美國西屋制動公司 (WAB) 2005 Q3 法說會逐字稿

Hello and welcome to the Wabtec Corporation third quarter 2005 earnings results conference call. (Operator instructions) I would like to turn the conference over to William Kassling, Chairman of the Board, President and CEO. Please go ahead, sir.

Thank you, Camille (ph), and welcome, everybody, to the call. Joining me on the call today is Alvaro Garcia-Tunon, our chief financial officer. He's joining us from a remote location, which is good because it's 37 degrees and snow flurries here in Wilmerding, and Tim Wesley, our vice president, investor relations. You have, obviously, seen our announcement this morning. I want to point to our forward-looking statement disclaimers in that press release. I'm going to take some opening - I'll make some opening remarks, I'm going to turn it over to Alvaro and then we'll come back and answer your questions.

First of all, let's talk about third quarter results. We had very strong financial performance in the quarter and this quarter is one which sometimes shows seasonality. This year, we overcame that seasonality, due to the strength of the market and some lift that we're starting to see in our gross margin. Earnings per share of $0.31 is - versus $0.20 a year ago, is a 55% increase on a 26% sales increase. So, we delivered very efficiently to the bottom line on incremental sales.

Our EBITDA in the quarter was 31.9 million. That's versus 17 million a year ago. Alvaro is going to talk about those numbers in more detail. But the key point is we had a strong quarter. And combined with our near-term outlook, this gives us confidence to increase our earnings guidance for the second time this year.

As you saw in our press release, we're now raising our guidance on earnings per diluted share to about $1.15 for '05. That compares to our previous guidance of about $1.10 and our initial guidance as we enter the year of about $1.00. So, our optimism remains strong today and we feel very good about the future in the transit and freight railway equipment markets.

Let's start with the freight market and talk about that and then we'll talk about transit. First of all, in the freight car market, our third quarter orders were slightly higher than 17,000 cars and deliveries were just under 17,000 cars. So, that means the backlog grew for the third straight quarter. It's now at about 61,000 cars and that's the highest number we've experienced in the past four quarters. So, business continues to be good on the freight car side.

We're seeing a mix of car orders shift a little, but for us that's irrelevant because it's pretty much we sell the same type of equipment when it comes to whatever car type out there. Now, some are a little stronger, some a little weaker, but overall, we put brake systems on any type of car that's out there. The locomotive order book continues to be strong. Railroads are power short and lease fleets are operating at high utilization rates and that bodes well for really this year and next. We're looking for around 1,200 locomotive units delivered this year and we think '06 will be another very good year as well.

Let me talk about the freight aftermarket. The freight aftermarket, as you know, is dependent on rail traffic and usage of equipment. Rail traffic continues to grow. Year-to-date car loadings are up 1% and intermodal is up 6%. In the most recent week, intermodal was up 8% and set a weekly record. So, we're seeing continued strength in intermodal, which is, if not now, will soon be the largest segment of railroading in North America. As traffic continues to grow, the railroads are running their equipment harder and that means more spending on maintenance and repairs for us. With the aftermarket representing about two-thirds of our freight group, that's a positive trend for Wabtec.

Now, let's talk about transit. The biggest news in transit particularly in the quarter is the new Federal Transportation Funding Bill, which was finally signed - passed and signed during the quarter after being delayed for over two years. We know municipalities rely primarily on that funding for new equipment spending. So, some projects were delayed up until now due to funding uncertainties.

Now that the bill is passed, we're starting to see some of those projects being dusted off and brought to the market once again. It's a long, slow process in most cases, but it's still a positive force in the market. The funding bill provides about 8.6 billion for transit projects in the fiscal year '06 - about 13% more than 2005. And the funding increases beyond that will average about 6% annually through 2009.

Another positive trend in the transit market is ridership, which increased about 2% in the second quarter, our most recent data that was published. And with the high cost of gasoline and a reasonably strong economy, it looks like ridership should continue to grow. More riders means higher fare box revenues, which municipalities use for operating expenses and maintaining their existing equipment. And this eventually translates into more aftermarket spending for our products and services.

Let me give you an update on the R-160, which is the contract to provide New York City in their new transit car program. Our portion is about $250 million worth of components for new subway cars. We're still expecting sales to begin ramping up in 2006 and they are delayed from where we were. We expected to see some uplift in the past around - in the late '05. Now, we'll be into '06. And delays are common in this - with these new large contracts. It looks like one of the car builders, Kawasaki, is on schedule. The other, Alstrom, is probably a little bit behind. But again, that's to be expected.

