美國西屋制動公司 (WAB) 2003 Q3 法說會逐字稿

Welcome to the Wabtec Corporation third-quarter conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. At this time it is my pleasure to turn the floor over to your host, William Kassling, Chairman of Wabtec.

I want to welcome everybody to our third-quarter conference call. Joining me on this call is Greg Davies, our CEO, and he'll speak very shortly after me; Alvaro Garcia-Tunon, our CFO, who will follow Greg; and as always, Tim Wesley, our Vice President of Investor Relations, has joined us on this call. Without any further delay let's get right into it.

Actually we felt pretty good about the quarter, it was pretty solid. Typically our third-quarter is our slowest quarter because of general slowdowns, shutdowns and vacations at most of our plants and at certain customer locations. We did 13 cents per share in earnings which is within our range of guidance and it's really an improvement from 9 cents in the year ago quarter. That improvement comes mainly from lower interest expense. Our cash was positive and was strong. We had cash generation of 9 million during the quarter and we had an EBITDA of 18 million for the quarter.

In terms of the rest of the year it looks about as we expected, so we're able to affirm our previous guidance for the fourth-quarter, and that guidance is an earnings from continuing operations between 13 and 16 cents. Now I'm going to turn this over to Greg who's going to talk more about our outlook for the future and including the R160 transit order which we received and announced today. After Greg is finished Alvaro will cover the financials and then we'll take your questions.

Thanks and good afternoon, everybody. First, let me talk a little bit about the rest of 2003. In general we continue to see positive signs in the freight OEM market, but the aftermarket, both transit and freight, remains sluggish along with rail traffic as those of you who track our industry will be familiar with. On the transit side you know that the OEM business is not growing right now after the completion of the New York City contracts as the aftermarket, as I said, remains below our expectations. In looking ahead to 2004 we're still refining our operating plan but we do expect to forecast continued earnings growth based preliminary on market expectations.

As we look out to the future, for the remainder of the year, while freight car data for third-quarter isn't yet available, our freight car outlook for 2003 is now that car build will be about 30,000 for the full year, and next year we're looking for a growth of as much as 20 percent in that market area. Locomotive deliveries, which as you know are down from 1000 last year, should come in, as we've said, around 700 locomotives built this year, and we have growing expectations that we'll hit or exceed 1000 locomotives next year.

The freight aftermarket does remain sluggish and the railroads continue to defer periodic maintenance and new projects wherever they can. In part this is explained by the sluggishness in freight traffic which is down in the third-quarter versus last year. Carloading is about about -- a little less than half a percent down so far this year. Ton miles are up slightly because Intermodal slowed a bit -- sorry, because Intermodal is still up, even though it did slow a little bit it's up by about 5 percent. Part of the problem here in the overall car loadings is that shipments of coal and grain continue to be weak spots compared to last year.

If we look at the transit side of the business, on the OEM side of course the big news is that we signed the contract to supply the breaks, couplers and card collectors for New York's new R160 subway car contract. The base contract for the brakes and couplers and card collectors is worth about 60 million, and that's expected to be about 150 million including options that, based on historical experience, we fully expect to be exercised. As we continue to negotiate for the doors, and we'll hopefully be able to make an announcement about that soon. Our production will ramp up for R160 probably starting late in 2005 and continue out for three or four years, which gives us a very solid base of future business to build on.

Some other business recently booked that will help support sales before the R160 kicks in include recently announced -- the recently announced orders from Kawasaki for break doors and other components for New York and also for Boston. And then our Italian affiliate also booked a large bus door order in Italy worth about $8 to $12 million. The aftermarket on the transit side continues to be impacted by funding cutbacks and lower ridership levels and is running at about 80 percent of planned levels. This is a risk going forward that we're monitoring closely, but certainly it's something that is impacting our numbers as we go forward.

Other issues in terms of the transit business that are of note, T21 spending that most of you are familiar with that expired this year, federal funding for all transportation projects, that has been extended now for an additional five months in order to give Congress time to work with the administration to iron out a long-term plan along the lines of what is now being called SAFE-T which would be the new legislation for transportation projects going forward. The Bush administration has proposed maintaining '04 spending at the same level as '03 with annual increases of about 2 percent through 2009. Congress and the American Public Transit Association want a lot more, but finding the funds, of course, is going to be a significant issue.

