美國西屋制動公司 (WAB) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Wabtec Corporation Fourth Quarter 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 turn the floor over to your host, William Kassling. Sir, the floor is yours.

Thank you, Ashley. I want to welcome everybody to our fourth quarter conference call. Joining me today is Greg Davies, our Chief Executive Officer, Bob Brooks, our Chief Financial Officer and Tim Wesley, Vice President of Investor Relations. Before I make any comments, I would like to have everybody take a look at the press release disclaimers, so you understand what we mean by forward-looking statements. I will have a few opening remarks, pass it over to Greg, who will, in turn, pass to Bob, and then after he's finished, we'll open the floor for questions.

First of all, fourth quarter results. Actually, a very good performance. We had earnings per share of 12 cents. It's very much in line with expectations. But it's higher than last year's adjusted fourth quarter, which was only 6 cents. Essentially it's a doubling, quarter over quarter. The improvement is due to lower interest expense, lower amortization expense, and favorable product mix.

Our cash earnings per share was 13 cents and our EBITDA was $19m. We generated about $18m in cash in the fourth quarter, and we hit $42m for the year versus a target of $40m. So we essentially paid down debt by $42m. And that is almost $1 a share in cash. So we feel very good about, in very difficult conditions, generating positive cash from earnings and working capital of almost $1 per share.

For the full-year results, we had earnings per share of 40 cents and a cash earnings per share of 48 cents. Our EBITDA for the year was $73m, and that's about four and a half times interest coverage, and that's a very good and comfortable number for us. We entered the year with $176m in debt net of cash, and that is the lowest debt number we have had since being a public company, starting in 1995.

In fact, we hit a peak in the third quarter of 2000 of $562m in debt. So essentially we've lowered debt by almost $400m in the last 27 months or so, which I think is an outstanding performance. Half of that came out of operations, and the other half from the sale of the business to General Electric, but half of that $400m came out of operations, which is very good performance under very tough conditions of the cyclical downturn we've been experiencing for the last three years. So, I think it's really a very good job and when you step back from it a few paces and look, you can see how much progress we've made.

Now, I'm going to turn this over to Greg who is going to talk about our other accomplishments during 2002 and give you an outlook for 2003. Greg?

Thanks, Bill. It certainly has been a very difficult year with difficult challenging market conditions in our rail businesses and then even in some of our non-rail areas. But despite that, 2002, as Bill was describing, I think, was a very solid year. We achieved our cash target and we strengthened our operating units in many ways. I would like to talk a little bit about that, because it's really the engine that provides us with the opportunity to continue to improve in the future.

At Wabtec, we are big users, big proponents of a tool called priority deployment by which we set corporate-wide breakthrough goals in a number of areas each year which are intended to give us a step function improvement up the curve, as it were, towards some of our long-term corporate strategic objectives. In that regard, we did very well on most of them.

One of the ones that I've talked about in the past was our material cost reduction goal that we introduced in the second half of the year. We set ourselves sort of an outside target of being able to achieve $7m in savings actually during the year, and we got about 93% of that. So, I feel very much like that made a major contribution to our being able to achieve the results we did.

Similarly, we had improvements in inventory reduction, on-time delivery improvement and sales growth during the year. So priority deployment is proving to be a very effective management tool for us and I'll talk about our 2003 goals in a minute.

In addition to these breakthroughs, we also have a number of continuous improvement measures that we've adopted right across the corporation, so we can make sure that what gets measured gets done. We call these key performance indicators and at the moment we have four of them. And in 2002 made very solid progress on all of them, and I think you will see that these are the kinds of things that are going to help us improve our business outlook in the future.

One of our measures is first time quality. We improved our first-time quality pass rates by 23%. We increased productivity across the corporation by 4.7%. We reduced our day's supply of inventory by 10%, actually $16m in total, and finally, we increased our on-time delivery rate by 27%. So we feel as though those things position us very well as we go forward.

