美國西屋制動公司 (WAB) 2013 Q2 法說會逐字稿

Good morning and welcome to the Wabtec's second-quarter 2013 earnings conference call.

(Operator Instructions)

After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Tim Wesley. Please go ahead.

Thanks Jessica, and good morning, everybody, and welcome to our second-quarter earnings call.

Here with me are Chairman and CEO Al Neupaver; our President and COO Ray Betler; Alvaro Garcia-Tunon, our CFO; and Pat Dugan, Senior VP of Finance and Corporate Controller. We will make our prepared remarks and then of course we will be happy to take your questions. During the call we will make forward-looking statements so please review today's press release for the appropriate disclaimers.

Go ahead, Al.

Okay, thanks a lot, Tim. Good morning, everyone.

We had another good operating performance in the second quarter with record sales of $638 million and record earnings per diluted share of $0.77. Our backlog has held steady at near-record levels, at about a $1.7 billion backlog. Overall, our business is performing well in what is still a slowly recovering global economy. We have been successful thanks to our diversified business model, our strategic growth initiatives, and the power of our Wabtec performance system.

We remain excited about the long-term growth opportunities in our freight and transit rail markets, which continue to be driven by several mega- trends. Those trends are increasing global trade and urbanization, continuing need for infrastructure investment, and the demand for more, and environmentally friendly, technology. Today, we increased our 2013 EPS guidance based on our first-half results and our current outlook. We now expect full-year EPS to be between $2.98 and $3.03. With sales growth of about 8% for the year, this EPS guidance is about 15% higher than our 2012 results.

As we said last quarter, transit will drive our top-line growth for the year. This is due to our strong transit backlog both in the US and internationally, as well as acquisitions that we have made in the transit market. We expect freight revenues to continue to pick up into the second half. The second quarter comparison in freight shows the impact of lower freight car build, lower locomotive build than the prior year quarter, and lower industrial sales.

Our guidance assumes the following. There will be continued slow growth in the global economy. There will be stable US and European transit markets with the emerging countries driving growth. Our transit revenues should grow based on our existing backlog of projects in the US and internationally. We assume that US freight traffic will remain stable with OEM locomotive and car bills down 10% or more for the year. And lastly, we assume no major changes in foreign exchange rates, and that our tax rates remain steady for the remainder of the year.

As always we will be disciplined when it comes to controlling costs, focused on generating cash to invest in growth opportunities and ready to respond decisively to any changes in market conditions.

I would like to have Ray Betler discuss what we are seeing in our key markets now.

Thanks, Al.

We continue to see stable transit markets in the US and abroad. In the US, ridership is essentially flat over the last 12-month period. In 2013, North American transit car deliveries will be about 900, and bus deliveries about 4,500; both figures are the same as last year. Transit funding in the US is also stable at about $10 billion a year. About where it has been in the last several years.

This stability in the North American market continues despite budget issues and uncertainties about the long-term transportation bill. Outside the US, we're seeing stability in the developed markets and growth in the emerging markets. In Europe, for example, our transit markets remain stable because public transportation is so ingrained into their cultures. Currently the largest transit opportunity in the world is actually in South Africa, where the country's passenger rail agency, called PRASA, plans to invest $1 billions over the next decade to both upgrade and modernize their system. We hope to be involved in that project in a variety of ways.

Our growth in transit this year has been fairly broad-based, with a strong backlog of projects in the US and elsewhere. Through the first half of the year about 60% of our transit growth has been outside of the US.

Turning to the freight market, in NAFTA, real traffic is up year-to-date. Total traffic is up about 1.3% compared to a year ago first half. This is driven by a 3.5% increase in intermodal, which more than offsets the 0.4 decrease in general traffic. The decrease in general traffic is due mainly to a 4.1% decrease in coal.

Categories that have increased include petroleum products, aggregates, and chemicals. We still expect OEM rolling stock deliveries in 2013 to be lower than 2012; about 1,200 new locomotives were delivered last year, we expect around 1,000 to 1,100 this year. It looks like the industry will deliver about 50,000 cars. In the freight car market, that is compared to 59,000 that were delivered last year in 2012. In the second quarter, about 12,500 cars were delivered, compared to about 18,000 in second quarter 2012, about 12,000 in 2013 first quarter. Second quarter orders were good at about 15,000, which drove the backlog to almost 74,000, which is the highest since 2007. For the first time in several quarters, tank cars represented less than 50% of new orders. So maybe we will begin to see other car types start to pick up.

