Date: Thu, 20 Nov 1997 16:17:07 GMT Server: Apache/1.2.4 Last-Modified: Fri, 31 Oct 1997 15:05:49 GMT ETag: "4b145-2c8d-3459f3cd" Content-Length: 11405 Accept-Ranges: bytes Connection: close Content-Type: text/html MotivePower Industries
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MotivePower Industries
Headquarters
1200 Reedsdale Street
Pittsburgh, PA 15233
412-237-2250
fax 412-231-2698

Boise Locomotive Co.
4600 Apple Street
Boise, ID 83716
800-272-7702
fax 208-389-4820

Motor Coils Manufacturing Co.
100 Talbot Avenue
Braddock, PA 15104
800-245-0240
fax 412-271-4077

Engine Systems Co.
6 Northway Lane
Latham, NY 12110
518-783-0545

Touchstone Co.
321 Bellevue
P.O. Box 7568
Jackson, TN 38308-7568
800-568-7245
fax 901-424-4625

Clark Industries Inc.
104 East Butterfield Trail
P.O. Box 337
Gilman, IL 60938
815-265-7201
fax 815-265-7383

Power Parts Co.
1325 Pratt Boulevard
Elk Grove Village, IL 60007-5711
800-621-3068
fax 1-800-329-9772

MPI de Mexico SA de CV
Ciceron No. 612
Chapultec Morales C.P. 11530
Mexico, D.F. Mexico
011-525-280-6455
fax 011-524-812-5015

Following is the script from the MotivePower Industries investor conference call, held Monday, Oct. 20, 1997:

Jack Pope, Chairman

Good morning, and thank you for joining us on the call. From the MotivePower Industries side, we also have Mike Wolf, Bill Fabrizio and Tim Wesley. We have a few remarks to make, and then we'll invite you to ask questions.

Before I begin, the lawyers, as usual, want me to give you a disclaimer regarding any forward-looking statements we make during this call. You will find that disclaimer in the press release we distributed earlier this morning. If you don't have a copy, please call Tim. Earlier this morning, we announced earnings per share of 28 cents for the third quarter. Clearly, this was another outstanding quarter for the company: an E.P.S. increase of 87 percent from the year-ago quarter on an 11 percent increase in comparable sales. Obviously, we're very pleased with these results and the momentum we have created.

Looking forward, we continue to see many favorable trends: an outstanding order book, high demand in the industry, and growing economies in the U.S. and Mexico. With these trends in mind, we are comfortable with Wall Street's fourth-quarter estimate of 27 cents per share. And, as we begin to look into 1998, we see no reason why the company cannot grow E.P.S. at a minimum of 15 percent annually, which is the same commitment we've made to you for quite some time. The $30 million in locomotive contracts that we announced last week certainly make us feel comfortable about that commitment.

With that, let me turn this over to Mike Wolf and Bill Fabrizio. Mike...

Mike Wolf, President and CEO

Thanks, Jack, and good morning to everyone.

Well, I hope I'm starting to sound like a broken record: I am very pleased with the numbers we announced earlier this morning. Sales were up. Margins were up. E.P.S. was a record for the quarter. Cash flow continued to be strong.

The fundamental economic and industry trends are very much in our favor. The U.S. and Mexican economies continue to be strong. And all NAFTA railroads need reliable and available locomotive power to alleviate the unprecedented congestion in the system that we keep reading about in the newspapers almost every day. I can assure you, we are, more than ever, a vital part of the solution to their problems. I'm sure you took notice of the $30 million in contracts we announced last Thursday. Also, several of the projects on our short list of proposals relate directly to the stories we're reading in the papers almost every day about traffic jams and service problems.

We're also continuing to make good progress on a number of our other strategic initiatives.

First, looking south of the border, our Mexico operation continues to increase sales and profits from its growing base contract with T.F.M., the Kansas City Southern consortium. We're seeing a lot more freight car repair business, and we're being given more locomotives to maintain, too - both for the end-user and for our leasing partner, Helm Financial, with orders exceeding our internal forecasts. For example, at the beginning of the year, we were maintaining 240 locomotives; today, we're up to 325 - at an availability rate of about 95 percent.

