美國西屋制動公司 (WAB) 2002 Q3 法說會逐字稿

(incomprehensive) ladies and gentleman and welcome to the Wabtec corporation third quarter earnings release teleconference. At this time all participants have been placed in a listen only mode and the floor will then be open for your questions and comments following the presentation. I would now like to turn the floor over to your host Mr. William Kassling, chairman, Mr. Bob Brooks, chief financial officer and Mr. Greg Davies, chief executive officer. Mr. Kassling, you may begin.

Thank you very much, Emma. Welcome to our radio (incomprehensive). Also joining Greg, Bob and, I is Tim Wesley on this call. I want to refer everyone to the forward looking statements, disclaimers and press release. I'll have some opening remarks. I'll turn it over to Greg and then Greg will turn it to Bob and then we'll come back for any questions you might have. First of all, my comments regarding the third quarter, it was a pretty solid quarter. We had higher earnings from continuing operations. We had very good cash flow, and we continued to reduce debt. Despite really having a quarter-to quarter reduction in sales year over year. This reflects the benefits of our drive to reduce costs. Our interest rates were lower. Earnings per share from continuing operations was 12 cents. That's versus 9 cents a year ago. We're a little bit below expectations but we're above the second quarter. The improvement we've experienced in terms of performance is due to a higher Gross margin, lower manufacturing and operating costs and reduced interest expense. Let me just state again that quarter over quarter last year we had a 13% sales decrease. So to have improved in light of that, I think, is pretty good performance. We generated cash flow in the quarter. And that cash flow we generated allowed us to reduce debt by $9 million in the third quarter. And that makes us believe, although we have a fairly significant fourth quarter in terms of cash generation ahead of us we believe that the $40 million total debt reduction for the year that we've talked about since last year is imminently do able. Our cash earnings per share was 14 cents, and we had an EBITDA of 17 million. And that's on track to be in the 75 million range for EBITDA for the year. Which gives you a relatively comfortable interest cover pitch. So to the -- for the final quarter we had good performance within good execution, and Greg will talk about this in more detail. And discuss some positive trends that are developing in the freight market. With that, Greg, you want to take everybody through this?

Sure, thank you, bill. As Bill said, we are starting to see some positive signs in the freight market, although those -- you know, the Improvement is not in time to impact our business in the fourth quarter , because it's going to take the car builders some time to ramp up production. As a result of that, we are revising our fourth quarter guidance a bit lower. Now we expect earnings per share from continuing operations to be similar to the third quarter, which would put us at about 41 cents for the full year, slightly below our previous range of 45 cents to 50 cents. But the increasing order rate for freight cars gives us a high degree of confidence that our related businesses will have a stronger year in 2003. In addition, freight traffic, while still lower than it was last year over year on a year-to-date basis has continued to pick up for the second consecutive quarter. The industry is guardedly optimistic that this trend will continue. In fact, during the third quarter car loadings were up 1.8% versus a year ago. And inter modal is very strong. I'll come back and talk about that. Inter modal is up 7.7% versus third quarter '01. These trends, I think, bode well if they continue. We must always expect -- or accept that there are risks. You know, we have a potential risk of a double dip in the economy, war with Iraq, West Coast labor issues could all be plus or minus events depending on what happens. But definitely the freight car look is improving as we look at it now. Albeit, of course, with the -- we're improving from a very low base, but nonetheless, it's encouraging to be able to report some preliminary third-quarter numbers. Orders -- freight car orders, that is, appear it be about 10,000 units versus 7,000 in the second quarter. Deliveries were up a little bit, to about 5,000 versus about 4,150 in the second quarter. And the backlog now stands at about 14,000, which is the highest since the second quarter of 2001. And up for the second quarter in a row, probably the first time we can say that in as many as four years. The results of that is we expect deliveries now to be in the 17,000 to 18,000 range for the year. But as I said, that does not include much of a ramp up in the fourth quarter, because of the time it takes for the freight car OEM's to get their build rates and material flows working. The higher order rate is positive, but I want to remind everybody else that the OEM freight car business now only represents about 10% of our sales. We should look at some of the other indicators as well. Locomotive deliveries for the year look pretty solid in the 800 to 900 range. As we said before, that probably will go down in some in 2003. But we're pretty confident that a rebound will begin in 2004 and particularly confident of that in the sense that there are new EPA emission rules in effect -- coming into effect at the end of 2004, which should make 2004 a relatively strong year with some pull forward. When we look at the transit group, as we've said before, the R-142 New York order is now completed, and as a result, of course, that's really the primary reason why you see our transit group sales coming down in the third quarter. New York on the other hand has now awarded the new R-160 contract for a little over a thousand cars which we've been expecting for some time. That contract was awarded to ALSTOM and KAU Kawasaki working together. We're working hard for the brakes, doors and couplers. Those digs will probably not be taken until as late as early next year. Deliveries for that program will start at the very end of 2004 and then begin a ramp up through 2005. And then finally on the transit side, as we've talked before, the bus door business continues to be impacted by lower OEM production rates, but I think that the good news is that, of course, the demand is still there. And is we do expect those issues to be worked through gradually over the coming quarters.