Globally freight traffic is also mixed. China is still growing, but not as fast as previously, so that has the ripple effect in some of the mining countries around the world like Australia, Brazil, and South Africa, where we can see some slight weakness.

Now I will turn it back over to Al.

Thanks a lot, Ray.

We continue to focus on growth as a Corporation, as well as cash generation. Our priorities for allocating our free cash have not changed. We want to fund our internal growth programs first, acquisitions, and return money to our shareholders through a combination of dividends and stock buybacks. As you know, our board voted in May to increase our quarterly dividend by 60% to $0.04 per share, and that is the third straight year we have increased our dividend.

The board also declared a 2-for-1 stock split in the form of 100% stock dividend. We think both actions were a strong statement of confidence in our future growth opportunities and strategic direction. Our growth strategies also haven't changed. Global market expansion, aftermarket expansion, new products and technologies, and acquisitions.

Looking at our growth strategies from a global market expansion standpoint, our sales outside of the US were $310 million in the second quarter, at 50% of total sales, versus if you look at five years ago we were only at about 33%. Some of our new projects include a $21 million order for freight car [bogeys] in Mauritania, a $15 million order for electronic braking equipment in Australia, and a follow-on order for six additional freight locomotives in Australia.

In the aftermarket expansion area, overall aftermarket sales were 50 -- they ended up being 56% of our total sales at $356 million. That is a growth of 14% compared to the prior year quarter. We look for opportunities to help our customers when they want to outsource non- transportation functions; for example, we expanded our Chicago service center last year so that we could to provide locomotive maintenance, and the facility is already at capacity.

From a new-product standpoint, we're always focusing on being able to improve the efficiency and the productivity and the safety of the railroads. New products represent about one-third of our total annual sales. We won additional orders for locomotives from MBTA up in Boston; that was13 units for around $70 million, this is a follow-on order from several years ago. These locomotives dramatically improve fuel efficiency, reduce emissions, and lower lifecycle costs. They include many components and systems manufactured by others Wabtec units. Fast-brake electronic air brakes, air compressors, event recorders, tread brake units, brake shoes, [apta]coolers and radiators.

Positive train control continues to be a growth opportunity for Wabtec. This quarter we had sales of about $55 million and we expect that pace to pick up in the second half as we continue to work with the railroads and other industry suppliers to deliver an interoperable system. We feel our 15% to 20% growth target for this year is within reach.

Earlier this week we announced the PTC contract for North County in San Diego, where we will provide equipment and services for their installation of PTC. We expect to have additional opportunities to work with other transit agencies in the US. From an acquisition standpoint, we did not complete any during the quarter, but our activity level remains robust.

I'd like to now turn it over to Alvaro to talk a little bit about the financial performance in the quarter.

Thanks, Al, and good morning, everyone.

I'm always happy to review our financial results which we are very pleased with for this quarter. Sales for the second quarter were 5% higher than last year at $638 million, which is a record high for us. The growth was primarily driven by acquisitions which overall are performing well. Transit group sales increased due to revenues from our backlog of existing projects, as well as acquisitions.

Brake group sales of the results are a little mixed there. Sales increased 13% compared to the first quarter of the year, but were lower than the last year's second quarter, mainly for two reasons; the first is that although NAFTA rail traffic was slightly higher in the second quarter this year, deliveries of new freight cars were lower by about 5,000 units, and also, reduced natural gas drilling activity has resulted in a lower demand for our industrial heat exchangers that are used for [gemsets] in that market.

Turning the margins, where as you know, we are always striving to drive our operating margins higher, and I think the performance in this quarter was good. Operating expenses increased due to mainly to acquisitions, but are still only about 12.6% of sales, just slightly higher than the year ago quarter, but slightly lower than the first quarter this year. For the quarter, operating income was a record $113 million, or 17.6% of sales, compared to 16.5% of sales in the year ago quarter. The margin performance was driven by several factors including higher sales, and we would like to take advantage of the leverage of the increased volume and benefits from the Wabtec performance system.

