美國西屋制動公司 (WAB) 2002 Q2 法說會逐字稿

Good morning ladies and gentlemen. And welcome to your Wabtec Corporation second quarter earning's release conference call. At this time all parties have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, and Chairman, Mr. William Kassling. Sir, the floor is yours.

Thank you . And I'll go through some remarks, turn it over to Greg and Bob Brooks. And then we'll come back for follow-up questions. Joining me today here in Wilmerding Central, in lovely Pennsylvania is Greg Davies, our President and Chief Executive Officer; Bob Brooks, our Chief Financial Officer; and Alvaro Garcia-Tunon, our Senior Vice President of Finance. Tim Wesley, our VP of Investor Relations, is traveling today and can't join us but will be here next time.

I want to note everybody looking at the - in the press release for our forward-looking statement disclaimers. And with that I'll get into our opening remarks.

Earnings per share for us from continuing operations in the second quarter was 11 cents a share, versus 15 cents in a year-ago quarter. We're in line with our expectations and we're higher than the first quarter. However, we are below last year's second quarter and that's due to essentially volume. Freight rail market conditions are considerably worse in the second quarter this year than they were in the second quarter last year. We generated cash earnings per share of 13 cents and an EBITDA of about 20 million.

In terms of outlook, the market outlook does remain weak for us although we're sort of bumping along the bottom at this point. Freight rail traffic is essentially a bright spot over the last quarter, showing some growth. And we think that railroads should have a great incentive to grow because they have significant cost advantage over over-the-road trucking, and, hopefully, they're starting with on-time performance to take some advantage of that. And, hopefully, that's reflected in the - in the traffic numbers.

We're looking at the - in the transit industry we're seeing some deferrals out of the second half of this year, which Greg will talk to you about in specifics, but we think that fills in our gaps our concerns we had about 2003 to some extent.

We still expect full-year earnings per share to be in the range of 45 to 50 cents. EBITDA for the year will be about 75 million and the good news is that the cash target we set for ourselves late last year of $40 million of essentially debt paydown or essentially pre-cash flow we're maintaining that at 40 million. We think we can continue to do it despite really a weaker top line.

We have reduced employment since the first of the year by five percent from continuing operations, and Greg will fill you in a little bit more on that. And we remain focused on generating cash and positioning the company to benefit when the market turns.

So essentially, if you summarize where we are we're not in really a - it's not really pretty for us in our - in our industry, not certainly particularly fund for us in the downturn of this cycle. But I think that the company is reacting effectively and positively to the cards we're being dealt and we're very well positioned for when the inevitable upturn begins, although we don't think that will be in the second half.

Now I'll turn it over to Greg who'll give you details on the current market.

Greg.

Thanks, Bill.

Good morning, everybody. Let me just go through a little bit about what's happening in the freight markets and transit markets and then we'll also talk a little bit about our responses to that.

As Bill said, freight traffic is beginning to look a little bit better. While traffic as a whole is still a little bit lower than it was year-over-year, there has been a noticeable pickup in the second quarter. Car loadings, in fact, are up about five percent since the first quarter of this year, even while they are still down slightly about one percent versus last year in this second quarter.

Intermodal is very strong. Intermodal's up about 10 percent compared to either quarter, which means that overall ton miles putting the car loading and together, ton miles were approximately flat. But that's a good trend. And if that continues, I think it bodes well for the future for us.

But in the immediate future, what we're seeing is actually a relatively flat outlook for freight car demand. We think that what's happened here is that the sort of current economic turmoil is causing some conservatism in placing new orders. So, where we had expected the car build and order rates to start to grow in the second half, as we talked the last couple of conference calls, with all this additional economic turmoil even despite the turn-up in car loadings and a turn-up in , it just seems to have dampened the sort of ability of the market to take risk.

I think what it really is doing is to divert sales into 2003 as we begin to see a need for increased cars of various different types as a result of the growing traffic. So that may mean a little bit lower sales this year, but should bode well for coming years. In fact, for freight car forecast, what we expect to see is deliveries in the 3800 range per quarter continuing from the first quarter through the - through into the second quarter, third quarter, and fourth quarter. So we see now a relatively flat built rate which will give us approximately 15,000 car build for the year versus our earlier forecast of 20,000.

Locomotive, on the other hand, book has certainly firmed up. We're now expecting somewhat more than 800 units to be - to be built this year, so that has helped to mitigate the situation for us somewhat.