In response to the market conditions, as Bill said, we still have our dealing with lower year over year sales. We're certainly staying the course. We're still working aggressively on our QPS and lien programs to reduce cost and increase productivity. I think you're starting to see some of the benefits. We have talked in the past about our efforts to reduce raw materials, and we believe we're on track to do that. We expect to hit our goals, something like $4 million in actual reductions in the second heavy, and of course, those are annualized in 2003 and we're going to continue that effort. When we look at new business, give you a sense of the things that are -- you know, the business that we're winning and the opportunities we see. One interesting development is our new ten-year $20 million exclusive supplier contract with CSX where we've been contracted to provide a complete supplier managed inventory system for 37 of our components at ten of their locations. We hope to be able to add other Wabtec products in the future and hopefully expand in other makers components as well.

That is a complete contract to maintain and reorder inventory electronically. We have talked about our efforts to expand electronic capabilities into new value-added areas, and this is a first and very exciting opportunity for us to demonstrate our capability. Overseas we have a $6 million contract with a Korean subway car builder to supply doors in Greece. That's breakthrough for us into the Asian OEM market. And that -- those doors will be going into cars that will be delivered to Greece in time for the -- their hosting of the 2004 Olympics.

Also internationally, in China, our JV there on business doors -- bus doors has won its first major contract to supply door systems. That's a initial order of 200 door systems, but this represents a break through into a market that we think is going to grow very fast as China begins to build up its whole infrastructure, its whole passenger transportation infrastructure related to its 2008 Olympic schedule.

Back home a metro contract for new locomotives we talked about is on schedule. We're going to deliver the first unit before year-end. And we'll be ramping up for major deliveries of those 26 metro locomotives during the following year, 2003. I said I would come back and talk about inter modal. I think that deserves a special mention. As you may have seen recently, there have been press reports indicating that inter modal is certainly the fastest growing segment of the railway industry and these new reports even suggest that inter modal may grow to become the largest single revenue source for railroads as early as next year. These reports indicate probably a 5%annual growth rate substantially faster both than GDP for inter modal .Now, we've talked about the ramp car in the past, and we think that we are really offering a breakthrough product here, which allows the railroads to take advantage of additional Neshas of the inter modal transportation market that the other -- they otherwise can't reach, because the ramp car really enables railroads to compete in the 3,000 to 1,000-mile market with no major capital costs and that is being demonstrated now by successful operation of the first units in revenue service on CN. So as that business grows, we think that we'll position -- we're positioned with the right product at the right time and help the railroad industry gain modal share. In summary, as Bill said, I think it was a very solid third quarter, which demonstrated the payoff, if you like, of the hard work we've been doing with lien and QPS. Fourth quarter is below our original expectations, but, as primarily related to lower growth and anticipated in the freight car ramp up, but we do begin to see some positive trends there, and we think that the bottom has been reached. And we're expecting that sector of the market continuing to increase in 2003. And finally, the R-160 order is something that we hope to be able to report to you on -- in our next call. So with that, why don't I pass it over to Bob, who would like to go over the numbers.

