美國西屋制動公司 (WAB) 2004 Q4 法說會逐字稿

Hello and welcome to the Wabtec Corporation fourth quarter 2004 earnings results conference call. As a reminder, all participants will be in a listen-only mode, and there will be an opportunity for you to ask questions at the end of today's presentation. If you should need assistance during the conference, please signal an operator by pressing star then 0 on a touch-tone phone. This conference is being recorded. If you have any objections, please let us know by pressing star 0 now. Hearing no objections, I would like to turn the conference over to William Kassling, Chairman of the Board, President and CEO, and Alvaro Garcia-Tunon, Senior Vice President and CFO. Mr. Kassling, you may now begin.

Thank you, Lania. Also on the call is Tim Wesley, our Vice President of Investor Relations. I want to welcome everyone to our year-end and fourth quarter conference call. As can you read, the forward-looking statements in the press release, our disclaimers, and you should note those as we go through this. I have some opening remarks. I'll turn it over to Alvaro, then come back, and we'll take your questions at the conclusion.

First of all, let's talk about the quarter and the year. The key points about the quarter and the year. Earnings grew 54 percent in the fourth quarter, and for the year, our earnings were up 37 percent, and we met the target of about $0.70 that we committed to about a year ago. Our cash flow was very strong. We reduced debt net of cash by 65 million during the year. So that's well over $1 a share of cash impact for the year.

Our top-line growth initiatives continue to make a significant and positive impact. And those top-line initiatives are international, sales, aftermarket sales, and, of course, incremental from new products, and I'll talk about each of those in a moment. Finally, we started to take actions to improve our future margins, and that has to do with the issues of some of the material expenses and our Canadian dollar exposure, which Alvaro will talk in some detail about.

First of all, let me go over the 2004 accomplishments. Beyond the financials, we continue to make progress in strengthening our operating units on the factory floor. As we talked about last year, we push for continuous improvements in what we call the key performance indicators. We track these monthly, then we summarize them for the full year. In 2004 we made very solid progress on our key performance indicators.

First of all, on quality, we increased our quality in terms of parts per million by 3 percent. So we continued to improve there. Inventories, we reduced our days supply of inventory by 8 percent, while having a significant increase in sales, and that's what lean companies do. If you can track the fact that our inventories got better in a period of sales growth, that tells you that we are, in fact, following the lean principles that we set out on many years ago.

Our on-time delivery was flat. Virtually the same as it was a year ago, but that was a very high number. Really, it's customer satisfaction index north of 90 percent. And finally, our productivity measure was one of growing 6 percent. Again, a good move from a lean company perspective.

However, that productivity growth was overcome by material prices during the year, and an inability for us to realize the full amount of that from our customer base, in terms of price increases. So in a sense, our margins declined just very slightly in the face of improving productivity. But all in all, we think 2004 was a solid year, and we're working on those things that were deficiencies for us. And we have work to do to improve margins, and we'll be talking about that as the call progresses.

Let's talk about 2005. Today we also will affirm and continue to affirm our previous guidance for the year of sales of about 900 million and earnings per share of about $1 a share. This will include the recent Rutgers acquisition, which we completed in January, as well as any expenses we might incur for restructuring. So our restructuring costs will be taken on a pay-as-you-go basis. That earnings per share level will be a growth rate of about 40 percent, and that would leave the last 3 years' growth in the 40 percent range. So we've been pretty good about earnings growth over the last 3 years.

The outlook is based on current assumptions and market conditions and I'll cover those later. Of course, as always, there are risks in our business. First of all, the macro-economy risks, exchange rates, which we're acting to mitigate against, and nonetheless still impact us, and industry. Freight and rail traffic rolling stock orders, for example, and transit aftermarket, and other internal cost issues. Again, however, in terms of these risks, there are a lot of positives. I'll talk about the market positives in a minute.

First of all, let me talk about the growth initiatives, and let me highlight the first of that, which is new products. Our Electronic Train Management System is performing well in its field test at the Burlington Northern Santa Fe. Those tests began in 2004. We equipped 50 locomotives along 135-mile corridor in Illinois with a computer software and hardware to monitor and manage train movements. This ETMS product informs train crews about work areas or speed limits and can initiate braking if for any reason the engineer fails to respond. This offers for our customer both safety and productivity benefits.

So after many years of fits and starts, seems to us the time has finally come for some form of train control. We are in the forefront and I think this is very exciting. We think that this has tremendous opportunity for the entire rail industry in North America. So as this pilot starts to roll out and do well, you can expect to see the BNSF be more aggressive and then other railroads following behind. We don't expect it to have a major impact in '05, but '06 is where we'll start to look for this type of thing.

