美國西屋制動公司 (WAB) 2003 Q4 法說會逐字稿

Welcome to the Wabtec Corporation fourth-quarter earnings results conference call. As a reminder all participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS) This conference is being recorded. If you have any objections please let us know by pressing star and then zero now. I would like to turn the conference over to Greg Davies, President and CEO, Alvaro Garcia-Tunon, Senior Vice President and CFO. Mr. Davies, please go ahead.

Welcome to our fourth-quarter 2003 telephone conference call. As Andrea said, you have got me here and Alvaro and Tim Wesley is also here from our Investor Relations Vice President, but Bill Kassling is traveling and not able to join us for this call. Before we get started, I just want to refer you to the forward-looking statement disclaimers in the press release. Something that we always have to pay attention to. We are going to have some opening remarks. I will talk generally about the Company and its operations and then turn it over to Alvaro to deal with the details of the financial statements. Then of course, we will take your questions.

The key messages to start with are first of all earnings in the quarter and the year, and we met our targets for both periods. Our sixth consecutive quarter of earnings growth by the way. Our cash flow exceeded our target for 2003. We had improved key performance metrics in our operations, again I will talk about that in a bit and several new business breakthroughs and we accomplished all of this despite end markets that are still somewhat sluggish. So let's talk about the fourth-quarter results.

First, GAAP earnings per share of 13 cents or 15 cents from operations. That is in line with expectations of higher than last year's 12 cents GAAP earnings. The improvement was due to higher sales and favorable product mix partially offset by foreign exchange impacts. Our EBITDA was 19 million from the quarter. We generated strong cash in the quarter to hit $45 million for the year versus a target of 40 million, that is about a dollar per share in cash. Looking at the full year, our earnings were 52 cents EPS, GAAP EPS, substantially higher than 2002 and we had cash EPS of 57 cents and EBITDA of 71 million or about seven times interest expense.

We ended 2003 with $120 million in debt net of cash which is the lowest figure since becoming a public company. Alvaro is going to cover the numbers in detail later so I would like to talk about some of our other accomplishments in 2003 and the outlook for 2004 before turning over to Alvaro. Beyond the numbers, we strengthened our operating units in many ways. Using our priority deployment management tool we met or exceeded several of our important breakthrough goals. We reduced the cost of purchased materials by about $8 million. We improved on-time delivery and quality substantially and I will talk about that a little bit later. We also improved our product development process getting virtually all of our product development effort on to our new electronic product development system.

We initiated new training and management development programs in the areas of marketing and quality engineering. In addition to those breakthroughs, we always push for continuous improvements in what we call key performance indicators at all of our plants. In 2003 we made solid progress in three of those measures. Those were increased quality where we improved quality by 40 percent. We reduced our day's supply of inventory by 27 percent, and we increased on-time delivery by eight percentage points. Our productivity measure was flat but that really means real productivity was approximately equal to our foreign exchange cost and our inflationary adjustments, meaning that we essentially just used productivity to offset those cost increases. I think this proves that we still have more work to do in that area though and so even with those accomplishments in 2003, we think we have still a long way to go to achieve a true lean culture and we are pursuing this more aggressively in 2004.

Some of the changes we are making are going to be relatively subtle, but others are going to be significantly more noticeable to everybody. For example, we are changing how we monitor the business monthly, internally. We are focusing much more on forecasting improvements and in checking whether we made improvements both in financial metrics and in our common measures or key performance indicators. We are also combining product development into QPS (ph) to form one, what we might call process improvement business development effort within the Corporation.

Finally, we are modifying our senior management incentive compensation system to focus more on economic profit. In short we are putting even more emphasis on improving performance and you'll hear more on that in the coming months. Now we look forward to 2004, there really is no change to what we talked about only a month or so ago. We continue to forecast earnings per share of about 70 cents for 2004 with sales of about $750 million. That earnings per share level would be a growth rate of 35 percent. That forecast is based on current assumptions and market conditions which I will go over in a minute. And of course, is always mitigated by the macro and micro risks like the economy, exchange rates, insurance and so forth within the industry, freight OEM orders and rail traffic, transit aftermarket and the like.

