美國西屋制動公司 (WAB) 2006 Q3 法說會逐字稿

Hello and welcome to the Wabtec Corporation Third Quarter 2006 Earnings Results Conference Call. [OPERATOR INSTRUCTIONS] At this time I would like to turn over the call to Tim Wesley. Mr. Wesley?

Thank you, Keith. Good morning everyone and welcome to our call. I'd like to introduce the rest of the Wabtec team who are on the call, our President and CEO Al Neupaver, our CFO Alvaro Garcia-Tunon, and Pat Dugan our Corporate Controller.

As usual, we will have some prepared remarks and then we will be happy to take your questions. Of course during the call, we will make some forward-looking statements so we ask that you please review today's press release for the appropriate disclaimers. With that, I'll turn the call over to Al Neupaver, our President and CEO. Al?

Yes. Thank you, Tim. Good morning everyone. What I plan to cover is a review of the third quarter, our current market conditions and our outlook, talk a little bit about the Schaefer Equipment acquisition, as well, then I'll have Alvaro cover the numbers in more detail. Afterwards, we'll take some questions.

In the third quarter we had a strong financial performance with sales and earnings growth and a continued strong cash flow. Earnings per share of $0.35 included $0.09 for a previously announced restructuring plan. Excluding restructuring, earnings per share was $0.44; that's a 42% higher number than a year ago quarter. We had a strong quarter and our near-term outlook is equally strong. This gives us confidence to increase our full-year earnings guidance. We are raising EPS guidance to between a $1.70 and $1.73 excluding restructuring expenses. This is compared to a previous guidance of about $1.60.

In addition, we're issuing full-year sales guidance of between $1.06 billion to $1.70 billion. The business is strong and we continue to look forward to the future with optimism.

Let's talk about the freight market first. Rail traffic continues to be strong. Revenue ton miles is up 3% year-to-date. Intermodal traffic is very strong, up 6% year year-to-date. The railroad financials are good. The locomotive OEM market is tracking as planned with about 1,200 units to be produced this year. The freight rail car OEM market continues to be strong. Year-to-date car deliveries are up 12% and deliveries in the third quarter topped 19,000 for the second straight quarter. Third quarter car orders come in a little over 21,000' that's 18% higher than second quarter and bodes well for future business. The backlog is holding steady at about 88,000 units. This is the highest it's been since the 70's, so all the market dynamics remain positive.

Wabtec has certainly benefited from the strong freight car market. Our freight group sales are up 6% year-to-date. This compares to the 12% growth in rail car deliveries. Although rail car deliveries are a good indicator of market activity for Wabtec, only about one-third of our freight group sales are directly related to that market sector. Also, there is a timing difference between when we ship components and when cars are delivered.

Our transit business is strengthening and actually it is coming in a lot quicker than we anticipated. The key market drivers in transit - federal funding and passenger ridership - they remain positive. Federal spending is expected to increase on average of about 8% annually. Ridership is increasing more than 3% this year and a double-digit pace in cities such as Los Angeles and New York. During the third quarter, we began to see an overall sales mix shift with transit representing 33% of total sales. This compares to 28% in the first half of the year. We expect that trend to continue with fourth quarter transit sales increasing a few more percentage points.

As you know, our margins in freight are better than they are in transit. So our product mix shift toward transit, we will see some pressure on margins which is evident in the third quarter. This mix shift impacted our gross margins by about 1% compared to the second quarter of this year. Our goal is to minimize this impact on margins and work to drive our consolidated operating margins higher. So far this year, operating margins in transit have improved each quarter driven by higher sales and internal actions such as sourcing and Lean manufacturing. We expect that trend to continue.

