美國西屋制動公司 (WAB) 2009 Q3 法說會逐字稿

Hello, and welcome to Wabtec's third quarter 2009 earnings conference call. All participants will be in a listen-only mode for today's event.

(Operator Instructions.)

After today's presentation, there will be an opportunity for you to ask questions.

(Operator Instructions.)

Please note that today's event is also being recorded. At this time, I would like to turn the conference call over to Mr. Tim Wesley. Mr. Wesley, please go ahead.

Thanks, Jamie. Good morning, everybody. Welcome to our third quarter earnings call today. Let me introduce the rest of the Wabtec team. As usual, our President and CEO, Al Neupaver; our CFO, Alvaro Garcia-Tunon; and our Corporate Controller, Pat Dugan.

We'll make our prepared remarks, and then we'll be happy to take your questions. Please refer to today's press release for the appropriate disclaimers on our forward-looking statements. With that, go ahead, Al.

Okay. Thanks, Tim.

Good morning. I'll cover the third quarter results and I'll talk about our market conditions. And I'd like to also talk about our strategic growth initiatives, including our latest acquisition, Unifin. Then Alvaro will cover the financials in a little more detail.

Despite an economy that continues to be sluggish, Wabtec posted good results in the third quarter. Our third quarter EPS was $0.57, about the same as we did in the second quarter, if you exclude some of the one-time items from that quarter. We had solid margin performance. We were up 60 basis points from the year-ago quarter as we continued to reduce costs. We generated $51 million of cash from operations.

Keep in mind, we achieved these numbers during a global recession and a very weak US freight rail market. This shows the strength of our diversified business model, that our strategic initiatives are paying off, and that we continue to benefit from the Wabtec performance system.

Let's look at our markets. First, the transit market. We continue to see a stable transit market, driven by federal funding and passenger ridership. Current federal spending bill, SAFETEA-LU, expired September 30th of this year, but was extended through October, and we expect it to be extended again for at least six months. The House strongly favors a new six-year bill with a substantial increase in funding so that the transit agencies have the funding and lead time they need to plan future investments.

Stimulus money is making its way into some transportation projects. Clearly, Wabtec is in a good position to take advantage of what is a strong commitment in the US to expand the country's mass transit capabilities. Remember, about $20 billion of stimulus money was directed towards transit.

Ridership is still strong, but has been affected by the economy. Keep in mind, about two-thirds of those people using mass transit are work-related. Nationwide, ridership is down only 2% in the second quarter, despite the sluggish economy, lower gas prices, and higher unemployment. Some cities are still seeing increases, especially where the service was either expanded or is new.

Positive long-term trends in transit should continue to drive investments by municipalities. Some of these trends are population growth and urbanization, long-term concerns about fuel prices and the environment and reduced dependence on foreign oil.

In addition to our domestic market, Wabtec has ample growth opportunities in international transit markets, which have remained strong even in this economic environment. We are a small player in a much larger market.

Looking at the freight rail market, although we have seen some sequential weekly improvement in rail traffic, the numbers are still down considerably from a year ago. Third quarter ton miles were down 15%, car loadings were off 16%, intermodal traffic was down 17%. Rail activity is dependent on the economy. With traffic down, the railroads have parked, perhaps, one-third of their freight cars and locomotives, which has a negative impact on both OEM and aftermarket demand. They've pulled some cars out of stowage, but it's still a very small percentage of what's parked.

As expected, third quarter rail car numbers are in. Deliveries were 4,126. Orders come in at only 1,890. That leaves the backlog at 19,343, the lowest since 2002. These numbers compare to deliveries of about 16,000 and orders of 8,000 in the year-ago quarter. For the year, we expect deliveries to be around 20,000, and maybe only half of that for the next year.

There is similar slowdown in the locomotive OEM market. Some international freight markets, such as Australia, have started to recover. But overall conditions remain difficult.

At this point, I'd like to talk a little bit about our updated guidance. With just one quarter to go in the year, we're able to tighten our earnings guidance by slightly raising the floor and lowering the ceiling. The guidance was $2.35 to $2.55. It is now $2.40 to $2.50. Sales are now expected to be down about 12%.

