Westinghouse Air Brake Technologies (WAB)

Q3 2011 Earnings Call

October 25, 2011 10:00 am ET

Executives

Timothy R. Wesley - Vice President of Investor Relations and Corporate Communications

Albert J. Neupaver - Chief Executive Officer, President and Director

Alvaro Garcia-Tunon - Chief Financial Officer, Executive Vice President and Secretary

Analysts

Scott H. Group - Wolfe Trahan & Co.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Arthur W. Hatfield - Morgan Keegan & Company, Inc., Research Division

Kristine Kubacki - Avondale Partners, LLC, Research Division

Presentation

Operator

Good day, and welcome to the Wabtec Third Quarter 2011 Earnings Conference Call. [Operator Instructions] Please also note that today's event is being recorded. At this time, I would like to turn your conference call over to Mr. Tim Wesley, Senior Vice President and CFO. Mr. Wesley, please go ahead.

Timothy R. Wesley

Thanks, Jamie. That's actually not my title. We have our CFO, Alvaro Garcia-Tunon here, so I'll...

Alvaro Garcia-Tunon

Battlefield promotions always work. That's okay.

Timothy R. Wesley

Well then good morning, everybody, and welcome to our third quarter call. So with us today, we've got, as I mentioned, our CFO, Alvaro Garcia-Tunon; our CEO and President, Al Neupaver; Ray Betler, Chief Financial Officer; and Pat Dugan, our Corporate Controller. Al and Alvaro will make some prepared remarks and then we'll be happy to take your questions.

During the call, we'll make forward-looking statements, so please review today's press release for the appropriate disclaimers. I also want to point out that on today's call, we will refer to both GAAP and non-GAAP EPS guidance because of the special items that we discussed in our second quarter report. We lifted those special items again in today's press release. We believe that Non-GAAP guidance provides useful supplemental information to assess our operating performance and to evaluate period-to-period comparisons. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, Wabtec's reported results and guidance in accordance with GAAP.

Al, go ahead.

Albert J. Neupaver

Thanks, Tim. Good morning. We had a very strong operating performance in the third quarter with record sales of $499 million and record earnings of $0.96. As we'll discuss, this performance was driven mostly by growth in our Freight Group, but our Transit Group continues to perform well. Based on this third quarter performance and our outlook for the rest of the year, we've raised our annual guidance for sales and EPS. Clearly, our business is performing very well, thanks to our diversified business model, our strategic initiatives and the power of Wabtec Performance System. We are well-positioned to take advantage of our growth opportunities around the world, yet prepared to manage through an economic downturn should one occur.

As I mentioned, we raised our 2011 sales and EPS guidance based on our current backlog and outlook. We're now expecting earnings per diluted share between $3.65 and $3.70, with sales growth of about 25% for the year. This guidance excludes the special items we recorded in the second quarter. If we had included those items, our guidance would be $3.46 to $3.51.

Our guidance assumes the following: the global economy continues to grow modestly; freight rail traffic continues to improve with the economy; transit market continues to be stable; and there is no major changes in foreign exchange rates. We will continue to stick to our long-held philosophy and that is, be disciplined when it comes to controlling cost and focus on generating cash to invest in our growth opportunities.

Let's first look at the freight rail market. Rail traffic continues to grow this year and, in fact, it is currently running at the high point for the year. Through mid-October, ton miles increased 2.7% and intermodal traffic was up 5.3%. The Increase in traffic has led to strong growth in our North American aftermarket business with aftermarket sales in the third quarter up 26% compared to a year ago quarter.

The OEM markets in freight also continued to strengthen, with OEM sales almost double that of the year ago quarter. We expect about 40,000 new freight cars to be delivered this year. We just got the statistics related to rail car build just this morning. Third quarter deliveries were at 12,519. Orders were at 20,165. So that means that the backlog rose to 65,000, the highest level in more than 3 years. We do not expect any changes in the locomotive build, about 800 this year, and that's about double what it was last year. In the third quarter, our freight revenues hit a record -- quarterly record of $316 million, even with OEM deliveries still well below recent annual high, which bodes well for continued growth.

Now if we look at the transit market. We continue to see stable markets in the U.S. as well as abroad. In the U.S., ridership was up 1.7% in the second quarter, the second consecutive quarter it has increased. Transit car deliveries were about 1,000, but bus deliveries will be at 4,800, both are slightly less than in 2010. And these numbers are projections for 2011.

As for funding, the politicians in D.C. on both sides of the aisle are now talking about a new federal Transportation Bill, that we could see something by the end of the year if they manage to tie it to the Jobs Bill. In the Senate, Boxer's going to introduce a two-year bill, and Mica in the house is taking a look at a 6-year bill. More important, they both seem to agree that stable funding plus inflation is the way to go. That's a far cry from just a couple of months ago when Mica was calling for a 20% to 30% cut. So we are positive about our transit opportunities based on the long-term demographic and economic trends on a relatively small market share and large global market.

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