Secondly, our growth initiatives is to focus on international and grow outside of the NAFTA region. We've been successful in doing that. Just to give you some historic numbers, in '03, 21 percent of our total sales was outside of North America. In '04 that had grown to 22 percent. Not much of an increase. However, in terms of year-over-year, we grew the international, or outside of NAFTA sales, by 21 percent, which is a very solid record of growth.

Because of the acquisition of Rutgers, an excellent fit, we expect our growth in '05 to match or exceed that number and our outside of NAFTA sales should be over 25 percent of total sales. Certainly, we continue to to have strong export sales in Australia and the U.K. along with growth from in-country business units there. So we're really positive about the international side of our business, and as we've talked about historically, in terms of total market potential, it's many times the size of NAFTA. And we're taking advantage of it.

And finally, in growth initiatives, let's talk about the aftermarket. The service business is introducing new capabilities. We're bringing more and more electronics and radio to repair to our business and we're adding new locations. We opened a service center in Montreal, for example. This is meant to take care of having railroads do things outsourced to us so they can focus on things to make them more efficient as we take care of making them efficient in the products we serve to them.

In terms of our aftermarket business, it went from 56 percent of total sales in '03 to only 54 percent. So a slight drop. But nonetheless, that business grew by 10 percent from 403 million to 442 million. So while some of our OE businesses are on an upturn, nonetheless our growth in aftermarket was 10 percent, and that's a very good number. And we expect that number hopefully to continue.

Now, let's talk about first of all the freight aftermarket, and I'm going to talk about the freight OE, then I'll talk about the transit aftermarket and transit OE. The freight aftermarket represents 60 percent of our Freight Group sales. Provides a stable base for our business, and it moves really with the move in freight rail traffic, which operates in a much narrower band in terms of depending on what's happening to the economy. In other words, up or down, a few percentage points.

Traffic set records last year, and car loadings and for intermodal and is off to another good start so far this year. Car loadings are up about 2 percent year-to-date, with coal and aggregates leading the way. Intermodal was 8.5 percent, still driven by strong imports, so that's a very healthy sector. This is encouraging, and we expect the aftermarket business in freight to continue to benefit, especially as we focus on growing our service capabilities.

Let me talk about freight OE. Now, freight OE is 15 percent to 20 percent of our total sales, so it's not -- we're not overly dependent on it, but I know everybody focuses on that number, and it has grown. Backlog was about 59,000 freight cars at year end. Orders for the year came in at just over 70,000, and deliveries were about 46,800. So it was a strong ramp-up in the fourth quarter. Earlier in the year, freight car deliveries were constrained by certain components, steel and castings, and that started to loosen up by the fourth quarter.

Locomotive order book is firm at about 1,100 units, down very slightly from last year's 1,200, but still very strong despite the fact that last year was sort of -- this year was a -- the year just finished, '04, was a target year for EPA requirements. They're really more stringent in '05 and beyond. The volumes are so good in the railroad industry that, in fact, this "buy ahead in '04" is continuing to give us a strong locomotive order rate in '05.

In terms of transit, the aftermarket has rebounded. We've been waiting for it. It rebounded very well last year, as ridership remains stable following the 2-year decline. We know the Federal Transportation Funding Bill, T-21, has been extended through May spending levels. So the new bill is expected to be passed sometime this year. I don't expect that that bill will have a decline in spending. It will possibly have an increase. I know it's being discussed and debated, but I certainly wouldn't expect it to go down. And we think it will be passed sometime this year. Otherwise, it's sort of on a continuing resolution status.

In terms of OE, OE is about 60 percent of the Transit Group's sales, and, of course, our major contract is New York City's R-160 project, which we expect to start ramping up late this year and really start to hit its stride in 2006. We think that will go over a 4 to 5-year period going out, and as you know, we've booked about a $250 million order for the total cycle. So it will add to our Transit sales next year.

We have other projects in terms of components for Bombardier and also for subway cars in New York City and Washington D.C. respectively.

That concludes my overall remarks. Let's turn it over to Alvaro to talk about the income statement and talk about our restructuring. Alvaro?

Thank you, Bill. I'll try and summarize the highlights of our operating results, then we'll turn over the session to Q&A. Sales rose from approximately 206 million in the quarter last year to 224 million in '04, a 9 percent increase. Freight Group sales increased due to higher sales of components for new freight cars and locomotives in North America as Bill discussed earlier, and Transit Group sales increased due to a ramp up of door renovation contract in the U.K. as well as a stronger aftermarket.