Considering the steep declines in some of our key markets, we feel that our team has responded well. In fact, if you take a look at our year-to-day revenues, which are down about $127 million, our operating income is only down $10 million after you adjust for the restructuring costs of $14 million. By anyone's standard, that is good performance.

So what are we focused on? Well, what we're focused on continues to be controlling what we can control. We've completed various restructuring cost reduction activities in the past several quarters, headcount reductions in operations and at our corporate headquarters, plant consolidations, outsourcing initiatives, and we've tried to control and reduce expenses across the board.

We've incurred costs of $14 million so far in 2009. About $6 million of that was in the first quarter, $8 million in the second, with only minor costs in the third quarter. We expect to achieve annual savings of $35 million to $40 million from these actions, with about half of those savings being realized in 2009. About half of these savings should be permanent, even as volumes start to pick back up.

What else are we focused on? In this environment, we're also staying focused on growth and cash generation. We continue to invest in our strategic growth initiatives. In the new product area, such as positive train control, we are in a market position that continues to strengthen. From a global expansion standpoint, we are working on an additional joint venture in China. From the aftermarket thrust, we just opened a new service center in Brazil. And as I mentioned earlier, from the acquisition area, we purchased Unifin International, which I'll talk a little bit more about in just a minute.

Cash also remains a high priority. This provides the opportunity to invest in the acquisition and our growth strategies. We have renewed our efforts to increase free cash flow through cost reductions, driving down working capital, and controlling our capital expenditures.

Talk a little bit about our acquisition, Unifin. Unifin is a good strategic acquisition in an adjacent market where we know the products well. They provide cooling systems and related equipment for transformers and generators in the power generation markets. Our Young Touchstone division, which provides heat exchangers for locomotives, also provides heat exchangers for backup and standby diesel generators.

Unifin will be integrated into our Young Touchstone division. The purchase price was about $93 million. They have sales of about $45 million. They have solid margins, and they are in a very stable market, power generation. This helps to offset the cyclicality of the rail business. Wabtec is now about 15% non-rail. This includes power generation, friction, and other industrial markets.

I'd like to now turn it over to Alvaro for a further look at our financials.

Great. Thank you, Al. And good morning, everyone. Welcome to the call.

Financial results for this quarter were pretty straightforward. I think my job's pretty easy this call. We really didn't have any one-time items of any significant amount to comment on. Sales, as we said earlier, were about $330 million. This was down about 17% from the year-ago quarter. A portion of this, about $7.5 million, was due to foreign exchange changes, the dollar strengthening. However, the effect on EBIDT of this foreign exchange -- of the foreign exchange changes was negligible. Basically, our natural hedge continues to work. The increases in -- increases or decreases in costs in our cost centers tend to offset the results coming in from abroad.

The Transit Group, in terms of sales again, was basically flat. It was down slightly, about 3%. Where the decrease really occurred was in the Freight Group, for the conditions that we've talked about before. Higher sales from acquisitions, principally Standard Car and Truck, which was about $19 million, more than offset the negative effects of the lower rail traffic, reduced demand for new freight cars and locomotives, as well.

In terms of margins, Al has talked about this and we all continue to be focused on improving margins, with particular attention to the consolidated operating margin line. You're going to have changes due to mix, but at operating margin is where we really want to show the improvement.

I think a concrete result of this emphasis can be seen this quarter. Compared to last year, sales were down about $65.6 million, but EBIDT was only down about $6.3 million, or about 10%. We consider a negative 10% contribution margin in this market to be relatively good performance. And it really reflects, I think, well on what our operations have done to reduce the costs in this recession.

For the quarter, you see the benefit of this reduced cost. Operating margin, in spite of declined sales, increased to 13.8%, as opposed to 13.2% last year. And you can see the results in SG&A, which is significantly lower. Last quarter, we had a couple of one-time items which increased SG&A by about $2 million. I think, this quarter, it's a reasonable run rate for SG&A going forward. It can always fluctuate a little bit up or down, but I think we have done a very good job of reducing our SG&A.

Interest expense, it's -- compared to last year, was higher, due to the acquisition of Standard Car and Truck. Income tax rate's relatively stable at just under 36%.

