美國西屋制動公司 (WAB) 2007 Q1 法說會逐字稿

Hello, and welcome to the Wabtec Corporation first quarter 2007 earnings results conference call. As a reminder, all participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. An operator will give instructions on how to ask your questions at that time.

(Operator Instructions) For your information, this conference is being recorded. I would like to turn the conference over to Tim Wesley, VP of Investor Relations. Mr. Wesley?

Thank you, Maureen. Good morning everyone, and welcome to Wabtec's first quarter earnings conference call. I'd like to introduce the rest of the Wabtec team who are here. Our President and CEO, Al Neupaver, our CFO, Alvaro Garcia-Tunon, and Pat Dugan, our Corporate Controller.

As usual, we will make some prepared remarks, and then we will be happy to take your questions. We will make some forward-looking statements during the call, so we ask that you please review today's press release for the appropriate disclaimers.

With that, let me turn the call over to Al Neupaver, our President and CEO.

Thanks, Tim. Good morning everyone. This morning I'd like to review the first quarter results, talk a little bit about the current market conditions and outlook for the rest of the year, and update you on our strategic growth initiatives.

Alvaro will then cover the financials in more detail. We had a solid first quarter, which gives us a good start to 2007. In the quarter, our revenues increased by 20%. We had earnings per share of $0.52, 27% higher than a year ago. The backlog grew to $1.1 billion, this is up 7% from year end. That's a strong performance, given our record sales in the quarter.

These numbers demonstrate our progress on our strategic growth initiatives. Global and market expansion, new products, aftermarket expansion and acquisitions. We continue to work hard to take advantage of all the opportunities that we see in North America and around the globe.

Today, we also are increasing our guidance for 2007. We now expect sales growth of 12 to 14%, that's up from 10 to 12%, earnings per share of about $2.10, which now includes the cost of completing the restructuring we announced and started in 2006. Remember that our initial guidance was about $2.10 excluding those costs, which we expect to be about $0.05 per diluted share.

We now have a clearer picture of the settlement charges related to this restructuring. However, the timing is dependent on the Canadian regulators. This earnings per share target of $2.10 represents growth of about 20% versus 2006. Wabtec is well positioned to achieve this growth. Our core markets are expected to remain strong. We have some long-term contracts that are now kicking in, and again, our strategic initiatives are paying off.

We have a diversified business model built around selling OEM and aftermarket products and services to both freight and passenger railroads around the world. And we will benefit from lower costs through our continued application of the Wabtec performance system and other internal cost improvement programs.

Let's talk a little bit about the markets. The freight rail market, railroads posted record traffic volumes in 2006. Against that comparison, volumes are a little lower so far this year. To date, revenue ton miles are down 3%, and intermodal traffic is flat. This result is due to tough comparisons with the 2006 volumes and some weather issues. We will continue to monitor the traffic numbers, but aren't overly concerned as long as they remain near the record highs of a year ago.

The locomotive OEM market should be slightly higher in 2007. Of course, part of this is due to our own increased production of commuter locomotives. The freight car OEM market should have another strong year in 2007. For example, one group, Economic Planning Associates, is forecasting deliveries of 69,000 cars in 2007. That's down from about 75,000 in 2006 but it's still a good number.

Industry numbers are hanging in there, with the first quarter orders of railcars of 11,000, delivery of 17,000 -- and these are estimates -- and a backlog of 79,000. And remember, the freight car OEM market represents only about 20% of our sales. It's certainly an important market for us, but just one of many served by a diversified business model.

The transit market has also been on a growth track in recent years, and the indicators continue to look positive for the future. The key market drivers in the transit area are federal funding and passenger ridership. Federal spending is set to increase 5% this year, and ridership increased 2.9% last year. And at a faster pace for rail transit, such as cities like Los Angeles where double digit increases were achieved.

Overall, transit usage has increased 30% in the last decade. We believe that high fuel costs and ongoing environmental concerns about emissions will continue to drive growth in the years ahead. For Wabtec, this means opportunities in several areas. Commuter locomotives, components for subway cars, and components for buses. We are well positioned in each of these markets.

Now, let's shift gears a little and talk about our strategic growth initiatives. Remember that it all starts with our Wabtec performance system, which we believe gives us the ability to generate cash to invest in our growth strategies. Which are global market expansion, new products, aftermarket products and services, and acquisitions. We're making good progress in each of these areas, and I'd like to highlight some examples.

