美國西屋制動公司 (WAB) 2006 Q1 法說會逐字稿

Hello and welcome to the Wabtec Corporation first quarter 2006 earnings results conference call. As a reminder you will be in listen only mode for the presentation. There will be an opportunity for you to ask questions after the presentation and instructions will follow at that time. If you would need assistance during the call you may signal an operator by pressing star and zero on your touchtone phone. For your information this conference is being recorded. At this time I would like to turn over the call to Tim Wesley, Vice President of Investor Relations. Mr. Wesley?

Thanks, Keith. Good afternoon everyone and welcome to our call. I'd like to introduce the rest of the Wabtec team who are on the call, Chairman, Bill Kassling, President and CEO, Al Neupaver, and our CFO, Alvaro Garcia-Tunon. As usual we'll have some prepared remarks and then we will be happy to take your questions. During the call we will be making some forward-looking statements so we ask that you please review today's Press Release for the appropriate disclaimers. With that I will turn the call over to Al Neupaver, our President and CEO.

Thank you, Tim. Good afternoon. We're off to a strong start this year as you've seen by our announcement this morning and we expect our momentum to continue. Our earnings per share more than doubled, $0.41 versus $0.20 a year ago, and this was on a 9% increase in revenues. EBITDA was up about 60% to almost 39 million. Gross margins were improved at 28.6%. After adjustments this is greater than a 3% improvement. This strong margin improvement shows that our efforts to drive down costs are having a meaningful impact. The key point is that we're off to a good start and this has allowed us to increase our full year earnings per share guidance to about $1.60 compared to about $1.50 at the beginning of the year. Alvaro will spend some time after I make some remarks about the market, some recent contract awards, new vision and growth strategy about our financial results.

Our freight markets are strong. Rail traffic continues to grow. In North America revenue ton miles are up about 2% year-to-date. Intermodal is very strong. It's up about 6% year-to-date. The locomotive OEM market appears to be tracking as planned with about 1,200 units to be produced this year. The freight car market continues to be very strong, even better than we had anticipated. First quarter orders came in about 36,000 units, the highest level since fourth quarter of 1997. Deliveries topped 18,000, highest since mid-1999. The backlog is now greater than 86,000 rail cars. This is the highest since the '70s, obviously a very strong market.

There has also been a lot of activity in our transit markets. The key market drivers in transit are federal funding and pass or ridership. Both these indicators are positive. The new federal spending bill includes annual increases of around 8% a year of spending. Ridership was up about 1.5% in 2000 and-- over 2005 and gained strength in the second half due in part to higher fuel costs. As you know, we've announced some major transit contracts in recent months that really solidify this business for the next several years. Our transit sales were slightly down quarter-to-quarter but we feel that these new contracts will provide growth into the future

Some of the ones that we've talked about in the past-- we received a contract from New York City, the R160 contract. With options this should be worth about $250 million in revenue over the next few years. We have an order from Port Authority Trans Hudson for subway car components worth about 80 million including options. That will start in 2007. We have some good locomotive orders in transit, Go Transit in Canada with 27 units on order and an option for 26 more, total potential value 217 million. We have a contract for work locomotives for MTA in New York with options total value of 122 million. And we recently were able to announce an additional contract, a 10-year $140 million contract to overhaul bogeys, at HSBC Rail, a leaser in the UK. This provides a solid base for this business and a platform for growing this capability.

Another recent announcement that's very important is that our new ATMS Pilot with Union Pacific Railroad was announced. This is an overlay train control system that enhances safety and efficiencies for the railroad. Combined with our pilot at BNSF this means that we'll have the two largest railroads in North America testing our train control system. BNSF, as you know, has been testing this system since 2004 with excellent results.