To give you some of the numbers now that we continue to give out on the call, our receivables at the end of the quarter were $231 million, down $21 million from the June 30 balance sheet. Inventories were $245 million, down about $5 million from, again, the June 30 balance sheet. So we continue to improve working capital, obviously with the goal of generating cash.

Payables were $113 million, down about $4 million. Basically, we're ordering less, so payables are down. Our cash balance at September 30th was $255 million, which is up $121 million from June 30th. What happened is, because of the timing of the Unifin acquisition, we had to draw down on our line of credit to complete the acquisition. Like Al said, we paid $94 million. And that closed on October 1, which, obviously, reduced the cash balance.

Cash flow from operations during the quarter was solid, at about $51 million or 15% of sales. Our debt at September 30th was $432 million, higher than the $350 million at the -- again, at June 30th, because of the acquisition of Unifin. But we still remain in very good shape, balance sheet wise. We have substantial amounts of flexibility. And we can continue to invest in all our growth initiatives comfortably, I think, in spite of the current credit crunch.

A few more of the numbers that we always give out. Depreciation for this period was $5.3 million, versus $5.9 million last year. Amort was $1.5 million, versus $1.7 million last year. And CapEx, we're -- we continue to invest in everything we need, but we do it very carefully. And for the period, it was only $2.1 million, versus $4.6 million last year.

Backlog was down slightly this quarter. The 12-month backlog, not the total backlog but the 12-month backlog, that which we expect to execute in the next 12 months, compared to the June 30th backlog; this quarter, it was $513 million, versus $565 million last quarter. So again, down slightly.

Transit is always going to constitute the major portion of the backlog. Transit was $426 million, versus $468 million at the end of the last quarter. And freight, $87 million, versus $97 million. So not much change there.

The multi-year backlog, the total backlog, which does include the 12-month numbers, in total was $952 million, versus $1 billion at the end of June. Transit, $782 million, versus $825 million; and freight $170 million, versus $179 million.

And with that, I think, that concludes the financial review. Obviously, we'll be glad to turn it back over to Q&A. But Al will just give a few summary remarks.

Thanks, Alvaro.

Once again, we had a good performance in a very difficult environment. Like most companies, we continue to face some very challenging market conditions and uncertainty due to the economy. But we -- at Wabtec, we have stayed focused on what we could control, cost reductions, future growth initiatives, and cash generation.

We are fortunate that we have a diverse business model and that our transit business, now more than half of our revenues, remains stable at a high level. The Wabtec performance system is what really provides the established culture of lean manufacturing and continuous improvement, and gives us the tools we need to reduce costs and generate cash as we have.

We have a very experienced management team that is committed to managing proactively and aggressively through these tough times. And I must say that the whole team has really stepped up and is doing everything that they can to run this business at the level it's at. And I couldn't be more happy with the team that I have.

With that, we'll answer any questions that you have.

Jamie, you want to poll for questions?

(Operator Instructions.)

And our first question comes from Art Hatfield from Morgan Keegan.

Morning, guys.

Good morning, Art.

Hey, Al, I missed something when you were talking about the freight car statistics. I missed what your comment was with regards to your expectations for deliveries this year.

This year, we think they're going to be right around the 20,000. Deliveries are probably going to slip further from the 4,000 that we had in the third quarter. So if you look at what's already been delivered this year, you've got, what, 10 -- 17,000. So it'll be above 20,000, but not that far above it.

And then you had followed that up by saying you expected it to be about half that next year? Did I hear you right?

That's correct, Art.

Okay. Secondly, can you talk about any significant contracts on the transit side that may roll off in the next couple years, and kind of what you're seeing as opportunities to replace those?

Yes. Sure, Art. One large contract that will finish up in 2010, we are supplying the last set of options on the R160 program, which is New York City Transit. That total project was about $250 million. And we shipped less than a third of that during 2009, and we'll continue to ship well into 2010. But that project will come to completion.

However, we have multiple cities outside -- municipalities outside of New York that are major transit car orders that are in the queue here. BART in California. There's a number of them that we feel there's ample activity in the transit car area where we think that the transit cars delivered in 2010 will be very close to what was delivered in 2009.

Okay. And then, finally, on the margins in the quarter, that was helpful, Alvaro, what you had commented there on the decremental margin. Can you talk about what that would have been had you not been able to put in place the cost saving initiatives that you had, and how we can think about that level of degradation in the margin going forward relative to potential revenue declines?

