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Wabash National (NYSE:WNC)
Q1 2020 Earnings Call
May 14, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Wabash National earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Ryan Reed, director of investor relations. Thank you.

Please go ahead, sir.

Ryan Reed -- Director of Investor Relations

Thank you, Felicia. Good morning, everyone, and thanks for joining us on this call. With me today are Brent Yeagy, president and chief executive officer; and Mike Pettit, chief financial officer. A couple of items before we get started.

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

Brent Yeagy -- President and Chief Executive Officer

Thanks, Ryan. Good morning, everybody, and thank you for joining us today. Let me begin by saying that we hope you and your families are healthy and that each of you have found a way to better connect with those you love. The world has changed at a remarkable pace since our Q4 earnings call, and we have a lot of topics to get everyone up to speed on with regard to the current environment, the state of our strong liquidity position, current customer sentiment and our supply chain stability.

I'd also like to offer some thoughts and perspective on the company's performance through the last recession in the 2008 to 2009 time frame and why we expect this experience to be very different. However, before we get into those details, I'd like to start by sharing the steps we're taking to safeguard the health, wellness and safety of our people. As we are in essential central business, we have continued to operate from the onset of this pandemic. Wabash products and services enable our customers to transform critical goods, whether it's tank trailers hauling feedstocks, the pharmaceutical processors, refrigerated trailers transporting fresh food to groceries or our truck bodies completing the last leg of a journey in delivering goods to the home.

We've been part of assuring that vital supplies and basic needs have been met, which has allowed people to stay home more comfortably and social distance more effectively. We've initiated a companywide business continuity effort that has been helping us navigate through this extraordinary time with agility and speed. In addition, we've made organizational changes throughout our company to facilitate bringing fast and deliberate decisions to action as we act on and within the business to best manage this dynamic landscape. We have made frequent, candid and empathetic communication with all of our employees, customers and suppliers, a top priority, as we put plans in place around the current and anticipated disruption to the economy.

Our supply chain and general work practices, as well as work to proactively manage the situation. We have adopted and implemented best practices gathered by the World Health Organization, Centers for Disease Control and other respected sources of scientific fact to safeguard our people and our workplaces. In addition, we have been in close contact with the states and municipalities where we operate to assure we are in alignment and supportive of local measures. In our manufacturing facilities and offices, we've implemented working under standard social distancing protocols as a process that we need to embrace in the event that the standard of care must be in place for longer than any of us would like to imagine.

We are implementing smart, effective and risk-based control measures that are sustainable and productive, some of which are facility changes to reshape the physical manufacturing and office environments, wide reaching use of work from home or telecommuting tools, use of employee symptom prescreening tools, modification of common areas such as break rooms, cafeterias and other employee gathering areas, physical barriers, proper and effective use of personal protective equipment and administrative procedures such as enhanced/modified travel protocols and visitor procedures. I'd like to take the opportunity to thank all of our employees for their dedication to these unprecedented times. I've been extremely proud of how our employees have reacted to and embraced the changes that allowed us to adapt our business to the current environment. Essential business or not, people are in different places in regard to their home situation, personal health, the health of those around them, as well as their own respective fear and anxiety regarding the risk in contracting this virus.

By and large, our people have been responsible, open-minded and supportive of our efforts to remain open and constructive during the past 60 days. Our culture is what makes it special to be part of Wabash National, and I am always humbled by it. Let's move on to an update on the customer and supplier landscape. As an essential business, we've been able to maintain business continuity with our modifications in place.

However, we have not been immune to supply related disruptions caused by intermittent COVID-related issues, as well as state government pandemic response actions. Supplier impacts have been mitigated by agile supply chain actions taken as a result of changes made to manage the last three years of peak product consumption, supplier capacity limitations and tariff-related impacts and speaks to the sustainability of those supply chain actions. We have also managed through supply chain issues by holding increased inventory at some at-risk inputs identified as part of our supplier risk management process. An area of risk that remains that we're watching is in regard to truck chassis in support of our truck body manufacturing process.

All major producers of truck chassis have implemented hard and relatively extended shutdowns in response to the COVID crisis. While we may expect chassis production to reopen in the near future, the full impact of the supply chain is still being worked through. Overall, our supply base has weathered the storm well. And at this time, we do not see significant liquidity or solvency risk within our supply base as a result of shutdowns or reduced market demand.

In terms of our customers, they've done an admirable job keeping the flow of essential goods moving in a challenging environment. Generally, they've gone from extremely busy as consumers stockpiled prior to stay-at-home orders to experiencing a considerable market softening with nonessential business closures. They are now gearing up to handle increased volumes as states begin to open up again. While customers are managing their capital outlays closely at the moment, I think there is also an appreciation for wanting to maintain average equipment ages at reasonable levels to ensure efficiency, attract driver talent and avoid a situation down the road that we saw in 2018 and '19, where some customers could not get equipment as they manage their capital needs.

