美國西屋制動公司 (WAB) 2005 Q1 法說會逐字稿

Hello, and welcome to the Wabtec Corporation first quarter 2005 earnings results conference call. As a reminder all participants are in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. [OPERATOR INSTRUCTIONS]. This conference is being recorded. If you have any objections please let us know by pressing star, then zero now. Hearing no objections I would now like to turn the conference over to William Kassling, Chairman of the Board, President, and CEO, and Alvaro Garcia-Tunon, Senior Vice President and CFO. Mr. Kassling?

Thank you very much, Jennifer. And you got Alvaro's name exactly right. [Laughter]

For once.

Welcome to the first quarter conference call from -- we are broadcasting here from lovely downtown Wilmerding. And not only is Alvaro here, but Tim Wesley, our Vice President of Investor Relations is in the room with us. I want to call your attention to the forward-looking statement disclaimers in the Press Release. I am going to give you some opening remarks. I will turn it over to Alvaro and then we will take your questions.

Relative to the first quarter, we are really off to a solid start this year and we expect that momentum to continue. Our earnings per share was $0.20 versus $0.11 one year ago. That's an 82% increase on a 30% sales increase. So business is good and our earnings are up. EBITDA was up 42% to almost 24 million. Alvaro will talk more in detail about the numbers. But the key point here and your key take away is, it's a solid start to the year that keeps us on track to meet our 2005 goal for earnings per share of about $1.10, which will be overall 55% higher than 2004.

The topics I'm going to cover are really three. First, the current state of the freight and transit markets; secondly, I am going to discuss a new contract which we announced today with EMD, the locomotive modules; and finally, I am going to talk about growth initiatives and the restructuring programs that are under way in '05. First of all let's talk about the markets and I'll talk about freight after market first. Certainly rail traffic continues to be strong and our aftermarket business reflects that. U.S. carloadings were up 2.5% in the first quarter and ton-miles were up 3.3%. Intermodal continues to be very strong on top of double-digit growth last year, up 7.6% in the quarter over last year. Aftermarket sales in freight was up 26% for the quarter. Mostly in the segments that supply consumables and maintenance products, such as, brake shoes. But it does set that activity is starting to filter through into the aftermarket as we've been waiting really for several quarters. We could still see a pick up down the road in the more heavy maintenance markets, such as, locomotive overhaul.

Learning about OEM, both freight car and locomotive OEM markets are strong and they are strong as we anticipated. Freight car had 15,780 cars delivered in the quarter, the highest level for a quarter in five years. Orders were even stronger, 17,000 -- almost 600 -- up 40% from the fourth quarter. And backlog increased to slightly less than 60,000; exactly 59,416. Locomotive, the industry order book is firm for 1100 units and deliveries of the new Tier-2 Locomotives coming out of G.E. and EMD are ramping up as the year progresses. And we are already seeing some orders for next year.

Let me talk about transit. I will talk about first OE then aftermarket. On the transit side in OE we have a good backlog of work for this year as we get geared up for the R01-60 contract which ramps up in '06. Let me give you an update on T21. Looks like Congress and George Bush have reached agreement on the numbers with average annual increases of about 7% through 2009. But they are still working out the details about how much is guaranteed and how much of the municipalities must match. We should have final resolution in late May. In terms of the aftermarket, it continues to rebound as ridership has started the increase once again. And most major municipalities still have funding issues, nonetheless, ridership is up and we expect good maintenance will follow.

Of course, you know about reading in the papers there is a situation with Amtrak's high-speed Acela trains which were pulled from service about a week ago. As you might expect we've had a lot of inquiries about this. We thought it would be a good idea to include something in our Press Release today. I want to say before I give you this statement that because of the sensitive nature, and you can expect there is a lot of sensitivity about this, I'm really not going to be in a position to answer questions. But we believe this statement is a definitive statement of our position. And let me read it to you -- Wabtec did not design or supply the braking system for the Acela cars. Wabtec did provide and machine approximately one-third of the brake disks for the cars and is assisting Amtrak in its evaluation as requested. Wabtec does not believe that it has any material liability with respect to its work.