We look at the freight OEM market for example, the freight car delivery rate for 2004, we think remains at about 36,000 units versus 32,000 in 2003. Fourth-quarter orders were strong, they were just about 12,000 cars which is about 20 percent higher than the fourth-quarter delivery rate. The backlog grew to almost 34,000 at year end which is the highest since 1999.

Locomotive order book stands at we would say that locomotive orders will eventually reach about 1000 units for the year. The order book is not completely firm yet but I think that there is a pretty high confidence level that we are going to see over 1000 units built this year up from about 750 units in 2003.

Looking at the freight aftermarket, freight traffic for 2004 just in January started off pretty well. Car loadings are up by about 2 percent and intermodal traffic is continuing its upward momentum at about five percent. And early this year coal, grain and aggregates were the big increases compared to the year ago month. It is certainly encouraging but this really has not translated into meaningful pickup in our aftermarket order rates as yet.

On the transit side looking at OEM we have of course, had a strong backlog of projects entering the year, and our big news today was our announcement of additional contracts for the New York City R-160 project which I will detail in a minute. The aftermarket, there really isn't much change; we are still impacted quite negatively by funding cutbacks and lower ridership levels virtually across the country. And the federal transportation funding bill which we have talked about a number of times is still being debated in Congress. They have now been given a one-year extension, so it is really too soon to predict the outcome of that.

Now looking at the R-160 which will be the delivery with options of about 1700 new subway cars; we have been saying that our piece of the business could be as much as 250 million including options. Last year we announced $150 million for the business for brakes, couplers and current collectors and then this morning we were able to announce another $100 million for door operators, door panels and event recorders. This really gives our transit business a very solid footing for 2006 and beyond.

Looking at new business, UBX (ph) brake assembly, we have been quite successful during 2003 in landing some good pilot orders with several of the OEMs and we are expecting sales to ramp up pretty substantially in 2004. In the radiator business we won some significant contracts in non-rail markets such as power generation. Our friction subsidiaries continue to have success in moving customers from standard products into more value added products.

So in summary, 2003 was a solid year, strong cash generation and good progress in operations. We are forecasting strong earnings per share growth in 2004 and another year of free cash least in excess of net income. The rest, of course, are economy, foreign exchange, rail industry growth and the like but overall we remain bullish about the future. We do have a cyclical rebound in our key markets; we have the growth strategies in place, the international business, new products and services, tier one systems and we are stepping up our effort in regards to lean principles to drive performance improvements.

With that I would like to turn it over to Alvaro and he can talk about the income statement and balance sheet.

Good afternoon to everybody. The financial results were pretty much in line with our expectations. Sales were 16 percent higher than the prior year quarter. This was primarily due to an increase in freight group sales of about 21 percent due to higher sales of freight car components, and the contract in the UK to build specialty ballast (ph) cars. However we also had a modest increase in transit group sales of about 5 percent due to completion of certain OE contracts at the end of the year. It wasn't due to aftermarket which has been down for most of the year.

Gross margin was flat compared to last year at about 25.8 percent compared to 25.9 percent. However we did have an unfavorable FX impact of about one percent of sales. Absent these unfavorable FX we would have been up by about 26.8 or 100 basis point increase year-to-year.

Operating expenses were 14 percent higher due to really two or three reasons, primarily higher medical and insurance premiums. We also had inclusion in this quarter of an operation that was previously classified as discontinued. We had tried to sell it, we couldn't get a satisfactory purchase price so we put it back in continuing operations. Before it had been classified as discontinued, now all of the costs are segregated in the accounts as you would with a normal continuing operation. Then we also had a few onetime write-offs of certain asset balances.

Interest expenses increased modestly from last year and a little bit over the third quarter as expected reflecting our new capital structure and the new senior notes we issued in August of 03, of last year. Other expense consists primarily of charges for nonoperating asset write-downs which we mentioned in the press release totaled about 3 cents a share and that is where we classified some of the FX losses as well.

Income taxes accrued at a normal rate of 36.5 percent. The rate was lower last year because we were able to utilize some foreign tax credits that weren't available this year. On a going forward basis 36.5 percent looks like a pretty good rate for the time being.