Our order book was strong in the third quarter as backlog increased 7% compared to the second quarter. Some of the items, large items that we booked, our UK units signed a $27 million contract to refurbish passenger cars for high-speed trains in London; we received an $8 million order from New Jersey Transit to rebuild five switcher locomotives; we began the ETMS installation at Union Pacific and we renewed a five-year maintenance contract with Utah Railway. We currently have a backlog of greater than $1 billion of which half will ship in the next 12 months with the balance scheduled to ship over the next few years. 75% of that backlog is in transit which is a normal percentage due to the long-term nature of the contracts in that area.

Early this month we completed our first acquisition of the year by purchasing Schaefer Equipment for $36 million in cash. Schaefer makes brake rigging components for freight cars. It's a market leader with sales of about $30 million and a long history of success of managing through the cycles. They have a very experienced management team and a non-union workforce. It is a good strategic fit. There are two ways to attach the braking equipment on a freight car. Body mounted, the most common method, and the second one is truck mounted. Schaefer makes the body mounted components and Wabtec supplies truck mounted. Now Wabtec is the leader in both types. The numbers work. We'll be accretive immediately. We paid a multiple within our target range. Schaefer has solid margins and we see opportunities to improve them through our Wabtec performance system. As we've said earlier, acquisitions are one of our core growth strategies and Schaefer has many of the characteristics we look for.

We made another acquisition of sorts during the third quarter when we added another member to Wabtec's executive office. I'm speaking about Mark Cox our new VP of Corporate Development. Mark will be responsible for leading our acquisition efforts and reports directly to me. He joins Wabtec after several years in a similar role with the electrical group of Eaton Corporation. He's already been a great addition to our team.

We have not issued any 2007 guidance yet. As we've done in the past we will issue guidance in either December or January after the Board has approved our operating plan for next year. Until then we cannot comment on our expectations beyond this year except to reiterate our long-term financial goal which is to average annual double-digit growth in earnings per diluted share. Our strategy to achieve that goal is to rigorously apply the principles of the Wabtec performance system to generate sufficient cash to invest in our four key areas - global and market expansion, after-market products and services, new products and technology and acquisitions. We are very active in each of these areas and we expect them all to contribute to our growth.

With that, I'll turn it over to Alvaro.

Great. Thanks, Al and good morning everyone and welcome to the call. To emphasize what Al has said, we think we had a good quarter and we continue to believe we have a strong outlook for the future. We had stable sales and earnings growth, continuing strong cash flow which I will talk about a little bit more, a growing backlog and the market dynamics remain positive and in line with our expectations. So we were pleased with the quarter and are very optimistic about the future.

The results included some special items this quarter, so I'll start with those. As expected, and as we previously announced, we recorded a charge in connection with our restructuring plan. The charge was $6.8 million which equates to about $0.09 per diluted share. This was mainly for pension related accounting charges and fixed asset write-downs as we downsized two of our Canadian plants. We expect to book another charge in the first half of next year in accordance with accounting and regulatory guidelines; basically the regulatory authorities in Canada have to approve the actions we've taken, and that final amount is to be decided but it will be lower than this quarter. It will be charged sometime in the first half of next year, we expect. We're still on track for a payment of less than one year on the cash expenses for this plant which is very important to us.

In addition to the restructuring expenses, we also had some other special items this quarter that were higher than usual. We absorbed charges of about $2.2 million for warranty and to write down excess and obsolete inventory. These charges were in excess of what our normal amounts would be on a quarter-to-quarter basis. We also recognized a separate tax benefit of $1.4 million which tended to offset some of those charges that resulted from the expiration of statute of limitations from certain tax issues that we've reserved in prior years.

Sales were 5% higher than prior quarter and actually our highest quarter of the year so far. This was a little better than our expectations. The freight came in pretty much in line with our expectations; transit was a little higher. The transit group did lead the way with a 15% increase due to higher sales of commuter locomotives and after-market parts. The freight group sales increased modestly, about 1%, from last year, in line with normal third quarter expectations as I said earlier as demands remain stable at a high level.