I'd like to talk a little bit about a vision that we've developed and some strategies that are a slight change from previous initiatives at Wabtec. Since joining the Company in February I've spent quite a bit of time working with the executive team to develop a vision for Wabtec of the future and the appropriate strategies to get us there. We continue to work on the details but we'd like to share some of our initial thoughts with you. The vision that we've created is that we would like to grow Wabtec to twice its current size within the next five years and during this period we'd like to be able to maintain on average double-digit earnings per share growth through the business cycle. Our strategy for growth is really based on rigorously applying the principles of the Wabtec performance system to generate sufficient cash to invest in our four key areas. Those areas are global and market expansion, after market products and services, new products in technology and acquisitions. Important to note is that the first three that I mentioned are very similar ones to what we've had in the past and we have a great foundation for continuing to execute those strategies. What we've added is acquisitions as our fourth strategy. We plan to be very disciplined and selective and right now we're working very hard to fill a pipeline with possible candidates.

I want to emphasize the key to all this strategic thrust is the Wabtec performance system because this is really what drives our business. The Wabtec performance system defines our culture as one of continuous improvement. It combines lean manufacturing principles, which we call QPS, with a structured product development process, which we call PDS. It provides leverage to reduce costs, improve efficiency and it drives cash flow and working capital improvement. I think with the improvement that you've seen in the gross margin this system is in place and working. These strategies will provide the path for Wabtec to achieve our vision. What I'd like to do now is turn it over to Alvaro with some comments about our financial performance. Go ahead, Alvaro.

Great. Thanks very much, Al, and good afternoon everyone. I'll repeat the welcome, nice to be able to chat with you again. We think we had a good quarter and I am pleased to be able to go over the results with you. Starting with sales, sales were 9% higher than the prior year quarter due mainly to increased sales of locomotive and freight car components. Primarily this was in the freight OE segments. The other segments were relatively stable. A small point but a meaningful one, I want to point out that we've made some slight revisions in our segment reporting due to the changing nature of a couple of our business units. Historically our Motive Power and Wabtec rail units have been reported in the Freight Group because most of their sales were related to freight railroads. However, with a few of the contracts that we've entered into that Al went over in detail earlier and that mix of business shifting to transit, we think it's appropriate to move Wabtec Rail, which is our unit in the UK, entirely into the Transit Group and to split Motive Power, which is our business in Boise, Idaho, their results between the Freight and Transit Groups as appropriate. The numbers we've announced today reflect those revisions so both the prior year numbers as well as the current year numbers reflect those revisions so we're apples to apples. If you want any more details on this get in touch with Tim, Tim Wesley, and he'll provide you with any further information you need.

Turning now to gross margin, where again we're pleased with the results, gross margin increased to 28.6 for this quarter versus 23.6 in the year ago quarter. Now there are a couple of issues there. In the year ago quarter we had a 4.1 million loss from a locomotive modules contract, which is now profitable and if you take into account the swing from the loss of the profit, the impact on margin is about 2 to 2.5% so still even once you factor that in we've had a significant increase in gross profit and this is mainly due to favorable product mix. As you well know, our efforts to lower costs through sourcing and lean manufacturing, we've been emphasizing that quite a bit and it's starting to bear fruit and also obviously operating leverage from higher sales and pricing. All those factors helped us to improve margins. As you probably know, we've set a management goal to increase our gross margin and we are pleased to see the results of our efforts again finally starting to bear fruit.

Going forward we'll be working hard to maintain and increase margins as the transit business grows and I do-- I always mention this and I'll mention it again. This transit business will change the product mix and it will change margins because those tend to be at lower margins but they'll obviously have a favorable impact on the bottom line and that's what we're really looking for.

Operating expenses were about 16% of sales in both quarters. In the operating expense segment, the one that was up was SG&A, which was up about 4, 4.5 million in this year's quarter. This was due to a variety of factors. There's some normal inflation. Obviously some of these expenses are going to increase with volume but the most significant was recognition of stock option expense under a FAS-123. In essence up to this year we've been getting mostly a free ride on our long-term incentive comp plans and now under a FAS-123 you have to recognize the stock option expense as well and an anticipation of FAS-123 we switched some of our plans to actually granting restricted stock and as the price of the stock goes up and as we make these awards, again in lieu of options, that expense increases as well.

