, everyone, for joining us today. Look forward to following up with you during the quarter.

Operator

[Operator signoff]

Duration: 40 minutes

Call participants:

Ryan Reed -- Director of Investor Relations

Brent Yeagy -- President and Chief Executive Officer

Jeff Taylor -- Chief Financial Officer

Justin Long -- Stephens Inc. -- Analyst

Ryan Sigdahl -- Craig-Hallum Capital Group LLC -- Analyst

Jeff Kauffman -- Loop Capital Markets -- Analyst

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