美國西屋制動公司 (WAB) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to your Wabtec Corporation Earnings Release Conference Call. At this time, all parties have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn over to your host and Chairman, Mr. William Kassling. Sir, the floor is yours.

Thank you. I want to welcome everyone to our Second Quarter Conference Call. Joining me today and speakers today will be Greg Davies, our President and CEO, Alvaro Garcia-Tunon, our SVP and CFO and listening and always there if needed, Tim Wesley our VP Investor Relations. I will make opening remarks and I am going to turn it over to Greg and then come back at the end to help moderate the questions. First of all our second quarter results which were announced, is that we have earnings per share for the quarter of 13 cents versus 11 cents in the year-ago quarter. This 13 cents includes a 3 cent loss due to foreign exchange, primarily from the Canadian dollar. So, our operating number is 16 cents. Earnings improved because of higher margins and lower interest expense. We had an EBITDA of $17 million for the quarter, including this foreign exchange loss of about $2 million versus $19 million a year ago. 2003 is really coming along just about as we expected. The freight car businesses are slightly stronger and the transit marker businesses are running softer. Now, I'm going to turn this over to Greg for more details on our current market and outlook and then of course Alvaro will cover the financials, and then we all will come back and all of us will take your questions. Greg.

Good afternoon, everybody. As Bill said, we remain on track in 2003 for substantial earnings growth. We continue to forecast earnings per share of 50 to 60 cents on sales of about $700 million, and our EBITDA continues to be forecast at approximately $75 million for the year. Of course, that would give us an EPS level, which would we be a growth rate of something in between 25% and 50%, respectively, compared to 2002. Now, remember that all forecasts are based on current assumptions and market conditions, which I will cover later. But you know we both have macro economic risks and industry risks such as (inaudible) OEMs supplier capacity constraints or transit after-market. So we need to keep those in the back of our minds. So, let's look a little bit at market activity on the freight side. Industry freight car data for the second quarter isn't yet released, but our sense is that things are moving positively. In fact, we believe that deliveries were approximately 7000 for the quarter versus 4400 a year ago. And we understand that orders are somewhere in the range of two times deliveries so that the backlog continued to grow in a quarter.

However, an industry shortage of side frames and bolsters, the castings for side frames and bolsters is going to constrain the actual 2003 deliveries to some extent, which we will see how that plays out during the year. However, overall, where we had originally forecast about 22,000 car build for the year, we believe we are comfortably up in at least 25,000 range for the year now. Locomotive order booked, nothing new to report there, stands firm at approximately 700 units. Looking at the after-market and freight traffic, freight traffic itself was stronger in the second quarter than the first quarter. Car loadings were up 3.2%. Revenue ton miles were up 1.7%, and intermodal continued its strong growth up 6.3%. However, year-over-year we haven't seen much growth except for intermodal. Car loadings and ton miles between them are approximately flat. Looking at transit, New York City exercised its option for 80 cars, the option was the run-on from the prior deliveries over the last couple of years. These options were exercised with Kawasaki, and in turn we received an order for about $10 million worth of components. Originally those were in our plan for 2003, but with the delay of that order we will now begin delivering those components in 2004. Now, as to new order the R160 program, we have no news to report. We're still bidding a course on the brakes, couplers and doors, potentially a $250 million order over three years, at least beginning in approximately 2005. And we still believe we are well positioned to win at least the lion share of that.

Bus builders are still struggling so as we have said in prior quarters, they are struggling to meet demand. The demand is there, but you know sales are lower than we had planned for the year. Transit after-market continues to be impacted by funding cutbacks, state and local governments spending cutback and to some degree lower ridership levels and overall, the transit after-market segment is running at about 80% of what we had expected for the year. So, that does represent a continuing risk that we need to monitor closely. Look at some of the new business activity out there to confirm some of the positive outlook that we have for the future.

Recently, we have been awarded and press releases concerning about $10 million worth of international contracts in Australia for freight products, brakes, electronics and radiator equipment and in Italy, bus doors for Rome and Milan. We also received a $22 million contract for brakes, doors and couplers for a major project for Marta in Atlanta. In addition, we were awarded renewal of our brake shoe contract by the BNSF that's worth about $5 million annual contract. While the locomotive overhaul market in as a whole is still soft, we are still beginning to see some small projects coming into our Boise operation from GE. Now, in addition, we are very excited about the new pilot project for our train control or ETMS that was announced earlier this week with the BNSF.

BNSF is the second North American railroad to conduct a train control the pilot with us. CSX was the first. BNSF will equip 50 locomotives and 135-mile corridor with our new system, which represents a significant commitment. ETMS that's new to you is an electronics-based train control system that sends information like speed limit, works on authority limits, and so forth from the railroad central office network to the screen inside the locomotive cab and that automatic initiates braking of the engineer does not respond to the information he receives. It is high potential high profile project, which we hope will lead to substantial business in the coming years.