So in summary, it was a solid third-quarter with strong cash generation. We continue to see positive trends in the freight market, but there are some concerns about the transit aftermarket. And given our success on the R160 order and other new business initiatives throughout the Company, we think that Wabtec remains well positioned for strong growth into the future. So with that I'll turn it over to Alvaro to go through some of the details of the financials.

Good afternoon, everybody. What I want to do is just give you a quick summary of the financial results for the quarter and then we can get into more of the details in the Q&A session. Sales were 4 percent higher in the quarter, higher than the prior year, freight group sales increased by about 16 percent. This was due primarily to increased sales of OEM freight car components and commuter locomotives. Transit group sales, however, were about 21 percent lower. We were expecting lower OE sales, but aftermarket sales were lower than we had originally expected at the beginning of the year. Gross margins were 26 percent compared to 26.8 percent last year, so a decline of about .8 percent. This was due primarily to the unfavorable effects of foreign exchange rates on our Canadian operations and a little bit of a mix primarily again with the lower transit aftermarket sales which tend to be more profitable than the OE sales.

SG&A was higher due to insurance and medical cost increases. I think we're experiencing the same factors that numerous other companies are experiencing as well. Engineering was lower due to capitalization of certain design engineering costs for the R160 project. I think you'll notice that engineering expenses were lower than the last quarter. We think the last quarter is a reasonable run rate. What happens is with landing of the R160 contract there's some special work that needs to be done, and so we capitalized certain engineering connected with that special work. We expect to go through first article inspection on that project early next year and that will be the end of the capitalized engineering.

Interest expense decreased due to lower debt and interest rates as well as a charge that we had last year for early debt repayment. The charge was originally classified as extraordinary, however, a new FASB issued since then required us to reclassify it as interest expense. The charge was for early retirement of debt, it was connected when we paid off the bonds last year. Other income, there was a net change of about 843,000, and this was primarily due to foreign exchange rates in Mexico. Income tax expense, consistent with prior periods, has been accrued at 36.5 percent. It's slightly higher than last year which was at 35 percent due to higher effective state tax rates. Working capital was relatively flat compared to the last quarter of this year. Net debt stood at 164 million or 42 percent of total capital compared to 173 million or 44 percent of total capital at June 30, 2003, and 194 million a year ago. In essence we generated 9 million of cash in the quarter which, again, went to debt reduction.

A few summary stats. EBITDA was 18 million versus 17 million last year; depreciation relatively the same, a little bit in excess of 5 million, 5.4 million versus 4.8 million last year; amortization flat, 1.1 million this year, 1.4 million last year; CAPEX very constant, 4.3 million this year versus 4.3 last year. CAPEX continues to be constant for us. In terms of backlog, again no significant changes. The total in the quarter was about 280 million versus 292 million a year ago. Freight, in spite of the strong OE market, those orders really aren't backlog driven and they're not really that reflected -- they're not reflected that much in the backlog. So the freight backlog is actually down 131 million to 148 million because of there's a decrease in the commuter locomotive sales out of our motor power unit. Transit is stable with last year, slightly up at about 149 million versus 144 million a year ago. And the increase is due to '04 bookings. And transit, certainly on the OE side looks a little bit stronger for next year, aftermarket remains a question mark. With that I'll turn it back over to Bill who will summarize it and then we'll do the Q&A.

So to summarize, we had solid third-quarter earnings and cash flow, and that demonstrates continued progress and certainty in the business. Certainly we continue to see the positive indicators from the freight market that would bode well for next year. The surplus freight cars obviously are going away and that bodes well for some period of time. We feel very good about the R160 order which we worked very hard on because that assures our transit position for the coming years and for future growth. Obviously we remain optimistic about our prospects in our business area. Maria, do you want to come back on and ask anybody if they want to have some questions and answers?

(OPERATOR INSTRUCTIONS) Mike Peasley of BB&T Capital.

It's Thom Albrecht and Mike Peasley here. I have a view different questions for you. First of all, what was the approximate impact to the gross profit margin as a result of the unfavorable foreign exchange with Canada?

I would say of the -- it's hard to quantify because there are various factors involved, but I'd say of the 0.8 decline you're probably talking about half a percentage point or so.

All right. And then, Alvaro, did you say the other income was mostly Mexican foreign currency gain on the translation?

Just because of the way the accounting is done you have to recognize certain basically foreign exchange gains or losses in the gross profit line and in certain other ones below the line.