As far as global and market expansion, we saw strong pickup in our international sales during the quarter. 37% of the total sales were from sales outside of the U.S., mainly due to growth in our U.K. unit and the Becorit acquisition. In the U.K., Wabtec Rail began a long-term contract with HSBC at [inaudible] to begin rebuilding trucks and bogies for transit cars. It also started two other contracts for transit and car refurbishment.

Elsewhere, we booked significant orders in Australia for braking equipment electronics, and we're making good progress in other emerging markets like China, Brazil, India, and Africa. As a side note, the French TGV high speed train that just broke the world speed record reaching 357 miles per hour on a test run between Paris and Strasburg, we're proud to say that that train was equipped with CoFren, one of our divisions in Italy, center disc brake pads. And they performed as expected.

Now, a little bit about new products. In recent months, we've seen important progress in the area of railroad electronics with both our electronic management system and the electronic control pneumatic braking. Let's first talk about the electronic train management system, known as ETMS.

In the first quarter, the FRA approved DNSF's product safety plan, which gives the railroad the ability to expand ETMS beyond its initial pilot program that's been running since 2004. DNSF has said that it expects to begin installing this system in the second quarter on a 300 mile route between Texas and Kansas.

The FRA approval also allows DNSF to install the system on 35 other rail lines in 17 states, which could happen over the next several years. In the meantime, we're also working to install ETMS equipment for pilot programs with the Union Pacific railroad and Metra, a commuter line out of Chicago.

On the electronic control pneumatic front, ECP, the FRA has issued new rules to encourage railroads to consider using electronic braking. As a result, DNSF and Norfolk Southern announced the pilot program for ECP. We should play a role in those projects. For Wabtec, ETMS and ECP represent revenue potential of several hundred million dollars over the next ten years, but we expect very little of that in 2007.

Sales of our aftermarket products and services represented 50% of the total sales in the first quarter, and we certainly like that mix. As you know, the aftermarket has a fairly steady base business, and we are finding lots of opportunities to grow from that base. In the first quarter, we signed a multiyear contract to recondition air brake equipment for a short line railroad in the Southeast. We also started refurbishing transit brakes in Mexico.

Another nice opportunity has developed as a result of a new industry regulation to reduce wear from vibration in brake valves. We developed a solution, and it's driving some good growth this year.

Acquisitions. As you all know, we completed two acquisitions in the fourth quarter of 2006, and we are well on our way of integrating these operations into Wabtec. The two are Schaefer Equipment, a leading manufacturer of Ford's brake rigging components, and Becorit, a European leader in technology-based friction products. Both companies are a good strategic fit with solid financials. We have others in the pipeline, and we are working to complete transactions that will make good sense strategically and financially.

Now I'd like to ask Alvaro to cover the financials.

Thanks, Al. And good morning everyone. As Al mentioned, we were pleased with the quarter and we remain confident about future opportunities. Sales were 20% higher than the prior year quarter, and hit a record $314 million. More than half of the sales increase was due to organic growth, which again, reflects the implementation of our strategy, which we will continue to emphasize as we'll go along.

The Transit Group led the way with a strong increase due mainly to higher sales from car refurbishment products in the U.K., commuter locomotives in North America, and the Becorit acquisition. Freight group sales were also slightly higher than year ago quarter, and in line with our expectation as demand has remained stable at a high level for freight car and locomotive components.

After acquisitions, freight group sales actually declined just a little bit, but again, this was in line with the overall market trend. Operating expenses were 14% of sales, compared to 16.3% in the prior year quarter, reflecting our favorable leverage both from volume and other factors. This led to an improvement in operating margins, which were 13.4% in the current period compared to 12.3% last year, and 12.4% in the fourth quarter of '06. This improvement was due to our efforts to lower costs through sourcing and Lean manufacturing, and increased volume.

Interest expense, pretty stable and not much happening there. It was $636,000 compared to $1.1 million last year, due to higher interest rate on our cash deposits which were a little bit higher this year.

Other expense. We had an expense of $800,000 this quarter, mainly due to a [paper] foreign exchange losses on certain foreign assets.

Income tax expense, up a little bit from prior quarters. This quarter it was at 37.2%, which is slightly higher than 36.2% last year and our normal run rate of 36.5%. I would expect our run rate for the year to be in line with our history of about 36.5%, maybe up slightly higher to 37% due to higher foreign taxes. Tax rates in Italy as well as Germany are a little higher than our average, and they're having a small impact on our tax rate.

