美國西屋制動公司 (WAB) 2003 Q1 法說會逐字稿

Please stand by for realtime transcript. Please stand by for realtime transcript. the Wabtec Corporation conference call will begin momentarily. good afternoon and welcome to the Wabtec Corporation quarterly conference call. At this time all participants have been placed on a listen-only mode. It is now my pleasure to introduce your host, Mr. Bill Kassling. You may now begin.

Thank you, Stephanie. I am sitting here in Cleveland while the rest of our group is in a better part of the world, Pennsylvania -- and joining me on this call is Greg Davies, our CEO, and Tim Westling, our vice president of operations, also Alvaro Garcia-Tunon, senior vice president and chief financial officer. I'm fairly certain that Bob Brooks is lurking in the background. He is continuing with us as the vice president of strategic development and will continue to be involved in the business, but I wanted to thank Bob particularly for his many years of service to the company in terms of creating enterprise value for our shareholders. He's done a great job. A very able replacement, and will take us to new levels.

With that being said, let me bring you to the forward-looking statements disclaimers that are in our press release. In effect, I will make some remarks, turn it over to Greg, then I will come back and finish up, and then we'll entertain questions from the group.

First of all, to start in and talk about the first quarter. We had earnings per share of 13 cents, which is a penny better than most expectations. This really compares to a loss last year of $1.37, although that loss last year was a little misleading, because we had a major accounting charge for good will, and excluding this charge, we had earnings of 5 cents in the year-ago quarter. So we're actually considerably better on an operating basis last year. So -- and we had lower sales this year,so we more than doubled our earnings, even with lower sales. That was due to lower interest expense, lower operating expenses and higher margins, so all three were working in our favor this year. We had income from operations, plus depreciation and amortization, or the EBITDA measure of $18 million this year versus $17 million in the year ago quarter. So we had a solid start for the year and it puts us on track to hit our earnings and EBITDA targets in 2003, as well as our cash flow.

As we look ahead, we see the freight car market is starting to turn around, and Greg will talk about the specifics of that. That bodes well, I think, for continued margin expansion in our business. Greg will comment on that. Greg, you're up, and then we'll come back and answer questions.

Thanks, Bill. Good afternoon.

-- earnings per share in the 50 to 60 cent range on sales of approximately $700 million, no change in that kind of guidance.. That earnings per share level would be a growth rate of 25 to 50 percent compared to last year. Our forecasts are based on current assumptions in market conditions, which I'm going to cover. I just want to reinforce for everybody that there are risks in this kind of environment, risks that are macro economic risks, weaknesses that could be related to the war situation, and so forth. And then in an industrial sense, of course, we still are always at the mercy of OEM orders, rail traffic, and after market conditions, particularly in the transit area, some of which I'll talk about in a few minutes. When we look at the freight car outlook, as Bill said, it is encouraging at the moment, and we do believe that the freight car bill will be stronger than our original forecast of 22,000 units, I think it's still too soon to put a firm forecast on that number.

But if you look at the reported figures that have just been released, of new orders placed in the first quarter of $11,700, it is very encouraging. Last quarter we had 8,700. A year ago, of course, we were really in the trough, and we only had 2,600 orders placed in a quarter for freight cars. Deliveries this quarter also were encouraging, 6,600. We were at 4,800 last quarter, 3,800 a year ago. Again, the trends are quite positive. and of course, doing the math, that means that backlogs continue to go up. So I think that's four quarters in a row now that backlogs have grown. And the backlog and order figures are now the highest in about three years. In fact, the backlog now is up to 24,000.

If we look at the locomotive order book, that's firming up, pretty much is what we have said for a couple of quarters, at about 700 units. Of course, that is down from last year, but certainly, in line with what we were expecting.