Interest and other were relatively stable. Interest expense for the quarter was $3.3 million, about the same as last year. Other income was about $400,000. This is always a small item, it's composed of several items, sometimes it can be a loss, sometimes it can be a gain and it is primarily paper FX from our foreign units.

The effective tax rate was as we had expected. It is about 32% for the quarter versus 33.7% last year, but we had said earlier that it was going to be lower. Remember we also had a lower rate in the first quarter of this year, I think it was about 30%, due to benefits from the R&D tax credit extension, which just passed at the beginning of the year. Our full-year rate will be a little bit less than 32%, but going forward we expect our tax rate for the remaining quarters of this year to be about the same or about 32% for the next two quarters.

Cash from operations, we have generated about $45 million year-to-date, which puts us slightly ahead of last year's pace, but one of our goals for the second half is to improve this performance. We think we can do better. Working capital increased slightly, in part due to the higher sales. At June 30 receivables were $488 million, inventories were $406 million, and payables were $273 million.

Our working capital excluding cash was about 18.4% of sales for the quarter, versus about 15.8% at March 31. The primary reason for this difference was paying of some accrued liabilities and working down some contract repayments as we performed on those long-term contracts. As our business has become more global and as we expand our sourcing programs in other low-cost countries, working capital tends to increase, but even so, we think there were plenty of opportunities to improve performance and we hope to generate additional cash improvement in the generation of additional cash going forward.

Cash and debt, at June 30 we had about $215 million in cash on hand; most of this is outside the US. At June 30 we had a debt balance of almost $400 million, $397 million, compared to $418 million at March 31. The decrease was just due to utilizing our cash flow to make payments on our revolver. As I think you know, we have about $115 million of 10-year bonds that will mature and be redeemed on July 31. We have ample capacity under our revolver to redeem those bonds and we are currently exploring various long-term financing alternatives to do something on a more permanent basis. We will update you on those plans as they evolve.

During the quarter you probably saw that S&P and Moody's raised their Wabtec ratings to Triple B-minus and BA3 respectively, and these investment grade ratings give us greater flexibility as we evaluate our long-term capital structure.

A few other miscellaneous items that we typically go over and give you the details on; depreciation was $8.7 million compared to $6.7 million in last year's quarter. Amortization was $5.2 million versus $3.3 million last year and this increase is mainly due to acquisitions including some short-term -- what we call purchase-price accounting. The CapEx for the quarter was $8.2 million versus $6.3 million last year. For the first six months of the year, CapEx spending was about $15 million. Our budget is $48 million; we typically underspend our CapEx budget. The initial budget tends to be a little bit of a wish list and then we scrutinize the requests as they come in, so we are doing okay on CapEx.

In terms of backlog, which we always give you specific numbers on, we are still near the record high we established last quarter and 5% higher than a year ago. The multiyear backlog, the total backlog, is $1.7 billion, which is slightly lower than the one at March 31 of this year by about $40 million, but again that is not too material when you're talking about $1.7 billion. The total transit backlog is $1.18 billion versus $1.19 billion, and the freight backlog is $490 million versus $515 million. So relatively stable. Then the rolling 12-month backlog, this is what we expect to execute during the next 12 months, not the total backlog, is $1.1 billion, which is slightly higher than it was at March 31. Transit was $671 million versus $661 million, and freight was $409 million versus $403 million. So virtually the same. Of course these figures don't include options -- we don't include options in our backlog until we can exercise them, but the current option balance is about $200 million.

With that I will turn it back to Al.

Thanks, Alvaro.

As you can see, our team is performing well, with record sales and earnings, good margin performance and a backlog at near-record levels. We are anticipating another record year and raised our EPS guidance to $2.98 to $3.03 on revenue growth of about 8%. We remain pleased with our strategic process and our long-term growth opportunities that we see. As countries around the world continue to invest in freight, rail, and passenger transit infrastructure, we continue to benefit from our diverse business model and the Wabtec performance system which provides the tools we need to generate cash and reduce cost. With our experienced management team and dedicated workforce, we're poised to take advantage of our growth opportunities and respond to any changes in the market conditions.

With that, we will be happy to answer your questions.

(Operator Instructions) Scott Group with Wolfe Research.