Working capital. In total, it was up about $20 million. The major elements, receivables, increased about $19 million, in line with higher sales. Inventory were $10 million higher, and payables offset the two increases by increasing by about $8 million. This is one thing that we remain focused on during the years, particularly in inventory. We think we can do a little bit better, and we're committed to do so as we go along.

Cash. Our cash balance increased during the quarter by about $18 million, and cash now exceeds debt. We have total cash of about $206, debt of about $150, so our cash exceeds debt by $56 million. Obviously, this gives us a substantial amount of flexibility to invest in our growth strategies.

We spent about $1 million during the quarter to buy back some stock. We still have an amount left under our cap, but what happened is during the quarter, we have a limited window period because we were in a quiet period due to the release of earnings until late February.

Depreciation. Just to go over a few miscellaneous items for your calculations and your models. Depreciation during the current quarter was $5.4 million versus $5.2 million last year. Amortization was almost $700,000, it was about $688,000 this quarter versus $859,000 last year. And CapEx very stable, $3.9 million this year versus $3.3 million last year.

Backlog data. As Al indicated that did show a slight increase, and the rolling 12-month backlog. So the backlog that we expect to execute during the next 12 months totaled $534 million. You can break that down between freight of $209 million and transit of $325 million. The multi-year backlog, so the backlog in total was about $1.1 billion. Freight constituted about $275 million of that, and transit is about $834 million. Obviously, the transit backlog is going to always exceed the freight backlog just because of the nature of the business. Transit is a multi-year business, freight is a much quicker turnaround business.

And that pretty much summarizes the financial summary. With that, I'll just turn it back over to Al.

Thanks, Alvaro. Once again, we had a strong performance, with a $0.52 quarter, record sales, and a growing backlog. Our end markets continue to be positive, which gives us the confidence to increase our sales and earnings guidance. The diversity of our business model, freight and transit, aftermarket, and OEM, [NAPTA] and international, is serving the company well.

The Wabtec performance system provides an established culture of Lean manufacturing, and we have experience and a dedicated management team. With that, well be happy to answer your questions.

Maureen, we'll take questions now.

(Operator Instructions) the first question is from Wendy Caplan, Wachovia Securities. Go ahead please.

Thanks. Good morning. A couple things. Since you unfortunately don't break out the segment detail in your release, could you give us some sense of where that vast operating margin in seven years came from? Perhaps by volume versus mix, or any other details you feel comfortable giving us on the call?

Okay. As you saw, our income from operations was up nicely. We had 13.4% compared to first quarter last year was 12.3% and last quarter was 12.4%. If you look at the sales increase, which is about $52 million, we were able to get about $10 million of that to the bottom line. And what that works out to be is about a 20% contribution margin.

Now, a lot of that was that we leveraged the positive volume that we're getting from the transit business, but we also have a very positive impact from our Wabtec performance system, which includes pricing, sourcing, and our QPS, Quality Performance System.

When you look at the first three months of 2006, and you see that our mix -- and this has been a concern of, I think, everyone, including ourselves, and we've been very focused on it -- we went from 69% freight down to 58%. And transit's gone from 31% up to 42%. That's quarter-on-quarter. And we were able to improve the income from operations on that, and it really is a direct result of, like I said, leveraging that volume. You can see that the operating expenses was leveraged extremely well, and we get the results from our Wabtec Performance System.

Okay, that's helpful, Al. Could you comment also on the progress in terms of your restructuring program?

Sure, Wendy. The project that we started in '06 is basically complete. The only thing left is what they call settlement charges, which is clear to us now. The amount is clear, but the timing of those settlement charges is not.

Now, that said, and that's the reason why, as I discussed, the reason why we rolled it into and start reporting the GAAP number, that does not mean that other restructuring projects will stop. We will continue with other projects and we will fund those as we go.

Okay. Your comments on revenue, your higher expectation. Can you help us understand what drove you to raise that expectation from 10 to 12, to 12 to 14%?

Yes. Obviously, the strength in the first quarter has allowed us to do that, and what we expect is that we now have the transit long-term contracts are starting to kick in and we're moving along that. R160 has now become commercialized, and we're shipping at the rates we had anticipated.

So we expect to see that kind of rate throughout the year, except that normally in the third quarter, there is some seasonalization that we've had over the years, mainly from our international customers that generally have a shutdown during that period. So we think that the first quarter and second quarter and fourth quarter should be pretty much the same with probably a lesser revenue result in the third quarter, as we've done in the past.