With that being said let's move on and talk about the EMD contract which is new news and the reason its new news is because we've had confidentiality agreements with EMD and we have not talked about it in detail. Only we've referenced it from time to time. But now that we are beginning to ramp up this value-added contract it's time to really talk about it in some detail. During the quarter we ramped up production of locomotive modules for EMD. We are supplying the complete locomotive cab, that includes all electronics and air brake controls, and on top of that we are providing the equipment rack, as well as radiators for EMD locomotives. These components are being supplied by various Wabtec subsidiaries with the final assembly at our MotivePower locomotive plant in Boise, and then the modules are going completely outfitted to EMD. This is a very strategic contract for us because we are increasing our locomotive content substantially and we are building OE market share which will help us increase our aftermarket in the future.

As we reported you can see financially we have some work to do on the contract. Revenues will be about $50 million on this contract this year and we incurred a loss of 4.1 million in the first quarter. That's about $0.06 a share. And that's really for start-up costs. Most of which were anticipated. We are making money on the components and we are concentrating our continuous improvement efforts on the cab module plus the final assembly. We have our best people working on this project and we expect to improve our performance beginning in the second quarter as we realize production efficiencies. And then continue to improve throughout the year. So let me just run through this very specifically in terms of numbers. The loss in the first quarter was $0.06. Our goal in the second quarter is to breakeven, but we certainly expect to do no worse than a $0.03 loss, and we should improve from there in successive quarters. We are pleased about the contract. We think it has a lot of opportunity and we are on the process of a learning curve to improve its performance.

Now, let's talk about strategic growth initiatives. Internationally our sales growth in the quarter was good. Our non-NAFTA sales grew faster than NAFTA sales and we continue to find new markets and build on existing relationships overseas. I will just run through a few of these with you. We signed a $3 million contract for event recorders in Australia. Sales for our braking equipment remain strong due to demand for iron ore and coal exports from Australia, Brazil, Columbia, and Venezuela. Our Young Touchstone subsidiary has been specified to supply radiator hatches to Siemens for locomotives being sold in Vietnam. And, of course, we had our CoFren acquisition in Europe, particularly, in Italy in our results for two months in the quarter. We continue to expand -- let me talk about aftermarkets next. In addition to responding to increasing demands we are busy creating our own growth opportunities here. We continue to expand our supplier managed inventory program with the CSX. We added additional service capabilities in Calgary and Montreal and we added heat exchanger service -- servicing of heat exchangers in Kansas City.

Let me make a comment about CoFren, our strategic acquisition. We completed that transaction in the quarter and it boosts both our international and our aftermarket sales. As expected the deal was accretive immediately and we're very pleased with its performance. CoFren is a leading European manufacturer of brake shoes and it's a very good strategic fit with Wabtec. When you put it together we have a world-wide friction materials business with a great deal of opportunity for synergies between us.

Let me talk about new products. Not only did we add this cab module for EMD, but there's a whole host of other things that we are working on. The third leg of our strategy is to development new products and we continue to make progress. The most excitingly current opportunity is probably ETMS or Electronic Train Management Systems. We have a pilot project with the Burlington Northern Santa Fe that began in 2004. We equipped 50 locomotives along 135-mile corridor in Illinois with computer software and hardware to monitor and manage train movement. ETMS is a cost-effective way to inform train crews about work areas or speed limits and can initiate braking, if for any reason the engineer fails to respond. So, therefore, it offers both safety and productivity benefits. This pilot with Burlington Northern Santa Fe is going very well. It's about halfway through its testing which means that we've had over 700 failure-free runs which is certainly quite a statement of its reliability. Following some additional testing we expect to get the FRA approval, that is the Federal Railway Administration, approval later this year and this could pave the way for larger orders in the future.

Let me talk about restructuring for a minute because we made progress in the quarter on restructuring. We continue to take these actions and these are the actions that we talked about historically that we'll focus on improving our gross margin. We've said this will be a multi-quarter process and it is still the case and we will have more to talk about in successive quarters. But in the first quarter we consolidated two U.K. facilities into one and we moved a ball valve product line from Canada to the U.S. These actions cost us about $460,000 in the quarter but they have extremely quick paybacks. So it should help us going forward. We continue to work behind the scenes on other improvement programs and we will provide you with those details as we take further action. Now for the numbers, Alvaro, you want to take over.