We are also finding, as we expected, customers within our strategically managed customer portfolio have been relatively resilient as compared to their peers. We can observe that in their Q1 earnings, internal pandemic response efforts and through our overall backlog stability. Moving to Wabash's financial results for the quarter, I'd like to split my comments between two distinct phases, which is January and February together and March specifically. The first two months of the quarter were relatively in line with our expectations as our operating cadence was certainly similar to normal historical performance during these months.

Specifically for Commercial Trailer Products, March tends to be the most significant month from a revenue and income perspective during the first quarter. And just as a quick refresher on revenue recognition, we recognize revenue when products move off our lot. In the case of trailers, pickups are typically heavy in March, a period this year that that coincided with carriers being busy as freight activity received an unusual boost from pre-shutdown purchase behavior. So even though production was in line with our expectations, customer pickups were not.

This resulted in a revenue shortfall for Commercial Trailer Products during the first quarter. As we discussed on our last earnings call, Final Mile Products was expected to see an operating loss during the first quarter due to weaker-than-anticipated customer pickups. Coupled with the initial impact on operations of COVID-19, the loss in the quarter exceeded our initial expectations. Diversified Products' quarterly performance was only lightly impacted by COVID-19-related reduction or customer complications.

As such, revenue and operating income were near our expectations for the quarter. Let's move on to customer orders and backlog. As reports have shown, backlogs have come down throughout the industry as production has outpaced new orders since year-end 2019. Wabash National's backlog ended the first quarter at approximately $1 billion after registering $1.1 billion at the end of 2019.

This is much less than the 20% decline that is seen in the broader industry over the same time period. We feel very good about these industry figures as they continue to imply our share position. We have previously mentioned we continue to believe that the customer conditioning that our portfolio executed over the past decade has and will continue to dampen the level of volatility that we've historically seen within our Commercial Trailer Products reporting segment. I will now move on to broader actions taken and look to the future.

Along with the well-being of our employees, we are focused on protecting the financial well-being of our company during these extraordinary times. We have taken rapid action to rightsize our cost structure for the current environment. Understand that Wabash National has really been reacting to the pandemic in only the last 60 days, and those actions that we take will be seen in future periods. We have eliminated essentially all travel, implemented a freeze on all nonessential spending across the company, only moving ahead on operating and capital spending that is viewed as critical and customer supportive.

We have ceased all hiring, cut expenses on outside resources, implemented furloughs and headcount reductions. It is always difficult to part with team members who have devoted themselves to the betterment of our organization, but is our obligation as stewards of the company to ensure not only its near-term liquidity but also best position the company for overall stability, as well as the creation of longer-term customer and shareholder value. We recognize that this is a period of shared sacrifice. And as such, myself and my team have taken voluntary salary reductions.

Additionally, variable compensation for salaried employees will be reduced and potentially eliminated if we do not meet targeted performance metrics that were set out at the beginning of the year. Looking ahead, we have well-developed contingency plans to reduce spending further, if necessary, based on further deterioration of product or macroeconomic market conditions. In terms of how we're planning to operate in the near future, first and foremost, we will safeguard our people and our communities. We will then focus on serving our customers in the premium manner they deserve.

While assuring the previous mentioned priorities, we will work to produce as effectively and efficiently as possible. We're in a very dynamic period of change and evaluation of how best to go forward balancing customer responsiveness now with efficient operations while looking to understand future operating needs. From a manufacturing perspective, furloughs are one tool that we have already used and will continue to evaluate to allow us to produce efficiently while up and running and then minimize our costs as much as possible during the downtime. Our intent is to maximize efficiency while assuring ongoing stability for the customer.

Finally, I'd like to express my continued confidence in the future. We've been preparing for several years for an eventual downturn in our end markets. And while no one expected the downturn to look like our world does now, the actions that we have taken to strengthen our balance sheet and ensure excess liquidity have proven extremely important. Although not all my leadership team was at Wabash National to learn from the company's experience during the Great Recession like I was, the diverse perspectives that we bring from other companies and other sectors have been additive to our approach to managing through this current situation.

Our board of directors has also been extremely helpful through this time in devoting their expertise to helping us think through our approach to both short-term and longer-term initiatives. We are fortunate that all levels of our organization, this is not our folks' first time at the dance, and our collective experience in managing through a market downturn, regardless of cause, is deep. We expect to show our improved financial performance through the cycle that Wabash National is a more resilient company than we've ever been in the past. Wabash National has enjoyed a number one or number two position in the vast majority of our markets, and we intend to leverage this crisis to further distance ourselves from our competition.

This crisis has afforded us the opportunity to move faster with organizational changes that were already under way, which we believe will allow us to increase our level of intimacy with our customers and drive an accelerated pace of customer-focused innovation that further differentiate our products in the marketplace. We look forward to sharing those with you on future calls. In closing, our focus right now is on navigating the impact of coronavirus. I'm confident that we're doing the right things to protect the health and safety of our associates, to continue serving our customers in this critical time and to play our part in supporting the transportation sector.

While the economic impact of COVID-19 will be severe, Wabash National has been through difficult times before, and we have learned lessons from prior cycles that we have embraced to make us stronger and more agile heading into this one. Finally, our resilient culture and strong balance sheet provide us with the opportunity to emerge as a stronger company as we have continued to execute our strategic plan throughout this crisis. With that, I'll turn it over to Mike for his comments.