And that's even though, Al, you have a greater percentage of business internationally than in the U.S. I mean, than you have had?

That's exactly right, Wendy.

But even with that, you expect that third quarter should not have as great a seasonal impact?

I think other than the shutdowns, I don't think it's going to have any more impact than what we've estimated here.

Okay. And finally, a working capital question. Your working capital, you said, Alvaro, was up 20% on the quarter.

No, I'm sorry. I may have said that, and if I did, I misspoke. What I meant to say that it was up $20 million.

Oh, $20 million.

Yes. I'm sorry. If I said 20%, I apologize. It was up $20 million.

I could have misunderstood. How much of that $20 million was related to the acquisitions versus the core business?

In the quarter, we would expect that probably a small portion of that, I don't think more than $3 or $4 million, Wendy.

When I talk about working capital, Wendy, I'm comparing it to the year-end balance sheet, because working capital goes sequentially quarter to quarter. And in the year-end balance sheet, we already had all the acquisitions. So this was due mostly to operational factors.

Okay. That's very helpful and clear. Thank you very much.

The next question is from Kevin [Madka], GB&T. Go ahead please.

Thanks. Good morning. I've got a couple more questions on the revenue outlook. I'm still not clear on this. It looks to me like you did 20% in the first quarter, which is up against one of the more difficult comps you'll have this year. And it sounds like, Al, from your comments with the projects ramping up and things like that, that we shouldn't necessarily see a revenue in absolute terms decline going forward. So it would seem to me that maybe that 20% is more sustainable than 12% to 14%.

I think that obviously we're trying to be a bit conservative, we're not sure of the economy. However, if you look at what we did in the first quarter and you build in the fact that there probably is some seasonalization in the third quarter which will have a lower revenue, I really feel that it's not a lot of conservatism in it, but possibly a little.

And Kevin, the comparison to the first quarter is not necessarily like you say, the hardest one. If you take a look at the fourth quarter of '06, actually, revenues in the fourth quarter of '06 exceeded this first quarter by $30 million. So I'd probably say this was probably an easier comp rather than a harder comp.

Okay. I'm looking specifically at the second quarter as well, where I think the year-over-year change was negative last year.

It varies, and there is some seasonality, and it's tough to look at a crystal ball, but this is our best estimate right now.

Okay. And I may have missed this, I got disconnected, but railcar loads were running up about 3% last year, they're running down about 3% so far this year. But you made a comment that you're not concerned about that. But I thought the freight business tended to track that.

Well, it does track it. I think what we're trying to say, Kevin, is that we think it's -- and '06 was a very difficult comparison. And they did have some weather problems. Now, if we could stay at this high level, what we're saying is we don't think that's a terrible situation, because of the tough comparisons and the problems they had.

Obviously, we're concerned and will be tracking it. If it continues to go down or go in the wrong direction, then we have to have contingency plans, which we have in place to deal with that. And the other thing, most of the Class Is are really talking about maybe recovering some on their volume in the second half.

All right. And if I could just ask one more. Alvaro, the mix impact on the gross margin in the quarter. And could you comment at all on pricing? We don't hear a lot of commentary about pricing typically.

Pricing is always, I guess, a little bit of a touchy issue. You certainly don't want to go around bragging that you raised prices. But pricing is an element, and I think there is an element of pricing in there. Probably though, the main reason for the change in gross profit -- I guess I tend to compare it more to the last quarter than this quarter.

Compared to the fourth quarter, we actually went up by about 90 basis points, which I though was positive. 80, 90 basis points, I think it was actually 80. And we think that's a positive, and it's really due to implementation of the Wabtec performance System, particularly sourcing as well as increased volume. That helps. The acquisitions are having basically a neutral effect on margins, we think.

Compared to last year, we were down a little bit, and that's mostly due to mix, because the transit margins being a little bit lower than the freight margins.

If you could just remind us that gap again between transit and freight margins?

I think traditionally what you'd find is the freight markets were in the 20% range, and transit was 10%. Operating, not gross margin. And that's what I keep trying to get everyone focused on.

And those are peak. If you look in the numbers that we had released with the revised segment reporting, the freight group numbers were 15 to 20% and transit was maybe 8 to 11% or so.

All right, gentlemen. Thanks for the time.

The next question is from Jim Lucas, Janney Montgomery Scott. Go ahead, please.