Okay.

I could give you a 20 minute discussion on it and I'm not sure that either of us would be any smarter after that.

20 seconds is probably fine. Was there any actual interest income in that figure though?

If there is it would be very minimal.

Okay. And then, just trying to get a little better sense here. I know we continue to bounce along the bottom, maybe a couple bounces above the bottom, but Q4 revenues historically, especially for freight group, have been seasonally a little bit longer than Q2 and Q3, although it's been so long since you've had a normal year it's tough to say, but would you generally expect your fourth-quarter freight group revenues to be at or a little above what you've experienced these last two quarters?

I think that'd be fair to say, Thom. We did experience the normal seasonality that you get -- I know that the same as the second, but seasonally we are a little bit less in the third than we are in the fourth, so I don't think it's unreasonable to expect a little bit of a bounce back.

And then on the new transit contract, do you believe you'll realize any revenues in the latter part of '04, or should we just sort of view that as a revenue and earnings contribution from '05 onward? And then I have kind of a part B to that question.

What we will realize -- and I should've made this a little bit clearer (inaudible) contract -- we won't recognize any revenues because we won't recognize revenues until we start shipping product which probably won't occur until late '05 and certainly ramping up in late '05 and the main part will start in earnest in '06. But we will realize cash. The way this contract works is we get certain milestone payments (technical difficulty) we have to perform certain tasks associated with those payments which is different than the prior contracts. The prior contracts, basically you got an upfront payment, no milestone payments, and then you got paid the rest when you delivered. This one is different that's why the accounting is (technical difficulty) before and so you do have some capitalized engineering, some cash which we'll treat as a prepayment not as a sale, and then once we start delivering the product again in late '05 and in '06 that's when we start recognizing the revenue.

Okay. And then, do you have a sense at this point how many prototypes you might build and/or how much that would cost you even though that would be a capitalized engineering expense?

As to the numbers of prototypes, I'm not real sure to be 100 percent. I think typically for your FAI I would say it's no more than a handful -- I'm taking a guess but I don't think it'd be any more than that.

I'd say -- I couldn't answer it directly but it'll be a very small number.

Okay, I know it's early on. Mike, did you have a question?

I'm assuming, Greg or Alvaro, that the door component that you're still negotiating or bidding on is not included in the $150 million estimated potential, but can you kind of maybe give us an idea of what that magnitude could be?

You're correct, it's not included. The total door business would be on a like to like basis all options included would be more in the $100 million range.

Okay. For the new R160 order, can you refresh our memory a little bit and compare that to -- because I think you said that that was the largest order New York has ever had, including the add-on. Can you refresh our memory with the 142 and 143, how many cars that was and the length of time it took to deliver those cars?

I think -- well, this will be 1770, and I think the R142, R143 contract was 1400 approximately. That was built out over -- the cars were mostly built out over two years, there was some overlap, and this new order will be built out over three or four years. So it's quite a significant change which, of course, from our point of view is a very good thing and I think from the whole supply base it's a good thing because it allows us to build our manufacturing cells on a nice steady rate and really be able to ring out manufacturing efficiencies as a result over the three or four year period.

Thank you.

Robert Lavitz (ph) of David J. Green.

How much debt did you reduce in the third quarter?

It was approximately 9 million, I think we went from 173 to 164, and that is net debt -- debt net of cash on hand.

I just wanted to know what the total debt was. The debt went down by -- how much did the debt go down by -- total debt?

Robert, we still have some bank debt and bank debt, just because of a few of the LIBOR trenches, sometimes you pay it off, sometimes you don't and you might have some cash on hand which we always do net, but the net debt actually went up about 8 million or so. I'm sorry, the actual debt went up 8 million or so.

Okay.

And cash went up significantly, and that's the difference why the net debt went down -- or debt net of cash I should say. That's a better way to say it.

Now these capitalized engineering expenses, can you estimate what that will be in total?

Right now our estimate is that it will be somewhere between -- in total it will somewhere between $2 to $2.5 million by the time it's all said and done.

Okay. So it's not a big deal?

No, it's not. It's just that the accountants felt, and we concurred, that that resulted in a better matching of income to expense, and in particular with these milestone payments which was different from contracts that we had in the past.

Now capital expenditures through the nine months look like it's about a little under 10 million, is that right?