Now, going forward, looking at 2003, the outlook remains pretty much the same as we've talked about in the last call. We continue to forecast earnings per share in the 50 to 60 cents range on sales of about $700m. That EPS level would be a growth rate of somewhere between 25% and 50% compared to where we ended up the year in 2002.

Now, forecasts, of course, are always based on assumptions and market conditions which I'll cover. I just want to particularly mention that there are some risk factors that we all need to be taking into account these days, you know, economic weakness at the moment, potential for war. On the industrial side, freight OEM orders, rail traffic, transit after-market are all issues that are, to some degree, are out of our control. We try to take them into account in our forecasting but certainly can vary more or less than we forecast.

That said, freight car outlook for 2003, we think remains at about 22,000 freight cars versus 17,700 in 2000. That 2000 figure was the lowest since 1997, by the way.

Fourth quarter order rates which we see built out into cars in the early part of 2003, fourth quarter order rate was orders of about 8,700 units, which is down from 10,000 units in the third quarter, but still almost three times the order rate of a year ago in the fourth quarter. So fourth quarter deliveries were about in line with our prior forecast, 4,800 instead of 4,900 in the third quarter. And that means that the backlog now stands at 18,400 cars, which is the highest since the first quarter of 2001.

Locomotive order book looks pretty good at around 700 units, about 80% or so of the order board is booked, which gives us pretty good confidence that that 700 unit number will be about right. As we've said before, that is down by 25% from 2002.

If we look at freight traffic, it remains largely flat due to the weak economic conditions and improved reliability in cycle time on the railroads. For example, despite cold winter weather in the northeast, coal shipments are still lower on a year-over-year basis than they had been last year because the increased railroad reliability has meant the utilities can stock less inventory.

Eventually that sort of one-time effect will work its way out of the system. But for the moment, that contributes to overall car loadings for 2002 being 1% down from prior year. A very modest initial start in January 2003 of .4% growth, by the way.

Intermodal is the strong point and driving a good part of the demand for new cars. Intermodal was up 6% for the year 2002, and it's up almost 12% in January itself of this year.

On the transit side, we are still awaiting word on the component level orders for the R-160 project in New York City. That would be for brakes, couplers, and doors. The total potential there is about $250m in business spread out over about six years, beginning late in 2004.

Another factor that's important is the upcoming reauthorization in Congress of the TEA-21 or T-21 funding which is the primary funding instrument for providing federal money to the transit programs around the country. And then finally, as in prior quarters, the bus builders are still struggling to be able to increase production to the level that would be dictated by demand. So, they're still well behind the demand curve.

After-market is beginning to be a problem on the transit side. We've all heard about government and local entity tax revenue shortfalls because of the various different problems with the economy. That is starting to find its way in to impacting transit spending and cutbacks on some of their after-market activity. So that's a bit of a concern going out into the year.

On the new business side, some exciting developments. On the international side, we've got a $12m contract for brake shoes in India and Australia. We just won a $7m contract for more of those specialty freight cars that we produced last year in the U.K. Commuter locomotive, the first Metro unit has been delivered in Chicago. We're going to deliver 27 of those units over about 15 months worth about $80m.

The first unit accepted on time is a good indicator that we will be able to take full advantage of that program this year. In addition, we got $16m worth of contracts for overhaul units from Cal Trans and MBTA in Boston.

And finally, the UBX truck mounted brake we talked about in prior meetings, prior conference calls, has received approval now from several key customers so the order rate is beginning to build up for that.

Now, I mentioned earlier the 2003 priority deployment goals that we've established as a company are to continue to grow our business in the area of services and integrated system in international. Those will be key focus areas for us that you'll hear more about as time goes on.

Product development, one of the things that we're absolutely determined to do is to improve the sort of discipline by which we make sure that new product development programs move towards production in a way that minimizes reliability problems for us in the future. We expect to roll out a new electronic product development system for all of our new programs this year.

We're going to continue the material cost reduction goal that we had or program that we had last year, and this year we are going to go for another $7m worth of material cost reduction.