Interest expense net is 1.1 million in the quarter versus 2.5 million in the year ago quarter due to higher interest income on our increasing cash balances so that's the good news that we're almost down to minimal interest expense. Income tax expense both quarters very comparable, accrued is 36.2% this year versus 36.6% last year. EPS is, as Al pointed out at the beginning, bottom line we more than doubled, $0.41 versus $0.20 last year. Again, last year had about $0.06 for the modules contract, which has now turned profitable, and about 2% of one time asset write downs in connection with some restructuring we were doing last year.

Turning to the balance sheet, our cash balance at March 31, 2006 is 191.5 million so we're getting close to the 200 million level compared to 141 at December 31, obviously a significant cash increase. We did receive some prepayments in anticipation of some of the large contracts that we're doing for the inventory buildup and non-recurring engineering. We like those contracts to at worst be cash neutral and I think we've achieved that. Working capital was relatively stable, inventory up, receivables up some but it was actually offset by the prepayments so actually down a little bit, net working capital. And debt remained at 150 million at March 31, 2006 so for the first time-- I've been here at Wabtec I think 11 years-- and our cash balances by a pretty material number exceed our debt balances so you can say that we are free of debt.

And then the question obviously becomes in your mind what are we going to use our cash balance and there I would reiterate what Al has said before. We're going to continue to invest in our organic growth strategies, new products, after market and international. We are going to be closely looking at acquisitions. We've discussed this in the past and we'll repeat what we've said before. We've set no real timetables but we are working hard to fill up the pipeline so we'll be exploring opportunities over time. However, we'll do it with a very disciplined approach and we'll be selective. We want to use the cash wisely.

Just to wrap up a few of the cash flow items for your modeling purposes, depreciation this quarter was 5.2 million versus 5.8 million last year. Amortization was 867, 867,000 versus 971,000 last year. Cap ex last year at this quarter we had for us a higher cap ex than maybe a little bit higher than normal. Last year it was about 6 million. This quarter it's about 3.3 million. We were doing again some restructuring last year, which I think you're familiar with. For the year cap ex should be about the same as last year, somewhere in the 22 or 24, 25 million versus a total D&A of about 27 million so no surprises there, very consistent.

In terms of backlog, all the new contracts have been adding to our backlog. Our total backlog for the Company as of the end of this quarter is 972 million and this compares to 827 million at December 31, 2005 so it's grown by almost 150 million and if you include the options-- a variety of contracts as Al said have options-- the backlog is over 1.2 billion at the end of the third quarter. And with that, that pretty much wraps up the financial summary so I'll turn it over to Al for the final summary.

Okay thanks, Alvaro. In summary once again we're off to a strong start this year with a $0.41 quarter. On the strength of this first quarter and our expectations for the rest of the year we're raising our 2006 guidance to about $1.60 earnings per share. We have a new vision for the Wabtec of the future and a strategy to get us there. Thank you very much I'll be and we'll all be happy to answer any questions you have. Keith, why don't you go ahead and set that up?

[Operator Instructions] The first question comes from Jim Lucas at Janney, Montgomery and Scott.

Great start to the year. A couple of questions, one can we delve a little bit more into the gross margins, which really just kind of blew everyone's expectations away? Mix playing a big factor in there, could you kind of break down on the apples to apples of the 300 basis point year-over-year improvement where the biggest buckets of improvement came from?

Yes. I'll-- we've done, obviously we've done that analysis which is important. I think it's an excellent question and, Alvaro, why don't you go ahead and go through that?

