International demand for railcars and services will drive Wabtec’s freight segment (NYSE: WAB) in the fourth quarter and into 2021, executives said Thursday as they announced the rail equipment manufacturer’s third-quarter earnings.
“We have a strong order pipeline internationally” in areas such as Brazil, Russia and the Commonwealth of Independent States, said Wabtec President and CEO Rafael Santana during Thursday’s call.
International demand for both Wabtec’s freight services and freight equipment has been steadily improving this year, Santana said. Meanwhile, although North American demand for Wabtec’s freight services and equipment lags behind international demand, North American demand should also pick up, he said.
The freight services segment includes services such as component reconditioning, and so its production and sales cycle is shorter, which means that it’s quicker to reflect rail volume rebounds. The freight equipment, which consists of assets such as locomotives, has a longer cycle and so it’s slower to reflect changes in market demand.
“There’s pent-up demand in terms of utilization of fleets that didn’t happen this year,” which in turn pushes out the need for fleet maintenance, Santana said of the North American market.
While some market volatility and uncertainty remains in terms of how quickly rail volumes will rebound in North America, Santana sees an aging fleet and overall underinvestment in the fleet. As a result, Wabtec’s technology offerings could benefit as railcar and locomotive owners seek to use technological tools to increase fleet reliability and efficiency, he said.
“We’ve got some good dynamics here to work from,” Santana said.
Third-quarter financial results
Wabtec’s third-quarter net income rose 40.6% on a 22% increase in income from operations and a 16% decrease in operating expenses.
Net income attributable to shareholders was $128.1 million, or $0.67 per diluted share, in the third quarter of 2020, compared with $91.1 million, or $0.48 per diluted share, in the third quarter of 2019.
Third-quarter net sales totaled $566.2 million, a 5.5% decrease from a year ago as the COVID-19 pandemic put pressure on Wabtec’s sales for its freight and transit segments.
Operating expenses totaled $359.5 million in the third quarter, down from $430.3 million in the third quarter of 2019.
Income from continuing operations was $206.7 million in the third quarter, compared with $169.1 million a year ago. Transit income and the international freight market supported overall income.
“Wabtec had a strong operational third quarter in the face of a challenging and dynamic environment,” Santana said. “Our team continued to deliver for our customers, while driving strong cash generation, aggressively reducing costs and executing on our $150 million net synergy targets for 2020.”
Looking at Wabtec’s freight segment, sales slipped 7% to $1.2 billion as the pandemic resulted in higher locomotive parking levels, lower demand for new freight car components and lower digital electronics sales. But higher deliveries of locomotives somewhat offset the sales decrease in the third quarter, Wabtec said.
Meanwhile, third-quarter freight segment income from operations was $160 million, up 3% amid lower service sales and higher original equipment deliveries.
Wabtec updated its sales guidance for 2020, putting it in the range of $7.5 billion to $7.6 billion, with earnings per diluted share guidance to between $2.35 and $2.45. It also offered an adjusted earnings per diluted share of between $3.75 to $3.85, which excludes estimated expenses for restructuring, transaction and amortization expenses.
“We are seeing signs of recovery across some of our international end markets. While our North American OE markets are transitioning [from a] trough, global freight volumes and equipment utilization continue to improve from the lows in the second quarter. Global transit service levels are also improving,” Santana said. “These directional trends, along with our backlog and strong order pipeline, are encouraging. The strength of our business portfolio, combined with the focused performance of our team, positions us well for a strong order recovery.”