Let me spend a minute and talk about our strategic growth initiatives, as we've been talking about this quarter to quarter for quite some time now. These programs, we believe, give Wabtec an avenue for growth in addition to the current cyclical rebound in the North American freight rail market. First of all, one of our CSOs is international growth. In the third quarter, our non-NAFTA sales, that's outside North America, even if you want to exclude the CoFren acquisition, grew 32%. So, that's a good bit faster than the corporate total.

As a percentage of total, non-NAFTA sales were 26% in the third quarter of this year versus 22% in the year-ago quarter. So, we're making good progress on the international side. We're seeing strong international sales on electronics and freight braking components. Also during the quarter, we renewed an 80-year license agreement with our two Japanese partners. This agreement will help us to continue to pursue projects in places such as Taiwan and China, which are growing rail markets.

Now, let's talk about aftermarket sales growth as a corporate strategic objective. We're seeing very solid growth here. Aftermarket sales is 26% higher in this quarter versus the year-ago quarter. And our 50-60% of total aftermarket, as a percentage of total sales, is staying in - holding up quite well despite a growth in the OE market. So, we're keeping pace in the aftermarket with the growth we've experienced in OE, which is good.

A third leg of our strategy is to develop new products and we continue to make a lot of progress here. And the first thing I'd like to talk about is, obviously, our ETMS project with the Burlington Northern. That's Electronic Train Management System. We've - we have a pilot going with the Burlington Northern Santa Fe and we've completed about 1,300 runs error free. And these trains continue to run error free every day going forward. And that was the hurdle that we needed to have for the Burlington Northern to feel that they had a go project. So, we've been now working with the BNSF to put together a product safety plan that we expect to submit to the FRA for their approval to allow a greater expansion of these ETMS programs.

Now, the BNSF really believes that this ETMS product will play a key role in its plan to go to one-man crews. Certainly, we and the Burlington Northern are talking to other Class 1 railroads about similar ETMS products - or projects and pilots. So, this is, I think, going very, very well.

Secondly, we won an order to build 53 new commuter locomotives including options for GO Transit. With options, that project is over - is $217 million. Five years ago, we didn't have a commuter locomotive product. But since then, we've delivered them to commuter railroads in Illinois, California and New Mexico. This is a proven product and we feel very confident about this new order as being a profitable and low risk one for us.

We're also beginning to sell centered (ph) brake shoes in NAFTA, thanks to our CoFren acquisition. So, an acquisition in continental Europe is having synergistic effect in terms of selling products into North America, which is exactly what we intended to do when we bought that business.

Now, talking about the operating side and our strategic objectives and that really is the lean manufacturing principles or what we call our Performance First business system. This is our strategy to improve margins, productivity and efficiency. We're attacking this from really three fronts - strategic pricing - that is raising prices in areas where we have an advantage, sourcing - that is going to lower cost sources, and using traditional lean tools to improve our internal value added productivity. In this strong market, we've been able to sustain some price increases and our sourcing programs are well underway and beginning to show results. Although we really believe the best is yet to come.

We're using the sourcing programs in combination with other lean tools to restructure underperforming operations and increase margins. And you saw some evidence of that in the - in our third quarter performance in that our margins - gross margins were up over a percentage point from prior quarter and prior year. So, we're starting to see these programs roll out and that makes us feel good about them.

Let me talk about another opportunity, which is a locomotive modules contract that we had discussed in prior quarters. Another reason our gross margin improved in the quarter is that we've been improving the performance of our contract to improve our productivity on these locomotive modules for EMD. These are locomotive cabs and they're really built as a standalone unit. They include electronics, air brake controls and radiators. These components come from various Wabtec subsidiaries with final assembly at our locomotive plant in Boise and then are really essentially welded in directly to the EMD locomotive.

It is a strategic contract for us because we've been increasing our locomotive component content substantially and we're building OEM market share through this process by feeding in our own products into a cab module. And it helps to increase our aftermarket going forward. We mentioned in the first two quarter reports that we observed startup losses on the contract in the first half. We said our goal was to work internally and with our customer to make this a profitable contract in the second half. And I'm pleased to say we're on target to meet that goal.

