美國西屋制動公司 (WAB) 2002 Q1 法說會逐字稿

Good morning and welcome to the Wabtec Corporation earnings release conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation.

I would now like to hand the floor over to your host, Will Kassling, Chairman. Sir, the floor is yours.

Thank you, , and welcome, everybody, to our first quarter 2002 conference call.

We're joining you here from world headquarters in Wilmerding, Pennsylvania -- a modest world headquarters that it is. And it's located, as you all know, in one of our production facilities.

So we want to welcome you here today.

Joining me on the call is Greg Davies, our President and Chief Executive Officer, Bob Brooks, our Chief Financial Officer and Tim Wesley, our Vice President, Investor Relations.

I want to make comments about any forward-looking statement disclaimers as -- in the press release. And, with that, let's get into the first quarter numbers and I will turn this over to Greg Davies when I'm finished.

First of all, we reported earnings per share from continuing operations of six cents for the quarter. That is in line with our expectations and really the same as the fourth quarter although our revenues declined $11 million quarter to quarter. So we were able to overcome that and still achieve the same level of earnings.

If you look versus last year, last year's first quarter earnings was 19 cents. So we're down around 13 cents from last year. But versus last year we had an 18 percent revenue -- a top line decline for $38 million. So in that sense -- and we'll look at the causes a little bit later -- we did a I think a pretty good job of overcoming the volume losses.

In fact, freight car deliveries in the first quarter were 65 percent lower than the first quarter of last year.

Our cash earnings per share was eight cents and we produced an EBITDA of 17 million for the quarter. That puts us really pretty well on track to hit our target of 80 million of EBITDA for the full year as we had committed. And that will -- given the fact that we've done a good job of deleveraging the company in the last 18 months -- will give us about four times interest coverage.

The general outlook for the market remains weak but we still expect our full year earnings per share to be between the 50 and 60 percent and 60 cent guidance that we gave at our last meeting.

Now Greg will spend a lot more time on details regarding the current market and the actions that we will continue to take as we go forward. But you can rest assured that we remain focused on generating cash and we keep positioning the company to benefit on the upside when the market turns.

And all of those things we're doing will pay big dividends on the upside. With that, let me turn it over to Greg Davies. Greg?

Well, thanks, Bill, and good morning, everybody.

I think it's a good news bad news story in the sense that some of the -- some of the market members have continued to deteriorate a little bit but the good news side is that we were able to match the downside of the market with both some upside opportunities in some parts of our business, as I'll discuss. And continuing cost reduction activity is allowing us to stay the course on the -- on the kind of earnings projections that we had given you before.

And if you look at freight traffic -- freight traffic is at lower levels, which really reflect the weakness in the general economy. Tons miles are down a little over two percent versus the first quarter of 2001. And they're down five percent since the first -- since the fourth quarter of '01.

And car loadings, which are probably an equally important measure are down 3.8 percent versus the first quarter of '01 and down four percent since the fourth quarter of 2001.

So overall freight traffic is at somewhat lower levels and that partly is reflected in the fact that there are coal trains parked because we had a mild winter so less need to haul coal to keep inventories where they need to be. And, as in most of these situations, we had talked about this before -- the good news in the underlying -- the whole freight traffic market -- is that railroad reliability and service continue to improve.

In the short term, of course, as we've said before, that tends to mean fewer cars needed in the -- in the immediate future to haul the same amount of goods. But what it really does is provide for growth opportunity in the future as the railroads become a more competitive and more able to attract mobile share.

Given those -- given those freight traffic movement numbers, the short term outlook, as I described and the general weakness in the economy, freight car build outlook is a little bit weaker than we had expected.

First quarter orders are at 260 units approximately versus 3,200 or so in the fourth quarter. And first quarter deliveries of cars were 3,850 versus 7,000 in the fourth quarter.

So what you're looking at now is a backlog of only about 6,400 cars, which is the lowest since the mid 1980s.

Now given that number I think it's only reasonable to say that we have to expect that deliveries for the year will be a little bit lower than we had previously forecast.

We were forecasting 20,000, as you know, in the past. And that was predicated on recovery beginning in the -- in the second half of the year.

I think that will still occur but given the lower order rates in the first quarter it means that probably that turnaround will be just a little bit slower and a little bit lower ramp up than we had thought before.

So something in the range of 15 to 20 still is the right number we believe but it's probably going to be a little bit shy of 20,000.