If we look at -- from a revenue standpoint, one thing that -- if you look at these two different markets, we think that you'll still see some problem with the rail car delivery, so OEM freight car will go down. But we think the aftermarket, because of the sequential improvement in the ton miles, we think that portion of the market will come back.

Now, that said, what we've done in the freight area is, as you can see from our results year-to-date, is we've been able to manage that to a very small contribution margin in the negative direction. And we will be able to continue to do that.

From a transit standpoint, we're anticipating that this marketplace should remain high -- at a high level, stable at a high level, is what we're saying. If there is any degradation in that particular market, again, we will manage using the Wabtec performance system and controlling what we can control. And our initiatives are very pointed in a number of areas. One is applying these lean principles across all the divisions; two, in our sourcing, moving activity from higher cost platforms to lower cost platforms; pricing initiatives.

So all those will continue to be put in place to minimize the impact of any revenue problems that we have, Art. Now, maybe -- Alvaro, you want to add anything to that?

I think -- I don't know if you caught it earlier, Art. And I'm not sure this was your question. But Al did mention earlier that he thought the -- that we think the effect of the restructuring actions that we've taken will generate overall annual savings of about $35 million to $40 million.

And we expect -- it wasn't all done January 1. So we expect --

Right.

-- we'll get about half of that this year. I don't know if that was part of your question.

Well, it was. And what I was curious is how much -- when you talk about this year half of it, is that meaning that by the end of the year, say fourth quarter, your quarterly run rate of savings would be a $5 million quarterly run rate? Is that fair?

Yes. It's kind of hard. It all depends what you're comparing it to. Because, again, these layoffs have occurred throughout the year. For the most part, though, we're done. And that's why I mentioned, at least SG&A wise, once you get down to SG&A, I think you can use this quarter. It's always going to vary by a million or two.

Right.

You're always going to have some unusual items in there, coming in there one way or the other. But I think you can use that -- this quarter's results as a reasonable run rate going forward.

And then further on that strain of thinking, though, the commentary was that half of those savings would be permanent. How do we think about those, the other half, coming back on? What kind of level of revenue growth do we need to see before we start to see some of those -- you needing to add costs?

That's what we're going to manage, Art. That's what it's all about. That's what we get paid to do. You've got to make sure that that revenue is there and the growth is there before you add those costs. When you look at direct costs, it's easy to deal with. And they're totally variable. But when you get into the burden area of costs, you have some costs that are -- you would consider it fixed burden and variable burden.

And what you're really talking about is that variable burden that you may need to add back to make sure that you take full advantage of your growth opportunities. And we're going to do that judiciously.

Okay. And so it's fair to say that that's a rough estimate. You could come out a lot better --

You could do better. You could do worse. And it depends on our ability to manage.

Okay. That's very helpful. Thanks for your time.

What we can assure you is that we will add costs very slowly. We're -- seriously, I mean --

Oh, I've known you long enough, I know that.

It's tough to do what we have to do, and you don't like doing it. So you're very reluctant to add costs, only to do this again. So we'll be doing it very slowly.

Sure. I just wanted to get a feel for how you were assessing that estimate of half being permanent.

Yes.

It really -- it's hard to say what that exactly is right now, but you're going to do your best to try and make it all permanent, I would say.

That, I think, is a very good summary.

Okay. Thank you.

Thank you, Art.

Our next question comes from Paul Bodnar from Longbow Research.

Yes. Good morning, guys.

Good morning, Paul.

Question for you on, I guess, the European transit business and as well as, particularly, UK. And just kind of -- if you could just give us an outlook on what's going on over there and what the outlook is for over the next 12 to 18 months.

Okay. In the market in the UK, there -- that market really did decline, and we've seen the impacts of that. We have not seen an improvement. It is not getting worse. It's probably comparable to how you see things going on here in the States, from the economy standpoint.

In Europe, there was really -- from the transit standpoint, there was very little, if any, decline in the transit area in the European markets. It had some impact from the economy, but not a major. Those projects that they had on the table, they continued with. So the spending related to rolling stock and those areas that we're involved in really continued, very similar, again, to the US economy.