Now, with all that said, let me turn it over to Alvaro and he can go through the numbers. Alvaro?

Great. Thanks, Bill. As Bill said at the outset, our financial results for the quarter were quite strong. Sales were 26% higher than the prior year quarter. Freight group sales, in particular, increased by 37%, mainly due to higher sales of freight car and locomotive components in North America, the CoFren acquisition, which needs to be factored in and the locomotive modules contract, which we didn't have too much activity in last year.

Transit group sales were down slightly - about 2% - and this was primarily due to delays in some OE projects. In relation to gross margins, which we do have a meaningful improvement during the quarter, as Bill said, we're beginning to show progress here, but we still have a lot of room to improve and we realize that. Gross margin was 26.2 in the quarter versus 24.6 in the year-ago quarter and 24.9 in the second quarter of this year. The benefits of this improvement is evidenced in our results. Our gross profit and operating profit was about the same in the second quarter of this year, even though sales were about 14 million lower due to seasonality.

There are several reasons for the increase in margin. Bill touched on them. I'll touch on them again - higher sales compared to the year-ago quarter, which do give us some operating leverage in our units. Obviously, we're taking actions to increase prices and lower raw materials cost. We discussed those before and we'll continue to discuss them. And the improved operating performance of the locomotive modules contract, which Bill just touched on, which we said would turn around in the second half of this year and, indeed, is doing so.

Operating expenses - SG&A - were 1% lower in the current quarter, but you really have to make a couple of adjustments in the numbers for a more relevant comparison. SG&A, again, was about the same, but the '04 quarter included 3.2 million for a litigation charge. If you exclude that expense, then SG&A was higher this year, but this was due mainly to the addition of CoFren, again, our Italian friction subsidiary, and Wabtec higher sales. When you take a look at our run rate and you compare it to the last quarter, you'll see that both quarters are relatively constant.

Interest expense decreased to 2.2 million, reflecting lower debt level and higher interest income on our cash balances - our increasing cash balances. And other expense increased to 1.2 million, mainly due to foreign exchange losses on basically - on what I would categorize as non-economic, basically paper foreign exchange adjustments.

Income tax expense during the quarter accrued at 35.3%. We normally expect our rate to fluctuate somewhere between 35-36.5. So, this was certainly in the normal range. When you do the comparison, you should note that in last year's third quarter, in '04 third quarter, we recorded a tax benefit of 4.9 million after resolving certain tax issues from prior years. And that does have an effect on a comparison.

Cash continues to grow. Our cash balance increased by about 9.2 million since the end of the second quarter. This reflects strong cash generation by our operations as well as some cash from stock options exercised during the quarter. Debt net of cash continues to decrease. It's at about 44.2 million now or 11% of total capital, compared to 53.4 million or 13% of total capital at June 30, '05, the end of the last quarter.

Speaking of cash, one of the questions we get asked frequently is what are we going to do with the cash? As we've said in the past, one of the possible uses of cash is for acquisitions and that continues to be something we look at. We set no timetable for making acquisitions, but we do have opportunities and we continue to explore them. Basically, we're looking for acquisitions that would reduce the impact of the North American freight cycle, give us sales opportunities in new markets and contain cost saving potential. We're being disciplined and highly selective. And as we develop these opportunities, we'll announce them.

Getting to the tail end of the numbers, depreciation for the period was 5.3 million versus 5.9 million last year. Amortization was 918,000 versus 771,000, so basically, a small amount. The increase in the amort was due to the addition of CoFren. And CapEx for the quarter were 4 million versus 4.7 million last year.

In terms of backlog, which again we don't like to emphasize too much because it's not as meaningful in our aftermarket driven business, but the aftermarket - I'm sorry - the backlog was basically flat, a little down, at 392 million versus 407 million at June 30 of this year. The freight backlog was about the same - 267 million versus 271 million at June 30. The transit backlog down slightly - 125 million versus 136 million at June 30.

One thing I'd add here is when we disclosed this backlog, this is backlog deliverable in the next 12 months. The recent GO Transit order, which we announced and which Bill mentioned earlier - we only have about $10 million in our transit backlog for that right now because the delivery of that is just going to start in the 11th or 12th month from now. And a large chunk of that then will be delivered thereafter.

And that pretty much wraps up the number. Bill, I'll turn it over to you for a summary and Q&A.