Freight car traffic is an encouraging sign. Now, we see car loadings up in the 1st quarter by .4 of a percent. Intermodal itself continues to be strong, growth is up 9 percent, and the overall ton miles are now up. That's the first time we've been able to say that for a full quarter for some time. So that's encouraging, and we're starting to see a little bit of increase possibly in after market orders as a result of that, although, it's a mixed bag. Freight is a little bit stronger, and as we'll talk a little bit later, that's counterbalanced by some conditions that we're seeing, negative conditions we're seeing on the transit side.

We've talked about transit for a few minutes. One area of risk that we need to mention is that we have about $10 million in sales in our plan relating to an option, option cars for the New York City R142 order that we've talked about in the past. We believe those orders are indeed going to be less, but that there is some chance that at least some of those will slide now into the next year. But that delay hasn't impacted R160, as you know, that business has been let. We don't yet have news to report in terms of actual orders on the brakes, couplers, doors and so forth. But, of course, you can be sure that we're working hard to try to land the majority of that business, if not all of it.

So that continues to look good, and we'll be able -- I imagine, by the next quarter, to report on that. And, finally, looking at the transit OEM side, another area of concern, bus builders are still struggling to get their production rates up to meet the demand figures, the demand numbers that we know are there. And the aftermath market on transit is now showing impact due to both funding cutbacks and lower ridership levels. So that's a concern, and, of course, so many new cars have been delivered in recent years, particularly in New York City, that transit authorities are seeing the need, in fact, to buy fewer parts. As their fleet gets newer, the need for major parts consumption for aftermarket goes down.

If we look at some of our new business, some interesting and exciting new activities in some of the areas that we have stressed as our primary strategic focus areas, for example, in the international area, we had a follow-on order for more specialty ballot vehicles in England, worth about $7 million. Moded Power has delivered now and put into service the first of the metro locomotives, a very exciting -- rave reviews, I think from the transit authorities. We look at some up-the-tier kind of activity. We got a multi-year bus systems order in Italy for 500 doors, plus another 150 option, more international business. And then, in the electronics area, we sold 600 more engine control units to CSX for what we call the ERN project. And they also are -- CSX is also purchasing Comlink systems, 75 Comlink systems to manage wireless communications on their locomotives. So those are encouraging activities.

In fact, in regard to new business, one of the things we've talked about numerous times over recent quarters is our continued investment in R&D. And, in that regard, we hosted an investor conference at our electronics plant in late March, attended by some of you who are on this call. In fact, 40 investors, analysts and brokers came, and it gave us a great opportunity to show case the many opportunities we have to grow the business faster than the growth rate, as we focus on technology and new products and services, and also, helped introduce our new product development system, which we think is a very important contributor to our ability to focus our resources more efficiently.

As we look beyond 2003, we've been talking about a step-by-step recovery in our markets, and that does appear to be happening. Freight car market now is clearly going to be stronger,than last year. Locomotive outlook continues to look positive for 2004. Beginning in 2004, then, we see a turn-up in the locomotive indicators, and transit continues to be on track for a growth rate in car deliveries in 2005. So, well, I have to remind you -- I have to remind you of the risks. I think that the long-term prognosis is continuing to unfold pretty much the way we've described it, so we feel quite encouraged. With that, I think I'll turn it over to Alvaro, and he'd like to go through the financials.

Thanks. As Bill pointed out, we had a very sound quarter in comparison to the last year. In general, this is largely the result of our fiscal discipline and QPS efforts. In terms of specific line items, sales were 4 percent lower than the prior year quarter. Freight group sales actually increased 13 percent, as OE freight car deliveries showed a strong increase. However, the transit group sales decreased 32 percent, primarily due to the completion of the R142 order from New York City in early '02, and slightly aftermarket sales as well.

In terms of margin, in spite of the lower sales we were able to increase margins to 23626.7 percent, versus 25.3 percent in the last quarter. This was again due mainly to operating efficiencies, as well as the product mix both within the freight group and the corporation as a whole. Gross margin was 25.9 in the fourth quarter of '02, so this represented an improvement, not only from the first quarter of last year, but from the fourth quarter of '02 as well.