Thanks. Good morning, all. Start with a numbers question. The operating expense leverage that you've been able to get is pretty darn impressive. And when you look at the ability to continue that leverage, is there any dynamic in there related to the transit contracts, depending how they ramp up, that can impact those operating expenses? Or could you just give us a little bit more color of how to think about that leverage going forward?

Yes. I don't know of any impact from any of the long-term contracts we have that should affect that, Jim, and I really feel that the basis of this company was really sound and we were positioned well for growth. And we just don't need to add those type of expenses to the bottom line in order to achieve this growth. The structure is in place as well as the people to support that, and that's what you're seeing. And we've spent a lot of money over the years, especially engineering expenses, trying to develop this technology. And we're finally seeing the fruit of that effort.

Okay. And then two strategic questions. Number one, updates with regards on ETMS. You alluded to it in your prepared remarks, but any additional color? And you have this new FRA waiver with relations to the ECP, and I feel like you're becoming a defense company with this many. And any other potential technology changes you see on the horizon?

And then, secondarily, the question inevitably comes up every quarter with this balance sheet being as clean as it is, how you're thinking about acquisitions. In particular, within the rail industry you're somewhat limited in the number of deals you can look at. Can you talk about how you think about potentially non-rail business?

Okay. I think there was seventeen questions, right?

But only four acronyms, so you're well sure of the acronym record.

Okay. A quick update on ETMS, or the Electronic Train Management System. We're really excited about getting the product safety plan approved. This really puts us in a position now to work with the Class I railroads to implement this system. The next phase of this program, which is going to be put on a track between Ft. Worth, Texas and Kansas is really very important, because there's other railroads that operate on that.

And we also have the UP, Union Pacific, doing a pilot program as well. And we're going to be starting to look at interoperability between the railroads. We're also on the commuter track up in the Chicago area. They'll have 10% of their locomotives and transit cars will have ETMS on it.

I think that the thing we have to emphasize, though, as excited as we are, because this investment we made goes back a lot of years and we've put a lot of time and effort in this. However, the implementation of ETMS or positive train controls throughout the world is going to take a long time. It's going to be slow to be adapted. And the important thing is we're on the right track and we're moving in the right direction.

And it's a similar thing with the electronic controlled pneumatic braking. The fact that the FRA is -- what they really did is they put out an incentive that, if we will test and use ECP, that the frequency that they would have to do checks on their braking systems is actually lengthened, which is a savings and it improves efficiency.

The end result of ECP and ETMS is improved safety, improved efficiency, improved productivity. And I think that what the government's trying to do and what the Class Is are trying to do is get this in place. So we're very happy about it, and we're positioned well to take advantage of that.

Your last question was really related to acquisitions, and how difficult is it to get acquisitions in the markets we're in, and you're correct. When you're in one particular market and not diversified across the number of different markets, the number of acquisitions you have is somewhat limited. However, we are not short of opportunities, and we continue to aggressively look for acquisitions that make strategic sense that meet our financial criteria, I think, that we've talked about in the past.

As far as looking and exploring outside of that area, we have a number of examples that rate today of adjacencies that we've been very excited about, and also very successful. And the first one is that we make heat exchangers. These heat exchangers were designed and built for the ruggedness of the locomotive. But we also found that the power generation market finds that they need to run at higher temperatures in order to meet some EPA requirements. So our product is being accepted in that area.

We have friction products that are being sold into other market areas, including windmills and mining equipment. And thirdly, we've been able to take our technology of transit doors, these are doors for the transit cars, and we have a nice division that uses that technology on buses right now. And these are some of the areas that we consider as adjacent opportunities. And we would look for acquisitions in those areas as well.

And just one quick point of clarification. When you look at those adjacencies -- and those are great examples -- what percentage of your revenues today? That's still less than 5%?

I can give you the exact number, if you give me a second. I would say that we're between 5 and 10%.

Okay.

It depends on how you define them, but I'd say 5 to 10%.

All right. Thank you very much for answering those 17 questions.

The next question is from Art Hatfield, Morgan Keegan. Go ahead please.

Thank you. Morning, guys. As surprising as it is even after 17 questions, I've got some more. No, just a couple questions on some line items. On the SG&A, you were almost up to $35 million. Sequentially that was up kind of a little bit higher than I thought. Can you address that? Also amort expense. And I know this isn't a big number, but it was down about $.5 million sequentially. Is anything going on there, or are both of those numbers kind of what we should see quarterly going forward?