There's a variety of factors that went into the gross margin improvement, Jim. Let's-- if you want to compare it to last year, last year we had 23.6 and this year 28.6 so obviously increased by 5% in a 500 basis points. If you take a look at our locomotive modules contract, which again we were having issues with last year but which we subsequently turned it around and made it profitable which was really a good accomplishment on our part we felt, that accounted for about 2.5% of the improvement in gross margin. So that was a meaningful chunk. That's about half of it. The rest you can-- to be honest it's difficult to quantify. I mean you know there are a variety of factors. QPS always is important but QPS is difficult to quantify. Sourcing, we've identified several, actually more than several, quite a few strategic vendors where we've significantly improved our cost position. On the other hand that's offset by some cost increases at others, which we'll target now. Pricing has been favorable and we're starting to make some headway in pricing. Mix, the freight market right now is very good and that's favorable to us. A lot of times people would compare our margins to those in 1999 and they say can you get back to those margins and we said one of the reasons for those high margins was a favorable mix and we're starting to see a little bit of that again. Obviously volume when you compare it especially to last year it up and that was offset by normal inflation and some negative FX so again about half of it is due to the improvement in that one contract. That leaves you about 2.5. I would probably say half of the remaining of that improvement is volume and the rest is due to efforts such as QPS sourcing and pricing just roughly.

Okay that's helpful. And then when you look at the sustainability of this that freight continuing to be the main engine, at least here in the foreseeable future, you've alluded to potential actions that may be taken in the future to help generate further cost savings. Could you give us an update on that?

We are continuing to work on a program and it's in the earnings release this morning, a restructuring program, that we are not yet to totally discuss openly and one of the reasons is because of that strong market. We've had to really reassess that project and we still feel that this is the right time to be looking at these kinds of things and we think that it will help us continue to improve our productivity and our margins but there will be some cash and non-cash type expenses related to it so that program is still on the table being worked on and we think that the timing is right to be doing that kind of thing, Jim.

Okay and the final question, the new vision, you know this is clearly a blueprint that has been successful in the past and execution being 80% of the game the new-- the fourth leg of the stool that is new now, the acquisitions. One of the questions that I guess I would have is as you're filling that pipeline do you need to add more internal resources, meaning do you need M&A function internally or is that putting he cart before the horse?

No. We have right now started a search for an individual that will report to myself and that is something that we've announced internally and have a search going on to create a corporate development group, Jim.

Okay great. Thanks and congratulations again.

[Alice Blineack] from Wachovia Securities.

Question for you on ETMS, can you talk about-- a little bit about the project now that UP signed on kind of where we are in the process in terms of getting it past testing?

It's just been announced. This is something I think that went out April 20th and this is a project that we've been working on for quite a bit to get another major railroad out there testing this system and in our announcements that we made we talk about they're going to install this in two different places, one in Nebraska between two sites and as well as a Spokane, Washington to East Port, Idaho test route and one of the things I think is really important about this is during this pilot program that they're testing they also are planning to test the interconnectability with the DN program, which will really help give this program a boost if things go as well as we anticipate it will.

Okay great and then can you also update us on the New York City Transit Project, you know where we are in the process? I know there were some delays that had nothing to do with your products.

We actually visited our transit plant here in the last 30 days and we're producing product and shipping it. The program is moving forward. We should have some substantial sales by fourth quarter this year and moving forward. The way that the order pattern on this particular program compared to the last one it will not be a peak but more of a gradual program for us so we're pleased about that.

John Barnes at BBT Capital Markets.

So I was on the Burlington Northern call this morning and Matt Rose made the statement to a question I asked him that right now things are so good for the rails that they're not able to announce major replacement plans for their rail equipment, that all of their orders right now are just to keep up with volumes, which I guess is a great problem to have but from your perspective does that mean this cycle lasts longer or do you think that numbers you're seeing right now reflects majority replacement over new, you know net additions?

Well, I don't have a tremendous amount of experience over the last 20 years of my career with this but I can tell you, John, that I really studied this and looked back and fundamentally these programs should be sustainable. However, history would suggest that at some point there's going to be a down cycle and we plan on having a strategy that will prepare us for that down cycle if it was to happen. We're hoping that that's not the case and that this really is a sustainable growth forward. All the dynamics are there for increased use of railroads, fuel prices, the intermodal traffic. I think all the stars are aligned properly right now for this to be a sustainable period but we're just not going to set on that. We're going to use strategies and plan for this to prepare for that inevitability.