Thanks, good morning guys. So I want to understand the revenue guidance a little bit. With the rail car delivery comps getting a lot easier in the back half of the year, do you think freight flattens out or turns positive in the back half, and that's -- is that what is getting you towards a bit of a higher growth rate than we saw in the first half of the year, or is it more that transit just continues to get better?

Yes, as you can tell from the guidance, in order to hit that 8%, we would have to have increased sales in the second quarter of about 6% over second half compared to the first half by about 6%, and most of that growth, we feel, is going to come in the freight area. As you stated. Some of that will be from PTC, some of it will also be from our industrial business. I think, like others in the industrial community, there is still this belief that we should see some improvement in the economy in the second half of the year. Although it sure isn't apparent so far in this quarter that we are starting out.

Do you have a view on why the rail car delivery rate is down so much if the backlog is up? What is the issue in the supply chain? What is the bottleneck in the supply chain that is preventing delivery?

If I understand it correctly, what you have is about 80% of the backlog is in tank cars. If you take a look at what the Railway Supply Institute puts out, basically tank car deliveries and orders are about the same at around 7,000 in the quarter. That is about what the capacity is. So if you have a backlog that is up around 74,000,and 80% of that is in tank cars. What you get is when the tank cars is at capacity, now there is a lot of activity going right now for people to increase their capacity in tank car production, but it is basically limited to about that much right now, so if there's any bottleneck, I believe that is what it would be.

That is good color. Maybe for Alvaro; when I look at second quarter versus third quarter, typically operating margins look pretty similar. I know you don't give guidance, but is there anything we should consider about second quarter that was unusual in any way when we start thinking about our models for third quarter?

I'm not sure there really is anything unusual in the second quarter. We will typically have a few one timers in any quarter and this quarter is no different. You have some good guys, some bad guys. I think overall, things are relatively stable. I think we had a favorable mix, we had good aftermarket programs that resulted in a favorable mix. SG&A should be relatively stable going forward and maybe up just slightly from where we are right now. If I had to estimate a run rate for SG&A I'd do it at about $65 million, $66 million, something like that, going forward. Absent of acquisitions, I'm not saying we are not going to do any acquisitions, I'm just saying for modeling purposes, absent acquisitions, I think it is relatively stable.

Okay, great. The last thing, you mentioned the opportunity in South Africa, is there any more color you can give on how big of an opportunity this could you think this could ultimately be or when we could start to see this ramp up?

It is so far out, and dependent on our participation, I think that we just wanted to give you a little bit of color on how large --. there are large opportunities in other parts of the world. As we develop products and our systems we are able to participate in those areas, and I think that is the message we are trying to perform rather than to say were going to guarantee anyone that we are going to get X percent of any kind of opportunity.

That makes sense. Would you say you got a pretty decent share penetration in that market so whenever that business comes it should be a good opportunity?

This is all new business. This is a new opportunity for us, so it creates an interest and hopefully we will be able to participate in a number of ways and we are working hard to do that.

Thanks.

Allison Poliniak with Wells Fargo.

Good morning. Just turning, going back to the margins -- gross margins, obviously, quite substantially high for you guys, is that going, related to mix, sort of what you were talking about Alvaro, is that number going to be stable to go forward as well?

If you take a look at the increment in sales and how much of it we were able to drop to the bottom line, we call it contribution margin, incremental margin, typically we are only able to drop about 20%, and in this particular quarter, it has doubled that. I think the team executed the quarter extremely well from all facets. I don't think there is one absolute reason why it was there, and that is how we view our continuous improvement program. We're going to focus on cost, we are going to focus on getting that contribution margin. Anytime that we have a revenue increase, we want it to come to the bottom line. Yes, mix had some favorable impact and in any different quarters, as Alvaro said, there was pluses and minuses and sometimes the pluses beat the minuses.

Great.

Going forward if I could, I think we expect our expenses to be relatively stable from where we are right now. As I think you know, we are always try to cut our expenses and I think we do a pretty good job of that, but I think going to forward it will be relatively stable.

Perfect, thanks. On acquisitions, Al, obviously a quiet quarter I think across the board, here; can you give us your thoughts in terms of multiples? What is driving this calm in terms of the acquisition environment right now?