Amort expense, Art, we'll start with the easy ones first. There's a couple issues there with purchase price accounting, and that's what causing some of the variability. What happens is when you do an acquisition you actually have to write up some of the inventory, you have to write up some of the backlog. And the inventory goes through cost of sales, but, say, the backlog goes through amortization. There's a couple of adjustments that flow through relatively quickly.

I'd say for your modeling purposes, you can assume that for the rest of the year amort will be around $800,000 to $900,000. What happened is, in the fourth quarter -- I think that's what you're talking about in run rate -- we slightly overestimated what we thought the adjustments were going to be because we didn't have the final numbers from the appraisers and we were just trying to make sure there were no negative surprises at the end on the acquisitions. And then this quarter we had an adjustment for a couple hundred thousand, nothing material in there, basically to decrease the number a little bit. But the run rate is about $800,000 or $900,000, and I think you can model that. In terms of SG&A, probably the major reason from the increase from last year is -- it's about $1.8 million from acquisitions.

And once you factor that in, I think you'll see that we're relatively at a pretty good run rate this quarter. And I think you can continue using that. SG&A is always going to contain a couple one time items, both positive and negative. And this quarter did contain a couple of positive ones, a couple of negative ones, and they pretty much washed out. And I think you can take the current run rate and go with that one as well.

Okay, that's helpful. And then secondly, and maybe Al, you can address this. Kind of a more longer-term question, but if we start to dig into some of the freight car data that's been coming out over the last couple quarters, and you mentioned the estimates for Q1. It's looking like ex the tank business, things are slowing somewhat. And it's setting up possibly for 2008 being a more difficult year in that business.

And additionally, as you guys roll out ETMS, the hope would be the railroads can do more with less as they get more efficient. And that could create a scenario longer term where the actual need for freight cars decreases somewhat. Can you talk about -- you've done a great job over the last several years of diversifying your business -- kind of where you see yourself going in that respect, and if, in fact, you've got to target where you'd like to see your freight car business, particularly the OEM business getting to as a percent of your overall company pie?

Okay, Art. Sure. First of all, as we look and analyze the data, I feel that it's important that we continue to track it. One of the concerns that we have when you do look at the backlog, a large proportion of the backlog is really tied to ethanol, with the tank cars as well as the covered hopper. So we are concerned about that, but at the same time, ethanol is going to probably continue to drive some good results for a period of time. I think there's 33 to 37 new plants going to come on line.

Now, is that going to be a continued growth and a real answer for the railroads? I wouldn't bank on that, but I do think that it's great timing and it's fitting in well, because as you know, there hasn't been a lot of intermodal activity over the last number of months, and at some point we expect that to come back.

So yes, I think the backlog is something that we're concerned about. And as you know, we really [still] a diverse business model that we continue to strive for is important to protect us against any cyclicality that could happen. We don't see any great big drop coming, but we still feel in the long-term it is a cyclic business, and we have to have a business model that creates the best value for our shareholders.

I think that we will continue to shoot for diversity. We would like to have this business about half of it outside the U.S., 50/50. Right now we're 37%. We think that the aftermarket gives us some stability when it comes to a cyclic approach.

The transit and freight, history has shown that they're both somewhat cyclic, but they normally don't happen at the same time. We think the ratio that we're at now is a pretty good ratio between transit and freight, taking advantage of when one is growing, one is not.

So I think our diverse model is serving us well, and I think additional diversity is really our target. As far as more with less, the railroads being able to do more with less, I think is the most positive thing that could ever happen.

I think the railroads are at a point right now where there's a lot of opportunity for growth. All the dynamics of importing products from Asia, the intermodal traffic, the need for coal, 50% of electricity is generated that way, it's a large component. You have the positive with ethanol, you have high prices for gasoline, which wants you to really use rail more.

And the way people are going to use rail more is if they become more efficient, more productive. And I think the overall health of that industry would be the health of Wabtec. Because Wabtec really is one of only a few companies in the world that can move the needle in efficiency, productivity, and safety of the railroads. And it's our systems that will be utilized if there really is a renaissance or improvement, or growth in the rail industry.

Let me ask you this, because some people will ask. And I agree with what you're saying, that if you come up with a new product, you have the risk of cannibalization of another product where the need for that product becomes less so because you've created efficiencies in another area. Do you kind of look at that approach as you go forward and develop new products or seek new markets?