Mike Pettit -- Chief Financial Officer

Thanks, Brent. We're going to do things a little differently on this call by spending more time discussing metrics that have taken on greater importance in this environment, like our balance sheet, liquidity and debt structure. As Brett mentioned, we feel that we're better positioned than at any point in our company's history to not only absorb a recession but also to use this period to set ourselves up to perform on the other side. But first, beginning on Slide 4, I'd like to briefly give some color on our first-quarter financial results.

On a consolidated basis, first-quarter revenue was $387 million, with consolidated new trailer shipments of approximately 9,150 units during the quarter. As Brent mentioned, customer pickups of equipment were below our initial expectations for the quarter, leading to revenue also coming in below expectations. First-quarter gross margin was 9.5% of sales, while operating income came in a loss of $110 million due to noncash goodwill impairment charges. Operating income on a non-GAAP adjusted basis was a loss of $2.9 million.

Given the uncertainty of the current environment, we recorded noncash goodwill impairment charges totaling $107 million relating to the acquisitions of the Walker Group and Supreme Industries. Brent and I would like to reinforce in the strongest terms possible that our Final Mile business remains an exciting opportunity and a growth platform that we intend to leverage in the short, medium and long term. The progress we've made to recapture share, combined with Wabash's technology offerings, will continue to resonate in the marketplace, and we continue to work diligently on the operating performance within this business to ensure profitable growth. Finally, for the quarter, GAAP net income was a loss of $106.6 million or negative $2.01 per diluted share.

On a non-GAAP adjusted basis, net income was a loss of $2.3 million or negative $0.04 per share. Moving on to Slide 5. I'd like to review our cost structure and give you a little more detail about how we've made quick adjustments from a cost perspective. In rough numbers, it's fair to say that our cost structure is highly variable with material cost of 60% and direct labor equating to another 10-plus percent.

So in total, I'd like to think of our total cost base is approximately 75% to 80% variable. We have moved quickly to ensure that our variable costs are coming down in line with volumes. Additionally, we have temporarily but significantly reduced fixed costs in the second quarter by executing a two-week, companywide furlough that incorporated 90% of all salaried employees. We plan to handle the near-term market disruptions with furloughs and downtime as we continue to work to permanently lower cost.

We will give an update on some of these plans at the second-quarter call. We are also heavily scrutinizing and anticipating cutting most discretionary, nonessential expenditures in the short term. In addition, executive officers took voluntary salary cuts, as Brent mentioned. We have a significant amount of our incentive-based pay that is tied to financial performance metrics, like operating income and free cash flow.

And these act as a relief by significantly reducing depending on financial performance. I'd like to stress that we have contingency plans for multiple scenarios. And while the actions we've walked through are important steps in reducing costs, we have additional levers that we're ready and able to pull should the situation dictate. Given that we're all managing through unprecedented uncertainty and conditions, that can change at a moment's notice, we have decided the time is not right to provide detailed forward guidance.

However, under current circumstances, we expect free cash flow to be positive in 2020. Moving on to our balance sheet. Our liquidity or cash plus available borrowings as of March 31 was $277 million with $155 million of cash and $122 million of availability on our revolving credit facility. In March of this year, we proactively drew $45 million from the revolver to bolster our cash balance.

Our modeling suggested a $45 million revolver pool covered the worst case we could envision, which is to say, we do not expect to tap our revolving credit facility again in 2020, but it is further liquidity that remains available to us. Moving on to capital allocation on Slide 6. Regarding capital expenditures, we are again heavily scrutinizing spend and only proceeding with projects that are critical to the maintenance of our existing operations. We are targeting a 50% reduction from our previous guidance to approximately $20 million in spend and stand ready to reduce further as required.

We expect to free up cash through working capital reductions, and that, coupled with our quick and decisive cost cuts, should allow us to deliver positive free cash flow even in this difficult operating environment. With regard to capital allocation during the first quarter, we invested $6.3 million in capital projects, paid our quarterly dividend of $4.5 million and repurchased $8.9 million of shares prior to the pandemic. For the near term, our approach to capital allocation centers around preservation of cash. We will carefully control capital expenditures while prioritizing our dividend and assessing opportunities for debt reduction.

Turning to our debt structure, our nearest maturity is not until March of 2022 when our term loan matures. The balance stands at just $135 million, and we expect to look to refinance this instrument in the next year. We are covenant-light with no financial covenants on our term loan or high-yield bonds. The only potential financial covenant in place is on our revolving credit facility, which dictates a minimum fixed charge coverage ratio of one to one when excess availability on the revolver is less than 10% of the total facility.

We obviously do not expect this covenant to come into play. We've been in close contact with our bank group over the past couple of months. They have been very helpful in advising on the trends that they see developing in the debt markets, and we have confidence in continuing with the partnerships that we have in place. Now finally on Slide 7, I think it might be helpful to spend a moment comparing where the company stands now compared to prior cycles.