Believe me, the calm is not a lack of activity here that we are working on. The calm is that we will always be very selective. We take a very a cautious approach to acquisitions and making sure that we want to be able to close acquisitions and we want them to be good acquisitions. So there is a lot of activity going on right now in that area, and hopefully we will have things we can report about in the near future. But I think from the standpoint of, What's the environment out there, I think that there is a lot of people who are active in this area as well, so I think it has become more competitive than it has been in the past.

Thanks.

Mike Baudendistel with Stifel Nicolaus.

Good morning. One question I've been getting a lot is, following the Ontario -- Quebec derailment and sort of which companies benefit from that, I was wondering if there's a big crackdown on crashworthiness of equipment and additional safety features; is there any possibility that you could play in that market or possibly add additional value to the cars and the locomotives you service?

First of all, our hearts go out to the people that have been affected by that tragedy. They are definitely in our thoughts and prayers and any tragedy like that is truly a tragedy. I must say that -- all I will say is that our focus at Wabtec has been and will always be to really work on the efficiency and the productivity and safety of the railroad. That is what we focus our technology on and that's what were going to focus on in the future.

Great. The revenue guidance of about 8% this year, I think earlier you said 8% to 10% in previous quarters, I was just wondering what sort of -- the changes to get to the lower end of that range? Is strictly macro driven?

I think it is. As we go on we try to refine what we think the year is going to look like. I think everyone in the industrial community, as I stated earlier, felt that the second half was going to be better than the first half, and to be honest with you, some of that improvement that others have been looking for, and you could read the earnings reports that come out, you are going to see that really hasn't happened yet. All we are doing is refine it. We think that we have got good growth strategies that will result in 8%. By anyone's means, I think that is an excellent performance in an economy on a global basis that is really slowly, slowly recovering.

In the emerging markets that you serve, you talked about some headwinds as far as slowing global commodities and some of the ways it impacted traffic negatively, if any of the customers that are buying equipment for mining and things like that are starting to slow down as far as discussions with those customers?

I think the emerging country, the main driver for growth has been China. China I think most recently announced that they're going to try to keep their GDP above 7%, and how they're going to do that is investment in transportation. They didn't just say infrastructure, they said transportation. Which is a plus. But as they go from -- they used to be at 10% and then it dropped to 9%, 8% and their GDP was growing. That growth across all aspects of the infrastructure helped drive economies in Australia, Brazil, and South Africa. I think that as it slowed down, there is an impact in those marketplaces and we have seen some of that but nothing drastic because, again, China I think is the driving force for all three of those market areas for us.

Thank you.

Liam Burke with Janney Capital Markets.

Good morning. Al, in your aftermarket discussion, you talked about the Chicago service center, which has run up to capacity quickly. Do you see any opportunity to grow that either through expansion or opening up some more facilities throughout the country?

Yes, that's a good question. We think it is location, location, location. Our Chicago operation is right there where it services a lot of the railroads and some of the leasing companies, and we are actually looking for other areas in the country that we could provide a similar service to our customers. Yes, there is some opportunity there.

How are the margins in that business, services versus aftermarket product?

In a way service is --as we classify it-- is in our aftermarket business and generally aftermarket service type activities are a little more profitable with an OEM but we also have good profit on our OEM side. I would say it is very comparable to our average margin area if not a little better.

Alvaro, you gave us a capital expenditure estimate for the year that typically in terms -- is high based on the wish list. Do you see any of the wish list investment coming through this year, or do you see potentially that CapEx number scaling back? Measurably?

I would say if you annualize the current pace and take the budget amount, which I think was about $48 million, and you split the difference, I would say that is probably a rough number for the year if I had to take a guess.

Okay, thank you.

Matthew Brooklier with Longbow Research.

Thanks, good morning. The PTC rev for second quarter of $55 million, roughly how does that break out for freight and transit?

About $45 million was freight and about $10 million of that was international. I don't think we had much transit revenue this quarter.

Okay. If I take what you have done in the first half of this year, and I look at your guide, for 2013 it implies second-half closer to maybe $75 million a quarter; what gives you conviction that we are going to start to see PTC ramp into the back half of this year? Is it just your visibility with the freight railroads? Is it expectation for the cadence of transit contracts to accelerate? What gets you to that plus-$70 million number in the second half?