Now an interesting thing to note and most of you follow Wabtec and think of the freight car build number as a good indicator of Wabtec's business. It's interesting to note that freight car OEM business of Wabtec now only represents approximately 10 percent of sales.

We wish it worked like that. We wish there were build rates at three or four times higher like they were a few years ago but that is the way it looks right now.

And, as I said, there is some -- there is some good news as well. The locomotive order book is still well below where it was. The locomotive build rate this year will still be well below where it was last year. It is firming. We talked a little bit about that last quarter and we do now see some possible upside to our forecast of 700 units.

And there's a little bit of activity starting to come in terms of overhaul bid activity -- things that we are out able to bid on for some of the regional markets and so forth that we see as a potential plus.

On the transit side -- nothing very new to report. The build, as you know, is beginning to wind down this year. And our general level of activity in the transit area continues strong and will continue to strong -- to stay strong but there is that little run down towards the end of this year because of while we await word on the new follow on order for New York City, which we expect to receive word on shortly.

the only two issues that we see in the transit activity that are a little bit unusual or a little bit of a concern compared to last quarter are that bus door business has been impacted by lower OEM production rates.

The demand for buses is still where it has been but because of some quality problems not related to us -- quality problems and financial issues and so forth, some of our OEMs have lower build rates than we had expected. And we should be able to catch that up at some point because the demand is there.

And then, finally, business is a little bit slow on the rail side and that's caused a little bit of a downward push on our sales in the first quarter.

So what are we doing to respond as a result of that? As you know, we have a team with an action oriented track record and that's continuing to produce results.

-- our quality performance system and our other lean programs -- we're working very aggressively on all of those to reduce costs and increase our productivity and continue to drive down inventory so that -- so that we can have a very strong positive cash flow.

In fact, one thing to note is that three percent of our employment or about 130 jobs were taken out in the first quarter.

A new program that we're going to go after, though, to make sure that we are responding to these slightly more negative market conditions in a very positive way is to really attract raw material cost and purchase service cost.

We think we can take out as much as two percent of those costs in the second half. And, of course, anything we do in the second half of this year reflects into next year as a full year effect. So we're going to really go after that in a -- in a very aggressive way for the remainder of the year.

And then beyond that, if we need to we will take out further plants and will do further plant consolidation. We're already closing the Burlington-Ontario brake parts plant in the second quarter.

That will take out another 120 -- another -- and about half of that's already included but about another 60 or so production support jobs yet to come out in the second quarter related to that closing. And that should give us about a million and a half savings in the second half.

As I said, if we feel the need to further reduce plants, we won't shrink from doing that.

Let's turn a little to new business because there's a lot of activity going on out there that gives us good feelings about our opportunities as the year unfolds and as we move into the next couple of years.

We formed a joint venture in China to build bus doors. We expect dramatic growth in the bus door business for relatively sophisticated buses in china as China ramps up for the 2008 Olympics.

Our ramp car that we've talked to many of you about over the last year or two is now in service, so that's a break through for us. It's in service on the and we are starting to see increased interest on the part of the other railroad as a result of that -- of that milestone.

We're performing field modifications now on some of GE's most technologically sophisticated locomotives. That's a relatively small piece of business but what it does do is give us a growing presence, if you like, or growing credibility in front of General Electric, which, of course, is one of our largest customers.

It gives us growing credibility as a company that's able to support them in the after-market. So we're very pleased to get that business.

We've also received a letter of intent from the Massachusetts Bay Transportation -- what do they call it -- Authority -- Massachusetts Bay Transportation Authority -- MBTA for an additional 12 locomotives. That's another $10 million worth of business and that letter of intent has just been received.

And then on the electronics side we've talked numerous times about our train control activity. We have now received a further contract for CSX -- from the CSX, which will help to prove out some of the savings that are available so that we could be able to go forward with a major rollout as early as next year.

And, finally, another CSX activity is engine control units -- APU units, which are aimed at reducing fuel consumption and lowering emissions on locomotive engines -- not just on the CSX property but elsewhere.

We are going to provide a major subsystem to that product called ERM. And that's a control unit for the engine itself. And we are now seeing those first units going into service on the CSX.

So a lot of our -- a lot of activity.

We pedal fast, pedal hard -- continue to take the right kind of action for the rest of this year. As we hit the bottom and begin to ramp up we're very optimistic about the opportunities on the upside as we come through the bottom of the cycle.