Gross margin was 24.6% but the gross margin includes the special charges that I referred to earlier. Most of the charges were included in the cost of sales. Of the $6.8 million of restructuring, $6.3 million was in cost of sales and all of the $2.2 million of the other charges were in cost of sales. Excluding these items, our gross margin was 27.8% this quarter. This compares favorably to the year ago quarter which was 26.2%. It's slightly lower than the 29% we achieved in the first half of the year and this was due primarily to changing sales mix with the increased transit sales; that does impact gross margins as we talked about before.

Operating expenses were 3% higher than the year ago quarter but pretty much in line with the second quarter and the run rate is very much in line with our expectations in, like I said, the second quarter. The reason for the increase from the prior year was mainly due to recognition of stock based compensation expense under FAS123 and, also, in amortization you'll note in the press release, this includes $500,000 of a goodwill write-down related to the restructuring plan which was recorded an amortization expense rather than cost of sales.

Our operating margin was 9.5% including the special items that we talked about above. Excluding those special items, our operating margin was an adjusted 12.8% in the quarter. Our year-to-date number was 12.9%, so this was consistent with that. Last year in the third quarter, it was 10.7%; so a definite improvement year-over-year.

Interest income, it used to be interest expense but now with our cash balances in the - and the increasing rates - we've actually offset our total interest expense and now we're generating interest income; albeit at a modest level of about $200,000 but this was comparing an expense of $2.2 million last year. Other expenses - not much happening there; they decreased to about $140,000 compared to $1.2 million last year. This was mainly due to a lower FX translation loss in this quarter. Rates were much more stable in this quarter than they have been in the past. Income tax expense was impacted by the favorable resolution of these items that I mentioned earlier. Normally our tax rate is about 35 to 36.5%; this quarter it was about 31%.

We'll talk a little bit about the balance sheet and cash flow. Our cash flow continues to be very strong. Our cash balance which is the way we measure it typically just to keep it very simple, increased by about $8.7 million since the end of the second quarter. That includes the $13.5 million we spent on our stock buy-back which you know is in the press release. So in essence we generated more than $20 million of operating cash flow in the quarter. For the year we've generated about $100 million in cash from operations. So the Company continues to produce strong cash flow. I will remind you, though, that in the early -- in the first quarter of the year and a little bit in the second quarter we had some customer prepayments for some of these long-term contracts. And in essence, we will build up the inventory and eat into that amount a little bit as we go forward. But in this quarter, we've had -- we didn't have any of that so this is all strictly from operations.

Speaking of cash a question we get asked frequently, so we may as well address it here, relates to the future use of cash. And in essence, we will continue to invest in our organic growth strategies which I think you know well, new products, after-market and international, the repurchase -- the stock repurchase program is still in effect, we've not completed that. And obviously acquisitions will remain a priority of use for cash and I think we'll be able to kick that up in a higher gear as we go forward. We've set no timetables for the acquisitions because the pipeline is starting to flow and we continue to explore meaningful opportunities. Obviously we closed Schaefer during the quarter and we're very positive on that acquisition.

In terms of the miscellaneous items just to help you model as we go forward, depreciation was stable at the quarter, $5.5 million versus $5.3 million last year. Amortization was $1.4 million which, again, included about a $.5 million related to the restructuring plan. Last year was about $900,000. CapEx continues in line with our expectations and this quarter was $4½ million, $4.5 million versus $4 million last year.

Backlog continues to grow. The freight car backlog as Al mentioned earlier, is growing and so are our orders. Our rolling 12 month backlog grew by about 7% and our total multi-year, and I'll stress multi-year and then I'll break it down for you, backlog remained over 1 billion. The 12 month backlog, again to update your numbers because I know a lot of you keep track of this, the total 12 month backlog is 484 million, freight is 187 of that and the balance transit is 297 million. The multi-year backlog is about 1.015 billion, freight which again freight is not as backlog sensitive as transit, freight constitutes 245 of that and the balance of transit about 770 million is the remaining.