We're continuing to do development. We invest $30, $40 million a year in engineering. And the reason I think Wabtec has been successful is that commitment to new technology. We recently brought in the technology individuals, the technologists from a number of the divisions just to come in and share and look at ways that -- what does the customer want, what's the voice of that customer, and how do we stay ahead of the curve on this technology?

And if you look at something like ETMS, Electronic Train Management System, and this was developed years ago, and we're finally seeing the fruits of that. So I think it's important to stay on top of that, Art.

Okay. Thanks.

The next question is from Scott Blumenthal, Emerald Advisers. Go ahead, please.

Good morning, Tim, Al, Alvaro. I always hate to go after Art. This time he provided me with an opportunity. I would tend to argue that ETMS does not reduce the need for brake cars, but the need for more track. Can you talk about the ramp up in staffing or sales support that you are going to need as these things start to come to fruition? And also, some of the service opportunities, revenue opportunities that you're going to have at Wabtec once EPMS is rolled out and the pneumatic braking becomes kind of the standard there?

Yes. Scott, obviously the ETMS rollout will require some small incremental addition to what we currently have. If the volumes materialize at the rate at which we expect it to materialize, we don't expect a large increase in costs related to that. And it's the same with ECP. This is going to take years in order to develop. Your second point, is there an aftermarket associated with these products? Yes, without a doubt. And that's an important part of our strategies is that aftermarket portion of our business, which we continue to try to increase, and today it's at 50%. So I agree 100%. And I also agree with your statement that ETMS should require more, not less.

Alvaro, in addition to many of his other skills, always does a great job in giving us the breakdown in the backlog between transit and freight. Are you able to carve it up between U.S. and international, because now that we have Becorit in addition to the other international businesses...

Actually, we have the data in front of us, but it takes some time to...

Actually, Scott, let me just first say that I appreciate the way you phrased that question. I thought you did that very intelligently, that was a good way to start. We can get that data, it's not hard to get. Overall, a large chunk of our international business is friction related, and that will have very negligible backlog.

That one unit that will have, just off the top of my head, more significant backlog is our rail car refurbishment unit in the U.K. And that one does have an element of backlog, and I think that's the most principal one. What's the backlog there, Tim? So their total backlog is 215?

215 of the 834 in transit is the Wabtec rail unit.

So that's the multi-year backlog, not just the 12-month backlog. But again, just to repeat the numbers, the multi-year backlog's $1.1 billion, transit is $834 million of that. Of that $834, GBP 216 is in the U.K. And that's really the principal backlog, I would say.

Okay. Are those dollar denominated contracts? I mean, are you getting any benefit in those from currency currently?

Let me answer your first question. Those are not dollar denominated, they're Sterling denominated, because they're in the U.K. The costs are Sterling as well, so you don't get whipsawed on that. On the top line, you probably will see some minor, I'd say it's immaterial, effect on the revenue line from the valuation of the dollar from the dollar being as weak as it is. We try to give a rough estimate for this quarter versus last year, and we came up somewhere between $4 to $5 million on effect on the revenue line just from that fact. Which again, we don't consider very significant.

On the bottom line, we do two things. One, we try and hedge, where on exposure to Canadian, we get hurt. Say, in the U.K. operations, et cetera, as the dollar weakens, it actually becomes a benefit. And what we try and do is hedge it so that in effect, economics wise, not paper, but economics wise, they neutralize each other. So the bottom line, the weakening or strengthening of the U.S. dollar shouldn't have very much of an effect at all. On the top line it will, but we don't consider it to be material, if I can recap that like that.

Okay, great. That's really helpful. Can you tell us, the freight car loading information, Al, that was U.S., correct?

That's correct. North America.

Do you get any clarity on what things are like in Europe, because anecdotally we're hearing that the European economies are picking up, and I would imagine that that should help us with regard to transit and rail traffic over there, maybe pick up something of what's going on here.

The business itself, the freight business in Europe is a small business compared to North America. They do have a freight business, but it is not a large business. Their large market is really the transit market, and there is a lot of activity there, and we participate in that market in a number of ways through a number of divisions. And the opportunities in the transit market are much, much greater than the freight opportunities for us.

Keep in mind that this company, when Bill Kassling and the team here went private from American Standard, only the North American portion of the business was what is known today as Wabtec. So there are competitors in those areas that have a much larger market share in those markets today. But it is obviously a good market that Wabtec has participated in, and views as a good opportunity into the future.

Okay, that's great. Thank you. One last one, if I may. Can you tell us if the contribution from the acquisitions from Schaefer and Becorit, do those have margins similar to the overall business?