That's correct.

What do you think for the year?

The plan we had was for about 18 million, obviously on a pro rata basis we're below that target. We continue to scrutinize capital expenses very closely and we continue to make sure that we only make those that are absolutely necessary. If I had to guess I would probably say that we'd be slightly below plan, obviously maybe the current run rate is a pretty reasonable run rate for the end of the year, but again, the plan was in excess of that.

Is there anything on the drawing board that would make this figure change meaningfully in 2004?

2004 probably would be up a little bit from there, but it's still well below depreciation we believe at this point.

And our depreciation tends to be in the 20 to 21 million range, and that's our target, that's our consistent target to spend below that level, somewhere at that level and we wouldn't see a marked increase next year to this year we don't think.

Tim, are you there? Tim, did you ever find anything out about that announcement on the train wreck when I called you up about last week?

No, still waiting to hear back from the electronics guys on that.

Okay.

You know that what happened, for everybody and as far as I am aware what happened, there was a train wreck of a metro commuter train that derailed that was being led by two of our locomotives. Both locomotives went off the track, one of them in fact turned over, 45 people were hurt. I haven't heard of any fatalities. But it turns out the preliminary data shows that the train was over speeding, it was running at about 67 miles an hour in a ten mile an hour restricted work zone. So that's the preliminary data we have. I couldn't vouch for whether that -- for anymore than that, that's a preliminary indication.

Okay. My inquiry was that when I heard this report on the radio, they talked about the total train control these locomotives didn't have.

This was for a wreck that was out in California a couple years ago I think or a year ago, and I'm waiting to get the answer back from the electronics guys. Bob was asking if -- there was apparently in part of the investigation they recommended positive train control.

Well, on a lot of these things -- if you're going through a work area that's posted at 10 miles an hour and you're going 67 and you have positive train control you would be aware that there was a work area and you had to control your speed, or the electronics would take over and slow you down. That's what positive train control is, and that's why we think it's a good product and we're offering it to the railroads today.

Thank you.

Art Hatfield of Morgan Keegan.

Good afternoon, gentlemen. I've got a few questions. First, Alvaro, can you refresh my memory on when you priced your recent debt offering and how that should impact interest expense expectations for Q4 and going forward in 2004?

Sure, the debt offering was at 6 7/8 which we thought -- for 10 years -- which we thought was a very good rate and good news for us. It was for 150 million and like we said right now net debt is at about 165 but that included about $25 million worth of cash, so net debt is about 190. On our bank facility we typically pay about 150, 175 let's say above LIBOR, that's what the new facility is going to be that we're going to enter into. So I think it's relatively easy to make the interest rate calculation.

Okay. Secondly, Greg, can you address -- you had mentioned your expectations for the locomotive market, and I know some of your thinking there is due to the new emission standards that are supposed to go into effect in '05. But can you address any specific things you're seeing in the market, any hard evidence that's out there right now that gets you more comfortable with that expectation for next year?

I can't give you too many specifics in the sense that a lot of it's sort of internal confidential data between us and our customers, but I can certainly tell you that based on customer data forecasts they're giving to us suppliers, and our knowledge of the railroads, that they build in a range of 1000 or higher, Art, is pretty secure right now.

Okay. And this is predominantly based on what you're hearing from GE and GM and their expectations?

And from the railroads themselves whose (technical difficulty) we keep very close contact with them in the course of trying to make sure they're specifying our components.

Okay, thanks. One last question, Alvaro, on the tax rate, is 36.5 something that you guys expect to be paying on an average basis going forward?

I think that's pretty much in the ballpark. Last year it was lower, we had some R&D tax credits and a few foreign tax credits that lowered our effective tax rate, but I think going forward 36.5 is a solid rate to use, yes.

Okay, thank you.

Those states out there are hungry.

I can tell you that's true. Thanks.

Ed Lefferman (ph) of First Manhattan.

My question is that when you look at the mix, your freight revenues, as Alvaro pointed out, were up 16 percent, transit is down 20, typically your freight business is much more profitable than the transit business. Total revenues were up and your overall operating margins were down in the quarter. We know you've been cutting costs all along through the tough cycle and I'm just wondering where -- more clarification as to why we're not starting to see some positive leverage to the margins with -- even though it's a slight upturn in total revenues, but again given the mix you would think that it would start to hit the margins a little better than it has and I'm wondering if you could just clarify that better?