Yes. Thanks very much, Bill. Just to go over a quick highlight of our financial results for the quarter, sales were 30% higher than the prior year quarter due mainly to three factors -- increased sales of locomotive and freighter car components in both the aftermarket and OE segments. This reflects the activity that Bill referred to in his portion of the remarks. The CoFren transaction which was completed during the quarter. Basically that added about $7.5 million of sales during the two months that we owned the Company. And the ramp up of the EMD Locomotive contract that, again, Bill referred to earlier and that added approximately $15 million worth of sales during the quarter.

In terms of gross margins, we are very frank about this and we continue to be unhappy with our gross margin performance. We think we can do better and we are committed to doing better. Gross margins decreased during the quarter to 23.5% from 25.2%. This was primarily caused by two factors. One was the ramp up of the EMD contract which had a loss of 4.1 million during the quarter, again, most of which was anticipated. And we also had approximately 460 to $500,000 of restructuring expenses which flowed through cost of sales. As we said before, and we will continue to say, improving our gross margin is a top priority internally and we're working on a number of initiatives to make progress and we will continue to report on these initiatives throughout the year.

In terms of operating expenses, operating expenses were 9% higher. This was mainly due to a one-time asset writedown of about 1.1 million. We had some IT assets that we replaced early to improve our functionality. And the addition of CoFren added about $1.3 million. The balance of the increase in the selling and administration cost is basically due to increase in selling costs, as well as normal inflation. As a percent of sales SG&A was about 12.1% this quarter versus 14% in the year-ago quarter, which we believe demonstrates some of the leverage we have as sales increase. If you are looking for a run rate of operating expenses which is a question that we frequently get, you can probably take this quarter's number for SG&A, deduct the asset writedown of 1.1 million and that puts you at about 38 million. Which given our increased sales volume, again, would be a pretty normal run rate for us to expect. Interest expense net was about $500,000 lower than last year due to our lower debt level compared to the year-ago quarter and higher interest income. Other expense not much happening there, was about the same in both quarters and mainly consisted of foreign exchange translation losses in each quarter. Income tax expense, again, pretty steady. We accrued at 36.7% this quarter versus 36.5% last year. You can expect that to fluctuate at 10 or 20 basis points in any one quarter, but, again, pretty steady and pretty consistent. EPS as we mentioned at the outset was $0.20 versus $0.11 in the prior quarter of last year, up approximately 82%.

In terms of cash and working capital management, the cash balance was 68 million at March 31, 2005, compared to 95 million at December 31, '04. It's lower, it has been building up but it was lower due to the CoFren acquisition for about $39 million and this was offset by cash generation of about 12 million during the quarter. Working capital, when you compare it to December 31 balances it was up 17 million. This was mainly due to CoFren which added about $12 million of working capital and the balance of about 5 million was due to higher sales compared to the fourth quarter, which again, in balance that's good news. We'll take the higher working capital as long as it's company buys significantly higher sales. Debt net of cash was 82 million or 20% of total capital at March 31, compared to 55 million or 15% of capital at year end, at December 31, '04, and the increase as we've talked about is primarily due to the CoFren acquisition we still generated cash during the quarter.

In terms of specific cash flow items which would help you with the modeling, depreciation during the quarter was 5.8 million versus 5.5 million last year. Amortization, about 1 million versus about 800,000 last year. CapEx increased slightly from about 6 million versus 4.1 million last year, this increase is primarily due to some of our restructuring initiatives which, again, we expect to bear fruit in the later quarters particularly, in the second half of the year. For the year CapEx should be slightly higher than our normal experience the last few years, probably somewhere in the neighborhood of 20 to $22 million, but that again you can compare that to D&A of about 27 million. So we are still understanding that.

In terms of backlog, corporate backlog is at a recent high of 412 million versus 376 million at 12/31/04, up about 10%. The freight backlog is up. The transit backlog is up. Freight is 259 million versus 233 million at year end and transit is 153 million versus 143 million at year end. And that pretty much concludes the financial synopsis. I will turn it back to Bill for some closing comments.

Sure. Thank you, Alvaro. Once again we are off to a solid start this year with a $0.20 quarter. We are confirming our 2005 guidance of earnings per share of about $1.10. Our end markets are strong and growing. We are making good strategic process on our growth initiatives. In the meantime we'll continue to work on restructuring programs and other activities to improve margin. With that we will be happy to answer your questions. Jennifer, could you come back on and field some questions for us?