Thanks, Alvaro. Once again, our third quarter performance was strong. It really gives us confidence to raise our earnings guidance for the year to about $1.15 per share. We've demonstrated very good progress on improving margins. This is a good quarter for that. Certainly, we have a lot of work to do to keep moving those margins up to where they have been historically. Our industry demand is strong and it looks like things are going to stay that way for awhile. And we continue to make progress on our strategic growth initiatives.

So, with that, I'm going to turn it back over to Camille for our question-and-answer session. Hold on just a minute.

Yes, sir. Are we ready for questions?

We are.

(Operator instructions) Our first question comes from Wendy Caplan from Wachovia Securities. Please go ahead.

Thanks. Good morning.

Good morning, Wendy.

If we could talk about the gross margin a little more, please. It was particularly strong in the quarter and better than we had thought. Can you talk about the sustainability of that level? What has to happen in terms of the top line to keep the gross margin above the 26%? And you referred several times to more opportunities on the cost side. How are you thinking about that at this point in terms of over the next, say, 12 months? And finally, can you tease out for us how much of the gross margin improvement was operating leverage, what the price versus material cost gap is and how much the locomotive module turning positive was impacted.

Okay. Alvaro is in a remote location. Let me respond first, Alvaro, and then ...

Yes. And then I can cover the tail end of that, Bill.

Okay. Good. Relative to the gross margin improvement and the legs it has going forward, the leverage came from really three areas. It came from, certainly, the startup and ratcheting up of our strategic sourcing initiatives. It takes well - slightly over a year to get these initiatives really rolling into the pipeline. You have to qualify components. You have to go through a whole process of ensuring the quality is what it needs to be.

And those programs are just starting to roll out. It comes from internal productivity programs and I don't want to use the term restructuring, but really organizing to be very efficient. And those programs, again, are just starting to roll out and it comes from, of course, the locomotive modules contract, where we absorbed some startup problems - not problems. Some startup experience, if you will, in the first two quarters, which we see performing as we had felt they would as we go into the second half. So, we're much better there.

So, all three of those contribute. Certainly, the going forward contribution will come from the internal initiatives, which we really didn't talk about much this quarter, but are still in the pipeline to be accomplished, as well as the sourcing, which is really now starting to gain momentum. So, we feel very good about seeing this initial step along the way toward more traditional growth margins and we do think this will have some legs. Alvaro, do you want to answer the question about operating leverage?

Sure. I think you really asked two questions Wendy, if I got it right; one about operating leverage and then costs in the material gap. And I guess there are various factors that are affecting, really, our cost of sales. And we do attempt to quantify them, but in the end, I think the proof in the pudding is whether overall gross margins went up or down.

The factors that affect us on the negative side are Canadian FX which we have discussed before, the Canadian dollar getting stronger and we do have operations in Canada this is affecting. Steel continues to be an issue, although a minor issue. We are getting hit with some now oil/gas price surcharges. Those are mainly on the down side. On the plus side are the initiatives that we have talked about before, pricing, increased benefits from sourcing, and our QPS efforts and then you can add the increased sales on top of that.

We try and measure all those, but in the end, again, it is pretty tough especially like, how do you measure a QPS effort. And it can even be difficult to measure benefits from sourcing because you have different part numbers and it is difficult to capture. But we do try and the results that we generate internally show that during the year we have made progress in all three fronts, pricing, sourcing and QPS. We believe there is still more benefits to come from really all three.

QPS without belaboring the point is continuous improvement effort and we have shown the results that you can generate from that in the past and they are incremental, it is not a big bang. Pricing, especially in freight we were tied into some agreements but they are due to expire during this year and some during the early part of next year. And we think we do have some more flexibility on price. And sourcing, we are really just beginning, it takes us a while especially with our castings tend to be relatively complex and those are the main items that we are trying to source first. And so it takes a while to find the right vendor, to qualify them, to review the parts, to make sure they meet our standards and to get the production going. So, we do think we have momentum in all three and that will continue in the future. This is just kind of hard to say how much is which.

Thanks a lot that was helpful.

Next question, please. Do we have any more questions?

Let me see if I have - - let me see if I have - -

Sir, there is Art Hatfield from Morgan Keegan and Company. Sir you may - - I think he has his line on mute, sir.

No, I don't.

Okay.