A number of things are driving it. Number one is we are moving along in our large project that we have in South America. We have progressed into the pilot phase, which is running extremely well and as that progresses, we can get an idea of what kind of revenue we could recognize on that project. We also have about, I think almost $100 million of announced booked backlog in the transit area and some of those projects are moving along as well. We are starting to talk, and we have been talking, to a number of other transit agencies. Hopefully the other part of it would be the freight railroads, and we are continuing to support that initiative and hopefully we will see that initiative would result in some continued orders we would see for onboard equipment. I think it is all three areas.

That is good color. Maybe if you could touch on what you are seeing within the European theater, how did the operating environment feel in Q2 versus first quarter?

It is basically stable. As you know -- I mean, I don't know how many quarters in a row now, but they remain in a recession, and it hasn't had that much of an impact in the transit arena and their freight market is just not that large, so we are not seeing any negativity coming out of Europe.

Okay, good to know. I appreciate the time.

Greg Halter with Great Lakes Review.

Good morning, thanks for taking the questions. A couple of housekeeping ones, can you provide equity; a number as of June 30?

I figured that one was coming; the total shareholder equity is about $1.4 billion. I think the number we are working with right now is $1.405 billion.

All right.

And that compares to total long term debt of about $400 million.

Okay. Relative to the opportunity for PTC in South America, I presume you were working, or looking at, or speaking to the other larger railroads there, can you provide any update on how that may be going?

We continue to have discussions. I think most of them would like to see the system running and making sure that the advantages that this particular railroad had anticipated are delivered. We think that we are at the stage where that is being proven out right now. I think the other thing that will impact them is the growth opportunities they see going forward. For MRFs, as we have communicated, this was a productivity improvement. They had an antiquated signaling system and by putting in this system they are able to increase their capacity without capital expenditures and rolling stock and maintenance away areas. So I think as the results get proven out and the market improves in those particular areas, I think that there will be an increased interest. Now, their signaling system may not need adjusted at this moment, but at some point they are going to need to upgrade, and I think it depends on how successful we are at -- where we are at, at MRFs right now.

How much longer do you think the MRFs goes before you will have a solid footing on the success factor?

Right now we are predicting the project to be totally complete before this time next year. I think early next year we are going to be operating, and hopefully we will be talking to them about -- this is not their total railroad system. There are additional projects that we could have with them as well depending on their demand.

Great. Is there any update on the content on Wabtec's contact per locomotive and car? Now? Or is it pretty much --

Not really. If you take a look at about 25% of the onboard equivalent, locomotives have been equipped and I think we have openly said that our freight PTC sales have been, of the total $350 million, about $200 million of it is freight-related.

Okay. You mentioned the situation in Québec, and you have probably seen the additional one here in Spain, and there seems to be about a crash per day worldwide in trains, so unfortunately it's nothing that new, if you want to put it that way. Most are minor, obviously. Any impact you would feel from this situation in Spain?

Again, these are tragic accidents. I think the railroads, at least in the US standpoint, 2012 was the safest year ever, in history. Our focus is and will continue to be on efficiency, productivity, and safety of the railroads.

Thank you.

(Operator Instructions) The next question is a follow-up from Scott Group with Wolfe Research.

Hey guys thanks. Just a quick follow-up. Within that guidance, Alvaro, what have you assumed with respect to the debt on July 1st? Because it can have an impact on the numbers.

Yes. Basically, in terms of the debt, it will mature July 31, the current debt is at 6.875% and obviously rates are much lower than that. What we would like to do is do something long-term, where right now we are exploring different alternatives and there's a number of options open. You can do a private placement, you can do term notes, you can issue other public debt. What we have done is we have assumed we are going to enter into some kind of long-term transaction. So in other words, for the rest of the year, right now we borrow on the revolver at about 100 basis points over LIBOR, so that rate is extremely low. We have assumed a higher one for the rest of the year, given that we hope to do something to tie in some of these rates for a longer term, which will be at a higher rate than the current, just 100 over LIBOR.

With investment grade, is that somewhere in that 3% or 4% range?

Right now rates are very volatile and they are all over the place, but we are assuming a higher long-term rate for the balance of the year.

Okay, thank you.

With no further questions, this concludes our question and answer session. I would like to turn the conference back over to Al Neupaver for any closing remarks.

Thank you very much. We look forward to talking to you at the end of next quarter. Thanks a lot.

The conference is now concluded.