With the uniquely severe nature of this crisis, it seems like the 2008 to 2009 time period will provide the most relevant comparison. While we know some of you who have followed Wabash for more than a decade, I think it would be useful to discuss some of the challenges the company faced during the last cycle and why we don't expect a repeat this time. First and foremost, in early 2008, the company did not have the cash or liquidity balance that it enjoys today. This lack of liquidity, combined with limited access to fresh capital during the financial crisis, forced the companies to take drastic steps that we will not repeat.

I think it's fair to say that experience has left a scar tissue around the organization, and those are mistakes that we will not repeat. And clearly, our present liquidity situation speaks to that. Beyond our presently stronger liquidity situation, this company has also grown and diversified our product and end market exposure over the last decade. We have gone from primarily a producer of dry vans to a holistic provider of transportation equipment and expanding our portfolio to include tank trailers, truck bodies and expanding our customer and end market exposure accordingly.

In summary, we feel that we're well-positioned to navigate the unprecedented time. Our cost structure is highly variable, and we've taken quick actions to reduce fixed costs. We have excess liquidity, no financial covenants at present borrowing levels and a patient debt structure. It's absolutely our intention to continue furthering the progress of our strategic plan and prepare ourselves to be stronger as market conditions recover.

With that, I'll turn the call back to Felicia, and we'll open it up for questions.

Questions & Answers:


Operator

[Operator instructions] And your first question comes from Justin Long from Stephens.

Justin Long -- Steph

Good morning, everyone. So it was good to hear that you expect to remain free cash flow positive this year. As we think about that outlook, could you talk about what you're assuming for the working capital tailwind in 2020? Just curious how much you can adjust there. And then also, as you made that comment that you feel like the revolver pool of $45 million could cover a worst-case scenario, is there a way for us to kind of think about what that worst-case scenario looks like from a trailer production perspective, or any other way you'd want to frame that up?

Mike Pettit -- Chief Financial Officer

Sure. I'll start with that one first. When you look at the timing when we pulled it back in March, it was an error of pretty high uncertainty. So we looked at a second-quarter pullback that would have been far greater than 50% drop year-over-year in revenue.

At that point in time, in March, we weren't sure what the reactions from the economy or the industry would be. So we modeled something that was greater than 50% pullback in revenue as our worst-case scenario. In terms of free cash flow and the working capital, we feel that a number in the $25 million to $30 million to $40 million range is highly possible. Again, it would be dependent on how much revenue were to contract.

So those obviously are connected. But we have already seen some nice efficiency in our working capital based on some inventory reductions. So it's somewhere in that ballpark, we think, we could reduce working capital and help our free cash flow position.

Justin Long -- Steph

OK. That's really helpful. And obviously, the outlook is really uncertain here, and we're all kind of running different scenarios in terms of the top line and what it could look like. But as you think about all the cost cuts that you're implementing, and it sounds like you're taking a pretty aggressive approach there, is there a way we could be thinking about decremental margins for the business? Do you have a specific target in mind? And maybe you could talk about decremental margins across the different segments and how that might vary.

Mike Pettit -- Chief Financial Officer

I would say, as a total, what we saw in Q1 was something that we would feel pretty comfortable with going forward. As it relates to the segments, we're looking at it more in total, but I would say that the 15% to 20%, high teens, I believe, was kind of a good range that we're trying to manage within. And that's because we're able to do that because we are actively going after the fixed cost reductions, along with the variable costs. I think there's two points in there, that when people look at us, I think they sometimes overestimate the level of fixed costs.

We have a pretty variable fixed cost structure -- excuse me, pretty high variable cost structure, so we're able to reduce variable costs with volume. And we are also taking some pretty quick action to move down fixed costs, which allows us to keep those decrementals in that just under 20% range.

Brent Yeagy -- President and Chief Executive Officer

Yeah. And I would add to that, just from a relative preparedness for this unseen, we'll call it, environmental reality, remember that when we think about our history with the '08, '09 recession, the preplanning that we've done, we had a pretty solid variable cost, we'll call it, book of actions that we already knew what we would pull, how we would pull and the degree at which we would pull them on various market conditions. So we were able to move relatively fast in that late March and into April time frame on a fixed cost basis. We've been talking about the restructuring of the company, really, for the last year.

Those were active evaluations and work streams that were, in a way, in place prior to the COVID-related crisis. All we've done at this point is accentuate and accelerate those as we move the business forward. So that's why we feel good in how we'll be able to manage those decrementals going forward. We're not starting from a dead stop in our thinking, like many companies will be.

Justin Long -- Steph

Makes sense. And one just last one on Final Mile. I was a little bit surprised by the impairment charge. I was wondering if you could just give a little bit more color on that and maybe say how much of that is related to COVID in this downturn versus other adjustments that would have happened regardless of this downturn.

And then just thinking about that Final Mile business longer term, I mean, do you still feel like the financial framework in terms of the top line opportunity and margin opportunity is intact? Or structurally, should we be thinking about something lower than what you talked about historically?