Thanks, Greg. It was a good quarter for operations. We generated $9 million in cash from operations during the quarter. And we're on target for the debt reduction of $40 million this year. Net debt was $194 million or 50% of total capital at September 30th. And this compares to$455 million or 68% of total capital September 30th a year ago. During this quarter, we called in 175 million in bonds, which were at the rate of 9.375 and replaced them with our bank debt, which is much lower. in the interest rate. In Goodwill, the FASB 142, we took a 9 cash after-tax charge of 62 million, which is retroactive to the first quarter. It had no affect -- no effect on operations but it has lowered Goodwill by $90 million. Sales for -- let me go the income statement now.

Sales, as bill had mentioned, were 13% lower than the year earlier's quarter. In the freight group, sales decreased 7% and transit group sales decreased 23% reflecting the completion of the New York City contract. Gross margins were 26.8%, and this compares to 25.7 from a year ago. This is due to the favorable mix and the manufacturing cost reductions that have been put in place.

Gross margin from last quarter was 25.2. Cost reductions and efficiency programs are kicking in. Operating expenses were 9% lower this year from a year ago. This is due to two reasons. One, the lower (Inaudible) from the F.A.S.142. And the lower actual spending in SG&A of 1.6 million.

We did maintain our engineering spending at a level over $8 million, approximately $8.5 million, as we continue to fund the new product developments at a level similar to or slightly above last year.

Interest expense was 61% lower due to the lower debt level from a year ago and the improvement in interest rates. Income tax expense we accrue at a rate of 35%. This is similar to the rate of last year, except last year we also had 3.5 million of R&D tax credits, and that's the reason for the change there.

Now, this going to be a lot of numbers, but I thought you might be interested in this. I'm going to try to break the E.P.S. down from last year's quarter to this year's quarter in cents from continuing operations. This year was 12 cents. Last year was 9 cents. The difference being we were 7 cents better this year than last year due to interest expense. We were 4 cents better due to mix, moving and purchase -- manufacturing and purchasing improvements. We were 3 cents better due to the good year am or the. We were 2 cents better due to the lower SG&A spending. We were 2cents better due to the restructuring cost of SG&A last year of which we had none this year. And we were 11 cents lower due to the sales volume decrease of 24 million. The one final number was 4 cents lower due to the fact we had this R&D credit last year of 3.5 million.

So as total that says 9 cents -- total that says 9 cents in the third quarter of '02 was what we reported, and this --the difference between this and the 12 cents from operations was a noncash charge of 3 cents for the early redemption of bonds. Last year, the comparable number was 15 cents in the third quarter, but included 6 cents of discontinued operations.

A few other numbers that you always enjoy having for the cash flow, depreciation, 4.8this year versus 5.5 last year. For this third quarter. AMORT 1.3 million this time versus 3.2 last time. Cap X, at this quarter we spent 4-point you 3 million. Last year we spent 4.6. The target still for free cash flow,$40 million. Finally, let he give you the backlog numbers. This is the 12-month moving backlog.

The total is 292 million versus 311 million from the second quarter, which is down about 6%. Freight is 148 million versus 153 million. We're down 3% from last quarter. And transit is 144 million verse you 159 million. We're down about 9%, which is due to the completion of the R-142 contract. So all in all, from TWAGS operations, it was a very good quarter. Bill?

Thank you, Bob. So just so summarize, solid earnings and good cash flow demonstrates the company's continuing to make progress in a very difficult environment. We had net debt reduction of 9 million and we're on target for our 40 million for the year. As Greg said, we have positive indicators in the freight car market that will start to kick in, we believe, next year. And we continue our focus as it has been really for us for the last period of time as we deleverage the company, we continue to focus on generating cash and being red ear 0 -- ready for the inevitable market rebound. I'll be happy to take questions. Emma, can you come back on and help us get the questions?

Thank you. The floor is now open for questions. If you have a question or a comment, you may press the numbers one followed by four on your touch-tone phone at this time. If at any point your question has been answered, you may remove yourself from the cue by pressing the pound question key. Questions are taken in the order they are received. We ask while you pose your question to pick up your handset to provide optimum quality. Once again that is one followed by four on your touch-tone phone at this time. Thank you. Our first question is coming from Robert Refits of David Drake Green and company.

Good morning, everybody.

Good morning, Robert.