Is there still further like down in the UK -- I mean, is a lot of your old business still trickling through, so we're going to see a big dip in 2010 revenues from the UK, or is that already starting to take place and a lot of that's going to kind of be -- it will be sequentially flat, I guess?

Yes. I think it's already bottomed out there in the UK. And remember, we're on the repair side. That's almost an all aftermarket business there, and not all of it's transit. Some of it is freight. It was all freight at one point. And we moved a lot of that business into the transit area.

Okay. What (inaudible) at this point, I mean, in 2009, what percent of revenue is the UK business right now?

Of our total revenue?

Yes.

Probably around, maybe, 7%-8%.

Okay.

-- 7%.

And then, I guess, also just along the term (inaudible) any kind of different thoughts now on what you're looking for in acquisitions? Obviously, you made this one which is a little bit off the -- your, I guess, recent pattern of transit acquisitions. Any kind of shift to what you're looking for?

No. We've been staying really focused on the same areas, and we're not changing our approach. I mean, we're looking for strategic acquisitions, first and foremost. And we're not afraid to look at adjacent acquisitions on an opportunistic basis when they come about. And this truly was one that fits tremendously well with the Young Touchstone division, is and was a target area for growth for us.

But we are still focused on those same areas that we were focused on three, four years ago. And we feel that the rail business, whether it be transit or freight, is a compelling industry that we think there's a lot of opportunity for acquisitions and growth in from a Wabtec standpoint.

Is that pipeline relatively full now or filling up or how is that --

It has -- I must tell you, Paul, that it has improved, which was good to see. There was a period there where it was just trickling along. But the pipeline is starting to flow good.

Okay. Thanks a lot.

Thank you.

Our next question comes from Jason Rogers from Great Like Review.

Hello. Did you provide the equity, shareholders' equity balance for the quarter?

750.

About 750.

Okay. And where do you expect CapEx to end up for the year and any thoughts -- early thoughts for 2010?

CapEx, obviously, again, we're not cutting it off. We're trying to control it judiciously, but we're spending what we need. We'll probably spend -- end up the year somewhere between 20 to 25, which considering our numbers, I think, is -- actually, it's below depreciation and it's a very reasonable amount. And I would say, next year, you'll see it, probably, in the same range. This year will probably be towards the lower end of that range. Next year will probably be towards the upper end of that range.

Okay. And did you provide the -- where you expect locomotive deliveries to be in 2009?

We didn't, but we can. We were estimating around 1,200. We think it's going to be right around 700.

Okay. Yes. Thank you.

Thank you.

Our next question comes from Kristine Kubacki from Avondale Partners.

Good morning.

Good morning, Kristine.

Good morning --

A question on the freight aftermarket. Sequentially, how did -- did it get better?

It did get better in the quarter, but that seasonality is there. There was a good chart that UP put out during their earnings presentation that shows -- and they actually showed the numbers. And it is an improvement sequentially, quarter-on-quarter. Now, whether that is sustained or whether it's seasonality, they did indicate in their thoughts there was an increase in demand that did play into that increased traffic.

But if you look at the ton miles, quarter-on-quarter-on-quarter, you will see that the first quarter was -- on a weekly basis, was somewhere around 28 billion ton miles. And then it went down to 26 billion. And then it's back up to 29 billion in the third quarter. So 28-26-29. But the third quarter is traditionally a stronger quarter.

Okay. I guess, moving on, on positive train control, I was wondering how that's setting up for this year, and then how you guys are looking at that going into 2010.

Positive train control; our development efforts continue. Right now, we're -- as you know, our product safety plan was approved with the BNSF and we are commercializing. And they're extending what is called an overlay system onto various parts of their system.

We're working very closely with a development program with CSX, NS, and UP, all three of them, where we have pilot programs going on. And we'll be working toward a product safety plan approval, which is a necessary step in order to commercialize the product. That will happen late in the year in 2010.

What you're seeing at the railroads, they have got together, they're working very hard on trying to work on the communication systems and the interoperability that is necessary. We're all pushing hard for a full implementation December 31st, 2015. We don't think we're going to see a lot of revenues here as we finish out 2009. It'll start ramping up late in 2010, and probably see more in 2011.