Mike Pettit -- Chief Financial Officer

Yeah. So the goodwill impairment, when you have a market disruption like we had in Q1, it forces us to relook at all our modeling on goodwill. Usually, you do that heading into the end of the year. So with the stock rise pullback that we saw in the quarter and then just the overall market conditions, it forced us to do another quantitative look.

And I'll tell you that the major change in our modeling of the Final Mile business was the near-term cash flows, which, as you know, on a cash flow model, those have the highest impact. So it was really a 2020, 2021 look. Given the environment that we're in, we believe it would have significantly lowered cash contribution from Final Mile in 2020 and 2021 than what we would have modeled in Q4, let's call it. That said, nothing really changed about our long-term outlook in that business.

So we believe that business returns to the same level of long-term growth, cash generation and profitable growth that we had modeled at the time of acquisition and earlier points when we were modeling the goodwill analysis. So we don't think it changes the future outlook of the business, but there's definitely a short-term disruption based on the COVID.

Brent Yeagy -- President and Chief Executive Officer

Yeah. And I'll add to that, and I want to add in the fact that we're not retreating in any way, shape or form from the long-term strategic impact that FMP will have for us, both top line and margin performance. We are dealing with unfortunate and unplanned environmental condition with COVID that has had a larger impact on FMP than we would have planned for, if you can plan for such a thing. We were seeing and we've talked about knowing what was impacting the variable cost basis of that business in Q4.

We understood how it was going to impact in Q1. We guided to it, and we saw incremental improvement on a month-to-month basis in that variable cost structure as we move through. So for what we control, we're acting on it. Unfortunately, that gets washed through when you have something as significant as a 40% top line reduction that's caused by a myriad of COVID-related issues.

I'll give you one example, being unable to ship into New York and most of the East Coast because of severe shutdowns and fear of contracting the virus, and that is something that has been worked through over the last 45 to 60 days. That's not in someone's game plan in terms of how you're going to manage your guides in a given quarter.

Justin Long -- Steph

Makes sense. Appreciate all the time today. I hope you guys stay safe.

Brent Yeagy -- President and Chief Executive Officer

Thanks, Justin.

Operator

And your next question comes from Joel Tiss from BMO.

Joel Tiss -- BMO Capital Markets -- Analyst

Hey, guys. How's it going?

Brent Yeagy -- President and Chief Executive Officer

Hey, Joel.

Mike Pettit -- Chief Financial Officer

Good.

Joel Tiss -- BMO Capital Markets -- Analyst

I know you don't want to give us any guidance, but somebody always has to ask the mandatory question. If you could give us a little bit of color on how April and maybe the first week of May started. Just kind of -- some other companies have kind of hinted that week-by-week since the beginning of March or whatever, things have gotten a little bit better or things are kind of stabilizing or just anything you can help us with there.

Brent Yeagy -- President and Chief Executive Officer

Sure. I'll give you kind of a round horn view, some macro, some micro. Right? So one thing we talked about was that we furloughed the 90% of our salaried workforce and all of our hourly workforce effectively for two weeks in April to manage just overall cash spend. What we were able to experience during that period when those employees came back to work was a healthy, engaged and productive workforce coming right out of the chute.

And that speaks to the resiliency of Wabash National. I think that's something that we're using, and I'd like to express to everyone on the call that should give some level of forward-looking stability for the company from an operational standpoint. Our operations were not impacted in the month of April from what I would call a mandatory shutdown basis in any way, shape or form and any material manner. And we are able to weather through without significant impact on it from a supplier basis.

And we see that rolling into May as well. So the operating front looks good. From a commercial standpoint, our customers are still ordering, and cancellations have remained, I'll call it, nonmaterial at this point as we manage the in and out of backlog. So we've maintained relative backlog stability, and that is a really good sign as we look at the remainder of the year.

Joel Tiss -- BMO Capital Markets -- Analyst

That's great. And then you gave just a little hint, and I wonder if you could spend another minute on what you're hearing from your customers in terms of holding on to their orders. I'm sure they're doing the same things as you guys, trying to cut as much outside spending as they can. Or any color about when they plan to pick up the trailers, those sorts of things.

Thank you.

Brent Yeagy -- President and Chief Executive Officer

Yeah. Well, I would say you have some more access than we have. We can see it in the earnings calls with some of our largest customers how they plan to maintain capital spending, specifically on trailers, as they look to manage fleet, age and operating cost per mile throughout the rest of the year. And just as we have learned, how to manage through a downturn, they have as well.

And they don't want to get on the wrong side of an average age per trailer as they did coming out of the '08, '09 time period. And as we tend to sell to the most sophisticated and well-capitalized customers in the industry, with that comes a level of sophistication that they're using today and how they manage their assets. We've specifically structured our portfolio to leverage that going into a time just as we're in today. When we talk to them on a one-on-one basis, they echo that.

And we can see that in the context of the level of cancellation that we have seen, primarily in our indirect channel, not in our large customers, as well as we have not seen significant pushouts in trailers or other Wabash National equipment across all of our segments. So not only it has an overall backlog stable, but we've seen a stability in the, we'll call it, uptake and sequence of product as well. And their intent -- which signals their intent, their need will pick up. I would say pick up -- the actual measurement of window pickup is, it's complicated by the nature of the time we're in.