Talking about coming years, you know beyond 2003, we have been talking or before about a step-by-step recovery in our markets that recovery does appear to be happening. The freight car market, of course, is clearly stronger this year. We expect locomotive outlook to be -- sorry, we expect locomotive growth in beginning to occur in 2004 and transit continues to be on track for growth in late 2005 timeframe with the commencement of this new R160 build for New York City Transit. Again I have to remind you about potential risks, projects can be delayed. But, overall, we are very encouraged by seeing our markets turning up and the evidence for that those turnarounds occurring sort of (inaudible) progressive year-over-year basis, so with that, I'll over to Alvaro to go through the financials.

Thanks very much Greg and good afternoon, everybody. As Greg mentioned about conductive brief review of our financial results for the quarter and then turn it over for Q and A. Sales decreased slightly from last year. Last year's total sales were approximately $180 million. This year they were about $175. Freight group sales increased during the period to increased by about 20% due to increased sales of OEM freight car components and commuter locomotives. However transit group sales decreased by 37%. For the most part, this is expected because the decrease was primarily due to the completion of this R142 order for New York City, but the transit market has been a little bit softer than we anticipated at the beginning of the year. Overall, these two tend to offset each other and because of mixed freight tends to be more profitable than transit.

We think we will meet projections for the year. Gross margin, the results are favorable. It increased to 27.2% versus 25.2% last year and 26.7% in the first quarter of '02. This improvement was due to operating efficiencies and continued application of lean techniques and favorable product mix, which I mentioned earlier. SG&A expense increased by about $2 million from last year. This was due in large part to insurance costs both casualty insurance cost, you know insurance cost etc as well as medical cost, which everybody has been experiencing. SG&A will fluctuate somewhat from quarter-to-quarter, but in large part, this is the due reason for the increases. Interest expense was substantially lower. This is due to the reduction in debt and the continued favorable climate for interest rates. Other expenses, I think Bill mentioned at the outset, we booked foreign exchange loss of approximately $2.3 million during the quarter or 3 cents per share, which was mainly due to the weaker U.S. dollar relative to the Canadian dollar. About half of this expense was paper expense. It was due to an accounting convention, which we had to adopt, but it did not really have a substantial economic effect and about half of it was a true economic effect, cash effect just from higher expenses in Canada due to the exchange rates.

Income tax expense we are accruing slightly higher than last quarter, 36.5 versus 35% due to higher effective state tax rates. We typically try to give you a simple bridge, simple causal of one quarter to the prior quarter and to the prior quarter we were 2 cents higher than last year. We had a negative effect due to lower volume of about 2 cents, negative effect due to the higher SG&A insurance of 3 cents and about 3 cents lower due to foreign exchange. However, because of mix and higher gross profit margin, that had a 5-cent positive effect and then a 5-cent positive effect due to reduced interest expenses. Again, showing the benefits of reduced leverage. One thing you noticed when you compare numbers to last year, is that the EBITDA numbers are slightly different. During the intervening period, we adopted with Regulation G, which was issued by the SEC, which provides guidelines on the use of GAAP and non-GAAP financial measures. We now report EBITDA again this is how we do it now with net income and we only add back interest, taxes and D&A. That is what Reg G says -the only item Reg G says is that you are allowed to add back in calculating EBITDA according to their methodology. The traditional way in the past we started with income from operations rather than net income and then we added back line items below that which tended to be non-recurring, such as restructuring expenses or non cash. But again, the numbers we disclose now are Reg G compliant.

In terms of working capital, our working capital increased slightly during the quarter by about $2 million. Receivables increased by about $2 million. Inventories increased slightly and it is offset to a certain extent by an increase of payables and other accruals. The effect was $2 million.

Debt net of cash was $173 million, which translates to 44% of total capital at June 30 compared to $179 million at end of the prior quarter March 31 and compared to $203 million a year ago. We continue to make progress in generating cash and maintaining our more conservative credit profile. We generated $6 million of cash in the current quarter.

In terms of non-cash items, depreciation was stable in line with the prior quarters at about $5.1 million. Amortization of about a million during the quarter. Capex, we continue at a very reasonable level mainly through the continued implementation of lean principles which really were resolved in low capital expenditures and we had only about $2.6 million during the quarter. For the year we anticipate the run rate may be a little higher than that, but we think we will certainly under spend the depreciation level. And we are still aiming for free cash of $40 million or $1 per share for '03.

In terms of backlog, the total backlog for the company was very stable at about $300 million versus $311 million a year ago. As we shift a little bit more to freight mix and transit and less of dependence on transit, the backlog will be less and less significant. In freight, the backlog was very stable about $155 million this quarter and $153 million a year ago. Transit was lower a year ago, about $159 million, this year about $147. This was expected to the completion of the R142 contract for New York.