Gross margin for the quarter was 24.8 percent compared to 24.6 percent in the third quarter and 25.8 percent in the year-ago quarter. We're going to discuss various -- a couple of one-time adjustments we made, after factoring for the one-time adjustments in the fourth quarter, as well as the third quarter '04 you will see that the gross margins were essential flat, 25.1 percent in both quarters. And one of the things we're going to talk about today is our initiatives to improve gross margins in '05.

Gross margins for this quarter included a charge of 750,000 to write down the value of certain equipment in Mexico as part of our decision to exit a low-margin product line is really no growth, low growth product line that had very low margins. We didn't see a lot of future for that. It was a gear and pinon product line, and so we are exiting but we took the charge last year. And the steel, we continue to be impacted by higher steel prices and we estimate that that was about 1.5 million in the current quarter.

Operating expenses were flat quarter-to-quarter. Operating expenses included -- operating expenses expenses in the fourth quarter included a $387,000 write-down of our joint venture investment in China. Basically what we did is, this is another business that we saw limited potential and what we've done is we decreased our interest in that joint venture.

Interest expense decreased to 2.1 million, this is primarily due to a lower debt level in the quarter. We paid off about $40 million worth of debt during the quarter and higher interest income from our cash balances. Other expenses, as you'll see in the chart accompanying the release, were minimal in the last quarter in '05. In the year-ago quarter, other charges consisted mainly of asset write-downs in the foreign exchange loss.

And income taxes, they were pretty much in line with our expectations. They were accrued at a normal rate of 36.5 percent in both quarters. That leads to an EPS of $0.20 for the quarter on a GAAP basis versus 13 percent last year. Excluding the items that I talked to you about before, principally the Mexico and the China asset write-down, earnings per share was close to $0.21, again, compared to last year, adjusting for a couple of items at $0.15.

Talking about our margin improvement efforts now, since mid '04, we've been evaluating ways to increase our gross margins and we're starting to put some of these plans into action. I think we've talked about that in prior phone calls and we'll continue to discuss that as we go forward. This will be a multi-quarter process -- really, a multi-year process -- with the goal of fast paybacks on any expenses we incur.

A couple examples of what we're doing, we did ex at this time gear and pinon business in Mexico. We did reduce our investment in the Chinese joint venture. We'll be taking some funds out of there as well. In the first quarter of '05, obviously, the results are not being reported here, but we did relocate a ball valve plant -- I'm sorry, relocated a ball valve product line from Canada to the U.S., not the plant, and we initiated a plan to consolidate 2 facilities in the U.K. into 1. And we've also initiated other actions in Canada to reduce headcount, which we estimate by now we've reduced headcount in Canada by about 80 people, or about 8 percent over the last 4 months.

Another effort that we're doing to improve margins is putting additional -- we're stressing our sourcing programs in a much greater degree. These sourcing programs have been ongoing. They began in early to mid '04, and the pipeline is now starting to fill with these new products, and we expect significant improvements as we go forward from our sourcing activities -- or outsourcing activity. As always, we continue to evaluate other actions to restructure underperforming units.

Turning now quickly to the balance sheet, debt net of cash was 54.8 million at the end of the year compared to 120 million at December 31, '03. Just to make -- just to clarify the way we measure this, I think we've discussed in this prior calls as well, we -- the way we measure cash generation and the way we measure progress in that area is to take our debt and reduce it by the level of cash that we have on hand at the end of the period. These balances are down from a peak of 562 million, so we've gone from 562 million in the third quarter of 2000 to about 55 million at the end of this year.

During the fourth quarter, we repaid the balance on our revolver of about 40 million, which leaves us 175 million of availability, and at the end of the year we had approximately 95 million in cash. Now, we used part of that, we used about 36 million to purchase Rutgers, our new Italian friction company, from which we expect great things.

Speaking of cash, one of the questions we get asked frequently is what are you going to do with all your cash? At this point, we were continuing what we said before, we're continuing to look at acquisitions at any one point in time, we probably have 1 to 3 that we may be examining, but we're being very disciplined and highly selective. We don't want the cash to burn a hole in our pocket. We want to make sure that we meet our strategic objectives.

Rutgers for us is a great fit, it's an aftermarket oriented business. We have top-line synergies. We can bring some of our products from other units to there and we can bring their products to other areas, such as the states and it will be immediately accretive. However, we set no timetable for making acquisitions because we think that's when you can make a mistake. We do have the opportunities, and we'll be exploring them over time.