And with that, I think that concludes the number summary. I'll turn it back over to Al for a wrap-up and then we can do Q&A.

Okay. Thanks, Alvaro. Once again, we had a strong performance; a $0.44 quarter, increased our earnings per share guidance for the second time this year. Our balance sheet and cash flow are strong. Our end markets continue to be positive. I think the diversity of our business model, the diversity of freight and transit, after-market versus OEM, NAFTA versus international, is really serving our Company well. In addition, the Wabtec performance system is providing results. It's an established culture of Lean manufacturing and we have an experienced and dedicated management team. With that, we'll be happy to answer your questions.

Thank you. [OPERATOR INSTRUCTIONS] The first question comes from Jim Lucas at Janney Montgomery Scott.

Thanks. Good morning.

Good morning, Jim. How are you?

All right. Thanks. First question, housekeeping, Alvaro. Operating cash flow year-to-date, do you have that number?

Basically it will be right around $100 million and we'll have the final number when we release the queue but it should be right around $100 million, Jim.

Okay. And regarding --

And, again, just to remind everybody, that does include some of these prepayments that we had earlier in the year which will start to reverse really starting more next year. And we'll keep, we'll keep you updated on how that works.

And with regards to the working capital data, receivable inventory and payables, do you have any of those numbers you can share with us?

Again, I'd rather not share specific numbers until we get the queue out but in general I can give you trends. Accounts receivable, we're doing pretty well on that this year. They're actually down a little bit which is good. Inventory has been one of the things that, to be honest, we think we can do better. We've been a little disappointed in our performance with inventory with the kind of sales increase, modest sales increase, that we're having. We think we can do better in inventory. Inventory is up. It's stable pretty much quarter-to-quarter, third quarter to second quarter; but it's up for the year and that's one thing we're going to work on to see if we can reduce going forward.

And some of that's driven by the advance cash payments which requires us to build inventory especially in the transit area, Jim.

Okay. And circle back on the acquisition side. You've got your first deal under your belt, here, and now you've got a new person on board to help fill the pipeline. One of the things, as outsiders, we're continuing to try and get our arms around are how do you think about acquisitions? You've given the EBITDA multiple ranges that -- of where you're comfortable but in terms of if you look at the strategic [bolt] on versus market differentials, do you think about the return on capital aspect differently in terms of the time frame and the multiples you're willing to go out depending on the type of acquisition? Can you, perhaps, give us a little bit of color there?

Sure, Jim. Acquisitions are a critical part of our growth strategy, as you know. First and foremost the acquisitions that we're looking for are ones that are strategic. Strategic meaning that it will provide us some growth opportunity and it helps dampen that cycle that exists in the marketplace in the rail industry. Some of the financial criteria that we look for - I'll try to be as specific as I can - we're looking for companies that are accretive in the first year. We would like to have the EBITDA model within our range. The upper limit of that range is 7 to 8 times. We require a positive economic profit. And the IRR should be in excess of cost to capital which is estimated about 10%. Once we've gone through the financial hurdles and the strategic hurdles, then we take a very long look at what is going to add long-term value to the business.

Now aspect to the question as what we're looking for and how we're filling up this pipeline, we're obviously focused on businesses, like Schaefer, that are very close to the core and doesn't go far away. However, we have not limited our search to just total 100% rail play. We will also look at adjacencies. But right now we feel that the businesses that we're being able to look at that are close to the core has been adequate. So we will continue to push forward. The addition of Mark Cox has been a fantastic addition. We've got his plate quite full already. It's amazing that an individual -- Mark's only been on board a month and I don't think he's had much time to rest.

I hope that answers your question.

No, that's very helpful. And finally, circling back to the freight market, just the overall trends there remain pretty positive and the top line the last two quarters has been a little bit -- not quite in line with what you're seeing from the markets. Can you talk a little bit about where you see the freight trends going forward?