The bottom line, earnings per share was 13 percent. GAAP earnings per share were 13 cents in comparison to 12 cents last year. As I mentioned earlier nonoperating items totaled about 3 cents and these were for nonoperating asset write-downs of vacated facility held for resale and an adjustment in connection with reclassifying the discontinued operations to continuing. Then we also had one cent of income from discontinued operations not to make the whole thing too confusing, it was the elimination of a reserve from a prior sale of assets that we didn't need anymore. Excluding those items earnings per share would have been approximately 15 cents.

We are very pleased with our liquidity and our debt stood at about 120 million net of cash which is 33 percent of total book capital at 12/31 compared to about 176 million at the same date last year. And this is down from a peak of 562 million in the third quarter of 2000. We also previously announced that we completed our bank refinancing arrangement early in January which gives us an additional 175 million line of credit. So for the short-term on financial needs I think we are very well met and we have a substantial amount of liquidity.

Working capital was relatively flat; it was up about 7 million year-over-year. We have had some increased sales that accounts for part of it and while we are projecting increased revenues for '04 we will certainly continue to strive for improvement in working capital in that year. The key components of cash flow were depreciation, it was about 5.8 million in the current quarter versus 5.2 million last year. Amortization virtually flat year-over-year 1.2 this quarter. Our CAPEX was 5.9 million for the quarter, for the year our CAPEX was about 16 million, well under our DNA of about 25 million. For next year we will be somewhere in the ballpark of about conservatively speaking, we're typically under our projection but at least our goal would be somewhere in the neighborhood of 20 to 22 million in CAPEX.

Talk about the backlog a little bit and again I would add the caveat that about 50 percent of our business is aftermarket which has no real backlog. And in freight and in really for a lot of our other businesses, backlog is not that significant of a component. The delivery times are not that great and the most significant part of backlog relates to transit. But overall we had backlog of 263 million versus 280 million at September 30, of '03. The freight part of it was 112 million versus 131 million at September 30, and then the transit was 151 million versus 149 million at September 30.

With that I will turn it back over to Greg for a quick summary and then Q&A.

So as we have said fourth-quarter earnings and EBITDA were in line with expectations. We are still expecting our 2004 earnings per share to be approximately 70 cents. And we continue to be focused on generating cash and positioning Wabtec to continue to benefit from the market rebound as well as from our growth strategies. So with that I would like to turn it over to questions. We will take them in the normal order in which they are received.

(OPERATOR INSTRUCTIONS) Art Hatfield from Morgan Keegan.

First off on SG&A, can you talk about the big jump there? As you talk about that, as I looked back at the numbers since the merger between Waco and Motive Power, there hasn't been a quarter where SG&A has been above 25 million. And I was a little bit surprised to see the number as high as it was, and I know you referred to health care costs, but can you just address that issue as why the number was so high and if that is a run rate we should see going forward?

I will be happy to address that. There really are a couple of components for the increase. We did, and I think this is fairly common really across the country these days, we did have a pretty significant jump in health care costs year-over-year. We were addressing that going into '04 and we are asking for greater contributions from our employees, unfortunately the deductibles had to rise, etc. etc. So we are hoping to stem the increase but again this is widely felt across the country. If you take a look at our press release SG&A I think what you're referring to is that this year to last year went up by about 4.5 million. We are estimating that of that 4.5, 2 million or so is due to health care, then about another 500,000 or so is due to inclusion of these operations that we had discontinued, where again, I am sorry, where we just one-lined everything and discontinued and now we know we blow it up and reflect it in the normal category and that is about another 500,000. Then we did have some write-downs of certain operating assets. Onetime charges of about 2 million in that number. If you are looking for a normal run rate which I think you asked at the end I would probably take our current result and subtract those onetime charges and that will give you a decent answer going forward.

Okay. With that said, the health care cost that has been an issue throughout the whole year, hasn't it?

It has, yes, but again it has been increasing but you know we're comparing the fourth quarter of '03 to the fourth quarter of '02.

I understand that.

Insurance in general and medical has been an issue all year for us.

The reason I asked that is we just haven't seen the bigger jumps in the year-over-year comparison to last year. And I'm just curious if there was something unique to Q4 but you're saying there wasn't.