On the transit side, what we are seeing here is that the business is continuing to wind down as we had already talked about. But we had counted on a add-on order for - sorry, for the - an add-on order for the which we had expected to be built in the fourth quarter, and now that will have to be delayed. It was part of the follow-on order, which has also been delayed by a few months. We now expect an order from - on the from New York City probably in the September - October timeframe.

Similarly, bus door business has been impacted negatively. We had talked to you about our expectations that bus door OEM production rates would rise. There is strong underlying current demand for buses, but the - some of - some of the major bus OEMs are constrained in their ability to produce. And while we have expected them to be able to correct those situations in the third and fourth quarter, just recently it really has become apparent that they're going to be unable to do so. So, again, strong demand, inability to supply means that probably what we will see then is deferrals of those sales into 2003. So, I think that is really nothing lost - just a deferral.

In terms of responding to the market, we've talked a lot in prior conference calls about our aggressive implementation of lean manufacturing - programs. We're continuing to stay the course on that. We're continuing to drive productivity improvements and drive down working capital need. As Bill described, we've taken out about two percent of our workforce in the past quarter, about five percent for the year so far. We'll continue to work in that, in that area.

On inventory we've been able to take about $5 million in total out of inventory so far during the year. And we would expect to see that trend to continue in the third and fourth quarter. In terms of continuing to improve productivity, we did close a components plant in Canada during the second quarter, that had a net impact of about 120 jobs, and saved us, well will result in savings of approximately one and a half million in the second half.

Also we've talked before about our restructuring of the vapor door businesses. That is continuing and will be complete by the end of the year, saving us approximately $4 million in 2003 and beyond. So all of the, all of the activities that we have been working hard on are continuing. As Bill said, I think we're setting ourselves up for, to be in a very good position once the tide begins to turn in these marketplaces. And we're looking forward to that beginning to happen early in the new year.

Similarly, just to mention capital investment, we continue to invest in new projects at approximately half of our depreciation rate, and think that we can maintain that trend during the rest of the year without impacting negatively our long-term growth prospects. So everything we can do to control and maintain cash flow, good cash flow, we are doing. That's really why we're able to project that we will be able to achieve our $40 million cash target for the year.

Finally I think last quarter we talked about a response to the market in terms of going after material costs. Just want to report to you that project is, has begun. And is working effectively. I think we expect to see something in the order of $5 million worth of savings from our material cost program in the second half of the year. Which again carries over very positive opportunity for us in 2003.

Some of the examples of things we're doing are consolidating our packaging materials, for example, beginning to look at corporate-wide steel purchases. Corporate-wide purchases of factory automation equipment, factory - sorry, also computers and things like travel and office supplies, and all that add together, as I said, looks like we'll be able to reduce our cost by something in the range of five million, or two percent in the second half.

So with that, I think you've got a good sense of the work that we're doing to continue to position ourselves well in the marketplace, as we wait for conditions to improve. I think we feel optimistic that the bottom is close to here, if it isn't here. I think we're beginning to get guardedly optimistic reports from the marketplace on the freight side. So with that, I'll turn it over to Bob.

Thanks Greg. I'm going to start with the balance sheet. Our debt, 241 million, 48 percent of our total capital at June 30th. And that compares to 241, basically the same number, at the end of last quarter, March 31.

Included in that number is 175 million in bonds. Those are that are 9.375 percent. We were able to call those bonds in July and as of July 8th we have replaced those with bank debt that now the interest rate is a little under five percent.

Working capital is essentially flat so far for the year. Inventories have been reduced during the year from December by $5 million even in these periods of times where sales have been adjusted downward. And receivables net of payables are essentially flat. We're comfortable and confident that we can continues to chip away at both of these.

Our cash balance as of the end of June was 38 million, compared to like 27 million at the end of March. So we generated 11.3 million in cash that now that we've converted these bonds to bank debt we can take this cash balance and pay down that debt and start to show you the actual debt numbers reducing below the 241. Year-to-date we've generated from operations and have gotten the ability to pay down $15 million so far against that $40 million target.

During the second quarter sales were seven percent lower than the year-ago quarter. Most importantly freight sales, they were down 11 percent. But OE, as Greg had told you, that had dropped from like over 8,000 cars last year to under 4,000 this year, so a drop of over 50 percent in the OE. And our freight sales, as I said, dropped 11 percent. Now transit was essentially flat and, therefore, the sales overall were seven percent lower.

Gross margin was 25 percent, 25.2 to be exact, compared to 27.6 a year ago. And this was due to the lower sales, the unfavorable product mix both within the Freight Group and within the corporation; and, obviously, pressure on price.