Sure. [OPERATOR INSTRUCTIONS]. Our first question comes from Wendy Caplan of Wachovia Securities.

Hi. Bill, the EMD contract, do you think that -- were you in negotiations with EMD before their new ownership? And I guess what I'm getting at here is I was wondering whether the new financial owners were presented more in the way of opportunity for Wabtec than the old owners?

We were in negotiations with the old ownership, but we have been very close to the new ownership and they are current on the situation.

And are there -- as we look at that contract is it exclusive to EMD or are there -- can we also be speaking with G.E. about the same kind of contract or is their strategy somewhat different?

I would say G.E.'s strategy is somewhat different, but this is really a negotiation strictly with EMD.

And what percentage of EMD's locomotives will you be supplying the modules for this year? And is there some follow-on opportunities?

Well, what we do, we are going to supply 100% of their needs and we are doing the cab and equipment rack plus the components that go inside those.

Okay. And finally the question about your ETMS that you are testing with the BNSF, you mentioned that that's going well. Can you give us a little more detail in terms of what they are saying about it and if you've gotten additional inquiries from other customers?

The Burlington Northern Santa Fe is very happy with this. They've, in fact, put out a small brochure on the performance of it. I think they're enthusiastic because of not only the results, but the fact that it's cost-effective and essentially we know the FRA is very focused on this because they don't want to have any -- they want higher safety. And so I would say that the vibes are very good on this and, of course, CSX has done some historic work in this area. So -- but in this case I think everybody is kind of looking at BNSF to see how they come out with this effort.

Thanks very much.

Thank you, Wendy.

Our next question comes from Stephen Weiss of MindFlow Capital Investments.

Yes, thank you very much. Hey, Bill, congratulations on a great quarter.

Thank you.

A couple of questions for you. What I've noticed in the industry over the last couple weeks and the last couple of months as well, a lot of your competitors have recently been implementing some new strategic initiatives for processing and technology to help them reduce their sourcing cost for their suppliers and establish better collaboration. I'm interested if you can provide some color as to what you guys are doing to reduce those sourcing cost for the suppliers and collaborate better to get some more cost efficiencies out of your system?

You mean you are talking about our suppliers -- or the supply chain to us?

Yes, you're -- the suppliers you buy from -- the resources.

We have a lot of initiatives and as we've talked about the -- and we haven't been too specific because it's a work in progress. But what we have said is that we have some very high costs and particularly those costs that are denominated in Canadian dollars given the unfavorable movement of exchange rate over the last 18 months, and the expected continuation of that for some time to come. So we have looked at alternative sourcing and continue to work very actively in that arena. The move -- the specific move of ball valves from Canada to the U.S. was in response to that and there are other initiatives under way; outsourcing initiatives to lower-cost sources.

Do you have a specific [indiscernible] that's handling that or --?

Yes, we have a very defined program and we have quite a large staff both here and outside of North America dedicated to this effort.

Okay. How are they manage the supplier base to make sure at all times they are getting the lowest cost from supplying the suppliers quality standards are up to par?

We work very hard on quality standards. It is absolutely imperative that any source have very high performance and so we are very pleased with that effort.

Okay. Last question, for the remainder of the year what would you say your top initiatives are going to be and how do you plan to go about accomplishing that?

Well, we just continue to look at each of our components, assess its value and contribution and volume, and look for appropriate sourcing.

You're doing a great job, Bill, continued success down the road.

Thank you.

Our next question comes from Art Hatfield of Morgan Keegan.

Good afternoon, guys.

Hi, Art.

Just a couple of questions on the EMD contract. First of all did you mention how much revenue was generated in the quarter?

We said 15 million.

15. Okay. Additionally, the loss of 4.1 million, was that in-line with what you were expecting or was it more or less?

It's in-line.

Okay. And --.

These projects have startup and learning associated with them.

I guess -- could you talk a little bit about that? Just curious what kind of startup you had to do and if there was any initial investment you had to make to get --?

Well, we made an investment in Boise because you're starting to handle individual components. We are welding up a complete cab module. We are wiring it up and, of course, that's, that has a lot of steps in it, a lot of hours in it, and so it's -- we go through the learning curve. It's very much a learning curve kind of a business. And you expect for the -- for this type of contract to incur some front-end expense and that's certainly what's happened. But we anticipated it and so we are able to hit our numbers despite having that.