I think the core of the issue is around three things that I think we've already talked about. One is that this is just seasonally a difficult -- this is always the lowest quarter. Another thing that's going on here is the foreign exchange is certainly something that's impacting us and others and, in fact, I'd lump into that kind of thing that it's the kind of problems affecting everybody, I'd lump in the insurance and health costs and so forth as well. And then the final one that is particularly specific to our business is this aftermarket, and while it's true that the freight car build is up, remember that the locomotive build is off this year by almost 40 percent from where it was last year. And in addition, the freight aftermarket is very sluggish. We're seeing no pickup in that area. The railroads continue to defer maintenance and new projects, as I said earlier. So I think those are the real underlying factors that we're still trying to deal with here as we, as Tom put it, sort of bump along. As the tide is sort of maybe turning, but we still have some potholes here to negotiate.

You're also not really forecasting any real improvement in this trend as far as the fourth-quarter is concerned. So I mean what's the mix then at this point in your freight revenues? How does that breakdown? How should one look at it? Because, again, if you look at the totals, 16 percent increase in revenues, even though it might be from a very depressed basis, one would think there would be some very good leverage in those numbers. And we're not seeing it. So I hear what you're saying but percentagewise that's --?

Transit is down what? 26 percent. But also the transit aftermarket, which is a pretty good margin business, is also being hit in that. So while you are correct that transit and the freight margins are different, embedded in the transit number is some pretty powerful margin business in the aftermarket.

What's your aftermarket -- how do you define your aftermarket sales, and you say from your nine months 375 million, how does the mix look?

Typically the mix is, as you know, overall it's in the 55 percent range aftermarket, and on the freight side it tends to be more aftermarket than OE, and on the transit side more OE than aftermarket. But it becomes pretty difficult to go much beyond that because there's so many factors and so many different parts of the business that are included. But going forward I expect that as we start to get into next year we're going to see the locomotive build increase which is going to be a factor. As the economy -- again, we have to make some assumptions as we go forward here, but if we assume that the economy is going to continue to rebound then we would expect to see carloadings begin to increase which we should hope would free up our railroad spending in the aftermarket. But that is discretionary spending and it does depend on the economic outlook.

And where you say you're refining your operating plan for '04, what does that mean? Does that mean you're thinking that the level of business is going to be better than what you were thinking previously, or how are we looking at this directionally?

We've not given any guidance about all this.

I don't mean specific numbers, I just mean in terms of how you're -- is it directionally better or is it --?

We certainly expect to see growth next year, absolutely both on the revenue line and therefore follow through to the bottom-line, as we said in the press release. I mean we're talking about something in the range of a 20 percent improvement we believe in freight car build. We should see the locomotive build going from the 700 area to the 1000 area. And what we're still trying to refine as we go through this in the planning process is with the latest data available is it 15 percent, is it 20, is it 25 percent? I mean that's the kind of thing we're trying to narrow down. And of course, the other area that is difficult to forecast is when is this aftermarket, either on the freight side or on the transit side, going to turn? We've always found it prudent to gather as much data as we can before trying to put a specific set of numbers out there.

Let me ask it this way, if you assume the aftermarket didn't turn -- at least for another six months or whatever period of time -- but given what you think the freight car market and locomotive market is doing and given what you see in transit, would you expect your margins to improve from the third-quarter nine-month base from what you're generating currently? Without any improvement or any change in the aftermarket?

That's a fair statement or a fair thing to affirm. Yes, because we think the OE side is going to be marginally up on transit. We think there's going to be some significant improvement on the freight -- substantial improvement on the freight side so I would say, yes. Margins will tend to be buoyed by that.

Okay. Thanks very much.

John McGinty of Credit Suisse First Boston.

Just a couple of things. I'm trying to make sure I understand. The revenues up 4 percent, can we assume -- can you give us any kind of help -- you did it kind of on the pieces -- about the OE versus the aftermarket? You did a transit -- the decline was in aftermarket. I wasn't clear on freight. If you just kind of split it that way -- could you give us help on that?

Yes. The split for the third-quarter is pretty munch the way we always talk about it. It's about 55 percent aftermarket and 45 OE.

But in other words, does that mean that both of them went down 4 percent?In other words, both of them went up 4 percent?

No, not necessarily.