We are also going to continue to work on on-time delivery. We're going to further accelerate our effort to introduce lean manufacturing or improve the lean manufacturing implementation across all of our units, and we're going to be making continued efforts and focus on driving down working capital percentage of sales.

So in summary, 2002 was a very solid year sort of under the surface with strong cash generation and operational progress despite the difficult market conditions. We're forecasting strong EPS growth in 2003, despite relatively soft markets, and there are risks, but we feel very comfortable with the earnings range that we projected.

And finally, longer term, we remain very bullish about the future. As you know, this year our freight car builds are turning upwards, but we expect to see a rebound in locomotive build by 2004 and a rebound in transit car build in 2005. We expect to see all our market indicators turn around one year at a time, so we feel very good about the medium- to long-term future of the corporation right now.

Now, I will turn it over to Bob who is going to review the details of the fourth quarter numbers.

Thanks, Greg. Last quarter, we mentioned that we expected to do 12 cents in the quarter and $40m in cash for the year. If you notice in the release, there's a chart, and that chart shows that excluding some non-operating specials, operations did 13 cents for the quarter, and cash was generated $42m for the year.

Debt net of cash is $176m or 47% of our total capital as of the end of the year. This is down from a peak of 562. As Bill had said earlier, and represents the lowest level that we've had since we had gone public back in 1995. That's almost $400m of debt reduction coming in a little more than two years, with about half of that coming from operations.

Of the $18m cash generated in the fourth quarter, $8m came from working capital. Inventory was down $9m for the quarter. Receivables net of payables went up $1m. We're confident we can continue to chip away at this working capital in the times to come.

In the income statement, sales were 6% lower than the prior year quarter. Freight sales increased by 5%. This is the first year-over-year quarterly increase since 1999, and the third quarterly increase in a row for the freight group. The transit group sales

decreased 23%, reflecting the completion of R-142 and lower sales from bus stores, as Greg had mentioned.

Gross profit was 25.9%, and this compared to 25% from a year ago. It's due to the favorable mix changes and cost reductions. However, it is lower than the third quarter by almost a point. And that's due to the close-out and warranty costs related to finishing up R-142.

Operating expense was 7% lower due to lower amort expense primarily, with FAS 142, which eliminated periodic goodwill amort.

SG&A expenses were 10% lower. Most of that was due to the severance costs that were in the year earlier number. And after adjusting for that, SG&A was 4% lower. That is especially good as the quarter itself included substantially higher health care costs and insurance costs, and we do see these increasing again as we go into the future year, but we're doing everything that we can to minimize these costs.

Engineering expenses were 6% higher and reflect our continued investment in new products. Interest expense, 64% lower due to the lower debt levels and lower interest rates.

And in other expense, we increased to $3.7m. Now, this is primarily due to the expenses of about 3 cents per diluted share primarily associated with a write-down of a facility that we're holding for sale.

Income taxes had a lower effective tax rate due to the utilization of accumulated foreign tax credits which resulted in a benefit of about 2 cents per diluted share.

So, if you look at kind of the pluses and minuses on a cents-per-share kind of basis from the fourth quarter of last year, we improved 6 cents. 5 cents were unfavorable due to volume deterioration between the two quarters. 4 cents was unfavorable due to this other expense, the asset write-downs of 3 cents and foreign exchange of 1 cents.

Offsetting that, 6 cents of

favorability due to interest, 3 cents of favorability due to amort, 2 cents due to taxes, and 1 cent favorable due to the mix of having higher freight. Also, 1 cent due to the lower SG&A. And finally, 2 cents netted through in manufacturing, which is really associated with the efficiencies of QPS and purchasing activities offsetting some other cost increases. So, that totals down to a total improvement of 6 cents between the two quarters. A very positive move.