First, on the cash flow picture, what's your estimate of the full year cap X and depreciation amortization and what are you thinking about next year?

Our cap X year-to-date for the nine months is right around 11 million. We expect the total year to come in right around 16 million. The AMORT is approximately 23 million. So depreciation I mean. And with amort, that would take you up to 27, 28 million. So it's --we're operating at a level of significantly below that, yet at a level that all the operations feel very good about. Next year, our target is to be right at 20 million. And still with the depreciation in amort being around the 27 million.

Next, update the status of the SAB situation.

Yeah. SAB webco which was a part of cardo was acquired by veststar capital, and they closed on that business about two weeks ago. So they are now -- they're no longer a part of cardo. They are really part of a New York-based private equity company, and veststar also happens to be an historic investor in the (Inaudible) company. At this point we're very comfortable with that. We have no issue with it. And those are the facts.

Well, could you, you know, theorize on what the implications of this could be?

Well, my theorization of the implications are that, I think we would say we're pleased that SAB, WABKO is in hands of things we know and understand. When this thing was put on the market it could have been sold to anybody. We know that of the private equity folks that it was sold to and we continue to evaluate a whole range of options relative to that. But we really have nothing to report at this time. I can say this, that, you know, in this environment, we've been very strong on deleveraging the company, and we're pleased with the progress we have made and continue to make in that regard. And so things are fine.

I think that's a very good as summary, bill. Thank you.

Sir, do you have any further questions?

Not right now.

Thank you. Once again, if you do have a question or a comment, you may press the numbers one followed by four on your touch-tone phone at this time. Our next question is coming from Ed Leverman from First Manhattan. First go ahead with your question.

Yeah, good morning. I guess the -- my question is your biggest market -- you know, you said the freight looks like the orders are turned up that's small for you. I don't have a good sense of where that deferred maintenance and repair market has been. That's hit you very hard. You must have some -- you know, there's obviously a lot of pent up spending. Don't you have a better feel for what your customers are saying and thinking in that area and, you know, what the status of their equipment is, how much longer they can continue to hold off? I mean, I suspect that this is, you know, the area that has the biggest leverage to your company in a turnaround.

You may very well be right. One of the difficulties is that there are no sort of formal yard sticks of measurement. You know that, therefore, you rely a lot more in that market on, you know, feel and what people say and, you know, so it's much more difficult to get a really clearer fix on it. And I also say that most of the after-market businesses that we're involved in are very shortly time kinds of orders. I mean, they want -- might be as little as three or four days. So what I would tell you is that, yes, there is -- there continues to be a sense in the industry that maintenance has been deferred during this year. I can certainly attest, as you can see in the numbers really, I mean we can all certainly at test to the fact that that side of our business has also been depressed during this year and the last couple of years. It's just very difficult for us to be able to give you a -- you know, anything like an objective view of the numbers involved. I would say that although we aren't going to produce a forecast for 2003 until December, as we've said before, that, you know, that the signs are more positive now than they have been. It's a little early to see much real action. We'll sort of wait and see were we get any positive surprises in the fourth quarter and then that will help us to build our picture for the forecast that we'll give you in December for next year. But, you're right, I mean, that's certainly we're all hoping will happen, and I -- you know, I would just tell you that natural logic is pretty much the same as yours, that as demand continues to grow, if we see delivery -- sorry. If we see car loadings continuing to be a little bit higher quarter over quarter for a few more quarters that pulls more cars into service. And that, in turn, should be positive.

Yes, and Greg, the only thing I'd add to that is certainly with an emphasis on reliability and being on time and being predictable, which the railroads are talking about as -- it has to be there for inter modal to continue to grow, this, I think, makes you feel that --although I agree we don't have any data or statistics, that reliable train operations require good solid maintenance, and having products that work all the time.

That's very good point.

But you don't have any sense that as the year kind of winds down here, I mean, these companies must be in the process of compiling their budgets for '03, so you don't have any sense of what those budgets look like versus '02, whether it's -- well, you know, maintenance or even some capital items

Nothing clear enough yet, Ed, that we could give you a formal forecast. I think that the logic that I and you both talked about, plus what bill was -- added to the situation are clear, but it's still too early for us to have any firm fix. That's one of the reasons, of course, why we really feel uncomfortable putting out a forecast until December, because we've got to collect all that information as those guys go through that process as you're describing.