Okay. The freight market trends are obviously very positive. Every dynamic that you look at is positive related to locomotive builds as well as rail car builds and deliveries. And we track that pretty closely as I said earlier in the commentary. However, our business is slightly different in the fact that our freight route sales are all not directly related to those particular metrics and the timing of our shipments to the components and delivery of the rail cars vary. I think that we will continue to see freight route sales at a high, stable level going into next year. I don't see any major changes; although there is a lot of changes in the industry related to -- if you look at the backlog of the rail cars, the backlog is weighted heavily right now to tank cars or it's down in some of the other areas. Intermodal really doesn't have a backlog and, in a way, that has a negative impact on Wabtec in a sense. As we get a little more value when people are ordering intermodal cars from the fact that the way they order the cars, there's not as many trucks that are delivered in the same number of cars, if you understand what I mean?

Yes.

What they do is they share the trucks between two of the platforms so there's a little less componentry that we would get so that has a little bit of an impact. If that trend -- if you look at that impact on year-to-year and even quarter-to-quarter, second quarter to third quarter, that has about a $10 million impact on revenues in 2006. The other impact that we see is the impact from the locomotive module business that we elected to get out for financial reasons. That also has almost an equivalent impact on our sales. And those intermodal numbers are actually year-on-year, not second quarter to third quarter.

Okay. Thank you.

Thank you. And the next question comes from Wendy Caplan of Wachovia Securities.

Good morning.

Good morning, Wendy. How are you?

Good thank you. Can we talk about the transit business a little bit more? I know that margin in Q2 was 5.8%. I know you're not going to give us the margin until you do the -- you file your Q, but could you remind us which, which do root for in that business, the consumer locomotive piece or the transit car piece?

We root for all of them. We like them all.

From a profit standpoint do we care -- are we indifferent or do we care?

We obviously, I think that our backlog which is a lot of which is in the locomotive area really will be more positive for us than some of the transit car business that we've had in the past and I think that it's not a large difference but we would favor what our backlog actually is showing, Wendy.

Okay. That's good news. And, also when will we start to see -- are we still on fourth quarter for New York City?

What's happening in New York City is that the Kawasaki transit car has passed the 30 day test and the [Austin] is about a week into it which is good news. So we expect to start seeing that business to start flowing early in 2007.

Okay. And when do you kind of -- when do you think about our getting to kind of a steady pace in that business -- inclines, a steady and favorable margin?

I would think starting in the second half of next year we should have a stead flow of that business going out. And that should last for a couple of years.

All right.

As you know, their order patterns are a little different than in the past where it was very lumpy.

Right. Okay. And finally, I know that you've mentioned before and you mentioned today that new products are an important part of the business. Can you say a little more about ETMS? I know that you mentioned that UP was working on it at this point. And also there was a big article in one of the rail journals, my favorite way to spend my free time reading them, on the single car test device and was wondering whether that seemed to be moving ahead more than it has historically and if there are any other new products that we should know about.

Okay. First of all, let's talk about ETMS. The BNSF pilot continues to run and it's in revenue service and the results are excellent. We expect the FRA to approve the product safety play. We're just not sure when. We also have the pilot that's under way with UP. That will get underway in January. We were actually delivering the product and it's being installed now. We're also seeing some interest in ETMS and the transit industry which is positive for us and we delivered during the third quarter an ETMS system to Iraq for their train system.

We talk about the single car test device. The way that 95% - 90 to 95% - of the rail cars that are tested, the brake rails on these cars are tested today is manually and we provide a single car tester, an automated tester. And the conversion going from manual to automated is just slow as molasses. The automated tester provides a lot of advantages - reliability, also just the credibility in the results you get from a manual tester. There is, however, a cost associated with it. You have to have a adapter or connection plate on the control valve and you have to buy the tester. So the railroads have been somewhat reluctant in spending that money. We are seeing it grow but at a very slow pace, Wendy.