I'm fine, thank you. Thanks guys, hey, great quarter, just a couple of questions. First, on the productivity programs you guys have been talking about all year. Could you address whether or not that - - you had any one time expenses related to that in the quarter with those programs?

And secondly, can you talk a little bit and I know you're not in the position to give guidance for next year, but kind of talk about your comfort level for seeing some growth on the freight side of your business on the revenue line in 2006?

Well, I'll respond first and then let Alvaro clean up any mistakes I might make.

No, I don't think so.

But, essentially your question was one-time charges. We have said in our efforts to rationalize, if you will, production and improve our margins, we would go on a pay as you go basis. And so that is the way we have done it. We take those costs contemporaneously with changes. In the quarter we didn't really have much. We are still in a positioning phase for a lot of this stuff, but as we -- as it does roll out and whatever charges there are will be encompassed in the actual results as they are -- as they come out.

Okay. And on the revenue growth for...

Yes, you are right about guidance, we don't -- we are not -- our process is that we have to go through an operating plan process through -- close to the end of the year and then we talk to our board of directors and we adopt an official direction, if you will. And we are not - we are at the very preliminary stages of that. But if you ask me, do I feel good about how things feel as we look out to '06, certainly our markets are continuing strong, these backlog numbers and these orders that we are receiving on the transit side, make us feel pretty good about the future. So, we feel very comfortable where we are and where we are going and where we are in the cycle.

We know that energy costs have the impact of biasing people toward using rail more. And just the intermodal number that we decided in the first part of this which was the quarter last week, uptick and the overall growth in intermodal over and above some significant growth in the last two or three years has to make you feel that this railway cycle has quite a ways to go.

Right, thank you.

All right, Art.

Our next question comes from Adam Thalhimer from BB&T Capital Market, please go ahead.

Close enough, thanks a lot, good morning guys.

I have the same problem as well Adam, so.

First of all I just wanted to start off, I know you guys have been conservative on guidance all year long and remain to be somewhat conservative, I guesss, in our view. That being said, Q4 typically if you look over the last 5 years has been your strongest quarter, I think in four out of the five. And given your guidance it looks like you'll be looking for a sequential drop in EPS, not much, but two or three pennies. Is there anything that we are missing, we need to be aware of in terms of revenue recognition, anything like that that is not out there that we need to know about?

What you are saying is that, in order to get to about $1.15 we would have to have a small -- a weaker fourth quarter?

Well, sure, I mean a weaker fourth quarter than the Street is looking for and a weaker fourth quarter than you have sequentially -- or that you have seasonally had if you look over the past 5 years.

Yes, well, you know I would say that if we do in the $0.30 range, low thirties which given the fact that the momentum is there in the business we think the guidance we have talked about at about $1.15 is prudent. You are correct that we like to be in this world -- we live in an uncertain world and you have to be conservative because of potential surprises, but we don't have anything specific in the fourth quarter that is hanging out there that gives us any concern at this time.

Okay, great. Moving along, are you guys buying back any stock right now?

We haven't.

You haven't.

No.

Is that something that you look at now that the cash continues to pile up and...

I'll let Alvaro answer that.

Yes, let me try and take a stab at that if I could, Adam, because that is one thing -- one that we get continually asked and two, we get asked not just by you but by our board and other stake holders and we continually look at that. And what we have said, you can do the numbers, we've done the numbers. If you compare the benefits of a stock buyback versus what we can do with a typical acquisition, we think the results are compelling towards the case for an acquisition if executed properly.

And so what we are going to try and do is give ourselves a couple of years and see if we can find the right acquisitions. We found the last one has been CoFren, which has been doing very, very well and which we are very pleased with. And if we can find additional candidates like that, then I think long-term we are much better off growing the company than buying back shares, then I think the financial results will show that.

If in a couple of years, let's say, we haven't been able to find the quality candidates that we are looking for, then we really will evaluate all our alternatives including the stock buyback. And like I said that is something that we discuss every board meeting and we keep the board up to date on that. So it is a frequently asked question, but that is our strategy right now.

Okay, that being said, I guess two follow-up questions from that, number one is as you look at acquisitions what is the biggest sticking point right now, is it price or something else? And then number two, I guess the reason I asked about the share buybacks was also just because we just continue to see the share count tick up here, it looks like '05 will end with the diluted share count of about 2 million higher, is that something we should continue to forecast going forward given the options that are out there.