Let me just again touch some of the elements of cash flow. Depreciation, $5.2m. Last year's quarter, it was $4.8. Amort. this time, $1.1m. Last time, $3.2m. Our CAPEX for the quarter was almost $4m, $3.9m. And for the year, our CAPEX was at $14m, well under the D&A of $26m. We expected this number to be in the range of $20m to $25m for '03. So once again, cash was generated at a level of $18m for the quarter.

The 12-month rolling backlog, for the total corporation, our backlog is $282m versus last quarter, September 30th, of $292m. So our total backlog rolling for the next 12 months is down by $10m.

Freight is up by $6m. It's at $155m versus last time of $149m. Transit, at $127m currently, is down $16m from the $143m at September 30th. The increase in the freight backlog bodes well for us and the favorable mix that goes with it.

Bill?

Yeah. So, in summary, fourth quarter earnings and EBITDA in line with expectations. We're still expecting an earnings per share of 50 to 60 cents for 2003. About $75m in EBITDA, and about $40m of pre-cash for debt repayment. We're focusing on cash still, still de-leveraging, and that of course positions us very well for the upturn as we move on to a new phase in Wabtec's future.

With that, Ashley, do you want to come back on and entertain questions? Ashley?

Thank you. The floor is now open for questions. If you have a question or a comment, please press the number 1, followed by 4 on your touch tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask while you pose your question that you pick up your handset to provide opt number sound quality. Once again, to ask a question please touch the number 1 followed by 4 on your touch tone phone.

Our first question is coming from Stephen Volkmann, Morgan Stanley.

Bill or Greg, kind of a longer-term question as you get your debt levels down to historic lows and so forth, I assume you'll generate more cash next year. Do you start thinking about growth again? I mean, we've been sort of attacking the core business and waiting for the end market to rebound, but are there some areas either internationally or product extensions or acquisitions that might make sense now that your house is kind of getting more in order?

Steve, certainly the general answer to that is yes. The difficulty is you can't really go into making specific predictions because, of course, particularly on the acquisition

side, those are essentially opportunistic. If you get the right opportunity at the right time, you know, we will move forward. Certainly, our long-term thought process is that we do need to begin to shift into a growth mode.

We want to take advantage, first of all, of the three-year upturn in our own markets, because as we go through these all three markets turning around, there will be substantial upside opportunity from that. But as the cash begins to get down, or as our debt-to-capital begins to get into more conservative ranges, it certainly frees up and it's certainly something that we've been thinking about is, how might we use some that have capital that is freed up to extend our product line?

And you're right, I think you picked the right areas. I mean, we would look at International, we would look at extending our product line. We might very well look at taking some of our technology into new markets, areas where we already have some skill or experience but outside of the rail area.

Okay. Maybe pushing that just a little bit harder. Your former company, Greg, I think one of the things that they're really known for, is doing the work ahead of time, figuring out what the attractive adjacencies are, and going out and looking for things rather than being more -- what was the word you used?

Opportunistic.

Opportunistic, right. So I wonder if you guys -- maybe it's still too early, but have you started the process for that or is that how you anticipate doing things? If so, you don't have to say what they are, but have you identified some that you'd really like to do?

Basically the answer to that is yes, we have started an internal process to look for those opportunities, and we have both some sort of outside-of-the-box ideas and we have some areas of product evolution along either axis in mind. I just want to caution everybody that we're not quite there yet.

This is the time to do the

planning, but we have to make sure that we have our year going along in the right direction, that we're continuing to get the cash from operations that we're forecasting before we can do too much of that. So, we will be able, I think, to do more in that area and to talk more about it as the year unfolds.

You're right. I'm jumping the gun a little bit here, but that's what we do.

(laughs) Sure.

The final thing. If we were to go down this path at some point, can you just sort of tell us what sort of leverage ratios, you would sort of use to bookends for the process? I mean, how comfortable would you be re-leveraging the company and so forth?

Let me answer that because I've experienced a good bit of leverage in my life. We are not afraid of leverage. And so I would imagine that we would tolerate maybe a little more than larger kinds of entities. But nonetheless, we will be prudent, and we will always be in a position, as the company has in its history, of fulfilling its obligations and growing within its means. But being on a little bit of the aggressive side.