So, with that, we'll turn it over to Bob and go through some of the numbers and then we'll come back to answer any of your questions. Bob?

Thanks, Greg. First, let me talk a little bit about cash. Last year, as most of you know, we generated about $111 million from operations and operations including earnings, working capital and cap ex with a significant portion of that in the fourth quarter.

At the end of March this year we had $28 million in cash as a cash balance compared to 54 million at the end of the year.

Now that's a reduction in cash of 26 million but it was primarily due to payments of $30 million for asset sales that we had in the fourth quarter.

That $30 million -- when we had done the first -- fourth quarter -- we expected to be $36 million. but we found ways to improve the state taxes by almost two million and additional taxable levels for the federal by four million due to certain reclassifications.

So in addition to that, we've also generated in the first quarter four million in cash and that primarily comes from earnings and working capital -- or not working capital but cap ex.

So, again, first quarter continues on the trend of cash generation. Now our debt was 241 million, which is 49 percent of our total cap. It's one of the best levels that we've been for quite some time.

And that debt level is essentially 175 million in bonds, 60 million in fixed debt and six million in industrial bonds. That's the same level essentially as the end of the year.

Important to note that that 175 million in bonds is currently at an interest rate of 9.375 and is callable at par at June.

Our bank debt is somewhere between four and five percent. and we will be currently looking at this capital structure between now and the next -- end of the next quarter very strongly.

Working capital remained flat for the quarter. Primarily as inventories remained at the 105 million level, receivables net of payables were just slightly short or lower than the year end level.

We're confident that this level now has given us an established stability of the first quarter working capital and is a level that we will be consistently be chipping away at during the rest of this year.

Sales, as Bill and Greg both said, were 18 percent lower than the prior year's quarter. Freight sales -- 22 percent lower. And the OEM of those freight sales -- 65 percent lower.

The transit sales from ongoing operations were about seven percent lower and these were due to the low bus stores due to the manufacturers' production issues and within rail vehicles.

Our gross margin was 25.3. This compares to 28.5 a year ago and is due to the change in the lower sales, the product mix, unfavorability within the freight group and pricing.

Our gross margin was flat to the fourth quarter, which was 25.0.

Operating expenses were five percent lower this year than in the prior year but this was entirely due to the elimination of goodwill amort due to the adoption of the new FAS-142.

We expect about $8 million annually to be reduced in about two million a quarter.

We also expect to have a non-cash charge to write down a portion of our goodwill, which is a new program, again, that's sponsored by the FAS programs. And this amount has not yet fully been determined but will be and will be for less than 25 percent of our goodwill.

Interest expense is 51 percent lower than a year ago. Due to the lower debt levels that we spent during the year this number has come down substantially. To try and give you an idea of the EPS change, we've gone from the 19 cents to the six. So 13 cents lower in the first quarter of this year.

We're actually seven cents better due to interest expense. We're two cents better due to goodwill and amort. We're two cents better to the salary lay-offs that we did at the end of the third quarter. And, as a result, that makes us 24 cents lower due to volume mix and price, which is roughly 15 million on 38 million reduced sales.

Depreciation for this year was at 5.1 for the quarter versus four nine -- about the same level as a year ago.

Amort was 1.5 versus 3.3 and our cap ex was three million this year in the first quarter versus 5.3 last year.

Now the three million level is a level that would be consistent with what we had said before was 12 million -- our kind of replacement cap ex level for the year.

Thus, I believe we're on target for our free cash flow commitment of the $40 million that we said we would do in 2002.

The 12 month rolling -- yeah -- the 12 month rolling backlog is up this year. We are -- at corporate for the whole corporation 361 million t the end of March versus 300 million at year end, which is about 20 percent higher.

Freight is a significant change. It's 193 million versus 147 million at year end with about 45 million of that growth being the and locomotive rebuild contracts that have been taken at our Boise operation.

Transit's 168 million versus 153 million or about 10 percent higher than year end levels.

With that, I'll turn it back to Bill Kassling.

Thank you, Bob. Well, just to summarize -- first quarter earnings and EBITDA are in line with the expectations that we gave you for the last time we were together.

We're still in range of earnings for the year of 50 to 60 cents and 80 million in EBITDA and about 40 million of free cash or cash available to pay down debt. And we're doing all of this despite a tougher freight car market. It just moved south on us in the last few month in terms of our expectations.