Yes, the answer to the second one first just because that is just a little bit easier, we do have people exercising options and we do issue them out of treasury. We don't buyback the options shares. We have thought about it but again, in the end, when you take a look at the numbers, the cases is quite compelling. And so, I think that could continue, although I think at a decreasing pace. You will see some blips, you will see some temporary blips up and down, but mostly we think at a hopefully decreasing pace.

In terms of the acquisitions right now, they are being priced pretty richly. There are still some out there, and we have a couple under review that we think may be within our price. But really, what we are really looking for more than price is quality. We want acquisitions that will help to diversify us outside the more cyclical North American freight market. An international acquisition would be ideal. But certainly an acquisition of a company that has high after market sales would certainly fit that criteria.

We want acquisitions like CoFren, where we can take some of their technology, some of their knowledge base and apply them to other territories and other segments of our operations and increase sales. We want acquisitions that where hopefully, there is some cost cutting opportunities. And to be honest with you it is hard to find acquisitions that meet that criteria, but we are determined to find them, or if not then do something else with the cash. We don't want to, in essence, spend the cash on a bad acquisition, we don't think that would help anybody.

What he is saying, Adam is that we have to have discipline.

Okay, that's very good. One thing you mentioned in your commentary you mentioned that you saw a shift, a mix shift in freight car types on the OEM side, can you just elaborate on that?

I think we have seen -- we know that the coal order rate is very good and intermodal is very good. Going into next year, the question is whether TTX is going to place more orders for intermodal cars. As of this point they have not placed those orders, so we are looking at that very, very carefully. To the extent intermodal continues -- I mean intermodal growth was slowing a bit, but this last week, which certainly doesn't make a year, started a little uptick, might drive the utilization rates or continue to keep those utilization rates for intermodal high; and could bode well for future orders there.

But the mix shift that concerns us going forward is whether intermodal -- whether TTX will come in with a big order. They do tend to wait until the last minute. They are owned by six major railroads and they, really, kind of sit on the sidelines and then they come in big.

Maybe...

That would be the mix shift we are noting.

Maybe something -- they might do something before the end of '05 or not out maybe not until the first half of the...

You know, with the backlog as it is, they would -- I can't tell you when, I don't know when they will make those decisions, it could be the end of this year, it could be next year. And I think they are watching their utilization factors very, very carefully. There has been a big flood of intermodal delivered in the last 12 months and the question is will the fleet continue to be utilized. If it is, you could expect then that TTX would reenter the market. But I don't have any real insight as to how their process works. But the mix shift I referred to was intermodal.

Okay, final question here and I will turn it over. The GO Transit, that is first time I've heard -- is that a new win that you are first introducing today?

Well, we have done business with GO Transit it is really just the people moving, the Canadian entity and we have done business with them for years. In this particular case, the new part of this is our brand new commuter locomotive, they really like that locomotive and so this is a big win, it is the first win for us in commuter locomotives for GO Transit.

Excuse me Bill, I don't know -- Adam was you question is if we just announcing it today or if we had a previous release --

Oh, we had a previous release.

Yes, early October, earlier this month.

Yes, we had a previous release, I don't know if you are on our email list, if not please contact Tim and he will make sure you are on it. But we released it earlier this month.

Okay, so that is really an '07 event?

Yes, it is a three year event starting in - -

Yes, it will start in '06, like I said in our 12 month backlog we have 10 out of the initial 100 some in revenues we expect. So it will be late '06 and really gain traction in '07.

Great, thanks for your time, guys.

Sure.

Our next question comes from Roy Smith from Equant (ph) Capital, please go ahead.

Hey guys, good morning.

Good morning.

Three questions, first on the freight side of business, one of the areas that you have been focused on is the fact that GM has taken their subsidiary private, maybe if you all could talk a little bit about there, if you all have made any progress on that front?

Progress with GM in what way?

In terms of sales into them?

Yes, the locomotive modules contract is the EMD initiative and so that is a major inroad into EMD and as a newly formed private company. And we are currently providing to their line a completely assembled locomotive cab, fully wired, with all the brackets for whatever the railroad wants to hang their paperwork on it. And it gets welded into place into a platform and delivered. So, this is quite an initiative for us that we were working on for some time and of course, started up in the first half of '05, given the new locomotive platform that both builders had to offer in order to meet the emissions requirement, more stringent emissions requirement. They both designed locomotives; we got a very good position on the EMD module.