No, I really don't think so. Normally at the end of the year you really true up your estimates a little bit and try and make sure that you are done. That may have been a little bit of that but really it has been felt throughout the whole year.

Okay. I think I would probably direct this at Greg. As I look at the Company in Q4, you did about 206 million in revenue and you did a gross profit margin ex the Canadian dollar issue of roughly 26.8 percent, as I look back at the company back after the merger in Q1 and Q2 of 2000 really that was the last time that you had revenue at this level, your operating gross profit margins in the 29 to 31 percent range. Is there something unique about the mix now that is different from then that is pressuring those margins somewhat? What can we expect to see happen with the margins going forward? And finally, Greg, I know this is a long winded question, but what do you think it takes for you guys to get back up to the 28, 29 maybe 30 percent gross profit margin?

I think the first thing that of course there are some differences, I mean there's nowhere near as much freight car billed now as there was then, and freight car billed has always been our most profitable single piece of business. So we have been working hard in all of our other businesses to try to drive margins up so that is the simple answer. How do we get the margins back up? I think that is where we are working on this material cost savings that I talked about as deployed priority. It is where we are working the lean manufacturing operations very hard, that is one of the reasons why we have just gone back and adjusted how we're going to be doing our reporting so that we stay much more focused on our predictive and therefore, making sure we get the numbers that we want rather than waiting until the end of the month and finding out we didn't make them and so forth. I think it is going to be a lot of blocking and tackling.

I think the true answer to this business is that beyond the freight car businesses the margins are just not as good as they are in the freight car business. So we have to work ever harder to get the margins where we want them. I think we are making progress because if you look at, as you said you take out the foreign exchange and you look at this year versus last year that is positive. And as we go forward one of our internal goals has always been to improve our gross margins by 1.5 percent a year. And I know we haven't made that every year but that is still our target and we are still working to do everything we can to get there. You remember in some of the presentations I have made we talk about up the tier (indiscernible) becoming a tier one supplier, that gets us more margin, more value added if you would like per dollar of sales, those kinds of things. Again it is a long winded answer to a relatively simple question to turn that around on you. I think the answer is we got to work very hard to get there but I'm confident that we can get there particularly as we start to see our market stabilize, the aftermarket come back and so forth in the next year or two.

Thanks, Greg.

Michael Peasley of BB&T Capital Market.

Alvaro, let me start with you. Just a little confused about the charge where it is on the income statement, it was 3 cents after-tax. Did you say that the majority of that was in the SG&A line item?

No, actually I apologize for the confusion, it can get a little confusing. We actually had write-offs both in the SG&A line as well as the other expense line. The ones in the SG&A are onetime but we consider those relating to operating assets. The ones that we consider are non-operating are in the other expense line and they related to a vacant facility that we held for sale as well as a charge associated with taking the discontinued operation back into continuing which we felt were non-operating so they are in the other. Again there were some operating ones in SG&A so it can get confusing so they are in both.

So there was 2 million dollars of operating charges in SG&A and then what another 2 in other?

Yes, roughly.

Okay. Exchange rate losses that would be both in the other line item as well as cost of goods sold?

Right. Typically and again I wish I could make a complex subject matter a little easier but I can't. Some of the FX is in cost of sales because they basically relate to goods purchased by our Canadian operations that are now more expensive in US dollars so that is in cost of sales. Then in the other we also have some FX which basically are more paper type FX which relate to translating certain Canadian assets mostly receivables to US dollars and the loss in there. So again they are spread out throughout the income statement; that is the proper accounting for it so we can't one line the FX items (inaudible).

That makes sense. Thank you. I'm just looking at revenue and I understand you had a piece of business in the transit side that came through I guess in this quarter that probably jumped it up greater than what the run rate actually might be at almost $60 million. It has been consistently on a run rate anywhere between 43, 47 over the last three quarters. Is that kind of a onetime thing in Q4? And then I guess on a consolidated basis even freight group sales jumped pretty good which would make sense, rebound the rail market in general. I guess again, like (indiscernible) long winded question, but here we are at somewhere around $206 million in sales, I mean why can't we annualize that out through 2004 versus your guidance somewhere around 750 million?