But during this process as we -- as we see the markets shrinking on us we focus on generating cash and getting our break evens down and getting our cost down to position us for the inevitable upturn as the surplus capital equipment in the rail industry gets worked off and it inevitably will.

So that really is the end of our formal remarks. , the three of us would be happy to take any questions that comes from our group.

Thank you. The floor is now open for questions. If you have a question or a comment you may press one followed by four on your touch-tone at this time.

If at any point your question is answered you may remove yourself from the queue by pressing the pound key.

Questions will be taken in the order they are received. We do ask that while posing a question that you do pick up your handset to provide optimum sound quality.

Our first question is coming from of Morgan Stanley. Please state your question or comment.

Hi, guys. That was quick.

, how are you?

Good. Usually I'm not first but just a couple of things here. One nit picky thing for Bob. If you're successful in repositioning your debt from the higher coupon into more of the bank debt, is that factored into your guidance at all because presumably I guess that would be a good increase in earnings vis-a-vis lower interest expense?

You're right. the -- it would be. I don't think we really decided on that capital structure yet. and so, as a result, that's definitely not in the low range -- the low end of the range. And it would certainly push whatever earnings we have up.

OK -- good. And then one more strategic maybe for the other guys. We're starting to see some companies who are in real cyclical end market business really going back and asking themselves whether these markets are really going to recover or not.

And I'm wondering, given the philosophy you have in terms of lean manufacturing and so forth, what if we assume that rail cars just bump along at 25,000 for the next 10 years or something? What would you have to do to position the company to make what you would consider a reasonable return in that type of environment -- A.

And then B, is your structure -- your manufacturing structure that you're headed for -- is it variable enough so that you'd also be able to take advantage of some upside if it happened or would you really be shooting yourself in the foot?

Well, my first comment is to watch for tall guys on bridges in Pittsburgh. But, seriously, , I hear you. I think that there is an inevitable -- there is an inevitable question about recovery.

I think that we are going to see a recovery. This is a cyclical business and the build rates are going to be higher in the future than they are now. So that I'm confident of. And I think that the other thing that's interesting here is I really believe and have for some time that the railroads have a very real opportunity to gain share in the -- in the next cycle.

So I'm not -- I'm not concerned that the markets won't come back but, nonetheless, your question would still be relevant because everybody's asking the question, "Well what does come back mean? Are we going to be at 40 or are we going to be at 70,000 cars?" And things like that.

And I think on the freight car side of our business alone you have to be thinking about variability so I -- we -- there is some work going on in that regard. I think maybe the best answer is not to give you specifics because, quite frankly, we don't have them, but you just acknowledge that it's a good question and it's the kind of thing that our people are starting to think about.

If you can drive your fixed cost down then you're much better able to deal with that kind of cyclical swing.

And that is the kind of thing that we're talking about when we're talking about the potential for plant consolidation and when we talk about the potential for overseas sourcing and things of that nature those are all part of that kind of a response.

So I think the answer is yes -- we are thinking about it. And, yes -- we will be looking for ways to improve the variability of our -- of our cost structure.

The other thing to remember is that today only about 60 percent of our business is in the freight side of the business anyway. The rest is transit where the cyclical question is not as much of an issue. So we are also somewhat protected from that problem compared to many people in similar industries.

Yeah -- freight care is another 10 percent.

Freight car is down 10 percent -- freight car build. But the freight business as a whole is still about -- is still about 60 percent.

But that's the point, , that Bill's reminding us of. We're -- here we are -- we're able to stay profitable and we have made adjustments to our capital structure and we are able to survive and still throw off positive cash in an environment where freight care build has come down to 10 percent of our business.

And you think about where we were only a couple of years ago that's kind of unthinkable. So ...

Well, I remember mid '90s it was 35 to 40 percent. So it has come down. And I agree with Greg. I think you can -- this -- if you're going to do 700 -- $800 million of revenue overall you can position your cost to make money. That's not a -- that's not a bad top line to work with if it goes on for awhile.

And we can continue to get our cost down and make money at those levels.

OK -- great. Where are we in that process, do you think? What inning is this?

Well, we'll go around the room and see. I think we're in the seventh inning. I think we're through the trough and maybe the dawn will come. I had originally thought it would be a three year downturn recession -- maybe it's going to be more like four. But I think we're through the halfway point. But what do you think, Greg?