Gotcha. And I apologize, is this also -- does this also include the compressors as well?

We do not have compressors on EMD; it is an initiative that we are working on. They are -- they have a water-cooled compressor and we have produced historically air-cooled but we are obviously working on that as an opportunity.

And I guess that was really where my question was on the compressor side.

Oh, okay, we have not at this time make endroads into the EMD compressor business.

But you all still consider that an opportunity?

Absolutely.

Okay, terrific. On the transit side, we talked a little bit about the delays in projects. Maybe just help me understand your visibility and do you see some of these delays correcting themselves here in the fourth quarter? Or how are you all looking at that?

Well, specifically I mentioned R160 and there are two suppliers, Kawasaki and Alstrom. And Kawasaki is pretty much on schedule and Alstrom is a little bit behind schedule. We -- on these large projects, typically the startup is a little slower. What happens is customers like New York City are tough customers and so they demand a certain number of error free runs before they will accept volume deliveries of products. And New York City is currently going through that process with these two suppliers. It does, typically, major projects of this kind you can view to be on average 6 to 9 months beyond their initial schedule.

Okay.

What happens is these guys negotiate until the last minute, probably beyond the last minute and then they award. And so already the car builder starts a little behind schedule and the idea is that they will always make it up, but, it is very difficult to do.

Gotcha. Okay. And then the last question is two areas, the BNI situation which you made mention about the 1,300 error free runs. It sounds like you are getting close to finalizing the testing there and how are you looking at that for next year? And then the other question on the inventory management product that you have specifically with CSX, if you are seeing anymore opportunities out there in the marketplace.

I will respond to both. First of all on ETMS we are working with the BNSF as well as other railroads to do more pilots. The FRA is pushing railroads to improve their safety and this is a safety enhancement for them. The BNSF looks at this as an opportunity not only for safer more productive runs, but also leverage for them to get to a one man crew. That gives them a payback, if you will, of definitive bottom line payback to these initiatives.

They are going through their capital budgeting process just we are going through our operating planning process. So, as we get closer to the end of the year they will have better visibility about what the BNSF is going to do about rolling out this pilot more broadly and we will certainly have better knowledge relative to other railroads about starting up and having pilots. So, we are awaiting news, just like you might be. And hopefully we will have more to report in subsequent quarters.

Relative to our wireless aftermarket replenishment system, we are -- we have, yes, gotten a contract at the CSX and we are working with other suppliers as well. This is a great product, it allows -- you know, there are thousands of points of use for replacing defective parts on freight cars and locomotives. And our system, which we acquired a few years ago, is adept at sensing when anywhere on the railroad something is -- a component, an air brake valve is taken off and a new one put on. it will trigger an order automatically upstream and it really improves the supply chain immensely; cutting out all the intermediate warehousing steps. And that is why CSX bought this and we think it has application on every railroad. So, we are actively promoting this product and it does provide as you might expect, once you have that system set up and running, it does provide some insulation for you to continue to get the business as opposed to having someone come in and outbid us, if you will, for those components.

Gotcha. So in terms of new contracts with some of the other class 1 guys, there is really no news there?

No, but as we are successful we will make announcements.

Terrific, thanks a lot guys.

Our next question comes from Art Hatfield from Morgan Keegan, go ahead.

Hey guys, just a quick follow, I must have missed this, but Alvaro did you give the backlog numbers?

Yes, I can give them to you again; Art, just a second and I'll find them in my notes here. Let's see, overall backlog was 392 at the end of this quarter versus 407 at the end of June 30. Freight was about the same, it was pretty flat; 267 versus 271 at June 30. Transit was down slightly 125 versus 136 at June 30. And the transit number does include 10 million for GO Transit, the base contract was 112, but we'll only deliver 12, I'm sorry, we''ll deliver 10 in the next months and then the balance in really late, starting in '07 as Adam and us were discussing.

Well, does that mean when you report revenues from the GO Transit contract it will show up in transit revenue?

Yes, that should show up in transit, correct.

But those locomotives are being built in Boise?

They are being built in Boise.

Okay, thanks.

[Operator instructions] At this time, there seems to be no further questions.

Okay, well, again, great quarter and we are looking forward to being back with you here and talk about year end results in sometime around mid February. Thank you very much.