Well, if you don't mind me being a little cynical, I would continue to hesitate. You've not been right on your '02 forecasts all year so I don't know why you have to put out a public forecast. But - in any event, my other question is on the transit side, I'm not sure if you're a little hesitant in your comment on this R-160. I mean, do you -- are you as confident of your position to get this business as you were about the R-142? Or is the fact that ALSTOM is in it as opposed to bombard yea, does that change your -- you know, the pecking order or how you see yourself in this -- for that business?

It doesn't change at all, Ed. In fact, our relationship with ALSTOM is very positive. I think all but one of the orders that they have received in North America in recent years have been equipped with our door and brake equipment. So, no, that's a positive sign.

Okay. Thanks very much.

Welcome.

Thank you. Our next question is coming from Tom Albrecht of BB&T Capital Markets. Please go today head with your question

Good morning, guys. Couple of different questions. I know you don't want to talk ban '03 forecast yet but do you have an '03 debt target reduction that you're comfortable sharing?

I think not, no. I think it will still be part of our -- you know, if you run your model and we would run our model and we will come out with a positive cash flow come for next year but I'd rather not give you until December a -- you know, a formal number.

Yeah. That's fair. And then can you talk a little bit more about the new emissions standards for the locomotive engines? I wanted to get a little better sense of the timing of that. I assume older engines don't have to be retrofitted.

That's right.

But some of the dynamics behind that. What's the exact date in 2004?

There's been a series of EPA emissions targets brought in to effect for a locomotive for the locomotive industry. Tier 2 sets some new limits for emissions of NRX and hydrocarbons. That comes into effect in December, December 31st, 2004, January first, 2005 is probably the right way to say it. And that is -- applies only to new locomotives. We already have in effect what's called tier1 regulations, which are -- which govern overhaul and remanufacture, and that's -- you know, that emission hurdle has been handled smoothly and that's not a concern at this point.

Okay.

But there -Greg, having seen that in terms of demand for locomotives.

Well, I think what it will affect, bill, I think we're going to see a turn turnaround. We would see a turnaround in locomotive demand naturally by 2004 anyway, because if you look back historically, the locomotive cycle tends to run one year behind the freight car cycle. But it does sort of underpin a relatively good year in 2004. We think there will be modest pull forward from 2005 to 2004, just because, you know, there's newness. There's potentially could -- fuel economy penalties in the new engines and the like. So there will be a tendency for railroad it's to want to say, let me buy a few -- buy some more of something I know and I already know how to maintain. But we don't expect it to be severe. We don't think it's like a -- you know, a cataclysmic event. It's just going to help us make sure that 2004 is a good year and we would expect it maybe to be a little bit better than 2005. But we don't see a huge (Inaudible) here

Okay. And then how about your head count? Where did you finish approximately at 9/30 and how was that compared to June 30th?

Bob, you want to handle that?

We're checking it right now. Call okay. And then --

We ended up at about 4360 for the end of September. Which is up about 90 people from June. This is primarily in two areas, one's our foundry operation as we're adjusting for freight, and then our second was out in the Boise operation as we continue to build for the metro.

Okay. And then your cost targets? I was just looking through some information. Can you review the total amount you were targeting and I guess the timing of that, how much of that is going to impact '03 as opposed to the mid-year cost efforts you undertook and what would have impacted '02?

You're talking the material improvement.

The purchase

Yeah, really the purchasing initiatives.

Greg, what we said was that, you know, we targeted a$4 million reduction in the second half the year.)) Annualize ed, something like that?

Annualized to 8. And all I said was we're going to continue that process. That's -- we're both using auctions, consolidated buying, so forth, Thom. This so a newer area of intense focus for us as we saw, you know, the need to continue to find new ways to deal with the down turn in the middle of the year. It's been a very positive effort so far and I think that there's plenty more to go.

Okay. Good. Thank you.

Thank you. Gentlemen, at this time we are showing no further questions. I would like to turn the floor back over for any closing or additional comments.

Well, I just want to thank everybody for joining us. And we'll see you on this telephone call in 90 days. Take care.

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