And that's, primarily, caused by some of the systems -- until the design has been really finalized, there's a reluctance to move ahead on; two, that because of the recession people are a little reluctant to move ahead. And we still haven't resolved the communication package and the interoperability using that communication device.

So those things will occur. And we look forward to, really, a good growth product here over the next four or five years.

Well, there's been some pretty public pitches by some of the Class I's out there to kind of ratchet down the scope of the project. Do you have any concerns that, maybe -- and I'm not sure if they're talking about just geographic footprint. Would they still have to convert the same amount of locomotives? Are you concerned in any way that the scope of the project could be ratcheted down, and what impact that would have?

Yes. First of all, as far as their discussion, I really think you've got to get their ideas. I mean, I'm not sure exactly -- it's best to talk to them to get their view on what they're saying. I can tell you that we are totally focused on implementation in 2015, December 31st.

I think that this will move forward, my own personal opinion, at the pace that they've already dictated. It, obviously, is a very costly implementation. And it would be tremendous if the government, who is mandating this, could put money up so that the -- to alleve some of the burden that the railroads are going to have to make sure that this is implemented properly and across the whole system.

I do not anticipate much changes from what the program is now.

Okay. Thank you very much.

Our next question comes from Steven Barger from Keybanc Capital Markets.

Hi. Good morning. This is actually Joe Box, filling in for Steve.

Hey, Joe. How are you doing?

I'm pretty good. Thanks.

Al, you had some fairly positive commentary on the transit side earlier, with respect to future orders. Given what's in the hopper right now, I mean, would you expect to see the transit backlog stabilize at these levels or, potentially, even increase?

I think that the business -- the market is -- will be stable at the high level. So what does that mean? I think that as big projects come in and some finish, there's always a fluctuation quarter-to-quarter. But the amount of activity that's out there right now is very encouraging. And we expect that marketplace to remain strong.

All right. Fair enough. Now, as you start thinking about developing your 2010 guidance, with the domestic railcar market being down, locomotive likely being down again in 2010, can you highlight some of the areas where you might actually see some growth next year within your freight business?

Well, we do feel that what we've seen is the ton miles have shown some sequential improvement, as we were talking earlier. We would hope that the aftermarket business will be the first sign of a recovery. And we hope that would lead into 2010.

We also have a lot of opportunity on the international front. And we have seen where China is -- obviously, their economy has come back strong. Australia's economy is back strong. We're seeing some pickup in the Brazil area and other mining countries. So on an international front, we think there's opportunities on the freight side that could really help with what is going -- what appears to be a continued very weak freight rail market in the US.

All right. And my last question is a follow-up to Kristine's question on PTC. In the past, you've highlighted the Wabtec potential opportunity as being somewhere in the range of $200 million to $400 million in total. Given the Class I's focus right now on interoperability, taken in the context with your exposure at all the Class I's, do you think that this could potentially create some upside to your initial estimate on PTC?

Yes. Our estimate, the $200 million to $400 million over the next four or five years is based on the fact that we would not have 100% share. And it's only the onboard computer. And there's other parts of the system. The onboard computer, which is RE, ETMS, or positive train control, is only one part of what really needs to be done to make this whole system work. And it's a fraction -- it's probably only 20% to 30% of what's going to be spent to implement positive train control.

And we think there's opportunities in other areas. So there is some upside, and it's not included in that number. We have not quantified it.

Do you care to expand at all on what those other opportunities might be?

Well, the other actions -- or the expenditures are really going to be from a communication standpoint. The system has an onboard computer. You have to have a handheld radio that communicates with the dispatch system. We have the capability and we are supplying and we have dispatch systems that are installed in various railroads around the country.

It also has to communicate with the various signals and switches. So it's a very complex system. It has lots of parts. And we have opportunities to participate in that. We also have not included in that any installation or service aftermarket business that would be tied to it.

Very good. Thanks, guys.

Okay. Thanks, Joe.

(Operator Instructions.)

And gentlemen, at this time, I'm showing no further questions. Would you like to make any final comments?

Yes. We really, really appreciate the questions. And we like them short and sweet like this. So thank you very much, and we'll talk to you again soon.

Thanks, everybody.

Bye-bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your telephone lines.