All right and the same thing on the transit side, I mean it seems like the states are flush with cash and they're ordering equipment but are you seeing anything there that concerns you at all or is it kind of the same thing that the orders are coming in?

Actually the thing about transit that is good is the we're just getting into the orders here. We're going to see an up tick in the transit in the fourth quarter and into 2007 and beyond for the contracts we have so I think there's a lot more confidence that this is going to be a pretty strong market into the future, probably more so than what we have visibility on the rail side, rail freight.

Back to Alice's question on ETMS, now you've got two rails signed up on it. How many do you really need to make this a commercially viable product where we can see a meaningful addition to the P&L? Is two enough or do you really need you know, do you need a couple more to sign on and do you feel like the more you get sooner or later the others are going to have to abandon competitive products? Do you think you'll be the lone standard in the industry if more than a couple more sign up with you?

Obviously we'd like to have all the railroads sign up and we think the first step is to get one or two. Two would be a measurable improvement and would be a success for our program so we're really going to push forward with the two programs we have going now and we're continuing to talk to the other railroads at the same time. And I think it will catch on and I think the interconnectability is going to be important.

Okay, but again to the question on commercial viability and moving the P&L, are you saying two is enough to do that?

Yes.

Okay very good. And then lastly, I like to hear you guys talking about this vision and especially adding that acquisition leg, but from a timing perspective. And I'm not asking for specifics, I'm just talking ballpark. How long are you willing to let this go before you think the shareholders are going to start asking for some of the cash back? I mean it's a lot of cash you're building very quickly. You are net debt free. I mean you've got one of the cleanest balance sheets in the space. How long are you going to go without doing something?

Yes, we're going to be very disciplined and we're going to be very selective and we're going to only do acquisitions that's right for Wabtec in the long run. That may take three months. It may take a lot longer than that, but we're going to be very disciplined and selective and that's something that I've preached and I think the whole executive office team agrees fully on and we're going to focus on acquisitions. We're going to look at ways that we could get adjacencies and other opportunities on the table. We'll explore international opportunities, but we're going to be disciplined and selective.

What's the biggest issue right now? Is it unwilling sellers? Is it you know they're willing, but they're just--?

I think the biggest issue right now is just filling the pipeline. This has not been an initiative. I think the subject was broached earlier. We did not have an internal department that was focused on it, so you had individuals who were part time and they've done a great job and if you look back over the history this has been a great Company with acquisitions. It's just that the focus was really to get the cash generated and the debt driven down and I think we're in great position. I think that the team did a great job to get us where we're at and now we've got to switch that focus and put a lot more effort in that area.

And to add something really briefly, John, but a lot of what we were seeing it's almost like to be honest with you there's some low quality targets out there that I think are being marketed just because the market is so good and you have to be very careful with that. So we hadn't really seen the quality that we had in the past, but we're also hearing a few things that may indicate that, that's going change a little bit. Looks like you're going to see some actually higher quality candidates start, but we really weren't seeing anything that got us excited to a certain extent.

Okay fine. Very good. Nice quarter guys. Thanks for your time.

And the next question comes from [Robert Ravits] at David J. Green & Co.

Yes, a couple of questions. With respect to acquisitions, are you prepared to tell us that you're not going to depart from-- how shall I put it-- the transit-- I don't mean-- the transit field in its broader sense, railroads both freight and transit and replacement parts?

Yes, we're obviously a rail Company and that's our core and as we look at what is available to us I think that the closer we are to that core the less risk that exists on an acquisition and so that's exactly where we're going to look at is find places close to what we're good at and try to develop a plan around that. We also need to look at acquisitions that will help differentiate us, add some technology, take us up the engineering curve as well as dampen the business cycle. That would suggest that maybe a little bit away from the core would help with those goals, so we're going to be very open minded and we're not going to restrict ourselves to any set rules, but again we have to make sure that it's the right acquisition before we make that step forward and I can't say enough about a discipline and selective approach.