Gross profit was about the same as the first quarter and so we've seen that flatten out. Operating expenses were about eight percent lower than last year, but essentially that's due to the $8 million that have adjusted in goodwill for the year due to the FASB 142.

Interest expense is about 35 percent lower than a year ago and is due to this lower debt level. As Greg had said, capital expenditures are significantly below depreciation and amort. To date we have spent 5.9 million in cap ex and our depreciation to date is 10.2.

For the second quarter specifically, depreciation was 5.1 million versus a year ago of 6.6, amort was a million three versus last year in the second quarter of 3.8. So that's a total you can see of depreciation of amort this year of 6.4 million. We spent a cap ex in the second quarter of 2.8, very consistent with the level of the first quarter. So I believe we're well on our target for the $40 million that we've said and committed to generate in 2002.

Our earnings - the EPS from continuing operations, 11 cents for this quarter, 17 cents year to date. Now the 11 cents is four cents lower than the second quarter of last year. If I were to go through the major areas for you so you can see what that is, $15 million lower sales resulted in about eight cents of that drop. So eight cents is due to volume. Mix in price - another three cents. We were three cents better due to interest expense. We were two cents better due to the goodwill . And that nets us down to we were also two cents better due to performance with the manpower adjustments that we've talked about.

So that kind of gives you a summary of the earnings. Let me just end by giving you a summary of the backlogs. For the corporation, the backlog at the end of this quarter was 31l million. That compares to 361 million at the end of the first quarter. That's down, like, 14 percent. The freight was 153 million versus 190 million and transit was 159 million versus 158. So while the total is down by, like, 14 percent, it's still significantly up. And this is just the 12-month rolling forecast at 311.

So with that, I'll turn it back to Bill.

Thank you, Bob.

So, just to summarize before questions, second quarter earnings and EBITDA were in line with expectations. We're currently expecting earnings per share of 45 to 50 cents for the year, 75 million of EBITDA for the year, and maintaining a $40 million free cash target.

The bright spot is rail traffic increases in the second quarter, hopefully leading to better things in subsequent quarters, and the corporations has continued to focus on generating cash and positioning Wabtec for the market rebound.

So, thank you very much. , do you want to come back on and entertain questions?

Thank you very much, Mr. Kassling.

The floor is now open for questions. If you do have a question or a comment at this time, you may press one, followed by four on your touch-tone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key.

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

Our first question is coming from Art Hatfield of Morgan Keegan. Sir, your line is live.

Thank you. Morning, guys. Good quarter, considering everything that you're going through in your industry. Just a couple questions - first, Bob, what was the share count at the end of the quarter - shares outstanding?

At the end of the quarter, I have the weighted for the quarter as . So the end of the quarter probably would have been just slightly higher than that.

OK. Secondly, maybe Bill or Greg can address this, but can you kind of give us an idea of what you saw in the aftermarket throughout the quarter and any trends that you may have saw - seen that developed throughout April, May, and June?

Sure, Art. Good morning. Actually, aftermarket has been negatively impacted on the freight side by the fact that there had been, as I told you, cars and some locomotives parked. So I think what we're doing here is we're seeing a little bit of deferral of aftermarket activity. There's no question that numbers were lower than they were a year ago at this time.

But did you see any trend develop throughout the quarter getting better or getting worse or kind of was it just flattish throughout?

It's relatively flat, just like the, just like the car build at this point. I mean, I don't think anything's getting worse. I think that, you know, again, I think that there's sort of a guardedly optimistic feeling that maybe we're getting to that sort of, that point where we're beginning to turn, but on the other hand, I don't want to give anybody, you know, a false sense of expectation. We haven't seen a turn. So I think the best thing to do is to say we're sort of bumping along at a, at a relatively flat level right now.

OK. Thank you.

Thank you. Our next question is coming from of Capital. Sir, your line is live.

Gentlemen, aren't you being overly pessimistic, using just the, and I'm no genius analyst, just using the usual scrap as far as freight cars are concerned, and the pick up in rail traffic, I mean, couldn't you really find ourselves with back in a reasonable range of 25 to 35,000 cars over the next year?

it's a, it's a tough call, question. I mean, we don't want to be constantly talking about, you know, everything's going to get better, or it's going to get better when clearly the market has been really tough this year. But on the other hand, you know, you're certainly right, that there is, that the long-term trend is that we're just going to scrap more cars than we're building right now. And furthermore, as I've said before in these calls, when we do start to see some release of funds, if you like, some of, some - just start again.