But ultimately, we're a build-to-order company. They want their product. They want it scheduled when they schedule it. It will get picked up.

Mike Pettit -- Chief Financial Officer

I think also the diversity of our customer base. We have customers that this has been a very busy time for them. A liquid tank food-grade hauler or a refrigerated trailer or truck body customer may have more demand than they've ever had. So it's a very diverse customer base.

Joel Tiss -- BMO Capital Markets -- Analyst

OK. And last one, maybe it's a little bit unfair. But can you see any signs of distress in any of your competitors? Or any chance to sort of consolidate the industry a little bit? I know it's not really the time to think about those kinds of things but just anything that would give you a little bit of a tactical advantage a year from now. Thank you, and then I'm done.

Brent Yeagy -- President and Chief Executive Officer

Yeah. I'm not going to speculate on robust acquisition roll-up or consolidation activity. That's too early to talk about. What I will say is, I think, something that we take into consideration is that we have been very dynamic and planful in the way that we manage our sales and operations planning process, coupled with how we've derived our customer portfolio.

You can see it in our backlog. And we were taking variable cost actions and rightsizing our business in the fourth quarter for what we intended the initial backlog and demand pull to be. We've further done that. I would say, based on our backlog, our capacity changes are effectively done.

I believe a portion -- and I won't speculate on the size. But a portion of our competitors will still go through capacity rightsizing as they move into the midsummer period. I think that may put us in a very competitive situation and being able to respond to what demand could be in the fourth quarter, as well as moving into 2021. It gives us much more responsive footprint depending on what the world gives us, and that's something that we're looking to enable so that we're at a higher level of competitive advantage to react to what our customers' needs are.

Joel Tiss -- BMO Capital Markets -- Analyst

That's awesome. Thank you.

Brent Yeagy -- President and Chief Executive Officer

Thanks, Joel.

Operator

Your next question comes from Ryan Sigdahl from Craig-Hallum Capital Group.

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

Good morning, guys. So first off, so CTP and DPG gross margins held up well despite a challenging environment, but negative gross margins in Final Mile was certainly surprising to us, the magnitude there. I guess why the outsized pressure? And then how do you think about those margins trending throughout the rest of the year?

Mike Pettit -- Chief Financial Officer

For FMP, I would say the reason why they came in maybe more negatively than expected was because, as Brent mentioned, we were seeing improvement through the first quarter. We knew the first quarter was going to be challenging, and we talked about that in the Q4 call. As we were seeing some of our operational improvement hours per unit and productivity move in the right direction, it came right at the heels of us hitting March and hitting the pandemic and some of the slowdown. And also the revenue pulled back because of that.

And some of the comments that Brent mentioned, pickups and shipments became difficult. So the lower revenue base with the absorption and the improvement that stalled out based on the pandemic really caused those margins to be a little bit worse. We would expect the improvement to continue into Q2, but the slowdown in the first quarter due to COVID is really what caused those to be worse than what we expected.

Brent Yeagy -- President and Chief Executive Officer

Yeah. I think you have to -- when you think about a 40% revenue decline that was predominantly occurring in that early February and into the March time frame, you have to really look at how product has moved off our lots. And the vast majority of our product is customer pickup or customer arranged. In the truck body world, we're significantly moving product in the urban centers, urban centers that are disproportionately impacted by municipal restrictions.

They were significantly more impacted by literal COVID risk. Populations were impacted. People were distracted. Our businesses were distracted.

Picking up truck bodies were probably not high on individual's list during that specific period of time, let alone, physical, I'll call it, institutional barriers with getting product into these urban centers as well for the products that we sell specifically and the customers that we're moving to. You also think about nonessential businesses that were shut down. In many cases, the dealer outlets for Final Mile-related products were shut down or had skeleton crews. So their ability to manage the literal logistics of moving truck bodies were significantly impacted.

Those are businesses that really only through roughly the second or third week of April were really encumbered. Those are beginning to loosen up now as we move into the reopening phase for state and local government.

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

Great. That's helpful. And then just kind of as we think over the medium term, I mean, I don't think anyone argues with the longer-term opportunity there and the secular trends. But Mike, I heard you say that the biggest change to the goodwill analysis was changes to 2020 and 2021 cash flows.

I guess we were previously expecting a pretty sharp bounce back in the second half of this year in Final Mile, but it sounds like that could be a little bit longer. I guess how do you think about the next, call it, six to 18 months?

Mike Pettit -- Chief Financial Officer

Yeah. We definitely would expect the second half to improve, but it would be a slower recovery than what we would have been expecting, say, in Q4 on the call. As we mentioned that we were seeing some improvement through that business in Q1, and we'd expect to see that continue, we'd expect to see improvement through 2020 and definitely significant improvement in 2021. It's just a matter that those absolute levels will be lower than what we would have originally modeled at a year-end time frame, call it, in Q4 of 2019.