And Art, just to expand on that slightly, I guess we take a look at it and we think there's two kind of costs. The first kind of cost would be the normal capital, let's say, kind, we would consider normal capital costs. And since we had the facility in Boise that has produced locomotives in the past what you would consider as a normal capital costs were relatively modest. I would say in the 2 or 3 million, let's say. And then the second cost would be these losses which we also include as part of the capital base. And like as Bill says which were mostly in-line with our expectations. So there's two kinds of -- but those are the ways we would distinguish them.

Just one last thing on this, how would -- would you characterize this opportunity initially as something that is lower margin than the kind of margins that you have place with your other businesses right now, but yet it generates better returns on invested capital?

I think you have it dead right. I mean it's the kind of business that won't have the gross margins that some of our traditional components businesses have. But by the same token it's incremental and if the CapEx investment is modest, you can get a very high incremental return.

Right. Thank you very much, guys.

Our next question comes from Mitch Golden of RH Capital.

Hi, guys. Just one more on the EMD contract, was this contemplated in the original guidance? And then consistent with that, given the loss you incurred which you said was consistent in your expectation of breakeven, I'm assuming that as it gets profitable towards Q3 and 4, is that also included in your -- around $1.10 guidance?

Yes. The answer to that is yes.

Okay. Thank you -- oh, one more if I may?

Sure.

The Canadian operations, I guess the valve unit that you brought -- that you moved to the U.S. and you incurred some costs, have you realized -- did you realize any benefit of that in the quarter or will that start trickling in going forward?

We moved it during the quarter. Our run rate is quite good now. And, so, yes, we are getting benefits. We didn't get a full quarter's worth of benefits, obviously, but certainly we should get full benefits the second quarter on.

Okay. And can you just talk a little bit more about just -- or help size what the potential is for further types of restructurings in terms of the ability for gross margin?

Well, we think there's a lot of potential, but we have, you know, what we would rather do is kind of report it as we do it rather than promise it so to speak. So we will be talking about this in coming quarters. But there's a lot of opportunity.

Okay. Thank you.

We have another question from Wendy Caplan of Wachovia Securities.

Hi, Bill, one I forgot, you talked about T21 and the resolution of that. Can you give us some sense of whether we should think about this in terms of some pent up demand for transit projects, either new projects or refurbishment of old projects and what you are hearing about that?

Well, what we are hearing is municipalities are still fairly strapped and essentially they operated under a continuing resolution from the old program. So we haven't seen really much in the way of diminution of normal business. And I don't anticipate there's going to be much of an event other than to have certainty for five years.

Thank you.

Our next question comes from Steven McBoyle of Lord Abbott.

Yes, thank you. First maybe just on EMD to clarify, this is a $50 million contract through '05. Would you anticipate there being any revenue associated beyond '05?

Yes, we would, Steve. Actually it's for a longer period than '05, but the eventual revenue is going to depend on locomotive bills. It's going to depend on EMD's share, on a variety of factors. So basically we are just giving guidance through the end of the current year -- [multiple speakers] guidance.

And if you look beyond the first year in the contract what sort of level of profitability do you think the contract would provide?

Obviously, our goal is to -- the one nice thing about having a contract like this is the longer we have it the more we have an opportunity to improve the profitability. So we would be -- our goal is to improve the profitability as we go along. But, again, our guidance is limited to this year.

Okay.

Typically these businesses do not have the same margins as our components businesses.

Sure. Understand. And you haven't spoken of raw materials, just curious how that fared in the quarter relative to what you were expecting?

I think raw materials, you want to answer that, Alvaro?

Sure. In terms of steel prices, they are still high and they have been fluctuating, but for the most part they've stabilized since, let's say, mid '04 to '05. If you take a look at the indices you will see the material indices have basically stabilized. Stabilized at a very high level which is reflective of our margins.

I think the real issue there is to what extent have we been able to recover the higher prices with surcharges. We've been actually doing our quarterly review with our units during the last couple of weeks and the pricing environment is starting to improve somewhat. Not as much as we would like obviously, but we are starting to see improved pricing. So it's going to take us awhile, but gradually we think we will be able to recover.