The last product that I think is something that has really just become very important in the news is the FRA has recently put out a memorandum and also spoke at the RSI about trying to get the railroads to adapt electronic control pneumatics for braking. And we have been a leader in that area. We have had a pilot, a successful pilot, in South Africa that resulted in a order for the spore net that we talked about earlier this year. And we'll be installing that unit. We've had two units installed in Australia and we have -- are ready to roll it out. It's a matter now of the industry trying to adapt us. We think the -- it's going to take probably over a decade to make the change but we're seeing interest now, the fact that the FRA is pushing along as well as the fact that they're suggesting they may even try to provide incentives for the rail car builders and the railroads in order to implement it. What it does is it provides a whole other level of safety as well as it allows you to go at faster speeds and carry a heavier load - all the things that, I think, are positive for the railroads.

So what that means to Wabtec, obviously it's going to take a long time for that to be implemented if it is adopted; but if you can imagine 1.3 million rail cars all needing to be updated with electronic control pneumatics at a few 1,000 dollars per rail car, it's quite a number. I don't think we'll ever get to the point where they are all converted, however, when you have these unit [sharings] which would be the first of the adapted, it makes tremendous sense to start that change.

I hope that answers some of your questions about our new products.

It does. Thank you very much, Al.

You're welcome, Wendy.

Thank you. And the next question comes from Lawrence Casse at M Partners.

Hi, good morning.

Good morning.

Question about the increase in transit. Does it reflect any part of the backlog that was delivered earlier than you expected on some of the large capital orders or other orders or was it just continued business in after-market parts and the subcomponents?

It's really both. We were able to get out a little early some of the prototypes on the locomotive builds that will really start to impact our sales next year. And we've seen an uptick in the component orders as well. This was a, somewhat of a -- something we had not anticipated and the reason why the sales were up higher in the third quarter than we had talked about.

Okay. And in terms of the large capital orders such as the commuter locomotives, do you see any further large orders potentially down the pipeline in the next 12 months?

We are working on a number of them right as we speak. And we're not ready to announce any results but I'm hoping that we can close more here in the next few months.

Okay. And just generally in terms of the car loads and wear and tear on parts, are you seeing on the freight side any increase in replacement parts as a result of greater car loadings or is it pretty much business as usual?

That's an interesting question because as we were preparing for the call we took a look and we're actually seeing our after-market business increase a few percentage points compared to our OEM business in the freight area. So the answer to that is, yes. And I think if you look at the backlog and the type of cars out there, there's certain cars that aren't being replaced and there's a lot of attention right now on these tank cars.

Great. Okay. And finally could you speak a little bit about the international side of the business and what you see there?

Okay. Internationally we see a lot of opportunity. We've actually grown our business related to products we make in NAFTA and ship outside of NAFTA; although on a year-to-date basis compared to last year we've -- our international sales have actually slipped a percentage or so. And we are actually planned on taking an international trip here, as the executive office, to visit our Australia operation and go into some of the Asian countries later this week and next week. We think it's a tremendous opportunity for us.

As you know, this Company originated as a North American company when it was taken private from American Standard back in 1990 and since that day we've been trying to grow this business and we think there's a lot of opportunity for global growth for Wabtec.

Okay. Great. Thank you.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] We have a question from Lewis Cann at Cann and Company.

Thank you very much for taking the call. A couple of things -- concerning the GNER contract in the UK for 27 million, I believe, the parent company has gone into Chapter 11 in Chicago and so there's a lot of flap around about what's going to happen with that whole franchise as the government has blocked them on certain expansion that they've given to somebody else and the whole franchise award from last spring looks likely to be renegotiated. Have you been in touch with them as to the impact of that on your contract?

I have to be honest with you. The answer to that is - no. We have not been in touch with them.

Well the parent has said they're not going to be supportive any longer in terms of financial support.

That's something I really appreciate the question because we'll have to check on that. I'm personally not --

Okay.

-- I'm [inaudible] that our people are but I'm not aware of it.