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

Got it. Last one for me, and then I'll turn it over. So you talked about Q2 kind of the worst-case scenario back in March, it was expected to be down 50% or more. Has that expectation changed? Have things improved or worsened since then? I guess, any high level kind of directional guidance you can give without being too specific.

Thanks.

Mike Pettit -- Chief Financial Officer

Yeah. No problem. It's really more along the lines that we're running multiple scenarios. And at the end of March, when we decided to cap the revolver, I would say the range of scenarios were a little wider than they are now because it was hard to see the bottom at the end of March just from an economy perspective, a recovery in the case rate of COVID or any of those things.

So we were modeling things pretty severely down. As we stand today, I think our general base case that we've kind of tried to outline qualitatively is relatively intact. It really feels like the bottom is coming up a little bit and a little bit more stable. So it's not so much the base case has moved too much.

It's just the bottom is more easy to see. So we feel pretty good at our liquidity levels and what we did, and we're actually very comfortable and probably wouldn't need to pull that money today if we knew then what we know now.

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

Great. Thanks, guys, and good luck.

Mike Pettit -- Chief Financial Officer

Thanks, Ryan.

Brent Yeagy -- President and Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Felix Boeschen from Raymond James.

Felix Boeschen -- Raymond James -- Analyst

Hey. Good morning, everybody.

Brent Yeagy -- President and Chief Executive Officer

Good morning.

Felix Boeschen -- Raymond James -- Analyst

Maybe if I could start with a bigger-picture question. Brent, I appreciate some of your comments on social distancing measures within facilities. I'm curious if you can maybe expand on that topic a little bit, exactly what you've done within the facilities. And maybe how you think about increased automation opportunities going forward, or any maybe short-term increases to costs we should be thinking about?

Brent Yeagy -- President and Chief Executive Officer

Yeah. Well, let's see where to start on that one. Well, obviously, we have two different types of facility considerations. We have the office environment.

We have the manufacturing environment. From an office environment standpoint, we've got roughly 40% to 45% of our salaried workforce working from home right now to facilitate social distancing within the office environment accordingly, right, so we can get the spread that we need. We have significantly changed, I'll call it, the administrative and physical layout of certain common areas, break rooms, cafeteria and so on. And what we will do is a phased approach of reintroducing some portion of that salaried workforce back into physical environments at the pace at which we can maintain effective social distancing.

So we'll make additional facility modifications to allow that to happen, but we probably will not have the same density of people in our office environment that we saw in the past. That's going to change physical needs going forward and I would say, in total, will lessen, and that gives us opportunities potentially for facility rationalization, office consolidation going forward. So net-net, I see that as a reduced fixed cost activity for the company. From a manufacturing environment, we have been able to implement effective safeguards on the manufacturing floor across all of our businesses, and we have a very diverse set of manufacturing systems.

But they do lend themselves much more than other industries, such as automotive. We have a much easier time putting in those appropriate procedures and where those can be put in place, physical barriers, right, to prevent the literal coughing and sneezing transmission through droplets to nearby workers. And so for the vast majority of cases, the productivity impact has been, I would say, minimal. We did see on the Final Mile business initially some impact in the March time frame, but that is something that we've been able to continue to mitigate over the course of the last 30 days.

And we just went through a round of work to understand how we can even further reduce that accordingly. What it has done -- so from a capital standpoint, I don't see us at a point right now where we will need to shift capital to tackle COVID-related social distancing protocols that are impacting productivity. I don't see that. I actually see the opposite.

I see us being able to understand how do we use our enterprise lean tools to understand how we reduce and improve our standard work on the shop floor to encourage social distancing through efficient use of people without the use of capital. And that's the direction that we're heading down at this point.

Felix Boeschen -- Raymond James -- Analyst

OK. That's very helpful. And then maybe a question on the backlog. I think, obviously, the $1 billion, down from $1.1 million, is much more stable in the broader industry.

Is there any way to parse out that $1 billion any further? How much is maybe Final Mile contributing to that versus the legacy trailer side? Just any color on that would be helpful.

Brent Yeagy -- President and Chief Executive Officer

Yeah. I'm not going to give -- I can't give, I'll call it, super specific, and I know you know that. What I'll tell you is that the breakdown of backlog by business reflects the normal breakdown that we have seen over the years. So we do not have some disproportional mix issue with backlog.

It reflects our normal customer behavior. It reflects normal seasonality. It is stable in many ways beyond the top line obvious number. And that gives us great confidence at this point in how we look to manage our business in the future.

Felix Boeschen -- Raymond James -- Analyst

OK. And then my last one, maybe for you, Mike. On the capex side, that 50% reduction, correct me if I'm wrong. But would you kind of categorize that as still sort of maintenance levels? I guess I'm trying to get maybe a better flavor for what exactly it is that you're maybe deferring or cutting this year.

Mike Pettit -- Chief Financial Officer

Yeah. So the $20 million would be primarily maintenance, safety, regulatory. There would be a couple key strategic initiatives that we continue to spend on in there. MSC, for example, could be contained in that, but it was largely reduced significant growth capex.