Moving down to operating expenses, these were 4 percent lower. This was partly due to lower SG&A and lower amortization, which was partially offset by a planned increase of 2 percent in engineering expenses for continued funding of new product programs. Interest expense was substantially lower. It was 55 percent lower than last year. This was as a result of our continuing efforts to reduce debt, to generate cash and reduce debt, as well as significantly lower interest rates compared to a year ago. You may remember that in July of '02, we were deemed public debt, which was bearing a slight -- a higher interest rate than what we were paying on our floating debt.

Income tax expense was accrued at 36.5 percent for the quarter, versus 35 percent last year, due mainly to lower foreign income tax credits.

Earnings per share, we typically like to present a quick summary of the main factors affecting earnings per share. This was 8 cents higher than the adjusted year ago quarter. This was, and this was four cents of-- actually, a negative 4 cents was due to lower volume. However, this was offset by improved mix and our QPS efforts, which actually resulted in an improvement of 5 cents, so the mix and the QPS efforts offset the lower volume and actually resulted in a positive margin. Then we had a 4 cent improvement due to improved interest expense, less interest expense. Approximately 2 cent benefit due to lower SG&A and amortization, and 1 cent improvement due to a discontinued operation which we sold last year and resuled in a loss, which we didn't have this year.

Moving on to the balance sheet, working capital increased, which is not what we're aiming for, but it increased $14 million. Receivables increased by $22 million. This was primarily due to strong sales in the final month of the quarter, which is good news, it results in higher receivables, but improved and increased sales are always good news. And this bodes well for cash collections in the second quarter.

Inventories increased 3 million, we were slightly disappointed in the fact that we had lower sales, but yet inventories increased. But that's one of the areas that we'll continue to emphasize and attempt to improve as we move on during the year. We're confident that we can continue chipping away at working capital, and obtain our goals.

This was slightly higher than the year-end balance, about 3 1/2 million due again to the strong sales at the end of the quarter, which resulted in increased working capital. Debt net of cash, In terms of cash flow items which we always get a few questions about, depreciation for the current quarter was 4.7 versus 5.1 in the prior quarter. Amortization decreased to about $1 million from about 1 1/2 million. The difference is due to reduced amortization on trade names and other intangibles whose life had expired, that no longer needed to be amortized.

Cap ex - we're pretty much in line with our budgeted amounts. Capex came in at $2.9 million versus $3.1 million last year. And we're still on target, pretty much, for free cash flow of about $40 million, which was the previously announced target, were about a dollar per share in '03.

In terms of backlog, the corporate - the total backlog was up slightly, to $304 million versus $282 million, which is up 8% from the year end. This was mostly due to freight. Actually, the entire increase was due to freight, which went up from $155 million to $184 million. The largest component of that increase was an order at Wabtec Rail Limited in the U.K. for some work on some cars, which I think we discussed earlier.

Transit, the backlog was down slightly, as expected. It was down to $120 million from $127 million at the year end, which is a decrease of approximately 6%. That completes the financial review, and I'll turn it back over to Bill for a quick summary.

Thanks, Alvaro. So, just to summarize. First quarter earnings are better than expectations. We're still expecting a range of 50 to 60 cents in earnings for the year. And we're looking at about $75 million of the EBITDA and $40 million in free cash or about a dollar a share in free cash.

We see a recovery in the freight market now underway, and we expect a recovery in the other markets during the next two years, locomotive next year and transit the year after. And hopefully all three of our end markets will be on the up side, probably for the first time in our history, starting two years from this year. So now, Stephanie, you want to come back on and we'll entertain questions?

Thank you. The floor is now open for questions. If you do have a question or a comment, please press the numbers one followed by four on your touch-tone telephone at this time. If at any point your question has been answered, you may remove yourself from the cue by pressing the pound key. Questions will be taken in the order they are received. And we do ask that by posing your question, you please pick up your handset to ensure optimum sound quality. Please hold the line while we poll for questions. The first question is coming from Tom Albrook of BBT. Sir, please pose your question.