Okay. For some time in your K's you've talked about trying to expand the AM market with new customers on short lines and regionals. Have you -- I haven't heard much about it in the conference calls over the last year and one half. Is there anything going on there that's of any sufficient [inaudible] to discuss?

It's very stable right now. We have tried to address it from our friction group area and have had some good success in that area; and friction is really a good after-market product and I know that that particular group is focused on it. But the business is stable and an opportunity.

Okay. Thanks a lot.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Okay. We have a question from Paul Bodnar at Longbow, I'm sorry, Longbow Research.

Hey, congratulations on a good quarter, guys.

Thank you.

A quick question on the shift to transit for revenues from the freight group. I think before you had said you had a target for the gross margins of around 30%. Is that going to impact the timing of that trying to reach that goal or --?

It definitely will make the goal more difficult but we feel there's a lot of opportunity to continue to improve the transit margins themselves as we get more volume, number one; number two our Lean manufacturing Wabtec performance system and sourcing. If you look back at the history there was a point where that business was run at about 10 to 12%. That's just a transit margin. And that's really -- our short-term goal is to make sure we do that. One of the things we did during the quarter, we had an investor meeting out in Boise, Idaho. And part of that investor meeting, really the beginning of it, we brought in to Boise all of our GM's throughout the world and did what we call a [caisson] on the operation out there in trying to deal with this because most of that backlog in locomotives is there and we found that we feel after that caisson that we will be able to almost double our output from the locomotive line that we worked on. It's these kind of efforts we're going to take and we have to really focus on to improve that margin. If we can get that margin up to the 10, 12%, then I think that the ultimate goal is within reach.

What kind of timing do you kind of foresee at the 10 to 12%? I mean, is it being hit within next year or out beyond that?

I really can't answer that specifically at this point. We're going through the budget, 2007 plan, right now. I would say that I hope to be able to provide that when we talk early next year. I'll give you what we think we can accomplish. But right now we are doing the budgeting with each of these divisions and one of the large divisions and MotivePower, the Boise outfit, will be here tomorrow.

Okay. Thanks a lot, guys.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] We do have a question from Craig Paringer from Wells Capital Management.

Good morning.

Good morning.

When I visited with you there was talk about legislation in Congress about an Infrastructure Act with -- regarding a tax credit. Is there any update on that?

No. There's been no update to our disgust. It would be a major positive thing, I think, for the whole industry. As you know, the cost of capital for the Class I's is just a large percentage and it's a multiple - three, four times - what other industries provide and the infrastructure that they have to put in to run their businesses. And what this would do if it is passed and I think with our political situation as it is in this country today, I just have no idea whether it will or will not, but what it would provide is almost a 25% tax credit related to infrastructure as well as productivity improvements which really is a positive to Wabtec when you start talking about ETMS would be included, the electronic controlled pneumatics and others; but there has been no advancement of that. Although I know that we plan on meeting with our lobby group here in the next three or four weeks they'll be in town so --

Okay. Thanks for the update.

Thank you. And the next question comes from Adam France from King Capital.

Yes, good morning, guys. Thanks for taking my call. Al, could you speak to the extent you've got a good feel for this now, what your '07 CapEx might involve and whether there's any material CapEx that the Schaefer acquisition brings with?

Yes. No, their capital requirements are pretty low. It was a long-term business that's been around for awhile. And we're in pretty good shape there. We expect the '07, and again I'm going through the budgeting cycle, but we spent -- we'll spend about $20 million this year on capital and depreciation is up around 24-plus, I think. And next year, I would not anticipate that number to go up at all.

Okay. Great. And congratulations on a very timely share repurchase there.

Thank you.

Thanks. [OPERATOR INSTRUCTIONS] All right. There does not appear to be any more at the present time.

Okay. Well, we really thank you for your participation and look forward to talking to you soon.

Thanks very much; talk to you soon.

Take care.