Yes, it's very hard to recover 100% of what happened to us. It fell out of a box. We are making progress, but we are still not at the level we are satisfied with.

And recognizing that, is it possible to quantify what the impact may be in the quarter? You've done that in the past?

We did, I think we were --.

I think quarter-to-quarter, in other words if you compare it Q1 '04 to Q1 '05 it was relatively modest. If you take a look at the indices they are relatively stable and probably slightly higher but nothing material.

What do we say overall '04 was to '03?

Overall '04 in comparison to '03 was, it was costing us about $0.02 -- about 1.5 million per quarter. [multiple speakers].

A 1.5 --.

It was about $0.09 '04 over '03 but I don't we -- I think that's kind of rolled through.

Right. It has kind of started rolling through. In the comparison.

So it would be close to flat versus last year.

So that's your experience this quarter and would anticipate that through the remainder of the year?

Yes, I think so unless pricing gets better. I know steel scrap sales have come down somewhat, but aluminum has stayed very high. And we're tied to both.

It's a little bit like FX everybody has an opinion on what prices are going to do, but in general you're seeing a more stable market then you did last year when it was going up dramatically.

Well, it's nice to have that behind you.

Hopefully.

Yes. And just on the guidance front obviously I understand the earnings guidance, but just curious if you could update the sales number since you've come out with your new delivery assumption?

Yes, I think before the original guidance was about 900 and obviously as we discussed during the call about $1.10 EPS. I would say probably, you know, originally we started at about [900 and $1] of EPS and then we went to $1.10. So obviously to get to the $1.10 our sales should be going up and they would. So I put it somewhere around the 925, 950 range, somewhere like that. But I think the key number is what I think everybody tends to focus on to be honest is the bottom line earnings number that we do say is going to be about 10.

Right, I'm recognizing that, but that number would include the new G.E. contract, as well as --?

EMD contract. [multiple speakers]. They don't like to get confused.

[multiple speakers]. Yes, EMD. Sorry. Yes, no, sorry. Okay. Thank you.

Yes, it would.

Thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from Mark Bishop of the Boston Company.

Hi. A couple of things. First of all on the steel, is -- how long in advance do you get your order before you produce -- before you deliver a car?

We essentially I think we are more of a spot buyer because we by the scrap steel and use in our foundries. So it's not as though we have kind of the "hedged" this particular --.

All right, but how long does it take you to go through the process of manufacturing?

It depends on the segment we are talking about, Mark. Remember we are about 55% aftermarket. So in the aftermarket segment it's relatively instantaneously. As a matter of fact in some instances we have what we call core parts which we exchange with railroads, say for example. They send us an old brake valve and we already have one ready to go. So that's instantaneous. In the OE market, again, it can vary. On a freight car it's relatively quickly. We will get an order and we will probably get it out within 30 days. Transit, obviously, has a much longer lead time, that can be a lead time of up to two or three years.

So it's not like you get the orders now and you've increased the price to reflect the higher steel cost and if we wait long enough it will just show through? You are just not able to even price it through at today's prices?

Well, what we've tried to do with steel and we've discussed this in the past and again to be fair, we've met with not, mixed success not as much success as we'd liked, is what we tried to do is institute a surcharge or -- we have done -- is institute a surcharge based on changes in the index. And so when we ship out the part we will include a surcharge based again on the change in the metallurgical index. We've collected some. Some we've actually had longer term contracts where we couldn't and the customer resisted. But in general that's how we try to deal with it.

So is there a point in time when some of these longer term contracts role off and you will have better luck in getting a higher pass through?

We are more or less waiting for contracts to roll all. It's really kind of continuing to work through our sales force to deal with the customer and as the customer has an opportunity to move their pricing then we move with them.

Okay. Are they going to let you know when that happens?

Well, we have a pretty good idea. We have -- our customer list, we are pretty close with. And we -- the answer is, we try to monitor as much as we can in terms of understanding where they are and, therefore, where we can go. We always have that competitive situation where we have another supplier out there and we have to deal with that as well. But we continue to work this thing and we are making progress.

Okay. And then just -- I didn't get these numbers, I'm kind of late to the game, but do you have the industry freight car shipments for last year and is there a current forecast for them for this year?