A few minor balances that we always get asked about, so we might as well clear them up here in the phone call. Depreciation for the period was 6 million versus 5.8 million the same period last year. Amortization was 1 million this period versus 1.2 million the last quarter of '03. CapEx for the quarter, it was 6.2 million versus 5.9 million last year, and for the year we continued to underspend depreciation and amortization. CapEx was about 19.3 million versus 15.6 million last year. Total D&A for the year is about 26 million. We're budgeting CapEx of 20 to 22 million next year. So, again, we'll keep it within the boundaries of D&A.

With that I will turn it over to -- I'm sorry, backlog. We always give the backlog figures as well. Backlog at the end of this year was 376 million versus 353 million on September 30, so the backlog, the total backlog, was up 7 percent. The freight backlog was up 21 percent, 233 million versus 193 million at September 30th, and the transit backlog was down slightly, 143 million versus 160 million at September 30th. But, again, very strong because of the New York City R-160 order.

And with that, I will turn it back to Bill for a summary, then we'll do Q&A.

Thank you. Well, just very quickly, we met our financial targets in 2004, and we generated extremely strong cash flow. We're forecasting to do about $1 of earnings per share in '05, that will be 40 percent growth. We do that for the last 3 years, we will have averaged each year in the last 3 years 40 percent growth in earnings.

We're certainly still focused on generating cash. We're highly focused and have a number of programs to improve our margins and we're positioning Wabtec to continue to benefit from the after -- from the market rebound. And we have a number of growth initiatives, all of which I think had a pretty healthy year and we'll continue forward in that way.

I want to thank you for your attention, and we'll ask whether Lania can come back on, and we'll answer questions.

Yes, sir. (Operator Instructions). And our first question comes from Wendy Caplan of Wachovia Securities.

Hi.

Hi, Wendy.

Couple questions. First, regarding the backlog, the freight backlog is up 21 percent from the third quarter. Is that correct?

That's correct, right.

Okay. And can you help us understand whether the bulk of that is freight cars? Or not?

That would -- the bulk of that would constitute freight car orders, right.

And as you look into '05, given the fact that the traffic continues to grow, the demand seems to be high, can you talk with us about whether you're enthusiastic about the prospects for freight cars in '05 despite the fact that you caution us it's a small percentage of your total revenue, but if you could give us some indication as to how you view it and what we should be thinking, because maybe I'm not listening carefully, but it doesn't sound like you're particularly enthusiastic about that piece of your business, if you could talk about that.

Well, no, I'd say we're enthusiastic about it. We're pleased to see that there's a continued replacement cycle going on, that there is a need for freight cars. That has been strong. We'll see how the first quarter comes in. The fourth quarter was a little light, but then again, the backlogs are pretty high. The only caution is the inflationary aspects of the fuel prices being passed through in terms of freight car deliveries and whether that will dampen the enthusiasm to place new cars, but overall I feel very good about it.

I would -- I'd like to see the market be real steady as opposed to kind of -- kind of having wild growth, because I think steady is the way cars are being used up, and so I think it should reflect some productivity growth on the part of railroads, therefore better efficiency, but a need to replace and a need to grow. So I feel very good about the freight car business at this time.

Well, I guess, Bill, you and I have been doing this long enough that we know it's not going to be steady, but I would agree that this year seems like -- '05 seems to be a good year. In terms of your Canadian, "problem" that's my word, not yours, you've reduced your headcount, you've moved -- relocated a ball valve manufacturing facility. Can you talk about what else you're planning for '05 or first half of '05 in terms of Canadian -- the Canadian operation?

Well, we like to report what we've accomplished as opposed to -- we've said that we're going to be focusing on this. We've said that this is a key to improving our gross margins, and we've suffered both from the material price increases, as well as the Canadian dollar exchange rate. We saw most of our sales in U.S. dollars and our costs -- much of our costs is denominated in Canadian dollars, and that's hurt us. So that we have a period of time that we should deal with this, and we are. And in the last 4 months, about 8 percent of our work force has been shifted or taken out. You can expect that we're looking very carefully at these issues.

Really don't have anything to announce at this time because we're -- we've got a lot of people involved. We've got -- we have to do this right, and we have to evaluate the overall productivity improvements we get in Canada against the higher costs that we're incurring. But we are committed to making sure that this is a non-issue for us in coming years. So I really -- that's about where I'd like to go on that, but we'll be reporting on it every quarter.