To see some release of funds by the railroads as they begin to feel as though capital expenditure in rolling stock, you know, looks like a little bit better, or a little bit more secure bet. There's going to be a need for kinds of, types of cars that aren't out there today. So I mean, I think that there's a, there's definitely a positive upside here. Anything that isn't bought this year, eventually means an increased in buy next year. The only thing that I think everybody has to be a little careful about, just to be honest about it, is that the railroads are doing pretty well, and they're getting their cycle times down, they're getting their delivery rates up and short-term that has undoubtedly affected negatively the demand for cars.

If you like, affected the replacement cycle. But again, I think that that's good news for all of us in, with a long-term perspective, because I think that really does help the railroads become more competitive. And as Bill was talking about, helps them to begin to get more freight off of trucks and trailers and on to, onto the rails as they're able to give reliable deliveries. Because I think that's always been one of the keys for the railroad. We know they cant go, you know, they can't deliver quite as quickly as trucks, but if they can be reliable, and they have lower cost base, I think that there's a substantial opportunity to move freight onto the rails.

Just to follow on . The surplus car numbers are a little fuzzy and hard to get. You can ask a lot of people, and they opinions, but everything that I've, people I've talked to would say that surplus number is in the seven, eight percent range, something like that. So, that's how many cars are parked in the fleet. And that's, you know, that can be soaked up quickly, and when it does, and then there's a demand for cars, it'll come quickly. If in fact those surplus numbers go away. So, but we've been looking at it, it's hard to say when that surplus has disappeared.

Thank you. Again ladies and gentlemen, if you do have a question or a comment at this time, you may press one, followed by four on your touchtone phone. Our next question is coming from of and Company.

Good morning gentlemen.

Hey .

How are you doing?

OK. What's your thoughts now on two things - talked a lot about potential for acquisitions and/or, you know, product lines or fill-ins, and what the picture looks like. And also, can you give us a rundown of the international business?

Sure, Robert. I mean, the first thing is that with markets being depressed there, you know - there are potentially opportunities in the acquisition area. And certainly one of the things we want to be able to do is to continue to drive a strong positive cash flow so partly - so that we have the ability to invest in those things as they come along.

You know, today, you know, as we speak, you know, there's nothing that we think that we ought to be talking about or announcing because there's nothing that close to fruition. You know, we're keeping our powder dry and we're certainly going to be opportunistically looking for opportunities, either, you know, large-scale, or as you said, bolt-on type of acquisitions when those make sense.

So I guess that's not a very firm answer but I guess at the same time I really can't - you know, can't be more precise than that. It's certainly something though that we would be looking for as opportunities to grow the business if we can make good accretive buys in the next, you know, six months to a year. I mean, that may very well be the case because there's a heck of a lot of turmoil out there. There's - there are - there are peers of ours who are not in as great shape as us and certainly we will be looking for opportunities to take advantage of that.

Internationally we continue to grow at the pace that we have talked about in the past. We are, you know, guardedly optimistic about some major international business in the heavy-haul freight markets in Australia and South Africa. Would expect to be able to talk about those in the relatively near future.

So I think in that sense, Robert, I think there's quite a bright opportunity for us in the international markets.

OK, thank you.

You're welcome.

Again, ladies and gentlemen, if you do have any final questions or comments at this time, please press one, followed by four, on your touch-tone phone.

Our next question is coming from of BBT.

Good morning, guys. I just wanted to ask a little bit - you were talking, I think, about a renewed focus upon your purchasing practices. Is that correct as you ran through a number of things? And if so, I guess I'm a little surprised to hear that given how zealous you have been over the years with watching your costs and lean manufacturing techniques, et cetera. So could you just talk a little bit more about some of those purchasing examples?

Well, , that's a good questions. Yes, I did talk about a focus on purchasing. I guess it goes a little bit in the category of teaching an old dog new tricks. You know, we have focused a heck of a lot of our attention internally on lean operations practice and in even supplier development. But I think that what we have sort of looked around and said to ourselves as the market conditions have gotten even tougher this year than we were expecting is, you know, where can we go to, you know, continue to drive cost down in a very difficult situation. I mean, you know, we've taken out people. You know, we don't want to cut any more than we need to, particularly into the productive areas of, you know, engineering and all those kinds of things. So, you know, it's time to start looking somewhere else.

And as we looked at the material situation and as we did some benchmarking of some of the companies who were doing some really exciting things both with sort of you might call it e-commerce - e-purchasing and also just thinking about how you can do a better job of consolidating your activity or coordinating your activity across the corporation, we decided to really try to . And that's essentially what we're doing.