But we feel like $20 million allows us to not only maintain, much like Brent's comments around our customers maintaining their fleets, we believe that allows us to maintain our facilities for the future to come out of this pandemic really running hard but also allows us to maintain some of our most important strategic initiatives with some level of funding.

Felix Boeschen -- Raymond James -- Analyst

OK. I appreciate it. That's all I have.

Operator

Your next question comes from the line of Jeff Kauffman from Loop Capital Markets.

Jeff Kauffman -- Loop Capital Markets -- Analyst

Thank you very much. Good morning, everyone.

Mike Pettit -- Chief Financial Officer

Good morning, Jeff.

Jeff Kauffman -- Loop Capital Markets -- Analyst

Quick question. You mentioned the customers didn't pick up the trailers to the extent we would have liked, so sales are down about 27%, receivables down about 30%. Inventory is only down about 3% or 4% on a year-on-year basis. As these pickups balance out, where do you believe inventories go?

Mike Pettit -- Chief Financial Officer

No. The inventory levels that you see at the end of Q1, especially in our finished goods, will come down. So a lot of those sit today, Jeff, in finished goods. So we had a situation where we built significantly more units in the first quarter than we shipped.

So finished goods inventory levels will come down as all things else remain equal.

Brent Yeagy -- President and Chief Executive Officer

Yeah. And I think, Jeff, I know you know this, but I want to say it for the call, the way that our -- when you look at the characteristics of our finished goods, again, we're a build-to-order business, we invoice upon finish. We recognize revenue upon moving off our lot. In many cases, the unit has been paid for prior to recognizing that revenue.

And I don't want anyone to have a misconception that these are speculative in any way. Effectively, every unit in finished goods is expected to ship. It's just a matter of timing.

Mike Pettit -- Chief Financial Officer

Yeah. And it's important to know, as Brent mentioned, we watch the receivables closely because there are scenarios where we regularly get paid for units that are still here on Wabash property. So we can't recognize the revenue on it, but we'll actually have the cash. And our cash flow has been really, really positive, even through early parts of Q2.

And part of that is because while customers aren't always picking up in a timely manner, they are paying in a timely manner.

Brent Yeagy -- President and Chief Executive Officer

Well, I think, when you couple paying in a timely manner with the pressure on making those units still available, our customers are still calling every day, wanting to make sure those units are available. They're paying effectively on time. They're not extending terms, as well as they continue to make logistics plans to pick up those trailers. Everything is still boxes, but that need is out there.

Jeff Kauffman -- Loop Capital Markets -- Analyst

Right. So if I think abou, to your point on the free cash, as we convert a lot of this finished goods inventory into revenue, that's going to help free cash flow. How should I think about where you want to position your inventories in this environment? I mean your sales are down 30%. Is it reasonable for me to assume? And I'm not asking for a forecast, more how you think about inventory positioning? We should, in theory, see inventories down about that much over time?

Mike Pettit -- Chief Financial Officer

Yeah. We would certainly strive to reduce inventories in line with revenue, and that's kind of my comment on working capital. We would expect to see a reduction in working capital. That exact level and timing in this environment, it's tough to project, but we are certainly planning on, and we will see some reduction in working capital which would be a benefit to free cash flow.

Jeff Kauffman -- Loop Capital Markets -- Analyst

OK. Just one other question, if I can. We talked about deferring nonessential capex. There's a lot of new products that were slated to be introduced this year, whether it was some of the new DuraPlate products or the development of MSC.

As you, no doubt, know in the media, there's a big focus on refrigerated right now and refrigerated final mile solutions. How is this environment you're facing impacting the timing of some of these new product introductions?

Brent Yeagy -- President and Chief Executive Officer

Jeff, it has had zero impact on the timing of the products that we have communicated to the market. Our Cell Core product is out on the road. Our MSC is where we want it to be, as Mike alluded to, we've maintained funding for that. And there's a host of others.

We've not delayed. In many cases, they are already commercialized, and they are available to the market right now.

Jeff Kauffman -- Loop Capital Markets -- Analyst

OK. Great. That's all I have. Congratulations and good luck.

Brent Yeagy -- President and Chief Executive Officer

Thanks, Jeff.

Mike Pettit -- Chief Financial Officer

Thanks, Jeff.

Brent Yeagy -- President and Chief Executive Officer

Well, seeing as how that's all of our analysts who have...

Operator

I would now like to hand the...

Brent Yeagy -- President and Chief Executive Officer

We'll close it there. Thanks, Felicia, and thanks to everyone for joining us today. More importantly, stay healthy and safe, and we'll look forward to following up during the quarter. Thank you.

Duration: 56 minutes

Call participants:

Ryan Reed -- Director of Investor Relations

Brent Yeagy -- President and Chief Executive Officer

Mike Pettit -- Chief Financial Officer

Justin Long -- Steph

Joel Tiss -- BMO Capital Markets -- Analyst

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

Felix Boeschen -- Raymond James -- Analyst

Jeff Kauffman -- Loop Capital Markets -- Analyst

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