Okay. But can I get some assurance from you or some sense that given that, I know you like to report about what you've accomplished. The market cares about what's yet to be, and is it fair that we should assume -- is it a fair assumption that we should expect over the next couple of quarters that you will announce some other initiatives in Canada that will improve the cost structure there?

You can expect that there will be more change, yes. You can also rest assured that we look at sort of the '99 time frame when our gross margins were in the 30 percent range. Now they're in the 25 percent range. We'll take actions to move that closer to 30 percent. It's going to take some quarters, 2 or 3 years, but I'm very confident, knowing what I know about our cost position, and the general market prices, that we'll be back in that range.

And finally, Bill, can you talk about the Board's thought in terms of -- Alvaro, you mentioned the use of cash and how we always ask about that, but can you talk about whether the Board has or expects to consider other uses of cash, such as a buy back or dividend increase?

Before we answer that I want to make one more comment about this issue of our costs and margins. You note that we also are consolidating 2 facilities in the U.K., so this is not just a Canadian issue. We're looking at all of our units, underperforming units, no matter where they are, or those that can be improved, and taking action there. So I just want to come back and say this is not strictly a Canadian issue. It's a general focus on productivity and getting our costs in line. Sorry about that. Now, Alvaro, you can answer the question.

Sure. No, I'm happy to address that one, Wendy. As you can well imagine, our Board also is aware of the cash balances we have, and I think that's a topic at every Board meeting. Right now, I think it's safe to say that our strategy is to continue to look for acquisitions. We think we can do well with well-positioned acquisitions such as a Rutgers, and that is our immediate intention, and obviously it's always subject to change, but we have considered stock buy backs, we have considered the dividends, but I would say that our current position is to continue looking for acquisitions.

Thank you.

Thank you.

Your next question comes from Danna Getske of Morgan Keegan.

Just a couple of quick things. I know before that you have talked about possible price increases in '05 sitting down with your customers, given what steel prices have done, et cetera. I was thinking it was kind of an early '05 time frame before you could necessarily begin those kind of dialogues. Can you give us any sense for what's going on there?

Sure. I'd say we're making progress there. We got the big hits last year, and it's been real sticky to kind of deal with our customers on that. But we're starting to make some progress. Is it the kind of progress that makes us feel like we're getting everything we deserve? I'd have to say the answer to that is no. But we are making some strides, and I would expect that as the year goes on, you'll see some improvement.

Is most of your pricing based on long-term contracts, would you say? I'm trying to get a sense of particularly the aftermarket versus the freight car market, whether prices are set -- determined by contracts or not.

First, on the transit market, we have escalators, but they are multi-year contracts. The R-160 is a fixed price with escalators. But in the freight OE side of our market, we could have 1 to 2-year contracts, which could limit us and in some of our aftermarket businesses we could be awarded on an annual basis business. So there are bids and there are contracts, and they do go anywhere from a year to maybe maximum 3 years.

Okay.

So we started working on this sort of early to mid last year, so that time period is coming to a close. We ought to be seeing improvement as the year progresses.

Okay.

Typically 1 year in the case of freight markets, freight OE and freight and transit aftermarket, and then multi-year on the transit side, but we do have inflation protection there.

Okay. As far as in the fourth quarter, your revenue growth was fairly healthy. Was -- I don't know if you can give us a sense for how much of that might have been driven by price increases or if that was fairly minimal still.

I'd say it's fairly minimal.

Okay.

Because, those -- again, because of this kind of 1-year kind of rebid kind of thing, I mean, you could -- some of these are during the year, some of them are early in the year. So you haven't seen much impact yet.

Okay. And the other thing is, last week, the BN was, of course, giving a presentation at a conference, and there was a question that came up in regards to the -- what they were seeing on the supply side, and they just made a comment that the component side of the market was getting tight, which we've heard before, and that they were looking overseas just because sourcing components have become somewhat problematic. Just wondering, you had mentioned the opportunity with sales overseas and everything, if maybe you can comment on the current situation in the component market in terms of the tightness out there.

Yes, well, it is tight. I think they're looking at -- their equipment is short because of the volumes they've experienced, but relative to outsourcing our types of product or components, we're very much integrated and interchangeable with all that's been sold for the last 50 years and you're not going to go get any of that stuff from anybody else but us, and our competitors.

Okay. Thanks a lot.

Thank you.

Gentlemen, at this time there are no other questions in the queue. I can repoll if you like.

No, that's fine. I want to thank everybody for joining us, and we'll look forward to a good '05. Take care now. Bye-bye.