Well basically I was going to refer you back to our guidance, obviously in the new environment where we are a little bit limited as to what we can say. But I think right now we are comfortable with the guidance that we have provided before of about 750 million and we do expect increases in both freight where we said OE is going to go from somewhere 31 to about 36 or so. As well as a modest increase in our transit business somewhere between 5 and 10 percent. Those are the numbers that is the numbers we are providing, that is what I use for modeling purposes.

So there was a onetime revenue hit in transit this quarter.

(multiple speakers) I think I did mention they were trying to complete certain OE contracts at the end of the year just tends to be a natural target for everybody. The fourth quarter for us is typically relatively strong sales wise as well for that reason and so, yes, if you do the math and you get to the highs of 750 then the only thing that is left I think is a little bit of a onetime spike and I would agree with that.

Okay. Just to be clear talked previously, is this the same order about the door systems -- is that what you said because I know when you took the order for $150 million previously, you said there was another 100 million out there for door systems, this is the same order?

Yes, that is right. We just confirmed really, remember I think we said we were confident we would get the majority or the lion’s share of the 250? It turns out that again assuming all of the options are taken that we will end up somewhat above 250.

What did you say net debt was, 122?

I think I said net of cash, we are about 120.

And then what is your cash position?

I think at the end of the year it was about 75 million or so.

Finally, shareholders equity?

That one I think I said in the press release I said in the conversation that we were about 33 percent book to equity and I would say shareholders equity will be somewhere about 250.

All right, I will turn it over for others now. I appreciate your time, thank you.

Mark Bishop of Boston Company.

First of all, do you have the operating income break out by group?

I think the only thing we disclose right now is just the total revenues by segment. When we file the K we will provide the operating income by the group but right now we have the sales.

Do you have a forecast, your depreciation was a little higher than in the quarter. Is that a good run rate going forward? Is it up from where it was the prior quarter or is that just adjustments?

It was a little bit higher and that is always going to fluctuate a little bit here and there (multiple speakers) I think somewhere in the 22 numbers is a reasonable run rate. I think last year it was 5.2 million, this quarter it was about 5.7, 5.8.

So in the neighborhood of 5.5?

Yes, somewhere like that.

Your interest expense, do you have a -- given all of the changes that you have made what would be a good estimate for interest expense run rate in the first quarter or?

I think you can use the fourth quarter as a pretty decent estimate going forward.

Okay. That is great, thank you very much for your help.

(OPERATOR INSTRUCTIONS) Blake Halseck (ph) of (indiscernible).

Just a quick question, you talked about locomotive units hitting about 1,000. Can you talk specifically about the new switchers with the background of the new EPA guidelines, where you see the long-term delivery growth rate on the new switchers?

I'm not sure that I have a good answer direct or complete answer for you but I would say that with the EPA guidelines and so forth that we would expect to see some movement, with that by the way some other things going on out there, we would expect to see some movement in switcher operations in the future. I know we haven't done -- there haven't been any switchers for the last two years, but I would expect to see some over the next two years. I think there is going to be a movement to a little bit more switcher operation.

So you are not getting a sense that there is a huge demand to upgrade to higher tiered switches at this moment? Are the long haul guys typically saying we can replace our existing switchers with some older locomotives to get to maybe the tier 1 stage, is there really no rush to get to a tier 2 at this point.

No, I do not think there is a rush to get to tier 2. That doesn't mean that we are not going to start seeing the railroads running out of four axle locomotives that they can cascade downwards, so that is where we will see some business. Of course there is always some interest particularly in some of the more emissions challenged environments like L.A. or Houston and so forth, to look at some of these new really good emissions locomotives, not just tier 2, but like natural gas and so forth or even alternative power. We are trying to stay very close to that but I wouldn't want you to think that there is this big market out there that we are going to somehow land in the next year or two.

Great, I appreciate that.

Art Hatfield of Morgan Keegan.

Just one other thing and this is kind of weird question to ask you all, but you have got 75 million in cash on hand at the end of the year. You did that note offering last year so you have got some fixed debt for a period of time. You really don't need to pay down any debt in the near-term, what are you going to start to do with this cash? And I would suspect that as things get better that number is probably going to grow pretty quickly?