What I'm trying to see is is that a 4 percent sales gain with a 10 percent OE gain and a 15 percent or 10 percent aftermarket decline? That's what I was trying to get a handle on.

As you know, we don't publish that data in specifics. But I think the key point is that definitely the aftermarket is the part where we are most down over last year because we've said that the transit business --.

Clearly the transit business --.

Is of in the range of 20 percent compared to where we would have expected. Freight at best is flat. So OE is the rest, if you --.

The increase in revenues is definitely due to OE activity, primarily in the freight. And like I said, I think the transit aftermarket -- the problem is we don't have exact numbers -- but it's down about 15 to 20 percent. And I think the freight aftermarket is down about 5.

Okay, that is very helpful. Do you have a number for the full year year-over-year hit from insurance healthcare, the standard kind of thing? What are you saying your headwind is in '03 over '02, and what would it look like in '04? Go down, be the same?

In '04 the trends we're seeing right now, John, let me talk about that, and then we can talk about numbers a little bit. The trend we're seeing is that the non-medical insurance, if I can call it that, the casualty, the D&O, etc., etc., is increasing slightly, but we're not seeing the exponential growth in those rates that we had in the past. I mean after 9-11, after the Enron, etc., etc., after the stock market crashed we were seeing doubling and tripling of these insurance rates, and this wasn't just us, this was across the board, this was for everybody. And I want to guess at the number but I think it's probably in the 3 to 4 million range increase year-over-year.

Maybe a little less next year?

Definitely, I would say it'd probably be maybe in the -- again, I'm guessing and we have probably a dozen policies and we renew those at different times, but I think probably the increase would be probably closer to about a million or so -- and much less increase than that. Medical increased significantly as well, it was increasing at about 30 percent or so, and that's been cut somewhat but it's still increasing I'd probably say at about a 10 to 15 percent range. So you'll probably see about another 1.5 to 2 million in medical. For us that's, Greg can address that as well, but for us we see that as the one key benefit which we feel gives us an advantage in hiring people and, to be quite frank, that's one we cut back a little bit, people are paying more, we've cut back benefits slightly, all the co-pays, etc., etc., we've adjusted and we actually took out close to basically additional contributions are adding up to about $1 million or so. But in spite of that it's going up by the numbers that I mentioned, and that one, again, that's systemic, that's nationwide you're seeing.

But what it is, it's like it $5 million head wind, if I add the two of them together, if I take that 3 to 4 and 1.5 and then maybe half that head wind next year?

I think that's pretty fair, yes.

Just a technical point, does anybody have any conviction that the locomotive manufacturers can make Tier 2?

Yes, I can confirm that. GE has already, I believe, actually certified, they certainly have units running out in the field. I believe they actually have their certification for Tier 2.

Are they using a cool gas -- exhaust gas recirculation or what are they doing?

They're using various different forms -- I mean they're using a form of air to air intercooling in order to get that. I'm not sure whether they're using exhaust gas recirculation to be honest.

But it doesn't take a -- there's not a huge increase in either the required radiator or cooling capacity that you're aware of in this thing?

As a matter of fact, it does provide us with some interesting opportunities because the current solutions are somewhat costly. And there are definite opportunities for us, we believe, to try to give them better product that is more cost-effective in terms of the total locomotive package cost.

Add have they disclosed to people what either the higher cost is going to be in '05 or the fuel decrement is going to be in '05?

Well, as a matter of fact, GE has announced a fuel improvement. So they're looking pretty good.

Okay.

I don't know exactly what they have said about cost. I haven't heard complaints about cost so let's assume cost is not a big issue in the total locomotive price arena.

But if that's the case, in other words, if I get better fuel efficiency with it and I'm not paying that big of a premium, why am I stimulating sales in anticipation of it?

Because of the difference factor.

In other words, anything that's different I don't like.

Right.

Different parts, different whatever.

Different parts and therefore different operating procedures to be training our mechanics on and so forth. And by the way, EMD has, I think, convinced everybody that they will be certified, although they're not, just to finish the equation. But they probably will see some fuel economy degradation. So that's another reason for -- at least from their customer base.

John McGinty Yes, if they can make it -- well, okay. Just two quick questions. The 36,000 -- or I'm sorry, the 20 percent increase in freight car deliveries 30,000 base which I assume is 36,000, how much of that is just based on talking to the builders, talking to the railroads, and how much of that is just kind of your best guess at this point?