And the result is that, as I said to you earlier, I think we feel pretty confident we can take some pretty significant savings out yet this year and that of course all rolls into, you know, double the effect next year as we get full-year kind of effect. And we continue to look for other ways to accelerate that effort. So I think it - I think it's a - it's a new - a new frontier, and I don't want to sound like, you know, we were asleep at the switch. I don't think we ever have been. I think it's just that as you try to respond to ever-toughening conditions, you look for different ideas. And as we get this, I think maybe there's a breakthrough here that we can, you know, take advantage of.

Because it just seems to me that with that being the case and if the figures that you shared, Greg, are attainable - the $5 million through purchasing, the million-and-a-half with Canadian tax affecting those savings works out to, you know, maybe nine or ten cents a share just in the second half alone, at the same time you're lowering your guidance a little bit for the second half, so I - it just would seem to me we're at a point where you're being ultraconservative. And you don't have to comment on that, but that would be my observation.

Well, I won't - I won't comment too strongly except to note that, of course, that does - we already are saying that we're going to be about - what is that, 20 - let's see, we're 17 in the first half, 30 in the second half. Right? So we're already getting more than the 10 cents into the second half.

So, I don't know, , I hope that you're right, but, you know, this is always a tough thing when you have to change your - when you have to change your forecast, and we - you know, we really feel it's better to try to be possibly a little on the conservative side.

But I can also tell you that there's some really hard slogging out there. You know, we're always depending on, you know, betting on the come. As you - as you know, we have a lot of businesses that don't have very much order backlog. They don't run off order backlogs. And so whether we perform in the third and fourth quarter at the rates that we're forecasting or not and some of those businesses, it's definitely up for grabs.

So, you know, I think we're reasonably comfortable where we are, but we certainly, you know - certainly hope that we can even do better.

OK, thanks.

Thank you. Our final question is coming from of BB&T Capital Markets.

Hey, guys. Good morning. Actually, Tom was reading my mind on that question, so he hit that. But I do have a couple of follow-up housekeeping items.

I was wondering maybe, Bob, if you had the operating income figures for each segment on hand?

Well, we always go through and talk about the sales on the two pieces.

Right.

And I can give you the sales - the sales were for freight, ; for transit, . And that's a - if you look at it versus the second quarter of last year, the freight was 120,367 and transit was 73,750. So you can see transit pretty much the same kind of number. The freight number's down 14 mil.

Would it, would it be accurate to look at it and say that margins were pretty much the same from Q1?

From . Right.

Yes.

Not from the first quarter.

Yes, for each segment?

Right. I, you know, the key is we've seen the margins in transit in general are not quite as good as the freight segments that have shown as much of the change. So the freight segments that have shown the downside do have the higher margins than the rest of the corporation, be it the other freight or the transit. So it does have an impact when that part drops, and obviously when that part goes back up, the impact should be in that direction, or the other direction. And that's part of the reason why, as you see, last year's margin was 27 and a half, and this year's a little over 25.

Sure, sure. All right, thanks. And then, and then Greg, just curious, locomotive orders seems to be holding, and holding up pretty well and, in fact you had mentioned that they had firmed. What's driving that versus, you know, the severe setback on the freight car side?

Well locomotive is still down pretty substantially from the last couple of years, so it's, I think that's important to keep in, you know, in front of you. I mean, where were we a couple of years ago, we were 1,400 locomotives, then last year we were approximately 11, this year we're a little over 800. So I think part until the, you know, the ramp down, if not as dramatic is similar. But also I think part of the difference is that 1,000 units over the last couple of years have been in one major purchase by the UP, which is coming to a conclusion this year.

And those 1,000 units have largely a, are our replacement of old locomotives that had very high maintenance and operating cost. One of the differences in the locomotive business from the freight business is that with the, you know, locomotives are a much more complex machine, and therefore have very substantially higher percentage of total ownership cost, really goes into O&M. Operations and maintenance. So it, you know, it's a, it's important for the railroads eventually to look at replacing rolling locomotives, just to get their operating cost down.

Unfortunately for those of us who also are in the freight car market of course, and the freight car business, there isn't that, you know, that much of an imperative to renew product in the same way. What it will be in the freight car, what will drive the freight car business up is when they need different kinds of cars for applications that are new or developing, and the old kind of, and the old cars don't fit those applications.

OK. All right. Great.

Hope that's helpful .

Yes. Thank you.

Gentlemen, there appear to be no further questions at this time.

Well thank you and thanks everybody for joining us. We'll see you next quarter.

Ladies and gentlemen, thank you very much for your participation. This does conclude today's Wabtec conference call. You may disconnect your lines at this time, and have a wonderful day.