In terms of forecasts, the guidance that we've given I think is 55,000 freight cars delivered for this year, about 1100 locomotives. How many transit cars, Tim, about 660? It's about 700 of transit cars I think is the guidance we've given. In terms of freight cars there's an outfit called WEFA that does provide guidance as well that's right there in New York. In terms of deliveries I think during the current quarter they delivered about 15.7 freight cars and in the order rate was approximately -- I think it was slightly higher than that. [multiple speakers]. About 17 or 18.

What was that number? Again --?

It was about -- the order rate was about 17. The delivery rate was 15,700, for the quarter.

And these are published by an outfit called the American Rail Car Institute or ARCI for short, and I do believe they have a website where you can obtain this updated information as well. Yet orders were 17,563, and deliveries were 15,781, and the backlog increased to 59,416.

From what?

[multiple speakers]. Well, it went up probably almost 2,000 because orders exceeded delivery.

It went up a little over a 1,000.

Yes, it was about 1500.

Okay. Thank you.

Sure, Mark.

Gentlemen, there are no questions at this time. Would you like me to repeat the instructions once more?

Yes, would you please?

Sure, no problem. [OPERATOR INSTRUCTIONS]. And we have another question from Steven McBoyle of Lord Abbott.

Yes, thank you. Just with regards to the ongoing restructuring and recognizing this is pay-as-you-go in multi-quarter. Any sense as to what the aggregate dollar amount may be over a reasonable period of time?

Well, we have seen that we felt that we should -- our gross margins were over 30% in 1999. And we have said that over a period of quarters and maybe two or three years that we would like to see those numbers revisited. So you can say that we wanted to improve them a couple of gross margin points a year as we go forward. That's really what we've said.

And in terms of the actual restructuring expense, Steve, what we basically said, like you said it's going to be pay-as-you-go and it is included in our guidance of $1.10. In terms of the individual magnitude of the restructuring expenses there is a lot of individual issues involved with that and that's why we will say well, we will give the guidance as we go along rather than upfront. And we prefer to keep it that way.

Okay. Thank you very much.

Our next question comes from Mitch Golden of RH Capital.

Hi, gentlemen, I was wondering if you could just talk a little bit generally about your capacity and utilization rates and your ability to ramp, assuming we do see continued strength both in the OEM and the aftermarket business? For your business, and then secondary --. [multiple speakers].

We have delivered at the rate of 76,000 freight cars in the last peak, 1999. We are also -- we believe in lien, we believe in the [Toyota] production system. And so our view is that we size our business to fit the tack time or that is the rate of which the customer is buying. And so, therefore, capacity for us is -- should be really the order rate that we get from the customer. If that of course goes up substantially we'll require some expansion of capacity, but we are pretty good at upsizing and we are pretty good at downsizing. And that's what lien companies do.

Related but not the same question is, I was recently meeting with one of the customers for you and other companies and they talked about constraints from their suppliers, not from you, but some other ones in the industry last year that affected their build and deliveries. And I was wondering if you could talk about if there may be other constraints or whether those have been resolved for components for freight cars?

I think there still are some constraints, although, they have improved somewhat over last year. There is as I understand it there are some constraints in some components, not in the components that we provide. You're correct about that. I would like to see mentioned kind of an orderly process in this industry, although, it's impossible to order it that way. I mean I would like to see us build at a consistent rate if it's going to be 14,000 a quarter or 15,000 a quarter I would like to see us be steady at that rather than ramp up to fulfill a backlog and then run through the backlog and then have a downward cycle. So in some ways this governor that the industry has in terms of some component shortages is not all bad, particularly if you are not the guy causing the shortage.

Right. I'm just curious if you think that those shortages get fixed? I just have one other company that was actually recently purchased and there may be some more capacity for some of these components. I assume that can lead to even higher --?

Over time capacity constraints get fixed. So I would anticipate that they are getting better and, in fact, constraining elements from the first quarter of last year, certainly had been improved from the first quarter of this year because there was an uptick in delivery. So these things do get fixed over time.

Thank you.

Sure.

[OPERATOR INSTRUCTIONS]. Gentlemen, it doesn't look like there are any other questions at this time.

Okay. Well, Jennifer, thank you very much. And I thank everybody for joining us. We will see you in 90 days.

Great. Thank you everybody.

Bye-bye.