Thank you very much.

Once again, if you do have a question or a comment, please press the number 1, followed by 4, on your touch tone phone at this time.

Our next question is coming from Lymand Delano of Williams Jones. Please go ahead with your question or comment.

Hello, gentlemen. It's Lymand Delano from Williams Jones. I missed you at the Rangers-Penguins game last Friday. Too bad. You have had a dramatic decline in your interest expense due to the retiring of the bonds last summer. I'm wondering whether you view any risks in keeping the current bank facility on or are you considering doing anything to perhaps lock in some of the lower rates available for the longer term?

Well, we definitely have -- you know, we have our bank group that goes through the end of '04, which then says it's nothing of an emergency or a need, but we definitely, based on comments you've heard from Greg and Bill, we know that there is a debt that will be a part of our business forever, and so we are currently looking at efforts that could entail an additional fixed level later in the year.

Okay. Thank you.

Our next question comes from Thomas Albrecht, BB&T Capital Markets.

Thank you. Good morning. Just sort of an open-ended question, if you will. It's clear that you guys have hit bottom, even maybe a quarter or two ago, and the question is: what pace do we see improvement, but at least we can see it. What sorts of things besides the larger rail macro indicators like rail traffic and rail intermodal do you get encouraged by in your daily business? Can you just talk about some of those elements that maybe are showing signs of life specific to Wabtec?

Okay. Closest to home is always for us modal share. As the railroads have been for the last year or two trying to switch some of their emphasis from cost reduction to growth. They go after modal share. So we don't have a formal tracking mechanism in the short term for that, but as we hear and listen to the railroads beginning to gain share in various different corridors, that's very encouraging to us.

As you know, only one point of modal share gain when we have 40 makes a pretty big difference in the potential number of cars that are going to be utilized. So it has sort of a multiplier effect, as it were, on short- to medium-term growth rates. That's an important one.

Other than that in the economy retail is, of course, very important, as you look. Why are intermodal shipments up as far as they are? That's something we track because enter modal is a key growth area for the railroads. Beyond that, anybody else got any thoughts about key macroeconomic indicators?

We have a couple of product areas that are square on with helping the rail industry gain modal share and that is electronic products to help them improve the speed of through-put and the density of rail traffic, computer-based ability to run trains closer together and faster, and then we have some products that I think fit unit train over-the-road trailer type of movements with a ramp car product that we have. Really, both of these products could greatly improve the overall industry, and of course we would arts participate, along with that growth, in growth of our own.

Do you have any sort of report you get weekly or monthly, daily, that tracks, like, the request for quotes, request for new business opportunities, and if so, is that showing an uptick over maybe a year ago?

We do on the freight side. Transit is a little harder to achieve that. But we are starting to see an uptick in after-market parts business compared to where we were last year. We also are watching the potential orders on freight cars that then, of course, turn into the order rate that we report on a quarterly basis. But we by and large know what those are a month or two ahead of the actual publication of those numbers.

So, yes, we are always tracking that and being very careful, you know, to learn what we can from the trends. So I would say the after-market is somewhat encouraging on the freight side. On the other hand, as I've said, there is somewhat of a slowdown in transit after-market business.

It's sort of a little bit of one thing at a time. That's the nature of this recovery for us, is going to be -- we're going to see growth on the freight side this year, but we're going to, you know, still see some downside on the transit part of the business, and then, as we go into the next couple of years, we expect the transit to turn around too, and then, you know, all of our cylinders will be firing at the same time, if you like.

Mm-hmm. Yeah, I can clearly see the big picture, some of the pieces starting to move together there. Greg, you've mentioned a couple of year 2003 goals. One was another $7m reduction in material cost. You wanted to drive down your working capital as a percentage of sales. Relative to some of the key performance indicators you described in the beginning, do you have goals for, for example, your first-time quality, you increased by 23% last year. Is there a goal that you can share with us on '03 for that or your on-time delivery rate or your DSIs, any of those metrics?