Well, Art, your guess is as good as ours in the sense that I think the things you would be thinking we would be looking at are probably exactly what we are looking at. There are good opportunities out there for us we believe to start to make some acquisitions in the not too distant future. We really do believe that there are much better opportunities out there in that regard than for example, buying back stock or a major dividend. I think the real thing to be looking for is what are the right opportunities for us as we go forward in the way of acquisitions.

What kind of strategy do you have in that direction? Is it acquiring more of the components that go into either a locomotive or a freight car? Or do you start to think about diversifying yourself? I guess both geographically and potentially diversifying yourself away from the rail freight industry at all?

I think the first thing that we would look at is to try to go more or less to things we know, because of course the more you can focus where you know, the better. On the other hand as you know a lot of the U.S. freight business is highly cyclical, and so we want to kind of be careful about investments in highly cyclical businesses that are only going to exasperate our cyclical swings in the future. So within those guidelines I think we could go in a number of different directions and we could buy more freight component kind of businesses. We could go international, and we could also begin to look at least carefully, look at expansions outside of the rail industry. I think to us the key is to make sure that it is something that we think we understand and know, and that somewhat at least significantly decreases our exposure to the economic cycle.

Great, thanks.

Michael Peasley of BB&T Capital Markets.

There has been a lot of talk around about steel, scrap steel prices up and demand increasing. How has that impacted you in terms maybe in availability but more importantly the cost of sales line and how has that played out so far this year?

First of all, you are right that scrap steel and scrap iron are very important components to us but we first of all haven't had any problem with availability. As far as price, we have not seen a lot of substantial price increase yet. I know like everybody else we are concerned about that in the future. And again a reason for stepping up all of this activity that we are doing relative to purchase price, supply chain management and so forth because I think that is a potential concern. Right now I think we are okay, I think we will be okay for 2004. But certainly something we want to be very -- to watch closely and to manage ourselves around. One of the things that that forces us to do is to look for more offshore sourcing.

All right, thank you.

Robert Ravitz (ph) of David J. Green (ph).

What is the interest rate on your new line of credit?

The interest rate changes in line with our leverage ratio but right now it is 175 basis points over LIBOR.

What LIBOR?

It depends, are you talking in terms of like a 30-day LIBOR, sixty-day LIBOR?

Yes.

It depends because what we do is when we have outstanding debt we can lock it in for 30 days in which case it leaves a 30-day LIBOR, we can lock it in for (indiscernible) in which case we use (indiscernible) and on until about, I think we have the flexibility to lock in up six months worth, so it just depends on the rate that we lock it up.

What is six-month LIBOR now, do you know?

Off the top of my head I don't, in general LIBOR is at about 1.25 and so our effective borrowing rate would be somewhere around 3 percent. It doesn't change that much between the tranches, maybe 5 or 10 basis points between each tranche.

Secondly, what happened with the secondary offering back in October? What happened with the green shoe?

The green shoe was exercised. And I think if memory serves me right that was about an additional 750,000 or so shares. That is included in our calculation for next year.

Right. Okay, thank you.

One thing to note there is that the cash proceeds for that were not included in that $46 million worth of cash we talked about.

It is obviously included when we say we have 75 million worth of cash on hand, it is in that number but when we talk about the cash generated during the year it does not include proceeds from the stock offering.

I'm confused. It was your stock that was sold, right?

Yes, but if you look at the press release we say we generated approximately $45 million worth of cash flow. The proceeds from exercising the shoe were about 10 million. When we say we generated 45 million of cash flow during the year that does not include the 10 million from exercise of the shoe. But when we say we have cash on hand of 75, that does include the 10 there obviously, yes. I didn't mean to make it so confusing.

Thank you.

(OPERATOR INSTRUCTIONS) At this time gentlemen, we have no further questions.

Thank you, everybody. I think that we are all looking forward to 2004. There is plenty of challenges out there but we have got some really good opportunity. We have got some good plans in place and we are looking forward to getting back with you on a quarterly basis to report on them. Bye bye for now.

Thank you very much.