An anticipated sequential rebound in rail volumes in the second half of 2020 should support Wabtec’s (NYSE: WAB) revenues in the third and fourth quarters, executives said during the company’s second-quarter earnings call on Tuesday, July 28.
For 2020, Wabtec provided sales guidance of $7.3 billion to $7.6 billion, earnings per diluted share guidance of between $2.05-$2.35 and adjusted earnings per diluted share of $3.50-$3.80. The adjusted guidance excludes estimated expenses for restructuring, transaction and amortization expenses related to Wabtec’s merger with GE Transportation last year.
Wabtec management based their assumptions for full-year guidance on how the company’s operations performed in the first half of this year. The guidance also assumes no material escalations in the severity or the duration of the COVID-19 pandemic, nor any sheltering-in-place mandates in response to the pandemic, Wabtec said.
There are several factors that will influence how Wabtec’s freight segment performs in the second half of this year, according to Wabtec President and CEO Rafael Santana.
The company will be watching the pace of the “unparking” of locomotives and rail fleets, both in North America and abroad, according to Santana. He was referring to the Class I railroads’ decisions to park locomotives because of the COVID-19 pandemic-induced drop in rail volumes. The railroads will be “unparking” their locomotives once volumes rebound, he said.
Wabtec will also be tracking orders for locomotives and rail equipment in international areas where the company is seeing demand growth. Those areas include Australia, Brazil, China, Russia and the former Soviet countries representing the Commonwealth of Independent States. Wabtec is also continuing to deliver equipment to India and Egypt per its contracts in those countries.
Production growth in agricultural and mining is among the reasons why Wabtec is seeing demand for rail equipment in certain geographical areas, Santana said.
Even though the Class I railroads have been seeking to make their networks more efficient through precision scheduled railroading initiatives, Wabtec is able to provide services to the railroads because of the fuel-saving technologies they offer, executives said. The company is working on developing engines and equipment that would reduce fuel consumption by 10-30%, and it has been testing a heavy-haul, battery-operated locomotive.
Second-quarter financial results
Like other rail equipment manufacturers, the COVID-19 pandemic impacted Wabtec’s second-quarter profits.
Wabtect’s net income for the second quarter of 2020 was $86.8 million, or $0.46 per diluted share, compared with $104.1 million, or $0.54 per diluted share, in the second quarter of 2019. Both figures are for net income attributable to Wabtec shareholders.
Net sales for the second quarter were $1.74 billion, compared with $2.24 billion for the same period in 2019, while operating expenses were $327.3 million versus $414.1 million.
Income from operations was $159.4 million, compared with $200.6 million in the same period of 2019.
”We could not have imagined a greater stress test for our company, and how we would perform in a difficult environment, than the one we’re seeing today,” Santana said.
Declines in both freight and transit segment sales contributed to the year-over-year decrease in profits. Wabtec attributed the declines to sales disruptions resulting from the COVID-19 pandemic.
Freight net sales were $1.2 million in the second quarter, compared with $1.5 million a year ago, amid lower deliveries of locomotives and components for freight cars and offset by sales growth for digital electronics. Freight income from operations was $141.5 million, compared with $167.5 million last year.
For Wabtec’s transit segment, sales were $532.7 million, compared with $710 million in the second quarter of 2019, on lower original equipment and aftermarket sales. Transit income from operations was $40.2 million, compared with $62.6 million.
“Wabtec delivered a strong operational quarter despite a difficult and dynamic environment as a result of the COVID-19 pandemic. Against a backdrop of uncertainty and unprecedented challenges, our teams drove strong cash flow from operations, allowing us to further strengthen our financial position. We also continue to make significant progress on our cost and synergy plans, giving us confidence that we will deliver on our synergy targets for 2020, as well as exceed our $250 million synergy run rate ahead of schedule,” Santana said in the earnings release.