Sure. Some of them we have goals; others, at the corporate level, we are sort of saying continuous improvement, we expect to see a positive trend line but don't have a formal breakthrough number. For example, on the delivery side, we're going to try to take our whole corporation up -- our goal is to hit 95% on-time delivery, which is a big stretch. I don't know if we'll hit it, but that's a true breakthrough for us and we're going to go for that one.

On the quality side, we do not have a corporate objective this year, but I would -- when we say continuous improvement, I would be very disappointed if we didn't make at least another 10% gain in that area. Working capital as a percent of sales, we want to make sure we have plans in place, we want to make sure we improve our working capital as a percent of sales at least half again better than the long-range forecast that we provided.

I'd like to add that we discussed these with each individual unit on telephonic call at the end of every month. With the flash numbers, we talk about these measures with all the units.

Okay. And on that 95% on-time delivery goal, you talk about that being a bit of a stretch target, but how would that compare versus '02, like 85% or something?

Yes. Yes, we were about 85 -- 86 I think is the actual number, but about 85%.

Okay. And then lastly, as business begins to pick up, again, however gradual, in the freight business, would your requests for business typically be for, you know, after-market parts? Would the time frame for those parts, whether it be repairs or new parts, tend to be shortening or lengthening, but it's just far enough out that people are confident, you know, that you don't have to hurry but we want a bunch of stuff in June or July, for example, or would it be a case where suddenly we've got to have a quick turn-around on the repairs here?

By and large, you don't see -- I don't think we've seen in our collective wisdom, you don't see dramatic change in capacity requirement. We're certainly not seeing that on the new freight car business. On the parts side, I don't think it would be dramatic. I think we're just seeing month-over-month improvement from where we were last year.

So I think we have -- our capacity is well in place and we're taking steps to make sure that, in the few areas where we have any potential bottlenecks out in the 2003, later in the year, that we're making sure we have those plugged. But by and large, we have more than adequate capacity to take advantage of whatever kind of reasonable improvement in sales opportunity there would be.

Okay. Good. I realize those are sort of open-ended questions, but I just, you know, want to hear your thoughts as we approach this turn here. So thank you.

Absolutely. No, we recognize that. We try to think about what's short-term, what's long-term, and how do we make sure we're positioned for the shorter-term stuff because, as you said, that can take you by surprise. But that's in place or in progress.

Okay. Thanks again.

Once again, if you do have a question or a comment, please press the number 1, followed by 4, on your touch tone phone at this time.

Our next question is coming from Robert Ravitz, David J. Green and Company.

Yes. Good morning, gentlemen. In your comments you said that one of your key focuses this year would be international. I wonder if you could recapitulate for us whether the recent acquisition by a major shareholder of the Swedish company, has anything developed from that in terms of your thinking about how do you crack the big markets that you're not in?

Right. Well, you know, that's a long-term kind of thing, Robert. But, yes, we are working with their management. This is SAB WABCO, we're working with their management team. We now have very regular meetings at senior levels to try to plan out how we can cooperate, where we might be able to work together to attack markets that we're putting our two technologies together, as it were. We'd be able to achieve market gains that we can't do on our own. So we're very active in that area.

Other international business, of course, we've talked about before, but the other things that we're really focusing on are conversion to AAR, American Association of Railroad, type of standards in some of the long-haul railroads, we have increased our emphasis on Australia and are picking up business across a wide range of our freight products in Australia. Then we're increasingly starting to look now at sourcing opportunities leading to component sales opportunities in the major sort of emerging railroad markets in India and China.

Does that answer your question, sir?

Yes. Thank you.

Ladies and gentlemen, there appear to be no further questions in queue at this time. I would like to turn it back over to the presenters for any

closing remarks.

Well, I want to thank everybody for joining us. We look forward to talking to you in three months. Take care. Bye-bye.

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