Good afternoon, guys. Encouraging to see things feel a little bit better. Wanted to get a sense -- what were your international revenues in the quarter, especially since your foreign tax credit was lower?

In general, Tom, international tax revenues average about 18% of sales, so-- Okay. And I don't think that was fairly steady this quarter.

Okay. And then, just -- you know, I know nobody can call the exact bottom, but just on the transit here, when you talk about that being a little below what you might have thought 2 and 3 months ago, should we be thinking about a revenue level in Q2 comparable to what you just experienced, or is it likely to still go a bit lower from the Q1 level?

I think that at this stage, probably we're comfortable in saying it should blg roughly comparable to where it is now.

I know it's more of an art than a science, but --

Absolutely. As you know, parts orders in general are pretty short lead time, so it's hard to tell. But I would say that's probably where it is.

Okay. And then the process with the R160 contract being awarded as a subcontractor, is this taking longer than the R142? And is that because of a different kind of lead contractor?

I don't think it has taken longer. These things always drag out. I remember the R142 was kind of already a done deal when I joined the corporation, so Bill can always chip in if he wants to, but my sense is, that it's -- this is pretty much normal practice.

It's always slower than you expect.

That's the way it is with with government.

And it's true with transit, absolutely.

Okay. And then --

I will say, Tom, I'll just add to that, that we haven't seen any delay yet that would cause us to, you know, substantially change our own internal three and five-year forecasts, for example. So I think this is basically in line, pretty much, with what we would expect.

Can you refresh my memory? Let's say you are awarded a big chunk of what you are going after here, get that sometime in the 2nd quarter, do you expect any benefit in calendar '03, or kind of the timing issue?. Because, it seemed like that was more of an -- maybe even second half '04 and especially a big '05, even.

That's correct. We've said in the past that we would see some upturn in the transit business as a result of this order, possibly late in 2004. So it's really a late 2004 beginning with car build in 2005, build and delivery, and we won't see anything this year, and relatively small next year. ,

How many cars is the R160 roughly?

It's a large number if they take all the options, and they always have. Up until now, options have always been included. I think it's 1700 cars, which is, you know, even more than the R142- 143 build.

Right.

But spread out over a few more years.

Okay. And then, just sort of on the issue of consolidated gross margins, I mean, we've also been looking at the operating margins between freight and transit. And again, fully acknowledging that there's a little bit of an artwork here -- I'm just trying to get a sense -- I can't see why I shouldn't be building modest consolidated gross profit margin improvement throughout '03, maybe 20 to 30 basis points sequentially. Do you have any thoughts on that? I mean, just with with what you're doing on the cost side as well as QPS, it seems like you're poised to benefit a little bit?

Let me address that really in two parts. The first part is really overall margins. Certainly historically, and generally, the freight OE margins are better than the transit margins. In spite of that, though, I think in the -- because of the current downturn, the freight margins have suffered somewhat, so they're not quite up to the level they were before, and basically, right now they're probably closer to each other than they really have been in the past. So in terms of mix, while freight continues to be slightly better than margin, there's not as big a difference as there had been in the past. This is particularly true -- part of freight is our locomotive operation in Boise, and their margins tend to be lower than the overall freight margins. In terms of QPS, certainly, you can see the benefit of the efforts, they're reflected in the results for this quarter. But we built that into the plan that we had originally submitted.

So right now, what we're saying is, geez, the freight market looks good, and we're optimistic about it. The transit market is not what we'd expected, so the two, basically are going to offset each other. And we prefer to stay where we are for the time being.

Okay. Well, I'll just continue to wiggle on my end until it feels good. Thank you very much.

Okay, Tom. Thanks.

Once again, if you do have a question or a comment, please press one followed by four at this time. Gentlemen, there appear to be no further questions at this time.

Well, great. And thank you very much. We'll be in touch at the end of the next quarter.

Thank you for your participation. That does conclude this afternoon's teleconference. You may disconnect at this time and have a great day. Thank you.