Next question is with respect to the electronic train devise, Burlington's been testing that now for two years. What's the delay in them making up their minds? I know railroads go slow, but how much more is there to find out?

I think we've asked ourselves that question but one of the things, there is a step that has not been completed and that is that they have to provide a product safety plan that shows that this is as safe as they've operated in the past and that has not been formally approved yet.

That has to be approved by them or the government?

By the government.

I see.

It's with the government and the government's been involved in this pilot all along, Robert, so we're pretty optimistic that, that plan will be looked upon favorably, but that's really the next step is to get approval of that plan and then at that point it would be in BN's corner to say okay we're ready to roll this out on a greater scale.

Would this potentially be on every train?

This could be.

Potentially, yes, absolutely. It won't be on like switch or locomotive, some of the short lines. They just don't and their track isn't long enough to be able to justify this, but potentially, and again I'll stress the potentially. We're not there yet, but it could be on every class one train of significance.

And just another anecdote about the BN and their strong interest in EPMS, we did see the BN annual report and in Matt Rose's letter to shareholders he mentions Wabtec railway electronics ETMS and their feelings about that, so I think that's just an anecdote that shows that this is something that they take very seriously and very important to them.

My final question shouldn't be a surprise. International, where are you at? Are there any new geographies or major new opportunities that you see?

There's definitely some opportunity on a global basis. The markets in Asia, specifically China is very strong right now. There's opportunities in Russia, also in India. These markets are very, very strong and so there's a lot of global opportunities and that's part of our strategic thrust is to take advantage that.

The next question comes from [Gregory McCuscow] from [Board Adam].

Just a follow up on that last question, how fast did international grow in the quarter?

International sales was basically flat from first quarter last year to this year. Most of our growth in strength was really on a North America basis.

I mean it grew pretty fast last quarter. Is there any issue there?

Not that we're aware of. I think, again, that there's so much activity going on in North America maybe it's we need to put a little more emphasis on and that's another one of our discussion points.

But, again, one of the key contracts that we recently announced, the HSBC maintenance contract, that was with our unit in the UK and that does show the benefits that we're getting from that increasing emphasis.

So, you expect--

But, again, the international's an incremental process. Absent acquisitions and absent a relatively big bang like HSBC you'll see small incremental bangs as we're going forward. That's not unusual and I don't think any cause for alarm.

And then with regard to the backlog, what share of that is in the next 12 months?

Hold on a sec, let me dig out that number?

We have that number.

I think, and again, backlog is much more important in the whole. Freight certainly as a whole is not necessarily backlog dependent, but in the next 12 months the backlog is about 418 at end of the first quarter and this compares to about 389 at year end, so up slightly.

Yes, very good. And then you've talked in the quarter about the restructuring and the idea that because demand is up you will have to re-look at it and make sure you restructure correctly so it might take a little longer. Am I correct on that?

That's correct.

But you also said-- did you do any actual sort of minor restructuring or sort of rejiggering in the first quarter that really didn't need charges?

No, there wasn't anything done in first quarter at all.

Not of any significance. We're always tweaking and we're always trying to improve, but nothing that you could point to the financials.

Most of these actually were really in place.

Continued momentum on outsourcing however?

Right.

Right.

And with regard, I know that you mentioned in the past that the restructuring would have something around a two year or less payback on cash charges. Do you anticipate something greater now that the demand is there and there's sort of changes in the marketplace? Should it-- might we expect a bigger process or bigger situation?

No, that's still-- that's about where we're at on the project as we've reviewed it. I don't think it'll be much different than that and that's two years on any cash outlay.

All right. Well, it's nice to hear. Thank you.

[Operator Instructions]

If there's no other question, we really want to thank you for your participation and enjoyed the questions and look forward to talking you again in a few months. Thank you, very much.

We'll see you in three months. Thanks, very much. Take care.