Yes they do, and they're well integrated into the company now. And we were able to visit both operations in the last three months, and we are extremely pleased with their performance.

When are we going to get to visit?

Well, we'll take you anytime you like.

Very good. Thank you.

The next question is from Lawrence Casse, M Partners. Go ahead, please.

Hi guys. Congratulations on a good quarter. First, just a line item. Alvaro, did I understand you correctly to say the depreciation was $5.4 million? I'm trying to get to an EBITDA number for the quarter.

No, absolutely. Yes. Depreciation for the current quarter was $5.4 million, and it was $5.2 million last year.

Okay. I'm coming up with an EBITDA for the quarter, I don't know if you can comment on it, of about $47 million? Does that sound right?

I'm sure you can do the numbers.

Let's go to the freight side now. It declined about 2% over Q1 2006. And Alvaro, I didn't quite understand what you were saying about it increasing and also declining. Could you clarify that?

I'm sorry. If you take a look at the sales by segment for the current quarter, for the '07 quarter, freight group sales were about $185 million. And that compares to about $181 million last year. So that's why I was saying it was a modest increase year-over-year compared to the fourth quarter of '06. The fourth quarter of '06 was about $174. So it's about a $10 million increase on that.

Year-over-year acquisitions accounted for about an $8 million increase in sales in the freight group. So once you take out acquisitions, the sales declined slightly. But that's not -- to be honest, a meaningful statistic, I would call it stable. Because again, they'll go up and down quarter to quarter.

Sure. And on the freight side, would it be fair to say that the international side of it helped you a bit? In other words, if you didn't have that international revenue, the decline would have been a bit more severe.

I think what really helps us more in freight is the aftermarket. That we're seeing continued strength in the freight aftermarket, and that really helps to offset any loss in OE business.

And we did get an increment. If you compare quarter to quarter on the acquisition of Schaefer as a freight product.

Right, but the aftermarket, you're saying, was stronger despite the fact that the rail volumes were off about 3%?

The aftermarket tends to be much more stable than the OE market.

Services business grew a little bit.

And that's one area where we're trying to strengthen it to actually grow by introducing new products. I think Al commented on a couple of the new products during his comments, and that helps to offset any volume decreases as well.

Okay. And what are some of the new products, other than brake replacements?

Let me go back to the comments here.

Well, we've actually started doing service work on heat exchangers in our Kansas City service center, which we hadn't been doing in the past, which has been a real plus for us. We've also increased the capability at our Mexico service center over the last year, which has again been very positive. So what we've tried to do is increase their capability at each of these centers, where products in the past, we hadn't really taken on.

The one thing I did mention was the development we made that really helped reduce the wear from vibration. And all of the product that we have out there that's our design will eventually need to be upgraded with this upgrade.

And another effort is we're trying to upgrade our repair of electronic equipment, particularly communication equipment. And that's starting to show some traction as well.

Okay. So what you're saying is that the aftermarket business has momentum of its own even if we have some softer freight volumes.

That's correct.

Okay, great. And what's your general outlook for the international business in terms of growing it organically over the next year?

We think there's a tremendous amount of opportunity. I can't put a number on that right now, but we think the emerging markets, there's a lot of interest. Australia markets are doing extremely well, and we're trying to expand there. We're looking at developing an opportunity to manufacture in South Africa. We're traveling into the Brazil area. A lot of these are markets that are growing more rapidly than the U.S., but for us it's a new market, which makes it even better.

And there's entrenched competitors there?

In a number of cases, yes. But not necessarily with the technology that we could bring to them. They may be using one or two generations back type technology, and as their demands become more efficient, more productive, have larger train and meet that growth area, especially in the emerging countries like India, China, and Russia, our technology helps pull us into those areas.

Okay, great. Thank you.

The next question is from Jim Lucas, Janney Montgomery Scott. Go ahead, please.

One follow-up on the balance sheet. Shareholders' equity at the end of the quarter?

Hold on one second, Jim. Right now, it's still very preliminary and tentative, but it's about $.5 million. That's subject to final adjustment and discussion. I'm sorry, $.5 billion. I'm having problems with my millions, billions, and percentages today, it's not my best day here.

Those columns can get tricky. Thank you.

(Operator Instructions) There are no further questions at this time.

Okay. We really appreciate the questions, and we'll talk to you next quarter.

Thanks very much, everybody.

Thank you.