Was that your question, ?

Actually I was asking where you are in your process of sizing the business for this increased variability that Greg mentioned.

Yeah -- on that I would say we're in early innings. We have a lot of thinking to do. We have a long way to go on that. So there's a lot of upside opportunity.

So maybe we're in the third inning in the sense we've given it some thought. We've already taken some action but I think there's a lot that can still be done. So ...

We're in the seventh inning of the cycle and our third inning of our reaction to it.

Yeah -- we've got lots to go. we've got lots .

That's great. Both of those are helpful. And the final detail here is one of you guys mentioned something about pricing pressure in your prepared comments.

Yes.

Yeah.

Can you expand on that a little? Where and why and all of that?

Well, it's a tough market out there and in any kind of down market, , as you know, people are always going to be driving -- your customers are always going to be trying to take advantage of price.

I think one of the things that had always been in our favor compared to some other businesses that you might look at is the oligopolistic structure that we have, which has tended to mean that we have been less effected by downward price pressure than in some other industries where there's five or six players in any one segment. Everybody's trying to struggle to stay alive. And we haven't seen that.

The other thing is, of course, that a lot of our products are proprietary customer specified products. And, again, you see a much lower pressure problem on that kind of product compared to commodities.

So one of the things you've heard me talk about a lot is how we want to be a tier one, supplier one -- get away from being considered a commodity supply. And the more we move along in that direction, the more we're protecting ourselves against short term price pressure in these kinds of cyclical troughs.

OK -- good. Any guestimate of what it might have cost you in terms of margin in the freight business?

Yes -- I won't hazard just a wild guess, . I don't know that.

OK -- thanks.

Once again, if you do have a question or a comment, you may press one followed by four on your touch-tone phone at this time.

Our next question is coming from of . Your line is live.

Good morning, gentlemen.

Hey, there, . How are you doing?

OK. Two questions but I think they're related. First, could you give us some update on what the status is of planning or discussions or anything concrete on breaking into the -- beginning to break into the European -- the Continental market for freight and/or transit equipment?

And, secondly, what's the opportunities out there in terms of real accretive acquisitions -- things that really would make -- would really be strategically sound?

, I think that the answer to the first and really to the second is that we must view acquisitions as opportunistic. We -- as you know, we've been through a period of having a very high debt to capital ratio -- something that I think you and all of the other investors would be concerned about us returning to.

So we're looking at the whole European market area and you're right to look at that as one of the major opportunities for us. That's certainly the way we would look at it.

But we'd look at that whole area as something where we see substantial opportunities but we aren't going to lever ourselves back up unless we can find the kind of acquisition that, as you said, would be strongly accretive -- something that would be clearly a relatively short term plus for us. And those aren't easy to find.

There are opportunities out there for acquisitions. We're certainly working on it. It's hard to tell you concretely, as you know, because for a number of reasons it's really difficult to say anything about a -- about that kind of a strategy until you actually have something on the -- on the hook.

But I can just tell you that if we see the right opportunity, if we believe that it presents a compelling case to our investment -- to our investor community, we will make acquisitions.

We certainly would like to. There's certainly no question that that's a growth opportunity -- a growth area in all of our planning.

That suggests that the only way to break into the European market is through acquisition?

It suggests that it's not the only way but it's certainly a difficult market to gain traction in without the kind of volume and presence and distribution system that an acquisition would bring -- yes.

One final question. In terms of future planning -- priorities -- particularly in light of the first series of questions by the gentleman from Morgan Stanley. In terms of priority, where would you put Europe -- one, two, three, four -- in terms of really major projects that you see are going to change the company significantly?

Well, I think, , unless -- I'm not sure I understood what you wanted me to compare -- rank it against but I may just have missed that. But, first of all, the first thing we have to do is focus on internal profitability, internal growth. There's just no question -- there's no substitute for that. That's got to be where most of our people are spending most of their time.

When you look at growth opportunities, you've heard me talk about both tier one supply issues -- supply opportunities. Those would be for our traditional domestic OEMs in the States.

And then we've talked about global growth. And I would say that global growth would come a close second to the tier one. And both of those really have come after we're sure that we've got our internal operations straight.

thank you.

You're welcome.

We're showing no further questions at this time, gentlemen.

Well, then I want to thank you for joining us and we'll look forward to meeting with you next quarter. Take care, guys.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.