We are nearing completion of negotiating a six-year extension of the base contract with T.F.M., and we're now in discussions with G.F.M., the Mexican consortium that includes Union Pacific, on a 10-year maintenance agreement for the Pacific North Region. As we have been saying, we should know more by year-end on both of these opportunities. Combined, these regions currently use and maintain 850 locomotives, or 70 percent of the entire Mexican fleet. We expect the number of locomotives to increase as the rails in Mexico increase their share of market from 12 percent today. In the U.S., for example, rails currently have about 42 percent of the intercity freight market.

On another strategic front, we have had continued success with sales of components to non-NAFTA markets. Excluding Mexico, through the first nine months of the year we've done about $10 million in international sales - approaching 10 percent of total sales from our Components Group, compared to 5 percent a year ago. And, we have a record backlog of another $10 million. We're working on some pretty exciting, new relationships in key markets that will be very important as we move forward, and we should be finalizing these partnerships in the fourth quarter.

In addition, discussions on alliances and joint ventures with large, global O.E.M.'s have also continued to progress. In the past, we have told you that we are bound by confidentiality agreements from disclosing much information, and that remains the case. But, I can tell you that as a direct result of these alliance discussions, sales to these O.E.M.'s continue to increase.

Bill Fabrizio continues to make progress on acquisitions, with several nearing completion. We expect to announce one or two by the end of the year, probably with revenues of around $10 million each. These two transactions are currently in the final stages of due diligence. They will be profitable and additive to earnings immediately, and they will meet our stringent criteria for real, sustainable synergies.

So once again, I am very pleased with our third-quarter results. I think they are the mark of a high-performance company and demonstrate the type of sustainable and profitable numbers we want to achieve with consistency. Most importantly, the momentum we have built is evident in our strong and increasing order backlog and the trends we see continuing for the next six months and beyond.

Bill, do you want to cover some of the financial specifics?

Bill Fabrizio, CFO

Thanks, Mike, and good morning, everyone.

As you look at our third-quarter income statement, I'm sure that a couple things will jump out at you.

First, we generated solid sales growth in the quarter and for the first nine months of the year. Excluding divested businesses, our sales were up a solid 11 percent for the quarter, more than double the pace of the U.S. and Mexican economies. As Mike has said, we're seeing excellent growth from our international export sales efforts, but we're also seeing growth in our traditional NAFTA markets, too. With this growth, we have more than offset anticipated lower sales of original-equipment locomotives, which contributed $13 million of revenues in last year's third quarter.

Second, a big story for us this year has been the margin improvements that we have achieved. For the third quarter in a row, our gross margins and operating margins increased dramatically compared to the prior-year quarter. This was due to several factors: higher sales volumes and resulting higher capacity yields, cost reductions, and productivity improvements coupled with a very favorable product mix. In part, what has happened is that we are booking more international sales, which tend to have higher margins. In addition, our Locomotive Group has been very successful at achieving cost reductions and productivity improvements that we are now seeing on the bottom line.

Can we sustain overall margins? A lot depends on the continuing product mix. As we've said in the past, we have over 25 product lines with margins ranging from 15 percent to 70 percent. We have, however, achieved cost reductions and productivity improvements that should be permanent, and we are still working on the cost and expense side. So we think there's room not only to sustain margins, but grow them -- again, depending on the product volume and mix.

As you look down the income statement, you'll see that our G&A expense was flat for the quarter. Although we had some expenses related to incentive programs and new marketing initiatives, we were able to offset them with cost reductions elsewhere. Going forward, we would expect G&A expense to be around $9 million.

We had no significant changes on the other line items of the income statement, with the exception of taxes. Obviously, if we're making more money, we're going to pay more taxes. But while we accrued taxes at 37 percent in the quarter, keep in mind that we're paying cash taxes at a lower rate because we have tax-loss carryforwards in the U.S. and Mexico. With these carryforwards, we can save about $5 million in cash taxes in 1997.

You can also see that our average shares outstanding increased during the quarter, for two reasons: First, some stock options were exercised during the quarter. Second, as the price of our stock has increased, more options are "in-the-money."

The corporation is continuing to generate strong cash flow, with EBITDA of $12 million for the quarter and $33 million for the first nine months. Debt, net of cash and equivalents, was about 21 percent of total capital at the end of the quarter, so we have some room to grow there.

All in all, it was another excellent quarter for the company.

© Copyright 1997 MotivePower Industries