One special note of interest, we sound a little tired because we have been on the road the last few days. We began a road show last week to offer a $100 million in senior notes due in 10 years. The proceeds would be used to repay bank debt and general corporate purposes. This is the start of the refinancing project that we have been discussing on prior phone calls. This would allow us to lock in favorable long-term rates and give us more flexibility for growth opportunities in the future. In the future, we probably will refinance our revolving credit, as well.

Go ahead, Bill, if you would like to summarize before the Q and A that would be great.

Thanks. Second quarter earnings are better than a year ago. We are still expecting earnings per share of 50 to 60 cents for the year with about $75 million of EBITDA and about $40 million of free cash. Recovery in the freight car market is underway. Expected recovery in other markets during the next two years appears to be taking shape. We are right on track as we started the year. Garcia, Do you want to come back on and entertain questions?

One thing real quickly before we do. Greg corrected me apparently I said it was a $100 million note offering, actually it is a150 million dollar note. I apologize

Just $50 million.

Yeah, what the heck.

Thank you, gentlemen. The floor is now open for questions. If you have do have a question or comment at this time, press 1 followed by 4 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 have a question or comment at this time, please press 1 followed by 4 on your touch-tone phone.

Our first question is coming from Mike Peasley of BB&T Capital Markets. Your line is live, sir.

Hi, guys how are you today?

Hi, Mike. We hear you.

I had a question, wanted to look at your margins a little bit. I think we've asked in the past and may or may not be available this time. We were wondering how the margins broke out on unit or segment-by-segment basis?

In general we report that when we do financial reporting. We don't have the data quiet there yet Mike. It will be reported eventually.

Is there any indication -

I wouldn't expect any substitute changes from historical trends.

From the first quarter?

Sure.

Then, looking at your SG&A, you mentioned insurance has been up a little bit and it has been trending little bit higher in 2003 than historically has been. I think it is about 14%percent of revenue in both Q1 and Q2, is that sort of the run rate 14 or high 13s that you are looking at maybe over the long term or mid-term or -

I think if you are trying to determine a run rate for SG&A, probably the results for the first six months of the year, I think it will fluctuate quarter-to-quarter to certain an extent. The results for the first half of the year will give a good run rate. I will say one thing. I hate to point out bad news. But the insurance rates have gone up more than just a little. This has been nationwide, everybody has experienced it in terms insurance rates have risen really dramatically over prior levels. We have tried to contain them, it has been a tough fight.

Mike, one of the thing may be taken into account as we go forward and see sales growing as the recovery comes along, most of those insurance costs are relatively fixed and not variable to volumes.

Okay. I guess lastly you mentioned the castings issue that has been at large for the last couple of quarters may be came more to light this past quarter. I understand -- I can't remember the name of the firm that went Chapter 11, I believe it was bought by a finance group. I understand they may be back up and running. I don't know if they are 100% capacity now. How does that look for their production coming up in the next couple of quarters?

I don't have any firm numbers and I am not sure anybody really does, Mike. No question there is a lot of work going on. You are right, the Moody and Assets, is the name of the company, once it was acquired by a financial buyer. There is a lot of work going on to bring assets like (inaudible) into production and even to increase the amount of supply coming in from China. But, the difficulty, of course, is proving it out making sure that you know all the quality and logistics, as well are in place before the OEMs can commit themselves to it. So, it's a bit of a moving target. That's why we just sort of hesitate to raise our freight car build forecast too far. I mean that's why we're comfortable at 25,000 or so, and possibly even more, but we just don't want people to be thinking that there is not some constraint out there to be taken into account.

Actually Greg, I have also said some of that might be good news for the industry. I mean we would like to see an very orderly progression in this industry as opposed to, you know a real expansive quarter or two and then -- not sustainable. So, it's good to see kind of a growing backlog and an ordered progression.

Good point.

That's a good point. As far as bringing any product in on the casting side from China or any other international source, is there a noticeable quality difference in the products?

Well, that's of course what everybody has to ensure themselves of. You know that there has been a significant problem with castings that have 35,000 or so castings, if I remember that were cast in Mexico by the old ABC Nako (ph) that have a quality problem now and they have to be replaced. So, everybody is being pretty cautious. You know there is no reason why a Chinese foundry cannot make the right quality, but it's a long way away and you want to make really sure before you commit yourself.

Okay well, thanks for your time.

Hi, there ladies and gentleman, if you have any further questions or comments at this time, please press 1 followed by 4 on your touch-tone phone. Gentlemen, there appear to be no further questions from the phone lines. I would like to turn back floor to management for closing comments.

Well, okay, we thank you very much and we thought we had a good quarter and will look forward to touching base with you shortly. Take care, now. Thanks every body.

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