It's almost totally built on discussions with the customers, both the end-user customers and the OE customers. And of course, we also pay attention to the econometric modelers, WEFA and EPA, and generally speaking we are being more conservative than they are.

Okay. And then in that -- you do have one statement in the release with regard to the aftermarket. You talked about you believe the transit aftermarket picked up, you said the aftermarket freight business will depend on general economic conditions and on freight traffic which continues to be flat. In order for -- I mean for the -- if we're looking at a 3 to 4 percent pickup in the economy, if we're looking at a build in freight traffic, is this just -- is it linear or can you give us any kind of a -- is there any kind of pent-up demand which once they start they have to accelerate because they have been deferring or can you give us any idea of the range of opportunity of growth you would expect in '04 for aftermarket?

I probably can't give you a good number on range of opportunity -- there are too many imponderables. But I would say that there is a component of the aftermarket that are what we call consumables and that's linear. But as you know, there hasn't been a big dip either, so there's not a very big dip in carloadings and carloadings themselves vary only a few percentage points. It doesn't make a huge impact on our consumables business, but the business that is being deferred is where the bigger bucks are in our freight aftermarket business. That's repair and remanufacture of things like air compressors, the airbrakes, the overhaul and repair work that is done by Motive Power and those kinds of units.

Then additionally there is -- because remember, I also talked about projects, electronics -- electronic train control projects are the kinds of things that have been deferred, and you could call that pent-up demand because these are areas where the railroad operating people would love to have the money to spend, so once the railroads feel that they've turned the corner and they see an improvement in economic conditions, we believe they're likely to free up capital for those kinds of projects that today they feel just too nervous about the outlook to want to take the risk.

One final question on that. Are any of these projects that they're pushing to the limits? In other words, are there AAR or whoever mandates that -- things have to be done after so many thousands or whatever miles or years or age that they're putting off or deferring? Can you turn around and point to actual deferred maintenance or are you just saying clearly they're just putting off everything they can? In other words, I'm not saying they will, but can they continue to just push, for whatever reason they choose to, can they just push these things off further or are there points at which because of specific guidelines with regard to regulation and legislation that they cannot push them off any further?

I'd love to answer you in the affirmative, but the truth is that the AAR standards are they have time limits on things like break repair, as you know, and those are continuing to be done. No, it's more a question of has the demand for locomotive overhaul and the work that goes with it and the electronic projects as I talked about. So, I really can't point to any regulatory, I think it's more a question of having to get out there and talk to the customers and understand what it is that they want to do that they feel constrained from doing today. And then of course, particularly in the area of overhaul like locomotive overhaul, you can only defer so long. So that pent-up demand is out there and it can be deferred so at some point it's going to get done.

It has to at some point, I agree with you fully. I just didn't know if there were points where somebody said wait, guys, you can't go any further. And unfortunately there aren't. I mean other than just logic.

The straight answer is, no. I don't think that that is a major factor today.

Thank you very much.

Mike Peasley of BB&T Capital.

Thom Albrecht again. I wanted to just run something by you on the transit group revenues, the last three quarters they've been roughly $43 of $46 million each quarter. We've kind of assumed 40 to 45 million a quarter, but I can't tell if from your comments on transit if you're actually even more cautious today than you were three months ago or whether you're about the same and just any thoughts you can give sort of on those quarterly revenues would be appreciated.

We certainly are expecting transit revenues to be up in the remainder of the year. There are some contract buildouts that will give us a lift in the fourth-quarter.

Okay. Approximately how much? Do you mean like just $4 or $5 million or are we talking a more material amount than that, Greg?

I think it's going to be a bit more than that, but it's hard to tell exactly today. Somewhere up in the 5 to 10 million range maybe is a good number.

But that won't carry on into the first quarter of '04, right? That's just completing some projects with some deadlines?

It should. We're certainly expecting to see some growth in our business next year. So if you take the quarterly run rates I think that comes out about -- the implied fourth-quarter run rate -- I think that comes out pretty well.

Okay. All right, so --.

It's hard to know without seeing all the numbers, but something at that range ought to be reasonable.

Alright. Well, we'll fiddle with it a little bit then. Thank you.

Gentlemen, I'm showing no further questions at this time.

Thank you very much and we'll look forward to getting back with this group certainly after the end of the next quarter. Take care.

This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.